Funding to address climate change was one of the main topics of discussion at the recent COP20 in Lima, Peru. One focus of climate negotiations in recent months has been the capitalization of the Green Climate Fund (GCF), which during the COP reached an initial resource mobilization of US $10.2 billion; as well as the efforts to scale up climate finance in order to reach the goal of joint mobilization of $ 100 billion annually by 2020.
It is worth noting that, today, not only developed countries are mobilizing resources but some developing countries are doing so as well. Thus, three members of AILAC announced contributions to the Green Climate Fund: Colombia and Peru will contribute US $ 6 million each; and Panama will provide a million dollars. Other developing countries such as Mexico, Mongolia and South Korea also announced contributions to the GCF.
At the same time, these countries are also recipients of resources for climate change. All the members of the AILAC group, comprising Chile, Colombia, Costa Rica, Guatemala, Panama and Peru, receive funding for mitigation and adaptation. Funding comes mainly from traditional sources such as: multilateral and bilateral development banks, particularly the World Bank (WB), the Inter-American Development Bank (IDB), the Andean Development Corporation (CAF), and the European Investment Bank (EIB); bilateral development agencies; and specialized funds, such as the Global Environment Facility (GEF), the Climate Investment Funds (CIF), and the Adaptation Fund.
The AILAC countries also promote innovative and creative approaches to climate finance. In the current negotiations, members of AILAC are among a group of countries that has proposed that financial contributions should not be limited to the traditional group of donor countries, but others countries in a position to do so may also provide financial resources and other means implementation. Chile, for example, established various trust funds at the Inter-American Development Bank (IDB), and the UNASUR countries jointly provided financial assistance to Haiti after its devastating earthquake, along with material support.
Some of the newer instruments used to finance mitigation and adaptation by governments in the region include the carbon tax introduced by Chile, the first of its kind in the region. Several countries in the region, such as Colombia and Peru, have launched National Climate Funds. In the case of Colombia, the National Adaptation Fund (www.fondoadaptacion.gov.co) was created, which will complement the existing Calamity Fund, designed for emergency assistance in the event of a natural disaster; and in the case of Peru there is the Fund for the Promotion of Natural Protected Areas of Peru (www.profonanpe.org.pe).
Among the investments of funds from public sources, some interesting examples to highlight are the following:
- The European Union (EU) launched the Latin American Investment Facility (LAIF), which provides a grant as part of a financing package which includes hybrid loans, concessional loans, grants, guarantees, equity investments, risk mitigation, and technical assistance from European and Latin American public financial institutions.
- The implementation of a Program for Climate Change and Clean Energy, funded by the German Development Bank (KfW) and CAF for members of that institution in the region.
- The EU, Germany and Norway created the Global Fund for Energy Efficiency and Renewable Energy (GEEREF). Its aim is to anchor new private equity funds for renewable energy and energy efficiency.
- Debt for nature swaps, as was the case of a swap with the participation of Germany and Guatemala,
- CAF and KfW are launching a new Geothermal Development Fund for Latin America. The fund intends to mitigate risk for the development of geothermal energy in Chile, Colombia and Peru, among other countries.
Among the investments of private, or mixed, sources, we highlight the following:
- The Multilateral Investment Fund (MIF) created, along with other public and private institutions, the Eco-Business II biodiversity fund, which invests venture capital for the growth of sustainable ventures in unique business niches, such as organic agriculture, non-timber forest products, sustainable forestry and eco-tourism. The instruments used are quasi-equity, convertible notes and long-term debt, among others. Several AILAC countries have participated in the operations of this Fund.
- Althelia Climate Fund backed carbon credits for Peru's Cordillera Azul National Park.
- In Peru, the International Finance Corporation (IFC) of the World Bank Group issued its first "Green Bond" denominated in Peruvian soles, with Rimac Seguros.
- Peruvian wind energy producer Energia Eolica SA (an indirect subsidiary of Contour Global) issued a $204 million green project bond with a coupon of 6% and 20 year tenor.
- Another interesting example, although without AILAC country participation, is the Caribbean Catastrophe Risk Insurance Facility, supported by the governments of Caribbean countries and administered by the World Bank, which has allowed the pooling of risks to address natural disasters in the region such as hurricanes. This is a mechanism that could be replicated in other regions that share similar climate risks.
As we have seen, there are many new and creative sources of funding for mitigation and adaptation to climate change in Latin America and the Caribbean, and the countries of AILAC in particular, although thus far with a majority participation of public funds.
In the case of private investment, the necessary measures to attract such resources require a more proactive role of the State (and sub-national entities), to adopt regulations that create the market conditions necessary to attract investment in sectors that are not commercially viable in the absence of specific legislation or regulations (concessions, approvals, incentives, etc.). For example, it is necessary to adopt specific regulations to promote the development of renewable energy; build large infrastructure to prevent flooding; or develop the market for indexed weather insurance.
National development banks play a key role in creating the type of financial instruments needed (such as political risk guarantees and concessional/hybrid lines of credit) to encourage investment by the private sector.
Once the business environment that enables private investment is established, a wide variety of instruments can be used to channel investments, including traditional bonds, equity investments and guarantees, as well as some newer instruments, such as green bonds, catastrophe or contingent bonds, securitization of resource flows for energy efficiency, the development of index insurance for climatic disasters, the development of carbon markets, and the aggregation of climate assets, all of which operate today in developed countries and have some incipient development in AILAC member countries.
(*) Soledad Aguilar, Lawyer (UBA), LLM (London School of Economics). Directs the Graduate Program on Law and Economics of Climate Change, FLACSO-Argentina. She currently leads a consultancy on Innovative Financial Mechanisms for AILAC.
(**) Luis Fierro, Climate Finance Adviser for AILAC. Economist (PUCE), M. A. (University of Oregon), M.Sc. and Ph.D. (c) (U. of Texas at Austin). Profile: www.linkedin.com/in/luisfierro. The opinions expressed do not necessarily reflect the position of the member countries of AILAC.
(***) Virginia Scardamaglia, Master in International Relations and Negotiations (FLACSO), research assistant at the Graduate Program on Law and Economics of Climate Change, FLACSO-Argentina. Works with Soledad Aguilar in a consultancy on Innovative Financial Mechanisms for AILAC.