Multilateral development banks in carbon assets and climate financing in Africa

Multilateral development banks in carbon assets and climate financing in Africa

Alfred Bimha (MSc) and Godwell Nhamo (PhD)

Paper presented during the 8th African Finance Journal Conference, 14-16

April 2011, Windhoek, Namibia

Cell: 073-163-1114; [email protected]

Introduction

• Climate and carbon financing is still relatively new globally and in Africa, in particular

• Lattanzio (2010) observes that MDBs are now major players in global climate and carbon assets financing.

• The MDBs are viewed as having a comparative advantage compared to bilateral, multilateral, UN backed systems and other carbon asset financing mechanisms as they dispense funds more efficiently.

• The environmental focus of MDBs shifted significantly following the G8 leaders meeting that took place in Gleneagles in 2005.

• The Gleneagles meeting encouraged MDBs to play a leading role in sustainable development and environmentally friendly.

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Introduction …

• Among the multilateral and own carbon asset funds available to the MDBs and African countries are:

– Clean Technology Fund (CTF),– Congo Basin Forest Fund (FBFF), – Forest Carbon Partnership Facility (FCPF), – Forest Investment Program (FIP), – Pilot Program for Climate Resilience (PPCR), – Scaling-Up Renewable Energy Program for Low Income Countries (SREP) and – the Strategic Climate Fund.

• The World Bank Prototype Carbon Fund had grown to $2 billion worth in 2008 (Nakhooda, 2008).

• The World Bank has provided more than $4.8 billion of its own funds and more than $13.8 billion in co-financing on climate initiatives and currently operates more than 10 carbon funds (SPREP, 2010).

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Research Design

• Paper aims to establish key climate and carbon assets funding mechanisms in Africa that are drawn from and administered by the MDBs, especially the World Bank and the African Development Bank.

• Main question: Which climate and carbon assets financing mechanisms are in place from both the World Bank and the African Development Bank for use by African countries and under which conditions?

• Aligned to the set aim and research question are the following objectives: – to evaluate the extent to which MDBs have embraced and mainstreamed climate change

into their funding mechanisms; – to determine key climate and carbon asset funding mechanisms from the World Bank

and the African Development Bank and establish how such funds are utilised in Africa; and

– to establish if there is any difference in the approval process and disbursement protocols of funds for climate and carbon assets funding compared to other traditional portfolios of the World Bank and the African Development Bank.

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Theory of MDBs• MDBs are public financing institutions with mandates to alleviate

poverty through financing projects and policy in developing countries

• MDBs are now major players in networked global system of environmental financing

• Environmental focus of MDBs shifted significantly following the G8 leaders meeting Gleneagles in 2005

• Role of the USA in MDBs financing and membership is undisputable

• USA is the single largest donor to many MDBs funding including carbon and climate financing.

• MDBs cooperate

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Theory of MDBs …

• MDBs administer both market-based and concessional loans.

• Such loans are for governments or other organizations with government repayment guarantees.

• Ownership and share option for MDBs is complex with the WB owned by more than 180 member governments that are shareholders

• Number of shares a donor country holds roughly corresponds to the size of its economy.

• USA is the largest shareholder in WB, followed by Japan, Germany, UK and France. To this end, the G8 is very influential in WB policy regimes.

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Climate and carbon financing: The paradox

1. Nakhooda (2008) concedes that at a conceptual level, MDBs acknowledge that climate change considerations need to be mainstreamed into their operations.

2. MDBs have launched various new initiatives to address climate change since 2005

3. However, the paradox in all this is the fact that MDBs still invest heavily in sectors that are carbon intensive such as transport, oil and gas, electric power and mining (see next slide)

4. The WB is by far the largest MDB financing carbon assets and climate in Africa.

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The paradox: MDBs investment in carbon intensive sectors

World Bank (2007) IDB (2006) EBRD (2006) ADB (2006)0

5

10

15

20

25

30

35

40

9.8

2.1 1.6 2.8

34.2

6.4

1.6

7.4

28

33

25

38

Investment ($ Billion) Total Investment ($ Billion) % of Total Investment

Authors, based on Nakhooda (2008: 1)

World Bank carbon funds to Africa

Authors, based on World Bank (2010)

Fund Year Established

Amount % of African Portfolio (2009)

Prototype Carbon Fund 2000 $209 million 4

BioCarbon Fund 2004 $90.4 million 33 (Tranche 1)

20 (Tranche 2)

Community Development Carbon Fund

2003 $128.6 million 32

Italian Carbon Fund 2004 $155 million -

The Netherlands CDM Facility 2002 - 1

Danish Carbon Fund 2005 90 million Euro 4

Spanish Carbon Fund 2005 290 million Euro

1

Carbon Fund for Europe 2007 50 million Euro 34 (Middle East & North Africa

Clean Technology Fund 2008 $4.4 billion Not yet specified

Forest Carbon Partnership Facility 2008 $221.27 million Not yet specified

World Bank: Climate Investment Fund architecture

Authors

Climate Investment Fund (CIF)

Strategic Climate Fund (SCF)

Forest Investment Programme (FIP)

Pilot Program for Climate Resilience

(PPCR)

Scaling Up Renewable Energy

Program (SREP)

Clen Technology Fund (CTF)

World Bank: Carbon asset and climate funds (as of 09/10)

Authors, based on World Bank (2010: 25-31).

CTF FIP SREP PPCR FCPF0

500

1000

1500

2000

2500

3000

3500

4000

45004400

558307

972

221

$ (M

illio

ns)

Future of Carbon Markets: IFC Fund for CERs

• January 2011: The IFC launched a €150-million fund to forward purchase certified emission reductions (CERs or carbon credits) that were expected to be produced between 2013 to 2020, from GHG reducing projects, either directly financed by the IFC or by local banks financed by IFC.

• This gives some certainty to CDM projects after 2012

AfDB: Climate change programme

Source: Duarte (2010)

AFDB: Carbon and Climate Funds

Concessionary resources– Climate Investment Funds (CTF and SCF)– Global Environment Facility (GEF)– Congo Basin Forest Fund (CBFF)– Africa Water Facility (AWF)– ClimDev-Africa Special Fund– Bilateral trust funds

Private capital– Clean Energy Bonds

Market mechanisms– Africa Carbon Support Project– Carbon markets

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The Key challenges

1. In as much as the MDBs are increasingly getting involved in financing carbon and climate mitigation and adaptation, the key challenge has been in the traditional protocols for approval of funds.

2. Finances take even up to six years to be released and co-funding remains a challenge.

3. The G8 and other major shareholders in MDBs still have a stronghold in terms of dictating the terms and conditions upon which funds can be released.

4. If not managed well, MDBs carbon and climate funding can be used as a tool for regime change.

5. Many carbon credits projects require capacity to be build in Africa (of which capacity we do not have)

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The Key challenges

6. Many African countries still have weak governance structures and this has resulted in MDB finance being channelled elsewhere like the Central and Latin Americas, Asia and the Pacific.

7. As we present this paper there is confusion in the Arab World and naturally, carbon and climate financing follow normal patterns of FDI flows.

8. Conditions for investment need to be improved in Africa.

9. Following Cancun (COP16) that took place in Mexico, there is hope that the global carbon market will remain alive.

10. Efforts are being made for a smooth transition to a second Kyoto Protocol commitment period

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Future carbon and climate financing opportunities

11. New vibes in terms of the carbon and climate financing emerged from Cancun, among them:

a. The acceptance of CCS as CDM projectsb. Mainstreaming REDD(+) projects into global climate architecturec. Proposals to streamline the CDM project approval and evaluation

criteriad. WB’s promise to finance national ‘cap-and-trade’ markets – South

Africa will be a good target for this.

12. The world is therefore looking forward to a new, legally binding and fair climate deal in Durban 2011 (COP 17).

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Thank you !

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