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1. International financial cooperation: An overview
2. Financial assistance through the flexibility mechanism under the UNFCCC convention 3. Official financial assistance in energy efficiency
4. Private financing
Since the 1992 UNCED Conference in Rio de Janeiro, lending for
environmental purposes has gained a high priority. Today, all
major multilateral agencies are incorporating environmental consideration
in their programmes. Although the share of financial assistance
from the institutions is not as big as bilateral aid or private
sector investment, they can play a pivotal role in promoting international
cooperation in the new emerging mechanism. Multilateral financing
agreements can promote models for private sector cooperation in
financing of energy efficiency investments.
The World Bank has increased its share in energy efficiency financing,
including AIJ activities, cofinancing operations with the Global
Environmental Facility (GEF) and through encouraging client countries
to improve energy efficiency under its "country-policy dialogue".
Assistance provided by the organization of the World Bank group
in energy takes several forms. The first comprises regular lending
instruments such as loans, credits, guarantees, technical assistance,
and advisory work (for IBRD and IDA), equity participation, syndication
of commercial bank financing, investment funds, and advisory services
(for IFC).
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The objective of Prototype Carbon Fund (PCF) is to supply high quality carbon offsets to industrialized countries through investments in emissions reduction activities in developing countries and economies in transition at prices which are fair to both buyers and sellers. The PCF has a framework similar to that of a World Bank trust fund, with the Bank receiving a fee for acting as administrator of the PCF. The structure of the PCF is similar to a closed-end mutual fund. With US$135 million cap, the fund plans to invest all capital within a period of 3 years in some 20 projects and it is scheduled to terminate in 2012, the year of UNFCCC first budget period. At the time of the closing, each participant will hold shares in the PCF and be entitled to a corresponding percentage of the aggregate carbon emission reduction units produced by the Fund. The PCF may not only invest in projects directly, but also assist host countries in setting up funds sponsored by commercial and development banks and other entities. This may increase the diversity of projects, spread the risk of investment, and increase carbon market trade through underwriting the risk of private intermediaries in the early market. Therefore ultimately, World Bank may become a leading initiator in the international emissions trading market, but it intends to pull out of the market once private sector interest will have been established.
The Fund is administered by a Fund Management Committee responsible for overseeing the operations of the Fund. A meeting of participants will be held annually and shall review and approve the budget for the Fund, elect members of the Participants' Committee to serve for a designated term, and review and authorize the payment of expenses presented to it. At each annual meeting, participants provide general policy and strategic guidance on the operations of the Fund and the selection of projects, approve any amendment to the project selection criteria. All projects would be implemented under the agreement of participants' meeting. At the same time, all projects will require prior host country approval through "Letter of Endorsement" of a proposed project. In addition, the host country committee shall provide general advice to the Trustee on the development and implementation of the Fund. The procedure for applying PCF is explained in Box 4.2.
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Another activity of the World Bank is the Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) funded initiative "Energy Efficiency Operational Exchanges Programme". This is not an activity related to financial activities but can be helpful for developing country hosts to share knowledge and practical lessons on energy efficiency issues. The programme started in April 1999 with the objective of more and better communication of experiences and lessons learned with between developing countries and in economies in transition focusing on energy efficiency area. Traditional training programme and seminars have focused on "industrialized countries" expertise - which may not always be the most appropriate in the developing country situation. The proposed programme aims to disseminate the experience and lessons learned from one developing country to another when designing and implementing energy efficiency investments. The core of the programme is a series of workshops or clinics and bilateral exchanges. The purpose of the work is to advance and spread operational insights, new methodologies and approaches and collect new best practices, thus putting ESMAP in a better position to provide bilateral and multilateral institutions, including the World Bank, with an improved basis to support energy efficiency projects and their preparation. It is intended to strengthen domestic institutional capacities to prepare and implement energy efficiency activities and to disseminate best practices derived from successful energy programmes, focusing particularly on the experiences of governments, enterprise managers, financial planners, and the financial community in general. top
The national strategies studies programme was launched in 1997 to assist potential host country governments of AIJ and JI in exploring the opportunities and potential benefits and in formulating their own positions. With a better understanding of the international demand for GHG offsets and their price, interested countries can make a more informed decision on policy options and opportunities. The World Bank and bilateral donors provide co-financing to host countries to analyze these issues in a National AIJ/JI Strategy Study (NSS). Host country interest, donor preferences and a country's offset potential are among the factors that can be studied in the context of NSS studies. The World Bank serves as an advisor, assisting host country governments in drafting the terms of reference for the studies, making arrangements for donor funding, administering contracts with consultants and providing methodological guidance. Each National AIJ/JI Strategy Study (NSS) is designed to emphasize the needs and interests of the participating country and begins with a review of existing studies on related topics with the purpose of consolidating and building upon completed and ongoing efforts. Estimation of the GHG offsets potential normally requires a macro-level projection of GHG emissions as well as a sectoral decomposition of GHG emissions and projections. A key output from strategy studies is a pipeline of GHG abatement projects along with the identification of potential sources of financing. Studies are carried out by teams of national consultants with targeted support from foreign consultants. The studies are co-financed by the host country, international donors and the World Bank, with the shares of 10-15 percent, 75-85 per cent and 5-15 per cent, respectively. top
With the need of an independent financial institution to fund mitigation and response strategies in eligible developing countries and countries in transition, UNFCCC designated the GEF as an interim financial mechanism with 3 agencies for implementation of projects: United Nations Development Programme, United Nations Environment Programme, the World Bank. From 1991 to mid-1999, GEF approved grants totaling US$706 million for 72 energy efficiency and renewable energy projects in 45 countries. The total investment of these projects probably exceed US$5 billion because the GEF grants have leveraged financing through loans and other resources from governments, other donor agencies, regional development banks, the private sector, and the three GEF project implementing agencies. An additional US$121 million has been approved in grants for 20 climate change related "short-term response measures" . In this field, GEF is one of the leading multilateral entities promoting energy efficiency and sustainable energy technologies in developing countries and in countries with economies in transition. The first three years of the GEF were considered a pilot phase. During this period, GEF financed short-term response measures. It was found that its limited resources could not significantly affect GHG emissions in the short term. Thus GEF adopted an "operational strategy and long-term operational programme" which reflects GEF's primary focal areas, which include biodiversity, climate change and international waters. GEF strategies of operational programme can be understood in a "logical framework". Figure 4.8 illustrates how project activities are expected to meet GEF objectives and support the design, implementation and coordination of a set of projects.
The aim of GEF grants for operational programmes is to enhance public-sector capacities, promote project sustainability and replication and remove the barriers of global, national and local markets for private sectors to play a major role. Energy issues are managed in operational programme 5 (Removal of barriers to energy conservation and energy efficiency), 6 (Promotion of the adoption of renewable energy by removing barriers and reducing implementation costs) and 7 (Reduction of the long-term costs of low greenhouse gas-emitting energy technologies). Each programme is followed by specific operational activities in the respective field. The output of a GEF-supported project in this operational programme No.5 will be the removal of a barrier to the widespread dissemination of least-cost energy efficient technologies and practices in a given country market. The GEF project approach includes a variety of mechanisms, including adaptation to local conditions, financing mechanism, national and regional energy strategies, ESCOs support, appliance standards, training programme, information centers and services and consumer information. In order to increase the cost-effectiveness of GEF operations, country-driven opportunities in each of the markets will initially emphasize; (a) national communications and or other information about country priorities and about opportunities in, and barriers to, energy efficiency and conservation; (b) conducive sectoral policies that increase sustainability of win-win projects. One of the basic operational principles of the GEF is that its projects provide consultation for the beneficiaries and affected groups. User participation is envisaged for all projects. In many instances, the direct participants in this operational programme will be industries and parastatal organizations. In projects dealing with energy efficiency in rural areas, public participation of affected beneficiaries is a new condition. Examples of GEF project are shown in Table 4.5.
The GEF's role is in removing barriers to the widespread dissemination of least-cost energy efficient technologies and practices. While the GEF is available to meet the incremental costs of removing these barriers, other financiers are expected to meet the costs of energy efficiency programmes once the barriers have been removed and the markets for energy efficiency and conservation are open. The required GEF resources for this are estimated to be in the range of US$ 50-100 million per year for the next 5-10 years, but further work is being undertaken on the longer term resource requirements. In the context of financing energy efficiency improvements in industry, energy-service companies (ESCOs) are also being supported in several countries to demonstrate their commercial viability to financiers. Box 4.3 explains the application procedure of GEF financing in energy efficiency.
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Asian Development Bank (ADB) also has undertaken several trial projects in the area of climate change. Since 1995, ADB has been implementing the Asia Least Cost Greenhouse Gas Abatement Strategy (ALGAS) in 12 Asian countries with funding provided by UNDP. Until 1999, selected projects in 11 countries have been identified. The total budget of the project was about 10 million dollars, of which about 8 million dollars came from the GEF through UNDP. ADB tries to catalyze private capital for developing countries by assisting co-financiers in the appraisal and management of risks, and to continue to promote official co-financing, particularly for low-income countries. To intensify its catalytic role for resource mobilization, the Bank adopted a new strategy on co-financing, and modified its policy and guidelines on guarantee operations. The intention is to make cofinancing and guarantee operations a mainstream Bank activity.
With the international cooperation through multilateral financial agencies, individual governments also have supported bilateral international investment in energy efficiency.
The Government of the United States of America has been actively involved in climate change mitigation activities through USAID. The United States Agency for International Development (USAID) is mostly focused on supporting private companies. Information on current USAID funded projects can be obtained through USAID's annual reports. The Environmental Enterprises Assistance Fund (EEAF) finances innovative environmentally sound enterprises in the developing world in cooperation with USAID. At the end of 1999, energy efficiency experts working with USAID provided technical assistance to the power plant in Almaty, Kazakhstan. Equipment was installed that enabled the facility to regulate its power output better. Pipes and flow systems were repaired, and pollution dropped considerably. The project resulted in a saving of 160,000 tons of fuel oil in three months. In Central America, USAID helped catalyze the first private sale of power generated from previously wasted sugar cane residue. The El Viejo sugar mill in Costa Rica now generates and sells 11 megawatts of power to the country's national utility. Approximately $100,000 in USAID technical assistance helped to leverage a $2.5 million investment by the sugar mill. Additionally, USAID co-sponsored a feasibility analysis in Costa Rica for the development of a 20 megawatt wind power plant. An investment of $120,000 resulted in USAID leveraging a $3 million grant from the Global Environment Facility and a $24 million loan from the Inter-American Development Bank. EEAF has taken the know-how from the U.S venture capital and "angel fund" experience and transferred it to nascent venture organizations in developing countries. EEAF also helps organizations raise funds to participate in debt or equity investment in projects. EEAF has raised over US$13 million for investments in businesses in the developing world that have a clear environmental focus. The fund has continued to expand and has been successful at attracting investment. In 1997, EEAF was named one of the three fund managers by the IFC for the Renewable Energy and Energy Efficiency Fund (REEF). The REEF will make investments in renewable energy and energy efficiency enterprises in developing countries. EEAF and their partners are currently raising capital for the fund and expect to raise $150 million by 2000. The United States-Asia Environmental Partnership (US-AEP) is an interagency programme led by USAID. US-AEP was established in 1992 to assist in addressing environmental degradation and sustainable development issues in Asia and the Pacific by mobilizing U.S environmental experience, technology and services. Much of US-AEP's work towards sustainable industrialization and urbanization promotes global climate change mitigation by addressing energy and resource efficiency. United States Government also operates Technology Cooperation Agreement Pilot Project: Business Participation (TCAPP) on the purpose of assisting developing countries in attracting investment in clean energy technologies. It provides small amounts of funding for in-country coordination and technical guidance and review. Attracting private investment and promotion of intergovernmental cooperation is its priority. The programme is designed to encourage actions by a broad range of stakeholders while it promotes active participation and collaboration between the international donor community in response to the country technology cooperation needs. In cooperation with the OECD, IEA, GEF, World Bank, UNEP, UNDP and various other donor countries, TCAPP is supposed to be a useful mechanism for donors and beneficiaries at the same time. top
In Japan two institutions are involved in promoting financing of energy efficiency investment in developing countries, namely Japan Bank for International Cooperation (JBIC) and Ministry of International Trade and Industry (MITI). JBIC supports Japanese corporate activities overseas and international economy through financing Japan's economic interactions with the rest of the world. International Finance Operations include export loans, import loans, overseas investment loans, untied loans, bridge loans, refinancing and equity participation. JBIC was established as conglomeration of the private sector investment finance by the Oversea Economic Cooperation Fund of Japan (OECF) and Export-Import Bank of Japan (JEXIM) in 1999. It provides financial services as follows:
The activities of JBIC in energy sector contained Miraballes Geothermal Project (Costa Rica), Power Distribution Systems Reinforcement Project, Power Distribution Systems Reinforcement Project, Normal Rural Electrification Project (Thailand), Palinpinon Geothermal Generation Plant Project (Philippines) and others . Japan is extending its assistance in sustainable development of developing countries through Green Initiative and Special Environmental Yen Loan. The former consists of "Green Technologies" and "Green Aid". The "Green Technologies" includes improvement in energy efficiency, development of renewable, improvement in forestry technologies etc. The "Green Aid" consists of cooperation through ODA and private sector, human resources development, public awareness, and exchange of information and so on. The latter is government loan for the project to be jointly implemented with other countries. Lending conditions are as follows: 0.75 per cent per year interest rate, 10 years grace period and 40 years repayment period. Under the Green Aid Plan of MITI, New Energy and Industrial Technology Development Organization (NEDO) has been implementing model projects for the efficient use of energy and AIJ. As a semi-governmental organization specialized in new energy and energy conservation technologies under MITI, NEDO is playing the dual roles of pioneer and core player in Japan's AIJ projects through model projects, joint demonstration projects and research cooperation projects with developing countries. The examples of model projects include 'Effective utilization of energy in re-heating furnace in steel industry in Thailand (1998)', 'Reduction of electric power consumption in cement plant in Vietnam (1998)', Utilization of waste heat from incineration of refuse in China (1998)' and so on. To respond to global warming and climate change concerns, Japan has been implementing studies on national strategies since 1991. In 1991 and 1992, a first study was carried out in cooperation with Indonesia. In 1992 and 1993, the studies of vulnerability assessment to sea level rise in Western Samoa and Fiji were implemented in cooperation with each country and South Pacific Regional Environmental Programme (SPREP). In 1994 and 1995, the study on coastal vulnerability and resilience in Fiji, and study of vulnerability assessment in Tuvalu were implemented in cooperation with each country and SPREP. top
For financial support of AIJ pilot projects, the Netherlands government reserved a budget of US$18 million - US$10.3 million for developing countries for the period of 1996-1999, US$6.7 million was available for Central and Eastern Europe during the same period. The Netherlands's assistance programme includes 21 projects in 8 economies in transition. On average, the project costs per avoided ton of CO2, varied from $1 to $138 per ton. In nine projects, costing for greenhouse gas emission reduction was below $10 per ton.
The Swedish National Energy Administration invested $42 million in 40 boiler-modernization systems and 25 district-heating systems, mainly in the Baltic states. For six economies in transition, the average specific investment cost for project implemented by the Swedish National Energy Administration has been $82 per ton of CO2, varying from $16 to $118 per ton. The net cost of the avoided ton of carbon is, however, negative. This suggests that such projects are overall profitable. For projects with a positive cost, the cost per ton is between $3 and $15 per ton CO2. top
Project finance, mostly applied in public infrastructure projects,
can also use international financing. Project financing models
offer mechanisms to allocate risk and to define a carbon revenue
stream for projects. As a result, projects that reduce GHG emissions
and are currently uneconomic could become viable by securing carbon
contracts in a future financing structure. Revenue streams from
sales of carbon credits could constitute a linkage between carbon
reduction projects and project finance. From the perspective of
investors, the additional revenue would lead to more secure cash
flow to cover debt servicing and/or improved credit terms for
lenders. The further information about private project financing
is introduced in Part 2 of this publication.
Some developing countries may have the opportunity to leapfrog
20 years of technology development with packages of external financing.
It would appear possible to avoid the costly mistakes that were
made in the development of some of energy systems in industrialized
countries. However, as discussed earlier the investment share
is not equal for every country. The role of host country has become
very important when it comes to effective investment promotion.
In several countries, relevant policies may need to be improved
to attract investors in general and to energy efficiency projects
in particular.
Costa Rica's Greenhouse Gas Fund can be a good example for energy
efficiency financing in developing countries. Costa Rica has done
more than other developing countries to establish a comprehensive
JI regime as a strategy for both meeting the objectives of the
climate treaty and promoting its own sustainable development goals.
The Costa Rican government began to develop official JI policy
and programmes in mid-1994 and assisted in the development of
more than fifteen project proposals. Costa Rica's Greenhouse Gas
Fund was established in 1996. It received foreign investments
and other revenues to support projects that reduce or sequester
greenhouse gas emissions and provide related environmental services.
The money in the Fund will implement three national "umbrella-type"
JI projects. Recipients of this funding, in turn, cede any claim
on the carbon credits to the Greenhouse Gas Fund. Carbon credits,
or creditable, tradable offsets (CTOs), will be certified by the
Costa Rican government through the Costa Rican Office for Joint
Implementation (OCIC) and distributed to the investors. The mechanism
of Costa Rica's Greenhouse Gas Fund is represented in an example
of forestry project in Fig 4.9.
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