55471 Other titles in this series economic evaluation of Climate Change Adaptation Projects -- Approaches for the Agricultural sector and Beyond fOrthCOming titles in this series monitoring Climate finance and ODA D E V E L O P M E N T A N D C L I M A T E C H A N G E Beyond the Sum of Its Parts Combining Financial Instruments to Support Low-Carbon Development ii © 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org/climatechange E-mail: feedback@worldbank.org All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The find- ings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Images from Shutterstock Images LLC and The World Bank Photo Library iii tABle Of COntents ACKnOWleDgments vii ABBreViAtiOns AnD ACrOnYms viii eXeCUtiVe sUmmArY xi Chapter 1 Climate Change mitigation financing instruments--Overview 1 Introduction 1 ScopeofWorkandMethodology 4 WhatDoComplementaryandSynergyMean? 4 Chapter 2 Assembling the Pieces -- A Conceptual framework for 7 Combining financing instruments DifferentNichesforClimateFinancingInstruments 8 MarketLevelComplementarityinLow-CarbonDevelopment 9 Programs ProjectLevelComplementarity--ConditioningMarkets,Scaling 11 UpInvestments,RewardingSuccess Conclusion 13 Chapter 3 matching tools to tasks -- structuring finance to fit 15 Project needs FinancingNeedsforClimateChangeMitigation 16 MatchingtheTooltotheJobatHand--NotEveryJob 21 RequiresaHammer UsingClimateChangeFinancingInstrumentstoMake 24 CleanEnergyProjectsAttractive iV Chapter 4 from the Drawing Board to the executive Board -- 29 Case studies ChinaRenewableEnergyScale-upProject 31 ChinaEnergyEfficiencyProgram 33 MoroccoMunicipalSolidWasteProgram 35 IndiaChillerEnergyEfficiencyProject 37 MexicoUrbanTransportTransformationProject 39 ChinaIntegratedGasifiedCombinedCycleProject 41 Chapter 5 Barriers to Combining 45 ResourceAdequacy 47 ApprovalProcessesandProcedures 48 Familiarity 48 Reforms 51 KnowledgeandExperience 53 Annex 1 financial instruments for mitigation funding -- A Brief summary 55 Annex 2 Project Documentation 59 referenCes 63 BOX es-1 ClimAte finAnCing -- mitigAtiOn instrUments xii FIGURES es-1 Categorization of mitigation Options (types of ghg mitigation xiv Activities and support required) es-2 market transformation--relative Positions of the three Climate xv financing instruments es-3 Cash flow for a Conventional energy supply Project xvi es-4 Cash flow for a Clean energy Project making Use of Climate xvii financing instruments 1 Climate financing needs 3 2 Climate Change mitigation Wedges for mexico (2008­30) 9 3 market transformation Curve 10 4 A market transformed 11 5 Cash flow for a Conventional Power supply Project 12 V 6 Cash flow for a Clean energy Project making Use of Climate 12 financing instruments 7 technological innovation Cycle 17 8 Categorization of mitigation Options 18 9 the Project Cycle 49 A-1 World Bank Carbon finance Project status (cumulative) 58 A-2 Costs of Cers from Projects in the CDm Pipeline 58 TABLES 1 summary of Attributes of mitigation financing instruments 5 2 maturity level of mitigation technologies -- support to expand 20 markets and Accelerate Uptake 3 Using Climate Change financing instruments to meet needs in 22 Project Design 4 Using Climate Change financing instruments to make renewable 25 energy Projects Attractive 5 Using Climate Change financial instruments to make energy 27 efficiency Projects Attractive 6 Climate Change mitigation financing Case studies 30 7 financial Package for China renewable energy scale-up Project 31 8 financial Package for China energy efficiency financing Program 34 9 financial Package for morocco solid Waste management Project 36 10 financial Package for india Chiller energy efficiency Project 38 11 Proposed financial Package for mexico Urban transport 40 transformation Project 12 Proposed financial Package for China igCC Project 42 A-1 gef Climate Change funding to the World Bank by 56 replenishment Period (million dollars) A-2 Clean technology endorsed investment Plans -- summary as of 57 march 31, 2010 (million dollars) A-3 Documents required During Project Cycle 60 Vi Vii ACKnOWleDgments this report has been prepared in response to the recommended actions in the World Bank group's strategic framework for Development and Climate Change. it has been included as part of the work program of the Climate Change team and the global environmental Coordination Unit of the World Bank's environment Department. it focuses on the blending of resources from different financial instruments to help reduce the growth in greenhouse gas emissions in developing countries. future papers in this series will focus more on the use of guarantee instruments, support to private sector operations (especially through the international finance Corporation), and support for resilience and adaptation. the World Bank team was led by richard hosier, senior environmental specialist, enVgC, and included nataliya Kulichenko, senior energy specialist, etWen; Aditi maheshwari, Carbon finance specialist, enVCf; natsuko toba, senior economist, eAsin; and Xiaodong Wang, senior energy specialist, eAsin. Kseniya lvovsky, Climate Change Program manager, originally suggested that the work be undertaken and guided the team in both the process and content of the paper. steve gorman, Program manager for enVgC, provided continual support and helpful advice. Peer reviewers at the concept and draft final project level were Daniel hoornweg, todd Johnson, and robert taylor. Climate Change team colleagues Ari huhtala, Philippe Ambrosi, and sonu Jain provided helpful comments and other assistance in making this paper possible. excellent comments and contributions were received from Patricia Bliss- guest, Joelle Chassard, Alexandre Kossoy, rohit Khanna, laura tlaiye, michael toman, Jari Vayrynen, and richard Zechter--all of the World Bank. Clare fleming and sonu Jain edited the report throughout the process. financial Assistance to carry out this work was provided by the multi-Donor trust fund for the Clean energy investment framework, supported largely with funding from the United Kingdom's Department for international Development. Viii ABBreViAtiOns AnD ACrOnYms ADB Asian Development Bank AstAe Asia sustainable and Alternative energy Program CAs Country Assistance strategy CCs carbon capture and storage CDm Clean Development mechanism Cer certified emission reduction Cf carbon finance CfC chlorofluorocarbon Cfl compact fluorescent lamp Cif Climate investment funds CO2e carbon dioxide equivalent CPf Carbon Partnership facility CPs Country Partnership strategy CresP China renewable energy scale-up Project CsP concentrating solar power Ctf Clean technology fund DnA Designated national Authority (CDm) DOe Designated Operational entity (CDm) DPl Development Policy loan Dsm demand-side management ee energy efficiency eirr economic internal rate of return enVCf environment Department­Carbon finance erPA emission reductions purchase agreement esmAP energy sector management Assistance Program esCO energy service company fCPf forest Carbon Partnership facility feC les fonds d' equipement Communal (morocco) fiP forest investment Program firr financial internal rate of return gef global environment facility ghg greenhouse gas iADB inter-American Development Bank iX iBrD international Bank for reconstruction and Development iCr implementation Completion report iDA international Development Association (World Bank group) ieg independent evaluation group (World Bank) ifC international finance Corporation igCC integrated gasified combined cycle isr interim status report kWh kilowatt-hour lUlUCf lane Use, land-Use Change, and forestry mDB multilateral development bank migA multilateral investment guarantee Agency mlf multilateral fund for the implementation of the montreal Protocol mtr midterm review mW megawatt nAmA nationally Appropriate mitigation Actions PAD Project Appraisal Document PCn Project Concept note (iBrD or Ctf project) PDD Project Design Document (CDm project) PhrD Policy and human resources Development Pif Project identification form (gef project concept note) PnDm national municipal solid Waste management Program (morocco) PoA Program of Activities (under CDm) PPiAf Public Private infrastructure Advisory facility PrsP Poverty reduction strategy Paper r&D research and development re renewable energy reDP renewable energy Development Project (China) sfDCC strategic framework for Development and Climate Change sil specific investment loan sW solid waste tA technical assistance UnfCCC United nations framework Convention on Climate Change UttP Urban transport transformation Project (mexico) WBg World Bank group (World Bank, migA, and ifC) X Xi EXECUTIVE SUMMARY The World Development Report 2010 estimates While the climate finance landscape is rapidly that an additional $200 billion per year* of cli- evolving, three dedicated climate financing mate-related financing is needed in developing instruments are currently available to the Bank countries between now and 2030 to keep global Group as key tools for increasing support to low- average temperature rise within 2 degrees Celsius. carbon infrastructure, particularly the energy and Developing countries face increased financing transport sectors: the Global Environment challenges over coming decades as they seek to Facility (GEF), the Clean Technology Fund pursue economic development along a lower (CTF), and carbon finance, especially the Carbon emission trajectory. Recognizing these needs, Partnership Facility (CPF). (See Box ES-1 for a industrial countries pledged at the 15th definition of each instrument.) Another relevant Conference of the Parties to the U.N. Framework instrument, Scaling Up Renewable Energy in Convention on Climate Change (UNFCCC) in Low-Income Countries, became operational in Copenhagen to provide $30 billion for develop- December 2009 and will offer further lessons in ing countries by 2012 through existing bilateral future. Combined, they represent potential and multilateral sources and to mobilize $100 bil- resource flows of about $3 billion per year. lion per year by 2020. A high-level Advisory Although each instrument differs in detail, they Group on Climate Change Financing was estab- are all designed to support market transformation lished by the U.N. Secretary General to assess toward low-carbon development. It is also appar- options for raising as well as effectively using ent that these or similar instruments will coexist such finance. Through the adoption of the for quite some time while post-Copenhagen Strategic Framework for Development and negotiations continue. As developing countries Climate Change, the World Bank Group (WBG, give greater attention to achieving economic or the Bank Group) has committed to facilitating growth while lowering greenhouse gas (GHG) developing countries' access to new financial emissions, blending these resources together-- resources and supporting climate actions in the and with development finance (including the context of countries' sustainable development International Bank for Reconstruction and plans. Development (IBRD), the International * All amounts in U.s. dollars unless indicated otherwise. Xii BOX es-1 ClimAte finAnCing -- mitigAtiOn instrUments the Global Environment Facility was established in 1991 before the United nations Conference on environment and Development to provide incremental cost financing for projects with global environ- mental benefits. it was originally a partnership between the United nations Development Programme (UnDP), the United nations environment Programme (UneP), and the World Bank, but it now provides its support through 10 agencies. in recent years, gef has committed about $250 million per year-- largely in the form of grants to eligible countries--as the financial mechanism of the UnfCCC. these projects are designed to support energy efficiency, renewable energy, new clean energy technology, and sustainable transport projects. its approach focuses on removing barriers to "win-win" mitigation projects by providing support for technical assistance, policy reform, capacity building, piloting, and partial risk guarantees. gef grants through the World Bank average between $8 million and $10 million each and are meant to be implemented as part of a larger investment engagement. the Clean Technology Fund was established in 2008 as one of the Climate investment funds (Cif), a family of funds devoted to climate change initiatives hosted by the World Bank and implemented cooper- atively by the mDBs. it is meant to be transformative, taking clean technology investments and markets to scale in the participating recipient countries. Between 15 and 20 countries will participate as recipients during this initial phase, which will run until 2012. the Ctf provides limited grants, concessional loans, and partial risk guarantees of between $50 million and $200 million per project to help countries scale up clean technology initiatives intended to transform a country's development path. Carbon finance refers to the use of the flexible mechanisms of the Kyoto Protocol. registered projects resulting in ghg emission reductions located in developing countries or economies in transition obtain emission reductions that can be traded in the market, thereby providing a performance-based revenue stream to the project. Carbon finance is something of a misnomer: there is little or no up-front financing involved. in 1999, the Bank created the first carbon fund in the world, the Prototype Carbon fund, which committed its funds to ghg mitigation projects producing emission reductions prior to 2012. the World Bank has demonstrated global leadership in the development of the carbon markets and continues to play a leadership role in the development of CDm methodologies. the newest initiative of the Bank's expanded program of carbon finance is the Carbon Partnership Facility (CPF), which brings buyers and sellers together in a partnership forum to focus on national priorities and strategies and to develop carbon revenue streams around projects and programs of interest to both. Source: Authors' data. Development Association (IDA), the The goal of this paper is twofold: International Finance Corporation (IFC), other multilateral development banks (MDBs), and · To provide greater information and clarity on national resources)--will become increasingly these three mitigation-related climate financ- important in order to expand their impact in both ing instruments available for the WBG and developmental and global environmental terms. their application in the context of specific projects and national policy frameworks. Xiii · To draw lessons for the broader development programmatic, and project levels. The goals and community on how resources from different uses of each financing instrument differ slightly, climate financing instruments can be com- but the resources from each can be combined or bined for expanded impact, increased lever- "blended" into the same project or program (as in age, and enhanced efficiency. blending together different ingredients). When these different sources are used together, they are This paper represents an initial contribution to able to complement one another, reduce transac- this field and will be followed by papers focusing tions costs, and increase their reach and impact. on guarantees for low-carbon growth support for "Complementary" means that the resources con- the private sector and the challenges of financing tribute in accordance with their face-value to the climate resilience and adaptation. whole (that is, 2+2 will not equal less than 4). Case studies of existing or planned projects are Furthermore, if carefully designed, projects and used to highlight how these dedicated instru- programs blending resources from these various ments can be used to make lower carbon alterna- funding tools can actually create synergies, tives more attractive for World Bank clients. The wherein the total impact exceeds the face value of paper's conclusions, as described in this summary, the resources contributed as they interact and cre- are as follows: ate transformative processes and increase both scope and scale (that is, 2+2 > 4). In project · The GEF, CTF, and carbon finance instru- terms, a "synergy" occurs when the outcome of a ments are complementary. project exceeds the outputs expected on the basis · Combining climate finance instruments of the project's inputs. For example, if in a makes a wider range of mitigation activities blended energy-efficient lighting project, synergy feasible. might be seen if the entire lighting market is · Blending is beneficial--especially when transformed to a more efficient level and many finance is scarce. more-efficient lamps devices are installed than were paid for under the blended project. In other · Familiarity and reform are the keys to sim- words, synergy results when the project or pro- plifying procedural complexity. gram outcomes exceed the sum of the parts. · Effective blending requires sophisticated institutional and technical capacity. COmBining ClimAte the gef, Ctf, AnD finAnCe instrUments CArBOn finAnCe Are mAKes mOre COmPlementArY mitigAtiOn ACtiVities feAsiBle Despite differences in orientation, priorities, and governance structures, the efforts and resources Low-carbon development paths frequently from GEF, CTF, and carbon finance complement require additional financial support to become one another. On a conceptual basis, each plays a financially and economically attractive. Climate unique role in helping stimulate low-carbon financing instruments help to make these mitiga- growth when viewed at the market-wide, tion activities feasible. But even so, their reach in XiV isolation remains insufficient to translate many of financially viable and to be implemented. The the expensive, largely pre-commercial low-carbon China Energy Efficiency Financing Project dem- technologies from the drawing board into reality. onstrates that GEF support alone when coupled with multilateral and national development Figure ES-1 contains the now familiar McKinsey resources may be sufficient to stimulate the cre- curve of global GHG mitigation activities, run- ation of a sustainable market for energy efficiency ning from those considered to be entirely "win- investments. In other cases and country situa- win" on the left (energy efficiency) to those tions, carbon finance may need to be combined requiring greater support than can be justified on with GEF or other donor resources to cover the the basis of risk-adjusted returns to the invest- barrier removal and learning costs, as in the India ment on the right (new technologies). Although Chiller Energy Efficiency Project. climate change financing instruments can be applied to technologies across the entire range, a Projects in the second band (light green) may different mix of resources may be required for require enabling support, investment support, and projects in different bands. Projects on the left- revenue enhancement to bring them into eco- hand side (white shading) are financially and eco- nomic and financial feasibility. They tend to face nomically attractive on paper at least, but they both higher costs and operational risks than those may require assistance in the form of barrier on the left hand side of the Figure. Both the removal, policy reform, awareness creation, and Mexico: Introduction of Climate Friendly possibly some revenue enhancement to become Measures in Transport Project and the China figUre es-1 CAtegOriZAtiOn Of mitigAtiOn OPtiOns (t YPes Of ghg mitigAtiOn ACtiVities AnD sUPPOrt reQUireD) Source: Adapted from mcKinsey and Company 2007. XV Renewable Energy Scale-up Project made use of BlenDing is BenefiCiAl multiple sources of mitigation financing to make sustainable transport and wind power investments -- esPeCiAllY When viable. finAnCe is sCArCe The third band in the Figure (light blue), on the Combining resources from these financing right, represents relatively new and unproven instruments will not only help create larger proj- technologies that have a rather high cost and risk ects, but if used correctly it will also help create profile. In such cases, resources from all mitiga- synergies leading to a greater impact and stimula- tion instruments may be necessary to make them tion of larger transformational processes than if attractive. But even with all of these resources those resources were used separately. For example, combined, the underlying projects may be too under the India Chiller Energy Efficiency costly or risky to be implemented. These pres- Project, when resources from the Multilateral sures explain why only a few integrated gasified Fund for the Implementation of the Montreal combine cycle projects seeking to use carbon- Protocol are combined with GEF resources, they capture-and-storage techniques to dispose of the provide the financial basis to meet the incremen- waste GHG stream have been commissioned tal costs of converting only about one-sixth of the anywhere in the world to date. Even with all of eligible chillers to newer, more-efficient, HCFC- the dedicated financing instruments combined, free chillers. When carbon revenues are also har- some projects (especially new technologies from nessed, the project will be able to double its the right-hand side of the curve) will not be suf- effect, reaching over one-third of the chillers in ficiently attractive to be implemented. the market. But in addition, by building the capacity of local financial institutions the entire chiller market in India will be transformed to the newer, low-carbon path. At the market level (see figUre es-2 mArKet trAnsfOrmAtiOn-- Figure ES-2), GEF sup- relAtiVe POsitiOns Of the three ClimAte port is used early in the finAnCing instrUments market's transformation to pilot innovative approaches ADOPTION OF INNOVATION and to help create the Market take-off -- Phase II enabling environment of policy and regulatory Percent saturation frameworks. CTF resources support low-car- bon infrastructure invest- ments on favorable terms that can help the market to scale up or to move up Time the adoption-of-innova- tion curve toward maturity. Early-entry -- Phase I Market saturation or maturity -- Phase III Carbon finance revenues Source: Authors' data. serve to improve the prof- itability of investments, XVi especially those that are already on the borderline At the project level, Figure ES-3 presents the of being financially attractive. Together, they can standard cash-flow situation of a "regular" devel- accelerate the pace of market transformation and opment project, in this case a conventional energy increase the scale of the eventual penetration of supply project. The costs are incurred up front, new climate-friendly technologies in the market. and once the plant is built the benefits repay both the capital and the interest, leaving additional rents that serve to improve the economic devel- In the China Renewable Energy Scale-Up opment of the implementing country. Figure Project, for example, GEF resources helped the ES-4 shows a project with similar development government create a mandated market policy outcomes but with reduced GHG emissions. To with a feed-in tariff for renewable energy. reduce these emissions and still achieve the devel- Together with IBRD financing, the terms of the opment benefit, the project has been redesigned investment program were still insufficient to to use a renewable source (such as geothermal). make the targeted investments feasible. However, As a result, it presents higher costs (deeper nega- when carbon finance was brought in, the project tive cash flows) but with only similar returns. was pushed over the private sector's hurdle rate of Such a project may not move ahead, as these return, making it sufficiently profitable to stand higher costs may now exceed the discounted ben- on its own. By combining its own resources with efits--or at least with the higher costs, the risk- those of GEF and carbon finance, the govern- adjusted rate of return may be reduced to below ment was able to create a sustainable policy envi- the "hurdle rate." ronment that successfully led to rapid growth in the wind market, making China the fourth larg- But climate financing resources can be brought to est wind market in the world at the end of 2008. bear to make these higher-cost, low-carbon figUre es-3 CAsh flOW fOr A COnVentiOnAl energY sUPPlY PrOJeCt (+) C a s h F l Year o w (-) Source: Authors' data. XVii figUre es- 4 CAsh flOW fOr A CleAn energY PrOJeCt mAKing Use Of ClimAte finAnCing instrUments (+) CPF C GEF a s h F l Year o w CTF (-) Source: Authors' data. option projects cost-effective and attractive. GEF pace of transformation to a low-carbon develop- resources are viewed as an early benefit, establish- ment path. ing the enabling environment necessary to make the project sustainable. CTF resources reduce the cost-burden of financing the project, covering part of the additional costs that show up as a fAmiliAritY AnD financing gap early in the project's life. Carbon finance provides performance-linked payments refOrm -- KeYs tO that improve a project's cash flow once it becomes simPlifYing operational. The Morocco Solid Waste Sector PrOCeDUrAl Development Policy Loan Project provides an COmPleXitY example of how carbon finance, when used in a program of activities (PoA), may provide suffi- The different governance structures for each cient additional revenue to make investment source of climate financing dictate that pipeline opportunities in a frequently ignored sector, like procedures and documentation requirements for municipal waste, financially attractive. these instruments will differ from those of proj- ects funded only through Bank loan resources. To These three complementary climate financing the uninitiated, approval procedures associated instruments can make low-carbon development with the different instruments may be baffling attractive in ways in which it has not been before. and sometimes frustrating. Although familiarity Blending resources from these different sources reduces the challenges associated with the naviga- to build upon underlying development invest- tion of these procedural shoals, reforms to sim- ments will increase the scale and accelerate the plify the procedures will make them more XViii user-friendly, enhancing not only the effective- Wider adoption of PoAs will both speed up ness of each instrument but also the efficiency approval procedures and enable carbon market with which resources from them can be com- support to incentivize efficiency in a broader bined. Familiarity and reform provide the key to array of projects--notably energy efficiency pro- simplifying approval processes. grams, which have massive emission reduction potential but to date have benefited little from The CTF documents and procedures are most carbon finance. In addition, all carbon market closely aligned with those of the Bank Group and participants should seek to maximize the use of other participating MDBs. Each participating approved CDM methodologies to limit the country must prepare an investment plan that approval delays. summarizes the projects to be pursued. Once the plan is endorsed, these concepts follow the At the level of the Bank's carbon finance opera- MDB's normal project life cycle. As operational tions, there is scope to tie programming more experience with this new instrument accumulates, closely to the Bank's core development opera- the effectiveness of the adopted programming tions, as well as to take into account support from procedures will become clearer. As early CTF GEF and CTF. The CPF has already made prog- implementation has progressed quickly, the addi- ress in this regard, as every project under consid- tional burdens placed upon MDB and country eration to date by the CPF has been tied to task teams have been manageable. underlying Bank (and frequently CTF and GEF) financing. Because the CPF is contracting to pur- During nearly 20 years of operational experience, chase only a fraction of a project's emission GEF procedures have been revised several times. reductions, it is pioneering a new approach for At present, a GEF project requires two approval the Bank by working to help its clients sell emis- steps beyond those required for a Bank or IFC sion reductions in the larger, open market. With project--one at the concept level and one at the continued growth of the carbon market, the time of final endorsement. The GEF 5 replenish- Bank's role in carbon finance will emphasize two ment provides an opportunity to focus on further key roles: continuing to serve a "public good" role simplification of the activity cycle to one addi- in developing methodologies and assisting clients tional step beyond those normally required by the to sell carbon assets that are linked to Bank proj- implementing MDBs. ects in the larger market. Because carbon finance operates under an exter- nal regulatory and governance mechanism, its approval processes and documents diverge the effeCtiVe BlenDing most from those normally used within the Bank. A review of 10 years of World Bank experience reQUires with carbon markets shows that reforms can help sOPhistiCAteD at two levels: an external institutional level and institUtiOnAl AnD the Bank's operational level. At the institutional teChniCAl CAPACitY level, the Clean Development Mechanism (CDM) and Joint Implementation ( JI) decision The ability to blend resources from climate makers need to set clearer universal guidelines on change financing instruments requires in-depth additionality to make the project registration expertise in both development and climate cycle simpler, expediting approval processes. change finance. In addition, effective blending XiX requires a good understanding of both the chal- greater synergistic impacts, leading to a scaling up lenges in the target markets and the relative of intended activities. Different countries, sectors, strengths of each instrument. Another require- technologies, or approaches may require differing ment frequently goes unmentioned: the commit- combinations of resources in order to ensure proj- ment, vision, and capacity to identify ect success. While private sector financing will be climate-friendly development plans that are com- essential for scale and sustainability, the ability to patible with growth needs of developing coun- leverage the private sector into a program may tries. This latter intangible element--the differ by project. Blending is a means to an end, willingness to innovate, learn by doing, and build not an end in itself. Only greater experience and capacity for scaling up--will play an increasingly familiarity with these instruments will assist in important role in shifting from conventional making clearer the benefits and disadvantages of least-cost approaches to more sustainable and combining resources from different financing demanding low-carbon, climate-friendly develop- instruments in the same project or program. ment. Staffing and personnel will require sophis- ticated skills and creative ingenuity to be able to pursue these options with greater success. Increasingly, management will need to recognize these extra challenges through provision of incen- lOOKing fOrWArD tives and funding. In response to the Copenhagen Accord, some 55 countries--both industrial and developing--sub- While blending resources from different mitiga- mitted information to the UNFCCC about econ- tion financing instruments has its attractions, not omy-wide emission reduction targets for 2020 every low-carbon project will require or even be and Nationally Appropriate Mitigation Actions eligible for support from all of the different (NAMAs). As developing countries prepare and sources of mitigation-related finance. Some miti- implement their NAMAs, the WBG can assist gation projects, such as energy pricing reform or with various aspects of the process: building on a the adoption of standards and labels for energy- solid analytical base through supporting some of efficient appliances, can be undertaken with the the first low-carbon-growth studies; providing use of only traditional development finance or extensive policy, institutional development, and technical assistance sponsored by GEF, grants investment support in relevant sectors; and lend- from other sources, or Bank financing. Other ing expertise on a wide range of financial instru- activities may need both technical assistance ments. Through this process, the demand for grants and concessional finance in addition to low-carbon investments and programs will lending support. increase, creating a need to respond by increasing both the breadth and depth of climate financing. The goal should not be to use all existing sources Developing countries attach growing importance of climate change financing in every project, but to having direct access to resources and arrange- rather to appropriately blend only the resources ments that ensure streamlined channeling of required to achieve the project's outcome. In finance to support the priorities articulated in some cases, the transaction costs associated with their low-carbon growth programs. packaging various financial instruments may off- set the benefit of that packaging. In other cases, At present, CTF and CPF are new instruments, efforts and patience in coordinating and packag- in a pilot phase and with limited resources, that ing various financial instruments will generate can support only a limited number of countries. XX GEF resources are allocated to the largest emit- carbon finance business (the Forest Carbon ters. Looking forward, it is critical that all devel- Partnership Facility (FCPF) and the Bio-Carbon oping countries have access to climate-related Fund). Resources from the FIP and the FCPF financing to support economic transformation are working to prepare suitable arrangements to along a low-carbon path. In addition, past mitiga- allow complementary use to strengthen linkages tion programs have focused largely on the energy between sustainable forest management, and transport sectors. But new initiatives will add improved livelihoods, and climate change. the urban, forestry, and agricultural sectors to this mix. GEF and CTF eligibility have already begun This paper contributes to a growing field of work to address the needs for low-carbon cities, and a about making the climate finance instruments CDM PoA focusing on low-carbon growth in better serve the sustainable development needs of urban areas has been developed. Land use, for- developing countries. Learning from emerging estry, and agricultural emissions are also the experiences should provide the basis for more focuses of GEF (Sustainable Forest Management efficient, sustainable, and effective approaches to (SFM)), and special programs under the CIF (the supporting low-carbon development by making Forest Investment Program (FIP)) and Bank's use of all available instruments. B e Y O n D t h e s U m O f i t s PA r t s 1 1 CLIMATE ChAngE MITIgATIon FInAnCIng InSTRUMEnTS oVERVIEW ChAPter 1 KeY POints through the adoption of the strategic framework for Development and Climate Change, the World Bank group has committed to help developing countries undertake climate actions in their development pro- grams. At present, three dedicated climate financing instruments can assist the Bank in increasing support to low-carbon growth in the infrastructure sector: the global environment facility; the Clean technology fund; and carbon finance, particularly the Carbon Partnership facility. Combining the resources from these instruments will become increasingly important as the Bank helps its clients respond to the chal- lenge of climate change. the resources need to be combined carefully so that the energy and transport projects supported might achieve an impact exceeding that of the resources used alone. intrODUCtiOn part of implementing this Framework, the Bank Group has committed to stepping up efforts to In October 2008, the Strategic Framework for support climate actions in country-led develop- Development and Climate Change (SFDCC) ment processes and to mobilizing financial was endorsed at the World Bank's Annual resources. Meetings. As the first institutional policy docu- ment adopted by the Bank Group on climate While this official commitment to pursue a more change, it defines an ambitious framework for the explicit response to climate change in the context institution's continued work to pursue its primary of development is new, the Bank Group's work on goals of development and poverty alleviation reducing emissions of greenhouse gases (GHGs) while taking into account the challenges imposed through the promotion of "win-win" efforts in the by climate change on all development sectors. As energy and transport sectors is not. The share of 2 D e V e l O P m e n t A n D C l i m At e C h A n g e the Bank's lending portfolio devoted to energy Bank (ADB), European Bank for Reconstruction efficiency (EE) and renewable energy (RE) has and Development (EBRD), Inter-American exceeded the commitment made at the 2004 Development Bank (IADB), and World Bank Bonn Renewable Energy Conference to increase Group (WBG). The first of these funds to steadily the share of Bank funding going into become active is the Clean Technology Fund these sectors by an average of 20 percent per year (CTF), with current pledges for concessional (World Bank 2009b). With this progress already funding of nearly $4.4 billion and a portfolio of in hand, the Bank has chosen to raise the bar and 13 investment plans for nine countries with the increase the target for renewable energy and total envelope of over $4.4 billion prepared in one energy efficiency in its financing portfolio by 30 year. Through its participation in these programs, percent a year during fiscal years 2009­11. the Bank Group has accumulated incomparable expertise and practical knowledge in the areas This impressive growth reflects that there are related to mitigation finance. synergies between climate mitigation and devel- oping country priorities and that the Bank has The 2010 World Development Report estimates indeed been working on climate change mitiga- the volume of financing needed to meet the addi- tion using dedicated climate change financing tional costs by the international community for instruments successfully for some time. These climate-change-related development at between instruments have been established and used to $180 billion and $250 billion per year (World make climate-friendly projects that might not Bank 2009d). However, this sum represents only otherwise have been of interest to developing the additional or incremental costs: it would need countries, economically and financially viable. to leverage nearly 20 times that amount--or up to as much as $4.6 trillion--from underlying Since the inception of the Global Environment investment finance from other public or private Facility (GEF) in 1991, the Bank Group has sources. Clearly, the challenge is enormous. (See been the major implementing agency in the cli- Figure 1.) The Bank Group has experience using mate change focal area, with a cumulative portfo- existing climate financing instruments to leverage lio of GEF grant resources of $1.7 billion. Since greater resources and achieve greater impact. The the formulation of the Kyoto Protocol, the Bank Bank Group's GEF portfolio of climate change became a leader in the field of carbon finance, at projects, estimated at $1.7 billion, has leveraged first through the Prototype Carbon Fund. The another $13.7 billion from other sources, bring- Bank's carbon finance (CF) program has been ing its total value to $15.4 billion, for a leveraging among the world leaders in the formulation of ratio of 1: 8. The average leveraging value of the the U.N. Framework Convention on Climate projects in the CDM pipeline is estimated at Change's (UNFCCC's) Clean Development about 1: 6, which means that the Bank's carbon Mechanism (CDM) methodologies and projects. finance portfolio may have leveraged as much as The Bank now manages carbon funds valued at $15 billion in underlying finance and that the over $2.5 billion. Since the articulation of the entire CDM/JI market may have benefited about Clean Energy Investment Framework, which led $138 billion of low-carbon investments (Kossoy to the more comprehensive SFDCC, the Bank 2010). The first cohort of investment plans Group has worked on establishing and imple- endorsed under the CTF demonstrated a leverage menting the Climate Investment Funds (CIF), ratio of nearly 1: 9; that is to say, anticipated which is a partnership between the African CTF investments of $4.4 billion have been linked Development Bank (AfDB), Asian Development to other investment resources valued at $40.5 B e Y O n D t h e s U m O f i t s PA r t s 3 billion--some of this financing may be viewed as its own unique niche and role to play. Like other underlying, baseline investments, and some may grant resources, the GEF is best used to conduct be newly leveraged, additional financing from policy dialogue, improve the policy environment, other sources. The remaining resource gap dic- and pilot or demonstrate innovative ideas and tates the need to become more adept at combin- activities. Concessional funds, available from the ing specialized climate financing instruments and CTF, can be used to scale up low-carbon invest- leveraging underlying development and private ments at reduced costs, making them sufficiently finance to assemble the financing necessary to address the climate change challenge. attractive to fit into least-cost development plans. Carbon finance provides an output-based incen- By adopting the SFDCC, the Bank Group com- tive that can be used to make low-carbon invest- mitted itself to sharing lessons from implement- ments more profitable, pushing public and private ing the CIF--including the CTF, the Carbon sector sponsors toward lower carbon investments. Partnership Facility (CPF), and GEF--to pro- International Bank for Reconstruction and mote packaging of its development financing Development (IBRD) and International instruments with these climate-mitigation instru- Development Association (IDA) investments can ments. Weaving resources from these instruments link to all of these and can provide the baseline together can be simplified by an improved under- investment resources needed to meet the chal- standing of each of these tools: each of them has lenges of development. All of these instruments have a critical role to play in shaping future cli- mate-friendly development. figUre 1 ClimAte finAnCing neeDs Climate finance For the Bank to use these climate financing tools covers additional costs and serves more effectively to complement development as a catalyst . . . investments, Bank project teams will need to US$250 bln p.a. understand not just the broad outline of these instruments but also the intricacies, strengths, and Private Sector weaknesses of each. The goal of this paper is to Investments provide clarity on the advantages, limitations, and evolution needs of the existing climate change . . . to leverage financing instruments--the GEF, the CTF, and development carbon finance, particularly the CPF. It can help US$4.620 investments National bln p.a. (2008) explain to interested groups and experts how the Development Budgets resources from these different financing instru- ments can be combined for greater impact, lever- age, and efficiency. This paper is meant to be an International initial work for combining dedicated climate Development financing instruments. Future work will address Source:K. lvovsky 2009. "making the most of Public other instruments and opportunities to devise Climate finance," Presentation given at COP 15 in Copenhagen, December 2009. www.worldbank.org/ financial products that catalyze private invest- climatechange ment, such as guarantees, private sector program- ming, and adaptation. 4 D e V e l O P m e n t A n D C l i m At e C h A n g e sCOPe Of WOrK AnD effectively woven together, in large part due to the novelty of the instruments. There is an methODOlOgY 18-year history of GEF projects being coupled with Bank Group projects, and the Bank's This paper first presents a conceptual framework 10-year history of carbon finance resulted in one to indicate how resources from the the GEF, out of four of those projects being associated CTF, and carbon finance can fit together in the with Bank operations. Initially, the blending of market development and transformation process GEF and carbon finance operations was forbid- or the same project to achieve complementary den. Within the Bank, the GEF was originally goals and objectives. (For a much wider range of given a "right of first refusal" for any carbon financial options outside the World Bank Group finance project in the pipeline. But experience for scaling up activities addressing climate demonstrated that GEF resources and carbon change, see UNFCCC 2009.) Next it discusses finance resources serve different functions and how projects or programs can best be structured therefore neither duplicate nor compete with one to take advantage of each instrument in overcom- another. Because of the time it took to under- ing the barriers and hurdles that team members stand this, only recently have projects that make encounter when piecing together a project consis- use of GEF resources and carbon finance gained tent with the goals of climate change and devel- approval. And while CTF envisages a strong link opment. Chapter 4 provides a number of case to multilateral development bank (MDB) opera- studies of projects--ongoing and under prepara- tions, only six CTF projects have been endorsed tion--to demonstrate how these instruments can by the Trust Fund Committee. Of these, four are help increase the impact of the client's interven- implemented by the WBG, of which only one tion. The final chapter raises some practical con- has been approved by the Bank's Board (the siderations regarding procedures and timing that Turkey Private Sector Renewable Energy and might prevent these instruments from fitting Energy Efficiency Project, approved on May 28, together gracefully. 2009). It has therefore not been possible to find numerous examples that use all of these financing The broad characteristics of the GEF, CTF, and instruments simultaneously. Rather, the case stud- CPF are summarized in Table 1. (For a descrip- ies discussion highlights what has been done and tive summary, see Annex 1. For the documents what could be done differently with future pro- needed during the project cycle, see Annex 2.) gramming to make the Bank more effective in These instruments can complement each other if using climate financing tools to achieve greater used according to their individual strengths and impact. weaknesses. Blending is not synonymous with co- mingling: the resources from each source need to be used in a manner consistent with their intent. However, the ability to piece together resources from these instruments requires an in-depth WhAt DO understanding of not only what each instrument COmPlementArY AnD offers but also what part of a mitigation project's sYnergY meAn? challenge matrix or risk profile it can address. The conceptual sections of this paper make the Identifying relevant case studies remains a chal- case that resources from the three major dedi- lenge because there are only a few cases where cated climate change financing instruments can multiple financing instruments have been be used together in the same country, the same B e Y O n D t h e s U m O f i t s PA r t s 5 tABle 1 sUmmArY Of AttriBUtes Of mitigAtiOn finAnCing instrUments Attribute GEF CTF CPF Objective to transform the market to provide scaled-up financing to target long-term emission development paths of eligible to contribute to demonstration, reductions; to scale up low-car- countries into trajectories deployment, and transfer of bon interventions; and to sup- with lower ghg emissions in low-carbon technologies with a port strategic, transformational the energy, industry, and significant potential for long- interventions in key sectors transport and land use sec- term ghg emission savings tors Overall approach removing barriers for sus- scaling up low carbon develop- increasing the scope and scale tainable market development ment through support to invest- of verifiable ghg offsets and and growth, including through ments the generation of carbon reve- pilots and demonstration-- nues by reducing ghg emis- includes reduction of risks sions through output-based and support to innovation approach Determination of funding initial resource allocation financing gap necessary to Payment made upon certifica- requirements through resource allocation make project viable tion of emission reductions at framework; incremental costs negotiated or prevailing market of each project, including rates costs of barrier removal financial tools grants and limited non-grant loans and risk mitigation instru- emission reductions purchase instruments ments at concessional (iDA) agreements (erPA) typically rates; limited grants available pay upon delivery; pricing based upon market prices for certified emission reductions (Cers) scale of financing $250 million per year over $4.4 billion over four years CDm primary transactions in four years of gef-4 (2007­ (2009­12), or $1.1 billion per 2008 totaled $6.5 billion 10) year typical project size from $5 million to $40 million Between $50 million and $100 CPf aims to scale up the size of gef allocation per project million, linked to larger client the transactions significantly, linked to larger Bank project project, including Bank loan typically at least one million (average size, $8 million) resources emission reduction units Source: Authors' data. program, and even the same project. They can be requires an interaction between the resources used to help make mitigation activities attractive whereby the whole is greater than the sum of the in both financial and economic terms. The case parts. In other words, complementarity requires studies demonstrate that there are emerging that 2 + 2 not be less than 4; synergy requires examples where funds from these different that 2 + 2 exceeds 4. sources are being effectively combined to create meaningful mitigation programs. But demon- In the context of a low-emission growth project, strating that these different resources can be used what does "synergy" mean? "Synergy" refers to the in a complementary fashion is easier than dem- creation of a larger process or a change in scope onstrating that they have created synergies. or scale resulting in further gains in low-carbon Complementarity requires only that the resources development beyond those whose costs were paid not be used in a manner contradictory to, dupli- for under the blended project. It entails successful cative of, or inconsistent with each other. Synergy replication through a changing atmosphere or 6 D e V e l O P m e n t A n D C l i m At e C h A n g e attitude so that the low-carbon activities take on This is not to say that a synergistic outcome can a life of their own beyond the project's life. result only when multiple mitigation funds are combined into the same project or program. Such An energy-efficient lighting project provides a results are possible when just a single source of simple example. GEF support might be used to mitigation financing has been used creatively. provide capacity building and to strengthen regu- Some GEF or CDM projects have resulted in the lations to expand the market for compact fluores- transformation of an entire market or the wide- cent lighting. Concessional resources from CTF spread adoption of an innovative idea regarding might be used to help finance the use of 10 mil- mitigation activities. But as resources from these lion high-quality compact fluorescent lamps various climate financing instruments are com- (CFLs) in a country's public sector. And a CDM bined together, the larger flow of resources will program of activities might be formulated to pro- require the adoption of more ambitious goals. vide additional payments of about $1 per bulb to With the attraction of more resources, more per- replace inefficient incandescent bulbs with CFLs. sonnel and increased effort would be drawn to Such a project would achieve its goals by using the mitigation activity, thereby increasing the the funding from the three sources in a comple- probability that a project's outcome will be truly mentary fashion--resulting in policies being synergistic. adopted, 10 million incandescent bulbs being replaced by more-efficient CFLs, and the govern- The creation of synergy among different funding ment recovering partial costs of the CFLs sources within a climate change mitigation proj- through carbon revenue. But if the project were ect represents a worthy challenge. Some may view designed and implemented more creatively, it the use of various dedicated funding sources to might lead to a full transformation of the market create a larger funding window as a means unto so that more than 10 million CFLs were intro- itself rather than a means to an end. But "piling duced. For example, the authorities might decide on" extra concessional or grant resources is not to raise efficiency standards for lighting devices, always necessary to achieve the stated outcomes. and private actors might make use of the CDM Too much funding for something that requires methodology to further obtain carbon revenues to careful implementation, such as an energy effi- accelerate the uptake of the new, even more effi- ciency project, may be a curse. cient lighting devices. In such a case, the final transformation of the market would result from Identifying and creating conditions for synergy the blended project as the follow-on activities among the various sources of climate funding take on a life of their own, eventually leading to requires creativity and vision. What constitutes the replacement of 100 million incandescent synergy may differ by sector or project type as lights. The outcome of the blended project sup- well. As the case studies show, creating a syner- ported by the three blended mitigation financing gistic outcome may require minimal use of blend- instruments far exceeds what could reasonably be ing in some cases, while in others the expected based upon the financing alone. In such combination of all available resources may still a context, synergy would be created by the origi- not be enough to push a project into implemen- nal blended project: the outcome of the project or tation. But that is part of the challenge of climate program exceeds the sum of the outputs from the change mitigation financing. blended resources. B e Y O n D t h e s U m O f i t s PA r t s 7 2 ASSEMbLIng ThE PIECES A ConCEPTUAL FRAMEWoRk FoR CoMbInIng FInAnCIng InSTRUMEnTS ChAPter 2 KeY POints each climate financing instrument can play a unique role in helping stimulate low-carbon growth when viewed both at the market-wide or programmatic level and at the project level. gef grants are targeted at removing barriers, conditioning markets, and demonstrating innovative approaches. Ctf concessional resources are directed at providing investment support to transform development paths to low-carbon alternatives. Carbon finance, especially the newly created CPf, offers performance-based payments that improve the profitability of ghg emission-reducing investments. At the market level, gef support should be used to pilot innovative approaches and to help create the proper enabling environment and investment frameworks. Ctf resources support low-carbon infrastruc- ture investments on favorable terms that can take the market to scale. Carbon finance provides a perfor- mance-based revenue stream throughout a project's lifetime that serves to improve the return on investments, especially those that are already on the borderline of being economically attractive. it may also help secure financing and create incentives for good management and practices throughout a proj- ect's operational lifetime. At the project level, gef resources are viewed as an early benefit, covering the incremental costs of barrier removal and market preparation. Ctf resources help reduce the cost burden of the project, pro- viding clients with favorable financing to help ease the higher costs of low-carbon investments. Carbon finance revenues may help secure financing early in a project's lifetime, but they largely come into play once the project is operational, providing a performance-reward that increases the project's risk-adjusted financial rate-of-return. Weaving together resources from all three climate financing instruments provides support to climate change mitigation projects in a way that can create synergies and increase their combined development and low-carbon impacts. 8 D e V e l O P m e n t A n D C l i m At e C h A n g e The three existing climate financing instruments · The CPF offers performance-based payments are designed to make climate change mitigation that provide extra revenue to scale up carbon- in the infrastructure sectors more feasible and reducing investments. attractive to clients. Even though these instru- ments may have different sources of funding, The GEF has played a leading role in providing focus on different aspects of mitigation program- resources for removing barriers for sustainable ming, and require slightly different procedures, market development and growth, including they are all generally tied together by the same through pilots, demonstrations, and partial risk objective: to encourage recipients to undertake guarantees. It has provided some funding to pilot and scale up nationally appropriate mitigation contingent financing approaches, but GEF actions in the context of sustainable development. resources are intended to be incremental to Bank Rather than being duplicative or redundant, these (and other implementing agency) and client- instruments each have a unique role to play in country investments, helping to mainstream cli- helping transform markets toward cleaner mate change into development. The CTF growth. This chapter focuses on how these provides precisely a source of funding to take instruments can be used together to enhance the scale, dynamics, and impact of the mitigation these investments to scale. It is designed to help interventions consistent with the country's scale up low-carbon development through con- national development. cessional support to make low-carbon invest- ments more attractive. When coupled with a Bank loan and other client investment resources, use of the CTF will reduce the overall cost of a Different niChes fOr country's transformation to a low-carbon growth ClimAte finAnCing path, making the pursuit of that path more attractive. Carbon finance also serves to make the instrUments adoption of that low-carbon path more attractive through improving revenue. The CPF is designed The GEF, CTF, and CPF are all instruments designed to help make low-carbon development to programmatically increase the scale and scope financially and economically feasible. Each one of verifiable GHG offset production that, in turn, can help make a particular project or program will provide output-based payments for success- attractive or transform a particular market niche; fully implemented mitigation projects. The base- collectively, they can turn low-carbon infrastruc- line investment projects into which these ture investments into reality at an unprecedented specialized financial resources are blended may be scale. As such, the three tools can be used financed with clients' own resources, Bank together in a complementary fashion to achieve resources, or other financial instruments. the objective that could not have been achieved by only one instrument. In particular: In summary, each of the climate financing instru- ments provides a unique push to the adoption of · The GEF provides grants to remove barriers, low-carbon development paths. When they can condition markets, and demonstrate innova- tive technologies and approaches. be linked together in the same program or proj- ect, there is an opportunity to have a net effect · The CTF provides concessional financial greater than what would be achievable through support for large-scale investments of a the deployment of each instrument individually. transformational nature. B e Y O n D t h e s U m O f i t s PA r t s 9 mArKet leVel program. (The "wedge" concept was popularized in Pacala and Socolow 2004.) COmPlementAritY in lOW-CArBOn At the core of each wedge or low-carbon devel- DeVelOPment opment sector is a specific technology or practice PrOgrAms or set of technologies and practices whose adop- tion will reduce future GHG emissions. Each of When countries start to analyze their options for these technologies or practices can be viewed low-carbon growth, they begin by preparing a within its own context as constituting an innova- baseline projection that attempts to analyze how tion for widespread adoption. As such, the market the nation's GHG emissions will change through for each such innovation is presented along a time under "business-as-usual" conditions. The learning curve or an adoption of innovation curve next step is to develop a series of scenarios to (see Figure 3). identify the most effective and inexpensive ways to pursue low-carbon development. These low- Dedicated financing can be visualized as helping carbon scenarios can then be cross-analyzed with the market mature, increasing both the pace and the baseline scenario to identify the most promis- final saturation level of the newly adopted tech- ing avenues for reducing GHG emissions while nology. In this process, the three financing instru- still meeting the energy and development goals in ments complement and facilitate market entry, the baseline (see Figure 2 for an example drawn growth, and transformation at the national level, from Mexico). Each low-carbon mitigation helping create opportunities for growth in opportunity or sector can be described as a miti- national-level adoption of innovation in the same gation "wedge" or sector of future GHG emis- market for low-carbon technologies. The three sions that can be avoided through the pursuit of tools can be used differently through the different the relevant low-carbon growth project or phases of low-carbon market development: figUre 2 ClimAte ChAnge mitigAtiOn WeDges fOr meXiCO (2008­30) 1,200 BAU emissions 1,100 Oil and gas Emissions (Mton CO2 eq/year) 1,000 Stationary energy end-use Land use 900 Transport Electricity 800 Emissions after mitigation 700 10 2008 2012 2016 2020 2024 2028 Source: Johnson and others 2010. 10 D e V e l O P m e n t A n D C l i m At e C h A n g e figUre 3 mArKet trAnsfOrmAtiOn CUrVe Adoption of Innovation Saturation % Market Take-off-Phase II CPF CTF GEF Ti me Early Entry-Phase I Market Saturation or Maturity- Phase III Source:modified from rogers 1962. · EarlyEntry­Phase1:Given the GEF's man- prices have rarely enabled carbon finance to date to innovate and remove barriers, the make a significant difference in the early GEF's limited resources have focused most stages of market development. frequently on the early stages in the adoption · MarketTake-Off­Phase2:While GEF of a new technology. By nature, GEF grant resources may be used to lay the foundation resources are relatively risk-prone and are fre- for a new low-carbon technology, CTF quently used to remove barriers or establish resources will come into effect once a tech- the enabling conditions for further market nology is introduced and is beginning to take transformation and growth. Although such off. As such, CTF resources contribute to the support is necessary to lay the foundation for demonstration, deployment, and transfer of further development of these markets for low-carbon technologies that may have been low-carbon technologies, the resources are piloted but that are still at lower levels of rarely sufficient to transform markets com- adoption. Carbon finance can also have a pletely. For example, the GEF may provide significant impact in this second stage, support to help reformulate regulations for improving the return on investments in rela- the generation and dispatch of on-grid tively new technologies that might best be renewable energy. In contrast, because of the considered marginal. Such technologies and established programming priorities, CTF practices may not be fully profitable or eco- funds are technologically risk-averse, and nomically attractive in their own right, or they rarely are proposed for use in this early they may remain relatively less attractive stage. Carbon finance may be used in the than higher-carbon development options. As early stage, but to date the prevailing market B e Y O n D t h e s U m O f i t s PA r t s 11 a result, these actions will require conces- sional funding and revenue enhancement to figUre 4 A mArKet make them economically and financially trAnsfOrmeD attractive, thereby shifting the low-carbon ADOPTION OF INNOVATION options onto a country's least-cost develop- Market take-off -- Phase II ment path. Percent saturation · ApproachingMarketMaturity­Phase3:By the time technologies reach this phase in a market, GEF resources may have little role to play. The CTF may still provide an impetus Time in these cases, but as the market matures, Early-entry -- Phase I Market saturation or maturity -- Phase III carbon finance resources provide the most significant push into these maturing technol- Source: Authors' data. ogy markets. The performance-based incen- tive provided by carbon revenues helps drive the market toward maturity. Market growth leads to economics of scale that result in cost declines for a particular technology. As the technological cost falls, so does the Unit PrOJeCt leVel Abatement Cost, making the project more COmPlementAritY-- attractive to carbon investors. For example, COnDitiOning carbon finance payments may increase the profitability and attractiveness of electricity mArKets, sCAling UP generation from wind-generating plants or inVestments, the adoption of energy-efficient lighting reWArDing sUCCess devices. However, once the market approaches saturation or the technology is Just as the three climate-change financing instru- considered standard practice in a particular ments can be used together to transform a mar- context, no support from any of the dedicated ket, they can also be used to make a single project climate instruments may be forthcoming as more cost-effective and to accelerate the growth the technology is considered no longer addi- of the target markets. Figure 5 demonstrates the tional or incremental. typical cash flow for an investment project (in These three mitigation financing tools provide this case, a conventional power supply project). support of a slightly different nature, and each may be more appropriate at different stages of If the project in Figure 5 is redesigned to make it market development. If used together, they can a clean power supply project--such as through an bring the adoption of the new technology nearer investment in geothermal energy--its shape and to the present and possibly increasing its penetra- dimensions change. Given the relatively high tion (see Figure 4). The remainder of this chapter investment costs and the up-front risks associated looks at how these instruments may be used with geothermal resource confirmation, such a together simultaneously or sequentially to help project would have greater costs than an equiva- drive the market for the low-carbon technology lent fossil-fuel-fired power plant. The underlying toward maturity by extending the reach of that graph in Figure 6 represents the cash flow of this technology or practice. re-designed low-carbon development project. To 12 D e V e l O P m e n t A n D C l i m At e C h A n g e figUre 5 CAsh flOW fOr A COnVentiOnAl POWer sUPPlY PrOJeCt (+) C a s h F l Year o w (-) Source: Authors' data. figUre 6 CAsh flOW fOr A CleAn energY PrOJeCt mAKing Use Of ClimAte finAnCing instrUments (+) CPF C GEF a s h F l Year o w CTF (-) Source: Authors' data. B e Y O n D t h e s U m O f i t s PA r t s 13 make it feasible, the more expensive geothermal Third, carbon finance funds, including those project can be made more profitable and effective from the CPF, will start to flow to a project once by building the project finance structure with the the investment is completed and begins to oper- three mitigation financing instruments. ate, reducing GHG emissions. Like GEF funds, carbon finance can be viewed on a conceptual First, GEF resources kick in during the early basis as a reflection of the willingness-to-pay of stages of project development. These resources, the rest of the world for the certified GHG which according to Bank economic accounting reductions, partly capturing the externalities of rules (World Bank Operational Policy OP10.04) GHG emissions at market rates through offsets are considered as a benefit to the project, reflect produced by the project. The additional revenues the willingness of the global community to pay provided to the project implementers once the for the global environmental benefits of the proj- emission reductions are certified provide an incre- ect. GEF resources focus on removing barriers to mental revenue stream, reducing the risks and the widespread use of the investment technology improving the discounted value of the invest- and create the condition for successful replication. ment. Occasionally, some portion of these funds In the case of a geothermal project, GEF grant has been paid in advance of certification, but due resources can be used to facilitate policy changes to the risk of non-delivery, these additional reve- to make geothermal investments more attractive nues are typically accessible only once the invest- and to cover the heavy expenses associated with ment is in operation. Thus, they function rather the up-front risks of resource confirmation. like a feed-in tariff or a green certificate payment under mandated market policies: they serve as a Second, CTF funds can be brought to bear to performance incentive to the project implement- make the financing terms for the investment ers. When carbon prices are at the higher end of more attractive. These funds are largely in the their historical limit, the impact of a carbon reve- form of concessional loans and help reduce the nue stream on a project's return will be greater costs of financing the project. When blended than when it is lower. To date, carbon revenues with conventional Bank resources and the client's have only occasionally moved projects from dem- own investment resources, the concessional onstrating a negative rate of return to demon- resources of the CTF will help reduce a project's strating a positive rate of return. More typically, costs and facilitate a clean investment of a larger the rate of return improves a few points. There scale and scope than would otherwise be the case. are also instances where, in addition to revenue It can also help push low-carbon projects that are enhancement, the fact that carbon revenues are not on a country's least-cost development frontier normally denominated in hard currency has onto that frontier. In the case of the geothermal resulted in a qualitative enhancement of the proj- project, CTF funds can help defray the high cap- ect's risk profile, leading to possible extension of ital costs of geothermal development, which may loan duration, reduced interest rates, or softer prevent such projects from being more attractive amortization terms. So carbon revenues may than conventional fossil-fuel generation plants. serve to improve not only the project's financial return but also the financing opportunities that it faces. 14 D e V e l O P m e n t A n D C l i m At e C h A n g e COnClUsiOn fold all three into a single project to accelerate the uptake of the mitigation activity or extend its On a conceptual basis, it is clear that all three reach to a broader share of the market. climate financing instruments can serve com- Altogether, the three should serve to reinforce plementary roles in driving markets for clean each other in accelerating the transformation to energy technologies toward maturity. These low-carbon development paths. With sufficient instruments may be used on a sequential basis, creativity, foresight, patience, and vision, all three with the GEF taking initial start-up risks to climate change financial instruments can be initiate market transformation, CTF funds woven into a single sustainable development proj- being used to take the market to scale, and ect that will reduce the future growth of GHG carbon finance providing added financial emissions by making low-carbon development incentives to improve the discounted present options more financially and economically value of the project's revenue stream. Beyond attractive. this sequential synergy between these financ- ing instruments, there is also the possibility to B e Y O n D t h e s U m O f i t s PA r t s 15 3 MATChIng TooLS To TASkS STRUCTURIng FInAnCE To FIT PRojECT nEEDS ChAPter 3 KeY POints most technologies or practices employed in mitigation projects are still relatively early in the innovation cycle. some technologies, such as concentrating solar power or integrated gasification combined cycle, are still emerging from the research and development stage and may not yet be economically or finan- cially viable even with support from all existing climate financing instruments without leveraging addition- al concessional resources from local or international sources. Others, such as on-grid renewable energy from wind or biomass, are commercially mature and economically attractive but require some preferen- tial support from climate financing instruments to become financially viable. still others, largely energy efficiency projects, require careful structuring and institutional support to be able to capture the value of energy savings, even though the financial rates of return that they offer are very favorable over the long run. Knowledge of the hurdles encountered by different low-carbon technologies, sectors, or approaches needs to be coupled with an understanding of the nuances of the financial instruments in order to be able to use each one effectively in structuring an attractive and sustainable low-carbon development project. Most low-carbon growth projects still cannot be requiring changes in policies and business justified on the basis of their financial and eco- approaches and efforts to overcome inertia among nomic merits alone. This simple fact explains the governments, project developers, and consumers. need for dedicated financial instruments for cli- The legal, fiscal, and political structures need to mate change mitigation. These new financing be improved to increase competitiveness. sources targeting climate change mitigation are necessary to change investment decisions and The Bank Group is uniquely placed to provide shift infrastructure investments toward low-car- this support to developing countries adopting bon development. This is no meager task, clean energy practices while pursuing the goals of 16 D e V e l O P m e n t A n D C l i m At e C h A n g e sustainable development. It can help create the designing clean energy and infrastructure proj- proper enabling environment through policy dia- ects. While some of these require the use of grant logue, capacity building, the dissemination of resources, others rely more on concessional knowledge, and awareness-raising. In addition, financing or investment financing to ensure that the Bank Group can provide conventional and the project becomes financially attractive, eventu- concessional development financing to invest- ally transforming the market so that cleaner ments--mitigating risks, enhancing credits, and options become preferred even in the absence of facilitating access to additional revenue streams to concessional support. make investments more financially attractive. In brief, climate financing instruments are meant to incentivize the pursuit of low-carbon growth paths that would likely not be taken in the absence of additional financial support. finAnCing neeDs fOr ClimAte ChAnge From 1991 to 1998, the GEF was the only dedi- mitigAtiOn cated source of climate change mitigation financ- ing available to the Bank to support clean energy Climate change mitigation activities do not form projects. Despite the limited nature of GEF a major component of developing countries' resources, they were called upon for use in all development plans because they are either expen- aspects of clean energy project cycle develop- sive, difficult to implement, or seen as diverting ment--from preparation and regulatory change resources from more important priorities. To be to incremental investment subsidies. In 2000, car- effective, low-carbon growth projects must stimu- bon finance became available through the estab- late the demand for new technologies, change lishment of the Prototype Carbon Fund, behavior, and create incentives for widespread providing a second financial instrument to pro- market adoption of clean technologies. But the mote low-carbon development using the flexible development and adoption of new technologies is mechanisms under the Kyoto Protocol. Given a complex process. Figure 7 provides the uncertainties regarding the linkages and lack of Intergovernmental Panel on Climate Change's clarity on the acceptability of these two financing (IPCC) recent representation of this process. sources, only recently have projects been devel- oped to use both GEF resources and carbon New energy technologies tend to follow through finance instruments. The CIF resources consti- the process described in Figure 7, moving from tute a new source of investment funding available the left to the right. The early stages of research for promoting low-GHG-emitting development and development (R&D) are supported by both paths, incorporating a number of new financial public and private sector funding but represent a instruments into the Bank Group's clean energy technological or supply-side push to the market. arsenal. The CIF is becoming increasingly impor- As a technology progresses to the demonstration tant as the traditional objectives of the WBG of phase, it potentially faces the "valley of death," addressing economic growth and poverty allevia- so-called because many new technologies have tion can be addressed by supporting low-carbon languished in this phase while awaiting either growth. further investment capital or effective demand to push them toward commercialization and matu- This chapter begins with a general discussion of rity. Surviving the valley of death and successfully the challenges and unique financing needs of completing the demonstration phase, a B e Y O n D t h e s U m O f i t s PA r t s 17 figUre 7 teChnOlOgiCAl innOVAtiOn CYCle Government Policies to influence innovation activity Funding Incentives, standards, regulations, taxes, subsidies Research Market pull performers: Consumers: business, Research and Commercially individuals, firms, Demonstration Deployment Diffusion governments, other government, Development mature higher education, entities non-profit institutions Technology/product push Funding Funding and investments; knowledge and market spillovers Business Policies to influence innovation activity Source: Based on B. metz, O. Davidson, P. Bosch, r. Dave, and l. meyer, (eds.). ClimateChange2007: Mitigation.Contribution of Working group iii to the fourth Assessment report of the intergovernmental Panel on Climate Change. Cambridge and new York: Cambridge University Press. p. 157, figure 2.3. technology may move through the phases of low-carbon technologies and practices but not to deployment and diffusion until it reaches the provide any support to technologies in the "pre- stages of commercial maturity. Traditionally, commercial" stages. Carbon finance tends to give MDBs have focused on the transfer of technol- a revenue boost to technologies that are at the ogy at the diffusion or commercial maturity border of commercial viability but that may still phase. Procurement rules require that technology need the benefit of additional revenue. to be procured is commercially available or at least available through more than one source Figure 8 contains the now-familiar McKinsey (Anderson and Williams 1993, World Bank curve of global GHG mitigation activities, run- 2009a). ning from those considered to be entirely "win- win" on the left to those requiring greater support Dedicated climate financing instruments have before they can be justified on the basis of returns created a focus on newer technologies that are to the investment. (The McKinsey curve is only further upstream in the technological innovation an indicative and stylized presentation of mitiga- process. While still not focusing on technologies tion analyses that have been undertaken for many in the R&D stages, GEF funding has empha- years; see Sathaye and Meyers 1995.) Although sized early demonstration of clean energy tech- climate change financing instruments can be nologies. The thrust of the CTF is to help applied to all of these technologies, the mix of accelerate the deployment and diffusion of these resources will be differently suited to technologies 18 D e V e l O P m e n t A n D C l i m At e C h A n g e figUre 8 CAtegOriZAtiOn Of mitigAtiOn OPtiOns Note:this graph is taken to be indicative and may not strictly correlate with the opportunities facing any of the World Bank client countries. however, graphs like it have been produced for some time, so the concept is well known. see sathaye and meyers 1995. Source:Adapted from mcKinsey and Company 2007. at different points in the mitigation curve. As barriers whose costs may be difficult to quantify, many technologies included in the mitigation such as limited up-front financing, lack of favor- analysis are relatively new in the market, their able policies, or inappropriate business models for costs have not yet fallen as much as those of more effectively capturing those returns. The next band mature technologies. Thus, the relative position of technologies in the Figure require both of an option in the mitigation curve reflects both enabling and investment support to bring them the costs of the technology and its relative matu- into the realm of feasibility. These options rity in the technological development cycle. include energy efficiency projects as well as a wider range of renewable energy, land use, and The options on the left hand side of the curve sustainable transport projects. With assistance constitute mostly energy efficiency options using from climate financing instruments, these options technologies that are well known but not fully can be readily implemented, although they some- adopted or disseminated. Most of these energy times require additional support from local efficiency options are cost-effective on a prima investment resources through feed-in tariffs, tax facie basis but may not have disseminated relief, or other preferential treatment. On the far throughout the market because of existing right in Figure 8 are the technologies whose cost B e Y O n D t h e s U m O f i t s PA r t s 19 cannot currently be justified, even with climate enhancement, via the carbon market, can play a financing instruments and local financial incen- role but will be insufficient to push the technol- tives. These are relatively pre-commercial tech- ogy through the commercialization process unless nologies (such as integrated gasified combined extremely high carbon prices prevail. cycle (IGCC) coupled with carbon capture and storage (CCS)) that are still emerging from The next stage of technology commercialization R&D. Only further R&D support from indus- is one in which the technology is technically via- trial countries combined with climate financing ble, commercially available and economically ben- support can make these options attractive. eficial, but still financially unprofitable for private sector investors. At present a number of renew- As per the principles stated in the SFDCC, the able electricity-generating technologies fit this emphasis for the Bank Group and developing description, such as wind energy, CSP without countries should be on options than can be storage, and photovoltaics. Economies of scale implemented using current climate financing have begun to work, but existing market and instruments combined with Bank and local finan- nonmarket barriers prevent these technologies cial resources--in other words, the technologies from being the technology of choice. Appropriate in the first two bands on the left-hand side of policies can play an important role here in the Figure 8. form of renewable portfolio standards, removal of fossil fuel subsidies, provision of tax credits, Table 2 presents a detailed representation of the renewable generation targets, net metering, or financing needs and opportunities of mitigation favorable feed-in tariffs. Grants still play a major technologies that fall primarily in these two role in helping to establish the enabling condi- bands representing more mature technologies. tions, providing training and capacity building, Technologies in the first row of the table are and even providing some limited risk mitigation those which are technically viable, but not yet or credit enhancement. Investment capital, mixed commercially available, economically beneficial, or with some concessional finance, becomes more financially profitable. Examples of this category important for projects in this category as they include CCS affiliated with conventional power begin to approach marginal profitability. Revenue plants, IGCC (without CCS), ultra-supercritical enhancement through the carbon market can fluidized bed combustion, concentrating solar make an important difference for technologies at power (CSP) with storage, tidal energy, biochar, this intermediate state. and fuel cells. These may still required public sec- tor grant or R&D funding as they are not yet The final stage for mitigation technologies comes cost-effective due to lack of economies of scale. when the technologies are technically proven, These technologies frequently face the valley of commercially available, economically beneficial, death as they languish in the laboratory. Moving and financially profitable. A number of energy these promising mitigation technologies out of efficiency technologies fit this category at present. that valley requires continued demonstration, What prevents these technologies from making favorable policies, a legal and regulatory frame- their way into a country's investment agenda? work, and the internalization of external costs. Typically, inertia on the part of decision makers, Grant financing plays a critical role at this stage vested interests, market failures such as limited because the risk-return profile of investments in information, inappropriate business models, and a these technologies will only satisfy the require- lack of financing tools can prevent them from ments for concessional financing. Revenue being adopted. Other reasons may include 20 D e V e l O P m e n t A n D C l i m At e C h A n g e tABle 2 mAtUritY leVel Of mitigAtiOn teChnOlOgies -- sUPPOrt tO eXPAnD mArKets AnD ACCelerAte UPtAKe Issues to be addressed to Maturity level Description/ advance Policy support Project financing or stage definition technology needed needs technically viable the basic science is Development and · Public and private grant resources are but not commer- proven and tested in demonstration need- r&D required to facili- essential as technolo- cially available, the lab and/or on a lim- ed to prove operation- tate large-scale dem- gy may still be at economically ben- ited scale; some tech- al viability at onstration r&D stage or in "val- eficial, or financial- nical and cost barriers scale--no economies · need to internalize ley of death"; conces- ly competitive remain of scale present and global externalities sional finance may no global externalities through carbon taxes, play a role blended examples: CCs, igCC, internalized feed-in tariffs, or cap with venture invest- fuel cells, second gen- and trade ment capital if togeth- eration biofuels; CsP · legal/regulatory barri- er they meet high with storage ers risk-reward profile and requirements; technology risk is high--requires cover- age; revenue enhancement is help- ful but by itself insuffi- cient to make project attractive technically viable, the technology is tech- few economies of · Domestic policies to grant resources are commercially nically known and scale present, provide a level playing important to establish available and eco- available from com- enabling environment field: enabling environ- nomically benefi- mercial vendors; proj- and policies still non- · remove fossil fuels ment, build capacity, cial, but still not ect costs are well existent; limited infor- subsidies and internal- and remove barriers; financially compet- understood; technology mation, human ize local externalities concessional finance itive is economically viable capacity, business · Provide financial very important to with inclusion of exter- models, finance, and incentives for clean meet financing gap; nal costs but still not playing field may still energy technologies investment capital financially competitive favor conventional, becomes important · Provide training, infor- with inertia technolo- nonmitigation options on its own; risk miti- mation, finance, and gies or fossil fuels gation for technical, support to mitigation credit, and business alternatives examples: renewable risks; revenue electricity, such as enhancement wind, CsP no storage becomes more important technically viable, technology is financial- market failures and · regulations, with grants help defray commercially ly viable for project barriers hamper financial incentives to costs of establishing available, econom- investors--cost-com- accelerating adoption remove market failures regulations, removing ically beneficial, petitive with fossil fuels through the market; and barriers barriers, and provid- and financially or with high financial economies of scale · support for delivery ing technical assis- competitive returns and short pay- beginning to appear mechanisms and tance (tA); back periods financing programs to concessional finance social acceptability expand adoption important but less examples: typically · Consumer education dominant in financing energy efficiency, mix; investment including lighting finance critical to (Cfls), appliances, scale up intervention; industrial efficiency, risk mitigation largely district heating, build- for credit risks or ings business risks; reve- nue enhancement may be necessary to push profitability above marginal levels Source: Authors' data. B e Y O n D t h e s U m O f i t s PA r t s 21 stranded assets or asset life cycles, slow stock instruments but also a different mix of financing replacement, and poor enforcement of minimal models and mechanisms at different stages of standards. Rapid building schedules can also technology and market development. Ramping squeeze out innovative ideas. For industry, energy up low-carbon development will require a famil- efficiency receives a very low priority because it is iarity with how best to use these instruments in not a core business. In this scenario, regulations the most effective manner. and financial incentives to overcome these barri- ers are needed. Limited grant resources and some favorable concessional resources will be required. mAtChing the tOOl tO This is the classic case where third-party finance or energy service companies (ESCOs) can play a the JOB At hAnD -- nOt significant role, as the projects are profitable on eVerY JOB reQUires A paper but are not being taken up quickly enough hAmmer across the sector. Revenue enhancement through carbon financing can make a difference in push- The needs can be categorized as falling into four ing some of these investments into profitability, categories: creation of enabling conditions, provi- but in cases where up-front capital is lacking, car- sion of investment finance, risk mitigation, and bon finance alone may be insufficient to stimulate revenue enhancement. While the different project financial closure and subsequent imple- financing instruments being discussed in more mentation. In the face of these financial limita- detail here may occasionally fulfill more than one tions, some of the Bank Group's carbon finance role, each has its own appropriate niche in financ- operations have included provisions to allow ing a low-carbon infrastructure project and can advance payments against a portion (typically less be used in combination with other existing and than 25 percent) of a project's carbon revenue in emerging sources of finance. For some activities, order to help clients achieve financial closure. But only one or possibly two of the mitigation financ- the front-end-loading of carbon revenues remains ing tools may be possible or feasible. In others, rare in the market today, given the nature of both only if all of the financing tools are available and market uncertainty and delivery risk. fully deployed can the investment project be made economically and financially attractive. In Climate change mitigation technologies require some, even with all the support available, the special financing for a number of reasons mainly projects fail to reach financial closure. The four linked to the maturity of the technology and the categories that serve as an organizing framework nature of the market in which it competes. Less are presented briefly in Table 3. mature technologies are riskier and thus are more dependent upon grant resources and concessional The creation of the proper enabling conditions finance to mitigate that intrinsic risk. More for an investment includes the initiation and mature technologies require support in the form maintenance of a policy dialogue, adjustments to of favorable investment terms, performance policy and regulatory frameworks, project prepa- rewards, and perhaps credit enhancement rather ration, technological piloting or demonstrations, than from grant resources. However, transform- capacity building, training, and awareness cre- ing markets for energy and infrastructure to low- ation. As most of these activities cannot be carbon alternatives remains a tremendous directly linked to concrete investment returns, challenge that involves not only special financing most clients prefer to use grant resources to pay 22 D e V e l O P m e n t A n D C l i m At e C h A n g e tABle 3 Using ClimAte ChAnge finAnCing instrUments tO meet neeDs in PrOJeCt Design Project financing needs Available financing instruments Creation of enabling environment to initiate and/or continue a relevant policy dialogue gef to make adjustments to policy or regulatory framework multilateral fund (montreal Protocol) to provide project development funds trust funds, such as energy sector management to undertake technology piloting and demonstration Assistance Program (esmAP), Asia sustainable and to build capacity and train personnel Alternative energy Program (AstAe), Public Private to increase awareness infrastructure Advisory facility (PPiAf) Bilateral donor funds foundation funding iBrD resources also available Investment resources Private financing: to invest in those projects that have a international private sector resources favorable risk-return profile for private sector financiers national private sector resources ifC resources MDB or government financing: to invest resources for iBrD (specific investment loan (sil) or Development short- to medium-term investments with rate of return at or Policy loan (DPl)) near market levels government resources Concessional financing: to provide significant invest- iDA (sil) ment resources to blend with mDB, government, or private Ctf or Cif sector resources for medium- to long-term investments to government resources fill a financing gap for marginal investments gef (limited incremental investment resources) Risk mitigation to cover risks or enhance credits associated with new Ctf (partial risk guarantees) technology, business models, resource certainty, and gef (limited resources for non-grant risk coverage) country or currency risks Carbon finance (may help defray currency risks, as erPA are normally hard-currency denominated) multilateral investment guarantee Agency (migA) Revenue enhancement to provide additional revenue stream to improve financial Carbon finance (CPf and other Cf funds) viability of investment Output-based aid (global Partnership for Output-Based Aid) non-World Bank carbon funds Voluntary carbon markets Source: Authors' data. for them. These are the cases suited to the GEF's taking off and use grant resources to create the barrier-removal strategy: figure out why a good conditions under which it can thrive. Beyond the sustainable energy or transport project is not GEF, grant funding may come from the B e Y O n D t h e s U m O f i t s PA r t s 23 Multilateral Fund of the Montreal Protocol; between the production cost of electricity gener- Bank-managed trust funds, such as ESMAP, ated from low-carbon sources and wholesale ASTAE, or PPIAF; bilateral donor funds; private power system tariffs might present a new financ- foundations; and other sources. Bank loans may ing mechanism to strengthen the revenue stream also be used for these purposes, but most clients of clean energy projects. prefer to obtain grants to meet these costs. This first piece of the project--creating the enabling Ultimately, the goal of Bank involvement in sup- conditions--frequently entails the longest and porting low-carbon development is to have these most labor-intensive preparation, implementation low-carbon options became the norm--that is, support, and serious client-government commit- they become the least-cost options that are com- ment; it is the most difficult to obtain funding monplace for private investors. In particular, the for; and it requires vision and persistence to involvement of climate financing instruments obtain the necessary results. seeks to engage the private sector in the form of project developers, investors, or financial interme- The opportunities for investment financing will diaries. However, private sector participants are depend on the project and its financial and eco- frequently reluctant to invest in mitigation proj- nomic profile. Government's own resources, ects without further risk mitigation or credit national development banks, other MDBs, and enhancement. Often they view the technology, the private sector's investment resources are nor- country, or business model as too risky and would mally available for clean energy and transport like some coverage to minimize their potential projects. For concessional financing, favorable losses. The engagement of the private sector is terms can be made available from IDA, the CTF, essential as the market encourages participants to WBG, and other MDBs and national investment find least-cost solutions to environment problems, sources. In some cases, GEF resources may be while command-and-control structures impede sufficient to pay for limited incremental invest- innovation. To cover these risks, the Bank's ment costs; in other cases, they remain most Multilateral Investment Guarantee Agency appropriately directed at creating enabling condi- (MIGA) normally can offer country-related risk tions only. Increasingly, GEF projects are guarantees for Bank client countries. The CTF expected to be tied to projects with Bank IBRD can provide support in the form of partial risk or IDA funding in addition to local counterpart guarantees for the projects that form part of a funding. CTF resources must be tied to an MDB recipient country's investment plan. In the past, loan (from the IBRD, IADB, ADB, etc.) of one the GEF has taken a limited number of first-loss form or another. With continued growth in the positions with various Bank and IFC projects carbon market, the Bank's carbon finance pro- through funds administered by financial interme- gram, including the CPF, will increasingly focus diaries. (Both the CTF and GEF have explicit on Bank-financed projects as well. The CTF's policies to encourage private sector engagement.) resources fall within the category of concessional These guarantees have been most effective when finance, and the exact terms of the loans will linked to providing leverage for greater private depend on the needs of the particular investment sector investments in energy efficiency or renew- and the host country. Other innovative financing able energy. mechanisms are being developed and explored by the donor community. For example, the output- To enhance the financial return from a project, based approach applied to bridging the gap carbon finance provides a market- 24 D e V e l O P m e n t A n D C l i m At e C h A n g e based performance subsidy linked to the verified expenses, experience to date has shown that their emission reductions from a mitigation project. preference is to pay these "barrier removal" costs Experience to date has shown that at prices pre- out of grant resources. For these activities, GEF vailing in the carbon market, the revenue grants or resources from other grant-based fund- enhancement from carbon finance alone in most ing sources are typically preferred. The disadvan- cases has been insufficient to boost an unattract- tage associated with these resources is their ive project's return to an acceptable level. limited size: a typical GEF grant to a World However, many projects with returns just shy of a Bank RE project has averaged less than $10 mil- hurdle rate have been pushed into the range of lion, meaning that most of it is used for these attractiveness by prevailing carbon prices. If the "soft" costs of the renewable sector investments. market price for carbon rises over time, this boost to financial returns for low-carbon projects will Concessional funds, such as the CTF or other increase, making a wider range of mitigation concessional investment resources (IDA, projects financially attractive. Kreditanstalt für Wiederaufbau (KfW), Agence Francaise du Development (AfD), Japan Bank for International Cooperation( JBIC), etc.), can serve an important function by helping make large Using ClimAte environmentally interesting projects financially attractive. With respect to the need for risk miti- ChAnge finAnCing gation beyond what can be done through project instrUments tO mAKe design, both the CTF and GEF are willing to CleAn energY allow their funding to be used for partial-risk PrOJeCts AttrACtiVe guarantees or other forms of credit enhancement beyond that available through MIGA. Such sup- port to fuel-supply risk for biomass or dry-hole Most experience to date with climate financing guarantees for geothermal energy exploration can instruments has focused on renewable energy and provide a critical link in stimulating RE invest- energy efficiency projects. The discussion here ments. Finally, carbon financing has proved itself serves to highlight how these activities can best capable of improving the revenue stream from be built to take advantage of the dedicated cli- RE projects, again helping projects exceed risk- mate financing instruments in order to become adjusted return hurdles. Although carbon reve- economically attractive. nues are not available until the projects begin operating, the guaranteed extra revenue stream The information presented in Table 4 links the can play a critical role in enhancing project financing needs for making a renewable energy payback. project economically and financially attractive with the various dedicated climate change financ- In contrast to renewable energy projects, which ing instruments, using the information summa- are basically energy supply projects, energy effi- rized in the preceding discussion. RE investment ciency projects cover a wide range of activities projects are capital-intensive by nature, but they focusing on providing a given or enhanced level also require the creation of a sound enabling of energy service while reducing energy con- environment to be replicable and sustainable sumption. Because EE projects are not as asset- rather than being limited to a single demonstra- based as energy supply projects, they face greater tion project. Although some client governments difficulties in obtaining financing even though may be willing to borrow to meet these "soft" B e Y O n D t h e s U m O f i t s PA r t s 25 tABle 4 Using ClimAte ChAnge finAnCing instrUments tO mAKe reneWABle energY PrOJeCts AttrACtiVe Financing needs Available financing instruments Creation of enabling environment, including capacity building · Policy and regulatory frameworks: Design of mandated market policies (e.g., feed-in tariff, renewable energy portfolio stan- grants from the gef, Bank trust funds (esmAP, dards, competitive tendering, etc.), long-term power purchase AstAe, PPiAf, Policy and human resources agreements, and incentive policies Development (PhrD) fund, etc.), foundations, · Projectdevelopmentfunds:Pre-feasibility studies paid for on a or other donors are the most appropriate matching grant basis with private developers · Technology development and improvement: Creation of a local manufacturing industry, technology standards, testing, and certi- fication (Clients may also borrow to meet these costs, but · Capacitybuildingandawarenesscampaign:raise capacity and typically prefer not to) awareness in government agencies and private sector and civil society at all levels · Renewable resource and environmental assessment: establish wind speed site data, confirm geothermal resource potential, or assess biomass resource availability Investment resources Private financing: re may still not meet private sector risk-reward international or national capital profiles, requiring longer tenure and lower return rates to be com- petitive Long-term financing for existing commercially available renewable iBrD (sil or DPl) or government resources energytechnologies:re is capital-intensive, so long-term financing is critical; iBrD lending to this sector helps countries adopt interna- tional best practices Concessionalfinancing:focus on supporting economically benefi- Ctf cial but not financially profitable emerging renewable energy tech- iDA (in low-income countries) nologies Concessional financing from other donors (AfD, · new emerging re technologies, such as CsP, require conces- KfW, or JBiC) sional financing to cover both the incremental costs and technol- gef resources (for piloting or demonstration ogy risks only) · more mature re technologies, such as wind or biomass, require less concessionality than less mature technologies, such as CsP Risk mitigation to cover exploration risks for geothermal or fuel supply risk for bio- gef grants can cover partial risk guarantees mass to cover country risks migA Revenue enhancement Carbon finance (CPf and other Bank carbon funds/facilities) to increase the return to an investment by increasing revenue from project production Source: Authors' data. 26 D e V e l O P m e n t A n D C l i m At e C h A n g e they often demonstrate favorable financial program costs for utility EE or demand-side returns. While efficiency investments may dem- management (DSM) projects. The promise of onstrate favorable payback periods and rates of carbon finance revenues may provide access to return, the management or organizational needed up-front resources to help extend the requirements necessary to get access to them reach of EE programs through soft loans, even remain challenging (see Table 5). Dedicated cli- though the carbon-linked revenue stream is by mate financing instruments play an important itself rarely front-end-loaded. This partly explains role in realizing these identified but elusive why carbon finance has made limited inroads to energy and GHG savings. enhancing the revenues of EE projects. The creation of the enabling environment for EE The challenge for energy efficiency lies in obtain- projects often requires regulations or standards ing the up-front capital, not in improving reve- for energy-using devices, such as appliances or nues. The delivery risk on carbon payments still building codes. Grant resources from the GEF, makes most buyers unwilling to make up-front other MDB trust funds (such as ESMAP, payments for carbon revenues. Second, the CDM PHRD, or PPIAF), foundations, or bilateral still requires projects to demonstrate that they are donors may be available to cover the costs of this "additional" to what would happen in an econom- preparatory work for energy efficiency ically rational baseline. As most energy efficiency investments. projects have favorable economic characteristics at least on paper, CDM regulators have only Other EE projects may demonstrate high eco- recently shown a willingness to consider them nomic rates of return on paper but are difficult to "additional" to the baseline. Third, many EE finance as the financial returns are not always investments represent individual, small installa- easy to capture. Utilities hesitate to borrow tions that fall below the minimum size threshold money to pay for activities that lead to a reduc- (measured either in value or volume) necessary to tion in sales of electricity or gas to their custom- gain investment commitment. The new program- ers. The principal-agent or landlord-tenant matic approach to the CDM, wherein many problem provides another example of split incen- small projects are bundled together for a larger tives that may undermine EE projects. aggregation of carbon credits, is a promising ave- Concessional financing can make a big difference nue that should be used more to enhance the in such projects by providing consumer rebates, attractiveness of energy efficiency projects financing ESCOs, or paying non-recoverable (Figueres and Philips 2007). B e Y O n D t h e s U m O f i t s PA r t s 27 tABle 5 Using ClimAte ChAnge finAnCiAl instrUments tO mAKe ee PrOJeCts AttrACtiVe Financing needs Available financing instruments Creation of enabling environment, including capacity building · EEregulations:energy efficiency appliance standards and labeling, building mDB resources are available to meet codes, industry performance targets, fuel efficiency standards these costs, but clients frequently · Regulatory reforms: removal of subsidies (power and heating pricing prefer to use grants, not loans, for reform), decoupling sales from revenues these activities · Technicalassistance:to esCOs and other ee project developers to build an grants from the gef, Bank trust esCO industry and prepare financing deals; to financial institutions to devel- funds (esmAP, AstAe, PPiAf, op financial products; to government agencies on public procurement rules; PhrD, etc.), foundations, or other to utilities on ee/Dsm program; district heating design donors Investment resources Privatefinancing: ee projects may be profitable and have short payback peri- international or national investment ods, but they suffer from other barriers such as inertia, principal-agent prob- capital may be used if investment lems, or managerial challenges meets risk-reward requirements Long-termfinancingcan be provided to governments on a sovereign guarantee basis for the following: iBrD (sil or DPl) · Lending for district heating: lending to municipalities or nationally owned government resources district heating entities · Lendingtolocalfinancialinstitutions:lending stimulates on-lending for ee investments · Public procurement: Bulk procurement of energy-efficient retrofits for gov- ernment buildings Concessionalfinancing: Ctf iDA (in low-income countries) · Financialincentives:Providing consumer rebates Concessional financing from other · ESCOs:Providing initial capital to set up esCO industry donors (AfD, KfW, or JBiC) or · DedicatedrevolvingEEfund:Operating like a dedicated investment fund gef resources (for piloting or dem- · UtilityEE/DSMfund:Paying costs of utility-based efficiency programs onstration only) Carbon finance may assist with ener- gy efficiency programs Risk mitigation Partial risk guarantees for investments or technology the Ctf can provide partial guaran- tees the gef has provided limited risk guarantees and first-loss positions Revenue enhancement Additional revenue based on product or output of investment Carbon finance has proved difficult to date because of additionality require- ments (on paper, energy efficiency looks profitable from the savings), but the acceptance of programmatic approaches to the CDm have begun to facilitate end-use energy efficiency programs under the CDm Source:Authors' data. 28 D e V e l O P m e n t A n D C l i m At e C h A n g e B e Y O n D t h e s U m O f i t s PA r t s 29 4 FRoM ThE DRAWIng boARD To ThE EXECUTIVE boARD CASE STUDIES ChAPter 4 KeY POints six case studies highlight the combination of resources from climate financing instruments with those from development finance, including resources available from iBrD loans and local investment capital. Although these projects are at different stages of development and implementation, they provide inter- esting examples of ways to increase the reach and pace of low-carbon growth by blending finance to maximize impact. the China renewable energy scale-up Project and the energy efficiency Project highlight the impor- tance of establishing enabling conditions and institutional capacity to stimulate low-carbon growth. the india Chiller energy efficiency Project demonstrates that by using different climate financing tools, the total resources and the fraction of the market to be reached with those resources under a project can be increased. these projects emphasize the importance of leveraging national investment resources to ensure long-term sustainability of low-carbon initiatives, especially when revenue can be paid in either local or foreign currency. the mexico municipal transport Project is an interesting case of using gef resources to lay the foundation for bigger investments through the Ctf and national sources. it even managed to attract carbon finance to a challenging sector like urban transport. Carbon finance has brought attention and investment into the much-neglected waste management sec- tor, as exemplified by the morocco waste management proposal. Without the contributions from these climate financing instruments, none of these projects would have moved ahead. the igCC-CCs project in China demonstrates that, with foresight, all climate financing tools can be brought to bear in a single project. however, simply mapping out how these resources might fit together is no guarantee that the project will move forward. All of these projects pose challenges to design and implement. to make them a success, Bank staff and in-country proponents must share the interest and commitment to pursue these more challenging and innovative projects over their more conventional baseline alternatives. 30 D e V e l O P m e n t A n D C l i m At e C h A n g e Climate change financing is a rapidly evolving Six case studies drawn from recent Bank Group's field. To the extent that this interest in and com- experience with financing demonstrate how mul- mitment to increasing climate change mitigation tiple mitigation financing tools can be deployed on the part of the Bank and its client countries either simultaneously or sequentially in the same continues to grow, familiarity with using these project or program (see Table 6). Some of these mitigation financing instruments will also have to projects are nearly complete, while others are still grow--making the blending of these instruments on the drawing board and do not represent firm a more common practice. commitments of any party involved. tABle 6 ClimAte ChAnge mitigAtiOn finAnCing CAse stUDies Project Status Sector Financing instruments used IBRD/ GEF IDA CTF CF Other China 2005­ On-grid $40m $173m $15m or renewable present renewable about energy scale- energy 1 up Project generation mtCO2e (CresP) China energy 1998­ industrial $14m $200m $12 m or $371m efficiency present energy 750 Program efficiency ktCO2e morocco Board Urban solid 100m $30m or municipal solid approval Waste 2 Waste march 2009 management mtCO2e* india Chiller Board energy efficient $6.3m $5.8m or mlf $1m energy approval Appliances & 485 iDBi/ efficiency June 2009 CfC Phase-out ktCO2e private Project $70m mexico Urban Board sustainable mexico $200m $200m ~$50m $868m transport approval transport City or about fOn- transformation October $5.8m 3 ADin+ Program 2009 + mtCO2e $732m (UttP) $8m private from sector + stAQ $225m to 4 from cities cities China igCC in efficient Power $10m $100­ $100­ tBD ~$400m Project discussion generation 200m 200m Note: *Value of Cers to be determined in market. Source:Authors' data. B e Y O n D t h e s U m O f i t s PA r t s 31 Two of the six case studies featured in this chap- ChinA reneWABle ter use GEF, IBRD/IDA, CTF, CF, and national investment resources. The other projects use two energY sCAle-UP to four of these financing sources. As the CTF is PrOJeCt the newest source (eight projects have been approved to date by the Trust Fund Committee), CRESP (see Table 7), approved in 2005, built the possible examples of its use are limited. But upon the lessons of its failed predecessor, the as the CTF portfolio grows and the Bank China Renewable Energy Development Program Group's experience with combining these financ- (REDP), initiated in 2001. The REDP provided ing instruments increases, future projects will resources to support the establishment of demon- combine these resources more frequently and in stration wind farms, but this component failed more ambitious ways in order to help countries and was cancelled. In analyzing the situation, the achieve low-carbon growth. tABle 7 finAnCiAl PACKAge fOr ChinA reneWABle energY sCAle-UP PrOJeCt Project financing need Financial instrument Targeted outcome Create enabling conditions, including capacity building · implementation of mandated market gef grant: $40m successful implementation of re law policies at national and provincial AstAe grants local manufacturing industry created levels resource information available · technology improvement (local man- A bankable project pipeline built ufacturing) local capacity strengthened · resource assessment · Project development fund · Cost-shared pilot or demonstration · Capacity building/training Investment resources in addition to investments implemented, the · 2 wind farms: 2x100 mW wind power projects are the first large wind · 1 biomass power plant: 25 mW iBrD loan: $173m farms (100 mW) in China; CresP intro- duced international best available technolo- · Bundling small hydro plants < 10 mW gies through international competitive bidding Revenue enhancement for the inner mongolia wind investment of An additional revenue stream from car- Carbon finance: $15m 100 mW carbon finance proved instrumental bon financing enhances financial viability in improving the project's financial viability of the inner mongolia wind farm from a marginal 7 percent to a financial inter- nal rate of return (firr) of 9 percent that made the project attractive to developers when the feed-in tariff would not Source:Authors' data. 32 D e V e l O P m e n t A n D C l i m At e C h A n g e task team came to understand that the failure country is now considered the second fastest- could be attributed to the lack of agreed approach growing wind market in the world and, with 12.2 to sharing the incremental costs of the invest- GW of installed capacity in 2008, has the fourth ments between the national and regional grids, as largest wind market in the world (REN21 2009). they far exceeded whatever grant resources could be mustered. None of the actors was willing to Both REDP and CRESP projects provide suc- pay the extra fee per kilowatt-hour (kWh) cessful examples of technology transfer of renew- required to make the wind investments able energy technologies with climate financing sustainable. instruments (GEF). REDP has successfully stim- ulated the building of a domestic photovoltaic In response, the Bank helped the Chinese gov- module manufacturing industry in China, while ernment obtain resources from both GEF and CRESP helped develop Chinese-made large (> 1 the Asia Sustainable and Alternative Energy MW) wind turbines. Through both projects, Program to evaluate international experiences and GEF funding was used to cost-share matching best practice with respect to RE mandated mar- grants with manufacturers to accelerate their ket policies and to develop its own RE policy learning and experience with the newer technolo- framework. China developed and passed an RE gies. These cost-sharing grants reduced the cost Law that lay the basis for sustainable renewable of the technology initially in China but eventu- energy development, one of the first in develop- ally on the international market. Under CRESP, ing countries. This technical assistance laid the GEF funding mobilized additional funding from foundation for an IBRD SIL ($173 million) that subgrant recipients of about three times GEF provided support for co-financing two 100-MW grant support. Combined with the government's wind farms, a 25-MW biomass power plant, and requirement of 70 percent locally manufactured a bundled package of small hydro projects. The content for wind farms in China, this has also Bank loan was seen not only as investment sup- boosted a large domestic wind manufacturing port but also as a way to bring international best industry in China, which is on its way to becom- practices to bear in private sector renewable ing one of the world's largest producers of wind power development. turbines. For one of the wind investments (Inner What might be done differently if the CTF or Mongolia) targeted as part of CRESP, the other concessional investment finance were made Chinese government specified that the wholesale available through CRESP? There is a risk that an power tariff should not exceed 5 cents/kWh, a accelerated process created by a larger volume of price that made wind uncompetitive. At this concessional terms would have created so much point, the Bank's carbon financing helped additional pressure for rapid disbursement that improve the project's financial viability by com- the project team and counterparts might not have mitting to purchase 1.6 million emission reduc- returned to the drawing board, regrouped their tions from the project, raising the financial efforts, and refocused on the mandated market internal rate of return from 7.2 percent to 8.8 policies or feed-in tariff. As a result of the early percent, a point where the project became attrac- failure of REDP's wind component, a transfor- tive. Therefore, by integrating GEF and ASTAE mation took place that required a number of grants, IBRD lending, and carbon finance pay- years to complete. Clearly, getting the policy ments, CRESP has had an effective transforma- environment right needs to remain at the core of tional impact on RE development in China. The low-carbon development programs no matter B e Y O n D t h e s U m O f i t s PA r t s 33 what quantity or type of climate financing instru- The program will continue to expand through ments is available. In this case, the government of the creation of new loan guarantee products. In China agreed with the Bank to pursue a longer- parallel, the GEF technical assistance grant term sustainable option--involving a change in helped build capacity for ESCOs through the the regulatory system--rather than a quick, one- ESCO Association and developed financial prod- off demonstration project. This decision--and the ucts with the guarantee company. efforts to implement it--made the program truly transformational. Based on the energy savings and carbon emission reduction rates actually achieved in 226 invest- ments supported through the ESCO Loan Guarantee Program, estimated energy savings ChinA energY from 2007 energy performance contract invest- ments total about 53 million tons of standard effiCienCY PrOgrAm coal equivalent. Associated carbon dioxide emis- sion reductions from investments made in 2007 Many financial institutions tend to regard energy alone total about 139 million tCO2e, a 900 per- efficiency investments as being relatively small in cent increase from 2004. size, with high risks and higher transaction costs. As a result, EE has frequently been relegated to Subsequently, the Bank financed a China EE the realm of social responsibility as opposed to a Financing Project to provide IBRD long-term profitable business line. With support from the financing, and the GEF grant was provided to GEF, the European Commission, and a World increase the local financial institutions' confidence Bank loan, the China Energy Conservation in jump-starting energy efficiency financing Project created the first three ESCOs in China in through learning by doing. GEF funding ($14 1998. These three energy service companies, in million) has been used to assist the participating Beijing, Shandong, and Liaoning, successfully banks in preparing a project pipeline and building pioneered the energy service company business their capacity. IBRD lending ($200 million) was model, adapting it to Chinese conditions. also used as a sweetener to engage domestic financial institutions to on-lend to large indus- Launched in November 2003, the Second Energy trial enterprises and ESCOs for EE investments. Conservation Project has helped stimulate a robust Chinese ESCO industry that has grown to In the process of developing an EE pipeline, a make energy efficient investments from their own Bank carbon finance deal was reached for Baotou resources valued at more than $1 billion in 2007 Iron and Steel Company. This project, with a (see Table 8). The ESCO Loan Guarantee total investment of $67 million, is a coke dry- Program implemented under this project created quenching operation that will make use of waste a bridge for many ESCOs into the world of for- heat to generate 45 MW of electric power. It has mal financing through the issuance of loan guar- contracted to sell 900,000 tCO2 valued at antees. Twelve Banks have provided support to approximately $12 million (8.5 million). The over 40 ESCOs. With $16.5 million of GEF carbon revenues have raised the FIRR of this funds placed in a special guarantee reserve fund, project from 11.5 percent, which was considered the project issued loan guarantees totaling about financially unattractive, to over 14.3 percent, $52 million from 2004 through April 2008, pro- which was considered attractive. This project pro- viding support for specific energy performance vides an interesting example because it shows contract investments totaling over $90 million. 34 D e V e l O P m e n t A n D C l i m At e C h A n g e tABle 8 finAnCiAl PACKAge fOr ChinA energY effiCienCY finAnCing PrOgrAm Financial Project financing need instrument Targeted outcome Create enabling conditions, including capacity building · Assist participating banks in capacity building, mar- A project pipeline built keting, due diligence, and pipeline development gef grant: $14m · Assist other banks and overall banking sector to increased capacity of local banks begin investing in ee to develop and evaluate ee proj- ects and to incorporate carbon · Preparation of pilot projects finance in their operations · monitoring and verification national energy Conservation · national policy and institutional support to national Center fully operational energy Conservation Center Investment resources On-lending through two selected domestic banks to iBrD loan: $200m energy saved and CO2 reduced medium and large-scale ee investments ($5­25m per subproject) Risk mitigation loan guarantee pro- enabled esCOs to expand financ- gram operated by ing i&g Revenue enhancement enhanced financial viability of waste-heat utilization project--for An additional revenue stream from carbon financing Carbon finance 8.5 Baotou iron and steel Co., firr enhances financial viability of the Baotou iron steel ee m for 900 ktCO2e jumped from 11.5 to 14.3 percent project Source: Authors' data. that the Bank's long-term commitment and with various approaches and learn the process of engagement in China has paid off handsomely investing in energy efficiency (Taylor and others and that a programmatic approach is the most 2008). Weaving GEF and IBRD resources effective way to scale up EE investments. This together in EE financing is critical. Early EE remains the largest single EE project being lending projects without GEF grants languished implemented by the Bank. because of insufficient deal flow. The most important lesson learned from the Bank EE A comparison of the experiences in investing in financing portfolio is the critical need for techni- energy efficiency in China, India, and Brazil cal assistance, particularly at the beginning, to undertaken by a team from ESMAP showed that raise awareness of energy efficiency, to provide TA and capacity building alone were not suffi- training and advisory services to the local finan- cient to make local banks interested in EE lend- cial institutions in developing financial structures, ing using their own capital in any of the case and to build the capacity of project developers. studies examined. Rather, what was necessary was On the other hand, grant-based TA alone is not outside funding that could be used to experiment sufficient to engage local financial institutions B e Y O n D t h e s U m O f i t s PA r t s 35 and interest them in EE lending, as demonstrated program design includes two single DPLs (valued in the three-country study (Taylor and others at $140 million or 100 million), with the first 2008). DPL focusing on support for the key foundations of the government's reform program, which What could be done differently with the new establishes the enabling environment for an inte- resources available? The availability of conces- grated and affordable municipal solid waste sys- sional investment resources might have acceler- tem. The planned second DPL will support ated the uptake of financing through local scaling up of the program, capitalizing on the financial institutions, but the concept of being momentum gained during the first operation able to experiment using grant resources has while deepening the reform through results-ori- proved critical to developing an energy efficiency ented actions at the regional and municipal levels. business for financial intermediaries. The project team has received requests for capacity building The Moroccan municipal solid waste manage- from financial intermediaries who were very keen ment sector faces challenges related to a weak to understand the rules of the CDM and how it legal and institutional framework. The Solid might become an additional service line in their Waste Management DPL includes the prepara- existing lending business. But without the assis- tion of a programmatic CDM solid waste activity. tance made available to develop and work The CDM SW program will help improve finan- through the business model using grant funding, cial sustainability and promote sound environ- the financial institutions would never have been mental practices in the sector. The program will convinced that energy efficiency could be profit- also contribute to Morocco's participation to the able. After the business model was tried and global effort in climate change mitigation (see developed, carbon finance played a role in provid- Table 9). ing incentives for greater replication of EE prac- tices. In a similar manner, concessional finance The CDM program will initially focus on munic- could be used to increase the scale and scope of ipalities and sites included in the first phase EE lending by the financial intermediary. But the (2008­12) of the DPL to support the PNDM. It GEF foundational support provided the enabling will create an incentive for municipalities to environment in which carbon finance can flour- invest in landfill gas use and to use carbon reve- ish, and concessional finance can play its role as nues to fund further landfills. Up to 11 landfill an accelerator for financial intermediaries. gas projects, including those of main Moroccan municipalities in the first phase of the PNDM, may join the CDM program. If implemented, these 11 subprojects would process 2.9 million mOrOCCO mUniCiPAl tons of waste per year with estimated emission reductions of 7.561 million tCO2e over 10 years, sOliD WAste PrOgrAm worth approximately $115 million at current prices. These payments alone are nearly sufficient This Development Policy Loan (DPL) was to recover the cost of the loan package. designed to support the government of Morocco in implementing its National Municipal Solid The CDM program will be developed as a Waste Management Program (PNDM) by Program of Activities, and each landfill gas proj- reforming and improving the financial, environ- ect under the PoA can be treated as a component mental, and social performance of the municipal without the need to go through a solid waste (SW) sector in Morocco. The 36 D e V e l O P m e n t A n D C l i m At e C h A n g e tABle 9 finAnCiAl PACKAge fOr mOrOCCO sOliD WAste mAnAgement PrOJeCt Financial Project financing need instrument Targeted outcome Investment resources iBrD iBrD financing will support a waste management policy Development framework to achieve the following outcomes: sovereign guaranteed loan-term Policy loan · improve governance of the sector concessional project financing · Create additional legal, regulatory, and institutional mea- sures designed to establish a clear framework for the sector · eliminate overlap and/or gaps in the policy-making, reg- ulatory, and operational structures · improve sustainability of the sector through the introduc- tion of financial mechanisms and incentives for munici- palities to improve their sW management systems · mainstream social and environmental considerations into the planning, implementation, and operations of solid waste services and investments Revenue enhancement A supplementary revenue Carbon finance A CDm Program of Activities (PoA, or "programmatic CDm") stream to leverage commercial will be developed to provide additional incentives for munic- financing for additional munici- ipalities to invest in landfill gas elimination or reuse projects pal landfill projects and create with additional resources resulting from the sale of certified incentives for private sector emission reductions generated by such investments. participation landfill gas projects will be implemented by the individual municipalities. the PoA will be considered as a CDm proj- ect activity, and each individual landfill gas projects can be added to the PoA umbrella. Source:Authors' data. separate registration process. The landfill gas instruments? There is no straightforward answer. CDM program activities will be implemented by The GEF Council has still not agreed to the pro- individual municipalities. The Fonds d' vision of incremental funding to DPLs in general, Equipement Communal (FEC) would either as the Council perceives itself as a project funding construct and operate the project themselves or mechanism. This policy may be tested in the contract the private sector to do so. The FEC will future, however, as more of the Bank's financing be the coordinating entity. It will help prepare for middle-income client countries is being pro- individual CDM program activities and sell a vided through DPLs, and a few of these have portion of the CERs to the Carbon Partnership focused on climate-related activities. Early in the Facility. At this early stage of the program prepa- pilot phase, the GEF did provide financing for ration, and based on preliminary discussions with landfill gas and liquid biomethane projects, and it the FEC, it is anticipated that the CPF would might support removing barriers and creating purchase around 2 million tCO2e over 10 years. successful market conditions for large-scale land- fill methane projects. With respect to conces- What might be structured differently with the sional financing such as the Clean Technology Morocco project with more climate financing Fund, a program like Morocco's PNDM would B e Y O n D t h e s U m O f i t s PA r t s 37 have to be defined as truly transformational in more energy efficient (see Table 10). This project order to be eligible for support. But the provision concept is in line with the objective of supporting of concessional finance for such activities would the transformation of the Indian electricity sector again scale them up in an accelerated fashion. In toward a less carbon-intensive path, thereby conclusion, there is no clear answer as to whether establishing an in-country mechanism to provide or not the project could be structured to increase chiller owners with an incentive that is sufficient its scale and scope using other climate financing to overcome the identified barriers. The objective instruments. is to replace 370 chillers over three years, with an average incentive of 20 percent, with precise amounts varying upon chiller age and timing of participation in the project, based on an agreed- inDiA Chiller energY upon sliding scale. Funds from the Multilateral Fund for the Implementation of the Montreal effiCienCY PrOJeCt Protocol (MLF) are being used to structure the project and build capacity for implementation. Chillers, which serve as the heart of large-scale Grant funds from both the GEF and MLF are air conditioning systems, remove heat from being used to provide an up-front subsidy to buildings and release it to the environment, con- chiller owners to encourage them to invest in the suming electricity in the process. Non-chlorine new equipment. Before chiller owners receive the fluorocarbon (CFC) based centrifugal chillers incentives, they must agree to render any future manufactured today can achieve energy consump- carbon revenues to the project. These carbon rev- tion of about 0.48 kWh/RT (kilowatt-hour per enues will be managed as a revolving fund to pro- ton of refrigeration), representing a 40 percent vide further incentive payments to replace improvement in energy consumption over older additional chillers. Of the targeted 370 chillers CFC-based centrifugal chillers (0.8 kW/RT or (out of a total market size of about 1,200 chill- higher, depending on maintenance and opera- ers), 185 of them will be supported by the fund- tional standards). Despite this clear private bene- ing from the GEF and 30 by the funding from fit to chiller owners, most building owners have the MLF. The other 155 chillers will be replaced not embraced early or even timely replacement of through carbon revenues earned from those early outdated chillers. It appears that managers make replacements. such decisions in an environment of competing investment opportunities and resource con- With the total cost of replacement of about $90 straints, where the mission-marginality of the million, the project will rely on local investment chiller investment, perceived technology risks, capital to pay for the bulk of the replacement and high opportunity costs constitute a formida- costs. This investment capital is expected to be ble barrier to early adoption of the more-efficient provided either by the chiller owners themselves alternative. In fact, the India chiller sector study or through a loan that they would obtain from a determined that Indian chiller owners apply an local financial institution--possibly, but not nec- implicit discount rate as high as 30 percent on essarily, through the implementing agency, the potential returns from chiller replacement Industrial Development Bank of India (IDBI). projects. The incentive payments from the GEF, MLF, and CDM are designed to meet 20 percent of the The India Chiller Energy Efficiency Project was replacement costs. To avoid the problem of free- designed to replace older CFC-based centrifugal riders (chiller owners using the subsidy to replace chillers with non-CFC-using chillers that are 38 D e V e l O P m e n t A n D C l i m At e C h A n g e tABle 10 finAnCiAl PACKAge fOr inDiA Chiller energY effiCienCY PrOJeCt Project financing needs Financing instrument Targeted outcome Creation of enabling environment · to continue the relevant policy multilateral fund of the montreal · Project is prepared consistent with dialogue Protocol ($565,000) evolving government policy · to provide project development · Capacity is built funds · staff are trained · to train relevant staff · Credible monitoring framework · to monitor, verify, and certify out- established comes Investment resources Conventional resources: to provide national investment resources, national investment resources com- significant investment resources for from both public and private sector, bine with gef, mlf, and Cf resources chiller replacement and financial intermediary (iDBi to pay for retrofitting of 370 chillers Bank ltd. (iDBi)) resources ($70m) pay for baseline investment costs reduction of 159 million tons of CfCs Concessional resources: to improve gef ($5.7m) and mlf ($220k) saving of 3.9m mW-hours and 48 mW the financial feasibility of invest- grant resources devoted to provid- electricity over 20 years ments in chillers in order to over- ing incremental cost subsidy for come inertia, to ensure favorable early adopters of new chiller tech- Direct reduction of ghg emissions by rates of return, and to promote repli- nology 4.50m tCO2e over 20 years cation resulting in market transfor- mation indirect reduction of ghg emissions by 8.68m tCO2e over 20 years Risk mitigation gef/mlf resources serve as a firr for individual investor estimated partial subsidy to improve profit- at 30 percent after tax or payback of to cover risks or enhance credits ability of chiller investments-- 3.3 years associated with investment in CfC- revenues from carbon finance also free energy-efficient chillers contribute to revolving fund eirr for project as a whole estimated resources at 68 percent without carbon revenues or 71 percent with carbon revenues included Revenue enhancement Carbon finance resources will be sale by project of approximately 488 devoted to renewing a revolving thousand Certified emission reduction to provide additional revenue stream fund to retrofit more chillers (target- Units (Cer's) equivalent to 488 to improve financial viability of invest- ing 155 of the planned 370) ktCO2e ment and ensure replication of activity Source:Authors' data. a chiller past its useful lifetime), an age limit is owner comes to about 30 percent after taxes, but placed on eligible chillers: only those still within it has a payback period of slightly more than their estimated useful lifetime (typically 20 years) three years. Given the capital-short nature of will be eligible for support. With the investment most Indian enterprises and the opportunity set promotion, the financial return to the chiller that they face, such projects would be unlikely to B e Y O n D t h e s U m O f i t s PA r t s 39 move ahead without an incentive payment. In meXiCO UrBAn this case, the carbon payments will be used to further the replication of the program, re-endow- trAnsPOrt ing the revolving fund to provide further incen- trAnsfOrmAtiOn tive payments to other interested chiller owners. PrOJeCt What could be done differently with additional The objective of the Mexico Urban Transport Transformation Project (UTTP) is to transform climate change mitigation resources? This project urban transport in cities to a lower carbon growth began with a kernel of seed capital from the path. Achieving this objective will significantly MLF. It approached maturity with the approval reduce the carbon footprint of the transport sec- of the GEF funds, and the approval of the CDM tor as well as reduce air pollution. The UTTP methodology by the CDM Board completed the will bring together the agendas of local urban package. Because early assessments made it clear transport, national poverty reduction, and global that chiller owners had sufficient access to invest- climate change, while responding to the govern- ment capital from local sources, no IBRD loan- ment's voluntary pledge to reduce GHG financing was requested. As the project predates emissions. the CTF or the CIF in general, there was no opportunity for further concessional financing. Demand for transport in Mexican cities is lead- Had it been available, it would have increased the ing to increasing motorization, with growth rates speed of the transformation from old, inefficient of around 10 percent per year. In many cities, pri- chillers to new, more-efficient ones. However, the vate cars today account for 80 percent of total trade-off might have been the financial interme- motor vehicles but represent not more than 30 diary's reduced reliance on its own resources. The percent of the daily passenger trips. This growing motorization has led to demand for more roads, key to full replication across the market--as including ring roads and multilane highways, shown in the China Energy Efficiency which has led to diversion of public funding for Project--is the involvement of local banks that private transportation enhancement. Although will first learn about EE investment using grant there is considerable variation between cities, the resources prior to pursuing further efficiency government is generally not in a position to investments with their own capital. So the trade- respond adequately to the demand. The transport off in design and timing might have made the policy and framework is inadequate, the institu- faster option less desirable over the long run, as tions responsible for public transit are weak, and the benefit of having the local financial interme- there is a shortage of capable professional staff to diaries gain more experience with EE business manage transport corridors adequately. models might well have outweighed the costs associated with the slower replacement. How The project focuses on urban areas across the long will it take to transform the chiller market country and is designed around three compo- fully and retrofit all 1,200 chillers in India, given nents: increasing the human and institutional that the project only provides incentive premiums capacity to prepare and carry out sustainable transport investment policies and projects; devel- to replace about 370 chillers? This answer to this oping integrated transit systems, including mass question is unclear, but the trade-off in project transit corridors and public transport enhance- design--less funding may actually leverage larger ment; and stimulating the market for low-carbon long-term investments--is clear. 40 D e V e l O P m e n t A n D C l i m At e C h A n g e buses in these urban areas as well as scrapping The project has been built around earlier and older, inefficient buses. Altogether, the program is existing GEF support to the transport sector in seen as an ambitious effort to transform the Mexico. One earlier GEF-supported project urban transport sector across Mexico (see Table focusing on Climate Measures in the Transport 11). Sector of Mexico City helped develop the tABle 11 PrOPOseD finAnCiAl PACK Age fOr meXiCO UrBAn trAnsPOrt trAnsfOrmAtiOn PrOJeCt Project financing need Financial instrument Targeted outcome Create enabling conditions for imple- support for transport policy reform for mentation of rapid transit systems in mexico's urban sector, including the fol- mexico and development of CDm proj- initial gef grant in mexico lowing: the formulation of a city-wide cli- ects City mate change strategy; restructuring of a regulatory and business structure frame- work for surface transport in cities; and with carbon finance support, the genera- Enhance capacity building to include tion of data and experience on the deploy- additional municipalities in the program ment of advanced bus technologies and on the operation and maintenance of Bus rapid transit systems under actual oper- ating conditions. gef grant to mexico for four the mexico gef stAQ grant will help cities as part of regional four cities--Ciudad Juarez, Puebla, leon sustainable transport and de guanajuato, and monterrey--prepare Air Quality (stAQ) project projects to be financed eventually by the proposed program Investment resources sovereign guaranteed loan-term con- iBrD loan iBrD financing will be provided to a local cessional project financing financial intermediary, Banco nacional de Obras (BAnOBrAs), to provide credit lines to municipalities for implementation of low-carbon transport projects Concessional long-term financing to Ctf concessional loan Ctf financing will be supplemental to bridge the financing gap iBrD and local funding to reduce financial barriers to implementation of urban low- carbon transport projects, including adop- tion of advanced and cleaner drive systems, scrapping programs, and inter- nalizing some of the climate benefits that are not typically rewarded by the financial markets Risk mitigation At present, no risk mitigation measures are being consid- ered Revenue enhancement An additional revenue stream from Carbon finance Provision of carbon revenues to boost urban transport projects project return Source: Authors' data. B e Y O n D t h e s U m O f i t s PA r t s 41 Insurgentes bus corridor, as well as testing various type of synergistic, transformative outcomes that types of buses. This early support not only helped will justify the existence of these climate financ- provide basic demonstration of the importance of ing instruments. Bus Rapid Transit systems, it also stimulated the development of a CDM methodology on such systems. This current project seeks to transfer these lessons and experiences beyond Mexico City to other urban areas. ChinA integrAteD gAsifieD COmBineD The program is ambitious in design and scope CYCle PrOJeCt and, if successful, will truly have a transformative impact on the urban transport sector in Mexico. Despite China's interests in improving energy It builds around an IBRD SIL of $200 million efficiency and shifting to cleaner energy sources, and an additional CTF concessional loan of $200 coal is expected to remain the dominant source million. These resources will be channeled for electricity production in the foreseeable through the Banco Nacional de Obras future. In a significant effort to improve the effi- (BANOBRAS), which will serve as a financial ciency of coal-based power plants, the govern- intermediary in the project. BANOBRAS will ment has announced plans to close down then provide loans to the participating munici- inefficient coal-based plants of an aggregated palities. This will be combined with up to $868 capacity of 130 GW. While China has made million from the National Trust for Infrastructure great strides in accelerating technological devel- (FONADIN). The private sector and the munici- opment so that the coal plants being built in palities themselves are expected to make contri- China now use supercritical or ultra-supercritical butions of up to $732 million and $225 million, technology, progress toward commercialization of respectively. An estimate of the potential for car- integrated gasified combined cycle power plants bon revenue payments is only approximate, but remains limited. Higher capital and operation using just the existing Bus Rapid Transit meth- and maintenance costs (translated into increases odology could add up to an additional $50 mil- in electricity tariffs) along with technology risks lion. Urban areas that complete and propose are cited as the key barriers to promoting IGCC. Integrated Transport Plans will be eligible for Carbon capture and storage (CCS) has been access to the funding. Four of the eligible cities-- identified as one of the key technologies to cli- Ciudad Juarez, Puebla, Leon, and Monterrey-- mate stabilization (IEA 2008), but it has yet to are also participating in an ongoing be proven in commercial coal-fired power genera- GEF-supported region-wide transport project tion installations. called the Sustainable Transport and Air Quality (STAQ) Project, which will help them prepare The World Bank and the government of China plans. have discussed the initiation of a project to con- struct a first IGCC plant equipped with post- Although in retrospect some activities might have combustion CCS. Although still at early stages of been structured differently or the program discussion, the demonstration CCS system will designed more directly, the Mexico Urban separate the CO2 from about 5­10 percent of the Transport Transformation Project represents the flue gas emitted from a first-stage plant; subse- type of ambitious program with an ambitious quently, a carbon dioxide pipeline will transport agenda that, if successful, will demonstrate the the separated CO2 to a nearby oilfield for use in 42 D e V e l O P m e n t A n D C l i m At e C h A n g e enhanced oil recovery and permanent geological achievable conditions if the technology is com- storage (see Table 12). mercially deployed, and is the most economically feasible option for the integration of CCS into Government support for IGCC is based on the the power generation industry. assumptions that the technology is more eco- nomically viable than wind and biomass under The main obstacle to deployment of IGCC the prevalent economic and environmental condi- plants is their higher up-front capital expendi- tions in China. It could become the most eco- tures, which result in elevated economic and nomically practical option among all coal-fired financial costs to be translated into increased con- power generation technologies under realistically sumer tariffs. China is the largest potential tABle 12 PrOPOseD finAnCiAl PACK Age fOr ChinA igCC PrOJeCt Project financing need Financial instrument Targeted outcome Create enabling conditions establishment of a legal framework including institutional arrangements for the CCs compo- Capacity building gef grant nent CCs project preparation equipment design specifications and updates on geological surveys hydrogen production and utilization Drilling tests for identification of storage capacity studies Assessment of options for hydrogen use in indus- tries and transport implementation of test programs implementation of test programs to assess equip- and knowledge dissemination ment performance and reliability and operational and maintenance costs establishment of a technology advisory commit- tee, carrying out workshops, production of publi- cations on technical standards and guidelines for igCC project planning and implementation Investment resources sovereign guaranteed loan-term equipment procurement, site preparation, gasifi- concessional project financing iBrD loan cation technology licensing fees, and construc- tion and equipment installation activities Concessional long-term financing to bridge the financing gap Ctf concessional loan incremental financing to help overcome a signifi- cant cost barrier and technology risks associated with igCC and CCs Risk mitigation At present, no risk mitiga- tion measures are being considered Revenue enhancement Carbon finance funding required to develop two new CDm meth- odologies being provided by the CPf; An additional revenue stream from igCC-related efficiency gains and sale of project credits provides additional reve- CCs component nue stream, boosting project return--quantity of credits and hence revenue is yet to be deter- mined Source: Authors' data. B e Y O n D t h e s U m O f i t s PA r t s 43 market for clean-coal based power generation, achieved in China for pulverized coal generation and the prospects for IGCC deployment warrant technologies, IGCC could generate electricity at the initiation of several commercial-scale demon- a level of $0.058/kWh (Ą0.40/kWh) and become stration projects in the immediate future. The a financially attractive generation option within technology development experience of the last the next decade. three decades in China shows that several dem- onstration projects involving a number of differ- The purchase of carbon credits from this project ent industry players are necessary to learn and is complicated by the fact that appropriate CDM acquire the requisite skills and manufacturing methodologies need to be developed. CPF is pro- capabilities. viding a preparatory grant to facilitate the prepa- ration and approval of this methodology. As an To date, the discussion has centered on structur- IGCC installation with CCS, this project will ing a financing package for designing and doing require a new methodology drawing on consoli- feasibility studies for an IGCC plant, obtaining dated baseline and monitoring methodology for favorable financing terms, and finding ways to new grid-connected fossil-fuel-fired power plants reduce risks (both technological and currency- using less GHG-intensive technology related) and maximize additional revenue. For the (ACM0013) and on CCS for coal-fired power preparation and feasibility work, a GEF grant of plants. $10 million is envisioned to lay the foundation and undertake the final pre-feasibility testing. If the CDM Executive Board approves the new Debt financing of $100­200 million would need methodology, Emission Reductions Purchase to be matched with a concessional loan (on simi- Agreements could be prepared and signed, giving lar terms to financing under the CTF) of approx- a significant boost in earnings to the project imately equal value. Local investment resources operator. would have to be provided at roughly equal value to the amount of debt financing. Finally, carbon This case study differs from the others as it finance would have to provide an additional reve- remains largely on the drawing board. Interest nue source for a quantity of emissions reductions has been expressed by the Chinese authorities in that is yet to be determined. An IGCC plant is pursuing this project under the CPF, but China is being considered by the Chinese Designated not participating in the CTF. As a result, it is not National Authority (DNA) as one of the first clear when this project might move ahead. But Chinese projects to be proposed to the CPF. the case study is included here for two reasons. First, it shows that with foresight and creativity, It remains to be seen whether or not the structur- financing packages can be created to improve the ing of this initial project along these lines will be attractiveness of difficult projects. Second, it sufficient to bring the cost of IGCC power shows that for a pre-commercial technology like within a competitive price range. With the IGCC linked with CCS, resources from all of the financing package described, the cost per kWh climate financing tools currently available still would still be lower than the price currently man- may not be sufficient to bring projects into dated for biomass power in some parts of the existence. grid. With cost reductions comparable to those 44 D e V e l O P m e n t A n D C l i m At e C h A n g e B e Y O n D t h e s U m O f i t s PA r t s 45 5 bARRIERS To CoMbInIng ChAPter 5 KeY POints if combining resources from different climate finance instruments is so simple, why is it not more com- mon? What barriers need to be removed so that combining climate financing resources becomes more commonplace? An initial but somewhat superficial response revolves around the relative novelty of the instruments and the awareness that they can be combined. since the Ctf has only been in operation since 2009, the cumulative experience with programming is limited. for the gef and carbon finance, which have a lon- ger history, only recently has awareness that they do not duplicate one another and serve distinct func- tions allowed collaborative programming to move forward. With greater experience, combining will become more common. A more profound answer about barriers to blending quickly focuses on three particular constraints. the first has to do with resource limitations in terms of both quantity of resources and coverage of countries. Clearly, current resources are inadequate to meet the demand for low-carbon development, so the limi- tation in the number of countries is a rationing device linked to the limitation of overall funding. to address these issues, the Bank needs to work not only as an advocate to raise resources to support more countries, but it must also work creatively to further leverage other sources of funding, including private sector developers, investors, and financial intermediaries currently on the fringes of the process. the second barrier has to do with approval procedures. Because each instrument is governed different- ly, the approval processes differ from one another as well as from those of the Bank. Bank staff and cli- ents may be daunted by the complex array of procedures required to combine resources. two elements (continued) 46 D e V e l O P m e n t A n D C l i m At e C h A n g e ChAPter 5 KeY POints (continued) hold the key to navigating this complicated procedural arrangement: familiarity and reform. greater familiarity will enable task teams to move smoothly between processes and manage the procedures for document flow. reforms can be applied to improve effectiveness and responsiveness of all instruments --including those of the Bank. the third barrier is the knowledge and experience of the staff and clients working to combine resources from these instruments. this paper has been prepared to help increase the knowledge about these pos- sibilities and to reduce the amount of collective trial-and-error. But Bank staff already possess a unique set of skills in identifying, preparing, processing, and supervising complex projects related to low-carbon growth. they represent the most promising global human resources for effective utilization of the various climate change instruments that exist to respond to the challenge of climate change in the fragmented financial architecture of the post-Copenhagen world. Source: Authors' data. Previous chapters have argued that the three dif- identifiable barriers to blending resources from ferent mitigation financing alternatives available climate change financing instruments, or it would to build support for low-carbon growth not only be more common by now. What are the barriers are consistent with one another but can be used to blending, and what can be done to overcome in a complementary fashion within the same them? project or program in a synergistic manner to expand the effectiveness, impact, and efficiency of A superficial response to this question would pursuing low-carbon development. As the inter- point to the relatively short time period in which est in and commitment to low-carbon develop- the three climate financing instruments have ment grows, demand for support from these been in place. Only one year has passed since the instruments will increase, and examples of the CTF was implemented. That there is any experi- synergistic use of the resources from them will ence with blending its resources with those of the proliferate. other two is a testament to the efficiency of the processes and the pent-up demand for support. The principles of blending are fairly clear and no For the two longer-lived instruments (the GEF "rocket science" is involved. Furthermore, the evi- and CTF), it was only recently that their distinct dence of the improved impact and reach from natures and emphases became known. So the blended projects would seem to strongly support examples that are used are also fairly recent in a dramatic increase in combining resources from nature and may have occurred during implemen- different climate change financing instruments. tation rather than during project inception. Why has blending not been more common to date? Why are there not more good case studies But a more serious examination of the barriers to to draw upon? Clearly there must be some blending highlights three different issues. First, B e Y O n D t h e s U m O f i t s PA r t s 47 and most important, the funding available Under carbon finance, resources naturally flow to through these instruments is inadequate. Second, the countries with the greatest potential to reduce the approval procedures are complex and some- future emissions. As a result, China has been the what daunting. Third, sophisticated skills and dominant supplier in the carbon market to date. specialized knowledge are necessary to be able to Although the World Bank's carbon offset portfo- weave resources from these different financial lio is more geographically balanced than that of instruments into whole cloth. This chapter the world as a whole, the bias toward large emit- addresses these barriers. ters is consistent across these sources. Small mid- dle-income countries and low-income countries will receive little financing from these climate financing sources. resOUrCe ADeQUACY Practically, this resource limitation will constrain The first barrier to the expanded blending of cli- the ability of the World Bank to respond to mate change mitigation financing instruments is requests for low-carbon development support in the sheer lack of resources. The World Bank has all of its client countries. No matter how much estimated the need for financing of low-carbon or the Bank would like to comply with the requests mitigation activities in its client countries at it receives, it will not, under current or foreseeable upwards of $200 billion per year of incremental circumstances, be able to meet the requests it or additional financing. With the three climate receives. It can respond by working harder to financing instruments discussed here, the total leverage additional resources not just from the funding may run as high as $5 billion per year, of public sector but especially from the private sec- which less than half is available as up-front tor by using its convening power, strengthening financing. Clearly, there is an order of magnitude enabling environments, providing guarantees and difference in the amount of funding available and risk mitigation where appropriate, and working the amount required. directly through the IFC to reach the private sec- tor directly. This is not new: carbon finance is directed at bringing private sector compliance One of the rationing devices put in place to deal resources into the developing country mitigation with the limited quantity of available resources is and sustainable development picture. Both the a limit on the resources available to any given GEF and CTF have well-articulated private sec- country. Under the GEF, the resource allocation tor policies and eagerly seek innovative ways to framework was imposed during GEF-4 to place bring private sector developers, investors, and an upper limit on the amount of funding any financial intermediaries to the table (GEF 2005, country could obtain. Most countries--110 out of CTF 2010). But still, more resources are needed. 140--received an allocation that was approxi- mately $1.4 million. Thirty countries received allocations ranging from $4 million to $ 150 mil- In response to the resource limitations and the lion, with the amount being tied closely to the constraints that it places on Bank programming, country's GHG emissions. In the CTF, an early the Bank can best become an advocate for greater decision was taken to limit the number of partici- funding for low-carbon growth and a wider dis- pating countries to no more than 15 so as not to tribution of the mitigation resources that it has spread the resources too thin. By and large, the under its control. The solution is not operational countries participating as recipients in the CTF but rather political. In this context, the Bank are large emitters (but not the largest ones). needs to continue to push for deeper and wider 48 D e V e l O P m e n t A n D C l i m At e C h A n g e climate change funding provisions, so that it can prepare, appraise, approve, implement, complete, help its clients achieve their low-carbon develop- and evaluate development projects for decades. ment goals. Ultimately, the Bank's Board of Executive Directors oversees this process, and it is Senior Management's job to ensure that all tasks are completed to the satisfaction of the Board and its APPrOVAl PrOCesses client countries. This cycle is well known and described throughout the development literature. AnD PrOCeDUres It is summarized in simple schematic form in Figure 9. It begins with a country's development Because the different financial instruments fall strategy and moves through the stages of project under different governance structures, their identification; preparation, appraisal, and approval processes differ according to the specific approval; implementation; and completion and opportunities and constraints faced under that evaluation. While different but similar versions of structure. World Bank staff members are accus- this cycle exist for different development agen- tomed to steering projects through the processes cies, this one has been fine-tuned to the needs of associated with Bank Board approval. Any other the Bank. approval process will look complex and difficult to those unfamiliar with it. One of the challenges of working with these dif- ferent sources of climate change finance is that On the one hand, familiarity with both the each has its own governing body and approval required documents and the approval processes of procedures. As a result, the project cycle for each these instruments provides a key to understand- financing instrument differs, because each of ing how to smoothly sail through the approval them makes use of a different governance mecha- process associated with all instruments. On the nism. Inevitably, this complicates the process of other hand, the insistence of the decision makers preparation, approval, and implementation for of a particular financial instrument on a particular projects seeking to use MDB funding in collabo- procedure or set of procedures does not mean ration with any of these dedicated funding that the procedures cannot sometimes be changed sources. with positive effects. All such decision making experiences bureaucratic creep, with new require- An IBRD or IDA project builds upon the direc- ments being incrementally added to a process tions set in the Bank Group Country Partnership that may have originally been relatively swift. Strategy (CPS), or Country Assistance Strategy, Hence, reform serves as a second key to manag- which are supporting government plans and ing these processes and making them more strategies, such as the Poverty Reduction Strategy streamlined for the same efficiency and typically prepared by IDA countries. CAS and effectiveness. CPS are documents that are prepared by the Bank in consultation with country stakeholders and approved by the country. The identified proj- ect concept is described in a Project Concept fAmiliAritY Note and approved by the respective country director. At this stage in a project's life, all infor- The project cycle is familiar to Bank task teams mation is made publicly available via the internet and clients, as it has been used to identify, and the Info-Shop. The next step is to prepare an B e Y O n D t h e s U m O f i t s PA r t s 49 figUre 9 the PrOJeCt CYCle Strategy Completion/ Evaluation Identification Implementation Preparation/ Appraisal/ Approval Source:Adapted from World Bank OPCs home Page. appraisal document, the terms of which are nego- A second step is a frank assessment of the possi- tiated with the client country's representatives ble climate financing instruments that are avail- prior to being approved by the Bank's Board of able to help meet the extra costs associated with Executive Directors. Once the project is approved the special needs of the low-carbon growth effort. by the Board, it is presented to the client govern- If GEF resources would be helpful, the GEF ment to obtain sovereign approval prior to Focal Point needs to be consulted with respect to effectiveness. the quantity and suggested deployment of those resources, as he or she will ultimately be the one Once a client has decided to undertake a low- requesting the GEF allocation. It is hoped that carbon growth project or program with the assis- this consultation takes place early in a GEF tance of the Bank, the question to be asked replenishment round so that all resources have revolves around what the specific needs of the not been pre-committed. If a project will require project might be. As discussed in Chapter 3, for concessional financing from the CTF, it will be example, a renewable energy project might important to verify first that the country is a require support to make the policy environment CTF participant, as only 13 investment plans (12 more favorable to renewable electricity, financing countries plus one regional plan) have been on favorable terms to compensate for the capital- approved thus far (see Annex Table A-2). Second, intensive nature of renewable energy, and some the proposed project will have to be included in revenue enhancement. Identifying these needs in the country's endorsed investment plan or the the low-carbon growth project or program being plan will have to be modified to allow for the pursued is an important first step. project. Finally, for carbon finance, any initiative 50 D e V e l O P m e n t A n D C l i m At e C h A n g e must first be approved by the Designated important to bear in mind that the approval pro- National Authority (DNA) prior to being regis- cedures for each climate funding instrument tered and certified through the CDM Executive reflect its specific governance structure. At the Board. But there also need to be significant concept level, the project needs to be approved potential carbon reductions to justify the extra not just by the Bank's country management unit work entailed in gaining approval and but also by the GEF, CTF, and CPF or carbon registration. finance operations. Similar documents covering the conceptual rationale, justification, and likely In general, if resources are not available from results must be prepared for submission to each these sources for the needs identified, other approval body. (The documentation required for sources of potential funding will have to be can- approval for each source is summarized in Annex vassed prior to abandoning the concept. At pres- Table A-3). The Project Concept Note being ent, the bulk of the mitigation resources are used in the Bank's own process can be submitted concentrated in a handful of countries, and it to the Trust Fund Committee (TFC) of the CTF would be prudent to anticipate the availability of for its endorsement. In this case, the document resources before committing to work on low-car- will need to make the case for transformational bon projects that require them. impact. Such preliminary assessments need to be under- For the GEF, a Project Identification Form (PIF) taken early in a project's life to set the direction needs to be submitted to the GEF Secretariat for of further project preparations. If a project can be review and eventual approval by the GEF Chief successfully implemented without using any of Executive Officer (CEO) and Council. The the climate financing instruments, then there is emphasis in such a presentation will be on the no need to complicate matters by trying to use incremental reasoning: Why is GEF funding them. Grant and concessional resources will needed to make this proposed activity happen? always be in short supply. Some mitigation proj- For a project seeking carbon finance, a Project ects, such as energy pricing reform or the adop- Design Document (PDD) will need to be pre- tion of standards and labels for energy-efficient pared and submitted to the DNA and the CDM appliances, can be undertaken with the use of tra- Board. To be more efficient, it is preferable for ditional development finance or technical assis- that submission to make use of a methodology tance sponsored by GEF, grants from other that has already been approved by the Board. The donors, or Bank loans. The goal is not to use all submission will need to focus on how the project existing sources of climate change financing in is "additional" and would not happen in the the same project, but rather to appropriately absence of the CDM support. But at the concept blend only those resources necessary to make the level, the documents being prepared and the project effective. In some cases, the transaction arguments being advanced are all fairly similar, costs associated with packaging various financial and they may well be undertaken in parallel or, at instruments may offset the benefit of that a minimum, with frequent "cutting-and-pasting." packaging. At the appraisal stage, the focus for the GEF and Once this stock-taking regarding needs and avail- the CTF turns on the Project Appraisal ability of climate financing has been realistically Document (PAD). As this document is also undertaken, the project preparations need to needed for the Bank Board's approval, there are make their way toward approval. However, it is some efficiencies in preparation. Both the GEF B e Y O n D t h e s U m O f i t s PA r t s 51 Council and the CTF Trust Fund committee will For carbon finance operations, the largest delay is review the same document as the Bank's Board, encountered when initial methodologies are sub- simplifying the document preparation process. mitted for approval. In these cases, the approval of a methodology may take up to two years. For a carbon finance operation, the process Hence, the importance of fitting projects within remains distinct from those of the Bank, the the framework of already existing methodologies. GEF, or the CTF. Once a CDM proposal has If a project uses an existing methodology, then been validated at the PDD stage, an emission the delays would be a matter of months and reductions purchase agreement is negotiated, might be constructively designed to coincide with approved, and signed by the Bank acting as the other dead times (final approval, reviews, Trustee. After receiving the Letter of Approval waiting for effectiveness) found in the Bank's from the DNA, the CDM Executive Board will normal operations. register the project. Once the flow of emission reductions from the project is initiated, the When considering the procedures and processes Designated Operational Entity must monitor and required for combining climate financing into the verify the project's performance in generating same project, it is useful to enter the process with emission reductions, usually on an annual basis. eyes open. Time can be saved by using similar The verified emission reductions are then certi- documentation and by working around the wait- fied by the CDM Board, which issues the CERs ing periods or "dead time" in each of the project to the national account of the buyers. ( Joint cycles being managed. Client and staff need to be Implementation has similar but separate proce- aware of both the strengths and the limitations of dures to those described here for the CDM.) the funding sources as well as the extra steps in This process continues providing the flow of the processing schedule so that they can antici- emission reductions until the termination of the pate them to ensure smooth delivery, approval, ERPA. and implementation of low-carbon development projects. How long will these extra steps take? To date, the small number of CTF projects that have pro- gressed through the approval process have resulted in only minor delays compared with refOrms those of a non-CTF World Bank project. For GEF projects, the PAD process can take any- While all three climate financing instruments where from six weeks to six months as the GEF that serve as the focus of this paper have been Secretariat reviews the documents to confirm that shown to be effective in their own right, their they are consistent with the concepts contained effectiveness and timeliness can be improved. in the PIF prior to submitting them to the GEF Reforms should seek to reduce delays in prepara- Council for a four-week review period. tion and approval, to improve conceptual clarity Considerable streamlining could occur if this sec- and responsiveness to client's needs, and to ond review of the project by the GEF Secretariat increase overall ease of blending for greater and Council could be delegated to the Bank's impact. All three climate financing instruments Board. But because the GEF and the CTF are will continue to evolve and improve in response framed within the multilateral development assis- to experiences of being used individually and in tance system, efforts to reduce delays can be blended format. And, it is important to note, so encouraged through reform. will core WBG instruments and processes. 52 D e V e l O P m e n t A n D C l i m At e C h A n g e Investment lending reform aims to make the The GEF, as the oldest of these instruments, has Bank Group more responsive and to better differ- undergone numerous evaluations and reforms entiate risks. since its inception during the early 1990s. Reforms have typically focused on reducing All low-carbon development projects do not delays, improving responsiveness, and increasing require financing from all or even any of these impact. Delays have always been a concern of financing instruments. Some projects focusing on project teams and clients. As a demonstration of energy pricing reform or building energy effi- this, the average time from concept approval to ciency may not require any funding beyond that project implementation across all Agencies was available from normal Bank or official develop- estimated at 44 months in 2006 (GEF Evaluation ment assistance sources. Others may require more Office 2007). Subsequent reforms have improved resources than can be mustered and therefore this situation and the imposition of a 22 month may still not be implementable. The intention deadline is meant to bring finality to the project should be to use only the mitigation resources preparation process. One concrete reform sug- necessary to make the best low-carbon growth gested for GEF 5 is to delegate the final or sec- projects move ahead into implementation. ond review by the GEF Secretariat and Council Different countries, sectors, technologies, or to the Executive Board of the MDB implement- approaches may require differing combinations of ing the project. (This reform would apply only to resources in order to ensure project success. In projects implemented by MDBs, as U.N. this context, blending must be seen as a means to Agencies have no full-time standing Boards of an end, not an end in itself. Directors able to undertake such reviews.) For World Bank projects, this would simplify the As the newest of the climate financing instru- approval procedures and reduce delays by at least ments, operational experience with the CTF has two months. Other reforms that will be consid- been limited to date. Only a handful of projects ered for GEF 5 include flexibility for a country to have made it through the screening of the Trust shift funds from a focal area with few resources Fund Committees to final approval. As the to one with greater resources in order to improve approval procedures of the CTF are closely responsiveness, reduce administrative costs and aligned with those of the implementing MDB, delays, and improve impact. Bank task teams can however, it is unlikely that significant delays will simplify GEF procedures by working strategically be attributable to the CTF review and approval to blend GEF resources more seamlessly with procedures. To date, the CTF has made an national investment resources (IBRD, IDA, and impressive and timely start in its operations by national) with national priorities. This also would building both on Agency procedures and on reduce transaction costs and enhance impacts. existing in-country knowledge, information, and capacity. One further advantage in this regard is Carbon finance also stands in need of reform at that CTF operations require blending with MDB two levels: the system-wide level and the Bank's lending and, wherever possible, with GEF and operational level. System-wide reforms would carbon finance operations as well. Nevertheless, as have to be agreed upon in the UNFCCC and the CTF matures, evaluators will begin to con- Kyoto Protocol context. But many critics, includ- sider what reforms would help improve its effi- ing the Bank's Carbon Finance Unit, have high- ciency, effectiveness, and responsiveness over the lighted the need for clarity and simplification in longer term. the determination of a project's additionality. B e Y O n D t h e s U m O f i t s PA r t s 53 Because methodological approval and project reg- KnOWleDge AnD istration require roughly two years, actions are needed to expedite this process. Such reforms eXPerienCe would no doubt be welcomed by all the con- While reforms will improve the efficiency, effec- cerned participants in the carbon market. tiveness, and impact of climate change mitigation finance, it will still fall to committed practitioners Based upon lessons to date, the Bank is working to prepare blended projects. This paper is meant to improve effectiveness, simplify procedures, and to provide them with the knowledge and skills reduce delays in its carbon finance operations that are needed to be able to prepare and imple- (World Bank 2009c). For example, the initiative ment these relatively complex operations. For to define PoAs to cover energy efficiency pro- example, the Climate Change for Development grams or urban mitigation programs have been Professionals Program has prepared training spearheaded largely by the Bank. PoAs have been modules dealing with all these instruments in shown both to increase administrative efficiency order to share the knowledge and experiences and to improve ownership and commitment of with World Bank staff in all regions. client country teams. Task teams working with carbon finance can also reduce delays by seeking Although the challenge of blending resources to use approved methodologies. On another level, from different mitigation financing instruments teams should also seek to tie carbon finance oper- does not require rocket scientist skills, it does ations more closely to Bank lending operations. require a specific skill set, knowledge, and experi- Under the CPF, this has become an explicit ence to be able to implement. Experience may be objective, and to date all CPF projects under con- the best teacher. Optimizing the mix of resources sideration are tied to Bank and--where possi- for a low-carbon development project represents ble--CTF and GEF operations. an intellectual puzzle with practical implications for both development and the global climate sys- Since the formation of the Prototype Carbon tem. Innovative sustainable projects with trans- Fund, the Bank has played a lead role in develop- formational potential are possible only if the ing and pioneering CDM methodologies. This necessary information--in this case, information role will no doubt continue to be an important about the nature of financial instruments--is one. But as the carbon market has grown, the available. share of total market issues made up of emission reductions from Bank-managed funds has The lack of a comprehensive, over-arching cli- decreased to as little as 1 percent. In light of this mate change financial architecture in the wake of fact, the Carbon Partnership Facility will empha- the Copenhagen Accord means that ambitious size catalyzing the development of carbon finance climate finance packages will continue to be programs and assisting its clients to sell carbon assembled from different sources for the foresee- assets tied to Bank operations. The CPF is able future. As a result, the skills and knowledge already actively encouraging sales to a broader of combining them to respond to client needs for market by limiting the fraction of a project's car- low-carbon growth will become increasingly bon credits that can be purchased by the CPF, important. It is hoped that this paper will help leaving the clients free to sell the bulk of the development professionals and clients better credits to other buyers in the carbon market. manage the unavoidable complexities associated with development projects that lay the founda- tion for a low-carbon sustainable future. 54 D e V e l O P m e n t A n D C l i m At e C h A n g e B e Y O n D t h e s U m O f i t s PA r t s 55 Annex 1 FInAnCIAL InSTRUMEnTS FoR MITIgATIon FUnDIng A bRIEF SUMMARY Dedicated climate financing instruments have development banks. It provides limited grants, been created in order to provide additional finan- concessional loans, and partial risk guarantees of cial and economic support to make low-carbon as much as $200 million per project to help coun- development more attractive to the World Bank's tries scale up clean technology initiatives that will developing country clients. transform a country's development path. Table A-2 summarizes the allocation of CTF funding The Global Environment Facility (GEF) was to approved investment plans as of December 7, established in 1991 before the United Nations 2009. Further information is available at www.cli- Convention on Environment and Development mateinvestmentfunds.org. to provide incremental cost financing for projects with global environmental benefits. It commits Carbon finance refers to the use of the flexible about $250 million per year--largely in the form mechanisms of the Kyoto Protocol. Registered of grants to non-Annex I Parties to the United projects resulting in greenhouse gas emission Nations Framework Convention on Climate reductions located in developing countries or Change (UNFCCC) in support of energy effi- economies in transition obtain emission reduc- ciency, renewable energy, new clean energy tech- tions that can be traded in the market, thereby nology, and sustainable transport projects. Table providing a performance-based revenue stream to A-1 provides a cumulative summary of the GEF the project. In 1999, the Bank created the first funding committed to World Bank­implemented carbon fund in the world, the Prototype Carbon climate change projects. For more information, Fund (PCF). The newest initiative of the Bank's see www.thegef.org. carbon finance unit is the Carbon Partnership Facility (CPF), which brings buyers and sellers The Clean Technology Fund (CTF) was estab- together to focus on national priorities and strat- lished in 2008 as one of the Climate Investment egies and to develop carbon revenue streams Funds, a family of funds devoted to climate around projects and programs of interest to both. change initiatives hosted by the World Bank and Figure A-1 summarizes the cumulative alloca- implemented cooperatively by the multilateral tions and emission credits associated with World 56 D e V e l O P m e n t A n D C l i m At e C h A n g e Bank implemented carbon funding. Figure A-2 projects. More information is available at www. provides an indication of the range of unit abate- carbonfinance.org/cpf. ment costs for various types of carbon finance tABle A-1 gef ClimAte ChAnge fUnDing tO the WOrlD BAnK BY rePlenishment PeriOD (milliOn DOllArs) Total GEF grant IBRD/IDA Other co- Total co- amount co-financing financing financing Total gef Pilot Phase 186.1 908.5 2,450.5 3,359.0 3,545.1 (1991-1994) gef 1 363.6 413.6 1,193.4 1,607.0 1,970.5 (1995-1998) gef 2 456.2 1,094.2 2,639.1 3,733.3 4,189.5 (1999-2002) gef 3 341.6 443.2 1,101.7 1,545.0 1,886.5 (2003-2006) gef 4 351.4 1,106.7 2,359.7 3,466.4 3,817.8 (2007-2010)* TOTAL 1698.9 3,966.2 9,744.4 13,710.7 15,409.4 (1991-2009) Note: * Because gef 4 runs from 2007 to 2010, the table only includes a summary until the end of fY 2009. Source:Authors' data. B e Y O n D t h e s U m O f i t s PA r t s 57 tABle A-2 CleAn teChnOlOgY enDOrseD inVestment PlAns: sUmmArY As Of mArCh 31, 2010 (milliOn DOllArs) Estimated CTF Estimated contribution co-financing Total Colombia 150 2,845 2,995 egypt 300 1,621 1,921 indonesia 400 2,710 3,110 Kazakhstan 200 1,069 1,269 mexico 500 5,697 6,197 menA CsP Program 750 4,854 5,604 morocco 150 1,800 1,950 Philippines 250 2,530 2,780 south Africa 500 1,850 2,350 thailand 300 3,963 4,263 turkey 250 1,850 2,100 Ukraine 350 2,255 2,605 Vietnam 250 3,195 3,445 Total $4,350 $36,239 $40,589 Source: Data drawn from Ctf Web site: http://www.climateinvestmentfunds.org/cif/Country%20 investment%20Plans. 58 D e V e l O P m e n t A n D C l i m At e C h A n g e figUre A-1 WOrlD BAnK CArBOn finAnCe PrOJeCt stAtUs (CUmUlAtiVe) Million tons of carbon dioxide equivalent Emission reductions purchase $1,800 >221 MtCO2e 119 agreements signed and active Carbon finance documents 140 >232 MtCO2e $1,900 approved and active Project idea notes $2,300 186 >262 MtCO2e approved and active 0 500 1,000 1,500 2,000 2,500 Number of projects Indicative contract value in US$ million Note: The above figures exclude options purchases. Source:World Bank Carbon finance Unit data. figUre A-2 COsts Of Cers frOm PrOJeCts in the CDm PiPeline 30 20 EUA Price Euro per CER sCER Price 10 Chinese Price Floor Lowest Price 0 Hy Hy Ge (new HF N2 Fu La Bi Co En La La Ag Bi Fo Hy W og om re b ind nd nd nd git ss er dr dr dr ric 0 al Cs ot as o o o gy il f he ive fill fill fill ult as be (e (ru ue rm po u s e gas ga d eff ga ga xis n- ls m al we er) ici s( s( s( ne tin off et wi da en io po fla co r rg ha g tch riv m cy y rin m w da ne ) er po g) m Source: green 2008. fla ) sti ) rin ng g ) B e Y O n D t h e s U m O f i t s PA r t s 59 Annex 2 PRojECT DoCUMEnTATIon The documents that need to be prepared at vari- for CTF support, but an independent expert ous stages of the project cycle are summarized in review is required at this stage. The GEF concept Table A-3. Basically, they fall into categories con- document, the Project Identification Form, pres- sistent with the different stages of the project ents similar material to a PCN but requires addi- cycle. For the strategy development stage, a regu- tional information regarding the rationale lar Bank operation should be tied to the strategy justifying the GEF's incremental financial contri- developed and presented in the Bank's Country bution. For a carbon finance operation, the Assistance Strategy (CAS) or Poverty Reduction Project Idea Note basically contains similar infor- Strategy Paper (PRSP). But the providence for mation as the PCN but requires additional infor- operations using mitigation financing will require mation on the emission reduction estimates and this origin as well as a link to a national strategy methodology to be used for Clean Development on its own. For example, GEF support would Mechanism (CDM) Board approval, including ideally come from needs identified in the coun- verification and certification. try's national communication to the UNFCCC. CTF projects need to be based on the approved For appraisal and approval, the Project Appraisal investment plan for the country. Carbon finance Document (PAD) is required for Bank operations operations require endorsement from the coun- and is the key document for GEF Council try's Designated National Authority (DNA) stat- endorsement as well. CTF operations require a ing that the project is consistent with the "no objection" review from the CTF's Trust Fund country's sustainable development needs. In addi- Committee members for the preappraisal pack- tion, the CPF requires that operations in partner age. For carbon operations, a Project Design countries fall within a range of partnership Document (PDD) must be prepared for verifica- priorities. tion and approval by the CDM Executive Board, and the emissions reduction purchase agreement At the project identification or concept stage, is negotiated and signed between purchaser and Bank operations require a Project Concept Note sponsor. (PCN). The PCN also meets the requirements 60 D e V e l O P m e n t A n D C l i m At e C h A n g e During project implementation, Bank opera- until construction is completed, at which point tions--including the Bank's GEF and CTF oper- the CDM project proponent or the designated ations, where the Bank is an implementing third party (e.g., consultants) begins monitoring agency--make use of Bank monitoring proce- project output and emission reductions and pro- dures, producing an Interim Status Report (ISR) ducing monitoring reports. These reports are then each year and a Midterm Review (MTR) at the verified by the Designated Operational Entity project's midpoint. The Implementation (DOE) and certified by the CDM Executive Completion Report (ICR) is prepared and sub- Board, and certified emission reductions (CERs) mitted to the Bank's Independent Evaluation are issued. This process continues until the end of Group (IEG) for consideration at the time of the emission reductions purchase agreement project completion. All GEF operations require (ERPA) period, with no requirement for final an independent evaluation. For carbon operations, evaluation. the monitoring requires periodic progress reports tABle A-3 DOCUments reQUireD DUring PrOJeCt CYCle Stage of IBRD/IDA CF project (when linked project cycle project GEF project CTF project to Bank operation) Strategy CAs or PrsP Project should be investment plan pre- Consistent with national justified in CAs, pared by Joint mDB priorities; DnA must also in UnfCCC mission must be approve national approved by govern- Communication ment and trust fund Committee Identification Project Concept Project single PCn for the Project idea note: simi- note identification iBrD/iDA and Ctf lar to PCn except it form: similar to co-financing with emphasizes carbon flow, PCn with addi- additional emphasis methodologies for verifi- tional emphasis on consistency with cation and monitoring; on incremental Ctf criteria less information required rationale on financing arrange- ments Preparation, Project PAD same as for single PAD for the PDD: As per CDm/Joint Appraisal, and Appraisal iBrD/iDA but iBrD/iDA and Ctf implementatoin rules Approval Document includes incre- co-financing, with a including baseline study, mental cost annex Ctf-specific annex emission reduction esti- and gef-required and inclusion of Ctf mates, etc. indicators indicators in the PAD results framework PAD prepared separate- Chief executive ly Officer endorsement Anticipated terms of memo required to erPA highlight key points registration of Project/ Determination report; and Operations and monitoring Plan. (continued) B e Y O n D t h e s U m O f i t s PA r t s 61 tABle A-3 DOCUments reQUireD DUring PrOJeCt CYCle (continued) Stage of IBRD/IDA CF project (when linked project cycle project GEF project CTF project to Bank operation) Implementation implementation isr submitted single isr for iBrD/ monitoring report pro- and Supervision status review annually and iDA and Ctf co- duced by project entity and midterm mtrs provided financing submitted Annual Verification review when available annually report (prepared by DOe) Annual certification and issuance of Cers by CDm executive Board if project closes prior to or during erPA or cred- iting period, supervision responsibility is passed back to the Carbon finance Unit(enVCf) Completion implementation iCr plus manda- single iCr for iBrD/ Project crediting ends at Completion tory independent iDA and Ctf the end of the crediting report evaluation period--frequently, but not always, the end of the erPA period Evaluation iCr submitted ieg reviews iCr ieg reviews iCr Closing date of the car- to ieg for ran- and conducts proj- and conducts project bon finance transaction dom evaluation ect performance performance audits, occurs after the final audits following following standard payment of the signed iBrD/iDA proce- iBrD/iDA proce- erPA; an iCr will be dures dures completed either by the task team leader or the Deal manager, depending on whether project is under supervi- sion of enVCf or regional Vice President 62 D e V e l O P m e n t A n D C l i m At e C h A n g e B e Y O n D t h e s U m O f i t s PA r t s 63 REFEREnCES Anderson, D., and R. 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