Bogotá, 26th September 2024
UNEP and its partner organisation Fedesarollo hosted a final validation workshop for the NDC Action project in Colombia. The session was opened by Sebastian Carranza, climate coordinator for UNEP in the LatAm region and chaired by Paola Herrera, regional coordinator for the NDC Action project. In attendance were key technical staff from the Ministry of Environment and Sustainable Development and the National Development Agency.
Marking the culmination of fours year’s work in Colombia, the local technical team summarised the main project outputs and activities of the NDC Action project in Colombia, divided into three main buckets:
- Strengthening NDC Governance
- Status of existing financing sources and the Colombian NDC
- Roadmap to connect NDC actions and objectives with public and private financing sources
- Institutional proposals to overcome climate financing barriers for NDC implementation
- Methodology for accelerating climate projects and prioritization criteria
- Training on project structuring and climate financing for Ministries and local development banks
- Support in updating the NDC 3.0 (due in 2025)
- Analysis of Prioritized Sectors
- A design and implementation model for two financial mechanisms for priority sectors of the NDC: Energy Efficiency and AFOLU
- Institutional recommendations for climate financing for AFOLU and energy efficiency
- Boosting climate investment
- Analysis of gaps and needs to build climate financial mechanisms
- Financial instruments to boost investment in energy efficiency and AFOLU
- Consolidation of two investment concept notes for the financing of projects to support NDC implementation
Energy Service Companies (ESCOs)
Energy Service Companies (ESCOs) were identified as a promising means to deliver major emissions reductions in Colombia enabling investment in demand-side energy efficiency measure in the industrial and commercial buildings sector.
An ESCO proposal for Colombia was divided in two parts: (i) mobilization of investments in energy efficiency measures financed by the saving of energy bills, thus overcoming the upfront costs faced by industrial or commercial consumers who may also lack technical expertise to design EE interventions and (ii) creation of a blended public-private fund to reduce investment risk faced by private lending to the ESCO sector.
The below schematic summarises the private financing mechanism for energy efficiency measures in the industrial and commercial buildings sector managed by an ESCO structure:
AFOLU sector analysis and proposals
The general objective is to promote a transformative change in Areas of High Deforestation (AHD) in Colombia by developing a comprehensive strategy that addresses structural barriers to reducing GHG emissions and improving the well-being of rural communities.
The specific objectives are (i) to create and adapt financial products tailored to the characteristics of AHD, which allow landowners to access green financing for sustainable production practices; and (ii) to strengthen technical and institutional capacities to migrate to sustainable systems that maximize the use of the forest without degrading it.
Design and offering of financial products (US$ 100 million)
FINAGRO will provide municipalities wit AHD: (i) green loans with reduced interest rates for eligible projects; (ii) the creation of a Credit Guarantee Fund; (iii) a carbon incentive proportional to the forest area of the beneficiary properties, which partially amortizes the loan. A typical financing structure could be 20-30% of the investor's own capital, 50-60% of debt with FINAGRO credit, and 20-30% of amortization to capital for the carbon incentive.
Other aspects of the AFOLU proposal includes 10m USD for national forest monitoring and 40m USD in multi-year technical assistance to identify production systems and technologies adapted to conditions in each AHD and technical support prior to (and after) structuring the credit facilities; strengthened capacities of local agricultural extension, aligning services with financial products.
Policy analysis: an “Institutional Triplet” for NDC implementation
At the policy level, the NDC Action identified the need for greater State leadership and multistakeholder coordination focused on NDC implementation, broadly speaking. A proposed solution for Colombia, and thinking ahead to the NDC 3.0 revision process, is to structure an ‘institutional triplet’ to tackle these problems:
1) Establish a clear “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, complement and not replace private sector initiatives. An NDC Mission must ensure that these functions are carried out by relevant Ministries or State agencies, through:
- The 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
- Offering prizes and penalties for achieving (or not) stated goals
- Open and transparent knowledge management in climate change mitigation and adaptation
2) Create a dedicated public agency to structure complex investment projects: this is needed in order to gather scarce public resource to fund socially profitable projects that do not have positive private profitability. For climate change adaptation, it should allow sub-national entities to co-finance interventions and to generate regional economies of scale.
3) Create a blended finance fund: Blended financing funds improve the risk profile of projects and attract a diversity of investors in terms of amount, term, risk appetite, and purpose. They are not designed to carry out the bulk of climate financing. The main aim of a blended finance fund should be to attract institutional investors who, worldwide, are looking to match local and commercial investment in income-generating low-carbon and climate resilience projects.
Policy recommendations from Colombia
- 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 projects in which it is necessary for the State to intervene.
- Build a pipeline of prioritized mitigation projects and establish the logical framework for adaptation projects: To meet the demand for high quality project concepts from institutional investors. The 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.
- 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.
For more detailed analysis you can read the article “accelerating projects to scale up climate financing in Colombia” and “An “Institutional Triplet” for the decarbonisation of Colombia’s economy”.
To learn about the main studies and analyses developed by the NDC Action Colombia project, visit here or below via the QR code:
