Financial Engineering of Climate Investment in Developing Countries: Nationally Appropriate Mitigation Action and How to Finance It

175 Pages·2014·1.38 MB·English

by  Søren E. Lütken

Financial Engineering
of Climate Investment in
Developing Countries
ANTHEM ENVIRONMENT AND SUSTAINABILITY
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Financial Engineering
of Climate Investment in
Developing Countries
Nationally Appropriate Mitigation
Action and How to Finance It
Søren E. Lütken
Anthem Press
An imprint of Wimbledon Publishing Company
www.anthempress.com
This edition first published in UK and USA 2014
by ANTHEM PRESS
75–76 Blackfriars Road, London SE1 8HA, UK
or PO Box 9779, London SW19 7ZG, UK
and
244 Madison Ave #116, New York, NY 10016, USA
Copyright © 2014 Søren E. Lütken
The author asserts the moral right to be identified as the author of this work.
All rights reserved. Without limiting the rights under copyright reserved above,
no part of this publication may be reproduced, stored or introduced into
a retrieval system, or transmitted, in any form or by any means
(electronic, mechanical, photocopying, recording or otherwise),
without the prior written permission of both the copyright
owner and the above publisher of this book.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
A catalog record for this book has been requested.
ISBN-13: 978 1 78308 018 2 (Hbk)
ISBN-10: 1 78308 018 3 (Hbk)
Cover photo: Gabriela Insuratelu/Shutterstock.com
This title is also available as an ebook.
CONTENTS
List of Figures and Tables ix
List of Abbreviations xi
Foreword xiii
Preface xv
Chapter 1 Introduction 1
Part I What Is
Chapter 2 Climate Change and Nationally Appropriate
Mitigation Action 9
The Identity of a NAMA 10
PoAs and NAMAs 15
Defining Appropriateness 16
The Substance of NAMAs 20
Summing Up 24
Chapter 3 Learning from the CDM 25
The CDM Experience 26
It’s a market – live with it 28
Thriving on domestic finance 29
Small is beautiful … 30
Cost inefficient emissions reduction 31
Additionality revisited 33
Reverse engineering the CDM 34
Summing Up 37
Chapter 4 Defining NAMA Finance 39
Government Investment Motives 44
Private Investment Motives 46
Summing Up 48
vi FINANCIAL ENGINEERING OF CLIMATE INvESTMENT
Chapter 5 The Financing Tools . . . 51
Public Sector Sourcing Instruments 54
Environmental Fiscal Reform 55
Non-domestic sources 59
Public Sector Operational Instruments 59
Grants 59
Taxes 60
Loans and guarantees 61
What happened to the carbon credit? 62
Summing Up 65
Chapter 6 . . . And the Financiers 67
The Intitutional Investor 70
The Insurance Companies 72
Hybrid Sources of Financing 74
The philanthropic foundation trustees 75
The Banks 76
Multilateral development banks 76
National development banks 77
Green Bonds 77
Blending 79
Summing Up 80
Chapter 7 Engineering and Leveraging the Finance 81
Transformation 83
Leveraging Finance from Different Sources 84
The ‘who goes first’ dilemma 85
Additional domestic public funding 86
Approaching international financiers 88
Engaging the local private sector 89
Attracting Foreign Direct Investment (FDI) 91
The Right Order of Leveraging 92
Summing Up 97
Part II What Ought to Be
Chapter 8 C hallenges to NAMA Finance – Mandates,
Aggregation and Lack of Instruments 101
The Aggregation Gap 102
The guarantee system and its shortcomings 105
The ECAs as aggregators 109
CONTENTS vii
Mandates 110
Summing Up 115
Chapter 9 Roles of the Green Climate Fund 117
The Green Climate Fund and Risk 120
The Green Climate Fund and Green Bonds 122
The Green Climate Fund and Equity 126
The Green Climate Fund as Aggregator 129
Other Options 130
Putting the Pieces Together 133
Summing Up 134
Chapter 10 Conclusion 137
How to Start? 141
Notes 143
References 147
Index 149

LIST OF FIGURES AND TABLES
Figures
Figure 1. NAMAs in the context of general
development planning 19
Figure 2. Weight of policy versus project NAMAs
relative to capabilities of developing countries 22
Figure 3. Emissions reduction returns on investment in the CDM 32
Figure 4. From ex-post to ex-ante approvals in CDM 36
Figure 5. Financial engineering of NAMAs 44
Figure 6. Sub-optimal investments in emissions reduction 46
Figure 7. Multilateral investment in mitigation
and typical instruments employed 53
Figure 8. Sourcing instruments and operational
instruments for NAMA financing 55
Figure 9. Direct and indirect taxation 57
Figure 10. Cost of types of risk 63
Figure 11. The right order of leveraging 86
Figure 12. The financing value chain 94
Figure 13. Instruments in the financing value chain 95
Figure 14. Maximizing leveraging 96
Figure 15. The aggregators’ central role in organizing financing 104
Figure 16 Expanded securitization model 119
Figure 17. Simple investment structure involving green bonds 126
Figure 18. Options for financial product development 133
Table
Table 1. Types of Policy NAMAs 21