Written by Juan Benavides and Helena Garcia
Key messages
The NDC Action project, led by the United Nations Environment Programme (UNEP) in collaboration with the UNEP Copenhagen Climate Centre (UNEP-CCC), aims to facilitate the implementation of climate-resilient and low-carbon development aligned with national and global goals. Fedesarrollo, as the National Technical Institution (NTI), spearheaded the technical work of NDC Action in Colombia. To address the problem, Fedesarrollo developed a roadmap connecting public and private resources with the objectives and initiatives of the Nationally Determined Contributions (NDCs).
Climate financing in developing countries faces major resource mobilisation challenges due to a mix of market and coordination failures. Improving transversal governance through an “institutional triplet” can solve these challenges by providing a sense of direction and facilitating the construction of attractive portfolios for the abundant financing that is available worldwide, especially from institutional investors looking for low-carbon and/or climate resilient projects.
Context and problem
Since 2015, Colombia has not reduced its GHG emissions, while its 2020 NDC commitments are more ambitious than the previous ones. Between 2014 and 2018, GHG emissions increased by 17.3, equivalent to an annualised growth rate of 4.1%. To achieve a 51% reduction in emissions by 2030, the annual compound emissions reduction rate will need to exceed 2.2% from 2024 onwards.
Climate financing faces massive resource mobilisation challenges in developing countries. In mitigation, the identification and prioritization of interventions, project structuring and risk management are very weak and often disconnected. In adaptation, countries are just beginning to outline national risk allocation and management policies in conditions of deep uncertainty about the frequency or severity of extreme weather events.
The complexities of mitigation financing stem from the disbursed nature of the interventions in heterogenous sectors. In adaptation, the financing difficulties come from the lack of capacities to structure plans and protocols and to incorporate these into public financing cycles, which much face impending social spending and lacks methods to bring together long-term investments to reduce physical risks. Except for regulated sectors (infrastructure service networks), key ministries have limited expertise in climate financing, nor do they have the resources to build prioritized portfolios of mitigation projects, let alone adaptation plans.
The slow progress in reducing GHG emissions is due partly to the large climate financing gaps Colombia faces because of (i) market failures (gap between financing supply and demand); and (ii) coordination failures within the state, and between the state and the rest of the actors.
In mitigation, the identification and prioritization of interventions, project structuring and risk management are weak and often disconnected. In adaptation, the country is just beginning to outline national risk allocation and management policies in conditions of deep uncertainty. In general, ministries have limited expertise in climate financing, nor do they have the resources to build prioritized portfolios of mitigation projects or adaptation plans.
Findings
Increasing climate financing will require greater coordination and additional institutional capacities focused on implementation. The following high-level policy decisions must be undertaken:
1) Define the public climate financing model for mitigation and adaptation
Public financing should follow principles of efficiency, equity, transparency, and catalytic impact. It must be part of medium and long-term fiscal plans, specifying ratios for mitigation and adaptation, and outlining eligible interventions. Financing for mitigation should use regularly updated marginal abatement cost curves (MACC) to identify state intervention needs. For adaptation, it should prioritize protecting natural and built assets and co-financing sustainable territorial reorganizations with local authorities.
2) Focus on creating project portfolios with significant mitigation impacts and establish conditions for complex adaptation investments
To mitigate the negative carry risk of sovereign and green bonds, prioritized portfolios must be profitable for investors and aligned with green taxonomies. Key mitigation areas include energy efficiency, green buildings, electrification of urban transport, sustainable agriculture, and forest conservation. In developing countries, the AFOLU sector requires tailored measures to reduce investment risks.
3) Adopt a national policy for managing adaptation risks
Colombia must create an adaptation policy that enhances existing initiatives. The four strategic lines are: (i) cost-effective investments in vital service networks, (ii) investment in ecosystem services and biodiversity, (iii) safeguarding the built environment, and (iv) R&D in new technologies and business models.
Recommendations
Recommendation 1: Set up the climate finance governance architecture via an “NDC Mission”
The NDC Mission must be led by the Presidency of Colombia to ensure that the following functions are carried out by the delegated government instances: (i) definition and follow-up of measurable goals (e.g., mobilized money, emission reduction, reduced risk); (ii) alignment of investment priorities and actions by hierarchical coordination at the highest level of the state; (iii) regulation of goal reaching (system of prizes and penalties); (iii) knowledge management in mitigation and adaptation.
Recommendation 2: Organize a public agency to structure complex climate finance projects
There is an appetite for financing that does not meet sound, structured projects to invest. Negative carry risk of sovereign and green bonds due to the absence of projects will be mitigated by a climate project structuring facility through a specialized agency bringing initiatives to financial closure in a satisfactory manner for all investors. The focus of the facility will be on structuring socially profitable projects that do not have positive private profitability. In adaptation, it would allow approaching territorial entities to co-finance interventions and to generate regional economies of scale. The areas with the greatest mitigation impact include the electrification of urban mass transportation, sustainable agriculture, and the conservation and restoration of forests and other carbon storage ecosystems.
Recommendation 3: Establish a blended finance fund
Blended financing funds improve the risk profile of projects and attract heterogeneous investors in amount, term, risk appetite and purpose. They are not designed to carry out the bulk of the financing. The main result of the fund's transactions is to attract institutional investors who, worldwide, have investment resources in climate finance of the same order of magnitude as those of commercial banks. Prospects sent to the fund must undergo an eligibility and additionality test, level of maturity, and/or proof of concept (to assess feasibility and propose a financing instrument and seek allies).
Outcomes
Increased climate financing will be achieved through enhanced resource mobilization for both mitigation and adaptation projects, enabled by improved governance and structured financing. Coordination among stakeholders, including state actors and private investors, will be strengthened, leading to more coherent climate actions. Prioritized projects will be effectively funded and executed, contributing to emission reductions and increased resilience. Public agencies will develop enhanced capacity for risk management, acquiring the necessary skills and knowledge. Investment priorities will be aligned, providing clear direction for public and private investments in climate-related projects that meet national and international standards.
Impact
This initiative will contribute to the NDC goal of a 51% reduction in greenhouse gas emissions by 2030. Communities and ecosystems will have increased resilience to climate change, reducing vulnerability. Sustainable economic growth will be promoted through the creation of green jobs and the adoption of sustainable practices in various sectors, leading to a more resilient economy. A robust institutional framework will be developed, facilitating ongoing climate action and adaptation measures. Public awareness and engagement will be improved, fostering a culture of sustainability.
Acknowledgements
We would like to thank UNEP through the NDC Action Project and the UNEP Copenhagen Climate Centre for their financial support and collaboration for this research-based advisory.
Disclaimer: The views expressed in this publication are those of the authors and should not be attributed to Fedesarrollo or UNEP.
