Aim and main message
Climate financing in developing countries faces challenges for massive resource mobilization because 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 available worldwide, especially from institutional investors.
Context and problem
Since 2015, Colombia has not reduced its GHG emissions, and its 2020 NDC commitments are more ambitious than the previous ones. Between 2014 and 2018, GHG emissions increased by 17.3%, equivalent to an annual homogeneous growth rate of 4.1%. To achieve a 51% reduction in emissions by 2030, the annual homogeneous compound reduction rate will need to be -2.22% from now on.
The slow progress in reducing GHG emissions is due partly to the large climate financing gaps the country 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 very weak and are disintegrated. In adaptation, the country is just beginning to outline national risk allocation and management policies in conditions of deep uncertainty. In general, ministries have no expertise in climate financing, nor do they have the resources to build prioritized portfolios of mitigation projects or adaptation plans.
Fedesarrollo findings
Increasing climate financing will require greater coordination and additional institutional capacities focused on implementation. A solution is to structure an institutional triplet to tackle these problems composed of:
- First component: NDC Mission
A mission is a set of coordinated decisions to solve a complex and specific high-impact social challenge. Missions serve to align transversal efforts in the public sector and to deliver tangible outcomes. Missions must trigger relevant R&D+i, do not replace private sector initiatives, and cross sectors and actors. An NDC Mission must ensure that the following functions are carried out by the delegated government instances:
- Definition and follow-up of measurable goals (e.g. mobilized money, emission reduction, reduced risk).
- Alignment of investment priorities and actions by hierarchical coordination at the highest level of the state.
- Regulation of goal reaching (system of prizes and penalties).
- Knowledge management in mitigation and adaptation.
- Second component: Public agency to structure complex projects
This facility gathers scarce public resource to fund socially profitable projects that do not have positive private profitability. In adaptation, it allows approaching territorial entities to co-finance interventions and to generate regional economies of scale.
- Third component: 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.
Recommendations
Recommendation 1: Define the public climate financing model for mitigation and adaptation
Public financing must be guided by the principles of efficiency, equity, transparency, and catalytic impact. Public climate financing must be included in medium and long-term fiscal allocations, assign ratios to mitigation and adaptation, and define eligible interventions. Public financing for mitigation must be based on constantly updated marginal abatement cost curves (MACC) to identify the projects in which it is necessary for the State to intervene.
Recommendation 2: Prioritize the construction of portfolios in projects with a high mitigation impact and establish conditions to invest in highly complex adaptation 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 having prioritized portfolios, aligned with a green taxonomy, and supplemented by certification systems. The areas with the greatest mitigation impact include energy efficiency, green buildings, the electrification of urban mass transportation, sustainable agriculture, and the conservation and restoration of forests and other carbon storage ecosystems.
Recommendation 3: Adopt a national policy for managing adaptation risks.
Developing countries are required to define an adaptation policy in a decision-making framework under deep uncertainty that strengthens existing sectoral and territorial initiatives. The four strategic lines of work in adaptation are: (i) cost-efficient investment in preserving the continuity of the service of vital networks; (ii) investment in ecosystem services and protection of biodiversity; (iii) protection of the built environment; and (iv) R&D+i in new technologies and business models that transform the economy and occupation of the territory.
Acknowledgements
We would like to thank UNEP through the NDC Action Project that has funded this research agenda.
Publication details: Benavides, J. & Garcia, H. Transversal governance for the fulfilment of NDC targets in Colombia: the missing link (2024).
Disclaimer: The views expressed in this publication are those of the authors and should not be attributed to Fedesarrollo.
