Selecting effective financial instruments to support action on climate change
This low emission development strategies (LEDS) Finance Resource Guide presents a curated selection of resources on a range of topics around finance for LEDS and Nationally Determined Contributions (NDCs). It is designed to help LEDS practitioners find high-quality resources that meet their specific needs, avoiding time-consuming searches on the internet. It will be useful to individuals working on, or interested in, LEDS and NDC finance in both developed and developing countries.
- 1. Understanding the situation
- 1.1 Understanding current flows
- 1.2 Assessing financing needs
- 1.3 Assessing capacity
- 1.4 Identifying and overcoming barriers
- 2. Planning and coordinating
- 2.1 Institutions and governance
- 2.2 National finance strategies
- 2.3 Investment plans
- 2.4 National climate funds
- 2.5 Green investment banks
- 4. Using public finance
- 4.1 Managing national finance
- 4.2 International climate finance
- 4.3 Climate finance readiness
- 4.4 The Green Climate Fund
- 4.5 Direct access
- 5. Designing financial instruments
- 5.1 General resources
- 5.2 Sources of private finance
- 5.3 Risk mitigation
- 5.4 Guarantees
- 5.5 Feed-in tariffs and auctions
- 5.6 Taxes and tax incentives
- 5.7 Carbon pricing
6.3 Making projects financeable
Nearly all projects designed to contribute to LEDS and NDC goals will require financing. This includes both the finance required to initiate a project (usually provided by some form of national or international public finance), and the resulting flow of private investment towards a low emission or more climate resilient solution. In order to secure that initial financing (e.g. from the Green Climate Fund) and then, more importantly, to effectively stimulate a lasting change in how private investment flows, projects must be designed with realistic financial structures and mechanisms at their core. This requires an understanding of who the relevant market and financial actors are, how finance flows between them, and what models could successfully change these flows towards a low emission model. The resources in this subsection provide guidance and lessons learned on how to make projects ‘financeable’.
This subsection has a particularly strong link with section 5, as the financial structure of many projects will ultimately make use of one or more of the financial instruments covered in that section.
This CDKN Working Paper focuses on understanding the concept of ‘bankability’ in support of the development of quality ‘bankable’ project proposals – to assist countries’ access to international climate finance. It was developed by CDKN in response to the observation that many countries are struggling to develop strong funding proposals that are ‘bankable’, and are struggling to understand what ‘bankability’ means for different funders in different contexts. The paper was informed by the experience of CDKN’s climate finance-related support across Africa, Latin America and Asia.
Derisking renewable energy investment: A framework to support policymakers in selecting public instruments to promote renewable energy investment in developing countries
The DREI framework systematically identifies the barriers and associated risks that can hold back private sector investment in renewable energy. Section 2.1 of this report covers the identification and classification of barriers to investment in renewable energy projects in developing countries. It helps identify barriers according to different stakeholder groups and provides a methodology for quantifying the impact of these barriers on financing costs of the project.
Guidance for NAMA design in the context of NDCs: A tool to realize GHG mitigation under NDCs (Chapter 5 How to structure NAMA financing: pp. 29–44)
This guide, updated in 2016, aims to support developing countries in the NAMA development and implementation process by providing guidance and good practices on the key aspects of NAMAs, and provide insights on how NAMAs may support NDCs. For further information on this tool see Featured resources in this section.
This primer is devoted to the financing of NAMAs and presents essential principles and models of financing. It highlights challenges in financing the policies and programs that make up NAMAs, as well as possible ways to overcome these challenges. The guide’s four sections cover defining NAMA finance, sources of NAMA finance, instruments, and leveraging finance for NAMAs. Although focused on NAMAs, the content of this guide would be very applicable to the design of any mitigation project that requires a robust financing strategy (such as Green Climate Fund projects).
This policy brief looks at how to develop NAMAs or other mitigation projects that are ‘bankable’—that is, something that a bank or other financier is willing to finance. It proposes three main elements for making projects bankable and explores each of these: improving policy and institutional frameworks; addressing financial risks and returns; and identifying projects and demonstrating feasibility. This brief, written by leading NAMA finance experts, is a useful introduction to this topic.
Part B of this report highlights the fact that the effective design and implementation of public interventions needs to be guided by a more nuanced understanding of current barriers to the flows of private finance in developing countries. These barriers, in turn, depend on the type of private finance required, as well as the location of the activity. The report considers three case studies (grid scale renewables; energy efficiency; climate resilient infrastructure) and for each one identifies the major barriers that currently prevent private capital from flowing into these project types, and what interventions can overcome them.