We speak to Alexandra Soezer, Climate Change Technical Adviser in the UNDP’s NDC Support Programme, on innovations the Programme is promoting in finance for the NDCs.
The UN Development Programme (UNDP) works in about 170 countries and territories, focussed on three goals – sustainable development, democratic governance and peacebuilding, and climate and disaster resilience. As part of the third mission, and following the ratification of the Paris agreement, UNDP established an NDC Support Programme, staffed by a 9-strong Global Support Unit of technical experts providing assistance to 31 countries.
Alexandra Soezer told us that the UNDP’s Paris-related work broadly comes under the aegis of the Nairobi Framework Partnership, originally set up by the UNFCCC to promote the use of its Clean Development Mechanism (CDM) but – again since Paris – now broadened to cover all carbon-based instruments supporting NDC implementation. The partnership brings together the UN climate change secretariat (UNFCCC), UNDP, UN environment, the World Bank and other main Multilateral Development Banks (MDBs), as well as industry associations such as IETA. Its main public face is the Climate Weeks organised annually in Africa, Asia Pacific and Latin America and the Caribbean.
CDM is just one carbon-based instrument that will come out of Paris once the rulebook is done
CDM is, however, just one of the carbon-based certification instruments contemplated under Article 6 of the Paris agreement and Soezer says that, once the Paris rulebook is finalised (the main business of this year’s COP in Poland), UNDP will be looking to promote all carbon-related instruments approved for use under Article 6 of the agreement.
The focus on use of Paris-related carbon instruments is reflected in UNDP’s other key linkages in the climate finance sphere. These are the World Bank’s “Innovate4Climate” initiative (previously Carbon Expo, covered by us here) and its Transformative Carbon Assets Facility (TCAF). This $500 million fund seeks to help developing countries create new classes of carbon assets associated with reduced GHG emissions and can be applied to policy changes (such as reductions in fossil fuel subsidies) as well as projects. As Soezer puts it, the facility can pay not only for emissions reductions, “but also policy transformation under the NDCs.”
UNDP is also an accredited entity of the Green Climate Fund (GCF), which is where it obtains funding for much of its grant-based adaptation work. The team in which Soezer works, however, is focussed on mitigation and on creating public-private partnerships. “Because we’re obviously not a bank,” she says, “we can only provide technical assistance, so we need to work with others who can provide the actual financial resources for implementation of NDC actions.”
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Soezer took us through initiatives the NDC Support Programme is working on in three countries in Africa – Kenya, The Gambia and Uganda. Most of these are deployed using an innovative climate finance instrument called the “Paris Climate Bond” or PCB (see Box). Another common thread is that a portion of the UNFCCC certified carbon credits generated by projects for which the UNDP helps structure and find finance for will be applied to the relevant country’s NDCs, helping them meet their Paris commitments. The UNFCCC provides a cancellation platform for these Certified Emissions Reductions (CERs) to prevent double counting, as well as issuing certificates with serial numbers to provide assurance that double-claiming is avoided.
The Paris Climate Bond
The Paris Climate Bond (PCB) financing concept, developed by London-based green finance firm Climate Mundial and global law firm Baker Mckenzie*, works at two levels – the initial financing of NDC-realted projects and the subsequent aggregation of these projects for securitisation and refinance.
- At the project finance level, a PCB entity will make loans to projects registered with current and future mechanisms of the UNFCCC in target developing countries.
- A PCB Investment Vehicle will then purchase these PCB loans and – most likely once projects are up and running, so their development risks are past – issue an appropriate range of capital markets instruments, including PCB commercial notes, to finance these purchases.
The PCB investment vehicles could be listed, offering immediate liquidity for investors. This, combined with the de-risked and long-term nature of the instruments issued, which could also be of a good size (in the hundreds of millions of dollars at a time), would enable the widest possible access to mainstream institutional investors, for whom the mantra for investment is “big and boring.”
The PCB has two advantages. First, the linkage to Paris compliant carbon instruments ensures that the use of funds is verifiably ‘green’ and can be measured as such without any double-counting or double-claiming, and where environmental integrity is certified using multilateral standards. And second, dinning is directly linked to helping countries meet their NDC commitments.
According to Daniel Rossetto, chief executive of Climate Mundial, “the PCB approach enables structuring of public and private finance to allocate risk and return in ways that can attract investors who, today, are not investing in climate-friendly infrastructure in developing countries. PCB therefore overcomes a market failure.”
Circular Economy in Kenya
In Kenya, the government is about to formally launch its Kenya Climate Change Fund (KCCF), for which it is targeting up to $50 million capitalisation in coming years, with the aim of this drawing in significant multiples of private sector finance. At the same time, a number of donors are funding the development of MRV system for the country’s NDC, which will also come into play in helping to measure “payments by results” structures that are expected to be a large element of financing structures facilitated under the KCCF.
In supporting the operationalisation of the Fund, the UNDP team has been looking for “large, transformative, national initiatives,” as Soezer puts it. Energy is likely to be an important sector, but the first project UNDP is involved with is the expansion of a waste management / circular economy initiative that has been successfully trialled in Nairobi.
In this public-private arrangement, the county governments organise the collection of waste around the city, which is then brought to sorting centres operated by private companies. These centres then pass the sorted waste to recycling companies, which are, again, privately run.
The recycling companies are already present in Kenya – “small but growing,” according to Soezer. The pinch point where KCCF / PCB funding will be applied is therefore the establishment of the sorting centres. KCCF will provide first-loss funding, and the PCB term debt for capex and working capital for the sorting centre operators. The interest rate on this debt will be reduced for the borrowers if they achieve agreed environmental impacts. The first two cities for the expansion will be Nakuru and Mombasa, with the eventual aim of having similar systems running in every major city within seven years.
Regional Grid Expansion in Gambia
In The Gambia, the UNDP team is designing a programme for renewable energy extensions to existing regional grids in the North and South of the country, mainly through solar schemes. The same basic approach to financing is being taken, with the most “junior’ (i.e. risky) layer being provided by a grant from multilateral climate funding. EUR 15 million of loans for the construction of infrastructure will then be provided by commercial investors, backed by the PCB mechanism. Soezer says that this an important example of an increasingly sophisticated approach to deploying public climate funds, aimed up scaling up available finance through levering private finance, rather than simply making grants for projects.
School Cookstoves in Uganda
In Uganda, two approaches are being tested, both applied to a revolving loan fund for the installation of institutional cookstoves in 18,000 schools over a period of up to 17 years. In the first implementation option, a special vehicle created by the government – the Uganda Energy Credit Capitalisation Company (UECCC) – will provide money to local commercial banks to onlend to schools. In the second structure, CDM project developers will create CERs based on the cookstove installations as they roll out, and EUR 15 million of finance from multilateral climate donors will be used to allow UNDP to pay for the UNFCCC-issued certificates and set them against Uganda’s NDC. With donor contributions backed by countries with robust credit ratings, there is limited risk for the project developers.
A similar programme is underway in the Philippines and Soezer says “it will be interesting for the climate finance community to see how efficient these structures can be, and to be able to compare how these different implementation pathways pan out in practice.”
Find out more about UNDP’s work, the Paris Climate Bond and other innovative climate instruments in this webinar recording