Investment and Financial Flows for

Climate Change Mitigation Projects in Developing Countries.

Deemant Himmat Lodhia

(Essay contributed towards the degree of LLM at the University of Auckland,

New Zealand, July 2010).

1

Comments

This paper presents an analysis that is sophisticated, provocative, and well-documented, and yet the analysis tries to cover too much.

Financing for climate mitigation projects in developing countries is a major and perennial source of discussion and debate in the UNFCCC context and in the economic development context as well, so the topic of this paper is a good choice. The writer appears to have sufficient mastery of financial analysis and economic principles to pursue the analysis at a sophisticated level, supported by selective use of charts and graphs. The research material supporting and informing the analysis is extensive and diverse.

On the other hand, the research and discussion do not effectively address the larger strategic questions about where and how financing should be provided. There is some good discussion of the Global Environment Facility and other institutional obstacles and opportunities. There is also, some respectable discussion of technology policy and how financing influences technological innovation.

Professor Sanford E Gaines

The University of New Mexico - School of Law

Albuquerque, New Mexico

2

Contents

1.0 Introduction

2.0 Progress Towards Solutions

2.1 The Main Driving Forces of Greenhouse Gas Emissions

2.2 The Role of Policy

3.0 Investment and Financial Flows for Mitigation

4.0 Enhanced Investment and Financial Flows for Mitigation

4.1 Mobilisation of Resources

4.2 Delivery of Resources

4.2.1 Access to Resources

4.2.2 Disbursement of Resources

4.2.3 Measuring, Reporting and Verifying

5.0 Financial Mechanisms

5.1 Institutional Arrangements

5.2 The GEF

5.3 The Carbon Markets

6.0 Mitigation Projects in Developing Countries

6.1 Project Cycle

6.2 Project Sectors

6.3 Performance Indicators

7.0 Progress Towards Impact

8.0 Bibliography

8.1 List of Websites

9.0 Appendices

9.1 Background

3

9.2 The Project Cycle & Criteria for Full Scale Projects

List of Tables

Page

Table 1 Some global estimates of costs and investments required for mitigation 19

Table 2 Additional investments and financial flows and emission reductions 23

Table 3

Possible options, tools and mechanisms available to enhance mitigation

actions 24

Table 4 How EERE financing mechanisms address generic barriers to investments 36-37

Table 5 Current and projected size of the international carbon markets 46

List of Figures

Page

Figure 1

A simplified model of the systems involved in investment and climate

change 13

Figure 2

Comparison of the main driving forces of GHG emissions under different

scenarios 14

Figure 3 Total greenhouse gas emissions under reference and mitigation scenarios 20

Figure 4 Energy supply and related greenhouse gas emissions under the scenarios 21

Figure 5 Share of global emissions by major sectors in 2004 22

Figure 6 Support for developing countries mitigation action 32

Figure 7

Current institutional arrangements to provide resources under the

Convention 39

Figure 8 A possible overall financial framework under the Convention 40

Figure 9

Possible key elements for enhanced financial support under the

Convention 41

4

Units of Measures

5

Acronyms and Abbreviations

6

7

1.0 Introduction

Climate change is widely recognised as the most fundamental and defining challenge of

our generation.1 The January-July 2010 mean surface temperature is the warmest of

131 years of records.2 The average temperature of the earth’s surface is projected to

increase by up to four degrees Celsius by the year 2100 in absence of an internationally

agreed comprehensive set of obligations for mitigation, adaptation and mechanism of

their implementation.3 Even the minimum predicted temperature increase has severe

consequences for the environment and sustainable development. The planet is facing

unprecedented challenges on many fronts. Services from Earth’s healthy ecosystems,

including the provision of food, fuel and fibre; the regulation of climate and water; and

support of primary functions such as soil formation and nutrient cycling is no longer

ensured. Ever-growing and inevitable pressures caused by humans threaten the overall

security of our life support systems.4

The Intergovernmental Panel on Climate Change (IPCC) in its Fourth Assessment

Report has underscored that mitigation efforts in the next 15-20 years will have a large

impact on opportunities to achieve lower stabilization levels and have the potential to

minimise major climate change impacts.5 The Kyoto Protocol is generally seen as an

important first step towards a truly global emission reduction regime that will stabilize

Greenhouse Gas (GHG) emissions, and provides the essential architecture for any future

international agreement on climate change.6 By the end of the first commitment period

of the Kyoto Protocol in 2012, a new international framework needs to have been 1 UN Secretary-General Ban Ki-moon, United Nations (2010). 2 Hansen J et al (2010). Global Surface Temperature Change, NASA Goddard Institute for Space Studies, New York, USA. Available at http://data.giss.nasa.gov/gistemp/2010july/ 3 IPCC, Climate Change 2007: The Physical Science Basis (Contribution of Working Group I to the Fourth Assessment Report of the IPCC), Summary for Policymakers. Available at http://www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4-wg1-spm.pdf 4 GEF Evaluation Office (2010). OPS4, Progress Toward Impact, Fourth Overall Performance Study of the GEF. http://www.thegef.org/gef/sites/thegef.org/files/documents/FULL%20REPORT_OPS4%20Progress%20Toward%20Impact.pdf 5 Yvo de Boer, UNFCCC (2007).

8

6 See Appendices for further background.

negotiated and ratified that can deliver the stringent emission reductions the IPCC has

clearly indicated are needed.

This research essay examines the investment and financial flows needed to achieve

emission reductions through mitigation projects in developing countries. Crafting law

and policy in this area is extraordinarily difficult. The features of climate change are

characterised by scholars as a public-policy “wicked problem” that “defies resolution

because of the enormous interdependencies, uncertainties, circularities, and conflicting

stakeholders implicated by any effort to develop a solution”.7 Other classic wicked

problems include AIDS, healthcare and terrorism.8 Exacerbating features of climate

change make it a “super wicked problem” because the longer it takes to address the

problem, the harder it will be to solve.9 Further, “those who are in the best position to

address the problem are those who caused it [and have] the least immediate incentive to

act within [the short] timeframe [and] are also the nations least likely to suffer”.10

7 Lazarus RJ, (2009). Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future Cornell Law Review at 1159, available at http://www.law.georgetown.edu/faculty/lazarus/docs/articles/Lazarus_SuperWickedProblems.pdf . Also see generally Horst WJ Rittel & Melvin M Webber, Dilemmas in a General Theory of Planning, 4 POL’Y SCI. 155, 160-69 (1973) (introducing the term ‘wicked problems’ to describe the nature of social policy problems). 8 Robert E Horn & Robert P Weber, New Tools for Resolving the Wicked Problems: Mess mapping and resolution mapping processes 3 (MacroVU® Inc. & Strategy Kinetics LLC, 2007), available at http://www.strategykinetics.com/files/New_Tools_For_Resolving_Wicked_Problems.pdf 9 Kelly Levin et al, Playing it Forward: Path Dependency, Progressive Incrementalism, and the “Super Wicked” Problem of Global Climate Change 8-10 (July 7, 2007), available at http://environment.yale.edu/uploads/publications/2007levinbernsteincashoreauldWicked-Problems.pdf

9

10 Lazarus above n 7 at 1160. See also Mike Hulme (2007). Why We Disagree About Climate Change: Understanding Controversy, Inaction and Opportunity. Cambridge University Press, Cambrige 432 pp.

2.0 Progress towards Solutions

Many different strategies are being developed and implemented globally. Given the

large number of human activities that generate GHG emissions, mitigating climate

change will require changes in terms of doing things differently or doing them better on

multiple fronts.11 Reorienting these activities involves mostly technological change that

reduce (or capture) these emissions while offering the services that humans desire,

however, behavioural change is an integral part of a response to address climate

change.12 Financing depends on the nature and scale of changes.13

The Bali Road Map was a two-year process to finalise a binding agreement for

Copenhagen in 2009. The map includes the Bali Action Plan14 which created the Ad

Hoc Working Group to the Kyoto Protocol (AWG-KP) is focused on emission

reduction commitments of the Kyoto parties for beyond 2012, and the Ad Hoc Working

Group for Long Term Cooperative Action (AWG-LCA) is responsible to deliver a long

term global solution. Both groups were to complete their work in 2009 and present the

outcome to the COP-15/ CMP 5 and drafts were presented but contained many

unresolved issues. These working groups are now due to report to COP-16 and CMP-6

in Cancun, Mexico.

According to United Nations Framework Convention on Climate Change (UNFCCC)

Executive Secretary Christiana Figueres, progress towards the shape of a successful

result at COP-16/CMP-6 “must radically narrow down the choices on the table”.15

Significant opportunities at high-level meetings scheduled in Geneva and New York in

September, followed by the next UNFCCC negotiating session in Tianjin, China in 11 UNFCCC Secretariat. Investment and financial flows to address climate change: an update (technical paper). FCCC/TP/2008/7, 26 November 2008, at 51. 12 Ibid. 13 Ibid. 14 COP-13/ CMP-3; Bali, Indonesia, December 2007.

10

15 UNFCCC Press Release after governments meeting at Bonn, 6 August 2010.

October16, provides governments some final opportunities to clear their individual

stances and determine what the collective stance is going to be. But Figueres predicted

there would be no new global treaty to combat climate change in Cancun, even though

she said that extreme weather such as floods in Pakistan or Russia's heat wave were

"warning bells" about the risks of inaction. A year ago, many nations were hoping that

the Copenhagen summit in December would be a "big bang" deal to help solve climate

change. But that didn't happen” and Figueres believes it was more realistic to look for

gradual progress in solving climate change, adding that there was no "magic bullet."

Cancun could end up setting a new deadline for working out a more binding deal,

perhaps by the end of 2012.17

The collective commitment by developed countries is to provide new and additional

resources approaching USD 30bn for the period 2010-2012 with priority for funding

adaptation of developing countries with particular vulnerability (i.e. Least Developed

Countries (LDC), Small Islands Developing States (SIDS) and Africa). The Advisory

Group on Finance18 is tasked to develop practical proposals to mobilize new and

innovative resources for long-term financing for climate change, as pledged by

developed countries. Their report on Finance is due in October 2010.19

Failure of market forces to ensure sustainable global economy and the desperate need to

lift billions out of poverty adds to instability and signals a clear and urgent call for

effective, innovative, and catalytic action to halt and reverse worsening trends.20 The

Stern Review refers to climate change as “the greatest market failure the world has

seen”.21 Public funding is vital, because these problems can only be solved through

16 Sessions for AWG-KP and AWG-LCA. 17 Reuters (Geneva), “Nations meet on climate cash, UN sees long haul”, September 2, 2010. 18 Convened by the UN Secretary General. 19 UNFCCC Secretariat. Negotiating Text Advance Version, FCCC/AWGLCA/2010/14, 13 August 2010. at 38. 20 OPS4 above n 4.

11

21 Stern N (2006). Stern Review: The Economics of Climate Change. Summary of Conclusions. .See also Report to the Prime Minister and the Chancellor of the Exchequer on the Economics of Climate Change.

partnerships with governments, civil society, the private sector, and local

communities.22 At present we have the opportunity to negotiate an effective and

equitable way to restructure the rules of the game so that every economic activity fully

bears the costs of its negative environmental externalities and takes into account the

discount rate of resources in an inter-generational perspective.23

Negotiations on equitable burden sharing arrangements need to be based on robust

numbers on the real cost of climate mitigation.24 Although figures on the order of

magnitude of financial and investment flows required are still hazy, the need for

massive scaling up of climate related investments is clear.25 Additional investments

need to be weighed against the benefits they generate, for example fuel savings over the

lifetime of the capital stocks can be significant.26 “[T]he time is ripe to identify

additional politically viable, low-cost, non-intrusive strategies to lower carbon

emissions”.27 Some such strategies, for example, the climate stabilization wedges28 and

the McKinsey greenhouse gas abatement cost curve29, demonstrate different paths to

cutting emissions, to lowering the cost of each technology and strategy, and to increase

their reduction potential.

Available at http://siteresources.worldbank.org/INTINDONESIA/Resources/226271-1170911056314/3428109-1174614780539/SternReviewEng.pdf 22 OPS4 above n 4. 23 United Nations (2010). Financing Global Climate Change Mitigation. ECE Energy Series No. 37 (ECE Report) at 1. 24 ECE Report above n 23 at 6. 25 ECE Report above n 23 at 12. Also see Doornbosch & Knight (2008). What role for public finance in international climate change mitigation. 26 IEA, World Energy Outlook 2009 (WEO-9), 10/2009. WEO-10 due in Nov 2010. 27 Vandenbergh, MP et al, Implementing the Behavioural Wedge: Designing and Adopting Effective Carbon Emissions Reduction Programs (May 28, 2010). Environmental Law Reporter (ELR), Vol. 40, p. 10547, 2010; Vanderbilt Public Law Research Paper No. 10-26. Available at SSRN: http://ssrn.com/abstract=1617426 28 Pacala, Stephen; Socolow, Robert H. (2004). "Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies". Science (AAAS) 305 (5686): 968–972.

12

29 McKinsey & Company (2009). Pathway to a Low-Carbon Economy: Version 3 of the Global Greenhouse Gas Abatement Cost Curve. For the industrial sector, see for example Vattenfall (2007). Global Mapping of Greenhouse Gas Abatement Opportunities up to 2030. Industry Sector Deep Drive available at http://www.greenswitching.com/library_files/2_1253885146_Power%20Sector_Global_Mapping_of_Greenhouse_Gas_Abatement_Opportunities_up_to_2030-Vattenfall-2007%5B1%5D.pdf Note that these curves should not be taken at face value as they have some flaws, for example, they generally underestimate costs by ignoring transaction costs and other market barriers. But they are useful nonetheless to prioritise mitigation actions.

Although market-based mechanisms are incentivising the private sector to fund

additional investment and financial flows needed for mitigation, substantial additional

public funding is needed to mobilize and leverage more private investment.30

International public finance mechanisms must be aligned to policy frameworks and also

be structured to act along the entire chain of financial intermediation including

International/ Domestic/ Commercial Financial Institutions (IFIs/DFIs/CFIs), investors,

equipment manufacturers, energy service companies and other technology delivery

companies.31 Each country needs to design policies to suit its own institutions and

circumstances; typically, a portfolio of different policies for different mitigation

measures is likely to be most effective.32 Lessons regarding the most effective mix of

policies are still being learned. Further, there is not enough exchange of information

and experiences to allow lessons to be shared and a body of best practice to emerge33,34.

“Securing access to low-cost energy for all, including the very poor, is truly and literally

liberating. Building resilience to surprise and to extremes of weather is a practical

expression of true global solidarity. Improving the quality of the air that people breathe

is an undeniable public good. [S]uch a framing offers the greatest potential for securing

sustainable and effective action on … these issues.”35

30 FCCC/TP/2008/7, above n 11, at 87. 31 Ibid. 32 Ibid. 33 ECE Report above n 23 at 45. 34 Ibid.

13

35 Professor Hulme, ‘The Hartwell Paper’: A new direction for Climate Policy after the crash of 2009’. [11 May 2010]. Available at http://eprints.lse.ac.uk/27939/ at 36.

2.1 The Main Driving Forces of GHG Emissions

Investments, and by necessity their finance, lie at the heart of mitigating climate change

effectively. Figure 1 sets out a simplified model of the systems involved in investment

and climate change. The supply and demand models stand for the market and policy

mechanisms that set prices for energy and GHG emissions.36 Financing enhanced

mitigation action in developing countries will require options, tools and mechanisms to

channel private and public finance enabled through national policies and the

Convention.37 Attributing the full costs of carbon externalities are a key part of policy

design, “policy has to affect the bottom line to make investment commercially

attractive, has to reflect the duration of projects and has to be legally based to instill

confidence”.38

36 Mainelli M et al, ‘An Investment Portfolio View of the Low Carbon World’ in Will Oulton (Ed, 2009). Investment Opportunities for a Low Carbon World. GMB Publishing Ltd, London, UK, at 283. 37 FCCC/TP/2008/7, above n 11, at 87.

14

38 Hamilton K, ‘Where Regulation is a Risk and an Opportunity’, in Will Oulton (ed), above n 36, at 243.

A comparison of the main driving forces of GHG emissions under different scenarios in

the literature is presented in figure 2. The link between energy consumption and

economic development is clear, unfortunately it entails a high environmental impact

thus an expensive negative externality that can undermine successful development

efforts achieved.39 The Hartwell paper identifies the Kaya Direct approach where the

Kaya identity shows that there are only four macro scale policy levers in pursuit of

emission reductions.40 These are population, wealth, energy intensity (units of energy

per unit of GDP) and carbon intensity (amount of carbon produced per unit of energy).

Each lever prescribes a particular approach to policy. The Hartwell paper finds

radically new ways to pull the levers of energy and carbon intensity.41

Figure 2: Comparison of the main driving forces of GHG emissions under different

scenarios in the literatures.42

39 ECE Report above n 23 at 73. Referring to reliance on fossil fuel resources for energy. 40 Hartwell paper above n 35 at 27. 41 Ibid at 28.

15

42 Scenarios as per UNFCCC Secretariat (2007), Investment and Financial Flows to Address Climate Change (IFFACC) at 25-26. Available at http://unfccc.int/files/cooperation_and_support/financial_mechanism/application/pdf/background_paper.pdf

The Hartwell Paper sets a new direction for climate policy and builds on the “crisis

which enveloped global climate policy [at Copenhagen]. It delves “into the deeper

driving forces of events […] which are different from and more than the […] visible

[signs] – the geopolitics, including especially the many cultural dimensions – of

events.”43 The paper presents some forward looking and productive courses of action.

[I]t emphasises the primacy of accelerating decarbonisation of energy supply and

acknowledges the need for very substantially increased investment in innovation in non-

carbon energy sources in order to diversify energy supply technologies. The ultimate

goal […] is to develop non-carbon energy supplies at unsubsidised costs less than those

using fossil fuels. The [paper] advocates funding this by low hypothecated (dedicated)

carbon taxes.”44 Early action on a wider range of human influences (not just CO2) on

climate could be more swiftly productive.45 The solutions presented are ‘clumsy’ by

intent because of the complexities in the world.46 Accelerated decarbonisation of the

global economy is the most arduous [step]. The paper criticises the Kyoto type

approach for not achieving any discernable acceleration of decarbonisation whatsoever

thus a radical reframing of primary goals.47 The reframed primary goals48 should be;

1. To ensure basic needs, especially the energy demands of growing populations are adequately met (i.e. simultaneously accessible, secure and low cost).

2. Ensure development does not undermine essential functioning of he Earth system, but not just CO2, for example black carbon49, tropospheric ozone and the protection of tropical rainforests.

3. Ensure societies are adequately equipped to withstand the risks and dangers that come from the climate, whatever their cause.

43 Hartwell Paper above n 35 at 4. 44 Ibid at 5. 45 Ibid at 8. 46 Verweij M & Thompson M (2006, eds). Clumsy solutions for a complex world: governance, politics and plural perceptions, Basingstoke: Palgrave Macmillan. 47 Hartwell paper at 10. 48 Ibid.

16

49 See also V Ramanathan & G Carmichael, “Global and regional climate change due to black carbon”, Nature Geosci 1, 2008, at 221-227.

2.2 The Role of Policy

Governments play a pivotal role through policy and investment frameworks they

establish.50 Changes in patterns of future investment and financial flows to address

climate change need a combination of actions by the intergovernmental process

(including the UNFCCC process and other processes such as the IFIs), national

governments and private sector (corporations and households).51 Solutions require a

combination of policy frameworks to increase attractiveness of investments in clean

carbon technologies by regulating GHG emissions and promoting reduction, incentives

and assistance to developing countries and scaling up flows to allow adequate

financing.52 Parties need to be aware of and consider implications of these complexities

in their deliberations but it is even more critical that some widely supported, relatively

simple and actionable themes be developed to shape the post-2012 structure.53 The

investment community needs rules to predict risks and returns, and room to innovate for

realizing financial and social returns.54

Developed country Parties striving to implement policies and measures to respond to

climate change have been urged to avoid and minimise negative social and economic

consequences for developing countries.55 The reality of current approaches, for

example, changing the rules of the game to include costs of negative environmental

externalities, and this is having severe impact on poverty lines because those who were

suffering the most and probably had the least input in changing the climate have been

made to pay. Recent protests in India over fuel subsidy removals and ever-increasing

electricity charges in Fiji are only two examples of further hardships that would not

have been a concern but for the past and present actions of developed nations. Instead a

more effective strategy would be to help plan and decarbonise the energy supply as the 50 IFFACC above n 42 at 191. 51 Ibid at 192. 52 Ibid. 53 Ibid. 54 Ibid.

17

55 FCCC/AWGLCA/2010/14 above n 19 at 60.

Hartwell Paper recommends. Feed-in Tariffs without raising the price of energy in the

LDCs, SIDS and other vulnerable nations could be an answer because most people are

paying significantly for their energy consumption anyway, but they lack the means and

perhaps initiative, to decarbonise. Prolonged inaction and indecision relating to the

global environment is exacerbating the situation.

National policies can assist in optimizing the use of funds by spreading risk across

public and private investors.56 Governments (at the international, regional, national,

state and local levels) set the rules for the markets in which investors seek profits and if

current market rule are failing to attract investors into lower GHG emitting alternatives,

then there are a variety of steps that governments can take to address these market

failures, including overcoming policy-based barriers to entry (such as fuel subsidies);

making the polluter pay (internalizing externalized costs by for example taxes); paying

the innovator (internalising externalized benefits (for example create tradable rights to

reward investments such as a cap and trade regime) and by filling information gaps by

providing data to potential investors.57 Such policy tools can be used across many

different sectors and tilt the playing field toward lower carbon and more climate-proof

investments.58 Both climate and non-climate related policies have important influences

that can raise or reduce various indicators concerning this super-wicked problem. The

design, implementation and enforcement of appropriate law and policies at all levels,

and aimed at all sectors is indeed the most serious legal challenge of our time.

Country risks play a major role in investment decisions by foreign investors and

lenders.59 The result is different countries attract varying levels of investments and

difficulties for poorer communities is compounded. Strong host government support is

crucial to the success of financial mechanisms’ objectives. The government can help by 56 IFFACC above n 42 at 170. 57 Ibid at 179. 58 Ibid at 180.

18

59 Ibid at 190. Numerous resources exist for evaluating country risks, for example http://www.fdi.net/index.cfm is a World Bank website dedicated to promoting foreign direct investment in emerging markets.

setting policies and targets for Energy Efficiency and Renewable Energy (EERE),

influencing market players, streamlining public procurement procedures, creating

incentives and if necessary, creating a dedicated financing window.60 Strong national

policies to create the right economic incentives and a good environment for investment

will attract the necessary capital for mitigation projects. Climate policies need to be

disentangled, with a recollected awareness of and response to their sheer diversity.61

Policies cannot ‘solve’ this super wicked problem but they can improve management.62

3.0 Investment and Financial Flows63 for Mitigation Actions

Estimates of future investment needs to meet mitigation targets vary widely due to

different methodologies used.64 The relevance and importance of the financing and

investment dimension was recognised by the Parties to the UNFCCC, consequently the

Secretariat was requested to analyse and assess investment flows necessary to address

climate change in an effective and meaningful way, with a special focus on developing

countries’ needs.65 The paper presented data on projected, climate-related investments

under reference and mitigation scenarios and the flows necessary in 2030 to meet

requirements for mitigating and adapting to climate change under different scenarios of

social and economic development. An update66 to the 2007 paper presented different

options, tools and mechanisms to enhance financing for mitigation, adaptation and

60 ECE Report above n 23 at 52. 61 Hartwell paper above n 35 at 36. 62 Ibid. 63 An investment flow is the initial (capital) spending for a physical asset; a financial flow is an ongoing expenditure related to climate change mitigation or adaptation that does not involve investment in physical assets. 64 ECE Report above n 23 at 6. 65 IFFACC above n 42. The paper provides an initial assessment of the financial architecture required for developing a post 2012 regime.

19

66 FCCC/TP/2008/7 above n 11.

technology cooperation for an effective response to climate change as per the Bali

Action Plan.67

Table 1: provides some global estimates of costs and investment required:

20

67 FCCC/AWGLCA/2008/8, paragraph 1. Paragraph 1b(ii) of the Bali Action Plan, calls for “nationally appropriate mitigation actions by developing country Parties in the context of sustainable development, supported and enabled by technology, financing and capacity-building, in a measurable, reportable and verifiable manner”.

Figure 3 (below) shows the GHG emissions by sources for the reference (RS) and

mitigation (MS) scenarios. The paper does not provide an estimate of the total cost of

climate change mitigation but rather indicates the differences in the total investment

flows needed for various infrastructure and the financial flows needed for various

mitigation measures. The analysis indicates that additional investments required to

bring the emissions to current levels are small in relation to estimated global gross

domestic product (GDP) (0.3-0.5 per cent) and global investment (1.1-1.7 percent) in

2030.68 This amounts to an average annual additional investment69 of $200-210bn but

the 2008 update to this report revised this upwards by 170% ‘mainly due to higher

projected capital costs’.70 Traditional investment flows will be redirected to climate-

friendly alternatives and with appropriate policies and/ or incentives, part of the

additional flows needed may be covered by the currently available sources.71 Tools to

mobilize the necessary flows include carbon markets, the financial mechanism of the

Convention, Official Development Assistance (ODA), national policies and some new

and additional resources.72

Figure 3. Total greenhouse gas emissions under reference and mitigation scenarios.73

68 IFFACC above n 42 at 170. 69 This only covers the initial capital cost of new physical assets, costs for capacity building or creating enabling environment is not included. 70 FCCC/TP/2008/7, above n 11 at 7. 71 Ibid. 72 Ibid.

21

73 IFFACC above n 42 at 24.

Under the reference scenario, global emissions rise from 38.91 Gt CO2 eq in 2000 to

61.52 Gt CO2 eq in 2030.74 The mitigation scenario reduces the projected emissions in

2030 to 29.11 Gt CO2 eq. Energy-related emissions account for the most emissions 66

per cent under reference scenario reduced by 35 per cent under mitigation scenario.75

The energy supply’s related GHG emissions are depicted in figure 4.

Figure 4. Energy supply and related GHG emissions under the scenarios.76

Energy efficiency is a major component of the mitigation scenario; energy demand in

2030 is 15 per cent lower than under the reference scenario, representing a 6 Gt CO2 eq

reduction in annual emissions.77 Decarbonisation of energy supply, including the use of

renewables, nuclear energy and CO2 capture and storage (CCS), also plays a major role

in mitigation accounting to annual reduction by 8 Gt CO2 eq.78 Investment and finance

are critical components of successful economic development and generating capital to

meet specific social and economic needs, meeting the Millennium Development Goals

(MDGs) and at the same time mitigate climate change. The share of GHG emissions

have been estimated for eight major sectors shown in figure 5 below.

74 Ibid. 75 Ibid 76 Ibid. 77 Ibid.

22

78 Ibid.

Figure 5. Share of global GHG emissions by major sectors in 2004.79

For all the sectors (except agriculture and forestry), the estimates corresponds to the

investment and financial flows needed to make possible a shift from the reference to the

mitigation scenario.80 Table 2 shows that 68 per cent of the projected global emission

reductions occur in non-Annex 1 Parties while only 46 per cent of additional investment

and financial flows are needed for them. This reflects mitigation opportunities

associated with the rapid economic growth projected for large developing countries, the

relatively inefficient energy use, and the prevalence of low cost mitigation opportunities

in the forestry sector.81 Mitigation actions are expected to be more cost-effective in

developing countries.

Collectively, non-OECD countries account for over 90% of the increase, their share of

global primary energy demand rising from 52% to 63%. China and India represent over

53% of incremental demand to 2030. Coupled with strong growth from ASEAN, this is

contributing to a refocusing of the global energy landscape towards Asia. Outside of

Asia, the Middle East sees the fastest rate of increase, contributing 10% to incremental

79 IPCC, Climate Change 2007: Report of the Working Group III on Mitigation. Cambridge: Cambridge University Press. 80 IFFACC above n 42 at 35.

23

81 Ibid at 93.

demand.82 Rapid economic and population growth accompanied by urbanisation has

created a very large investment needs in infrastructure in developing countries.83

Table 2. Additional investment and financial flows and GHG emission reductions.

4.0 Enhanced Investment and Financial Flows for Mitigation

Addressing climate change will require significant changes to investment and financial

flows. Such changes fall into three categories84:

Shift flows to more sustainable climate-friendly alternatives, particularly

important for power supply where a significant shift is needed from fossil-fired

generation to renewables, CCS, nuclear energy and hydropower.

Scale-up international private and public capital, for example by expanding

carbon markets or identifying other new sources of funding;

Optimize allocation of the funds available by spreading risk across private and

public investors, for example by providing incentives for private investment in

early deployment of new technologies.

82 WEO-2009 above n 26. See specifically Climate Change excerpt available at http://www.worldenergyoutlook.org/docs/weo2009/climate_change_excerpt.pdf ; 83 UNCTAD (2008) World Investment Report 2008 – Transnational Corporations, Extractive Industries and development. Available at http://www.unctad.org/en/docs/wir2007_en.pdf Also see note re urbanisation as opportunities in appendices.

24

84 IFFACC above n 42 at 178.

To support enhanced action on the provision of financial and investment resources for

developing countries, four broad means can be considered by the Parties: i. Private

finance; ii. Public finance; iii. National policies; iv. The Convention itself.

Table 3 summarises the options, tools and mechanisms available to shift, scale up and

optimize the provisions of financial resource to enhance mitigation actions.

25

Mitigation Measures can be either85;

i. Mitigation Specific that aims to achieve GHG mitigation in developing countries as its main objective (and further defined by financial support structure, for example CDM etcetera. Or;

ii. Mitigation Relevant that includes funding for development in key sectors that shape emissions in developing countries and thus mitigation potential. Relevant flows will include for example bilateral or multilateral ODA but mitigation relevant flows may have either a positive or negative effect on GHG emissions.

Mitigation specific flows are relatively small compared to mitigation relevant but

growing86. An important policy message highlights the need to steer private

investments across relevant sectors towards projects fostering mitigation, thus enabling

environments to attract investment and incentives in low carbon development are

prerequisites.87 At present, the vast majority of mitigation relevant financial flows is

not targeted to lowering GHG emissions and are more likely to be contributing to the

emission burden.88

Entities that make the investment decisions are different in each sector and the policy

and/ or financial incentives will vary accordingly.89 Coordination in policies by Parties

in an appropriate forum will be most effective.90 Areas where international

coordination would be beneficial include technology R&D and deployment; energy

efficiency standards for appliances and equipment.91 Cooperative sectoral approaches

and sector-specific actions, in order to enhance implementation of Article 4, paragraph

85 Jan Corfee-Morlot, Bruno Guay (OECD), and Kate M Larsen (IEA), Financing Climate Change Mitigation: Towards a Framework for Measurement, Reporting and Verification. COM/ENV/EPOC/IEA/SLT(2009)6 at 6. This is an important document was prepared in response to the Annex I Expert Group on the UNFCCC that oversees development of analytical papers prepared for useful and timely input to climate change negotiations. The paper considers the main pathways through which mitigation support to developing countries may flow as well as the availability and suitability of information to provide a basis for an MRV framework. 86 COM/ENV/EPOC/IEA/SLT(2009)6 above n 86 at 6-7. 87 Ibid at 7. 88 Ibid at 40. 89 IFFACC above n 42 at 94. 90 Ibid.

26

91 Ibid at 176.

1(c) of the Convention seems to be an integral aspect of the negotiating text92 for

AWGLCA’s 12th Session at Tianjin in October 2010.

An annual review of investment trends in the sustainable energy sector estimates overall

global investment in sustainable energy at $155bn n 2008 and $162bn in 2009

compared to $33bn in 2004, reflecting the boom in clean energy.93 In many sectors the

lifetime of capital stock can be over thirty years and total investment in new physical

assets is projected to triple between 2000 and 2030 providing a window of opportunity

to direct financial and investment flows into climate friendly and resilient

technologies.94 Developing Countries rapid economic growth means they will require a

large share of investment and financial flows.95 A substantial part of the flows can be

covered by currently available resources, however, improvement in, and optimal

combinations of mechanisms in some cases require new and additional resources.96 It is

important to consider the role of private-sector investments; as they constitute the

largest share of investment and financial flows (86 per cent), but ODA represents a

larger share of investments in some countries such as the LDCs (6 per cent).97

92 FCCC/AWGLCA/2010/14 above n 19. 93 UNEP SEFI (2010). Global Trends in Sustainable Energy Investment 2010. Available at www.sefi.unep.org ; an important limitation of this annual review is that financing of EE projects is usually excluded. 94 IFFACC above n 42 at 170. 95 Ibid. 96 Ibid.

27

97 Ibid.

4.1 Mobilisation of Resources

Parties have proposed a number of innovative options, tools and mechanisms to scale up

resources to address climate change including defined contributions from Annex I

Parties, use of market mechanisms, expanding the carbon market, auctioning emission

allowances, applying a carbon tax and levying aviation and maritime fuels. Potential

sources could be significantly larger than currently available and planned resources.

Specifically, the mobilisation of resources should be;

a. Adequate resources to cover the relevant costs for adaptation and

mitigation;

b. Predictable resources for proper planning and sequencing of actions

to address the varying and heterogeneous requirements thus not rely

on voluntary funding but defined or mandated contributions;

c. Equitable sharing of financial burden; in the context of climate

change, the key burden-sharing principle is that of common but

differentiated responsibilities and respective capabilities, as

enshrined in Article 3, paragraph 1 of the Convention;

d. New and additional resources including funds generated through

market-based mechanisms.

Efficient and effective delivery of financial resources will be central to the success of

global efforts to address climate change. It involves access, disbursement and

allocation, and measuring, reporting and verifying the provision of financial support for

measureable, reportable and verifiable action.98

28

98 FCCC/TP/2008/7, above n 11, at 95.

4.2 Delivery of Resources

4.2.1 Access to resources

Access concerns eligibility, ability, amount and technicalities of access. Currently,

funds under the Convention are accessible through the GEF, developing countries and

countries with economies in transition are eligible to access the GEF Trust Fund, only

developing counted can access the SCCF, and only LDCs can access the LDCF; but not

directly. Instead, they have to propose projects through one of several agencies99 which

assist governments and NGOs in the development, implementation and management of

GEF-funded projects.

Climate change funds under the GEF Trust Fund can only be used to meet a project’s

incremental costs of implementing measured covered by Article 4, paragraph 1 of the

Convention. The remaining costs of national and local benefit are borne by recipient

country (does not apply to LDCF or SCCF). Developing countries experienced

difficulties with the incremental cost principle so in June 2007, the GEF Council

approved guidelines for the application of the principle that have significantly enhanced

the transparency and efficiency of determining the incremental costs of a project.100

Funding from the GEF is subject to the RAF, a system for allocating resources based on

each country’s capacity, policies and practices for successfully implementing projects

and the project’s potential to generate global environmental benefits.101 Unclear

guidelines, complicated design and rules resulted in calls for improvement.102 In

response to concerns, the GEF has undergone reforms to speed up the project cycle and

introduce new results-based management framework.

99 Listed in the appendices. 100 FCCC/CP/2008/2. 101 FCCC/TP/2008/7, above n 11, at 96.

29

102 Council Joint summary of the Chairs, 2008.

The Group of 77 and China has called for streamlined and efficient project development

and approval cycles with faster processing of eligible activities and direct access to

funding rather than through implementing agencies.103 It has been suggested that

eligibility for funds could be decided on the basis of a vulnerability index or indicators

reflecting a country’s circumstances104, respective capabilities, level of associated risk

and physical impacts.105

4.2.2 Disbursement of resources

Disbursement concerns allocation (i.e. how much is allocated to adaptation, mitigation

and technology transfer) and type of support (i.e. project, programmatic or budget).106

Disbursements can be carried out on a project basis or a programme basis. A project

approach enables careful review but the time and administrative costs needed to process

each project is a disadvantage.107

The GEF Trust Fund has primarily focused on projects in renewable energy and energy

efficiency.108 In 2008, the GEF Council agreed that programmatic approaches may be

eligible for funding as medium to long term programmes seen as a more effective

financing vehicle for supporting countries’ sustainable development than the traditional

project-by project provision of funding. Several regional and multi-country sustainable

development programmes to assist especially LDCs and SIDS, including the Pacific

Alliance for Sustainability programme and a Sub-Saharan Africa and the West Africa

103 FCCC/TP/2008/7, above n 11, at 97. 104 For example, per capita GDP. 105 FCCC/TP/2008/7, above n 11, at 97. 106 Ibid. 107 Ibid at 106.

30

108 FCCC/CP/2008/2.

Program.109 The one-off, project-specific nature of the CDM raises questions about

how much cumulative […] learning it can promote.110 CDM projects do however

contribute to transfer technology that was previously unavailable in the host country.111

Parties have highlighted that a shift from a project-based to a programmatic approach is

needed to scale up climate action significantly and make best use of the full range of

means of implementation available for actions112. This approach should be enhanced

for the carbon markets as well to reach a win-win-win state as multi-sector benefits may

be realised and localised symbiance can be attained. Support at a more strategic level

has the potential to effectively scale up efforts to address climate change.113

4.2.3 Measuring, reporting and verifying (MRV)114

The foundation for an institutional framework for climate action has to be nationally

appropriate and undertaken in the context of sustainable development, supported and

enabled by technology, financing and capacity-building, in a measurable, reportable and

verifiable manner. In order to measure, report and verify, clear targets and timelines

would be needed.115 Outputs and outcomes of adaptation actions are more difficult to

measure, report and verify because it lacks a common metric such as CO2 equivalence

used for mitigation actions.116 The Results-Based Management Framework is codified

in policy and embedded in numerous strategies to drive reporting.117

109 FCCC/TP/2008/7, above n 11, at 98. 110 UNDESA (2008). Climate Change: Technology Development and Technology Transfer. Available at http://www.un.org/esa/dsd/resources/res_pdfs/publications/sdt_tec/tec_technology_dev.pdf 111 Seres S (2007) Analysis of Technology Transfer in CDM Projects (Report to the UNFCCC Registration and Issuance Unit). 112 FCCC/TP/2008/7, above n 11, at 98. 113 Ibid. 114 COM/ENV/EPOC/IEA/SLT(2009)6 above n 86. 115 FCCC/TP/2008/7, above n 11, at 99. 116 Ibid.

31

117 The key results expected under the $4.2bn replenishment scenario is available at GEF-5 Programming Document. May 03, 2010, at 83-87.

The MRV of mitigation specific support under the UNFCCC has a number of strengths

and weaknesses that should be addressed if it is to be used as a basis for an expanded

system in this area.118 Weaknesses include inconsistent and/ or incomplete and/ or

infrequent reporting with limited and incomplete information on multilateral

development banks and other non-UNFCCC funds; lack of primary data under Kyoto

mechanisms; and lack of verification procedures.119 An enhanced framework that fills

data gaps and develops a common reporting format drawing on more standardised data

from across comparable and publically available sources is needed.120 “A key would be

to provide a monitoring system that covers not just public but also private finance in

mitigation specific [and] mitigation relevant areas”.121

Establishing a harmonised, comprehensive tracking system under the UNFCCC, for

example, could build on the existing OED Creditor Reporting System, which provides

much of the relevant detail on flows of bilateral mitigation support; including

information on the source of mitigation support and on the end points (by recipient

countries, sector and project type).122 A move towards a comprehensive system of

MRV will assist Parties to build trust and understanding by monitoring effective

delivery of support commitments and to improve their own performance to achieve

common climate change mitigation objectives as set out under the Convention.123

An improved framework for MRV of mitigation support could organise information

along three main dimensions124:

i. Whether the finance is specifically tackling climate change (GHG mitigation) or

whether it would occur regardless of climate change motives but is nevertheless

118 COM/ENV/EPOC/IEA/SLT(2009)6 above n 86 at 7. 119 Ibid at 7 and 11. 120 Ibid at 7. 121 Ibid. 122 Ibid at 8. 123 Ibid.

32

124 Ibid at 11-12.

relevant because it invests in emission intensive sectors such as energy or

transport infrastructure projects;

ii. Whether the type of support is public and/ or private; and

iii. The geographic origin and directional flow of the support (e.g. whether it is North-

South, South-South, domestic or a combination125).

Domestic finance is driven by domestic policies that constrain or steer investment to

climate-friendly outcomes. This occurs as part of the broader enabling environment for

investment in a particular national context and in this case may explicitly put a price on

carbon or otherwise regulate emission performance (thus placing a shadow price on

carbon).126 In turn such a policy framework makes investment in low or no-carbon

technology or infrastructure more profitable than it would be otherwise and improves

the competitiveness of these investments relative to more conventional (higher

emission) choices.127 Elements of such a framework can be presented in terms of inputs

to support mitigation action and outputs or mitigation outcomes (Figure 6);

Figure 6: Support for developing country mitigation action128

125 North-South – where the finance originates in developed countries and flows to developing countries; South-South – where the finance originates in developing countries and flows from one to another; domestic – finance originates from within the developing country. 126 COM/ENV/EPOC/IEA/SLT(2009)6 above n 86 at 12-13. 127 Ibid at 13.

33

128 Ibid at 14.

Inputs may use several different types of metrics, including monetary, quantitative and

measurable but non-monetary and qualitative, thus providing a comprehensive

understanding of mitigation support.129

An international registry mechanism could provide a means to report and review

progress internationally, both in areas of nationally appropriate mitigation actions and

mitigation support to fight climate change.130 Other recommendations include

streamlining data collection to facilitate a standardised reporting and verification

system; detailed guidance to improve self-reporting; establishment of UNFCCC

certification of independent verifiers and/ or create more robust standards; expand and

enhance national communications (which may be burdensome at start but respective

capacity can be built).131

5.0 Financial Mechanisms

There is a vast and diverse array of financing mechanisms and identifying the ‘best’ is

highly relative.132 This section discusses numerous levels and types of financing that is

available from different sources to support mitigation in developing countries. The

discussion that follows necessarily skims the surface in any one of these areas and only

aims to provide a reasonable overview with some detailed discussion of the financial

mechanisms established under the Convention and the likely post-2012 frameworks.

129 Ibid at 14. 130 Ellis J, Moarif S and JA Kim (2009). Reporting and recording GHG mitigation actions and support in a post-2012 climate framework. OECD/IEA: Paris. 131 COM/ENV/EPOC/IEA/SLT(2009)6 above n 86 at 39.

34

132 ECE Report above n 23 at 12.

Public Support may be through;

bilateral mitigation support;

GEF (see below);

Bilateral/ multilateral ODA under the OECD system133;

Export Credit Agencies (typically provide direct loans or guarantees to facilitate

exports in riskier markets);

Multilateral Development Banks (MDBs) and specific climate change funds.

Private and Public-Private financial support may be through;

CDM;

FDI;

South-South FDI;

International Private Loans

Domestic

Other public-private

The existence of such a range of mechanisms suggests that local contexts are so

different that only bespoke solutions can work.134 Mechanisms can be designed to

address specific issues and target certain geographic areas. Examples of the types of

issues addressed are135;

Closing the equity gap with dedicated private equity funds (eg. GEEREF,

developing countries);

Closing the debt-equity gap (eg. CAREC, Central America);

Supporting a nascent energy service company (ESCO), eg. 1st Energy

Conservation Programme, China;

133 Whose main objective is to promote the economic development and welfare of developing countries. 134 Taylor et al (2008). Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond. (World bank report).

35

135 ECE Report above n 23 at 13.

Using municipalities or utilities as relays in the financial intermediation chain

eg. CHUEE, China

Financing energy access (off-grid communities in rural areas) with micro-

finance eg, Grameen Shakti, Bangladesh;

Mitigating risks of local lenders with guarantees eg, USAID Development

Credit Authority, developing countries and China’s 2nd Energy Conservation

Programme;

Remedying inability or unwillingness of CFIs to finance EERE projects with

SPV or special finance windows, eg, IREDA in India;

Dedicated DFI EERE credit lines to local CFIs eg, AFD Climate credit line in

China.

The main generic barriers to investments in EERE projects are summarized in table 4

below. It is clear from the table that some of the main barriers, such as low energy

prices, are beyond the reach of financial mechanisms and can only be tackled by policy

reform.136 Energy subsidies globally amount to approximately $250-300bn of which

$180-200bn are for fossil fuels.137 Subsidies (ie, finance not subject to normal

commercial rules) are incompatible with sustainability because they distort normal

market operations but the EERE market is not a well functioning market and faces

many barriers.138 Subsidies generally reduce costs and overcome the various barriers

identified in table X above. Once the barriers have been overcome, subsidies should be

phased out.

136 ibid at 13-14. For a detailed discussion on each of the 22 different mechanisms aimed at small-medium projects listed in the table, see pp.16-30. 137 UNEP SEFI (2009) Global Trends.

36

138 ECE Report above n 23 at 49. For EERE investments, subsidies can be for example investment grants, soft loan terms, guarantees, TA, feed-in tariffs and patient equity.

Table 4: How EERE financing mechanisms address generic barriers to investments;

37

An important ‘weapon’ that architects of financing mechanisms deploy to overcome

barriers to investment is the complementary Technical Assistance (TA) Programmes.

TA is aimed at filling information and skills gaps and is a necessary component of

effective financing mechanisms.139 TA’s useful purposes in connection with EERE

investments include understanding the environment (initial diagnosis and market

studies), raise awareness of target audience (more relevant for EE), build capacity of

38

139 ECE Report above n 23 at 39-40.

participants, facilitate project origination and preparation and evaluate results. The

mechanisms should provide for a real transfer of skills by requiring teams of

international consultants to include a strong local component.140 The UN system,

through its various agencies, is a major provider of TA for climate change mitigation.141

The Technology Needs Assessment (TNA) project will provide financial and technical

support to assist developing countries in carrying out improved and actionable TNAS142

that provide a pathway to implement projects on the ground. The Expert Group on

Technology Transfer has prepared reports143 that identifies and analyses existing and

potential new financing sources and vehicles to support development, deployment,

diffusions and transfer of environmentally sound technologies in developing countries.

The Final NEEDS Summary Report is expected at the Mexico Conference.144

Another important aspect of the financing mechanisms is the balance between supply

(the provision of finance) and demand (a steady flow of quality projects).145 An

imbalance will not yield optimal results. The scheme must therefore incorporate

marketing, project development and technical design functions with respect to the host

country’s capacity.146 The architecture of financing mechanisms should be simple,

flexible, align incentives and allow for evaluation.147

140 Ibid at 40. 141 http://esa.un.org/un-energy/pdf/un_energy_flagship%20report.pdf 142 Within the framework of Article 4.5 of the UNFCCC. Report of the GEF to the COP, FCCC/CP/2009/9 at 29. 143 For example FCCC/SB/2008/INF.7. 144 FCCC/SBI/2010/2.15 gathers information on non-annex 1 parties to implement mitigation and adaptation measures FCCC/SBI/2008/8. 145 ECE Report above n 23 at 46. 146 Ibid.

39

147 Ibid at 51.

5.1 Institutional Arrangements

For resources to be managed efficiently and effectively in a manner perceived equitable

by all stakeholders, appropriate institutional arrangements are needed.148 An overview

of the current arrangements is in Figure 7.

Figure 7. Current institutional arrangements to provide resources under the

Convention149

The establishment of new institutional arrangements has been suggested. The main

issues concern governance (direct accountability to the COP and equal voice to

developed and developing countries) and coherence (links and coordination between the

various sources and funds).150 The Group of 77 and China have called for the

operationalisation of an effective financial mechanism that would be under the supreme

authority and guidance of, and be fully accountable to; the COP.151 An overview of a

possible framework is shown in figure 8.

148 FCCC/TP/2008/7, above n 11 at 99. 149 Ibid, at 100. 150 Ibid.

40

151 Ibid.

Figure 8. A possible overall financial framework under the Convention.152

The overall financial framework needs to ensure efficient and effective management

and supervision of the various investment mechanisms and funds; coordination and

coherence amongst various flows153; and enable engagement of the private sector to

leverage resources for climate-action investments.154 Taking into account proposals

from Parties, observer organisations and findings of the UNFCCC Secretariat in the

context of the AWG-LCA155 and the AWG-KP, figure 9 below maps out the possible

key elements for enhanced financing to support action on mitigation, adaptation and

technology cooperation.

152 Ibid, at 103. A discussion on numerous proposals from Parties is at 100-103. 153 Consistent with Article 11, paragraph 5 of the Convention. 154 FCCC/TP/2008/7, above n 11 at 103.

41

155 Submissions from Parties and intergovernmental organisations are assembled in document FCCC/AWGLCA/2008/16, which also provides document symbols of all submissions. Submissions from NGOs can be found at http://unfccc.int/3689.php

Figure 9. Possible key elements for enhanced financial support under the Convention156

5.2 The GEF

The GEF is the dedicated financial mechanism for several multilateral environmental

agreements including the CBD, UNFCCC, POPs, UNCCD157. The financial

mechanism is accountable to the COP, which decides on its climate change policies,

programme priorities and eligibility criteria for funding, based on advice from the

SBI.158 The GEF brings clear added value to its role of solving global environmental

problems.159 Its unique position enables focus on priorities agreed on globally and it is

catalytic on three-pronged approach; “first, the enabling environment is created through

foundational interventions, in which regulatory frameworks, policies, and national

priorities are developed; then demonstration of new technologies, market changes, or

new approaches to interaction with the environment are put into place; and, lastly,

156 FCCC/TP/2008/7, above n 11, at 89. 157 http://thegef.org/gef/whatisgef 158 IFFACC above n 42.

42

159 OPS4 above n 4, OPS4 Executive Version at 8.

investments ensure the national implementation or up-scaling of these new

approaches.160

The GEF is replenished by donors every four years and each replenishment process is

informed by independent overall performance studies of the GEF.161 The Fourth

Overall Performance Study162 (OPS4) recognizes “that the GEF cannot, on its own,

bring about solutions to the major global environmental problems of our time. The

amount of funding is simply not enough”.163 Solutions are only possible through

actions of governments and local communities. Evidence shows GEF projects have

achieved satisfactory progress towards impact but up-scaling is needed for longer-term

impacts to be realized.164 The replenishment of funds follows a pre-defined ‘basic’

burden share.165 The amount of funding after 2010 will depend on continuing

negotiations on the fifth replenishment (GEF 5).

OPS4 calls for strengthening of the catalytic role because there is significant evidence

where subsequent replication based on an original project ensures global environmental

benefits.166 Project outcomes show a high level of progress toward global

environmental benefits, thus it is achieving its mandate and objectives.167 “[T]he same

evidence reveals that the GEF did not have sufficient funds to apply all of these

modalities … [the] least developed countries and small island developing states

especially have not progressed far in terms of demonstration and investment.”168

160 Ibid. 161 Ibid. 162 Ibid. 163 OPS4 Executive Version at vi. 164 Ibid. 165 GEF (2005). Overview of burden/ sharing for GEF Replenishments. GEF/R.4/14. 166 OPS4 Executive Version at 21. 167 Ibid.

43

168 Ibid at vi.

The world community may decide on ways other than the GEF to finance and create

solutions to global environmental problems but at his point in time the world is not

doing enough to solve the problems.169 Solutions will be more expensive in the long

run and presently endangering the poor and developing countries. The GEF has been

underfunded since GEF-2, given the scope of its agenda and the guidance of the

conventions.170 Donors have kept pledges to the GEF at the same level in both GEF-3

and GEF-4 reflecting the lower priority they attach to the environment, especially the

global environment while continuing assigning new tasks.171 The result is that many

areas are neglected, for example, international waters, LDC, SIDS and fragile states get

insufficient support.

Based on discussions at various replenishment meetings, the programming document

presents approaches across all focal areas targeting a total replenishment of $4.2bn,

which is a 34 percent increase over GEF-4 levels.172 Under the $4.2bn scenario, $1.4bn

is allocated to climate change mitigation and it generally follows the path of the past 18

years but with more emphasis on transformational impacts, programmatic approaches,

and sectoral issues with a key target of 500 million tons CO2 equivalent avoided over

the impact period of the projects.173 The result will be that many areas will remain

neglected and little progress towards impact will be made.

GEF-5’s aim is to improve responsiveness of the GEF to the needs and priorities of

recipient countries.174 The GEF-5 Programming Document175 supports

transformational programs with the objective of generating significant global impacts

by;

169 Ibid at 16. 170 Ibid. 171 Ibid. 172 GEF Secretariat. Sixth Meeting for the Fifth Replenishment of the GEF Trust Fund May 12, 2010, Paris, France, GEF-5 Programming Document, GEF/R.5/31, May 03, 2010, at iv. 173 Ibid at 21. 174 FCCC/CP/2009/9 at 39.

44

175 GEF-5 Programming Document, above n 172, at iii-iv.

i. Supporting a National GEF Portfolio Identification exercise towards programming

GEF resources;

ii. A Sustainable Forest Management/ REDD-plus Investment Program and

protection of “blue forests” that will combine resources and objectives in more

than one GEF-focal area and provide relative countries with additional resources

on top of allocations.

iii. Enhancing private sector engagement with the Earth Fund as a major element to

leverage private sector resources;

iv. Corporate Programs shaped around each country’s National GEF Portfolio

Identification Exercise and upgrade of numerous structural elements including, for

example, strengthening of the role of civil society organisations;

v. Underpinning the 5th replenishment is the GEF Results-based Management

Framework that aims to link the focal area and corporate program objectives to

four strategic corporate goals of the GEF.

Given the lack of commitment and adequate resources, the GEF is significantly

impaired to enhance its activities and assist those especially in need.

45

5.3 Carbon Markets

The carbon market is the market for GHG emission reductions (credits) and rights to

release GHG emissions (allowances).176 Carbon finance (inseparable from carbon

markets) is not so much a mechanism as an entirely new source of finance for climate

change mitigation that has only emerged in the last 10 years.177 Carbon markets play an

important role in shifting private investment flows and need to be significantly

expanded to address needs for additional flows.178 Three market mechanisms can be

distinguished:

1. The “Kyoto market”, consisting of three different trading mechanisms created

by the 1997 Kyoto Protocol to the UNFCCC sets binding emission reduction

targets for the 2008-2012 period by 39 industrialized countries (Annex B

countries):

a. Joint Implementation (JI); Annex B countries buy carbon credits from

emission reduction projects from other Annex B countries;

b. Clean Development Mechanism (CDM); Annex B countries buy carbon

credits from emission reduction projects from non-Annex B countries;

c. International Emissions Trading (IET); allows Annex B countries to

trade allowances from their carbon budgets, called ‘assigned amount

units’ (AAUs).

The first two are project-based and need projects to reduce emissions but the

third is allowance-based, that is, no actual emission reduction is required to

trade.179

2. Cap-and-Trade systems, for example the EU Emission Trading Scheme, sets a

cap on company emissions so that the overall emissions are reduced and

permits/ allowances up to that cap are granted or auctioned to companies. Then, 176 Allowances and credits are also called permits, quotas, offsets, and names unique to the specific market. 177 ECE Report above n 23 at 30. 178 Ibid at 170.

46

179 Ibid at 31.

permits can be traded. USA successfully curbed sulphur dioxide responsible for

acid rain in the early 1990s using this system. IET is also a cap-and-trade

mechanism.

3. Voluntary markets is for trading in the absence of emission targets or regulation.

The current and projected size of the international carbon markets is summarized in

Table 5 below. The EU ETS is the largest market with a total value of $92bn followed

by the CDM at almost $33bn.180 New Carbon Finance, an information provider,

projects that “assuming a US market does materialize, the world carbon market could

grow […] to $2.1 trillion by 2020 [and] global carbon price [could increase] from $16/t

in 2009 to $61/t in 2020”.181 Most active buyers (developers, carbon funds, utilities,

industrial firms, financial institutions and traders) operate from London, which is

considered the carbon finance hub of the world.182 The Emission Reduction Purchase

Agreement (ERPA) is an important document in carbon trading. CDM projects must go

through a public registration and issuance process designed to ensure real, measureable

and verifiable reductions that are additional to the emission reductions that would have

occurred without the project.

Table 5. Current and projected size of the international carbon markets.183

180 See Capoor & Ambrosi (2009). State and trends of the carbon market 2009. World Bank Report (26 May 2009). 181 http://assets.panda.org/downloads/newcarbonfinance_impact_of_auctioning_on_european_wholesale_electricity_prices_post_2012.pdf 182 ECE Report above n 23 at 33.

47

183 IFFACC above n 42 at 174.

Despite its growing size, carbon markets contribution to the financing of EERE projects

is not as significant as usually claimed because of the five main factors that determine

this contribution184:

i. Cost of the investment.

ii. Abatement yield of investment (tCO2 per dollar of investment) varies across

technologies.

iii. Revenue streams in EERE projects combine carbon revenue and non-carbon

stream and electricity price is the key, the higher the electricity price, the lower the

relative contribution of carbon finance.

iv. Cost of Capital, the higher it is, the lower the relative contribution of carbon

finance.

v. Carbon prices.

For the vast majority of EERE projects, the impact of carbon finance on returns and the

decisions to invest is marginal.185 “Financial markets are not yet converting future cash

flows into upfront finance. The carbon revenue arises from monetizing carbon credits,

but emissions reductions materialize over time and capital to finance a carbon

mitigation project is needed upfront.”186 This difficulty can be resolved by advance

payment from buyers (but increasing reluctance) or lending against the expected carbon

cash flow.

Although the international carbon market has generated a large amount of investment in

a very short period, its scale need to be increased considerably to finance the additional

investments needed for mitigation.187 Most proposals for expansion focus on expanding

the types of projects eligible under the CDM, such as sectoral or policy based CDM and

possible new mechanisms such as, reduced emissions from deforestation in developing

countries (REDD).188 REDD has now developed into REDD-plus and refers to “policy

184 ECE Report above n 23 at 34-35. 185 Ibid at 37. 186 Ibid at 37. 187 IFFACC above n 42 at 183.

48

188 Ibid at 184.

approaches and positive incentives on issues relating to reducing emissions from

deforestation and forest degradation in developing countries; and the role of

conservation, sustainable management of forests and enhancement if forest carbon

stocks in developing countries”.189 Other expansion options include land use, land use-

change, restoration of wetlands and revegetation, CCD activities, nuclear activities, use

of indicators etcetera.

Payment for Ecosystem Services190 (PES) can also be a cost-effective mechanism for

implementing mitigation and adaptation strategies and have the potential to deliver

multiple environmental services in a bundle, thereby providing multiple opportunities to

capture value and generate private sector funding such as through fisheries, tourism and

insurance industries. PES and other such market-based mechanisms can be powerful

tools for capturing values that can be quantified, and bring much needed new and

sustainable sources of funding to developing countries mitigation and adaptation

actions.191

Experience with the CDM indicates that a market mechanism is very effective at

identifying the most cost-effective mitigation measures but the stimulus provided varies

significantly across project types due to varying administrative, operational and

management challenges.192 For example, HFC-23 destruction projects have been more

profitable and easier to implement than transportation efficiency projects. The

disadvantage of adopting different mechanisms for different project types is possible

fragmentation of the market.193 Currently the expansion of global carbon markets is

constrained primarily by absence of long term political certainty of GHG reduction

targets post 2012.

189 FCCC/AWGLCA/2010/14 at 23. 190 Engel, S., Pagiola, S., & Wunder, S. (2008). Designing payments for environmental services in theory and practice: An overview of the issues. Ecological Economics, 65(4), 663-674. 191 Ibid. 192 IFFACC above n 42 at 184.

49

193 Ibid.

Several possible sources194 of expanded funding include auction of allowance for

international aviation and marine emissions, international Air Travel levy, funds to

invest foreign exchange reserves, a currency transaction tax (Tobin tax, a low tax on

large volume international currency transactions), Special Drawing Rights (SDRs) – a

form of intergovernmental currency by the IMF to serve as a supplemental form of

liquidity for member countries and converting non-performing debt to EERE

investments.

The Kyoto markets only really benefit a few countries and entire regions seem to have

missed out on the carbon market.195 The regional distribution of projects shows

limitations of markets in difficult investment conditions.196 The promotion of equitable

geographical distribution of projects has been underlined as key to improving access to

market-based mechanisms.197 All of these proposals are supported by various coalitions

and all have winners and losers. Proposals that ensure fair and transparent access to

funding as well as a wider participation of developing countries in the carbon market

may address accessibility issues.198 Some doubt and criticisms of the carbon markets

notably the volatile ‘price of carbon’ – the market has witnessed three crashes in the

short history of the ETS.199

194 Ibid at 203-207. 195 ECE Report above n 23 at 38. 196 FCCC/TP/2008/7, aboe n 11, at 105. 197 Ibid at 97. 198 Ibid.

50

199 ‘The European Union Emission Trading Scheme: a status report’, Mitsubishi Research Institute, Tokyo, April 2010 and D Helm, ‘EU climate-change policy – a critique’ in (eds) D Helm & C Hepburn, The Economics & Politics of Climate Change, Oxford: OUP, 2009.

6.0 Mitigation Projects in Developing Countries

It is recognised that for success, local institutional environments must be well

understood, and general solutions need to be at least partly customized for those

environments.200 Initial diagnosis through TA funds may consider a country’s EERE

opportunities; identify cost-effective technology options for mitigation and identify the

main barriers to EERE investments.201 The outcome of this analysis is a set of

investment priorities and market targets with a specialised focus.202

In 2006, the Joint Evaluation of the GEF Activity Cycle and Modalities concluded “that

GEF identification and approval of projects was inefficient and ineffective, and that

these processes were broken beyond repair”.203 Another evaluation was the Midterm

Review of the Resource Allocation Framework204 which concluded that the “system

was too complex, not sufficiently transparent, and too costly, leading to a low level of

utilization in many countries … resulting in complaints and tensions”.205 Consequently,

new systems and processes are under discussion and development.

To reach their full potential contribution toward global environmental benefits, GEF

projects need to be designed and implemented as much as possible to ensure local

ownership, continued government support, and ongoing availability of funding after

project closure.206 Given the initial high cost of alternatives and the limited technical

expertise, it is no surprise that development options have been based on the

200 Taylor et al (2008). Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond. (World Bank report). 201 ECE Report above n 23 at 46. 202 Ibid. 203 OPS4 above n 4 at 5. 204 Presented to the GEF Council in November 2008. 205 OPS4 above n 4 at 5.

51

206 OPS4 Executive Version above n 4 at 25.

consumption of fossil fuels despite massive potential for renewable energy, for example

in the ESCAP region.207

GEF provides grants to various types of projects ranging from several thousand dollars

to several million dollars. The GEF project categories are;

1. Full-Sized Projects (FSP) over US $1m;

2. Medium-Sized Projects (MSP) up to $1m;

3. Programmatic Approaches208 secure larger scale and sustainable impact on the

global environment, than a single FSP or MSP, through integration of global

environmental objectives into national or regional plans;

4. Enabling Activities (EA) is a basic building block to help countries prepare reports

and actions;

5. Climate Change Adaptation Projects can apply for funds under the GEF Trust Fund

as well as under the Special Climate Change Fund (SCCF), the Least Developed

Countries Fund (LDCF) and the Adaptation Fund;

6. Small Grants Programme (SGP) grants up to $50,000 for community-based projects

in the GEF focal areas.

Detailed procedures exist for the approval of “sub-projects” under larger programs209,

including umbrella projects; achievement of triggers for sequential tranches of FSPs or

the discrete phases that are sequenced to achieve the overall goal in a program,210 and

for cancellation and/ or termination of projects.211 Generally, the achievement of

207 ESCAP, Energy Security and Sustainable Development in Asia and the Pacific. Available at http://www.unescap.org/esd/energy/publications/theme_study/themstudy.pdf 208 A shift from a ‘strict’ Project approach to a Programmatic approach has been provided for in processing procedures outlined in an April 2008 GEF Council paper From Projects to Programs: Clarifying the Programmatic Approach in the GEF Portfolio, GEF/C.33/5. 209 Rules, procedures and objective criteria for project selection, pipeline management, approval of sub-projects and cancellation policy (GEF/C.30/3) GEF Council November 9, 2006 at 6 summarised in appendices. 210 Rules for projects. GEF/C.30/3 ibid, at 3-4.

52

211 Rules for projects GEF/C 30/3 ibid at 6-8.

triggers should follow a convincing process, clearly outlining the methodology

employed to assess the achievements and be verifiable by the GEF Secretariat.212

Each country has a designated officer (GEF Operational Focal Point) responsible for a

specific project cycle who assures projects are aligned to meet needs and priorities of

respective countries. Any eligible group or individual may propose project(s) but must

meet criteria213 for meaningful utilization of finances, made available by developed

nations.

Focal areas correspond to the wide range of environmental activities, the GEF’s climate

change programme is one of six focal areas, and is the second largest after its

biodiversity focal area.214 The largest share of GEF climate change resources has been

assigned to long-term mitigation projects envisaged to have “much greater impact

because the projects would drive down costs, build capacity, and start to put in place the

technology that can ultimately avoid GHG emissions”.215

6.1 Project Cycle

A revised project cycle216 reduced the number of processing steps and harmonizing the

documentation requirements with the standard procedures of the GEF Agencies, thus

reducing the time needed for project preparation. The new project cycle also facilitates

a more strategic programming of GEF resources and increases transparency in the

decision-making process by posting on the GEF Web site all the documents and

decisions related to each PIF submitted to the GEF Secretariat. The cycle ensures there 212 Rules for projects. GEF/C.30/3 ibid at 3. 213 See appendices. 214 Other focal areas are International waters, Ozone layer depletion, persistent organic pollutants, land degradation, multifocal. 215 FCCC/CP/1995/4.

53

216 GEF Policy Paper (November 2008). Policies and Procedures for the GEF Project Cycle.

is Council guidance on implementation, GEF CEO over-sight and cost-effective use of

resources and reviews.217

A key aspect of these processes is the project pipeline which plays the catalyst role and

bears the responsibility to ensure projects are performing satisfactorily and allowing

replication of successful models. Time-bound benchmarks for pipeline management

(concept identification to implementation) and review of other aspects of the project

will be built into the management information system.218 Under the previous system,

there were no time-bound benchmarks between milestones and concepts admitted into

the pipeline could remain inactive for a few years and accumulate in the pipeline.219

Such delays tied up GEF resources which could otherwise enable rapid progress

elsewhere.220 Expedited procedures were introduced a few years ago with for example,

MSPs and EAs to shorten the time required for project processing.221 Pipeline

management was introduced in late 2004 to improve the quality of the GEF pipeline,

and time-bound procedures with a 22 month time limit for FSPs (concept to

implementation) and various other enhancements.222

Co-financing arrangements enables GEF projects to leverage exceptionally high

amounts of co-financing223 but varies considerably across projects. Information on

materialization of co financing has been reported for 265 projects (78 percent).224 The

high co-financing ratio achieved is an indicator of GEF‘s “multiplier” effect in

217 Ibid at 9. 218 Rules for projects. GEF/C.30/3 above n 209, affirmed in the ‘Policies and Procedures for the GEF Project Cycle’, GEF Policy paper, November 2008 at 8. 219 Ibid at 1. 220 Ibid at 2. 221 Ibid at 2. 222 GEF Policy Paper (November 2008). Policies and Procedures for the GEF Project Cycle. 223 For example ratios range from USD6 per GEF dollar to over USD20 per GEF dollar in the IFFACC above n 42 at 164.

54

224 GEF Evaluation Office (2010). Annual Performance Report 2009 (Full report), June 8, 2010 at 1. Unedited version at http://www.thegef.org/gef/sites/thegef.org/files/documents/GEFEO-APR2009-fullrpt.pdf

generating additional resources for generation of global environmental benefits225. GEF

modalities will strongly support up-scaling.

GEF support has been crucial in putting climate change on the national agenda for many

developing countries and has enabled GHG emission reductions and market

transformations; however there is a need to step up the pace of reforms and further

simplification and streamlining of procedures.226

6.2 Project Sectors

Energy Efficiency and Renewable Energy (EERE) projects have a predominant role to

play in climate change mitigation.227 EE and RE are often lumped together due to their

common and important role in mitigation but there are key differences pertaining to the

purpose, nature, size of investment, awareness, skills and motivations of the sponsors,

nature of financial benefits, project risks as well as financing methods and sources.228

The implication is that the financier will need to deploy different skills and approaches

to appraise and finance EE and RE investments, thus consequences for capacity

building needs and design of financing mechanisms.

RE Project finance typically combines three features229;

a. Construction of a physical asset(s) that provides services for which a user can be

charged;

225 GEF Contributions to Agenda 21, GEF, June 2000 and the GEF Annual Performance Report 2009 ibid at 4. 226 FCCC/SBI/2009/MISC.10, Submission by Sweden re GEF on behalf of the EU at Copenhagen. 227 ECE Report above n 23 at 3. 228 Ibid at 8.

55

229 Ibid at 10.

b. The project asset(s) and its revenues are ‘ring-fenced’ in a special purpose

vehicle (SPV) to maximize leverage to limit the capital outlay and risk to

shareholders230;

c. Financing to the SPV is with limited recourse to project sponsor/ investors/

operators. The project revenues are the primary source of loan repayment and

the project asset(s) the main security for the loan.

Because of these characteristics, the legal documentation of project finance transactions

is complex and transaction costs high thus not suitable for EE projects as its ‘revenues’

accrue from savings and efficiency gains.231 EE financing requires an assessment of the

product market and its distinct risks whereas for RE it is sufficient to know the

technology specification and the electricity market.232 RE projects require assessment

of the regulatory framework, terms of contract and the credit-worthiness of the off-

taker.233 Feed-in tariffs are special, guaranteed prices for electricity from renewables

and an obligation for distributors or single buyers to purchase it at this price. This

relative simplicity and the attractive level of tariffs explain the boom in RE in many

parts of the world.234

A major obstacle of decarbonising the global energy supply is the high cost of

renewable except under the best of circumstances, i.e. when located at optimal sites;

close to existing transmission lines; displacing peak generation rather than base load,

and serving a constituency willing to pay higher prices.235 The bulk of emission

reductions arise from a smaller set of projects deploying other abatement technologies

mainly because of the higher warming potential of methane an industrial gases relative

230 UNEP SEFI (2009). The global financial crisis and its impact on renewable energy finance. Available at http://www.energy-base.org/fileadmin/media/sefi/docs/publications/Study_Financial_Crisis_impact_on_RE_.pdf 231 ECE Report above n 23 at 10. 232 Ibid at 10. 233 Ibid. 234 Ibid. See also REN21 (2009). Renewables: Global Status Report 2009 Update.

56

235 Hartwell paper above n 35 at 29.

to CO2 (which is the main GHG abated by EERE projects) and they also have much

higher profitability.236

Energy Efficiency (EE) is a powerful tool not only to fight climate change, but also to

promote sustainable development and reduce poverty because it reduces energy costs

and natural resource depletion thus help achieve MDGs and the objectives of the World

Summit on Sustainable Development (WSSD).237 Suitable regulatory regimes and

correct incentive structures are fundamental to the delivery of sustained self-financing

EE projects.238 The IEA, in its 2006 World Energy Outlook, estimated that on average

an additional $1 spent on efficiency avoids more than $2 in investment in electricity

supply.239 However, the main risk of EE projects is neither technical nor linked to the

energy market, but concerns whether the project is competitive in its main product

market and growth potential of the market.240 The long-held view that a cost saving is

not real revenue is another source of reticence.241

6.3 Performance Indicators

Nationally appropriate mitigation commitments or actions (NAMA), including

quantified emission limitation and reduction objectives, by all developed country

Parties. Developing country Parties NAMAs take place in the context of sustainable

development, supported and enabled by technology, financing and capacity-building.

Whether the mitigation actions (inputs) are resulting in the desired performance i.e.

mitigating climate change (outputs) is the task of performance indicators.

236 ECE Report above n 23 at 33. 237 Ibid at 1. 238 Ibid. 239 IEA (2006). World Energy Outlook. 240 ECE Report above n 23 at 11.

57

241 Ibid.

Performance indicators should be financial and physical including energy savings per

annum, RE installed capacity, co-financing ration, an indicator of organisational

efficiency, GHG reductions and GHG reductions per dollar of investment. The last

indicator is important for schemes supported by public finance because these funds are

scarce and it is essential to achieve the highest yield in terms of carbon abatement.242

Lessons and indicators should be derived for a results-based management framework,

including monitoring, evaluation, scientific advice, and learning thus enabling the GEF

to report on performance, outcomes and progress toward impact, and global

environmental benefits achieved.

A major element of the GEF 3 replenishment agenda was the establishment of a

framework for allocation to countries based on global environmental priorities and

performance. Two indices, the GEF Benefits Index and the GEF Performance Index,

are used in combination to determine the share of resources that each country is

allocated. The GEF Benefits Index measures the potential of a country to generate

global environmental benefits, and the GEF Performance Index measures a country’s

capacity, policies and practices relevant to successful implementation of GEF

programmes and projects243. The Performance Index relies on World Bank Country

Policy and Institutional Assessment data. Each country needs to work with a GEF

implementing/ executing agency244 to develop and prepare concepts for review, pipeline

entry and inclusion in a work programme.

Prior to adoption, the RAF’s was heavily criticized for seeking to use indicators (in

effect, eligibility criteria) for funding that Parties have not expressly agreed to.245 In the

end the GEF RAF was adopted with a few ‘amendments and understandings’ but

242 Ibid at 51. 243 IFFACC above n 42 at 165. 244 Listed in the appendices.

58

245 Mace MJ, Funding for Adaptation to climate change: UNFCCC and GEF Developments since COP-7, RECIEL 14(3)2005, 225-246 at 244-245.

structured for the most part as described in its respective technical paper.246 The

Midterm Review of the RAF247 (MTR) concluded that the system was too complex, not

sufficiently transparent, and too costly leading to a low level of utilization in many

countries; and rigid and skewed implementation rules, resulting in complaints and

tensions.248 Consequently a new system is in preparation for GEF-5.

The GEF Council requested its Secretariat, in collaboration with the GEF Agencies and

STAP, to improve the design of the resource allocation system and indices for GEF-5 in

light of experiences thus far and with comments for future issues.249 The latest version

of the System for a Transparent Allocation of Resources (STAR) improves on the

structure of the STAR design and refines indicators for each focal area and ensures

greater functionality, transparency, and structural simplicity250. The overall objective of

an allocation system for the GEF is for allocating resources in a transparent and

consistent manner based on global environmental priorities and country capacity,

policies and practices relevant to successful implementation of GEF projects.251 The

MTR had found that countries with small allocation face higher transaction costs in

accessing GEF funds than countries with larger allocations and restrictions to use funds

within a focal area has not been cost-effective. The review concluded that “maintaining

flexibility for greater cost-effectiveness is indispensible”252.

The system relies on the GPI and the GBIs and these are relevant for the present subject.

The GPI is a proxy for performance, considering actual performance from GEF projects,

commitment to put in place environmental policy and institutional frameworks, and

246 GEF/ C.26/2/Rev.1, Technical Paper on the GEF Resource Allocation Framework. See also Joint Draft Summary of the Chairs (GEF/C.26/CRP.1, 2 September 2005). 247 Presented to the GEF Council in November 2008. 248 OPS4 Executive Version above n 4 at 5. 249 GEF Council Meeting, GEF/C.36/6, October 9, 2009. System for a Transparent Allocation of Resources (STAR): Options and Scenarios. Available at http://www.thegef.org/gef/sites/thegef.org/files/documents/C.36.6%20STAR.FInal_.pdf 250 Ibid at iii. 251 GEF/C.27/Inf.8/Rev.1, 2005.

59

252 GEF/ME/C.34/2, November 2008 at 22.

governance and financial management. The GPI component is a critical balance to the

GBI, which is a broad proxy for the potential to generate global environmental benefits

from the resource perspective.253 STAR has been developed after reviewing a number

of indices currently in use, including the Human Development Index, the Environmental

Sustainability Index, the Environmental performance Index, and the MDG indicators.

After thorough consideration, a more robust resource allocation model was required and

the decision was made to refine the GEF-4 GPI. The GEF-5 GPI is, therefore a measure

of country performance based on two main sources254;

1. The World Bank’s Country Policy and Institutional Assessment (CPIA) derived

from the judgments of World Bank staff on country performance based on a set

of macroeconomic, structural, social, and governance criteria; and

2. A revised GEF Portfolio Performance Index (PPI).

The proposed new PPI is calculated using implementation progress ratings of project

implementation reports (PIR), as well as terminal evaluation reports (TER) ratings on

outcomes.255 TERs have more weighting because they come at the close of a project

and provide a better indication of objective achievement.

PPI = 0.4 x PIR + 0.6 x TER

The CPIA evaluates the quality256 of institutions and policies; it is the main criterion for

allocating country-credits from IDA and has been prepared annually since 1997. The

rating is against a set of 16 criteria grouped into four clusters;

253 GEF/C.36/6 STAR options above n 249, at 8. 254 Ibid at 8-13. 255 Ibid at 8.

60

256 Quality refers to how conducive are frameworks to fostering poverty reduction, sustainable growth and effective use of development resources (Van Waeyenberge 2008).

a. Economic management

b. Structural policies

c. Policies for social inclusion and equity

d. Public sector management and institutions.

Two sub-components for the CPIA are used in the GEF-5 STAR;

a. The Country Environmental Policy and Institutional Assessment Index (CEPIA)

and;

b. The Broad Framework Indicator (BFI) which examines the quality of

management in selected areas of the public sector including property rights and

rule-based governance; quality of budgetary and financial management;

efficiency of revenue mobilization; quality of public administration; and

transparency, accountability and corruption in the public sector.

The latest formula257 is;

GPI = 0.65 CEPIA + 0.15 BFI + 0.2 PPI

i.e. GPI = 0.20 X PPI + 0.65 X CEPIA + 0.15 X BFI

Concerns raised during the development of the RAF was the potential negative impact

on smaller, vulnerable countries,; SIDS; and countries with poor capacity. The

Secretariat introduced a premium derived from Purchasing Power Parity (PPP) Gross

Domestic Product (GDP), in addition to floors. This is in line with MDBs practice.258

These measures are a good proxy for socio-economic status among countries, thus a

PPP GDP Indicator (GDPI) is included in the overall STAR.

The GBI (a broad proxy for the potential to generate global environmental benefits from

the resource perspective) 259; develops indices for individual focal areas including

Climate Change (GBICC); Biodiversity (GBIBD); Land Degradation (GBILD); Persistent 257 Detailed calculations in Annex 2 of GEF/C.36/6, STAR options above n 249 at 18-26. 258 Ibid at 10.

61

259 Ibid at 8.

Organic Pollutants (GBIPOPS). GBICC is relevant for the present essay. The GBICC is

composed of two indicators. One is related to the emission of GHG, (CO2, CH4, N20,

HFCs, PFCs, SF6 in tons of CO2 equivalent in the latest year available adjusted by a

factor to reward decrease in carbon intensity (i.e. decrease in amount of emissions of

CO2 relative to GDP) excluding land use change, and the other is related to forest

cover, in the absence of an adequate indicator to track GHG budgets from land use

change (weighting given is 5 percent). This index is represented as “A country’s

emissions of GHG in tons of CO2 equivalents in the latest year available multiplied by

the country’s Carbon Intensity in 1990 divided by the country’s Carbon Intensity (latest

year).

The formula for the Climate Change GBI260 is:

GBICC = 0.95 x [GHG2007 x CI1990/CI2007] + 0.05 x [FC2005 x DF1990-2000/ DF2000-2005]

Where CI = carbon intensity, equal to GHG emissions divided by GDP, FC = forest

cover in hectares, DF = absolute value of average annual change in forest cover between

the years considered.

The chosen proxy is an imperfect indicator of overall carbon stocks, and there are

limitation with the data accuracy, thus subject to revision in GEF-6.261 The overall

score for each country for a particular focal area262, and where the GBI is the specific

index for that focal area is:

Country Score = GPI1.0 * GBI0.8 * GDP-0.04

260 Ibid at 23. 261 Ibid at 10-11.

62

262 Ibid at 13.

For comprehensiveness and comparability, standardised carbon emissions data available

from the Climate Analysis Indicators Tools (CAIT) unit for the World Resources

Institute are used. Issues and criticisms relating to topics under discussion at present in

the UNFCCC, such as LULUCF, REDD+ and AFOLU (agriculture, forestry and other

land-use).

7.0 Progress Towards Impact

The Parties acknowledge and agree on the most important aspects, and solutions have

been developed and are continuously being improved and implemented. A massive up-

scaling is required to avoid further major catastrophes. A measureable, reliable and

verifiable mechanism that ensures a system for transparent allocation of resources is

ready. Current level of funding is not sufficient to address the future financial and

investment flows needed to boost the catalyst into action so that mitigation of

anthropogenic interference with the climate system can be achieved.

Models for designing financing instruments and sources of financing are readily

available and the potential for EERE projects is vast throughout the world, allowing

win-win solutions for mitigation of climate change, the fight against poverty and the

quest for sustainability and energy security.263 We need to overcome numerous

obstacles and adjust to local contexts and needs while drawing on general validity of

measures taken. In the mid to long-run, self sustainability and cost-effectiveness of

EERE investments can only be ensured through sound reforms at the local, national and

international level.264 An appropriate regulatory framework is necessary but the more

politically costly yet fundamental step to take is restructuring subsidies of traditional

263 ECE Report above n 23 at 136.

63

264 Ibid.

fuels but assistance must be available to the most hardly hit groups, especially in

developing countries.265

Ultimately, successful mitigation of climate change relies on the ability of the

international community to create a regime providing strong incentives for lower

consumption levels and ensuring availability of knowledge, technology and finance at

the global scale.266 The transition from the Kyoto Protocol to an enhanced regime after

2012 is fundamental to fully deploy the potential of such financial mechanisms and

hopefully the next Conference of the Parties to the UNFCCC will decisively determine

their future usefulness and applicability.267

The Copenhagen Accord promised new and additional funds - $28-30bn but doubts

have surfaced surrounding how new and additional these funds are. Uncertainty about

the new regime and the effects of the economic crisis further hinder progress towards

mitigation aspirations of the global community. Carbon finance has not yet been really

successful in mobilizing the upfront finance that projects need to be built in the first

instance and mechanisms need to be upgraded in conjunction with the setting of more

stringent emission reduction targets. Carbon markets need to consolidate to become

more efficient and effective, leveraging much higher levels of investments for

mitigation.268 Transforming Blue Forests, PES schemes into emission reductions and a

tradable service on the carbon market presents significant challenges.

As the impacts of climate change become more obvious, particularly through extreme

weather events, using a wider range of risk management instruments, for example

catastrophe bonds and weather derivatives, to help address the macro-economic

financial impact of disasters, such as the Caribbean Climate Risk Insurance Facility

265 Ibid. 266 Ibid. 267 Ibid.

64

268 Ibid at 38.

(CCRIF)269, established under the coordination of the World Bank to provide member

states with index-based insurance against government losses caused by natural disasters.

This is an important shift from disaster response to ex-ante disaster management and

mitigation. The funds meet immediate liquidity problems while pooling risks reduces

premiums. Fees, premiums and other costs are borne by donors.

The present and ongoing financial crisis presents opportunities to shift investments as

part of economic recoveries on to a more efficient, low GHG-emitting and more

climate-resilient path.270 A radical departure from business-as-usual in climate policy

can begin with actions that command the broadest assent and achieve the quickest

results.271 By reducing the energy intensity of economies and the carbon intensity of

energy, many potential beneficiaries, independent of the politics of climate change272,

will assent to actions of respective leaders. Research, development, demonstration and

deployment (RDD&D) phase of radical decarbonisation could and should start at

once.273

Whatever the final solution may be, it should not overlook the inherent unknowability

of the future behaviour of climate-change drivers ranging from population growth to

economic performance to technological innovation. They introduce irresolvable

uncertainty independent of how well the basic science of climate is understood.274

There is still a need to change attitudes towards EERE investments that result in long

term reduction in GHG emissions through projects and programs that yield better global

environmental benefits. Climate change is a superwicked problem but it is also a

superwicked opportunity for the global community to embrace.

269 IFFACC above n 42 at 190. 270 FCCC/TP/2008/7 above n 11 at 107. 271 Hartwell Paper above n 35 at 20. 272 Ibid. 273 Ibid.

65

274 Ibid at 19.

8.0 Bibliography

Capoor, K and Ambrosi P (2009). State and trends of the carbon market 2009. World Bank Report (26 May 2009). Doornbosch & Knight (2008). What role for public finance in international climate change mitigation. OECD SG/SD/RT(2008)3 OECD Unclassified. Ellis J, Moarif S and JA Kim (2009). Reporting and recording GHG mitigation actions and support in a post-2012 climate framework. OECD/IEA: Paris. Engel, S., Pagiola, S., & Wunder, S. (2008). Designing payments for environmental services in theory and practice: An overview of the issues. Ecological Economics, 65(4), 663-674. ESCAP, Energy Security and Sustainable Development in Asia and the Pacific. Available at http://www.unescap.org/esd/energy/publications/theme_study/themstudy.pdf EU, ‘The European Union Emission Trading Scheme: a status report’, Mitsubishi Research Institute, Tokyo, April 2010 GEF (2005). Overview of burden/ sharing for GEF Replenishments. GEF/R.4/14. GEF Contributions to Agenda 21, GEF, June 2000 GEF Council Meeting, GEF/C.36/6, October 9, 2009. System for a Transparent Allocation of Resources (STAR): Options and Scenarios. GEF Council paper From Projects to Programs: Clarifying the Programmatic Approach in the GEF Portfolio, GEF/C.33/5, April 2008. GEF Council Meeting, GEF/C.30/3, November 9, 2006. Rules, Procedures and objective criteria for project selection, pipeline amanegement, approval of sub-projects, and cancellation policy. GEF Policy Paper (November 2008). Policies and Procedures for the GEF Project Cycle. GEF/ C.26/2/Rev.1, Technical Paper on the GEF Resource Allocation Framework. See also Joint Draft Summary of the Chairs (GEF/C.26/CRP.1, 2 September 2005).

66

GEF Evaluation Office (2010). OPS4, Progress Toward Impact, Fourth Overall Performance Study of the GEF. http://www.thegef.org/gef/sites/thegef.org/files/documents/FULL%20REPORT_OPS4%20Progress%20Toward%20Impact.pdf

GEF Evaluation Office (2010). Annual Performance Report 2009 (Full report), June 8, 2010 at 1. Unedited version at http://www.thegef.org/gef/sites/thegef.org/files/documents/GEFEO-APR2009-fullrpt.pdf GEF Secretariat. Sixth Meeting for the Fifth Replenishment of the GEF Trust Fund May 12, 2010, Paris, France, GEF-5 Programming Document, GEF/R.5/31, May 03, 2010. GEF, Report of the GEF to the COP, FCCC/CP/2009/9. Grubb M (2004). Technology innovation and climate change policy: an overview of issues and options. Keio Economic Studies. XLI.2, Available at http://www.econ.cam.ac.uk/rstaff/grubb/prevemp.htm Hamilton K, ‘Where Regulation is a Risk and an Opportunity’, in Will Oulton (ed), above n 36, at 243.

Hansen J, Ruedy R, Sato M and K Lo (2010). Global Surface Temperature Change. NASA Goddard Institute for Space Studies, New York, USA. Available at http://data.giss.nasa.gov/gistemp/2010july/

Helm D, ‘EU climate-change policy – a critique’ in (eds) D Helm & C Hepburn, The Economics & Politics of Climate Change, Oxford: OUP, 2009.

D Herr and GR Galland (2009). The Ocean and Climate Change. Tools and Guidelines for Action. IUCN, Gland, Switzerland. 72pp.

Horn RE & Robert P Weber, New Tools for Resolving the Wicked Problems: Mess mapping and resolution mapping processes 3 (MacroVU® Inc. & Strategy Kinetics LLC, 2007), available at http://www.strategykinetics.com/files/New_Tools_For_Resolving_Wicked_Problems.pdf Horst WJ Rittel & Melvin M Webber, Dilemmas in a General Theory of Planning, 4 POL’Y SCI. 155, 160-69 (1973). Hulme Mike (2007). Why We Disagree About Climate Change: Understanding Controversy, Inaction and Opportunity. Cambridge University Press, Cambrige 432 pp. Hulme Professor (2010). ‘The Hartwell Paper’: A new direction for Climate Policy after the crash of 2009’. [11 May 2010]. Available at http://eprints.lse.ac.uk/27939/ IEA, World Energy Outlook 2009 (WEO-9), 10/2009.

67

IPCC, Climate Change 2007: The Physical Science Basis (Contribution of Working Group I to the Fourth Assessment Report of the IPCC), Summary for Policymakers. Available at http://www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4-wg1-spm.pdf IPCC, Climate Change 2007: Report of the Working Group III on Mitigation. Cambridge: Cambridge University Press. Jan Corfee-Morlot, Bruno Guay (OECD), and Kate M Larsen (IEA), Financing Climate Change Mitigation: Towards a Framework for Measurement, Reporting and Verification. COM/ENV/EPOC/IEA/SLT(2009)6. Lazarus RJ (2009). ‘Super Wicked Problems and Climate Change: Restraining the Present to Liberate the Future’ Cornell Law Review at pp1155-1161, available at http://www.law.georgetown.edu/faculty/lazarus/docs/articles/Lazarus_SuperWickedProblems.pdf Levin K, Auld G, Bernstein S and Cashore B, Playing it Forward: Path Dependency, Progressive Incrementalism, and the “Super Wicked” Problem of Global Climate Change, 8-10 (July 7, 2007), available at http://environment.yale.edu/uploads/publications/2007levinbernsteincashoreauldWicked-Problems.pdf Mace MJ, Funding for Adaptation to climate change: UNFCCC and GEF Developments since COP-7, RECIEL 14(3)2005, 225-246 at 244-245. Mainelli M et al, ‘An Investment Portfolio View of the Low Carbon World’ in Will Oulton (Ed, 2009). Investment Opportunities for a Low Carbon World. GMB Publishing Ltd, London, UK, at 283. McKinsey & Company (2009). Pathway to a Low-Carbon Economy: Version 3 of the Global Greenhouse Gas Abatement Cost Curve. Pacala, Stephen; Socolow, Robert H. (2004). "Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with Current Technologies". Science (AAAS) 305 (5686): 968–972. V Ramanathan & G Carmichael, “Global and regional climate change due to black carbon”, Nature Geosci 1, 2008, at 221-227. Reuters (Geneva), “Nations meet on climate cash, UN sees long haul”, September 2, 2010. Seres S (2007) Analysis of Technology Transfer in CDM Projects (Report to the UNFCCC Registration and Issuance Unit).

68

Stern N (2006). Stern Review: The Economics of Climate Change. Summary of Conclusions.

Taylor et al (2008). Financing Energy Efficiency: Lessons from Brazil, China, India and Beyond. (World Bank report).

Nicholas Stern (2006). Report to the Prime Minister and the Chancellor of the Exchequer on the Economics of Climate Change. Available at http://siteresources.worldbank.org/INTINDONESIA/Resources/226271-1170911056314/3428109-1174614780539/SternReviewEng.pdf

Nordhaus William (2009). Economic Issues in designing a global agreement on global warming. http://climatecongress.ku.dk/speakers/professorwilliamnordhaus-plenaryspeaker-11march2009.pdf/

UNFCCC Secretariat Investment and Financial Flows to Address Climate Change October 2007. Available at http://unfccc.int/files/cooperation_and_support/financial_mechanism/application/pdf/background_paper.pdf UNFCCC Secretariat. Investment and financial flows to address climate change: an update (technical paper). FCCC/TP/2008/7, 26 November 2008. UNFCCC Secretariat. National Economic, Environment and Development Study [NEEDS] for Climate Change Initial Summary Report, December 2009. FCCC/SBI/2008/8. UNFCCC Secretariat. Report of the Global Environment Facility to the Conference of the Parties. FCCC/CP/2009/9, 27 October 2009. UNFCCC Secretariat. Negotiating Text Advance Version, FCCC/AWGLCA/2010/14, 13 August 2010. UNFCCC. FCCC/SBI/2009/MISC.10, Submission by Sweden re GEF on behalf of the EU at Copenhagen. UNCTAD (2008) World Investment Report 2008 – Transnational Corporations, Extractive Industries and development. Available at http://www.unctad.org/en/docs/wir2007_en.pdf UNDESA (2008). Climate Change: Technology Development and Technology Transfer. Available at http://www.un.org/esa/dsd/resources/res_pdfs/publications/sdt_tec/tec_technology_dev.pdf UNEP SEFI (2010). Global Trends in Sustainable Energy Investment 2010.

69

UNEP SEFI (2009). The global financial crisis and its impact on renewable energy finance. Available at http://www.energy-base.org/fileadmin/media/sefi/docs/publications/Study_Financial_Crisis_impact_on_RE_.pdf

UNEP Training manual, readings from lecture materials, online materials from UN, GEF, CDM etc websites.

United Nations (2010). Financing Global Climate Change Mitigation. ECE Energy Series No. 37 (ECE Report). Vandenbergh, Michael P. , Stern, Paul C., Gardner, Gerald T., Dietz, Thomas and Gilligan, Jonathan M., Implementing the Behavioral Wedge: Designing and Adopting Effective Carbon Emissions Reduction Programs (May 28, 2010). Environmental Law Reporter (ELR), Vol. 40, p. 10547, 2010; Vanderbilt Public Law Research Paper No. 10-26. Available at SSRN: http://ssrn.com/abstract=1617426 Vattenfall (2007). Global Mapping of Greenhouse Gas Abatement Opportunities up to 2030. Industry Sector Deep Drive. Verweij M & Thompson M (2006, eds). Clumsy solutions for a complex world: governance, politics and plural perceptions, Basingstoke: Palgrave Macmillan.

Will Oulton (Ed, 2009). Investment Opportunities for a Low Carbon World. GMB Publishing Ltd, London, UK.

Other Texts used in Research; Ben Boer, Ross Ramsay and Donald R Rothwell (1998). International Environemntal Law in the Asia Pacific. Kluwer Law International, the Netherlands. Chapter 7 is on climate change. Benjamin J Richardson (2002). Environmental Regulation through Financial Organisations: comparative perspectives on the industrialised nations. Kluwer Law International, Netherlands. Clarisse Frass-Ehrfeld (2009). Renewable Energy Sources: A Chance to Combat Climate Change. Kluwer Law International, the Netherlands. Sumudu A Atapattu (2006). Emerging Principles of international environemtnal law. Transnational Publishers Inc, Ardsley, USA.

70

8.1 List of Websites

Global Environment Facility (GEF) http://www.gefweb.org Implementing agencies of the GEF United Nations Development Programme (UNDP) http://www.undp.org United Nations Environment Programme (UNEP) http://www.unep.org World Bank Group http://www.worldbank.org Executing agencies of the GEF The African Development Bank (AfDB) http://www.afdb.org The Asian Development Bank (ADB) http://www.adb.org The European Bank for Reconstruction and Development (EBRD) http://www.ebrd.com The Inter-American Development Bank (IDB) http://www.iadb.org The Food and Agricultural Organization of the UN (FAO) http://www.fao.org The UN Industrial Development Organization (UNIDO) http://www.unido.org International Fund for Agricultural Development (IFAD) http://www.ifad.org United Nations Partners on Climate Change

United Nations Framework Convention on Climate Change

Convention on Biological Diversity

International Civil Aviation Organization

International Monetary Fund

Office of the High Commissioner for Human Rights

United Nations Department of Economic and Social Affairs

United Nations Economic Commission for Latin America and the Caribbean

United Nations Industrial Development Organization

United Nations University

World Tourism Organizations

Intergovernmental Panel on Climate Change

Food and Agriculture Organization

International Fund for Agricultural Development

71

International Strategy for Disaster Reduction

United Nations Commission on Sustainable Development

United Nations Development Programme

United Nations Educational, Scientific and Cultural Organization

United Nations Institute for Training and Research

Universal Postal Union

World Health Organization

United Nations Environment Programme

Global Climate Observing System

International Labour Organization

International Telecommunication Union

United Nations Programme on HIV/AIDS

United Nations Conference on Trade and Development

United Nations Economic Commission for Asia and the Pacific

United Nations Human Settlements Programme

World Bank

World Meteorological Organization

Global Environment Facility

International Maritime Organization

United Nations Office for the Coordination of Humanitarian Affairs

United Nations Convention to Combat Desertification

United Nations Economic Commission for Europe

United Nations High Commissioner for Refugees

United Nations Population Fund

World Food Programme

72

9.0 Appendices

9.1 Background

In 1988, the UN General Assembly determined that “climate change is a common concern of [hu]mankind” which required urgent action by all states. By 1992, sufficient scientific and political consensus was reached to allow 154 states to sign the United Nations Framework Convention on Climate Change (1992 UNFCCC Convention). The Convention was completed due to the explicit reliance on the concept of ‘common but differentiated responsibilities’. Parties to the Convention are guided by a range of principles that reflect the understanding of global environmental responsibility elaborated in the Rio Declaration on Environment and Development and Agenda 21. These principles include intergenerational equity, the precautionary approach, the right to sustainable development and the principle of common but differentiated responsibility.275

In light of scientific evidence from the Second Assessment Report by the IPCC, parties to the 1992 UNFCCC Convention recognised that commitments were ‘not adequate’ to achieve the aims of the Convention276, being primarily to stabilise greenhouse gas concentrations. The outcome of the first Conference of the Parties (COP-1)277 was the Berlin mandate which led to the adoption of the first Protocol to the Convention at the third COP (COP-3) in Kyoto, in December 1997. Many crucial technical and political issues were left unresolved, including, for example, emissions trading and the use of ‘sinks’. Outstanding issues proved highly controversial and negotiations broke down at COP-6 in Hague in 2000. In March 2001, the world’s largest emitter of CO2 the United States, announced it would not ratify the 1997 Kyoto Protocol. Despite this setback, the COP-7 in Marrakesh adopted a set of detailed rules (the Marrakesh Accords) for the Kyoto Protocol and the implementation of the Convention. These cover the ‘flexible mechanisms’ and the establishment of a compliance mechanism amongst other issues.

The major distinction between the Protocol and the Convention is that while the Convention encouraged industrialised countries to stabilize GHG emissions, the Protocol commits them to do so. Recognizing that developed countries are principally responsible for the current high levels of GHG emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a heavier burden on developed nations under the principle of “common but differentiated responsibilities.”278 The Kyoto Protocol has been in force since August 2005 and 275 UNFCCC Article 3. 276 Aims stated in UNFCCC Article 2. 277 Held in Berlin in 1995.

73

278 http://unfccc.int/kyoto_protocol/items/2830.php

current commitments end in 2012. Commitments could be fixed according to the economic status of each country, thus we have the developed states and countries with economies in transition (Annex 1 Parties) and developing countries279 (non-Annex 1 Parties) can voluntarily take commitments to limit emissions, but are not required to do so.280 However, all state parties are obliged to generally mitigate the causes and effects of climate change.

Under the Convention and its Kyoto Protocol, developed country Parties (specifically Annex II Parties) agreed to provide new and additional financial resources to assist developing country Parties in implementing the Convention (Article 4, paragraph 3) and the Protocol (Article 11). This assistance may be provided through the financial mechanism defined in Article 11 of the Convention and referred to in Article 11 of the Kyoto Protocol. In accordance with Article 11, paragraph 5, the developed country Parties may also provide, and developing country Parties avail themselves of, financial resources through bilateral, regional and other multilateral channels. Funding under the Convention and its Kyoto Protocol is available through the GEF Trust Fund, the SCCF and the LDCF, which all depend on voluntary contributions from donor countries. Funding is also available through the international carbon market established under the Convention and its Kyoto Protocol.

9.2 Projects Miscellaneous Notes

The Project Cycle281 at GEF for FSPs282 is as follows;

1. CEO review of Project Identification Form (PIF); 2. Council approval of work program; 3. CEO endorsement; 4. Implementation, supervision, monitoring and final evaluation.

The first step requires a PIF, endorsed by the country operational focal point, should include the indicative project amount, including project preparation grant, if planned, and Agency fees. Only need endorsement once in the project cycle however, operational focal points may reserve the right to review and endorse a project prior to submission to the GEF.283 The GEF Agencies will submit the PIF to the GEF Secretariat for review on a rolling basis and is circulated to all relevant Convention Secretariats for comments within five business days of circulation. The GEF Secretariat 279 Note that the Bali Action Plan uses developed and developing countries instead of ‘Annex’ language thus leaving options open. 280 UNEP Training Manual at 112. Available from http://www.iaia.org/training/unep-training-manual.aspx 281 http://www.thegef.org/gef/project_cycle 282 MSPs requires lesser scrutiny due to smaller scale whereas EAs follow expedited procedures and do not need to submit a PIF. All EAs are not eligible for PPGs with the exception of NCSA (project amount upto $200,000). If a NCSA is requesting a PPG, then the NCSA will need to submit a PIF as well.

74

283 GEF Policy Paper (November 2008). Policies and Procedures for the GEF Project Cycle. at 1.

completes review within another five days with relative comments and the PIF may be required to be resubmitted within a deadline and may be included in the work program on the GEF website for Council review. The review focuses on the following elements284:

i. Country eligibility; ii. Consistency with GEF strategic objectives and programs;

iii. Comparative advantage of the agency submitting the PIF; iv. Estimated cost of the project, including expected co-financing; v. Consistency of grant request with resources available in the focal area and

resource allocation framework allocations; vi. Milestones and agreements for further project preparation.

Once Secretariat completes review, the CEO considers the PIF for inclusion in a work program and is sent for STAP screening whereby comments of STAP posted on web with the PIF. All PIFs cleared for work program inclusion will be eligible for a GEF project preparation grant (PPG). The GEF CEO may approve a PPG for an amount based on financing the estimated incremental costs of project preparation (along with 10% of the PPG as Agency fees). The Trustee commits funds to the Agency once CEO approval is granted. If agreed milestones are not achieved, then the CEO consults with the recipient country and relevant GEF Agency to revise understandings or cancel the project concept.285

The second step is the approval of the work program by the CEO taking into account the level of resources available in the GEF Trust Fund. Programmatic approaches included in a work program should be submitted to Council in a Program Framework Document (PFD).286 The PFD contains the following key information287;

i. Background and program rationale; ii. Value-added of the program (including cost-effectiveness);

iii. Program objectives and results; iv. Consistency of program with national/ regional priorities; v. Alignment with GEF focal area strategies;

vi. Expected global environmental benefits; vii. Type of operations and potential scope of projects under the program;

viii. Risks and mitigation measures; ix. Program coordination, monitoring and evaluation; and x. Other relevant information including implementation, indicative financing

arrangements, results framework, identification of potential projects and timeline.

284 Ibid at 2. 285 Ibid at 2-3. 286 Ibid at 3.

75

287 Please refer to the April 2008 Council paper, “From Projects to Programs: Clarifying the Programmatic Approach in the GEF Portfolio” (GEF/C.33/6) for additional information on processing procedures for programmatic approaches.

The work program focus is on policy and strategic issues and overall programmatic coherence. The Council may remove a specific concepts if one or more Council member objects.288

The third step is the GEF CEO’s endorsement of the projects before approval by the GEF Agencies. The final funding amount is confirmed at this point Agencies transmit relevant documents plus a Request for CEO Endorsement which summarizes key information of the project which has been reviewed by the Secretariat for compliance with the following conditions of endorsement:

i. High likelihood of outcome delivery and global environmental benefits consistent with focal area strategies, with explanation for any changes in expected benefits since PIF approval;

ii. Funds are used cost-effectively, i.e. review of costs and budgets for project or program;

iii. Compliance with GEF’s monitoring and evaluation policies; and iv. PPG has been used in a cost-effective way

The fourth step consists of implementation supervision, monitoring and final evaluation whereby the Secretariat conducts an Annual Monitoring Review based on Project implementation Reports by Agencies and final evaluation reports are provided to the GEF Evaluation Office. A criterion for cancelation, suspensions or termination of projects is also provided for non-performing projects.289 The Objective Criteria for Selection of Projects for GEF financing is based on an assessment of a proposal against two broad measures:

1. whether it fits the GEF strategic objectives in the focal area; and 2. how it responds to relevant eligibility criteria at each stage of the project cycle.

These eligibility criteria cover:

a. country ownership; b. program and policy confirmation; c. financing, including administrative costs; d. institutional coordination and support; e. monitoring and evaluation; and f. Responsiveness to reviews.

Standards under the review criteria become more rigorous as it progresses from identification to pipeline entry to work program inclusion to CEO endorsement.290 In addition, beginning with GEF-4, projects in the biodiversity and climate change focal areas have to follow the rules and procedures of the resource allocation framework.291 Policies for approval of sub-projects under larger projects/ programs292

288 GEF Policy Paper (November 2008). Policies and Procedures for the GEF Project Cycle.at 4. 289 Ibid at 9. 290 Rules for projects GEF/C.30/3 above n 209 at 3. 291 Ibid.

76

292 Ibid at 6.

77

a. Sub-projects greater than $3 million: reviewed by

Secretariat and circulated to the Council for a 3-week comment period prior to CEO endorsement.

b. Sub-projects greater than $500,000 and up to $3 million reviewed by Secretariat and endorsed by CEO under delegated authority.

c. Sub-projects less than $500,000: to be approved by the implementing/ executing agency, following procedures that are agreed as part of the program/ project design. Approvals are reported to the Secretariat on an annual basis.

Miscellaneous Notes The way cities are planned, developed and managed have a major bearing on sustainable development and achieving the MDGs. “[A]lthough the current concentration of poverty, slum growth, social disruption and environmental degradation paints a threatening picture, urbanisation can be positive and has a great potential to play a key role in sustainable development. Cities concentrate poverty, but also represent the best hope of escaping it. Cities can create environmental problems, but they can also generate the solutions. The challenge is in learning how to exploit these possibilities”.293

The Sustainable Energy Finance Initiative (SEFI) is a platform providing financiers with the tools, support and the global network needed to conceive and manage investments in complex and rapidly changing marketplace for clean energy technologies. http://www.sefi.unep.org/

The Doing Business294 project provides objective measures of business regulations and their enforcement across 183 economies and selected cities at the sub national and regional level. Key variables include: resource assets (human/ capital/ raw materials); market size; infrastructure, economic performance and governance, taxes and incentives and the regulatory framework for investors.

293 UN Populations Fund (UNFPA) State of the World Population 2007 Report. 294 http://www.doingbusiness.org/ ; see also International Trade Centre http://www.intracen.org/menus/countries.htm