Mobilising climate finance for NAMA implementation and other mitigation instruments is one of the crucial challenges for the global agenda on climate change. Despite the existence of numerous climate finance instruments, not all are equally accessible. Financing works on a case-by-case basis and can incorporate sources of bilateral, multilateral, private sector finance, etc. Financing sustainable NAMAs requires the involvement of both the public and private sector.
The financing of NAMAs is distinguished by whether NAMAs are domestic or supported. While domestic NAMAs source their funding from public and private sources at a national level, supported NAMAs aim to attract foreign investment. Furthermore, financing fall into two distinct categories: (1) national and international investments; (2) and public and private investments.
The logic model suggests a sequence of climate finance in the process of supported NAMA. Initially, public finance should come first in order to motivate private finance. Primary funding is established at the domestic public level to attract international public sources, private domestic sources and eventually foreign private investments.
In general, the primary finance for NAMA development will come from a national public institution. This is because the domestic public sector is the principal initiator of NAMA development, and because national public funding already supports most low-emission activities in the country. The resources are typically allocated from rearranging the national budget of the developing country. Domestic public finance can come in the form of grants, concessional finance, etc. Providing at least initial domestic investment is a footing to motivate international sources of finance for multilateral NAMAs.
National public sectors firstly turn to international public donors with their policy ideas. The availability of international funding ranges widely between multilateral, bilateral, development banks, supra-national bilateral funding agencies, and so on. Examples of institutions involved in NAMA financing include the World Bank, Global Environment Facility (GEF), GIZ, NAMA Facility, International Climate Initiative (ICI), Nordic Development Fund, Clean Technology Fund, Inter-American Development Bank (IDB), etc. International investments are beneficial for covering risks and helping overcome technical, regulatory and financial barriers. Generally, they provide short term financing, such as grants, which may cover only the preparation phase of NAMAs. Every public funding institution has different priorities and different forms of assistance (e.g. grants, loans).
Engagement with the private sector is critical as the implementation of NAMAs remains extremely challenging. The incentive for the domestic private sector to support mitigation activities lies in economic benefits such as savings through their investments. In general the private sector will engage in stable and predictable NAMAs with appealing rates of return from low-risk investments. Mainly they support NAMAs related to renewable energy and energy efficiency as subsidies, which reduce the risk for investors, are more widely available in these sectors. NAMAs in transport may also be attractive because they are supported by governments and development cooperation agencies and, consequently, carry less risk. To attract FDI, the developer must make NAMAs bankable, by providing attractive returns and risk ratios. Unsurprisingly, developing countries face barriers when leveraging FDI particularly through high-risk premiums and lower returns on investments.
The NAMA Facility
In addition to the four sources of financing there are many ‘in between’ entities that operate at both the public and private level. One such example is the NAMA Facility, which was established as a joint initiative between the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) and the UK’s Department of Energy and Climate Change (DECC). It is the first initiative to provide earmarked support for NAMAs which are ready for implementation through both, technical and financial support. It aims to provide support to ambitious and innovative NAMAs based on a competitive selection process while encouraging additional investments from the public and private sector. So far, the NAMA Facility has supported 9 projects through two calls for projects proposals. Through these, BMUB and DECC have jointly contributed €120 million, making the NAMA Facility a key actor in NAMA implementation.
Although the NAMA Facility is classified as a publicly owned investment institution it also targets private-sector finance. The grants provided through NAMA facility are also to be used for setting up mechanisms to mobilize private investment (e.g. concessional loans, guarantee funds).
The Green Climate Fund (GCF)
Established at Cancun in 2010, the GCF operates within the framework of the UNFCCC. Like the NAMA Facility, the GCF aims to promote the paradigm shift towards low-emission and climate-resilient development pathways. It was established to leverage private and public finance in order to support mitigation strategies and adaptation practices in developing countries through projects, programmes, policies and other activities. Although still in the process of becoming fully operational, the GCF is expected to become the main source of climate finance by leveraging US$100 billion annually. As its stated intention is to allocate 50% of its resources to mitigation actions, it is to be one of the main funders that NAMA developers will engage with.
For more information read our Beginner’s Guide to NAMAs
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