WRI Publications Feed: International Financial Flows and the Environment (IFFE)

Environmental and Social Policies in Overseas Investments: Progress and Challenges in China

Sarah Parsons — Wed, 08 May 2013 16:57:41 -0400

Summary

Like other countries that invest overseas, China—through the projects it finances and executes—can bring great benefit to the countries and communities in which it invests (“host countries”). However, investments can pose challenges and risks to host and investor countries. Effectively tailored environmental and social policies can identify and mitigate not only unanticipated environmental and social harm, but also some of the investment risks that can undermine the long-term financial success of a project.

Even in the midst of the 2008–09 global financial crisis, China’s outward foreign direct investment (OFDI) continued to grow.1 Between 2008 and 2009, China’s OFDI flows grew nearly 8 percent, while total world OFDI flows during the same period decreased nearly 40 percent (Unctad Stat 2012). In both 2009 and 2010, the Export-Import Bank of China and the China Development Bank together lent more than the World Bank did to developing countries (Dyer, Anderlini and Sender 2011).

Environmental and Social Policies in Overseas Investments: Progress and Challenges for China examines trends in China’s overseas investments and considers how social and environmental policies can reduce investment risks and enhance the positive impacts of China’s OFDI. We focus on three major forces in China’s OFDI: the central government, financial institutions, and centrally owned state-owned enterprises (SOEs). Although a variety of institutions are involved in overseas investments, the majority of Chinese OFDI originates from centrally owned SOEs, and its OFDI growth is fueled largely by the strong lending capacity of its financial institutions, especially the China Development Bank and the Export Import Bank of China. Aid, trade, and other types of financial interest that may be associated with overseas economic interests are not addressed here, nor are overseas investments by collectively or privately owned companies.

As China continues to expand overseas investments, understanding and managing the environmental and social impact of these investments in host countries can help it build mutually beneficial relation-ships with host countries. Already, methods to address environmental and social issues in overseas investments are emerging in China. Chinese regulatory authorities are creating guidelines in their areas of jurisdiction, and individual financial institutions are developing and refining their own policies. International experience with environmental and social risk mitigation offers a useful context for Chinese investors and policymakers to consider as they continue to develop these overseas investment policies.

Moving forward, China faces several challenges, not the least of which is a lack of understanding of the regulatory and legal environment in host countries. Attention to host countries’ regulatory and legal environments must be ratcheted up if investment risks are to be reduced. Supervisory challenges and coordination among ministries should also be prioritized. Finally, even though governments, financial institutions, and corporations have produced multiple guidelines and policies to guide more sustainable overseas investments, implementation remains a major challenge. Sufficient resources should be directed toward implementation to overcome barriers such as cost, coordination of resources, and time.

While these challenges are real, China’s rapid economic growth and global presence also create opportunities that offer insight for a global audience. China can shape the direction and return of its OFDI to maximize positive impact and achieve “win-win” relationships with host countries. As an experienced recipient of OFDI, China can now apply those lessons as it invests abroad. In addition, China can step into facilitator and leadership roles in the international agenda of promoting sustainable cross-border investment, especially in developing countries.

This issue brief is the first in a series of WRI publications by the International Financial Flows and the Environment (IFFE) project that examine the role of environmental and social policies in overseas investments. Future publications will look at the “business case” for adopting stronger environmental and social policies, and will include case studies of overseas investments from China and other countries.

The U.S. Contribution to Fast-Start Finance: FY12 Update

Sarah Parsons — Tue, 23 Apr 2013 14:06:17 -0400

Summary

As part of the international climate negotiations, developed country governments committed to provide developing countries with “new and additional resources, including forestry and investments through international institutions, approaching $30 billion in the period 2010-2012 with balanced allocation between adaptation and mitigation.” This fact sheet considers U.S. efforts to provide “fast-start finance” (FSF) over the full three-year period, drawing primarily from program data presented in the State Department’s report series, “Meeting the Fast Start Commitment.” The fact sheet is part of a series of analyses on FSF contributions, and updates a May 2012 working paper quantifying total U.S. contributions to the global FSF commitment.

Over the FSF period, the United States has reported roughly $7.5 billion, or about 20% of the global self-reported total flows of FSF. Notable attributes of the U.S. FSF contribution include:

The levels of finance fluctuated over the three-year period, with the largest volume in FY11. This is related to variations in spending on the part of key agencies such as the Overseas Private Investment Corporation (OPIC) and the Millennium Challenge Corporation (MCC).
Over the three-year period, a significant share of the U.S. portfolio supported clean energy in Asia. OPIC and the U.S. Agency for International Development (USAID) played key roles in administering finance, and finance was channeled via a combination of grants and loans, guarantees, and insurance.

Transparency has improved in FY12 reporting, but there is room for further improvement. In addition to implementing the new international reporting requirements adopted at Doha, the following actions would help support verification of aggregate figures, as well as coordination and accountability:

Publishing a detailed, disaggregated, annual list of projects and programs;
Using the Foreign Assistance Dashboard as a platform for sharing information;
Aligning reporting under the United Nations Framework Convention on Climate Change (UNFCCC) with reporting to the Organisation for Economic Co-operation and Development (OECD); and
Continuing to work with other countries and multilateral institutions to strengthen and harmonize reporting systems.

Striking the Balance: Ownership and Accountability in Social and Environmental Safeguards

Sarah Parsons — Thu, 11 Apr 2013 15:05:46 -0400

Executive Summary

Many governments around the world have put in place systems to help ensure that investments in changes such as infrastructure projects, government programs or new national laws do not bring undue harm to their citizens or environment. The effectiveness of these systems in successfully preventing negative impacts varies widely. Developing countries tend to have a particularly difficult time ensuring that investments within their borders meet minimum social and environmental standards. As a result, many financial institutions have established their own policies to help ensure that their investments do not result in harm to vulnerable communities or ecosystems. These policies are generally known as “safeguards.” Although safeguard policies provide vital protection against risks to people and the environment, properly designing and implementing these policies means navigating complex relationships between financial institutions, governments, and the citizens of recipient countries.

The World Bank (the Bank) has been at the forefront among multilateral development banks in developing safeguard policies. In recent decades, the Bank has experimented with different approaches to social and environmental protection. These approaches respond in part to variations in the way in which countries receive money from the Bank, such as investments in projects versus policies. They have also emerged in reaction to the changing global landscape. Some developing countries have become richer and created stronger systems to protect people and the environment. The global community has also realized the value of letting developing countries define their own development path. At the same time, the pressing need to protect our global common goods and most vulnerable communities has become more apparent.

This working paper seeks to help the Bank and other financial institutions take stock of experiences to date and distill lessons for the future. We look at four different approaches to protecting against social and environmental harm: the traditional safeguards approach, which applies to most project lending; the Use of Country Systems approach, which the Bank has applied to some project lending on a pilot basis; the approach used for Program for Results investments, which applies to the Bank’s results-based lending pilot; and the approach used for Development Policy Loans, which applies to loans that support changes to policies and institutions.

While all four of these approaches rely on the rules and institutions of the recipient country, they do so to different degrees. Through an analysis of the strengths and weaknesses of each of approach, we arrive at seven lessons for the World Bank and other financial institutions looking to balance ownership and accountabil¬ity in their social and environmental policies:

Building on country safeguard systems can enhance ownership and incentives for safeguard implementation.
Minimum standards and positive incentives can clarify requirements and encourage countries to strive toward more ambitious social and environmental goals.
Safeguard implementation requires anticipating risks, planning to deal with those risks, managing and monitoring implementation, and responding to harm.
Proper safeguard implementation requires people on the ground to engage, collaborate and problem solve.
Recipient country safeguard systems still need support.
Citizens play a key role in any effective safeguard system.
To successfully balance ownership and accountability, safeguard approaches need to recognize differences among countries, sectors, and projects.

Mobilizing Climate Investment: The Role of International Climate Finance in Creating Readiness for Scaled-Up, Low-Carbon Energy

Sarah Parsons — Fri, 22 Feb 2013 15:20:51 -0500

Executive Summary

Between now and 2050, developing countries need an estimated $531 billion per year of additional investment in energy supply and demand technologies in order to limit global temperature rise to 2° C above pre-industrial levels. To achieve this scale of investment, developing country governments and custodians of international public finance will need to deploy limited public finance in ways that leverage an unprecedented volume of private sector investment. Despite growing global investment in low-carbon energy and falling costs, it will be difficult to achieve the scale and urgency of investments needed without the appropriate policy, institutional, industry, and financial conditions. Governments and their international partners need to undertake “readiness” activities designed to put in place the conditions that attract scaled-up investment and enable a transformation toward low-carbon energy development pathways.

Drawing on six developing country case studies, this report identifies a set of key lessons and insights for readiness. The report develops a framework to identify and prioritize readiness activities that will require public financial support to create the conditions necessary to scale up investments in renewable energy and energy efficiency (collectively referred to as low-carbon energy). The report discusses the implications of the findings for international climate finance and draws a number of recommendations for the Green Climate Fund (GCF). It targets international public funds and institutions looking to accelerate investment in low-carbon energy, as well as developing country governments looking to identify and prioritize activities for funding.

Enabling conditions for scaling up investment

We identify a number of policy and institutional, industry, and financial sector conditions that can attract scaled-up public and private investment in low-carbon energy. Policy and institutional conditions include plans and targets for low-carbon energy, institutional capacity to effectively implement climate change and energy policies, laws supporting investment in low-carbon energy, and regulatory and fiscal instruments to implement laws. Industry conditions include the capacity of developers to prepare bankable projects, information on renewable resource availability or options to conserve energy, engineering capacity, and the presence of a support industry and enabling infrastructure. Financial conditions include a stable financial sector with the capacity and range of financial products needed to support low-carbon energy.

In six case studies, we analyze the role that enabling activities have played in promoting scaled up investment in low-carbon energy, and the role that international public finance has played in supporting such activities. These case studies examine energy efficiency in Thailand, wind power in South Africa, solar water heaters in Tunisia, geothermal power in Indonesia, wind power in Mexico, and energy efficiency in India. Taken together, the case studies suggest two overarching determinants of success in scaling up investment: government leadership and effective responses to pricing distortions. When government leadership is strong, a commitment to policy and institutional reform and implementation of stated goals usually follows. This in turn strengthens the investment climate and increases investor confidence. In cases where market failures severely distort the market in favor of carbon-intensive energy sources, it has been more difficult to create the conditions that attract investment in low-carbon energy.

Lessons learned for the design of readiness activities

The case studies also reveal a number of lessons about the design of readiness activities and the role of international partners in supporting them.

Small amounts of long-term funding for enabling activities can help scale up investment

In each case study, small investments in enabling activities—from several hundred thousand dollars to several million dollars—helped pave the way for scaled up private and public investments by supporting the creation of conducive policies and market conditions. International support has been most effective when sustained over five or more years. Technical support can also be more effective if international advisors are integrated into national institutions and report to national, rather than international, authorities.

International support is likely to be more effective if it identifies and targets a few critical barriers to investment. In countries with comparatively few enabling conditions for investment, attempts to simultaneously surmount all investment barriers may result in resources being spread too thin to achieve a significant impact. Chapter 4 presents a framework that can aid governments and their international partners in identifying activities to support.

Strengthening the enabling environment should not end when investment begins. In each case study, readiness activities and larger investment took place simultaneously. Even in cases where the investment climate was already strong, there was still scope for additional enabling activities to address specific gaps.

Integrated, inclusive planning processes and policy and institutional reform are key to attracting investment

The integration of low-carbon energy into a broader development agenda can enhance coordination and alignment between different sectors of the economy. Civil society and private sector actors can bring valuable expertise and experience to the planning process, and play important roles in ensuring that low-carbon energy policies and plans are realistic, robust, and tailored to the needs of the country. International support should be aligned with national plans and priorities for effective and sustained outcomes, and should be flexible enough to respond in a timely manner to evolving priorities.

Changes to the policy and regulatory environment proved crucial to attracting investment on a significant scale in the case studies. International support for the design of policies is likely to be effective only if it is demand-driven and not seen as infringing on national sovereignty. Countries that have set up their own financial mechanism to support low-carbon energy projects are well positioned to implement their objectives effectively and independently, thereby reducing their reliance on international partners to finance their low-carbon energy needs.

Having the appropriate institutions in place to develop, implement, and regulate policy reforms—and empowering them with the mandate and resources to carry out their functions effectively—helped ensure that policies were coherent and consistent, which increased investor confidence.

In key institutions, strengthening the capacity of staff and management to carry out their functions is an important readiness activity that often requires international funding support. The case studies suggest that capacity-building support is most effective when carefully targeted to address particular skills gaps.

Tackling information barriers and strengthening industry and financial sector capacity can unlock investment

Public support for broad-scale renewable resource assessments or exploration can provide information on resource availability that is key to attracting investor interest. Similarly, measures to familiarize industry and other actors with low-carbon energy options—such as training centers, awareness campaigns, and seminars and workshops that bring together stakeholders—can strengthen industry knowledge of and capacity to implement renewable energy projects, and raise awareness of the potential cost savings from energy efficiency.

International support plays an important role in facilitating learning and demonstrating new financing models for renewable energy, as well as strengthening industry’s capacity to develop and implement low-carbon energy projects. In some cases, international support to strengthen the capacity of small and medium enterprises (SMEs) and improve their access to financing for low-carbon energy projects has helped unlock investment by this sector of the market.

Financial institutions can play a key role in opening the market for low-carbon energy technologies. However, some financial institutions lack knowledge of and experience with these technologies. Strengthening the capacity of financial institutions to support renewable energy and energy efficiency projects, including through pilot financing programs, has been important in scaling up domestic sources of finance for low-carbon energy in several cases. In some cases, the high risk—real or perceived—of investing in low-carbon technologies without a proven track record in the country has deterred domestic financial institutions. Mechanisms that carefully allocate risks to those best placed to manage them can help attract financing from domestic banks and other financial institutions.

A framework for guiding readiness support for low-carbon energy investments

Building on the experiences of the six case studies, we propose a framework to guide governments and their international partners in determining how best to provide readiness support to countries with low-carbon energy sectors in different stages of development. The framework describes some of the activities required to strengthen the enabling policy and institutional environment for investment. In the early stages of development, these include support for assessing energy options, engaging stakeholders in the energy planning process, capacity building for government agencies and civil society, technical support for developing plans and strategies, and outreach activities. In later stages, activities include support for designing and implementing regulations and fiscal instruments, and targeted capacity building for government agencies, including local governments.

The proposed framework also describes some of the activities needed to strengthen the enabling industry and financial conditions for investment. In early stages of development, these include renewable resource assessments and energy conservation awareness campaigns, capacity building for project developers and financial institutions, support for technology transfer and localization, feasibility studies and environmental and social impact assessments, and support for financial sector reform. At later stages, activities include strengthening engineering capacity for low-carbon energy projects, supporting ancillary industries (such as upgrading grid infrastructure), and supporting financial institutions to assess and finance low-carbon energy projects.

Recommendations for the Green Climate Fund

The six case studies illustrate different approaches that various international partners have used to support readiness activities. The lessons learned are intended to inform the recently established GCF as it attempts to identify how best to support a paradigm shift toward low-emission and climate-resilient development pathways. Although the GFC’s detailed operational modalities are not yet defined, it could take a number of approaches to support readiness. These include supporting readiness directly or partnering with existing institutions; establishing distinct channels and allocations for readiness or integrating enabling activities into existing channels and allocations; and supporting readiness through the private sector facility.

Implementation Strategies for Renewable Energy Services in Low-Income, Rural Areas

Sarah Parsons — Sun, 10 Feb 2013 10:10:46 -0500

Executive Summary

This issue brief is the first in a series of three that focus on expanding the delivery of affordable, renewable energy in developing countries. It describes the core business strategies employed by a group of socially oriented energy enterprises and organizations working to provide distributed, renewable energy services to low-income, rural communities and provides examples of how these strategies were implemented.

The enterprises and organizations described here promote the social, economic, and environmental benefits of delivering clean energy services to individuals and communities that are not well served by traditional energy providers. Their business models combine social and environmental objectives with entrepreneurship. Although these enterprises function across different countries and contexts, they are characterized by a common focus on clean, affordable, accessible, and scalable energy solutions. Millions of underserved people in 11 countries around the world have benefited from the work of the enterprises highlighted here.

This series is rooted in a three-day workshop held by the World Resources Institute (WRI) and the DOEN Foundation in March 2012 as well as follow up interviews that gathered the experiences of 25 socially oriented energy enterprises, organizations, and financiers who understand the energy needs of low-income consumers in developing countries.

Over the course of the workshop and interviews, participants identified four core strategies common to their business models: (1) understanding consumer needs, preferences, and capacity to pay; (2) demonstrating the value of a new technology or energy service delivery model; (3) building and maintaining consumer trust in the product and the supply chain; and (4) designing financing and payment schemes that fit within consumer energy budgets.

This brief examines each of these strategies, first through exploring its rationale and then by considering specific examples of its implementation. Although the energy access solutions discussed still face obstacles for scale up, several socially oriented energy enterprises and organizations have proven that with the right delivery mechanisms, and effective and efficient financing, many consumers can access affordable, cleaner energy services.

Summary of Developed Country ‘Fast-Start’ Climate Finance Pledges

Maggie Barron — Mon, 26 Nov 2012 15:41:50 -0500

OpenClimateNetwork.org

Visit openclimatenetwork.org for the latest analysis, project info, expert perspectives, and more.

Reiterating a pledge made in Copenhagen in 2009, the Cancun Agreements of December 2010 formally commit developed countries to collectively provide resources “approaching USD 30 billion for the period 2010 - 2012” to support developing countries’ climate efforts. This so-called “fast-start” finance will help developing countries, particularly the poorest and most vulnerable, mitigate (reduce) their greenhouse gas emissions, and adapt and cope with the effects of climate change. These pledges also present an opportunity to build trust between developed and developing countries in the international climate arena, in turn fostering progress towards a comprehensive post-2012 international climate agreement.

WRI has synthesized available information on countries’ pledges and measures they have taken to make the pledged resources available to developing countries. The accompanying table sets out both the amounts and the mechanisms by which funding would be delivered. WRI has also looked at how countries indicate whether their pledges will provide “new and additional” funds compared to what they provide as official development assistance. In-depth analysis on a subset of countries’ fast-start finance contributions is available separately.

This table will be continuously updated as more information becomes available.

Q&A on this Analysis

(Updated on November 26, 2012)

Have developed countries met their fast-start finance pledge?

Based on our research, as of November 26, 2012, 23 developed countries and the European Commission have publicly announced their individual fast-start finance pledges, in addition to the European Union’s collective pledge. These pledges total USD 33.92 billion. While this represents a significant step in the right direction, the extent to which these pledges are consistent with internationally agreed principles for fast-start finance is unclear. The Cancun Agreements mandate that fast-start funds have a “balanced allocation between adaptation and mitigation,” be “new and additional,” be “prioritized for the most vulnerable developing countries, such as the least developed countries, small island developing States and Africa,” and include “forestry and investments through international institutions.” Because the details of this mandate have not been defined, it is not clear that developed countries’ fast-start finance contributions fulfill these criteria.

Finally, ensuring that pledges are actually delivered will be essential. According to reported information of the pledged funds, USD 28.06 billion has been requested and/or budgeted by the executive bodies of the countries during the fast-start period. In some cases, the legislative bodies have also approved these requests. The actual delivery and implementation of the finance, however, can be complicated to track, and is generally not documented in countries’ fast-start finance reports.

Do the funds have a “balanced allocation between adaptation and mitigation”?

Countries often specify the general objective that their fast-start funds will support. For example, of the USD 1.58 billion mobilized for fast-start by Germany in 2010 and 2011, 48 percent will support mitigation, 28 percent will support adaptation, 21 percent will support REDD+, and 3 percent will support multipurpose activities. In its 2010 fast-start finance report, Germany highlighted the challenges of identifying suitable adaptation projects as the reason for this, and recognized the need to adjust the allocation of funds across the three areas of mitigation, adaptation and REDD+. In the case of both Japan and the United States, a large majority of fast-start finance supports mitigation objectives. The grant-based portion of their contributions, however, gives more balanced consideration to adaptation. Several countries involved in the Interim REDD+ Partnership — a process created parallel to the UNFCCC to ensure effective and sustainable REDD+ (reduced emissions from deforestation and forest degradation) actions over the next few years — have also specified that at least 20 percent of their funds will support REDD+. However, there is no agreed-upon definition among countries of what constitutes a “balanced allocation.”

Are the pledged funds “new and additional”?

“New” funding represents an increase relative to pledges or allocations from previous years. A number of pledges include restated or renamed commitments already made in the past. For example, Japan’s Hatoyama Initiative is a restructuring of the previously announced Japanese Cool Earth Partnership, with some new resources included in the Initiative. Countries such as the United Kingdom and the United States are counting previous commitments to the Climate Investment Funds (CIFs) as part of their fast-start finance pledge. The United States also counts its annual contribution to the Montreal Protocol Fund, a long-standing commitment that dates back more than two decades.

Funds that are “additional” ensure that their delivery does not result in the diversion of funds from other important development objectives. In other words, climate mitigation and adaptation funds should be additional to development aid. Parties to the UNFCCC have not yet achieved consensus on a clear and specific definition of ‘additionality’ that can be applied uniformly to developed country financial pledges. As a result, countries have proposed a variety of methods for defining the additionality of their fast-start finance.

Do the pledges include “investments through international institutions”?

Countries are channeling investments through a mix of multilateral, bilateral, and public-private institutions. Several countries, including Japan and the United States, are channeling a considerable amount of their funds through export credit agencies and other public-private channels. The Climate Investment Funds(CIFs) and the Global Environment Facility (GEF) are the primary multilateral institutions of choice through which other funds will be channeled. The governance of the funds has implications for the effectiveness and perceived legitimacy of the overall climate finance architecture. Developing countries generally prefer that institutions governing finance ensure developing country ownership of funded activities and prioritize funding for climate vulnerable countries. Developed countries tend to emphasize the need to minimize bureaucratic costs and ensure the effective use of resources.

Why is fast-start finance “prioritized for the most vulnerable developing countries, such as the least developed countries, small island developing States, and Africa”?

Countries under the Convention recognize that developing countries are highly vulnerable to climate change impacts because they have fewer resources to adapt to the effects of climate change, which can include increased droughts and floods, rising sea levels, and greater uncertainty in the agricultural sector. Least developed countries (LDCs) and small island developing States (SIDS) in particular are recognized as needing special consideration due to their extreme vulnerability. For these reasons, developed countries have pledged to prioritize fast start funds for the “most vulnerable countries.” Several countries are channeling their fast start finance through the Least Developed Countries Fund or the Adaptation Fund, many are channeling finance directly to SIDS and LDCs, and Australia in particular states that it will channel about one third of its fast-start finance to SIDS and about one quarter to LDCs.

What types of financial instruments are countries using?

There are several different types of financial instruments countries are using to deliver their fast-start finance, including grants, loans, equity, loan guarantees, insurance, and private investments. Many countries have provided some information on the type of financial instruments used. For example, the US reported providing USD 4.7 billion in grants through Congressional appropriations, USD 2.7 billion in development finance and export credits, which mostly take the form of concessional loans. Norway reports that all of its fast-start finance will be grants. Meanwhile, Japan’s fast-start finance includes grants and loans that meet ODA standards, finance in the form of ‘other official flows’, and may also count leveraged private finance, though this is ambiguous. However, reporting on the type of financial instrument used is neither comprehensive nor consistent. For example, little information is reported on the concessionality of the loans when used.

What are the next steps to ensure clarity on the delivery of climate finance pledges in the future?

The UNFCCC system for developed countries to report on the delivery of climate finance faces several challenges, which limit the utility of available data. For example, countries currently use multiple methods for reporting and often provided insufficient information even where requested. To address this, the Cancun Agreements mandate more frequent reporting by developed countries using an enhanced common reporting format.

While these enhanced reporting provisions will be essential for successful tracking of developed country climate financial flows, they will not be ready in time to provide guidance for reporting on the short-term, fast-start finance. In the meantime, the Cancun Agreements invited developed country Parties to submit information to the UNFCCC secretariat, for compilation, on the resources provided to fulfill their fast-start finance commitment by May 2011, 2012, and 2013. Nine developed countries and the EU submitted their reports on or around the most recent May 2012 deadline. While the Cancun Agreements include reporting provisions for fast-start finance, it does not provide guidance on what these reports should include, resulting in reported information that is neither fully comparable, transparent, nor complete, as is demonstrated by the gaps in information in WRI’s fast-start table, the Open Climate Network’s fast-start finance assessments, and in a report by IIED assessing the transparency of the May 2011 fast-start finance reports. The UNFCCC secretariat hosts a fast-start finance module on its finance portal that enhances the comparability of the reports but it remains limited to information provided by developed country Parties. It also does not capture information available on the faststartfinance.org website or on individual donor or recipient websites, or other sources such as NGOs, the private sector or multilateral development banks.

To build trust with developing country counterparts, developed countries should improve their fast-start finance reporting in the future, for example, by including more comprehensive, comparable and transparent information on the following seven elements in their annual fast-start finance reports: scale, method for determining that the money is “new and additional,” channeling institutions, objective, geographic distribution, status of the pledge, and type of financial instrument.

Athena Ballesteros, Emily Chessin, Kirsten Stasio, and Remi Moncel contributed to earlier versions of this Q&A.

Grounding Green Power: Bottom-Up Perspectives on Smart Renewable Energy Policy in Developing Countries

Maggie Barron — Tue, 24 May 2011 12:51:13 -0400

Watch the summary interview with Lead Author Lutz Weischer

This paper was published by the German Marshall Fund of the United States in cooperation with the Heinrich Boell Foundation and the World Resources Institute.

Developing Countries in the Renewable Energy Transformation

In order to meet the intensifying climate challenge, the global energy system must undergo a fundamental transformation, with a rapid increase of renewable energy worldwide. Developing countries are at the forefront of this challenge, since they are expected to add around 80 percent of all new electric generation capacity worldwide in the next two decades.

The deployment of energy from renewable sources is accelerating in developing countries, and already accounts for a higher percentage of electricity generation than in the developed world. In 2008, non-OECD nations generated 21 percent of their electricity from renewable sources including large-scale hydroelectric power (compared with 17 percent in OECD countries), according to International Energy Agency (IEA) statistics. However, this figure must more than double by 2035, to 46 percent, in order to meet the IEA’s “450 scenario,” which outlines a climate friendly pathway for meeting global energy demands.

Transforming the energy system on this scale will require significantly increased support from developed countries, channeled through both bilateral assistance and multilateral institutions, as well as philanthropic initiatives. Our conclusions, derived from a series of case studies and a comprehensive review of existing literature, suggest that donors should deploy financial support more effectively by moving beyond a project-by-project approach to one that creates the right environment for investments in scaled-up, nationwide deployment.

This working paper seeks to assist in this process, by identifying key components of smart renewable energy policy in developing countries, focusing on the power sector. It also provides recommendations for maximizing the effectiveness of international support for deployment of renewable energies, drawn from these on-the-ground experiences in developing countries.

About this Working Paper

Chapter 1 introduces the approach and methodology taken in this paper and describes the key concepts we address. The second chapter discusses what developing countries are already doing to deploy renewable energy sources, and how they can be supported in scaling up such efforts. It also introduces a set of principles of smart renewable energy policy to propel such a transformation, developed by the World Resources Institute. These are based on insights drawn from case studies of existing renewable energy policies in 12 countries in Africa, Asia, and Latin America as well as from existing literature.

The following five chapters each examine one key element of smart renewable energy policy, discuss lessons learned, and identify needs for international support. These cover planning and strategy (Chapter 3), well-designed generation-based incentives (Chapter 4), an enabling policy and regulatory framework (Chapter 5), attractive financing conditions (Chapter 6), and the necessary technical environment (Chapter 7). Our findings and recommendations are summarized in Chapter 8.

Principles of Smart Renewable Energy Policy

We define smart renewable energy policy as the set of rules, regulations, and government actions that lead to an increased share of renewables in total electricity consumption in line with a country’s development objectives. Smart renewable energy policy encourages private investment, achieves its objectives in a cost-effective way, promotes continuous innovation, and is designed through transparent, accountable, and participatory processes.

Presentation

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Power, Responsibility, and Accountability: Re-Thinking the Legitimacy of Institutions for Climate Finance

Maggie Barron — Tue, 14 Dec 2010 12:27:05 -0500

Executive Summary

The 2009 Copenhagen Climate Summit left unresolved major questions about how to fund lowcarbon development in developing countries. In a high-level political declaration—the “Copenhagen Accord”—developed countries agreed to “provide new and additional resources … approaching USD 30 billion for the period 2010–2012” and to a goal of jointly mobilizing USD 100 billion a year by 2020 from both public and private sources, to address the needs of developing countries. As the negotiations on a global climate deal continue, disagreement remains on how much of these funds will come from public or private sources and whether these billions should be delivered through new or existing institutions. There is also heated debate over whether a single centralized institution or a decentralized approach that coordinates international, regional, and national institutions would be more effective.

Although there are many variations in government positions, broadly speaking, developed countries favor a substantial role for existing institutions, such as the multilateral development banks (MDBs) that they have funded and led for the past 60 years. Developing countries prefer new institutions, arguing that existing ones favor the interests of contributor countries and have failed to deliver on promises to support poverty alleviation and sustainable development. The ongoing negotiations on a global climate deal reflect this “northsouth” gulf. Despite these differences, one thing is clear: if the institutional arrangements entrusted with managing new flows of climate finance are to succeed in raising the required resources and in investing these resources effectively, they will need to be perceived as legitimate by both contributors and recipients.

Institutional Arrangements for Climate Finance: Power, Responsibility, and Accountability

Box A. Dimensions of Power, Responsibility, and Accountability in the Design of a Climate Finance Mechanism

Power: The capacity—both formal and informal—to determine outcomes

How will the financial mechanism’s governance structure distribute voice and vote between and among contributors and recipients?
What role will the United Nations Framework Convention on Climate Change’s (UNFCCC) institutions, including the Conference of the Parties, play in guiding the financial mechanism?
To what extent will contributors be able to determine funding priorities by placing conditions on the resource mobilization and allocation process?
How influential will the secretariat and management staff of the financial mechanism be in determining project design and selection?
Will advisory groups, civil society observers, and local communities play a role in determining how the financial mechanism operates?

Responsibility: The exercise of power for its intended purpose

Are the financial mechanism’s standards, program priorities, and eligibility criteria strong enough to ensure its resources are invested fairly and effectively?
How do cost-sharing formulas (e.g., incremental, marginal, transformative costs) allocate responsibilities between contributor and recipient countries, and between the financial mechanisms and recipient countries?
To what extent are national institutions and local civil society entrusted with ensuring the effective design and implementation of investments?

Accountability: The standards and systems that ensure power is exercised responsibly

How does the financial mechanism measure, evaluate, and incentivize results?
Are effective environmental and social safeguards in place to ensure the investments do no harm?
How are fiduciary duties and financial management standards supported and enforced?
Are grievance and inspection mechanisms in place to ensure that standards are followed?

The full report seeks to ground the debate on the future of climate finance in an objective analysis of existing efforts to finance climate mitigation and adaptation in developing countries. The authors step back from the question of which institutions should be entrusted with new flows of climate finance to examine instead how governments can design a climate financial mechanism in a way that is widely perceived as legitimate. We identify three crucial dimensions of legitimacy: power, responsibility, and accountability (see Box A). While these three dimensions interrelate and overlap, we have found them to provide a useful analytical framework to analyze and guide choices in institutional design.

We review the governance structures, operational procedures, and records to date of 10 international and national financial mechanisms, with reference to these core dimensions of legitimacy, to draw lessons for future institutional arrangements (see Box B). We place special emphasis on the experiences with the Global Environment Facility (GEF), which, in operation since 1994, is the longest serving operating entity of the United Nations Framework Covention on Climate Change (UNFCCC) financial mechanism. In addition to the GEF, we review experiences from the Multilateral Fund for the Implementation of the Montreal Protocol, in operation since 1990, which is often referred to as a model for future funds. The remaining funds reviewed are much newer and yield more insights with regard to design, rather than operation.

We recognize that perceptions of the legitimacy of a financial mechanism are inherently subjective and that this subjectivity is revealed in the very different preferences expressed by contributor and recipient countries. We believe, however, that if governments were to discuss the dimensions of legitimacy more explicitly, the stakes and the trade-offs would become more apparent, and a more shared understanding on how to design a legitimate financial mechanism would emerge. We believe that the failure, thus far, to address the distribution of power, responsibility, and accountability more explicitly has led to a proliferation of financial mechanisms that are underfunded, which in turn leads to calls to create new mechanisms.

We recognize that perceptions of a financial mechanism’s legitimacy will also depend upon an institution’s performance—its demonstrated capacity to commit funding to investments that reduce greenhouse gas emissions and build resilience to climate change. Most of the climate financial mechanisms studied have not been operating at a scale or for a time period that would allow a full assessment of their performance. We nonetheless seek to make recommendations that could improve the design and the performance of new and existing climate financial mechanisms.

We conclude that a new global deal on climate finance is likely to significantly redistribute power, responsibility, and accountability between traditional contributor and recipient countries. Most significantly, the power of emerging economies to control climate finance mechanisms will grow, as will their responsibility and accountability for the performance of these institutions. In light of the dramatic changes in global politics and the global economy in past decades, this redistribution seems both long overdue and necessary to provide the basis for a successful global partnership on climate finance.

Conclusions and Recommendations

This is a dynamic time for climate finance, as the international community struggles to craft mechanisms that are perceived to be legitimate by all UNFCCC Parties and that are capable of funding climate-related activities efficiently and at scale. Our analysis of established and new climate financial mechanisms and the current UNFCCC negotiations leads us to conclude the following:

Change is coming. A new global deal on climate finance will likely reinterpret the principles that in the past have guided the design of climate finance mechanisms in a way that significantly redistributes power, responsibility, and accountability between traditional contributor and recipient countries.
A new balance of power, responsibility, and accountability could enhance recipient country ownership. Greater representation of developing countries on the governing bodies of international financial institutions more generally, and climate finance mechanisms more specifically, should help ensure greater emphasis on the national and local “ownership”—and thus the effectiveness—of climate finance investments.
A new understanding of how to balance national interests with global responsibility and accountability is required. This will require assurance that nationally driven investments contribute to global benefits in the form of net emission reductions and that investments protect the most vulnerable countries and communities.
New financial mechanisms—at both the global and the national level—are necessary. If the international community raises the scale of public finance necessary to move developing countries onto a low-carbon, climate-resilient pathway, the capacity and the creativity to spend these resources well will necessitate the creation of one or more new financial mechanisms at the global level and multiple nationallevel institutions.
Existing institutions must also be reformed. The scale of the climate change challenge and of the scale of the funding necessary to respond to that challenge will also necessitate the reform of existing financial institutions, many of which have been supporting fossil fuel–led growth and have yet to mainstream concerns about the impacts of climate change into their strategies.
Current negotiating positions reflect deep historical and ideological divisions—particularly between developed and developing countries—that will need to be overcome by building trust and experimenting with new kinds of relationships. Developed countries have been keen to build on existing financial institutions they have shaped and traditionally controlled. Developing countries are wary of these same institutions, which they see as historically having advanced contributor interests and theories of development, through both the formal and informal exercise of donor power.
At the international level, the choice between reforming traditional development agencies, such as the GEF, U.N. Development Programme (UNDP), the U.N. Environment Programme (UNEP), and MDBs, and creating new financial mechanisms will raise issues of institutional economy and effectiveness. In order to generate a greater sense of trust and ownership, backers of existing agencies may have to accept a degree of duplication of existing capacity through the creation of new mechanisms—particularly where significant gaps in capacity are identified—and to accept strengthened lines of accountability of climate finance mechanisms to the UNFCCC Conference of the Parties (COP). On the other hand, those calling for the creation of new institutions may need to concede that it may waste precious resources to replicate the staff and services provided by existing agencies.
Balancing the roles of international and national institutions will also involve trade-offs. Traditional development agencies have gained the trust of contributors by putting in place systems to both measure and manage impacts of their investments. Developing country recipients, however, have been frustrated by the bureaucracy and the focus on generic rather than country-specific concerns that these systems can generate. Many developing countries will likely struggle to convince contributors that their national institutions have the capacity to manage large-scale development finance without the support of development agencies. Notably, a number of developing countries are taking steps to build and strengthen this capacity and will need support to do so.
Delivering climate finance at scale, at least in the short term, will likely involve multiple mechanisms, both new and reformed. This is true because of the complex politics of the international negotiations and the differing views of legitimacy held by contributors and donors. The urgency and complexity of delivering funds at scale argues for moving forward, at least in the near term, with the institutions that we have, and investing in the strength and quality of COP guidance and national planning processes to ensure coordination and coherence. This experience should then guide the design and operation of the new institutions that will become necessary as the scale of resources grows.
Low-carbon, climate-resilient development is an unexplored frontier for all countries and has potential risks as well as benefits. While high standards will have to be developed and maintained to ensure emissions fall and the vulnerable are protected, climate finance will necessarily entail experiments with new policies and technologies that will need to be watched closely for unintended environmental and social impacts.
Policymakers must agree on ways to diversify the sources of climate finance and to de-link them from the levers of informal power. If existing institutions are to meet evolving standards of legitimacy, then their fundamental governance structures, as well as their operational procedures, will need to be reformed to give greater voice to developing country recipients. If formal grants of power are to lead to the effective exercise of that power, the international community must also make greater efforts to identify sources of revenue, such as new levies or longterm commitments, that are independent from the discretion of contributor governments.
It is necessary to build the capacity of non-state actors and civil society to monitor climate finance governance. Civil society groups at all levels can and are playing an important role in monitoring and influencing decision-making within climate finance funds. But they need to occupy such spaces more effectively than they have to date by monitoring and engaging in more inclusive decision-making processes with technical rigor and authority. However, “representation” of nonstate actors can be a very difficult issue—civil society is diverse with widely differing views.
Near- and medium-term climate finance should focus on strengthening national institutions. A next generation of climate investments should promote the responsibility of recipient countries by strengthening the national institutions that will implement mitigation and adaptation activities and by ensuring their transparency and accountability to citizens within countries, as well as to the international community. While it is important that development agencies provide technical support to national institutions, they should work in closer partnership with national stakeholders. It will be particularly important to engage with stakeholders outside of government, including the private sector, independent research institutions, and civil society. Such collaborations can help ensure climate finance proposals more appropriately reflect national circumstances and priorities.
It is important to draw from the lessons learned from decades of development finance to build national institutions that reflect universally accepted principles of good governance. Traditional finance and development institutions have decades of experience—both good and bad—in translating internationally agreed upon agendas into national and local investments. National institutions should draw from these experiences and be designed and supported to operate in accordance with universal principles of good governance. Strong provisions for accountability should be put in place, including sound fiduciary management, anticorruption measures, and grievance mechanisms and inspection procedures that ensure compliance with environmental and social standards and safeguards.

Guidelines for Reporting Information on Public Climate Finance

Maggie Barron — Fri, 03 Dec 2010 14:06:40 -0500

Executive Summary

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Reporting and reviewing financial information has become an increasingly urgent issue in the international climate negotiations. In the Copenhagen Accord, which resulted from the United Nations Climate Change Convention in Copenhagen in 2009, developed countries pledged to provide USD$30 billion for the period of 2010-2012 and $100 billion per year by 2020 for climate adaptation and mitigation in developing countries. Developing countries want assurances that developed countries are fulfilling their climate finance pledges. To address this need, the Bali Action Plan (2007) mandates that support from developed countries for developing country Nationally Appropriate Mitigation Actions be “measurable, reportable and verifiable.” The Copenhagen Accord, building on these provisions, calls for “financing by developed countries [to] be measured, reported and verified in accordance with existing and any further guidelines adopted by the Conference of the Parties,” and that accounting of such finance is “rigorous, robust and transparent.” However, countries have yet to agree on next steps for tracking progress against climate finance pledges under a post-2012 international climate regime and what, if any, common reporting format will be required.

Current United Nations Framework Convention on Climate Change (UNFCCC) reporting guidelines are neither transparent nor comprehensive, and efforts by multilateral and bilateral development finance institutions to fill this gap are emerging but have so far remained limited in scope. As a result, existing data collection systems provide only limited information on the levels of financing, what financing is used for and which countries are benefiting. They do not provide information on whether funds are new and additional. The result is a lack of coordination among donor countries to ensure that funding efforts address needs in a balanced and thorough way that avoids duplication. This also generates a lack of trust between developed and developing countries that hinders progress in the negotiations for a post-2012 international treaty to address climate change.

Therefore, for public climate financing to be evaluated and flow effectively and efficiently, it is critical that data on climate finance are reported using a common reporting system as well as reviewed. Depending on the level of detail required by a reporting system, the reported data should help determine how Parties are meeting their financial commitments, improve understanding of sectoral and technological investment trends, and lead to assessments of the effectiveness of different forms of financing.

The goal of this paper is to help Parties to the UNFCCC develop robust reporting processes for climate finance, starting with a decision in Cancun that addresses the measurement, reporting, and verification (MRV) of finance. The paper discusses:

The characteristics and principles of an improved reporting system for climate finance.
How and what kind of financial data are currently collected and reported by the UNFCCC, the OECD DAC, private organizations, and multilateral development banks (MDBs).
Options to improve on current reporting systems, including a proposed reporting format.
The potential implications and operational consequences of an improved reporting system for the review process, institutional structures, and fast-start climate finance.

This paper aims to inform not only the nature of the text to be adopted by the Conference of the Parties at COP-16, but will also be pertinent over the next two years as improved reporting guidelines are drafted, agreed to, and implemented.

Key Observations and Recommendations

An ideal reporting process for climate finance should ensure that reporting by developed countries is complete, transparent, comparable, accurate, and efficient. However, current reporting of public sector financing for climate change projects by bilateral and multilateral institutions do not completely fulfill these principles. Consequently, Parties to the Convention should at COP-16:

Request the SBSTA to revise the guidelines for the reporting of information in national communications by Annex I Parties to the Convention, part II: UNFCCC reporting guidelines on national communications (Decision 4/CP.5), including the development of reporting formats for finance, with a view to adoption of the enhanced reporting guidelines by COP-17.

The process of revising the guidelines should be informed by the insights and experiences of the Multilateral Development Banks (MDBs), bilateral financing institutions (BFIs), the OECD DAC, and experts from developed and developing countries.

Parties could significantly improve the transparency of financing by adopting a standardized financial reporting format with common definitions and methodologies to quantify climate finance. However, in launching an effort to either revise or initiate a new means to collect financing data, Parties to the Convention will need to determine the kinds of data they want a climate finance reporting system to provide. This will determine the extensiveness of any expanded data collection effort and its likely cost.

Improved climate finance data alone will not be able to shed light on whether or not funds for climate change are new and additional to official development assistance, a topic on which there are widely divergent political views. Better data would eventually allow Parties to determine from a technical standpoint whether there has been an increase or decrease in climate finance over time. However, judging newness and additionality is a subsequent and separate step which necessitates a political agreement on methodologies and a reliance on other data sources outside of the UNFCCC. A transparent reporting process can nevertheless help inform this discussion and build trust and understanding between developed and developing countries.

Parties should consider implementing a more robust process to review reported data. This could include launching voluntary pilot projects to establish how reviews could be successfully conducted, using independent, non-political technical financial experts, formally establishing clear rules and guidelines for civil society participation in the review process, and improving record keeping so that data between countries can be compared.

A revised reporting system will likely require the redesign of existing databases and search engines. If Parties wish to have a centralized data system, they will need to decide where such a system should be located and will need to develop new procedures for collecting and processing financial data.

The introduction of an improved reporting system will take time to implement. It will thus not satisfy the need for more transparency in the short-term, and in particular for fast-start funding under the Copenhagen Accord. It is important to ensure that financial support to developing countries is accounted for in a clear and transparent manner during the fast-start period through existing reporting systems and through short-term multilateral efforts and efforts on the part of donor countries. Lessons learned from this experience could shape the implementation of new reporting and review systems in the longer term.
With the exception of financing for renewable energy, there are limited data on how much financing is currently being provided by the private sector through channels such as venture capital funds, bank loans or equity finance. Further research is needed to track private sector funds for climate change, including the amount of private sector funds leveraged with public funds.

The Clean Technology Fund: Insights for Development and Climate Finance

admin — Fri, 12 Nov 2010 14:15:11 -0500

Over the past year, the Clean Technology Fund (CTF) administered by the World Bank in partnership with Regional Development Banks has begun financing clean technology deployment projects in fast growing developing countries. The objective of the CTF is to use the minimum level of concessional finance necessary to realize investment opportunities that will have transformative effects on the greenhouse gas (GHG) emissions of the recipient country over the long term. As of March 2010, US$4.35 billion –nearly the entirety of the $4.405 billion in funds pledged to the Clean Technology Fund (CTF)– have been earmarked to support investment plans in 12 countries, and a regional concentrating solar program in North Africa. $888 million dollars in financing for 15 projects in 8 countries has been approved to date.

This working paper reviews recent developments at the CTF, including the status of contributions to the fund, its governance structure, and evolving results framework. Its focus is on the projects for which CTF financing has been approved to date. It analyzes the Mexico and South Africa investment plans and projects as case studies to illustrate some of the challenges and opportunities of addressing policy, regulatory and governance issues in project design and implementation. It is part of a series of working papers WRI has produced analyzing evolving developments at the CTF. Our March 2010 Working Paper, The Clean Technology Fund: Insights for Development and Climate Finance, reviewed the basic mechanics of the Fund and the Clean Technology Investment Plans approved.

Note: This version of the Working Paper was updated on 30 November 2010 from the version posted on 11 November 2010. Corrections were made on page 4 regarding the role of private sector observers, and on pages 9 and 13 regarding the implementing modalities of the Turkey Commercializing Sustainable Energy Financing Program. A revised paper reflecting on developments at the November 2010 meeting of the CTF governing committee will be released in early 2011.