International Climate Fund: Annual Review - Summary Sheet

Title: Forest Carbon Partnership Facility (FCPF) Carbon Fund

Programme Value: £141.5m UK investment (£130m ICF + £11.5m ETF)

Date: May 2019

Start Date: 01 January 2018

End Date: December 2018

Summary of Programme Performance Year 2012 2013 2014 20151 2016 2017 2018Programme Score

A A A A A A B

Risk Rating Low Low Medium Medium Moderate2 Moderate Moderate Summary of progress and lessons learnt since last review The FCPF Carbon Fund is the world’s flagship fund for results-based finance for Reduced Emissions from Deforestation and Forest Degradation (REDD+). It purchases carbon credits from programmes designed to tackle deforestation at a jurisdictional scale (i.e. whole countries or sub-national areas, like states or provinces). The FCPF is a pilot mechanism, designed to test different approaches in the 19 jurisdictions participating in the Carbon Fund. Over 2018, BEIS has continued to support progression of high-quality Emissions Reductions (ER) Programmes through the Carbon Fund pipeline. BEIS has acted as a donor representative for negotiations on an Emissions Reduction Payment Agreement (ERPA3) with Ghana, and has been active in coordinating agreement between Carbon Fund Participants (CFPs) and the World Bank on a ‘default’ set of ERPA terms, while also pushing for clarity on the process, roles and responsibilities of ERPA negotiations. BEIS has been active in the review of the FCPF’s Monitoring & Evaluation (M&E) framework, as well as in discussions between CFPs, Technical Advisors, and REDD+ countries on the interpretation of the Methodological Framework. There is continued political commitment to the FCPF from forest countries. The first ERPA, signed with Democratic Republic of Congo, was confirmed in 2018 – a major milestone for the Carbon Fund – and Emission Reduction Programme Documents (ERPDs) from Lao PDR, Madagascar and Nepal were accepted into the pipeline. CFPs agreed a summer 2019 deadline for ERPD acceptance, and a further five to eight programmes are expected by this time. Time taken to complete due diligence and communication between host countries, the Facility Management Team (FMT), and CFPs (in some cases, due to changes in government administrations) are persisting challenges. However, there is growing clarity around the ERPA negotiations process (and we expect this process to be confirmed in early 2019) and momentum is building as the FMT, host-countries and CFPs learn from experience.

While the FCPF still has strong potential to deliver substantial emissions reductions and improve the livelihoods of forest dependent people, the 2018 Programme Performance Score has decreased from A to B due to continued delays toward formal operationalisation of REDD+ programmes.

1 From 2015, FCPF ICF Annual Reviews focus on the Carbon Fund. Previous reviews 2012-2014 were assessed on the basis of slightly different criteria (including progress of the Readiness Fund). Therefore, direct comparisons to earlier reviews are not possible. 2 New risk categories have been adopted since 2015 review (Minor, Moderate, Major and Severe). 3 The contract which would allow the operationalisation of an Emissions Reduction Programme.

1

The key milestone of concluding three ERPAs in 2018 was missed, and BEIS judges that under a ‘business as usual’ scenario there is a significant risk of missing the target of 10-13 ERPAs by end 2019. Delays would have knock-on impacts for implementing activities on the ground and making payments for verified emissions reductions.

The Carbon Fund is on the cusp of transitioning into a new ‘implementation’ phase, and the World Bank will need to ensure that the requisite structures, procedures and resources are in place for effective post-ERPA operational delivery. Getting processes working smoothly for agreeing ERPAs, and readying structures for programme implementation, will be a core task for the World Bank in 2019 in order to get progress back on track. Progress on Recommendations from the Previous Review The FMT should communicate more frequently with CFPs, for example through a monthly update email or phone call.

Recommendation partially met. The FMT have begun issuing monthly portfolio reports which give a high-level snapshot of timelines for key milestones. This has been a welcome development, but they lack the detail required to understand underlying challenges and why timeframes change. This information would be helpful to enable CFPs to have early sight of potential issues.

BEIS programme lead should update the logframe to capture the distinction between ERPDs which have been accepted without conditions/have fulfilled their conditions and those conditionally accepted into the portfolio.

Recommendation met. Specified changes were made to the logframe. This goes beyond the disaggregation in the World Bank’s indicators for the Carbon Fund.

The FMT and CFPs should agree to a Terms of Reference setting out the process for ERPA negotiations and the respective roles and responsibilities of CFPs and the FMT.

Recommendation not met. In June 2018, FMT explained that delays were due to lengthy internal Bank clearance processes. BEIS impressed on the FMT the importance of clarifying this process as soon as possible, as continued delays would have a detrimental impact on the efficiency of ERPA negotiations4.

The FMT should seek to avoid the number of substantive programme design decisions (particularly on contentious issues such as on benefits sharing or reversal management) which are made after ERPA signature.

Recommendation partially met. FMT is making efforts to address substantive design issues before ERPA signature in order to reduce the number of conditions of effectiveness contained in ERPAs. However, there is a tension with the pace of ERPA signature (at which point ER generation can begin), and there are often legitimate reasons for why substantive items require continued development post ERPA-signature.

The FMT should review its resourcing and prioritisation, to ensure that at least three countries reach ERPA signature by the end of 2018.

Recommendation partially met. FMT have scaled up staff resources focussing on operations, monitoring, evaluation & reporting and private sector strategy in order to liberate bandwidth to focus on ERPA negotiations. Despite these changes, the key milestone to sign at least three ERPAs by end 2018 was not met.

4 Our previous experience – most notably with the DRC ERPA negotiation – indicates that lack of clarity on roles & responsibilities frustrates the ERPA negotiations process (see the 2017 Annual Review for further information).

2

The World Bank should continue to develop new methods of filling financing gaps in FCPF programmes, including ‘mainstream’ World Bank finance (for example, IBRD loans), as well as innovative approaches (for example, forest bonds).

Recommendation partially met. In June 2018, the World Bank’s International Finance Corporation (IFC) presented a proposal for collaboration with the Carbon Fund to engage the private sector through a multi-country forest bond. The bond would include an upfront support element as well as long-term financing. The FMT are also exploring other initiatives to provide support to specific carbon fund programmes.

However, there remains a major predominance of public finance (mainly sourced from host governments and multilateral donor funds) in Carbon Fund programme jurisdictions.

The FMT, CFPs, and REDD countries should agree timetables for the completion of condition fulfilment and due diligence after a programme has been accepted into the portfolio.

Not applicable. Deadlines are given for fulfilment of conditions, and there is an implicit deadline for the completion of due diligence by the time of ERPA signature (or due diligence will delay ERPA effectiveness). It was discussed with FMT that agreement on more detailed timetables would increase the administrative burden disproportionately to the gains. It would be more valuable to strengthen the communication updating on where countries are toward completion of conditions and due diligence.

Summary of recommendations to complete before the next annual review (target dates are included in brackets)

1. The BEIS Programme Manager and FMT should review the Theory of Change on mobilising private finance and identify output level indicators to explain how programmes will achieve targets under Outcome 3 in the Logframe (by August 2019).

2. The FMT should do a report on portfolio and programme financing, identify challenges to integrating different sources of finance and make recommendations for options to fill financial gaps (August 2019).

3. The BEIS Programme Manager and FMT should agree improvements to be made to the monthly portfolio reports, and a schedule of regular informal calls with CFPs to update on programmes and key issues (February 2019).

4. CFPs and the FMT should agree a ‘default’ ERPA term-sheet and confirm the roles and responsibilities for ERPA negotiations (March 2019).

5. The BEIS Programme Manager should add a new indicator to the BEIS Carbon Fund Logframe relating to the duration of ERPA negotiations (August 2019).

6. The FMT should confirm that there are sufficient resources available in the FMT and in-country teams to support countries to make continued progress on programme development and due diligence between ERPD approval and ERPA effectiveness (July 2019).

7. The FMT should review and confirm that the team has capacity to negotiate multiple ERPAs simultaneously, and is preparing appropriately – putting the necessary structures, resources and processes into place – to shift into post-ERPA operational delivery mode (August 2019).

8. The BEIS Programme Manager should review the BEIS Carbon Fund Logframe alongside the completed FCPF M&E Framework and make appropriate updates. These should include: revising indicator 1.8 (for which an equivalent indicator does

3

not exist in the FCPF framework) and considering proxies; and, update indicators relating to Outputs 3 and 4 (August 2019).

A. Introduction and Context Link to Business Case:

Original ICF Business Case (£45m), 2013 ICF Extension Business Case (£85m top up), 2015

Link to Log frame:

Outline of the programme The Forest Carbon Partnership Facility (FCPF) is managed by the World Bank. It was established in 2008 to assist developing countries in their efforts to reduce emissions from deforestation and forest degradation and foster conservation, sustainable management of forests, and enhancement of forest carbon stocks (all activities commonly referred to as "REDD+") by providing value to standing forests. The FCPF has two separate but complementary funding mechanisms — the Readiness Fund and the Carbon Fund.

The Carbon Fund, which is the focus of this Review, has been operational since 2011. The Carbon Fund is a pilot payment for results mechanism, designed to incentivise ambitious actions to reduce deforestation through payments for verified emission reductions (ERs) generated by REDD+ (Reduced Emissions from Deforestation and Forest Degradation) programmes. There are currently 19 Emissions Reduction Programmes (ERPs) accepted, or provisionally accepted, into the Carbon Fund Pipeline.5 By December 2018, one ERPA (with DRC) was signed and another ten country programmes were provisionally accepted into the Carbon Fund Portfolio on the basis of their ERP Documents. These are from Costa Rica, Chile, Mexico, Ghana, Republic of Congo, Mozambique, Vietnam, Lao PDR, Madagascar and Nepal.

To date, UK has invested £141.5m in the Carbon Fund (£11.5m Environmental Technology Fund investment in 2011; £45m International Climate Fund (ICF) investment in 2014; £85m ICF investment in 2015). Total committed funds to the Carbon Fund at the end of FY18 (30 June 2018) totalled c.$861m6. UK is the second largest financial contributor with a c.21% burden share. B: PERFORMANCE AND CONCLUSIONS Annual outcome assessment The Carbon Fund’s ultimate success will be measured against its outcomes. Although the Carbon Fund has still not entered implementation phase (no ERPs are yet operational), there have been some indications of progress towards the outcomes identified in the Theory of Change and Logframe. OUTCOME 1: The FCPF has contributed to the design of a global regime under or outside UNFCCC that provides incentives for REDD+ and has catalysed the creation of recognised global standards for REDD+

5 Cameroon, Chile, Costa Rica, Cote d’Ivoire, Democratic Republic of Congo, Dominican Republic, Fiji, Ghana, Guatemala, Indonesia, Lao PDR, Madagascar, Mozambique, Mexico, Nepal, Nicaragua, Peru, Republic of Congo, and Vietnam6 Amounts may vary due to exchange rate fluctuations (FCPF 2018 Annual Report).

4

In 2018, the Carbon Fund’s experience with the Methodological Framework continued to inform the development of other results-based REDD+ standards. For example, the FCPF Methodological Framework has influenced the draft ‘California Tropical Forest Standard’ developed by the California Air Resources Board. Once endorsed, the standard will be used to assess jurisdictions seeking to link their programmes that reduce emissions from tropical deforestation with an emissions trading system (ETS), such as California’s Cap-and-Trade Program. OUTCOME 2: Large scale, results-based payments Emissions Reduction Mechanism effectively demonstrated (reduced emissions from deforestation and forest degradation from FCPF Carbon Fund portfolio countries)

This outcome is dependent upon (a) signing of ERPAs and (b) programmes delivering on their ERPAs. Based on the current agreed milestones, the Carbon Fund is not expected to deliverer verified emissions reductions from its programmes until c.2020 (since there is a lag between ERPA signature and payments being made for verified emissions results). UK BEIS modelling estimates that the UK ICF investment in the Carbon Fund is expected to deliver 22,951,290 tCO2e of emissions reductions (UK attributed) over the lifetime of the programme.7 Provided issues highlighted in this review around progressing programmes to ERPA stage are addressed, the Carbon Fund should remain on track to deliver this outcome. OUTCOME 3: FCPF has catalysed investment in REDD+ REDD+ countries in the Carbon Fund are seeking investments to support programme implementation in order to successfully deliver emissions reductions and receive payments from the Carbon Fund. The FCPF has helped to leverage public finance, particularly from other World Bank trust funds (for example, through coordination between the Forest Investment Programme and the FCPF in DRC). However, there are still barriers to unlocking private finance.

In 2018, a senior private-sector specialist has been brought on-board in the FMT and the International Emissions Trading Association (IETA) has been appointed the new Private Sector Observer to the FCPF. In June, the World Bank’s International Finance Corporation (IFC) presented a proposal for collaboration with the Carbon Fund to engage the private sector in forest conservation through a multi-country forest bonds programme. In February, the FCPF presented at the International Civil Aviation Organization (ICAO) Carbon Markets meeting, agreeing to participate as a sample programme in the informal testing of programs under CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). This could lead to opportunities for finance from companies wishing to purchase offsets for compliance purposes.

Recommendations

The BEIS Programme Manager and FMT should review the Theory of Change on mobilising private finance and identify output level indicators to explain how programmes will achieve targets under Outcome 3 in the Logframe.

The FMT should do a report on portfolio and programme financing, identify challenges to integrating different sources of finance and make recommendations for options to fill financial gaps.

7 Based on expected results from the latest version of the FCPF Results Collection Model 2019. Non-attributed results are estimated to be 114,756,188 tCO2e.

5

OUTCOME 4: The FCPF has generated momentum to address governance and transparency issues and policy reforms related to sustainable forest resource management and REDD+ There are numerous examples of policy reforms initiated in Carbon Fund pipeline countries which are an encouraging demonstration of commitment towards successfully implementing their REDD+ programme and delivering their NDCs under the Paris Agreement. It is difficult to directly attribute these to the FCPF per se, but REDD+ preparations have promoted an environment for strategic cross-sector policy planning. For example:

Indonesia finalised its “One Map” policy, which seeks to integrate 85 thematic maps into one single map endorsed by the country to help resolve prolonged land conflict.

Nepal now has several national policies that support its National REDD+ Strategy, including its 2011 Climate Change Policy, draft National Low-Carbon Development Strategy, Forestry Sector Strategy, and Biodiversity Strategy Action Plan.

Madagascar formed the Inter-Ministerial Committee for the Environment (CIME), which acts as the decision-making body on strategic aspects of the country’s ER Programme.8

Overall output score and description B – Outputs moderately did not meet expectation.

Key actions

Implement the recommendations outlined in the summary sheet above. Has the logframe been updated since the last review? Yes. Output Indicator 1.4 has been disaggregated to capture the distinction between ERPDs which have been accepted without conditions/ have fulfilled their conditions, and those conditionally accepted into the portfolio, in line with the recommendation from the 2017 Annual Review.

C: DETAILED OUTPUT SCORING

Output Title Emissions Reductions Programmes planned and implemented/progressing through the Carbon Fund process

Output number per LF 1 Output Score B

Risk rating (H, M or L): H Impact weighting (%): 60

Risk revised since last AR?

No Impact weighting % revised since last AR?

No

Indicator(s) Milestones Progress 1.1 Number of Readiness Packages endorsed by PC (cumulative)

2 by 2014 8 by 2015 20+ by 2018

Slightly underachieved: 19 approved as of 2018

1.2 Number of Early Ideas presented to the Carbon Fund (cumulative)

10 by 2014 20 by 2015

Over-achieved. No new early ideas were presented in 2018. 15 achieved by 2014 24 achieved by 2015

8 These are just a few examples of policy reforms initiated in Carbon Fund pipeline countries. Further information and examples are described in the FCPF FY18 Annual Report, p. 21-25

6

1.3 Number of ERPINs invited into pipeline (cumulative)

10 by 2014 17 by 2015

Over-achieved. No new ER-PINs have been invited into the pipeline in 2018. 11 by end of 2014 18 by end of 2015 19 by end of 2016

1.4 Number of ERPDs accepted into the portfolio

6 by 2017 10 by 2018 16 by 2019

On track. 11 ERPDs were accepted by end 2018. RoC had still not fulfilled conditions; eight were accepted without conditions, and two had fulfilled attached conditions.

1.5 Number of ERPAs signed (cumulative)

1 in 2017 3 in 2018 10-13 in 2019

Not on track to deliver. Only one ERPA (with DRC) was signed by the end of 2018, and it contains conditions which must be fulfilled before the contract becomes effective.

There were several ERPA negotiations ongoing by the end of 2018 – with Mexico, Costa Rica, Chile, Mozambique and Ghana. Signature of Mozambique’s ERPA is expected for early 2019. Progress has generally been slower than expected, putting at risk the target for 2019.

1.6 Amount of disbursements for ER Programmes according to plans (%)

Targeting 100% disbursement by the end of the fund in 2025

Progress cannot yet be assessed. Pipeline development continues, and it is expected that at least 16 programmes will be accepted into the portfolio. The FMT uses Monte Carlo simulation and a new ER delivery risk model to estimate the volume of ERs which the portfolio will produce by 2025. The first run of the ER model projected a potentially significant underspend risk. The FMT highlighted the use of conservative inputs and that it is too early for firm predictions, but this will be kept under review. The FMT are also proactively using portfolio management tools such as call options in ERPA contracts to reduce risk of underspend.

1.7 Amount of ER purchases following ERPA signature (MTCO2e/year)

Targeting total available balance of the Carbon Fund by the end of the fund in 2025

Progress cannot yet be assessed. This indicator is dependent on programmes being operationalised.

1.8 Number of pilots where carbon accounting, programmatic elements and pricing are operating as planned (cumulative)

1 in 2017 3 in 2018 16 in 2019

Not on track to deliver by end of reporting period. This indicator is dependent on a programme being operationalised. Since no ERPAs are effective yet, this indicator scores zero. An equivalent indicator does not exist in the FCPF framework, so BEIS should review this indicator and consider proxies for the next Annual Review.

1.9 Average % of monetary benefits shared with beneficiaries in approved pilots

TBD Progress cannot yet be assessed. This indicator is dependent on programmes being operationalised.

7

Comment At the June 2018 meeting CFPs agreed a Summer 2019 deadline for ERPD acceptance into the portfolio. Two are due to be presented in February 2019 (Indonesia and Cote d’Ivoire), with the remaining six9 aiming for the Summer 2019 Carbon Fund meeting. After ERPD approval, it will continue to be important for forest countries, with the support of the World Bank, to maintain momentum in fulfilling any conditions (if approval was provisional) and complete due diligence processes. FMT and CFPs should be ready to respond to any challenges which arise in order to facilitate continuous progression of programmes toward implementation; open communication channels between FMT and CFPs will be key to enable this.

A key milestone for the Carbon Fund in 2018 was to sign at least three Emissions Reduction Payment Agreements (ERPAs), as a precursor to programmes being implemented. Delays in ERPA signature will have a knock-on impact on indicators relating to how programmes are functioning. Only one ERPA (with DRC) was signed by end 2018, after over a year of formal negotiations. This was a complex case and the first in the pipeline, explaining at least in part the protracted negotiation.10 Delays to other ERPAs, such as Chile, raises some wider concern with regards to expectations for standard ERPA timelines. Further, by the end of 2018, FMT had still not provided clarity on the respective roles and responsibilities of entities in ERPA negotiations or guidance on Benefits Sharing Plans. In our view, this was an important factor contributing to the underachievement of this milestone during 2018. However, discussions have progressed on this issue and BEIS expects the process will be agreed in early 2019. FMT has noted that it has been a challenge to get agreement among different units of the World Bank on the protocol, but doing so diligently will deliver a robust result.

By the end of 2018, ERPA negotiations were ‘live’ with Mexico, Costa Rica, Chile, Mozambique and Ghana, and due to start with Vietnam, Lao PDR and Nepal. While this demonstrates an encouraging upward trend, BEIS is actively monitoring the risk that the Carbon Fund may not reach the 2019 target of 10-13 ERPAs. Experience thus far on agreeing ERPAs has been variable, most notably on the duration of the negotiation, so it is difficult to project what number of ERPAs is likely for 2019.

Looking forward to 2019, a top priority will be for FMT to ensure that the requisite structures, procedures and resources are in place to switch gear into a new phase of post-ERPA operational delivery in the Carbon Fund. Preparations for this transition need special attention, in parallel with ongoing governance activities. Key among those ongoing activities is the finalisation of the FCPF Monitoring & Evaluation Framework, to include revised indicators and a finalised Evaluation Plan. Once completed, it will be valuable to review the BEIS Theory of Change and Logframe for the Carbon Fund and make updates accordingly. Recommendations

The BEIS Programme Manager and FMT should agree improvements to be made to the monthly portfolio reports, and a schedule of regular informal calls with CFPs to update on programmes and key issues.

CFPs and FMT should agree a ‘default’ ERPA term-sheet and confirm the roles and responsibilities for ERPA negotiations as early as possible in 2019.

The BEIS Programme Manager should add a new indicator relating to the duration of ERPA negotiations to the BEIS Carbon Fund Logframe.

9 Nicaragua, Cameroon, Fiji, Dominican Republic, Guatemala and Peru.10 See 2017 Annual Review for more information.

8

The FMT should confirm that there are sufficient resources available in the FMT and in-country teams to support countries to make continued progress on programme development and due diligence between ERPD approval and ERPA effectiveness.

The FMT should review and confirm that the team has capacity to negotiate multiple ERPAs simultaneously, and is preparing appropriately – putting the necessary structures, resources and processes into place – to shift into post-ERPA operational delivery mode.

The BEIS Programme Manager should review the BEIS Carbon Fund Logframe alongside the completed FCPF M&E Framework and make appropriate updates. These should include: revising indicator 1.8 (for which an equivalent indicator does not exist in the FCPF framework) and considering proxies; and, update indicators relating to Outputs 3 and 4 .

Output Title Standards and preparations in place for high-quality ER

Programmes discussed and endorsed by CF Participants Output number per LF 2 Output Score A

Risk rating (H, M or L): L Impact weighting (%): 5

Risk revised since last AR?

No Impact weighting % revised since last AR?

Yes

Indicator(s) Milestones Progress 2.1 Methodological Framework and Pricing Approach endorsed

Endorsement by 2014

Achieved in December 2013. An updated Methodological Framework was endorsed in 2016.

2.2 Business Processes endorsed (ER-PIN, ERPD, ERPA)

Endorsement by 2014

Partially achieved in 2014/15. An updated Business Process was endorsed in 2016. Note on ERPA responsibilities and process outstanding.

2.3 Legal Documents (General Conditions, ERPA Term Sheet) endorsed

Endorsement Achieved in 2014. ERPA Term Sheet was endorsed in March 2013. The General Conditions for ERPAs was endorsed in November 2014.

2.4 Buffer and registries guidelines approved

Endorsement Achieved. Buffer Guidelines were endorsed in January 2016 Registries guidance was published in November 2016.

Comment

Indicator 2.2 Business Processes endorsed (ER-PIN, ERPD, ERPA) was updated from “Achieved” to “Partially Achieved” to reflect the outstanding note from FMT clarifying the process and respective roles of FMT and CFPs in ERPA negotiations.

Output Title Pilots have been successfully implemented on ways to sustain and enhance livelihoods

Output number per LF 3 Output Score B

Risk rating (H, M or L): H Impact weighting (%): 30

Risk revised since last AR?

Y Impact weighting % revised since last AR?

N

9

Indicator(s) Milestones Progress 3.1 Number of forest-dependent people benefiting from FCPF programmes

TBD Progress cannot yet be assessed. This indicator is dependent on ER programmes being operationalised. The recently updated ICF Results Framework allows more flexibility on how this indicator is reported against, to enable the most appropriate methodology to be applied.

3.2 Number or ER programmes that demonstrate relevant sustainability standards, as provided for in the Common Approach for Readiness preparation including those for grievance redress, and in the World Bank safeguards.

1 in 2017 3 in 2018 10-13 in 2019

Not on track to deliver by end of reporting period. This indicator is dependent on ER programmes being operationalised.

Comment Timelines have been delayed and no ER programmes are yet operational to test this Output. However, it should be noted that CFPs closely scrutinise ERPDs for their compliance with social and environmental safeguards and long-term sustainability, and programmes selected so far would likely meet this requirement if they were operationalised to specification. In addition, countries include non-carbon benefits in their programme design. For example, DRC’s ER programme helps to improve livelihoods through diversification of agricultural production for smallholders, which reduces deforestation rates while also improving incomes. BEIS is also active in discussions with FMT to finalise the Evaluation Plan, which includes mechanisms for assessing impacts on local peoples. Recommendation

The BEIS Programme Manager should review the BEIS Carbon Fund Logframe alongside the completed FCPF M&E Framework once available, and the revised reporting guidelines of BEIS International Climate Finance, and make appropriate updates for the indicators under this Output.

Output Title Knowledge gained in the development of the FCPF and implementation of ER programmes are broadly shared and used by international REDD+ practitioners

Output number per LF 4 Output Score A

Risk rating (H, M or L): M Impact weighting (%): 5

Risk revised since last AR?

N Impact weighting % revised since last AR?

No

Indicator(s) Milestones Progress 4.1 Examples of utilisation of/or reference to FCPF knowledge products

An increasing number of examples exist by 2015 and remains stable until the end of the fund

Met in 2015. No change in the number of examples has been recorded this year.

10

4.2 Number of people reached, by type of knowledge product and type of audience (including website site counts)

TBD N/A

4.3 Number of neutral/positive mentions of FCPF and REDD+ issues in different key media worldwide

TBD - Increase in neutral and positive mentions worldwide

N/A. FMT does not do structured monitoring on mentions of FCPF and REDD+ issues.

4.4 Number of negative mentions of FCPF and REDD+ issues in different key media worldwide

TBD - Decrease of negative mentions worldwide

N/A. FMT does not do structured monitoring on mentions of FCPF and REDD+ issues.

Comment The World Bank does not do structured monitoring on neutral/positive and negative mentions of FCPF and REDD+ issues, and this is not covered in the revised results framework. Anecdotally, the World Bank has not reported a notable change in neutral/positive or negative mentions of the FCPF and REDD+. The World Bank has been reviewing its own strategy and KPIs for knowledge management and communications, in line with the recommendation of the external evaluation. Hence, this output is currently under review as part of the revision of the FCPF’s M&E Framework – which is happening in consultation with CFPs – and is likely to change substantively. There is potential scope for neutral/positive and negative mentions to be covered under a future evaluation. Recommendations

The BEIS Programme Manager should review the BEIS Carbon Fund Logframe alongside the completed FCPF M&E Framework and update indicators relating to Output 4 on Knowledge Sharing.

D: FUND PERFORMANCE NOT CAPTURED BY OUTPUTS N/A E: VALUE FOR MONEY & FINANCIAL PERFORMANCE Key cost drivers and performance Financial contributions to the Carbon Fund now total c.$880m11 of which approximately $812m will be available for ER purchases. Since the Carbon Fund became operational in 2011, expenditure to date totals $28.2m, solely on costs relating to fund administration12; no payments for emissions reductions have been made yet.

11 Financial Contributions have been established using the latest version of the FCPF Results Collection Model 2019. The model uses information from the February 2019 FCPF Carbon Fund meeting. Numbers may vary due to time period differences and exchange rate fluctuations. Further financial performance information can be found in the FCPF FY18 Annual Report, produced annually by the Facility Management Team. 12 FCPF FY18 Annual Report , p.75. ‘Administration’ in this context includes the creation of technical advisory panels, providing advisory services and programme development support to countries, and private sector engagement. Core administrative costs associated with the Carbon Fund are $4.9m since 2011.

11

Most of the UK’s £141.5m (of which £130m from the ICF, and £11.5 from the ETF) investment in the Carbon Fund has been committed via Promissory Note and has not yet been cashed. As a result, the UK contribution is vulnerable to exchange rate fluctuations. The Carbon Fund has not yet produced any Emissions Reductions results, so the evidence has been evaluated as moderate.13 This evidence base is built on expected results as opposed to actual results. Economy (i.e. Are we or our agents buying inputs of the appropriate quality at the right price?)

• The economy of the Carbon Fund is sensitive to changes in the Sterling to US dollar exchange rate, and as a result has decreased this year due to unfavourable exchange rate movements from a UK perspective.

• An important consideration in the coming year is the price for the verified emissions reductions. CFPs have established that $5/t CO2e is the willingness to pay for contract emissions reductions. If the final price agreed is lower, the economy of the Carbon Fund would increase; if the final price agreed in higher, the economy of the Carbon Fund would decrease.

Efficiency (i.e. How well do we or our agents convert inputs into outputs?) • The efficiency of the programme was decreased during the revised value for money

assessment as part of the 2015 Extension Business case. This was largely due to the set-up time for the Carbon Fund being initially underestimated (there was no previous benchmark for the time required to establish a complex and robust mechanism of this type). As recommended by the 2015 Annual Review, the expectations and milestones for the Carbon Fund were re-baselined.

• There has been further slippage this year; one ERPA (with DRC) was signed in 2018, falling short of meeting the key milestone to sign at least three. BEIS expects that the first payments for verified emissions reductions may not be made until 2020 instead of 2019. Consequently, the fund is now considered less efficient than it was last year.  

Cost –effectiveness (i.e. How much impact does an intervention achieve relative to the inputs that we or our agents put in?)

• BEIS is engaging the World Bank on the potential underspend projected in their ER delivery model. The delivery model is based on conservative assumptions, and so is likely to underestimate delivery. It is new and will continue to be developed as we learn more about the implementation of jurisdictional REDD+ programmes. It is a helpful tool to test parameters but is not suitable to draw firm predictions from. BEIS still expects that the funds will be fully disbursed by 2025, and this will be kept under review.

• There is a risk that programmes may not be able to deliver all the anticipated ERs, or reversal events occur which reduce results. Options for purchasing ERs in addition to the contracted volume may be negotiated in ERPAs to reduce the risk of under-delivery across the portfolio. Also, guidelines for establishing Buffers have been agreed to insure programmes against the risk of reversals.

• As a payment-for-results mechanism, disbursements are tied to the achievement of clearly specified outcomes; in the case of the Carbon Fund, this is the number of

13 Countries are responding to the incentive provided by the Carbon Fund’s Results Based funding scheme as evidenced by the growing pipeline and are developing and implementing appropriate plans to achieve planned results. The first actual results related to carbon savings are only expected to be reported during the first payment year which will be dependent on the negotiated terms of the ERPA, BEIS expects this to be during 2020.

12

Emissions Reductions. Therefore, the majority of payments will only be made if the intervention is successful.14

• The cost of reducing a tonne of carbon is used as a measure of cost effectiveness; compared to last year this has increased from £5.49 to £5.66 at the UK attributed fund-level. The increase is due to a decrease in the total tonnes of CO2e avoided, following a reduction in the amount of funds available for purchasing ERs. The reduction in funds available for purchasing ERs has been caused by an increase in ER programme costs. This cost of reducing a tonne of carbon is within the value-for-money range for ICF programmes, and is close to the original business case estimation, indicating that the Carbon Fund remains a sound investment.

Assessment of whether the Programme continues to represent value for money As the Carbon Fund is yet to deliver verified results, it is too early to determine whether the Programme has deviated significantly from the original value-for-money expectations. Two risks to achieving value for money include 1) further delays to ERPA operationalisation, and 2) the potential for underspend. Delays to disbursement of funds and operationalisation of ERPAs will negatively impact the efficiency of the Programme. Additionally, underspend will negatively impact the effectiveness of the Programme as less ER’s than expected would be purchased.

Quality of financial management The FMT provide annual financial reports as part of the FCPF Annual Report. Budgets are approved annually by Carbon Fund Participants at the Carbon Fund meeting closest to the end/start of the World Bank’s fiscal year, which starts on July 1 and ends on June 30. BEIS has confidence in the capability of the World Bank to deliver the requirements of the programme. The FMT have scaled up resources to meet the needs of an expanded pipeline. The FMT must continue to ensure that the requisite structures, procedures and resources are in place to enable effective post-ERPA operational delivery. It is likely that efficiencies will be realised as the portfolio size increases, and learning is shared across programmes. Where additional expertise is required this has been be procured by the World Bank, such as a Technical Advisory Panel to support the development of programmes and provide an independent assessment of programmes’ technical quality.

Date of last narrative financial report October 2018 Date of last audited annual statement October 2018

See FCPF FY18 Annual Report

F: RISK

Overall risk rating: Moderate Overview of programme risk. Key risks to the programme include: Risk Description Mitigation Residual RAG ERPA negotiations are prolonged causing delays (reducing the efficiency of UK ICF investment in the Fund) or fail altogether (meaning there is an insufficient

FMT will continue to prioritise building capacity in forest countries’ understanding of the ERPA process and Terms. FMT will clarify respective roles of World Bank and CFPs during ERPA

Medium

14 There is a possibility that programmes could negotiate advances to cover the upfront costs of their ER programme.

13

number of ERPAs to commit 100% of Carbon Fund contributions – resulting in lower results than expected and a return of unspent capital)

negotiations, and should raise early any issues which may increase the need for CFPs to resource an ERPA negotiation. FMT will also issue guidance on Benefits Sharing Plans. CFPs should continue to collaborate to consider their approach to the negotiations in advance, and establish positions on the key negotiable commercial terms (such as price, volume, use of ERs, and other variables that form the package of incentives included in the ERPA). CFPs will also set out more clearly their baseline expectations on secondary documentation such as Benefit Sharing Plans.

GBP:USD Exchange rate risk. GBP weakens further, UK contribution and overall financial resources of the Carbon Fund reduce as a result leading to lower than expected results. NB: The World Bank will make a proposal for CFP’s pro-rata share of ERPA and other costs to be apportioned at the time of First Closing (shortly before signing the first ERPA).

The World Bank, as Trustee, will require UK to cash its pro-rata share of each ERPA agreed to ensure the UK does not over commit through ERPAs (which are agreed in USD). The UK will not have to increase its contribution but may wish to in order to secure the expected results.

Medium

Delivery risk (including underspend) due to programmes being unable to attract sufficient funding for the upfront investments required to implement the programmes.

Scrutinise the package of documents (which includes an assessment of financial viability) on each of the programme before entering ERPA negotiations. Scrutinise ERPDs to ensure robust financial plans are in place and an integrated approach to leveraging public and private finance, before final approval of programmes for funding. Work with committed host countries that are prepared to contribute resources to the programme. Support the World Bank’s efforts to advise countries on wider support that may be available to them from the Bank and other sources (including continuing to investigate the possibility of innovative financial instruments such as bonds and guarantees).

Medium

Delivery risk (including underspend) due to attrition, quality concerns, external factors, or other

The Carbon Fund is currently over programmed (19 programmes in the pipeline with the intention to include at

Medium

14

delays, results in insufficient ER-PINs developed into full Programmes, and/or operational delivery of forest nations’ programmes is unsuccessful, and full capitalisation of the Fund is not absorbed.

least 16 in the portfolio) and the pipeline is diverse. The Carbon Fund was extended to 2025 in April 2015. Part of the rationale for this extension was to improve the likelihood of programmes delivering the full volume of ERs. Milestones and associated deadlines have been agreed and countries should be encouraged to progress swiftly through the Carbon Fund process. A Summer 2019 deadline has been set for acceptance of ERPDs into the portfolio. The milestones and deadlines also facilitate monitoring of the pipeline’s progress.

FMT should expose potential issues in ER Programmes early to CFPs, and CFPs should coordinate on an approach to handling difficulties within Programmes and the World Bank.

The Methodological Framework (MF) is too stringent, meaning that an insufficient number of ERPINs develop into full ERPs.

Maintain a pragmatic position but uphold the principles of the MF to ensure the overall environmental integrity of the Carbon Fund programmes.

Low

Outstanding actions from risk assessment

• Clarify clear roles and responsibilities for ERPA negotiations. • The BEIS programme manager and FMT should agree improvements to be made to

the monthly portfolio reports and have more regular informal calls with CFPs to update on programmes and key issues.

• Monitor the Foreign Exchange Rate Risk and the impact on portfolio management if the GBP:USD exchange rate remains significantly below the historical average.15

Innovative, multi-sector, REDD+ programmes, such as those in the Carbon Fund, are inherently complex and risky. BEIS will continue to closely monitor the level of risk, and the World Bank’s approach to risk mitigation (as detailed in the above table), to ensure the risk profile for the Carbon Fund fits within ICF’s risk appetite. G: COMMERCIAL CONSIDERATIONS Delivery against planned timeframe

The initial underestimation of set-up time and perceived delays in the Carbon Fund were discussed at length in the Extension Business Case. UK expectations (and logframe) were re-baselined in 2017 so that progress can be monitored effectively based on updated, realistic, expectations. According to these revised expectations the Carbon Fund is not 15 The exchange rate used in the COP21 Joint Statement from Germany, Norway, and the United Kingdom was based on average exchange rates in the period from Sept 2014 to Nov 2015, which corresponds to an average exchange rate assumption of 1.59 USD to 1 GBP.

15

progressing as hoped, due to delays in the signing of ERPAs and the subsequent operationalisation of programmes. Performance of partnership(s) In 2016 the World Bank launched its Climate Change Action Plan and Forest Action Plan. Both Action Plans acknowledge the contribution of forests to economic development, livelihoods, and climate objectives. The forest action plan takes a cross-sector perspective to assess potential trade-offs and maximise on potential synergies. In 2018, the Bank has taken further steps to deploying the programmatic approach in ER programmes and undertook a review of financing plans for ERPs and options to address the financing gaps. This is strong progress in the right direction, and the World Bank is also investigating tools to leverage more private finance, or larger-scale IBRD instruments such as bonds. Enhancing engagement with the Private Sector should be a focus of 2019.

Asset monitoring and control The assets in the Carbon Fund relate to the emissions reductions produced by the programme. The FCPF is developing transaction registry models in accordance with country needs, the Methodological Framework and requisites for participating in CORISA under the UN ICAO. At the Carbon Fund meeting in June 2018, the FMT presented to CFPs on progress and confirmed that the functional structure and process logic of the centralized transaction registry model will fully meet Carbon Fund criteria and requirements. CFPs also discussed and agreed an approach for the use (by the seller or the buyer) of emissions reductions generated by Carbon Fund programmes.

H: MONITORING & EVALUATION Evidence and evaluation In 2018, the FMT updated the FCPF Results Framework and has begun collecting information and reporting against the revised indicators. The FMT are currently finalising the plan for future evaluations of the FCPF as part of the revised M&E Framework, which will be posted for endorsement in 2019. The UK’s priorities have been that the framework continues to track key quantitative measures of progress, for example on finance leveraged, while also improving data gathering for more qualitative indicators, such as the contribution of the FCPF to developing a global REDD+ framework and non-carbon benefits of ER programmes. It is anticipated that a series of thematic evaluations will be done to assess impacts of FCPF on key areas. Monitoring progress throughout the review period The bi-annual Carbon Fund meetings provide opportunity to monitor progress throughout the year. As outlined in Section C, the Carbon Fund is continuing to meet our expectations in terms of outputs on many areas but fell short of reaching targets for ERPAs in 2018, and progress toward implementation of programmes has been slower than anticipated. The annual Participants Committee is also a useful opportunity to take stock on the progress of the facility overall (covering both the Readiness Fund and the Carbon Fund).

I: TRANSFORMATIONAL CHANGE

16

Rating The Carbon Fund’s overall KPI 15 box marking is currently judged to be 1 – no evidence yet available/too soon to revise assessment in business case. Monitoring progress throughout the review period The note describing the indicators and methodology for KPI15 was prepared for the March 2015 Results Collection. Since then the evidence and scores have been updated for each Results Collection. Evidence and evaluation Assessment against ICF KPI 15

There is, as yet, limited evidence available against the below indicators. Therefore, the FCPF Carbon Fund overall KPI 15 box marking is currently judged be box 1 – no evidence yet available – too soon to revise assessment in business case. However, some indicators show evidence of box 2 - Some early evidence suggests Transformation likely or box 3 - Tentative evidence of change – transformation judged likely. Increases to scores from the March 2018 results collection are marked with an arrow (). CRITERIA INDICATOR EVIDENCE (BY DECEMBER 2018) SCORE

1. Fostering political will to act on climate change

1.1. A qualitative assessment of ERPINs and ERPDs on the level of political buy-in.

Of the 11 final draft ERPDs reviewed by December 2018, most demonstrated a strong level of political commitment, most notably within Ministries covering forests. However, in some cases CFPs have been concerned that there is a lack of buy-in at the highest political levels across all relevant Ministries to implement these large scale, paradigm-shifting programmes. This could become a barrier to implementation.

2

1.2. Number of R-Packages endorsed by Participations Committee (FCPF Readiness Fund indicator but of relevance to FCPF-C as R-Package is required before an Emissions Reductions Payment Agreement (ERPA) can be negotiated)

19 R-Packages were endorsed by 2017.

3

17

1.3. Number of forest countries coming forward under the FCPF-CF or similar funds with credible ER proposals.

The Carbon Fund pipeline stands at 19 countries. This shows strong demand from forest countries. This exceeds the original expectations of the Carbon Fund which has originally aimed to pilot REDD+ results-based payments in 5 countries.

3

1.4. Number of ER programs designed and successfully implemented under the FCPF-CF or similar funds.

0 programs at implementation stage. 1

As of December 2018, there has been some early evidence to suggest that transformation is likely against some of the above indicators. The number and quality of ER program proposals has been higher than expected. There are currently 19 countries in the FCPF pipeline, and approximately 16 programmes are expected to be piloted by the Carbon Fund, which exceeds original expectations in terms of demand from forest countries. However, no country is yet at the stage of implementing their programme.

2

2. Delivering

at scale 2.1. Qualitative

assessment of ER Programs against the aim to address a significant portion of forest related emissions and removals.

ER programmes are required per the Methodological Framework to be jurisdictional in scale, and to include all significant sources and drivers of GHG emissions. So far, no programme accepted into the portfolio has failed to meet these criteria. This could move up to a 3 once success is demonstrated in programmes being implemented.

2

2.2 An assessment of the significance of the reported number of hectares where deforestation and degradation have been avoided through ICF support.

Evidence will be available once ER programmes are being implemented (none are yet being implemented).

1

2.3 An assessment of the significance of the reported number of forest dependent people with livelihoods benefits protected or improved as a result of ICF support.

Evidence will be available once ER programmes are being implemented (none are yet being implemented).

1

As of December 2018, no actual results have been reported as no ER programmes are yet at implementation stage.

1

18

3. Evidence of effectiveness,Ideas and lessons shared widely.

3.1. The number of and types of standards and management tools discussed and endorsed for ER programs, including (a) Methodological framework and Pricing Approach (b) business processes (ER-PD, ER-PIN, ERPA) and

(c) legal documents (General Conditions, ERPA term sheet)

All of the anticipated standards and management tools have now been endorsed. ERPDs continue to be accepted into the portfolio, from a wide variety of countries including LDCs, suggesting at the global applicability of the standards set by the FCPF. The FCPF Carbon Fund could score a 3 against this indicator once more ERPAs are signed and programmes are being implemented, which will prove the viability of these standards.

2/3

3.2 Number and type of knowledge sharing resources made available on the FCPF website.

There are a number of resources and templates available on the FCPF website. This could score a 3 if there is evidence that these resources are widely used. The World Bank are currently doing a review of FCPF Knowledge Products and their impact.

2/3

3.3 Qualitative assessment of improved quality of ER programmes demonstrating learning from previous experience. Number of countries developing high quality ER programmes with limited support.

There is anecdotal evidence that host countries have learnt from previous Carbon Fund meetings what CFPs’ key concerns are, and anticipate how to address these questions before they present their ERPDs. The quality of ERPDs presented at Carbon Fund meetings has generally increased over time. Some more developed countries, such as Chile and Mexico, have developed ER Programmes largely independently and some less developed countries, such as Cote d’Ivoire have developed programmes with relatively less World Bank support.

1

3.4 FCPF has catalysed the creation of recognised global standards for REDD+ and there are examples of nonparticipant countries that have adopted FCPF standards in their

The high standards of the FCPF did help set a point of reference for negotiating the first allocation for REDD+ results-based payments in the Green Climate Fund, and has informed other standards such as the California Tropical Forest Standard. The FCPF has also been referenced in discussions relating to the

2

19

own REDD+ process

technical criteria for programmes eligible under ICAO’s CORSIA. This could score a 3 once key final decisions are made on unit criteria.

The FCPF has a high level of transparency. All of the materials and evidence of discussion is published on the FCPF website. There is some evidence to suggest the FCPF Carbon Fund could be transformational in this regard, a higher score will be given when there is further evidence of the utility of these ideas and lesson sharing to forest countries inside or outside the FCPF.

2

4. HMG supported activities are creating the incentives for others to act on climate change.

4.1. The volume of public finance mobilised for climate change purposes as a result of ICF funding (£s)

Evidence will be available once ER programmes are being implemented (none are yet being implemented)

1

4.2 The Volume of private finance mobilised for climate change purposes as a result of ICF funding (£s)

Evidence will be available once ER programmes are being implemented (none are yet being implemented)

1

No actual results reported yet. Nothing to warrant change against expected results. 1

20