Climate Financing

Siddhant Raj Pandey August 09, 2012

Climate Financing has been the buzz word after the developed nations deliberated the limitation of climate change to 2˚ C, which requires a major shift in investment patterns towards low carbon, climate resilient options. 

There has been a commitment by the developed countries to mobilize $ 100 billion per year by 2020 for climate change mitigation and adaptation in developing countries. The International Panel on Climate Change (IPCC) defines mitigation as any action taken to permanently eliminate or reduce the long term effect of climate change; adaptation is defined as the ability of a system to adjust to climate change to moderate potential damage or to cope with the consequences. The developing world would be considering the latter in line with the UN MDG guidelines. Clearly there are distinctive differences in the approach.  The Rio 20 Summit will deliberate on the renewal of political commitment and promotion of green economy.  A country like Nepal will need to clearly define how green economy will help towards its development goals. As Nepal is predominantly an agrarian economy, our concerns should be to leverage Nepal’s position as a least polluting nation in order to mitigate potential future environment degradation. The problems that we face in Nepal are not commensurate with the focus given to problems discussed in international forums on climate mitigation. Nepal’s focus will be more towards the sustainability and adaptation for mountainous nations. Nepal will need to increase its international competitiveness to access those resources of finance available and coordinate with various stake holders at the national and local level. Nepal needs ensure that climate finance is used efficiently to catalyze and significantly scale up public and private sector investment needed to address climate change and promote Nepal as an environmentally friendly economy.

A limited number of climate finance program have been tapped by Nepal.  The bilateral and multi lateral donor agencies are working directly with the government.  According to the World Bank’s Nepal Country Overview 2012, at the global level, Nepal is the only country in the world that has been selected to participate in two Climate Investment Fund (CIF) Pilot Programs – the scaling up of Renewable Energy Program (SREP) and Pilot Program for Climate Resilience (PPCR).  Both these CIF programs involve joint design and implementation by the ADB, IDA and IFC as well as collaboration with other donors such as DFID, Denmark, and the United States.  The PPCR was approved in 2008 with a grant of $ 50 million and loan of $ 40 million towards sharing the experience and knowledge useful to designing scaled-up adaptation measures that are strategically aligned with other donor funded projects.  The results so far have yet to be assessed.

The funding that the GON receives is in the form of grants and the focus has been limited to that. The involvement of the private sector is missing.  Donor agencies are directly working with the government, and the private sector is not fully aware of the mobilization of such climate financing and do not have direct access to global climate funds.  As a result the financial aspect, which involves commercialization, is missing creating a big question on the sustainability of such projects.  The limited role that the private sector has been involved in has been in the areas of renewable energy projects such as micro hydro, small hydro power, bio digester, solar home systems, improved water mills, energy efficiency projects and other clean and low carbon technologies.  At a small level, a few private sector banks and financial institutions have extended technical support and finances towards renewable energy technology that has made impact in the rural sector from the bottom up approach.

One such example of renewable energy technology financing with the collaboration of international partners such as United Nations Energy Program (UNEP), Frankfurt School of Management, Winrock International and the local implementing partner, Ace Development Bank Ltd., along with AEPC and local cooperatives has been the Solar Home System financing in rural households all over Nepal. The target is to install 3500 (SHS) by the end of 2012.  So far, since its commencement almost 2 years ago, 2600 (SHS) has been installed in 13 districts across the country with the help of 25 local financial institutions (local cooperatives). The transformational impact has been tremendous with the displacement of 11000 liters of Kerosene per month  (with savings per month of $ 11000) that would have otherwise been used for lighting purposes has now been a net saving for the homes involved.  It is a small step towards mitigating the usage of 115 million liters of kerosene that 24.10% of the population demands out of necessity.  The unquantifiable benefits due to the displacement of kerosene in the areas involved in SHS to health and the environment has been notable.  Furthermore, with the savings and a credit history the poorest areas are now eligible for credit towards income generating activities (IGA).  The cooperatives that have been trained are now able to advance loans in IGA activities, or SME financing in financial jargon, with the available funds.  This has been a unique example of scaling- up.  The success has been due to the collaboration of various players and mostly the ownership factor due to the commercialization aspect.  In the past 2 years there have been no defaults and the program has been highly sustainable. 

The process is painstakingly slow, but the outcome is highly rewarding.  If the private sector can tap into the Green Climate Fund then the multiplier effects from climate financing will be successful in replicating many more projects like the SHS and biogas financing in rural Nepal.  Our focus should be from a micro level to make climate change endemic and deep rooted. The difference between the developed and the developing economies in Climate Change has been a case of same planet different reality.


(Excerpts from a paper at a conference on Climate Financing that the author presented in April 2012 in Washington, D.C. hosted by Inter-American Development Bank, UNEP and WRA)

The author is Board Member of the Nepal Institute of International and Strategic Studies and Chief Executive Officer of Ace Development Bank Ltd.




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