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Opportunities and Challenges for Financing the Development Dividend

Opportunities and Challenges for Financing the Development Dividend. IISD Bonn Panel May 17, 2006 Diana Smallridge Managing Director. IISD Multinational, Multi-Discipline Task Force Goal.

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Opportunities and Challenges for Financing the Development Dividend

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  1. Opportunities and Challenges for Financing the Development Dividend IISD Bonn Panel May 17, 2006 Diana Smallridge Managing Director

  2. IISD Multinational, Multi-Discipline Task Force Goal • Increase understanding of the challenges in providing enhanced socio-economic and environmental benefits – the “development dividend” – via CDM • Present options for enhancing the CDM development dividend while recognizing the need of Annex I countries to access cost-effective emission reduction credits

  3. Financing the Development Dividend • Understanding the Challenge • Case Studies • Existing Finance Support Mechanisms • Supply and Demand Side Finance Gaps • Possible Solutions

  4. Understanding the Challenge Project proponents face several key financing challenges: • Seeking financing from a variety of local and international sources • Understanding what investors and lenders are looking for in a “bankable” project • Thinking like a banker, investor or buyer of carbon credits • Finding the right risk/reward balance for each project funder

  5. Understanding the Challenge Project funders need to assess not only “traditional” risk/rewards but also new CDM risk/rewards: • Investment environment in host country • traditional project risk analysis plus commitment to environment • Project viability • traditional project risk analysis plus new technology, non-traditional feedstock, non-traditional purchasers and new stakeholder communities • Carbon credit revenues • New potential source of finance, security enhancement, and contribution to equity ROI

  6. Understanding the Challenge As a result, development dividend projects often give rise to financing gaps in terms of: • Defining the risk/reward balance • Assessing these risks and rewards • Valuing the risk-factored rewards in terms of enhanced ROI to investors or security to lenders

  7. Case Studies • Four projects were reviewed, each having a strong development dividend but difficulty sourcing financing: • Low cost housing energy upgrade project in South Africa • Bellville South landfill gas recovery project in South Africa • The Vanilla Jatropha project in Kenya • Solar technology for electricity provision in Kenya • Case study analysis included country, project, and carbon credit challenges

  8. Case Studies: Country Challenges • South Africa – relatively stronger investment climate • Weak labour skills and education • Crime, theft & disorder • Kenya – relatively weaker investment climate • Crime, theft & disorder, corruption • Cost of financing • Anti-competitive practices, tax administration • Weak infrastructure • Uncertain economic and regulatory policy

  9. Case Studies: Project Challenges • Insufficient local supply capacity, retail level credit risks • capacity to supply solar water heaters • credit risk of purchasers of bio diesel fuels • Relatively small carbon credit flow, ownership and delivery is uncertain • Kyoto - CDM process and carbon credit benefits not well understood by project decision makers • Need for grant funding or similar financial assistance

  10. Case Studies: Carbon Credit Challenges • CER delivery risk uncertainty • CER volume may be too small to justify costs and risks to buyers • Voluntary market/offset buyers not aware of the projects and their relatively high SD/DD value • Ownership of carbon credits may not be clear: • Kenya solar project – carbon credits owned by project sponsors or rural schools and home owners?

  11. Existing Financing Support Mechanisms Traditional and emerging potential sources of financing include: • Multilaterals, Carbon Funds, ECAs, Equity Providers • Commercial Banks (local and international), Regional Development Banks • Other stakeholders (e.g. local, regional and national governments) • Individual Carbon Credit Buyers • ODA and Others

  12. Existing Financing Support Mechanisms Key themes: • Not driven primarily by sustainable development • Carbon funds focus on compliant CERs • ECAs focus on “export” benefits • Banks, equity, insurers prefer large scale projects where transaction costs can be absorbed more easily • Risk/reward is not in balance • Equity focus on ROI • Debt providers focus on min. term, max. interest and adequate security • Scarce technical and resource capacity to handle “one off” or more complex projects

  13. Summarizing the Financing Gap • Demand-side project proponents seek: • More flexible, risk tolerant debt & equity sources • Up-front purchases of carbon credits • CERs and offsets (voluntary) • ODA/grants • Sustainable development funds • Supply-side sources of financing need: • Good “bankable” projects regardless of the DD • Credible, timely, cost-effective CDM and host country approval processes • Risk sharing

  14. Possible Solutions: Country Level • Build CDM capacity within host country governments to make better use of carbon finance for projects • Link projects with high DD potential to national priorities and grant finance sources • Develop national/regional “clearing house” for DD project assessment and prioritization • Expand role and risk capacity of rural and community development banks to leverage financing • Engage ODA to catalyze CDM projects with high DD potential

  15. Possible Solutions: Project Level • Demystify the financing process for local project developers in terms of potential carbon credit revenue streams • Improve capacity building on small volume project commercialization in host countries • Develop tool to screen cost/benefit of developing projects with high DD potential • Develop tailored insurance and other risk mitigation instruments for use in ERPAs to enhance the attractiveness of projects with high DD potential

  16. Possible Solutions: Carbon Credit Level • Explore CDM transaction cost reduction strategies via bundling of small volume projects, sector- and policy-based CDM, and programmatic CDM • Greater understanding of the risk perception of carbon revenue streams, including in the carbon offset market

  17. Green Capital Advisors Ltd. • GCA specializes in advisory services relating to the financing for sustainable investment and development. • Extensive work globally with stakeholders in the areas of environment and carbon finance: • United Nations Environment Programme • World Bank Carbon Finance Business • World Energy Council • Environment Canada • Natural Resources Canada • Industry Canada • Green Municipal Fund • National Roundtable on Environment and the Economy • GCA is an affiliate of International Financial Consulting Ltd., a leading provider of advisory services to multilateral, public, and private sector clients.

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