Integrating GEF & Carbon Finance:A No-Regrets Policy

Robert KellyRegional Technical Advisor,Climate Change Mitigation

robert.kelly@undp.org

Washington D.C., November 15th 2010

2

In 5 years, the CDM has sparked an $8 billion/year market

Compound Monthly Growth Rate = 11%

Approximately 1 billion CERs by 2012

Compound Monthly Growth Rate = 11%

Approximately 1 billion CERs by 2012

Number of Projects in the CDM Pipeline,January 2005 – October 2010

Source: UNEP Risoe (2010)

Jan05

Jun05

Dec05

Jun06

Dec06

Jun07

Dec07

Jun08

Jun09

Dec09

Jun10

Dec08

67 147520

821

1,414

2,041

2,944

3,788

4,475

5,089

5,6886,060

6,767

Oct10

3

The carbon market already dwarfs the GEF

2.0

2.7

0.4 0.3

1.1

0.3

AAUs PrimaryCDM

JI VoluntaryMarket

GEF 5 Total

GEF 5ClimateChange

118.5

EUETS

AllowancesAllowances CreditsCredits GEFGEF

Carbon market in 2009: $144 billion

GEF 5 Climate Change (annualised):$0.3 billion

Carbon market in 2009: $144 billion

GEF 5 Climate Change (annualised):$0.3 billion

Source: World Bank (2010)

US

$ b

illi

on

s

4

But carbon finance is not easy

ACM0003: Emissions reduction through partial substitution of fossil fuels with

alternative fuels or less carbon intensive fuels in cement manufacture

3 pages of eligibility criteria;40 pages in total

CDM Tool: Calculation of the number of sample plots for measurements within A/R CDM project activities

A typical page…

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There is plenty of untapped carbon finance potential

The Potential

“There is a large, diversified range of CDM opportunities across Sub-Saharan Africa’s energy sector…a technical potential of more than 3,200 clean energy projects, including 361 Programs of Activities.

If fully implemented, this technical potential could provide more than 170 GW of additional power-generation capacity, more than twice the region’s current installed capacity.”

- World Bank, 2008

The Reality

25 registered CDM projects (two-thirds in RSA); 2 PoAs

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Yes, the GEF can play a vital role in laying the groundwork

Fin

anc

ial R

etu

rn

Risk of Investment

Infeasiblemitigation

project

Infeasiblemitigation

project

CDM revenueCDM revenue

Attractivemitigation

project

Attractivemitigation

project

GEF barrier removalGEF barrier removal

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But the GEF should not stop at the broader enabling environment

The distinction between ‘public goods’ and ‘private goods’ is artificial

oNew methodologiesoFirst-of-a-kind projects (including PoAs)oUnder-developed sectors (e.g. forestry, energy efficiency)oCatalysing national markets (proof-of-principle projects)

GEF financing should be used to support individual carbon finance projects

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8

But the GEF should not stop at the broader enabling environment

Emissions double-counting is not a show-stopper

oWhy not just create a new GEF accounting category, in addition to direct, indirect and post-project direct reductions, called ‘GEF-catalysed carbon market reductions’?

GEF financing should be used to support individual carbon finance projects

22

9

But the GEF should not stop at the broader enabling environment

GEF needs to stay relevant!

GEF financing should be used to support individual carbon finance projects

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“Mobilising $100 billion/year by 2020 is feasible but challenging…Funding will need to come from a wide variety of sources…Instruments based on carbon pricing are particularly attractive because they both raise revenue and provide incentives for mitigation actions”

- Secretary General’s High Level Advisory Group on Climate Change Financing

Mediterranean Solar Plan

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And project-based carbon finance is not the only game in town

Source: Climate Action (2009)

Glo

bal

Em

issi

on

s

Time

Evolving Carbon Finance Instruments

NAMAs+E.g. Renewable Energy Support

Programme

A NAMA to support the implementation of a feed-in tariff could include:

•Covering the incremental cost of renewable generation

•Capacity building to expand technical & regulatory expertise

•Establishment of institutions to operate the system

•Investing in enhanced grid capacity

•MRV

E.g. Renewable Energy Support Programme

A NAMA to support the implementation of a feed-in tariff could include:

•Covering the incremental cost of renewable generation

•Capacity building to expand technical & regulatory expertise

•Establishment of institutions to operate the system

•Investing in enhanced grid capacity

•MRV

Sound familiar?Sound familiar?

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Noel SorianoProject-based carbon

finance (CDM/JI)

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Comparison of GEF and Carbon Finance

Particulars GEF Carbon Finance (CDM)

ObjectiveTransformation of markets towards low carbon development

Provision of financial resources and technology for developing countries; meeting emission reduction targets for developed countries

StrategyHolistic, barrier removal; creation of enabling environments

Project-based; focus on emissions reduction

ModalityProvision of grant for agreed incremental costs

Payment on delivery of certified emissions reduction

Project Types

EE & RE and sustainable transport; barrier removal to facilitate widespread applications of EE, RE and sustainable transport technologies

EE, RE, and sustainable transport projects that results in energy savings and GHG emission reductions; applications for capturing and destroying high GWP industrial gases

GHG emission reduction monitoring

Estimated direct and direct post emission reductions attributable to project; self-reporting

Emission reductions quantified, monitored, verified, and certified

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Some Developing Countries are not Benefitting from Carbon Finance

• No established DNA in some countries, and where there is one, inadequate capacity to perform roles of DNA.• Lack of technical capacity to develop and prepare CF projects, let alone GEF projects• High transaction costs for CDM projects, which are being repaid from CER revenues (PIN/PDD development; DOE validation & verification; Registration; Monitoring cost, etc)• High risks for projects particularly those that have high development dividends in least develop countries (Uncertain feasibility, due to non-availability of baseline data, no established and approved methodologies, etc)

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Potential GEF Support for Carbon Finance in CCM Projects

Carbon Finance Requirements

Potential GEF Assistance

Institutional (Public Goods)

Creation and operation of DNAs

Supplementary TA for institutional capacity development for relevant government institutions, particularly the DNA, in the evaluation of suitable projects/initiatives on EE, RE & ST technology applications that leads to GHG emission reduction.

Capacity building Supplementary TA on capacity building for the private sector in accessing financing for EE, RE and ST projects from various funding sources including CF

Project

Feasibility Studies Financial support for feasibility studies and baseline studies/surveys of potential replication projects that intends to access or avail of CDM. Project Preparation FundBaseline studies/surveys

Basic engineering design Technical assistance (during GEF project implementation) for the basic engineering design of feasible replication projects that can be potential CF/CDM projects

Development of new methodologies

As follow-up for removing technical barriers to EE/RE/ST technologies, support the development of new methodologies for projects that have potentially high GHG emission reduction dividends

Environmental Impact Assessments/Studies

Technical assistance (during GEF project implementation) for the EIA/EIS of selected feasible replication projects that can be potential CF/CDM projects

PIN/PDD development Technical assistance (during GEF project implementation) for the PIN/PDD development of feasible replication projects that can be potential CF/CDM projects

Validation, verification and certification

Allow inclusion in the GEF CCM project financial plan at least the validation cost of selected replication projects that will be assisted under the GEF CCM project

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Examples of Potential GEF Support for Carbon Finance

Relevant GEF CCM Project

ActivityExample Description Suggestion for CF/CDM Support

Project Preparation Fund

PHI: CBRED As part of the financial barrier removal activities, PPF was established to allow project preparation (including arrangement of financing and power purchase agreements (PPA)) for a selection of "delivery mechanism" demonstration projects slated for development.

Selected potential CF/CDM projects can be included as eligible users of the Fund.

Detailed Feasibility Studies of Demonstration Sites

Several Detailed technical design and engineering, cost calculation, design of ownership and management models, cost-benefit analysis, design of operation and maintenance concept, and assessment of financing aspects

Apply also to selected potential replication projects intended for CF/CDM, and include this as part of the incremental activities.

Specific Demonstration Project Implementation Requirements

Several Performance of activities to meet certain requirements required to facilitate the smooth and effective implementation of the demonstration projects.

Apply also to selected potential replication projects intended for CF/CDM, and include this as part of the incremental activities. Include development of new methodologies and PIN development

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Examples of Potential GEF Support for Carbon Finance

Relevant GEF CCM Project

ActivityExample Description Suggestion for CF/CDM Support

Establishment of Baseline Data for the Demonstration Project Sites

Several Gathering of baseline data for each demonstration projects as well as establishing operating performance targets for each demonstration.

Apply also to selected potential replication projects intended for CF/CDM, and include this as part of the incremental activities.

Technical Assistance to Potential Replication Projects

Several As part of the follow-up work on promoting proof-of-concept through the demonstrations, technical assistance is provided to selected project developers interested in investing on the replication of the demonstrations.

Apply also to selected potential replication projects intended for CF/CDM, and include this as part of the incremental activities. Include TA in the conduct of EIA, drafting of PDD, and pre-validation

Technical Assistance for the Financing of Demonstration Projects

Selected Provision of assistance in the processing of applications for securing from banks/FIs financing of the operation and maintenance of demonstration projects

Apply also to selected potential replication projects intended for CF/CDM, and include this as part of the incremental activities.

Monitoring & Evaluation

All CCM projects with demos

Design of the M&E scheme for demonstrations

Apply also to selected potential replication projects intended for CF/CDM, and include this as part of the incremental activities.

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Oliver WaissbeinSectoral Approaches &

Unaddressed Sources & Sinks

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Ideas for GEF Engagement Sectoral Approaches & Unaddressed Sources & Sinks

General Barriers

Data:• Sector baseline surveys

Policy: • Policy formulation

and implementation

Finance:• Financing and incentives for

private sector

MRV:• Design of data collection systems

Project-based (CDM)

ProgrammaticCDM

SectoralApproaches

Trading Schemes

NAMAs

Moving to scale, quantifying and putting a price on carbon

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1. Sectoral approaches • Joint UNDP/Deutsche Bank report on GET-FiT.

Feed-in Tariffs for Renewable Energy• Possible fund to finance premium• Possible links to CDM, sectoral and NAMAs

2. Emission Trading • Domestic or regional schemes

3. Climate impact of ozone depleting substances• Transition from voluntary to compliance carbon

markets

Ideas for GEF Engagement Sectoral Approaches & Unaddressed Sources & Sinks

UNDP Examples

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End/Additional Slides

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Energy Efficient Market Transformation/

Early RetirementCurrent Funding Sources:

• GEF• MLF (pilots)• Innovative financing

mechanisms

Industrial Conversion/Manufacture of ODS-Free,

Low-GWP Appliances

Current Funding Sources:• MLF• CERs (HFC 134a)• VERs (HCFC 141b)

End of Life/ODS Destruction

Current Funding Sources: • VERs • MLF (pilots)• Innovative financing

mechanisms

ODS Life-Cycle

UsagePhase

Waste Management

Replacement of unit

Combining and Sequencing Climate Finance: Life Cycle Management of Refrigerators