Co-Financing Options: Support for HCFC Phase-out

The World Bank GroupMontreal Protocol Operations

4-7 October, 2011Regional Meeting of the Latin American and Caribbean

Ozone NetworkPort of Spain, Trinidad

Drivers for Funding Scale-upEnvironmental Objectives• Achieve ozone objectives through 2040• Maximize climate benefits

Funding Considerations Adequacy of MLF funding available as a whole to meet

incremental costs Potential to mobilize non-MLF resources for co-benefits

ee gains

Options 1. Co-financing approaches that can leverage funding through

market mechanisms2. Co-financing options possible through Multilateral

Development Bank lending instruments and mechanisms

Why Co-financing MattersThe MLF Context

Additionality Projects that bundle ozone and climate co-benefits can

generate significant global environmental benefits through phase-out of HCFCs + reduction in CO2 through adoption of more energy

efficient technologies

Scaling-up funds can be used to meet demonstrated demands in HCFC management strategies 3

DonorsMLFProjects

Positive impact on environmentPositive impact on environment

•The use of market mechanisms can increase and accelerate funding by tapping into carbon assets

•Future carbon assets generated by projects through ee gains can be monetized and channeled back into projects to improve the overall funding window

• Potential carbon assets are new and additional to MLF funding

• Depending on the modality, additional upfront funding/project finance can be made available

• Financial viability of projects improve with inflow of additional funds

4

Donors

MLFProjects +

Enhanced positive impact

on environment

Enhanced positive impact

on environment

Carbon Assets

MARKET

Tapping into the Markets

Blending with MDB lending instruments can alsoincrease and accelerate access to funding by identifying synergies with strategic national orsectoral development goals supported by varioustypes of loans

5

Donors

MLFProjects

+Enhanced positive

impact on environment

Enhanced positive impact

on environment

Relevant, sector specific loans

LOANS

Fully or partially blended

Blending with Other Finance Instruments

Co-financing:Options and Mechanisms

Grant Funding

• GEF

Market-based funding

• Carbon Finance

• VCS

Other Finance Instruments

• CIFs• Development

lending

Grant Funding

Global Environment Facility (GEF)

• Climate Change Strategy for GEF 5 • OBJ 2 - Promote market transformation for energy

efficiency in industry and the building sector • barrier removal—source of grant funding to establish

conditions for market sustainability

• OBJ 6 - Support enabling activities and capacity building

Market-Based Funding : Carbon FinanceWorld Bank Carbon Finance Unit (CFU) Funds contributed by governments and companies in OECD countries are

used to purchase project-based GHG emission reductions in developing countries and CEITs

Emission reductions are purchased through one of 10 carbon funds on behalf of the contributor, and within the framework of the Kyoto Protocol's Clean Development Mechanism (CDM) or Joint Implementation (JI)

Not loans or grant resources to projects : contracts to purchase emission reductions similar to a commercial transaction◦ Emissions reductions are paid for annually or periodically, once verified by a third party

auditor◦ The selling of emission reductions can increase the bankability of projects by adding an

additional revenue stream in hard currency, which in turn, can provide a means of leveraging new private and public investment into projects that reduce GHG emissions

Over 60 private companies and over a dozen governments have invested more than $2 billion in World Bank managed carbon funds

The Bank's carbon finance operations have demonstrated numerous opportunities for collaborating across sectors, and have served as a catalyst in bringing climate issues to bear in projects relating to inter alia, energy efficiency and waste management

Market-Based Funding : Carbon FinanceVoluntary Carbon MarketDec. XX/7 - study on the size and scope of existing ODS banks and the costs and benefits of takingaction on different categories of banks relative to the ozone layer and climate change

Verified Carbon Standard (VCS) : quality assurance standard that projects can use to quantify GHG emissions, ensure they meet accepted quality standards and are independently verified, and issue credits in voluntary markets◦ approved a new methodology to quantify greenhouse gas emission reductions

from activities that recover and destroy ozone-depleting substances (ODS)◦ http://www.v-c-s.org/methodologies/VM0016

Climate Action Reserve (CAR) : addresses the US carbon market by establishing regulatory-quality standards for the development, quantification and verification of GHG emissions reduction projects in North America◦ issue carbon offset credits known as Climate Reserve Tonnes (CRT) generated

from such projects◦ 2 protocols: United States Ozone Depleting Substances (ODS) Project Protocol

and an Imported Ozone Depleting Substances Project Protocol◦ provide a standardized approach for quantifying and monitoring the GHG

reductions from projects that destroy domestic or imported ODS with high global warming potentials that would have otherwise been vented

◦ http://www.climateactionreserve.org/how/

CLIMATE INVESTMENT FUNDS (CIFs)

A World Bank partnership with the multilateral development banks that providesfinancing instruments designed to support low-carbon and climate-resilientdevelopment through scaled-up financing

Clean Technology Fund (CTF)

Promotes scaled-up financing for demonstration,deployment and transfer of low-carbon technologies withsignificant potential for long-term greenhouse gas emissionssavings• Energy Efficiency - CTF promotes programs in support of buildings,

industry, and agriculture • Eligibility – ODA eligible + have an active MDB Country program• Mexico – 50 US $M (September 2010) - Efficient Lighting and

Appliances Project

Other Finance Instruments: Climate Specific

Strategic Climate Fund (SCF) An overarching framework to support 3 targeted programswith dedicated funding to pilot new approaches withpotential for scaled-up, transformational action aimed at aspecific climate change challenge or sectoral response

• Pilot Program for Climate Resilience (PPCR) – objective is to pilot and demonstrate ways to integrate climate risk and resilience into core development planning, while complementing other ongoing activities

• Supports two types of investments1) Funding for technical assistance to enable developing countries to build

upon existing national work to integrate climate resilience into national and sectoral development plans

2) Funding public and private sector investments indentified in national or sectoral development plans or strategies addressing climate resilience

• One regional program focused on the Caribbean: Dominica, Grenada, Haiti, Jamaica, Saint Lucia, Saint Vincent and the Grenadines

Lending Flows: Climate SpecificOther Finance Instruments: Climate Specific

The World Bank Group includes 2 unique development programsthat provide access to loans: The International Development Association (IDA) : focuses on the

world's poorest countries The International Bank for Reconstruction and Development (IBRD) :

aims to reduce poverty in middle-income and creditworthy poorer countries

The International Development Association (IDA) One of the world’s largest sources of aid, IDA provides support for health and

education, infrastructure and agriculture, and economic and institutional development to the 79 least developed countries

Established in 1960, aims to reduce poverty by providing interest-free credits and grants for programs that boost economic growth, reduce inequalities and improve people’s living conditions

It is the single largest source of donor funds for basic social services in the poorest countries

Other Finance Instruments : Development Focused

• IDA lends money (known as credits) on concessional terms. What does this mean?

1. IDA credits have zero or very low interest charges2. repayments are stretched over 25 to 40 years, including a 5 to 10-year

grace period3. select countries receive IDA grants

• Protecting National and Global Resources • IDA has provided about US$5.2 billion in environmental and natural

resources projects over the past decade• Support provided has helped mitigate air pollution in urban and

industrial areas, provide cleaner and more reliable supplies of water, make land management more sustainable, and deal with climate change, protect biodiversity and build environmental institutions[e.g. disaster mitigation and management in Haiti]

• IDA Eligible Countries (defined by GDP): Bolivia Dominica Honduras Grenada Guyana Haiti Nicaragua St. Lucia St. Vincent and the Grenadines

Other Finance Instruments : Development Focused

The International Bank for Reconstruction andDevelopment (IBRD) Aims to reduce poverty in middle-income and creditworthy poorer

countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services.

IBRD borrowers include countries at widely different stages of development, from emerging markets, such as Mexico, to countries struggling to find a foothold in the global economy.

Established in 1944 as the original institution of the World Bank Group, IBRD is structured like a cooperative that is owned and operated for the benefit of its 187 member countries.

IBRD raises most of its funds on the world’s financial markets. The income that IBRD has generated over the years has allowed it to fund development activities as well as to ensure the financial strength that enables it to borrow at low cost and offer clients good borrowing terms.

Other Finance Instruments : Development Focused

IBRD ~ Toward the FutureThe demand for policy, knowledge and financing support

in low carbon growth and climate resilience is growing steadily.

IBRD resources can be expected to be called to support transformational programs with lower emissions catalyzed by dedicated climate resources.

IBRD capital is also expected to be in greater demand for guarantees and insurance products to attract private sector investments in new technologies and in climate-vulnerable areas.

Contributions to existing and emerging climate funds are expected to leverage considerable underlying financing from public and private sources

Other Finance Instruments : Development Focused

World Bank Group Financing for Energy Efficiency & Renewable Energy | Figures in $US Millions (fiscal year 2010)

EE/RE Financing at the World Bank

1,771 US $ Millions

World Bank investment lending finances goods, works, andservices in support of specific economic and socialdevelopment objectives in a broad range of sectors

Specific Investment Loan (SIL) - supports the creation, rehabilitation, and maintenance of economic, social, and institutional infrastructure◦ SILs may also finance consultant services and management and

training programs When are SILs used?

◦ SILs are flexible lending instruments, appropriate for a broad range of projects

◦ SILs help to ensure the technical, financial, economic, environmental, and institutional viability of a specific investment. They also support the reform of policies that affect the productivity of the investment.

World Bank Lending Instruments and Approaches

WB GEF Portfolio: Blending with Lending As an Implementing Agency of the GEF, the

Bank views blending/integrating projects with loans as one good way to achieve the leveraging requirements of the GEF

Of projects under implementation in FY11, 44% were blended with IBRD or IDA loans◦The bulk are in the biodiversity and climate

change focal areas◦POPs – a recently endorsed PIF for a POPs FSP

in Vietnam will blend with an IDA loan of US $150 M in the health sector

Co-financing in Practice

MEX: Efficient Lighting and Appliances Project: Project RationaleEnergy Security• Mexico is Latin America’s largest energy consumer

• strategic importance to the economy and is a driver of economic growth, productivity and competitiveness

• Energy efficiency and diversification • long-term sustainability of the Mexican energy matrix

Climate Change mitigation• Mexico is a major contributor to greenhouse gas emissions

• 12th in the world in terms of total GHG emissions• 2nd largest emitter in Latin America.

• The energy sector accounts for >60% of total CO2e emissions

EE Residential Sector• 2008 - residential sector = 26 % of total electricity use in Mexico• PRONASE (Energy Efficiency Program 2009-2012)

• opportunities to achieve optimal use of energy and generate substantial energy savings in the medium and long term, including lighting and household equipment

Project Structure

Component 1:CFL Replacement ProgramReplacement of 45 million incandescent bulbs for compact fluorescent lamps amongst low-income households in Mexico over a 3-year period

Component 2:Appliance Replacement ProgramFinancial incentives to encourage the replacement of 1.7 million inefficient refrigerators and air conditioners over a 4-year period.

Component 3:Technical Assistance & Institutional StrengtheningHelp strengthen SENER’s capacity to effectively implement the project.

Appliance Replacement Component

$$$ Carbon Finance

$$$ IBRD, CTF, GEF

National Development

Bank

Government of Mexico (SENER, via an operator)

Line of Credit

Instant

rebates

Eligible Consumers

Retail Stores

Scrapping Centers

4 sources of financing

Guarantee Facility Repayment via

Electricity Bills

IBRD

CTF

GEF

Filling the Gap : Voluntary Carbon Markets

CFC-12 will be captured from old appliances and properly collected and recycled or stored at qualified scrapping centers.

Non-recyclable CFC-12 should be properly destroyed

With Montreal Protocol MLF resources, the project will support the development of a project document for submission to the voluntary carbon markets to finance the destruction of CFCs.

Old Refrigerators (GWP of CFC-12= 10,890)

Leakage every year

New Refrigerators (GWP of R-134a= 1,430)

No Leakage for at least 5 years

Useful Resources Climate Investment Funds

◦ http://www.climateinvestmentfunds.org/cif/ IBRD

◦ http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTIBRD/0,,menuPK:3046081~pagePK:64168427~piPK:64168435~theSitePK:3046012,00.html

IDA◦ http://www.worldbank.org/ida/

Climate Finance Options (WB/UNDP partnership)◦ Funding sources/results of projects on the ground ◦ http://www.climatefinanceoptions.org/cfo/index.php

Thank You

Montreal Protocol OperationsEnvironment Department

The World Bank