an emerging architecture for nama financeccap.org/assets/an-emerging-architecture-for-nama...an...

Dialogue. I ns ight . S olut ions.

A n E m E r g I n g A r c h I t E c t u r E f o r n A m A f I n A n c E

WrIt tEn by:

Stacey Davis and Leila yim SurrattcontrIbutorS:

ned helme, brad Johnson and Erica Jue

m Ay 2013

An Emerging Architecture for NAMA Finance – May 2013 2

An Emerging Architecture for NAMA Finance

Executive Summary The international community has committed to increase financial support to developing countries for climate change mitigation and adaptation, and from a combination of public and private sources, to 100 billion USD per year by 2020. This is roughly a quarter of the total investment needed for climate mitigation in developing countries. The way that international financial support is deployed over the next few years in the lead up to a new legal and universal international climate agreement in 2015 will have a profound effect on whether the level of mitigation action achieved in developing countries increases to the scale needed to meet international climate mitigation goals.

The nationally appropriate mitigation action (NAMA) mechanism, which calls for greenhouse gas mitigation actions by developing countries in the context of sustainable development, supported and enabled by technology, financing and capacity building, and in a measurable, reportable and verifiable manner1, offers a framework to achieve broad-based climate actions in developing countries that contribute to meeting developing country greenhouse gas mitigation targets while realizing priority development objectives. By linking financial support with effective government policies and sustainable development outcomes, the NAMA mechanism offers a way for international financial support to achieve emissions reductions at a sector-wide scale, and offers the ability to mainstream climate into development finance. It can accomplish this through targeted interventions to create the conditions across a sector for profitable project-level low carbon investments.

To realize the desired sector-wide climate mitigation action, financial support is needed in each of four critical stages in the NAMA development process—capacity building, design, implementation and investment—with a goal of advancing policies and financial mechanisms that are ultimately designed to attract public and private sector investments in the desired low carbon technology and infrastructure.

The chosen policies and financial tools that make up the NAMA should work together to improve the climate for financial investment. Policy change can create consumer demand for the low carbon technology and infrastructure investments. Both policy changes and financial mechanisms should reduce risks and overcome barriers that might otherwise impede the desired low carbon investments.

1 Bali Action Plan, http://unfccc.int/resource/docs/2007/cop13/eng/06a01.pdf

http://unfccc.int/resource/docs/2007/cop13/eng/06a01.pdf


Examples of policies that can create demand for low carbon investment range from measures that price carbon (e.g., a cap-and-trade program), to those that provide financial incentives (e.g., a feed-in tariff) to requirements that mandate different practices (e.g., building codes). In other instances, policies can be used to overcome barriers to private sector investment, for example, through changes to government procedures that lower transaction costs for private investors, or through government procurement that demonstrates the technical and financial viability of a domestic low carbon investment. Financial mechanisms can similarly overcome lack of local financing options and overcome risks of failure by, for example, providing local banks with a low cost line of credit, and through guarantees that limit investment risks. CCAP’s work to develop a waste NAMA in Colombia offers one example of a comprehensive step-by-step approach to identifying a financial mechanism addressing specific barriers to private investment.

Developing countries should work to structure their NAMA policies and financial mechanisms to target the most important barriers to investment and create a favorable economic climate. Bilateral and multi-lateral funding sources, including the Green Climate Fund, should consider how providing financial support for well-crafted NAMAs might align with their own climate mitigation and development goals, and how they might use their finance to advance this vision for climate action.


Acknowledgements This paper was written by Stacey Davis, Senior Program Manager, and Leila Yim Surratt, Director, with direction, support and contributions from Ned Helme, President; and Brad Johnson, Senior Financial Advisor. Erica Jue, International Policy Associate, provided research support.

This paper is a product of the Mitigation Action Implementation Network (MAIN). We are grateful to the German International Climate Initiative (ICI), Environment Canada, and the Danish Ministry of Climate, Energy and Building for their generous support of the MAIN initiative. We also wish to thank the members of the ICI NAMA Finance Working Group including GIZ, UNDP, and Ecofys, who provided feedback on a prior draft, and particularly Sebastian Wienges of GIZ for his helpful written comments.

The views expressed in this paper represent those of CCAP and not necessarily those of any of the other institutions or individuals mentioned above. For further information, please contact Stacey Davis at [email protected].

mailto:[email protected]


Table of Contents

Executive Summary ....................................................................................................................................... 2

Introduction: Meeting Climate Goals with Climate Finance ......................................................................... 6

Evolving Strategies to Supporting Climate Mitigation in Developing Countries .......................................... 9

The Clean Development Mechanism ........................................................................................................ 9

Evolving to NAMAs .................................................................................................................................. 10

Coupling Policy and International Financial Support to Attract Private Investment .................................. 12

Some barriers that affect investment, and example policy and financial solutions ............................... 13

Finding the Right Mix of Policy and Finance ........................................................................................... 16

The Role of NAMA Finance at Different Stages of NAMA Development .................................................... 17

Conclusions ................................................................................................................................................. 19

References .................................................................................................................................................. 20


Introduction: Meeting Climate Goals with Climate Finance As agreed in the Copenhagen Accord in December 2009 and reiterated in the Cancun Agreements completed in December 2010, developed countries are committed to a goal of jointly mobilizing USD 100 billion dollars a year by 2020 to address the climate finance needs of developing countries. This support, for both climate mitigation and adaptation, will be provided in the context of meaningful mitigation action and transparent implementation by developing countries. Further, the funding will come from a wide variety of sources, including both public and private sources. While the international community has not pledged specific financial commitments for the years leading up to 2020, developing countries and many observers hope and expect that international financial support will increase during this period from the levels of new and additional support provided during the 2010 to 2012 “Fast Start Finance” period.

Significant greenhouse gas emissions reductions are needed from both developed and developing countries to preserve global goals to limit temperature increases (see Figure 1, below), and the majority of the mitigation opportunity resides in developing countries (see Figure 2, below). As a result, the extent to which international financial support is used to spur broad-based emissions reductions in developing countries will have a profound effect on whether and at what cost the international community is able to meet climate mitigation goals. Financial support is needed to complement and facilitate climate mitigation policies in developing countries, both to support achievement of existing developing country mitigation pledges as well as to increase ambition beyond those pledges.

Figure 1. Emissions Pledges through 2020 as Compared to a Global GHG Emissions Trajectory Maintaining a Likely Chance of Limiting Temperature Increases to within 2 degrees C.

Source: Adapted from UNEP 2012. http://www.unep.org/pdf/2012gapreport.pdf

http://www.unep.org/pdf/2012gapreport.pdf


Figure 2. The GHG Mitigation Opportunity in Developed and Developing Countries.

Source: IPCC 2007. http://www.ipcc.ch/graphics/syr/fig4-2.jpg

Further, while it is imperative to deploy the climate finance provided by the international community so as to achieve significant emissions reductions in developing countries, the levels of support being offered now and pledged in 2020 may not be enough to keep aggressive temperature goals in play. A 2009 analysis conducted by McKinsey and Company2 estimates the total incremental expenditures required for clean technology investments in developing countries across the full range of industry sectors (except agriculture and forestry) is USD 292 billion in 2020, rising to USD 559 billion in 2030 (McKinsey and Company 2009). These figures suggest the commitment made by parties to the UNFCCC for both mitigation and adaptation is just over a third of the financial investment that will be needed in 2020 for mitigation alone. The remainder will need to come from a range of sources, including international and domestic private sector investments and development aid.

Already, mitigation climate finance to developing countries was estimated at USD 92.5 billion per year in 2009/2010 and USD 112 billion per year in 2010/2011 (Climate Policy Initiative 2011 and 2012), roughly 180 billion short of what is needed by 2020. (Note that while the aggregate amount of funding to developing countries exceeds the amounts pledged by developed countries, much of this support is not additional. These values also include some developing country and domestic funding sources.) In 2009/2010, more than half of the estimated mitigation climate funding to developing countries (USD 54.6 billion) came from the private sector, with the remainder largely from bilateral (USD 19.1 billion)

2 This analysis was prepared in November 2009 by McKinsey and Company at CCAP’s request using the modeling resources developed for their January 2009 study, “Pathways to a Low-Carbon Economy.” For the purpose of this analysis, developing countries were defined to include Africa, China, India, Latin America, the Middle East and the rest of developing Asia. The currency conversion from Euros to US dollars was done on November 14, 2012 based on the exchange rate 1:1.26947 listed on Oanda.com.

http://www.ipcc.ch/graphics/syr/fig4-2.jpg


and multilateral (USD 18.6 billion) sources. In 2010/2011, the Climate Policy Initiative (CPI) observed growth in the bilateral and multilateral contributions to roughly USD 34 and 27 billion, respectively.

Total climate finance flows to both developing and developed countries in 2010/2011 were estimated between USD 343-385 billion (CPI 2012). The vast majority of this funding (USD 268 billion) came from the private sector, with the remainder coming from development finance institutions (USD 77 billion), and government budgets (USD 19 billion) (see Figure 3). In contrast, total annual foreign investment (foreign direct investment, private debt, portfolio equity) ranges from 600 billion USD to over a trillion USD in 2009-2012 (World Bank Group 2012).

Figure 3. The Majority of Climate Finance Comes from the Private Sector.

Source: CPI, The Landscape of Climate Finance 2012.

Directing more private sector spending towards low carbon technologies and infrastructure in developing countries can help fill the climate finance gap. Spending by multi-lateral and bilateral agencies on development assistance and other forms of support can also be channeled to invest in clean technology and infrastructure, and can play an important role in fostering private sector investment and/or making investments directly where private finance is weak. Central objectives in deploying international climate finance should be to attract these private sector resources and to mainstream climate goals into development finance.

Private Sector Finance

73%

Dedicated Climate Funds 0.4%

Government Budgets

5%

Development Finance

Institutions 21%

Total Climate Finance = USD 343-385 billion


Evolving Strategies to Supporting Climate Mitigation in Developing Countries The mechanisms used to support greenhouse gas mitigation in developing countries are evolving in ways that both increase the scale of mitigation and also improve the ability of developing country governments to ensure that the reductions are consistent with sustainable development. Further, these mechanisms are evolving in how they engage the private sector and spur investment.

The Clean Development Mechanism In the past decade, considerable international investment in developing country greenhouse gas mitigation has been funneled through the Clean Development Mechanism and similar offset mechanisms, which support mitigation on a project basis (or more recently, on a multi-project basis) and where emissions reductions are sold to meet developed country compliance obligations. Because developed countries often prefer to purchase Certified Emission Reduction units (CERs) rather than invest in the underlying CDM project, it is often a host country project developer that plays the main role in developing the project and generating CERs (OECD 2007, GIZ 2003). While this approach can involve fewer bureaucratic hurdles, under this scenario, the host country developer assumes the risks, and there is limited technology transfer from developed to developing countries (GIZ 2003).

In addition to not meeting technology transfer objectives, CDM projects tend to be focused on certain types of projects and sectors. Developers have an incentive to invest in the lowest-cost carbon mitigation opportunities, as this is where they can make the most profit. This is why many CDM investments focus on relatively low cost solutions such as landfill flaring, whereas there are fewer investments in certain comprehensive and sustainable low carbon development practices, including holistic waste management solutions and transit-oriented development.

Regardless of how the project proceeds, the role of the host country in CDM and other offset projects is typically quite limited. Under the CDM, the developing country approves the project and attests to the sustainable development benefits, but has limited control over the broader mitigation strategy. In fact, some have argued that the ability for private companies to raise finance under the CDM mechanism actually provides a disincentive for government policies, as some of the emissions reductions may no longer be additional (C2ES 2011). The developing country ultimately benefits from the investment and technology transfer, but the greenhouse gas reductions accrue to the CDM investor, and ultimately, to a developed country.

We have learned a great deal from the CDM experience related to financing of GHG mitigation projects and on methods for monitoring, reporting and verification at a project level. Moreover, considerable experience has been gained in deployment of clean technologies. At the same time, the project-level approvals and financing arrangements have been time consuming, and the overall scale of effort—about 1.15 GtCO2e issued over more than seven years—has been small compared to the annual emissions reductions that are needed. Further, while a growing number of the projects have involved renewable energy and energy efficiency and therefore would be expected to yield sustainable development


outcomes3, there is little documentation of such impacts. While CDM may still have a role to play to encourage low carbon investment in least developed countries, there is an increasing risk of double counting with broader climate strategies.

Going forward, as we work towards meeting the global mitigation goals, it is desirable to achieve greenhouse gas emissions reductions at a broader sector-wide or national scale, and the developing country emissions reductions should be in addition to those achieved by developed countries, not a replacement for them. Similarly, rather than selling low-cost project-level emissions reductions as offsets to ease compliance costs in developed countries, this “low-hanging fruit” should be used to meet voluntary pledges and future commitments in the developing host countries,. At the same time, we should continue to be cognizant of creating attractive opportunities for private sector investment through intelligent use of international financial support.

Evolving to NAMAs The nationally appropriate mitigation action (NAMA) mechanism calls for greenhouse gas mitigation actions by developing countries in the context of sustainable development, supported and enabled by technology, financing and capacity building, and in a measurable, reportable and verifiable manner4. NAMAs offer a framework to achieve broad-based climate actions in developing countries that contribute to meeting developing country greenhouse gas mitigation targets while realizing priority development objectives. Already, at least 33 developing countries are in various stages of developing more than 55 NAMAs and 34 feasibility studies, exhibiting a high level of interest and engagement. (Source: Ecofys NAMA Database, accessed April 23, 2013) Likewise, donor governments are starting to step up, offering funds in return for ambition. The German and United Kingdom governments jointly announced the NAMA Facility at COP18 in Doha, Qatar, with a goal of financing ambitious and transformational mitigation actions in developing countries.

Learning from the successes and limitations of the CDM – as well as from past unilateral, bilateral and multi-lateral programs, as showcased in CCAP’s The Road to NAMAs: Global Stories of Successful Climate Actions and Climate Finance Works – the NAMA framework offers a way to target international climate finance to have a far-reaching impact on global greenhouse gas emissions while also aligning with national sustainable development priorities. NAMAs can drive both the development of good policy design in developing countries and the application of effective financial tools to leverage climate finance to attract larger scales of public and private sector investment.

NAMA finance is unique in its flexibility. Whereas other sources of finance are restricted to achieving target rates of return and payback periods that may depend on the level of real and perceived risk, NAMA support can be deployed to finance policies or fund financial mechanisms that fundamentally modify the investment climate and risk profile for the desired low carbon investments. In fact, the best

3 A large number of CDM projects have entailed HFC destruction or flaring of methane, both of which would be expected to have little to no benefit from sustainable development perspective. 4 Bali Action Plan, http://unfccc.int/resource/docs/2007/cop13/eng/06a01.pdf

http://unfccc.int/resource/docs/2007/cop13/eng/06a01.pdf


use of international support is likely to differ from sector to sector, and from country to country, depending on the nature of the barriers that impede the desired types of low carbon investment.

Figure 4. The NAMA Vision: The NAMA attracts and funnels investment resources to projects consistent with the national NAMA policy changes and low carbon development goals.

NAMA finance ultimately seeks to attract investment towards priority national low carbon development goals from the larger and more restricted funding sources, including from bilateral and multi-lateral development institutions, national development banks and the private sector (both commercial debt and private equity). A NAMA that combines government policies and international financial support to reduce risk and/or boost investment returns can be successful in channeling these larger and disparate investment resources towards the desired low carbon technologies and infrastructure.

For the NAMA mechanism to show success, a larger share of international climate finance must be dedicated to support well-designed NAMAs—potentially through the Green Climate Fund as well as through bilateral and multilateral support channels. A relatively small investment in NAMAs can attract a much larger share of investment resources to low carbon projects.


Coupling Policy and International Financial Support to Attract Private Investment Effective NAMAs — on-the-ground technology and infrastructure changes in developing countries that shift key sectors to a more sustainable and lower carbon development path — can be achieved by coupling new or modified domestic policies with international finance. The design of the policy and the financial mechanism should both be targeted to spur private sector investment and focus development assistance towards the desired low carbon action. The policy change—especially use of mandates—can create demand for the low carbon investments. The financial mechanism can support those investments by reducing risks that might otherwise impede private investment or creating additional incentives that improve the investment return of projects.

Policy choices can encourage private sector investment by influencing the relative costs and returns of investment choices, reducing or reallocating risks of low carbon investments, and by motivating new business practices (Climate Policy Initiative 2011a). Financial mechanisms, in turn, can be used to overcome remaining barriers to the desired action. It is therefore desirable to coordinate policy instruments and financial mechanisms so that the approaches complement one another and avoid duplication of effort. For example, a policy that fundamentally lowers the cost of the low carbon option relative to other choices may reduce or eliminate the need for a financial mechanism that lowers the effective interest rate. And together, government policies and financial mechanisms can help create a positive climate for low carbon investments (see the above text box).

While developing countries may wish to focus on the international finance component and how it will be used to address barriers and overcome risks, donor governments and institutions are seeking a shared approach, where ideally new developing country policies create demand for low carbon technology and infrastructure. At a minimum, before making a financial commitment, prospective donors may want to see that the developing country government has carefully evaluated and plans to resolve all the significant barriers to the low carbon investment, not just financial barriers that stand to benefit directly from the requested international financial support. In fact, some donors may expect a domestic policy component as evidence that the developing country is committed to the action and/or may view their finance as a reward for the developing country’s adoption of aggressive domestic policy.

What do investors want from policy? (Adapted from Fulton 2012)

Transparency – The policies and incentives should be easily understood and open to all.

Certainty – The policies and incentives should provide a clear and consistent signal over the investment timeframe.

Bankability – Incentives should lead to financeable and profitable investments.


The following section reviews a number of the barriers that affect private sector investment, along with example policy and financial solutions. In addition, we share an example process for identifying the policy and financial aspects to a waste NAMA in Colombia.

Some barriers that affect investment, and example policy and financial solutions The use of government policies and financial mechanisms should be targeted to address specific barriers that prevent private sector and international development investment in the desired low carbon technologies and infrastructure. Some example barriers and solutions are given below.

The cost is not competitive with alternatives

In cases where the cost of the low carbon action is not competitive with the alternative, a fundamental policy shift may be needed to change the playing field. If the cost is not competitive sometimes, this might call for more nuanced interventions.

• Policy Options: To the extent that external costs (e.g., health, welfare and environmental costs) of the higher carbon alternatives have not been fully factored into the actual costs, one solution (though often politically difficult) could be to put in place a carbon tax, cap-and-trade program or tradable intensity standard that would establish a price on carbon. If the low carbon solution is not cost competitive due to subsidies given to competing high carbon energy sources, removing existing subsidies for conventional energy would create a level playing field and improve the relative competitiveness of the desired investments. If a carbon price or subsidy removal isn’t practicable, the relative costs of alternative energy solutions can be addressed by putting in place preferential subsidies for low carbon solutions. Examples of subsidy policies include feed-in tariffs and tax incentives. Temporary subsidies can build experience with the target technologies and help bring down costs. Building codes, appliance standards, and renewable portfolio standards mandate the desired clean energy investments and drive demand for financing. Over time, such goals and standards can build experience with new technologies and greater economies of scale, leading to lower costs. To address issues of high up-front costs, governments can support performance contracting through legislation and procurement rules that encourage such contracts (LBNL 2002).

• Financial Mechanisms: In cases where the low carbon action is close to being cost competitive, having lower cost financing options can make those projects viable. For example, if local interest rates are too high for low carbon projects to be affordable, financial mechanisms could be used to provide co-financing at a lower interest rate, alongside local debt, resulting in an average rate that would make the projects affordable. Concessional financing to extend the terms of the loan can reduce annual debt service payments improve a project’s financial viability. In the instance that the problem is a higher first cost than alternatives, but where the overall cost is lower, the solution could involve debt financing, either directly, or through third parties willing to assume some of the technology risk such as energy service companies.


The investments could make money, but local financing options are limited

In general, if the problem relates to inadequacy of local banking products, this often calls for a financial mechanism. Capacity support and education can also build experience and lead banks to change their investment practices and/or lending terms.

• Policy Options: In cases where local banks are inexperienced with certain low carbon technologies, government measures, such as direct education, demonstration projects, and government procurement can help to build the technical knowledge within the banks to increase lending.

• Financial Mechanisms: To the extent that capital is limited, providing local banks with a low cost line of credit will increase the availability of funds for climate investments. Where companies are unable to take on more debt, lease financing provides a way for companies to cover the cost of the climate project through their operating income rather than debt financing. Local banks may not be willing to finance small-scale energy efficiency or renewable energy due to high transaction costs. In these cases, a special purpose entity could be established that would bundle similar projects for joint financing.

The investments could make money but for existing government policies

Sometimes existing government policies and procedures pose a barrier to and increase the costs of low carbon investments. In other cases, government policies may help, but the duration of the policies are not well aligned with the desired investment.

• Policy Options: In some cases, permitting, siting or other procedural hurdles make it difficult to invest in low carbon solutions, increasing the time required for project delivery and lowering the success rate. These extra risks are factored into decision making on the project, and require higher returns before the investment will move forward. (CPI 2011a) In such instances, changes to government policies or procedures could lower the transaction costs and improve the success rate. Greater clarity on the policies can also help streamline the investment process and reduce costs for the private sector. In another example, stand-by rates and interconnection standards applicable to energy sources that want to connect to the power grid may not recognize the value of the low emitting resource and the related benefits such as enhanced electric system reliability. In such instances, fees or standards could be adjusted. In some cases, there are already policies in place that favor low carbon investments (e.g., tax credits), but the duration of the policies does not match well with the duration of the financial investment. In such instances, policies can be authorized for a longer period.

The private sector avoids investments due to high real or perceived risks of project failure

In some cases, banks have concerns about whether the low carbon solution will be successful from a technical standpoint or due to concerns about the credit-worthiness of the loan recipient. For example, will it deliver the needed renewable energy or energy savings? Will the company go out of business


before implementing the planned technological or infrastructure change? In other cases, end users are reluctant to invest in new technologies due to perceived risks.

• Policy Options: If the risk of technology failure is more perceived than real (for example, where a particular technology is well proven elsewhere but has never been used domestically or in the target sector), the government can advance a demonstration project to improve perception, either through government procurement, or using international finance.

• Financial Mechanisms: Concerns about the risk of technology failure can be addressed through a performance guarantee. Concerns about the credit worthiness of the borrower can be addressed through a partial credit risk guarantee. Concerns about currency risk can be addressed through futures contracts, options, or other hedging strategies. Concerns about political risk can be addressed through political risk insurance or guarantees.

The investments could make money but there is a lack of supporting infrastructure

In some cases, new physical infrastructure is necessary for the low carbon investments to advance. For example, in the case of renewable energy, transmission capacity may be needed to get the renewable energy to market.

• Policy Options: Government policy can provide a mechanism for new infrastructure to be built. For example, in the case of Mexico, a mechanism was established to allow renewable energy investors to bid for shares of new transmission to particular destinations. (See, for example, CCAP’s Mexico Renewable Energy Case Study.) In this way, the investment costs of the new infrastructure are apportioned to individual investors and wrapped into the private sector investment costs.


Finding the Right Mix of Policy and Finance Finding the right mix of policy and financial solutions is the main challenge in designing a NAMA that will effectively catalyze private sector investment and achieve the desired scale of mitigation and sustainable development outcomes. The scoping assessment, technical assistance, NAMA design and outreach used in designing the Colombia Waste NAMA (described below) provides an example approach to screening NAMAs that could be helpful as others embark on this process.

Building a Waste NAMA in Colombia

Objective: To improve comprehensive waste management in the country, including reducing the amount of waste going to landfills and reusing the waste in ways that reduce emissions and produce economic benefits, Colombia is developing a NAMA for the solid waste sector that will reduce greenhouse gas emissions by promoting alternatives to landfill disposal.

Analysis: CCAP supported this effort by analyzing various technical solutions for waste management and determining which could be economically viable and environmentally attractive. The analysis took into account the potential revenue from alternative uses of the waste, including the generation of compost, recyclables and refuse-derived fuel. Using this information, CCAP devised a business model and various financial structuring scenarios to implement waste treatment facilities that can generate useable commodities from solid waste.

Barriers: One of the barriers to implementing waste treatment facilities is that under current regulations, it is much more profitable for waste companies to dispose of waste in landfills instead of diverting waste for recycling, compost or other uses. In addition, the equity capital needed to finance a facility is difficult to obtain in Colombia and could be prohibitively expensive, given requirements for higher rates of return for equity capital over debt and the lack of a track record implementing new solid waste technologies in Colombia. With significant input from a range of stakeholders including the federal and local governments, waste disposal companies, local banks, and development banks, Colombia is developing a NAMA to address these barriers.

NAMA Policy and Financial Mechanism: The federal government is revising their waste regulations to remove the biases that favor landfill disposal over waste treatment and to create policy drivers for new and holistic approaches to waste management. This policy change will be coupled with a NAMA financial mechanism. With international support, Colombia proposes to establish a revolving Equity Fund to contribute equity to waste treatment facility projects. The equity financing will attract development and/or commercial bank debt financing. In this way, the NAMA will combine policy reform and a new financial mechanism to catalyze private sector and development investments to transform the waste sector in Colombia.


The Role of NAMA Finance at Different Stages of NAMA Development There are four stages where support is needed to develop a NAMA and ultimately achieve the implementation of low carbon projects: capacity building in the developing country, NAMA design, NAMA implementation, and investment in low carbon technology or infrastructure projects. Different types of financial support are required to advance NAMAs through these different stages of development. Some of this support is specific to NAMAs, while other support is more general, and can be dedicated to NAMAs or NAMA-like actions. The different types of support are given in different forms (e.g., grants, loans, loan guarantees, equity investments) and at different scales. There are a variety of programs from developed countries and development banks which can fund these different stages of NAMA development and implementation. CCAP describes a number of such programs in its recent paper Identifying Potential Sources of NAMA Finance (May 2013). As developed countries consider how to allocate their climate finance to support developing countries’ efforts to address climate change, it is critical that international support flow to all four stages of developing and implementing NAMAs.

1. Capacity Building

A number of governments and institutions provide grant support and direct assistance to developing countries to develop the local capacity needed to advance climate actions. Prominent among these are investments to support low emissions development strategies, which can include long-term economy-wide climate goals as well as identifying short-term actions. These short-term actions could form the basis of NAMAs. Other capacity support seeks to identify and characterize climate mitigation options within a specific sector, or provide more generalized support for the institutions and staff that will be called on to implement the climate actions. For example, capacity support may be needed to modify fundamental legal and market institutions or intellectual property rights to be supportive of private sector investment. Capacity support could also be used to undertake energy audits, wind mapping and similar studies to better understand the cost and mitigation potential of specific low carbon investments.

2. NAMA Design

At the NAMA design stage, donor governments and institutions make grants or issue contracts to support design and development of NAMAs, potentially including support for technical analysis of mitigation actions, policies and financial mechanisms, stakeholder engagement, demonstration projects and pre-feasibility studies. This initial stage in the NAMA process draws on low emissions development strategies and government sustainable development priorities to create compelling and well-defined packages of policy designs and financial mechanisms that will overcome the identified barriers and are designed to win additional implementation-scale support. The NAMA design could be entered into the UNFCCC NAMA Registry and/or shared directly with potential funders to win implementation support.


3. NAMA Implementation

In this next stage, donor governments and institutions will invest funds to support implementation of NAMA policies and financial mechanisms. These investments are made possible by the prior work to build capacity and design NAMAs, and seek to encourage low carbon technology and infrastructure investments by the public and private sectors. Importantly, through well-crafted policies and financial mechanisms, support for NAMA implementation can help shape the direction of more general public and private sector resources, attracting larger and more wide-spread investments consistent with the goals of the NAMA. Countries and institutions funding NAMA implementation are likely to conduct an independent analysis of the NAMA proposal to ensure their support will yield the desired outcomes.

4. Investment in Low Carbon Technology and Infrastructure Projects

At the other end of the spectrum, international finance institutions, development banks and the private sector invest directly in low carbon technology and infrastructure projects. These institutions are generally restricted to financing projects that will achieve target rates of return. NAMAs that combine government policies and financial mechanisms can help overcome barriers and risks and improve the profitability for investors, ultimately attracting more resources to low-carbon development projects. Development banks and agencies may issue concessionary (or no-interest) loans that will eventually be paid back, whereas the private sector (commercial banks and developers) invests where there are profit-making opportunities consistent with their risk-return objectives.

Figure 5. Types of NAMA Funding.


Conclusions International climate finance pledged through the UNFCCC process will be insufficient to achieve the needed scale of climate investment in developing countries. The remainder will need to come from a range of sources, including private sector and international development bank investments, and development aid. While the CDM has been successful in encouraging a number of projects, the overall scale of effort is insufficient and the emissions reductions achieved are not additional to developed country commitments. Nationally appropriate mitigation actions, or NAMAs, have gained momentum within a number of developing countries and provide a vehicle to leverage international climate finance and attract deeper financial resources to the climate challenge.

NAMAs have the potential to dramatically scale up mitigation activities in developing countries, and NAMA support is critical to realizing this opportunity.

• The NAMA mechanism offers a framework to achieve broad-based climate actions in developing countries. NAMAs can achieve emissions reductions at a sector- or national-scale, contributing to meeting developing country greenhouse gas mitigation targets while also meeting national sustainable development goals.

• NAMAs should include both policies and financial mechanisms in order to reduce investment risk and improve the investment climate for mitigation projects. By doing so, NAMAs can create the conditions for scaling up private sector investments, leading to a pipeline of low-carbon projects within a sector, and ultimately the transformation of the sector to a low-carbon pathway. Government policies can be used to create demand for low carbon investment, and both policies and financial mechanisms can be targeted to overcome specific barriers preventing private sector investment.

• A wide range of international development finance, which can support climate investments, is currently available from a number of sources including multilateral banks, bilateral development banks, national development banks in developing countries, and private sector investors including commercial banks and developers. Through support for the design and implementation of effective NAMAs, NAMA funds can effectively channel these international development funds towards low carbon technology and infrastructure projects. As a result of such leveraging, a relatively small amount of NAMA finance can translate to significant international investment and on-the-ground action.

• In order to realize the transformational potential of NAMAs, international financial support is needed to support all four stages of NAMA development including capacity building, design, implementation, and ultimately investment in low-carbon projects.

Developing countries should work to structure their NAMA policies and financial mechanisms to target the most important barriers to investment and create a favorable economic climate. Bilateral and multi-lateral funding sources, including the Green Climate Fund, should consider how providing financial support for well-crafted NAMAs might align with their own climate mitigation and development goals, and how they might use their finance to advance this vision for climate action.


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Review of the First International Offset Program, Prepared for the Pew Center on Global Climate Change, March 2011. http://www.c2es.org/docUploads/clean-development-mechanism-review-of-first-international-offset-program.pdf

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3. CCAP 2012. Davis, Stacey et al., Mexico’s Renewable Energy Program: A Step-by-Step Approach for Overcoming Barriers to Renewable Energy Deployment, Discussion Draft, Center for Clean Air Policy, October 11, 2011. http://ccap.org/assets/Mexicos-Renewable-Energy-Program-A-Step-by-Step-Approach-for-Overcoming-Barriers-to-Renewable-Energy-Deployment_CCAP-October-2011.pdf

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Drive Investment,” Deutsche Bank DB Climate Change Advisors, PowerPoint presentation, May 14, 2012.

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S u p p o r t E D by:

Executive SummaryAcknowledgementsIntroduction: Meeting Climate Goals with Climate FinanceEvolving Strategies to Supporting Climate Mitigation in Developing CountriesThe Clean Development MechanismEvolving to NAMAs

Coupling Policy and International Financial Support to Attract Private InvestmentSome barriers that affect investment, and example policy and financial solutionsFinding the Right Mix of Policy and Finance

The Role of NAMA Finance at Different Stages of NAMA DevelopmentConclusionsReferences

an emerging architecture for nama financeccap.org/assets/an-emerging-architecture-for-nama...an...

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