Financial Mechanism Issues ______________

M.J. MacePre-COP Workshop to Strengthen Capacity of

LDC Negotiators UNFCCC COP 11 and Kyoto Protocol COP/MOP-1

24-25 November 2005Montreal, Canada

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SBI Agenda items 5. Financial Mechanism (Convention)• 5(a) Special Climate Change Fund (SCCF)• 5(b) Report of the GEF• 5(c) Matters relating to implementation of 5/CP.8• 5(d) Additional Guidance to the GEF (CB, TT, Art. 6)

6. Financial Mechanism (Protocol)• 6(a) Adaptation Fund• 6(b) Additional Guidance to the GEF (CB)

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5(a) – Special Climate Change Fund

• Draft text passed forward by SBI (SBI-22 report, FCCC/SBI/2005/10, pp. 20-22)

• Four categories of activities:– Adaptation – top priority– Tech transfer – also essentialEnergy, transport, industry, agriculture, forestry, waste

management Economic diversification for fossil-fuel dependent

economies• GEF Programming Document addresses adaptation

and tech transfer (GEF/C.24/12)

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• Donors can pledge to specific programmes• SCCF to fund the ‘adaptation additionality’ of

project activities • Sliding Scale for Co-financing based on Project

Size (US$) – Under $1 million – fund pays up to 50%– From $1-5 million – fund pays up to 33%– Over $ 5 million – fund pays up to 25%

• Guidance to apply to first 5 years of SCCF implementation

• Funds theoretically available as of June/July 2005

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• At a donor meeting in November 2004, a total of $US 34 million pledged to the fund.

• By May 2005, the SCCF had received US$6.5 million in cash receipts,

• $5.6 million dedicated to the Programme for Adaptation,

• US$1 million pledged to the Programme for the Transfer of Technologies.

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5(b) – Report of the GEF• FCCC/CP/2005/3• Addresses all funds handled by GEF:

– GEF Trust Fund (status of NC2 funding) – GEF SPA (describes 5 projects)– SCCF, LDC Fund – Mentions Adaptation Fund

• Describes new GEF Resource Allocation Framework• Describes GEF-4 Replenishment• Notes GEF Cross-cutting Capacity Building (UNDP

approach for PDF-A)

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GEF Resource Allocation Framework (RAF)

• As of September 2005, all GEF Funds in climate change and biodiversity focal areas will be pre-allocated to countries using a formula; RAF to be reviewed after 2 years, extended to all focal areas

• For climate change, formula includes two indicators as factors: GBI, GPI – GEF Benefits Index (potential for GHG emission

reductions – as potential for global benefits in cc focal area)

– GEF Performance Index (measure of country’s capacity, past successes with projects and governance indicators)

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Country indicative allocations• Country share determined by multiplying GBI and GPI• Some countries with big country shares get ‘individual’

country allocations• Remaining countries will be grouped together, have

collective access to an overall allocation – not an entitlement – Many LDCs in this group– allocations to between 2.5 and 3.5 million ?

• Funds set aside for global and regional projects (5%)• Funds set aside for SGP and cross-cutting (5%)• Ceilings and floors (1 million) on allocations• Country allocations not used in GEF-4 are not carried over

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• RAF does not address adaptation funding– states ‘Activities on adaptation to climate change are being carried out under the strategic pilot on adaptation’ (GEF/C.27/Inf.8/Rev.1, note 5)- notes that ‘GEF operates the SCCF and LDCF, both of which support projects designed to meet countries adaptation needs; in the future GEF to operate the Adaptation Fund’ (note 24)

• in reality, RAF would formally exclude adaptation from GEF climate change focal area funding. SPA is pilot and small funds; SCCF and LDCF only voluntary funds.

• Adaptation projects would have to falls in SGP, cross-cutting or other focal area.

RAF and Adaptation

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5(c) Matters relating to implementation of decision 5/CP.8

Article 11.3(d) of Convention -

arrangements must be put in place to determine in a ‘predictable and identifiable manner’ ‘the amount of funding ‘necessary and available’ for implementation of the Convention

Relates to GEF-4 Replenishment

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GEF-4 Replenishment

GEF has 6 focal areas: climate change (36%); biodiversity (33%); int’l waters; land degradation; ozone depletion; POPs

• GEF pilot phase - .86 billion• GEF-1 – 2.0 billion• GEF-2 – 2.7 billion• GEF-3 – 2.9 billion - July 2002 - June 2006• GEF-4 - ?

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Decision 5/CP.8 - requested secretariat to report on progress in implementing 12/CP.2 and 12/CP.3 (MOU with GEF, with Annex listing 4 categories of info be considered in GEF replenishment):

– Funds needed for agreed full costs of NCs– Funds needed for incremental costs of activities

under Article 4.1– Info on eligible projects submitted to the GEF that

could not be supported due to lack of funds– Other sources of funding

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COP-11 document for consideration

• FCCC/SBI/2005/INF.7 – Experience of international funds and multilateral financial institutions relevant to the investment needs of developing countries in meeting Convention commitments– For mitigation, looks at international funds and multilateral

financial institutions, agencies for ODA, export credit agencies; used criteria to compile info on adaptation

– For adaptation, uses Annexed criteria to compile information

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Some conclusions of report• information is based on developing country NCs – which were not written

to report on investment needs. (p.21)

• growing interest by developing countries in identifying and implementing adaptation projects in implementing the Convention. (p.22)

• Looks at examples of projects in a variety of adaptation contexts, and at cost assumptions provided in NCs of some countries. (Ag, health, forests and ecosystem management, coastal zone management, marine resources).

• Finds ‘it is difficult to draw conclusions at this stage of the relevance of experience of international funds and multilateral financial institutions to the investment needs of developing countries in the area of adaptation’.

• Most adaptation investments made by World Bank, and in area of water resources

• Report says use of climate-change markers for mitigation could be used for adaptation – such as with ODA

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6(a) Adaptation Fund

KP Article 12.8 - the COP serving as the meeting of the Parties to the Protocol

• ‘shall ensure that a share of the proceeds’ from certified Clean Development Mechanism (CDM) activities is used ‘to assist developing countries that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.’

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• At COP-7, in 2001, Parties agreed to establish an Adaptation Fund ‘to finance concrete adaptation projects and programmes in developing country parties, as well as activities identified under paragraph 8 of decision 5/CP.7.’ (10/CP.7)

• Decision 10/CP.7 makes plain that the Adaptation Fund is also to be financed from other sources.

• Annex I Parties that have ratified or intend to ratify KP have been invited to provide additional funding.

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• Decision 17/CP/.7 - Parties agreed that the ‘share of the proceeds’ referred to in KP Article 12.8 would be 2% of the certified emission reductions (CERs) issued for a CDM project activity

• share of the proceeds for the AF will be automatically forwarded to an account in the CDM registry as CERs are issued.

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Significant issues

– Relationship with GEF – governance of fund – Name of fund– Rules for allocation, access, disbursement of funds– Need to ensure an adequate level of funding– Modalities for converting CERs into cash to fund

adaptation– Relationship with other funds (GEF, LDC, SCCF)– Burden sharing among Annex II Parties– Particularly vulnerable developing countries

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MAJOR Governance issues• GEF Report says GEF requested by COP to operate the fund.• GEF Council has invited World Bank to serve as Trustee• World Bank has accepted and agreed to establish a ‘Multi-

Donor Trust Fund’ (see GEF Report to COP-11, p. 18)– Q: Does this reflect the nature of the fund? – AF is not a ‘donor’ fund –

automatic share of proceeds, CDM benefits Annex I Parties– Q: Who gave WB authority to rename the Fund?

• The fund ‘will be separately accounted for and disbursed in accordance with the decisions of the GEF Council’ – GEF Report at 18.– Q: Does GEF Council bears any relationship to these funds? These are

not GEF funds.

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Operational issues

• Mechanics of conversion of CERs to (auctioning?)

• Share of the proceeds?

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LDC Fund (decision for adoption)

• In May 2005, SBI reached conclusions for the operation of the LDC Fund (SBI Report, FCCC/SBI/2005/10/Add.1 at 4-5)

• full-cost funding shall be provided to meet the ‘additional costs’ of activities to adapt to the adverse effects of climate change as identified and prioritized in the NAPAs;

• the GEF will develop a co-financing scale for supporting activities identified in NAPAs, taking into account the circumstances of least developed countries;

• activities identified in NAPAs not supported through full-cost funding will be co-financed through the co-financing scale.

• ‘Additional costs’ are defined as the costs imposed on vulnerable countries to meet their immediate adaptation needs.

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LDC Fund Status/Challenges• Contributions are voluntary (e.g. US not contributing). • Fund insufficient to implement all projects identified in

NAPAs. • A co-financing scale will be developed for supporting NAPA

activities after guidance agreed at COP-11. • Full-cost funding will be provided to meet the ‘additional’

costs of activities to adapt to climate change identified in NAPAs.

• As of April 2005, the GEF had received US$32 million• US$21.9 million available for allocation to the Fund. • Programming document will be out in 2006

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GEF Governance• GEF has 173 ‘participating countries.’• Participants are grouped in 32 constituencies: 18

composed of ‘recipient countries’, and 14 composed principally of ‘nonrecipient countries’.

• 16 GEF Council Members from developing countries, 14 Members from developed countries, 2 from CEITs

• Decisions taken by consensus. • If no consensus, any Member may require a formal vote.• Formal votes taken by a double-weighted majority, which

both a 60% majority of the total number of participants and a 60% majority of total contributions

• Donor countries most powerful