CLIMATE INVESTMENT FUNDS: THE CLEAN TECHNOLOGY FUND AND THE STRATEGIC CLIMATE FUND. Public Disclosure Authorized. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CLIMATE INVESTMENT FUNDS: THE CLEAN TECHNOLOGY FUND AND THE STRATEGIC CLIMATE FUND SUSTAINABLE DEVELOPMENT NETWORK JUNE 9,

2 ABBREVIATIONS AM) ACRONYMS ADB AF AfDB CDM CEIF CIF cso CTF DAC EBRD ESMAP GEF GFDRR GHG IBRD IDA IEG IF1 ISDR JI LDCF MDBs M&E NAPA NGOs ODA OECD PHRD PPCR PPCR SC SCF SCCF SFCCD TF TFESSD UN UNDP UNEP UNFCCC WBG Asian Development Bank Adaptation Fund African Development Bank Clean Development Mechanism Clean Energy Investment Framework Climate Investment Funds Civil Society Organization Clean Technology Fund Development Assistance Committee European Bank for Reconstruction and Development Energy Sector Management Assistance Program Global Environment Facility Global Facility for Disaster Reduction and Recovery Green House Gas International Bank for Reconstruction and Development International Development Association Independent Evaluation Group International Financial Institution Internal Strategy for Disaster Reduction Joint Implementation Least Development Countries Fund Multilateral Development Banks Monitoring and Evaluation National Adaptation Programs of Action Non Governmental Organizations Official Development Assistance Organization for Economic Cooperation and Development Japan Policy and Human Resources Development Pilot Program for Climate Resilience Pilot Program for Climate Resilience Sub-committee Strategic Climate Fund Special Climate Change Fund Strategic Framework for Climate Change and Development Trust Fund Trust Fund for Environmentally and Socially Sustainable Development United Nations United Nations Development Programme United Nations Environmental Programme United Nations Framework Convention on Climate Change World Bank Group

3 CLIMATE INVESTMENT FUNDS: THE CLEAN TECHNOLOGY FUND AND THE STRATEGIC CLIMATE FUND CONTENTS Executive Summary... i I. Background... 1 I1. The Challenge and the International Framework... 2 I11. Financing Challenges... 5 IV. The Proposed Climate Investment Funds... 8 A. The Proposed Clean Technology Fund B. The Proposed Strategic Climate Fund V. Meeting Challenges and Managing Risks VI. Next Steps Annexes Annex 1: Proposed Clean Technology Fund Annex 2: Proposed Strategic Climate Fund Annex 3: Other Proposed Arrangements Boxes Box 1 : Bali Action Plan... 4 Box 2: Existing resources and financing instruments dedicated to climate change... 6 Box 3: Potential CTF Investments Box 4: Illustrative Project and Financing Plans for CTF Investment... 18

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5 CLIMATE INVESTMENT FUNDS: THE CLEAN TECHNOLOGY FUND AND THE STRATEGIC CLIMATE FUND EXECUTIVE SUMMARY 1. Climate Change as a Development Challenge. Addressing climate change is central to the sustainable development and poverty reduction agenda. An effective response to climate change must combine both mitigation-to avoid the unmanageable-and adaptation-to manage the unavoidable On the one hand, a delay in reducing greenhouse gas (GHG) emissions significantly constrains opportunities to achieve lower stabilization levels and is likely to increase the risk of more severe climate change impacts. On the other hand, climate change has the potential to reverse the development gains that have been hard-earned by developing countries over the past decades and progress towards achieving the Millennium Development Goals (MDGs), such as eradicating poverty, combating communicable diseases and environmental sustainability. Meeting the climate change challenge while also addressing critical poverty and growth needs, like energy access, is essential. 2. To address these needs, the Clean Energy and Development Investment Framework (CEIF) put forth in 2005, the IDA and Climate Change paper, and the Bali Action Plan agreed by the United Nations Framework Convention on Climate Change (UNFCCC) in December 2007, highlighted the need for new and additional financing in the form of concessional loans and grants to assist developing countries in achieving sustainability in their development, by reducing the risks to climate impacts and implementing mitigation actions at the country level. 3. Climate Investment Funds. Recognizing that UNFCCC deliberations on the future of the climate change regime are underway, including discussions on a future financial architecture and funding strategy for climate change, multilateral development banks (MDBs) have developed an interim measure to scale-up assistance to developing countries and build the necessary knowledge base in the development community. The new Climate Investment Funds (CIF) would build on progress made by many of the developing countries, with the objectives of scaling up investments in low-carbon technologies (Clean Technology Fund), and supporting various programs to test innovative approaches to climate action (Strategic Climate Fund). Designed as an interim instrument, the CIF will include specific sunset clauses linked to agreement on the future of the climate change regime. 4. Funding and Governance. By combining significant concessional financing with International Financial Institutions (IFI), public and private sector flows and other climate financing (such as carbon finance and Global Environment Facility (GEF), the CIF will demonstrate how MDBs can help developing countries combine poverty alleviation and growth objectives with the global climate change imperative. Donor contributions to the CIF would be new and additional to existing Official Development Assistance (ODA) fimding levels (which already include financing for climate change actions embedded within recent MDB replenishments; e.g., for IDA). Governance would be broad-based and inclusive. Key features include Trust Fund Committees with a balanced representation of recipient and donor countries and project approval by MDB Boards. A Partnership Forum-a broad-based meeting of stakeholders, including donor and recipient countries, MDBs, United Nations (UN) and UN agencies, GEF, UNFCCC, the Adaptation Fund, bilateral development agencies, NGOs, private i

6 sector entities, and scientific and technical experts-would be convened annually to provide a forum for dialogue on the strategic directions, results and impacts of the CIF. 5. Clean Technology Fund (CTF). The CTF would provide scaled-up financing to contribute to demonstration, deployment and transfer of low-carbon technologies with a significant potential for long-term greenhouse gas emissions savings. As country circumstances differ, investment programs would be developed on a country-specific basis to achieve nationally defined objectives. In order to maximize impact, the CTF would work with the private sector, as well as the public sector, to bring sufficient technological know-how and capital to dramatically scale-up clean technology deployment, while remaining technology neutral. The CTF would build on and complement the GEF, as well as link to capacity building programs of UNEP and UNDP. It would provide grant elements tailored to cover identifiable additional costs necessary to make projects viable. It would utilize a range of concessional financing instruments, such as grants and concessional loans, and risk mitigation instruments, such as guarantees and equity. 6. Strategic Climate Fund (SCF). The SCF would provide financing to pilot new development approaches or to scale-up activities aimed at a specific climate change challenge or sectoral response through targeted programs. The first program to be included in the SCF would pilot national level actions for climate resilience in a few highly vulnerable countries. Other programs under consideration would: support energy efficient and renewable energy technologies to increase energy access in low income countries; and investments to reduce deforestation and forest degradation and to promote improved sustainable forest management. An important objective is to maximize co-benefits of sustainable development, particularly in relation to the conservation of biodiversity, natural resources ecosystem services and ecological processes. 7. World Bank s Role. Together with other MDBs, the Bank will be responsible for implementing programs and projects financed by the CIF, following its normal programming and implementation procedures. In addition, the World Bank will serve as Trustee for the two trust funds and will host an Administrative Unit to administer the CIF. The World Bank, as Trustee, will enter into multi-donor trust fund administration agreements with donors and financial procedures agreements with each MDB for CIF funds. 8, Monitoring and Evaluation. Monitoring and evaluation and dissemination of lessons will be critical for optimizing impacts of the CTF and SCF. Each MDB will follow its procedures for monitoring and evaluation. Each Fund will include a results framework and annual reporting. Provisions for independent evaluations are included in the design. 9. Mitigating Risks. The two funds face risks for which mitigating measures have been built into the design. The most important measure is steady engagement of the Bank with the UNFCCC and GEF and other key stakeholders to ensure that the operations are indeed supportive of the UNFCCC negotiations and, in the interim, facilitate progress in advancing the Bali Action Plan. The CIF, therefore, avoids conditionality, while grounding projects in countryled sustainable development plans. The second risk mitigation measure is to maintain a close working relationship with the newly created Adaptation Fund Board. Other measures address the need to avoid or manage potential or perceived conflicts of interest relating to the Bank s roles in hosting the Administrative Unit, acting as Trustee and serving as one of the implementing agencies. ii

7 10. The CIF has been designed to make a positive contribution to supporting the goals of the climate change negotiations through learning by doing and by demonstrating in concrete terms actions at scale that meet countries sustainable development objectives while responding to climate coneerns and by taking full advantage of the MDB capabilities. The CIF will serve to better position the MDBs to address climate change issues in anticipation of a positive outcome of the UNFCCC negotiations

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9 PROPOSED CLIMATE INVESTMENT FUNDS: THE CLEAN TECHNOLOGY FUND AND THE STRATEGIC CLIMATE FUND I. BACKGROUND 1. From the Clean Energy Investment Framework...The 2005 Gleneagles G-8 Summit in July 2005 stimulated a concerted effort by the development community to broaden and accelerate support to developing countries related to energy access addressing climate change through the Clean Energy and Development Investment Framework (CEIF). Through the CEIF, the World Bank Group (WBG), the African Development Bank (ADB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the Inter-American Development Bank (IADB) (hereinafter referred to as the Multilateral Development Banks (MDBs)), working with other key partners such as the GEF and motivated private sector leaders, have, in a short period of time: (a) accelerated investments in Sub-Saharan Africa for access to energy, (b) assisted several interested countries to undertake low-carbon energy investments and move towards less carbon intensive growth; and (c) elevated the knowledge and ability of countries most vulnerable to climate risks to start the transition towards sustainable, climate resilient poverty reduction and development 2. The CEIF identified a major gap in the international architecture for development to address climate change (both mitigation and adaptation) in developing countries at a scale necessary to initiate transformational change. Among others, it identified the need for financing at more concessional rates than standard MDB terms, and at the scale necessary to help interested developing countries with implementing sustainable development plans and investment decisions that integrate nationally appropriate mitigation and adaptation actions. In the area of access to energy for the poorest, the WBG will continue to enhance its efforts to address unmet needs, with additional financing and leveraging for infrastructure needs at the core of the recently developed World Bank Group Sustainable Infrastructure Action Plan To a Broadening of the Agenda. In its Fourth Assessment (2007), the Intergovernmental Panel on Climate Change (IPCC) makes clear that warming of the climate system is unequivocal and that a delay in reducing greenhouse gas emissions significantly constrains opportunities to achieve lower stabilization levels and is likely to increase the risk of more severe climate change impacts. A consensus is growing that moderating and managing climate change is central to every aspect of poverty reduction, economic growth and development, and that climate change disproportionately affects the urban and rural poor worldwide. The CEIF provided the basis for definition of a range of initiatives to respond to climate change within each MDB, with a set of concrete results and impacts in terms of scale-up. As a direct response, the Strategic Framework for Climate Change and 1 See Clean Energy for Development Investment Framework: Implementation Report on the World Bank Group Action Plan, as Annex 1 of the paper Towards a Strategic Framework on Climate Change and Development for the World Bank Group - Concept and Issues Paper, March 27,2008. DC WBG Sustainable Infrastructure Action Plan, FY09-1 l, May 29,2008. SecM

10 Development (SFCCD) is being developed, with the objective of facilitating WBG operations to support countries efforts to take climate actions without compromising growth and poverty reduction through its regional and global operation^.^ The Development Committee in October 2007 empowered the WBG to help catalyze substantial additional resources from both public and private sources, including concessional finance as appropriate. Linked to the SFCCD and to the emerging strategies of the other MDB s, the Climate Investment Funds proposed in this paper will provide new and additional financial resources and appropriate technology for climate change consistent with the MDBs core mission of growth and poverty reduction and inclusive and sustainable globalization. 11. THE CHALLENGE AND THE INTERNATIONAL FRAMEWORK 4. Climate Change as a Development Challenge. Addressing climate change is central to the sustainable development and poverty reduction agenda, and an effective response to climate change must combine both mitigation-to avoid the unmanageable-and adaptation-to manage the unavoidable. A delay in reducing greenhouse gas (GHG) emissions significantly constrains opportunities to achieve lower stabilization levels and is likely to increase the risk of more severe climate change impacts. Yet, achieving growth and reducing poverty require, among other things, access to energy, which remains a critical driver for the development agenda. 5. Distributional Impact. Moreover, the distributional impact of the costs of climate action remains a key issue. Climate change presents an urgent challenge to the well-being of all countries and particularly to the poorest countries and the poorest people. The impacts of climate change include, among others, increased frequency and severity of droughts, floods and storms, water stress, decline in agricultural productivity and food security, collapse of ecosystems and further spread of water-related diseases, particularly in tropical areas. The poorest countries and communities are already feeling the impact of climate change and will suffer the hardest because of their geographical location, low incomes, and low institutional capacity, as well as their greater reliance on climate-sensitive sectors like agriculture. 6. Collective Action. Stabilization of GHG concentrations within the levels that would keep the impacts of climate change manageable, would require limiting global GHG emissions through multilateral action involving policy incentives and the deployment, on a global scale, of a portfolio of currently available and future low-carbon technologies in a range of sectors, including energy supply, transport, buildings, industry, agriculture, forestry and waste management. This translates into significant emission reductions by developed countries and curbing growth in GHG emissions by developing countries, with eventual stabilization in the long term. The need for collective action in the area of both adaptation and mitigation actions was central to the Bali Action Plan in December 2007, and will underpin the development of the Strategic Framework on Climate Change and Development (SFCCD). 3 Towards a Strategic Framework on Climate Change and Development for the World Bank Group - Concept and Issues Paper, March 27,2008. DC

11 7. Cooperative Arrangement. Because of their lower historical contribution to C02 concentrations, developing countries expect a cooperative arrangement to provide financing and investment to support action on mitigation and adaptation and technology cooperation in accordance with the principle of common but differentiated responsibilities and respective capabilities. Developing countries understandably place the highest priority on fulfilling immediate development needs rather than on mitigating climate change or on making their economies more resilient to longer-term threats from climate change. Therefore, even though emerging and transition economies have opportunities to choose lower-carbon technologies as they develop, they have little incentive to do so when the additional costs are not commensurate with the expected local benefits. Developing countries need resources and tools to level the playing field between conventional and cleaner technologies, eliminating or compensating for market imperfections, and financing the difference in cost. 8. UNFCCC and the Bali Action Plan. The UNFCCC foresees a broad range of financial resources to address climate change. The UNFCCC Conference of the Parties in Bali in December 2007 launched a comprehensive process to enable the full, effective and sustained implementation of the Convention through long-term cooperative action to address global climate change. The key areas for negotiations include mitigation of climate change, adaptation, technology development and transfer, and provision of financial resources in support of developing countries actions (Box 1). It recognizes the need for financial resources to be provided to developing countries to assist them in meeting the costs of mitigation and adaptation measures. 3

12 Box 1: Bali Action Plan The Bali Action Plan was formulated by member countries of the UNFCCC at COP 13 in order to enhance the implementation of the Convention and negotiate firther actions for a post-2012 period. While reaffming that socio-economic development and poverty reduction are global priorities, the Bali Action Plan calls for: 0 Enhanced action on mitigation of climate change: 9 nationally appropriate, measurable, reportable and verifiable mitigation commitments or actions, including quantified emissions limitation and reduction objectives by all developed countries, taking into account differences in their national circumstances; 9 nationally appropriate mitigation actions by developing countries in the context of sustainable development, supported by technology and enabled by fmance and capacity building in a measurable, reportable and verifiable manner; 9 policy approaches and incentives relating to emissions reductions from deforestation and forest degradation in developing countries; and 9 cooperative sectoral approaches and sector-specific actions, as well as market-based approaches Enhanced action on adaptation to climate change: 9 international action to support implementation of adaptation actions; 9 risk management and risk reduction strategies, including risk sharing and transfer mechanisms such as insurance; 9 disaster reduction strategies; and 9 economic diversification to build resilience. Enhanced action on technology development and transfer to support mitigation and adaptation: 9 effective mechanisms for scaling-up the development and transfer of affordable and environmentally-sound technologies to developing countries, and ways to accelerate their 9 9 deployment and diffusion; cooperation on research and development of current, new and innovative technology; and mechanisms and tools for technology cooperation in specific sectors. Enhanced action on the provision of financial resources and investment to support mitigation and adaptation: 9 improved access to adequate, predictable and sustainable financial and technical support and provision of additional resources, including official and concessional funding for developing k countries; positive incentives for developing countries to enhance mitigation and adaptation actions; innovative means of assisting developing countries that are particularly vulnerable to adverse impacts of climate change, including fmancial and technical support to capacity-building; incentives to implement adaptation via sustainable development policies; and mobilization of public and private sector funding and investment, including facilitation of carbon-fiiendlv choices. 9. There are already several mechanisms in place that have started responding to the challenge of climate change. The GEF, for example, is the financial mechanism of the UNFCCC (article 11) and has over the past 17 years financed $2.4 billion in mitigation pilots and related capacity building. It also manages two funds established by the Conference of the Parties to the UNFCCC, which provide financing for climate change activities: the Special Climate Change Fund and the Least Developed Countries Fund. The GEF also serves as the Secretariat to the Adaptation Fund established under the Kyoto Protocol, which was made operational by a decision taken by the third meeting of the Kyoto Protocol parties. With a more private sector orientation, the Kyoto Protocol was designed to stimulate an 4

13 international carbon market to generate revenues for developing country investments in low carbon developments. While less than four years in formal operations, the Kyoto Protocol flexible mechanisms (Clean Development Mechanism and Joint Implementation) have stimulated a global carbon market generating revenues to developing country companies and governments of over $7 billion in In addition, to its financial mechanism, the UNFCCC stipulates that developed country parties may also provide and developing country Parties avail themselves of, financial resources related to the implementation of the Convention through bilateral, regional and other multilateral channels (article 11 of the UNFCCC, paragraph l(5)) FINANCING CHALLENGES 11. The urgency in addressing climate change requires immediate financing and incentives that can act as a bridge while UNFCCC negotiations take place and until carbon markets, other financial mechanisms and policy signals have matured. The Bali Action Plan anticipates enhanced action on the provision of financial resources and investment to support mitigation and adaptation, and indeed this will be one of the central areas on which the negotiations on the future of the climate regime will focus on. In this context, the MDBs have been actively pursuing ways to increase the availability of innovative financing through existing and new instruments and to accelerate the access of developing countries to carbon finance, building on comparative advantages of the various institutions and their strong development policy dialogue with client countries (Box 2). 12. In particular, the time has now come to take the important lessons learned from pilot and prototype projects and programs and capacity building efforts, such as those supported by the GEF, to broader programs that help reduce poverty, foster growth, build climate resilience, and increase energy access using new low-carbon approaches to development, thus mainstreaming climate action into MDB programs. 13. Finance for Mitigation. While the estimates of the overall magnitude of the investment required to pursue low-carbon growth vary, it is clear that existing sources of financing can cover only a small fraction of the need. Estimated incremental cost to enable power investments in developing countries to reach a low carbon threshold is in the order of $30-$40 billion per year. Global incremental costs for a low-carbon trajectory, including all sectors, are estimated to be $100-$200 billion per year. These figures compare to the CDM market, which was about $7 billion per year in GEF is expected to contribute about US$ 250 million to mitigation activities. A strong market for carbon trading and policy instruments is a condition for the private sector to address the remaining investment gap. 5

14 Box 2: Existing resources and financing instruments dedicated to climate change Financing Source RoldScopdOperational criteria Financing Source RoldScopdOperational criteria GEF ca $265 million pea. Focuses on global environmental Trust Fund $250 benefits to finance incremental costs million p.a. of removing barriers to market SCCF - $15 million development of near commercial p.a. technologies through capacity building, policy and regulatory reform, institutional development, innovation, piloting and demonstration. GEF Adaptation Fund- Funding for the Adaptation Fund $300 million to $1 will mainly come from a 2 percent billion by 2012 levy on revenues generated by the (estimate); Clean Development Mechanism (CDM); Least Developed Countries Fund (LCDF)-$180 million; Special Climate Change Fund (SCCF) ~$90 million (for adaptation); LDCF helps in the preparation and implementation of national adaptation programs of action (NAPAs) in the least developed countries; SCCF supports adaptation projects in all developing countries; Strategic Priority to SPA is a funding allocation within Pilot an Operational the GEF Trust Fund whose objective Approach on is to support pilot and demonstration Adaptation projects that address local adaptation (SPA)-$50 needs and generate global million environmental benefits in all GEF focal areas. Clean Development Improves financial returns through Mechanism (CDM) long-term purchase agreements for and Join the GHG emissions reductions Implementation resulting f?om climate-friendly (JI) projects. The Bank manages 11 carbon funds, including the recently launched FCPF. Global Facility for Disaster Reduction and Recovery (GFDRR) $8 million FY07+$40 million FY08 IDA IDA15 replenishment increased by $9.5 billion over IDA14 (about 30%) Partnership within the UN International Strategy for Disaster Reduction (ISDR), focusing on building capacities to enhance disaster resilience and adaptive capacities in changing climate. The goal is to reduce disaster losses by IDA15 increase was, in part, in recognition that climate change will increase the cost of meeting development goals. IDA will focus on adaptation investments which reduce the damages from climate change and yield net benefits that are competitive with alternative development projects. 6

15 14. Country programming discussions with client developing countries have made it clear that countries are often unwilling to borrow for discrete mitigation activities, and some appear to be reluctant to act until resources that are clearly additional to ODA commitments are made available. In many cases, low-carbon technologies are perceived as unattractive due to: (a) technical risks associated with new technology; (b) slower uptake for new technologies due to slower pace of price decreases; and (c) higher capital costs. Developing countries understandably place a higher priority on fulfilling immediate development needs than on mitigating climate change or on making their economies more resilient to longer-term threats from climate change. In the absence of predictable, long-term revenue streams for carbon which reflect its social cost, and given market imperfections, political risk and other barriers, investment in lower-carbon technologies is likely to continue to be sub-optimal. Grant and concessional financing is critical to catalyze increased flows of commercial capital and to support early action by the developing countries to address the challenges of climate change. 15. Each MDB is refining its climate change interventions based on CEIF experience, striving to help client countries make lower-carbon investments. MDBs have shown that some scaling up of investment activities can be achieved in a short time using the MDB s existing and proven instruments. Priority has been given to identifying opportunities to further scale up the deployment of these instruments, based on client country demand to demonstrate efficiency gains and local environmental benefits, overcome market barriers, and mobilize the private sector. Collective low carbon annual lendinghnvestments is expected to be around $5 billion in FY09, and could reach $10.6 billion by FY2011 (in support of projects/programs totaling $41.3 billion). These projections compare to annual average collective lending/investments for energy access of $1.3 billion and $1.9 billion for low carbon in the period. A number of opportunities have been identified for the MDBs to further leverage their existing instruments if the funding from the proposed CIF were to be available. 16. Financing for Adaptation. The provision of adequate funding for adaptation to the adverse effects of climate change is seen by most developing countries as an essential component of the UNFCCC negotiations. Estimates of the resources needed to make development climate resilient vary widely but most place the amount in the low tens of billions in the near term with the UNFCCC estimating financial flows of $28 billion to $67 billion in Current funding for adaptation in development assistance is less than $100 million per year with most allocated as grants of a few million dollars or less. Adaptation Funds managed by the GEF are expected to add approximately $400-$500 million per year for adaptation actions in developing countries. This could grow to $1 billion per year by 2012 through the operationalization of the Adaptation Fund which relies on a 2% levy on revenues generated by the CDM. 17. As shown in the 2007 International Development Association (IDA) and Climate Change paper4 a key priority is to support a development process in low income countries that is sustainable and resilient to climate variability. IDA and similar mechanisms in other MDBs IDA and Climate Change- Making Climate Action Work for Development. International Development Association, Sustainable Development Network. October

16 are well positioned platforms for achieving this objective, through budget and multi-sectoral financial and technical support which mainstreams adaptation actions. IDA countries will need additional finance just to maintain the development benefits of projects at their without climate change level. The increase in IDA credits that would make this possible has been estimated to range from $600 million to $1.9 billion per year (Le., a 6 to 21 percent increase from the total FY06 IDA credits). The additional amount required to mainstream climate resilience in the development process will be substantially higher. Yet, there is virtually no experience in developing countries in mainstreaming climate resilience in the development process at the national, multi-sectoral levels, resulting in a substantial knowledge gap as well. IV. THE PROPOSED CLIMATE INVESTMENT FUNDS 18. Rationale. Within this context, and recognizing that climate change is central to the sustainable development and poverty reduction agenda, the WBG, in consultation with the regional development banks, developed and developing countries, other development partners and stakeholders, is seeking to establish the CIF. These aim to mobilize new and additional financing for activities and investments that demonstrate how financial and other incentives can be scaled-up to support adaptation and mitigation efforts in a coherent and integrated manner. Recognizing that UNFCCC deliberations on the future of the climate change regime include discussions on a future financial architecture and funding strategy for climate change, the CIF will be an interim measure designed for the MDBs to assist in filling immediate financing gaps and building the necessary knowledge base in the development community. The funds, therefore, will include specific sunset clauses linked to the agreement on the future of the climate change regime 19. Early Initiatives. The CIF was sparked by the early initiative of the United Kingdom (UK) for an Environmental Transformation Fund to support a Transformation Fund for Sustainable Development. This partnership also takes into account the United States of America (USA) proposal for a Clean Technology Fund, and Japan s Cool Earth 50 initiative announced in May Building on these initiatives, the World Bank undertook a series of consultations with the objective of developing an instrument that would generate broad-based support, especially from other donor countries and the developing countries to address these various objective^.^ The establishment of the CIF is consistent with the acknowledgement that climate change is a development issue, as well as an environment issue. 20. While recognizing that the UN is the appropriate body for broad policy setting on climate change, and that the MDBs should not preempt the outcomes of climate change negotiations, there is also an opportunity acknowledged for MDBs to help interested countries to undertake actions for low carbon and climate resilient growth and to strengthen the knowledge base for climate actions. Such action should be guided by the principles of Consultations included: a donors meeting in March 2008 (Paris); Consultations with developing country representatives on April 10,2008 (Washington);and Design meetings with developed and developing country representatives on April 14-15,2008, (Washington) and May 21-22,2008 (Potsdam). Consultations were also held with non-governmental organizations and the private sector during the design process. 8

17 the UNFCCC and should serve as a contribution to the ongoing climate change negotiations and to the MDBs own operations. 21, Two New Trust Funds. The proposed CIFs will comprise of two new trust funds: the CTF that will scale up investments in cleaner technologies, and the SCF that will be broader and more flexible in scope and will serve as an overarching fund that can support various programs to test innovative approaches to climate action. The SCF will include, as an initial program, a pilot program on climate resilience. Two separate trust funds are proposed because of the clear differences in objective and scope, and therefore, necessary differences in governance and administration. It is also likely that there will be a different set of donors interested in, and recipients benefiting from, each trust fund. The design of these two funds was agreed through a consultative process involving a broad range of stakeholders, and in particular representatives from developing and developed countries (See Annex 1 and 2 for the text of the agreements). 22. Governance Arrangements. The CIF will be supported by a broad-based and inclusive governance structure, including a strong role for MDB Boards, equal representation for recipients and donors on Trust Fund Committees, and a Partnership Forum to give voice to all stakeholders. The Trust Fund Committees and sub-committees decision-making will be by consensus. MDB representatives will participate in the Committees. The Committees will also benefit from inputs from other stakeholders such as GEF, UNFCCC, United Nations Development Program (UNDP), and UNEP. 23. Partnership Forum. A Partnership Forum will be established to provide an opportunity to optimize the contribution of the CIF operations to the implementation of the Bali Action Plan. The Partnership Forum, a broad-based meeting of stakeholders, including donor and eligible recipient countries, MDBs, UN and UN agencies, GEF, UNFCCC, the Adaptation Fund, bilateral development agencies, NGOs, private sector entities, and scientific and technical experts will be convened annually to provide a forum for dialogue on the strategic directions, results and impacts of the CIF. The Partnership Forum will have a consultative nature and will not engage in producing outcomes (such as agreed texts, declarations) that might be used as a basis for discussions in the UNFCCC. The Partnership Forum will be co-chaired by the World Bank Vice President for Sustainable Development and a country representative elected by countries participating in the Partnership Forum. The United Nations Environment Program (UNEP) will be invited to collaborate with the Administrative Unit in proposing to the Trust Fund Committees ways to ensure scientific and expert input, based on personal qualificati,ons and experience of experts and a balance of developed and developing country expertise, into the Partnership Forum. At the Partnership Forum, donor and recipient countries will agree, within their respective caucuses, on their representation on the Trust Fund Committee. 24. Additionality of Donor Support. Contributions from donors to the CIF should be additional to existing ODA funding levels. It is very important that donor support to address climate change in developing countries does not offset current and future commitments to assist these countries in their efforts to alleviate poverty and stimulate economic growth. The CIF funds will be closely monitored to ensure continued additionality. 9

18 25. Sunset Arrangements. Recognizing that the establishment of the CIF is not to prejudice the on-going UNFCCC deliberations regarding the future of the climate change regime, including its financial architecture, the CIF will take necessary steps to conclude its operations once a new financial architecture is effective. Notwithstanding the provisions to close each Fund, if the outcome of the UNFCCC negotiations so indicate, the Trust Fund Committees, with the consent of the Trustee, may take necessary steps to continue the operations of the CIF. 26. Country Ownership. Activities financed by the CIF will be grounded in country-led and owned development strategies, consistent with the MDBs own policies and procedures, and in support of the Paris Declaration focus on country ownership. Actions to address climate change mitigation and adaptation considerations will be integrated into the sustainable development process so as to contribute to the basic human needs of the poorest. MDBs role should be: (a) to ensure access of developing countries to adequate financial resources and appropriate technology for climate actions, and (b) to assist them to build country-level knowledge, capacity and development project experience about the feasibility and implications of addressing climate change. 27. Complementarities between activities foreseen for the CIF and activities of the GEF and the UN, especially at the country level, will be identified to maximize synergies and avoid overlap. One of the key concerns that emerged during the consultations with external stakeholders was the risk of duplication of roles, responsibilities and actions of the pilot program for existing mechanisms, most notably the GEF and the new Adaptation Fund. By working closely with GEF Secretariat, the Adaptation Fund Board, and key UN agencies such as UNDP and UNEP, the MDBs have been able to propose CIF trust funds whereby: (a) the design benefits from experience of GEF operations, (b) the operations will be coordinated with, and where appropriate undertaken together with, UN programs, and (c) the Pilot Program for Climate Resilience will contribute to the operational base for the new Adaptation Fund by giving priority to sharing lessons with, and receiving guidance from, the Adaptation Fund Board. 28. Role of the Private Sector. In pursuing a strategy that will combine public and private sector action, the CIF will seek to provide incentives necessary to leverage significant investments in achieving the objectives of the Funds. Working through the MDBs, including their private sector arms, the CIF will include a combination of public and private sector initiatives. As the foundation of economic growth, the private sector has a significant role to play in addressing climate change. The relationship between public sector reform and private sector action is critical. While many private initiatives can be tested and operate in a less than optimal policy and regulatory environment, full engagement and wide scale growth of the private sector will only occur if the policy and regulatory environment is both attractive and stable within a country. An appropriate business environment is particularly important for promotion of small and medium-sized enterprises that are critical to broad-based growth and technology adoption. 10

19 29. Investment Approval Process. Each MDB will remain accountable to its governing body and will therefore apply its own policies and procedures in project and program preparation, approval, and implementation. All operations financed by the WBG with the proceeds of the CIF will follow the WBG s operational policies and procedures, including environmental and social safeguards. In the case of IBRDADA, programs and projects will be approved by the Board, regardless of whether there is IBRD/IDA lending associated with CIF co-financing. Programming will be integrated in the Bank s country sector dialogue. Regional vice-presidencies will be responsible for identification, appraisal and supervision of operations, as part of their annual work programs. Documentation requirements will be the same as for lending operations, and management review arrangements, including for risk assessment and risk control, will apply. In the case of IFC, all projects financed with CIF funds will be submitted to an internal credit committee, which will be responsible for ensuring projects comply with CIF and approved proposal requirements. In keeping with current IFC practice for GEF, only projects that blend CIF funds and IFC funds will be approved by the IFC Board. Each Regional Development Bank will develop projects and submit its investment proposals to its Board in accordance with its practices. 30. Transaction costs will be minimized by following to the extent possible the MDB operational processes, as well as by simplifying and ensuring consistency with respect to the rules of access for these funds. Investment plans agreed with countries for the use of CIF resources will be submitted by the MDBs to the Trust Fund Committee to endorse further development of activities for Trust Fund co-financing and to facilitate prioritization of the pipeline of projects. Subsequently, a proposed program or project developed pursuant to the investment plan will be submitted prior to appraisal to the Trust Fund Committee for approval of trust fund financing. A key feature of the CIF will be joint programming with the relevant regional development bank and coordination with other development partners at the country level. The CIF will be supported by a small Administrative Unit located in the World Bank and by shared responsibilities of the MDBs through an MDB Committee (Annex 3). 31. Bank s Roles. The Bank will play a role in oversight and management of the CIF. The IBRD will be a member of the MDB Committee, will host the Administrative Unit, and be the Trustee of the CIF. It will co-chair the SCF Trust Fund Committee and the IBRD s Vice President for SDN will co-chair the Partnership Forum. 32. Monitoring and Evaluation. Monitoring and evaluation and dissemination of lessons will be critical for optimizing impacts. Progress will be monitored in several ways: (a) (b) (c) through the results framework (see paragraphs 47,48 and 64); annual reports to the Trust Fund Committees that will be made publicly available; as an element of the SFCCD, reporting to the Board on the framework will include information on WBG s use of the Funds and will discuss linkages with the implementation of the climate change and development strategy; and 11

20 (d) an independent evaluation of the operations is to be carried out jointly by the independent evaluation departments of the MDBs after three years of operations (see paragraph 33). 33. Each MDB will follow its procedures for monitoring and evaluation, based on criteria outlined below for each fund. There will be annual reporting by the MDBs on the activities financed by each Fund to the appropriate Trust Fund Committee. In addition, for the WBG, each project will follow standard WBG monitoring and evaluation procedures. An independent evaluation of the operations of each Trust Fund and the impacts of its activities will be carried out jointly after three years of operations by the independent evaluation departments of the MDBs. Results achieved through the finds will be published and publicly available. The Trust Fund Committees will be responsible ensuring that annual reports and evaluations, including lessons learned, are transmitted to the UNFCCC. Full reporting criteria will be agreed by the Trust Fund Committees. 34. The CIF acknowledges in its design the principle of common but differentiated responsibilities to addressing climate change. Consultations on the CIF design and the Bank s successful experience with scaling up assistance through the CEIF give confidence that the new Funds can make a positive contribution in finding ways to address the climate change challenges and inform constructively the UNFCCC process. To prevent any potential undue effect on the UNFCCC negotiations, the advice of Parties and other stakeholders, several of which are expected to join the CIF, will continue to be sought and incorporated. A. The Proposed Clean Technology Fund 35. Objectives and Scope. The CTF will provide scaled-up financing to contribute to demonstration, deployment and transfer of low-carbon technologies with a significant potential for long-term greenhouse gas emissions savings. (Annex 1). In order to maximize impact, the CTF will work with the private sector as well as the public sector to bring sufficient technological know-how and capital to scale-up clean technology deployment, while remaining technology neutral. It will complement GEF through scaling up activities and mainstreaming into broader based sustainable development programs. GEF s mandate in the climate change mitigation area provides financing: (a) to pilot and demonstrate innovative technologies, (b) to remove barriers to transform markets, particularly for renewable energy and energy efficiency and (c) for capacity building, in particular the creation of an enabling environment, including establishment of codes, norms and standards. To the extent GEF fimding is available for capacity building, in particular for the creation of an enabling environment, including establishment of codes, norms and standards, efforts will be undertaken to maximize GEF financing, including through such partners and UNDP and UNEP. 36. Objectives. The CTF will aim to finance transformational actions by: (a) providing positive incentives for the demonstration of low-carbon development and mitigation of greenhouse gas emissions through public and private sector investments; 12

21 promoting scaled-up deployment, diffusion and transfer of clean technologies by funding low-carbon programs and projects that are embedded in national plans and strategies to accelerate their implementation; promoting realization of environmental and social co-benefits thus demonstrating the potential for low-carbon technologies to contribute to sustainable development and the achievement of the MDGs; promoting international cooperation on climate change and supporting agreement on the future of the climate change regime; utilizing skills and capabilities of the MDBs to raise and deliver new and additional resources, including official and concessional funding, at significant scale; and providing experience and lessons in responding to the challenge of climate change through learning-by-doing. 37. Governance Structure. The CTF will have representatives from eight donors and eight eligible recipient countries on its Trust Fund Committee. The World Bank and an MDB representative will also participate on the committee as non-voting members. Others, including the GEF and, on strategic agenda items, a UN representative, will be invited as observers. Decisions of the Trust Fund Committee will be made by consensus. 38. Financing. The CTF will provide positive incentives through grant elements tailored to cover the identifiable additional costs of low-carbon investments necessary to make a project viable. The financing plan will aim to maximize other available sources of finance (e.g., CDM, GEF). In order to maximize impact, the CTF will work with the private sector as well as the public sector to bring sufficient technological know-how and capital to dramatically scale-up clean technology deployment, while remaining technology neutral. The CTF will utilize a range of concessional financing instruments, such as grants and concessional loans, and risk mitigation instruments, such as guarantees and equity. Concessional loans for public sector operations will be provided on IDA-like terms. The Trust Fund Committee will approve loan terms. The pricing and terms of the CIF funds offered to private sector clients will be tailored to address the specific risk, market, and structural aspects of each investment. MDBs will seek to ensure that pricing and terms of the subsidized financing do not distort the market. 39. It is proposed that the CTF provide the MDBs with a menu of blending options to accommodate different needs of client countries and program interventions. The CTF could co-finance MDB non-concessional loans or provide additional financing of new components within on-going investments lending operations, on concessional terms. Resources from the CTF would thereby increase the concessionality of the overall financing for the project. 13

22 40. CTF Investments. The CTF will focus on high abatement opportunities at the country level (but could support sub-regional and regional initiatives) and will be technology-neutral. While there will be no a priori allocations to specific proven technologies or sectors, financing could support a range of investments in the power and transport sectors as well as energy efficiency initiatives in multiple sectorss6 (See BOX 3) 4 1. Private Sector. Private sector participation is integral to the overall CTF strategy. The CTF presents a unique opportunity to build on public sector reform and stimulate private sector action. Experience has shown that private sector initiatives, especially those where the market barriers are not regulatory, can successfully proceed and at times even be a trend setter for subsequent regulatory change. The CTF will provide an opportunity for private sector initiatives, developed and implemented through IFC and the private sector arms of the other MDBs, to address two primary market challenges: a) a dichotomy between perceived risks and real risks; and b) the disincentive for private investors created by the high costs associated with being a first mover in a new market. In both cases, private investors are discouraged from entering a new sector on their own. CTF private sector initiatives will seek to achieve scale-up (a significant proliferation of the types of projects being supported - without a subsidy) by demonstrating, and creating a track record with a few initial investments. Once the private sector can observe the real market risks, and/or the costs of the new technology decrease, replication is expected and a subsequent scale-up in the market. 42. Private sector proposals will be submitted in the form of programs which may consist of individual large-scale projects or envelopes of smaller thematically-linked projects. Proposals will explain how the underlying sub-projects in the proposal are expected to contribute towards the objective of achieving transformational outcomes in a sector, subsector, country, or sub-national region while demonstrating that these outcomes would not be possible without support from the CTF. In designing the CIF, it was recalled that with respect to enhanced technology development and transfer, the Bali Action Plan calls for cooperation on research and development of current, new and innovative technology, including win-win solutions, and collaboration by institutions in developed and developing countries on technologies for mitigation. Recognizing that there is a gap in national and international financing for research and development, it is proposed that the World Bank collaborate with other relevant international institutions with a view to proposing innovative means to address the financing gap. 14

23 ~~ Box 3: Potential CTF Investments Financing fiom the CTF could cover, among other low-carbon technologies, one or more of the following proposed transformational investments : > Power Sector Increase substantially the share of renewable energy (including solar, wind, hydropower, biomass and bio-fuels, geothermal, and waste-to-energy), in the total electricity supply; Switch to highly efficient gas plants resulting in reduced carbon intensity of power generation; m Achieve significant greenhouse gas reductions by adopting best available coal technologies with substantial improvements in energy efficiency and readiness for implementation of carbon capture and storage; Promote grid interconnection schemes that support lower carbon energy production andor significant transmission efficiency improvements; m Large reductions in transmission and distribution losses (new T&D systems using energyefficient technologies, or retrofitshpgrades); Adopt utility managed demand management programs for retail and wholesale customers. > Transportation Modal shift to public transportation in major metropolitan areas, with a substantial change in the number of passenger trips by public transport;. mprove fuel economy standards and fuel switching; > Energy Efficiency in buildings, industry and agriculture Large-scale adoption of energy efficient technologies that lowers energy consumption per unit of output by a minimum of 5% in: o Building design, insulation, lighting and appliances; o District heating; o Energy-intensive industries and equipment (motors and boilers). 43. CTF Investment Plans. The starting point in developing operations to be cofinanced by the CTF will be a request from a country for a programming mission to be undertaken by the WBG and relevant regional development bank to begin a dialogue on how the CTF may contribute to scaled-up low-carbon activities. It is envisaged that the government will play a central role in programming of the CTF s public sector related projects and in donor coordination. The investment plan will take into account the framework of the MDBs Country Assistance/Partnership Strategies, other relevant national planning exercises, and activities of other international programs, including the GEF. A key feature of the programming missions will be engagement at the country level with UN and bilateral development and investment agencies, particularly with a view to mobilizing cofinancing and ensuring harmonized policy support. 44. The investment plan will be a clearly articulated proposal for the use of the CTF s resources in the country, including a potential project pipeline and notional resource envelopes. 7 The Fund would not support technologies that are still in the research stage, but should be focused on deployment which may include demonstration of new low-carbon technologies. 15

24 45. Review Criteria for Investment Plans. The investment plan should highlight how it is embedded in national development plans or programs that include low-carbon objectives. As country circumstances differ, investment programs will be developed on a countryspecific basis to achieve nationally-defined objectives. The CTF will use criteria which will allow a generic assessment of transformative potential, consistent with the objectives of the CTF, and aim to maximize GHG reductions per dollar spent. Investment plans, and the proposed pipeline of projects and programs, will be-assessed and prioritized on the basis of the following four sets of criteria: (a) (b) (c) (d). Potential for Long-Term GHG Emissions Savings.. Cumulative emissions reductions', or avoided, from the investment and per unit cost; Reductions in carbon intensity; Scalability and replicability of low-carbon investments, given carbon intensity of GDP and electricity generation, economic growth rates and sector expansion plans; Significant opportunity for reducing growth in GHG emissions. Demonstration Potential, Accelerate deployment, diffusion and transfer of low- carbon technologies, consistent with the objectives of the CTF, at the following scale:. thematic programs and large-scale projects;. sector or sub-sector in a given country; sub-nationally, by focusing activity on a particular. province/state/municipality ; regionally, particularly where regional cooperation is required; through the private sector, or public-private partnerships.. Development Impact Poverty alleviation, fuel savings, efficiency gains, air and water quality, energy security and access, economies of scale, economy-wide impact, local industrial development potential, and environmental co-benefits. Implementation. Potential Technology development/commercialization status, and policies and capacity to support technology adoption are present or can be developed. in the short term; Minimum level of macroeconomic stability and stable budget management; A methodology will be developed to take into account direct emissions savings from the project itself, potential emissions savings from replication through demonstration, and the potential for wider emissions savings as a result of policy and regulatory change. 16

25 . Commitment to an enabling policy and regulatory environment, including planning commitment and expenditure framework in the sector or subsector;. Incentives for leveraging private sector financing;. Institutional arrangements for implementation of policies. 46. Target Size of the CTF. The World Bank will work with donor countries to mobilize new and additional funding for the CTF with a goal of mobilizing US$5 billion. It is expected that these new resources will leverage another $25-$30 billion in financing for lowcarbon investments. 17

26 1 Case 1 : A financial analysis of a scaled-up solar thermal energy generation investment program, with sponsor equity and MDB and other non-concessional loans, shows that the rate of return on sponsor s equity is 3%, given the higher capital cost of the technology. Anticipated revenues from emissions reductions would increase the IRR to 5%, still below the target rate of return on equity investment for the sponsor. A concessional loan from the CTF could increase the IRR on sponsor s equity to 12%, making the investment financially attractive compared to other power generation options. Case 2: The cost of the most efficient coal generation technologies is % more than conventional advanced power plants. Two commercial-scale demonstration plants of the high efficiency technology would have a projected cost of $1 billion. After taking into account sponsor equity, MDB non-concessional financing, and carbon revenues, there remains a financing gap of $400 million. A CTF concessional loan of $200 million, co-financed with an equivalent amount from a bilateral development bank (factoring efficiency gains and local environmental benefits), would complete the financing package. Case 3: A country plans to introduce bus rapid transport systems, with diesel bus technologies, in five cities over ten years in order to achieve significant efficiency gains in fuel use, improve air quality, and reduce congestion. The current investment program of $2 billion over the ten years balances multiple budget demands on municipal and regional authorities. A program to accelerate adoption of BRT systems in these five cities over the next five years, with the adoption of more efficient, hybrid drive buses, would require financial incentives through concessional loans for local governments to deploy planned levels of investment capital on infrastructure and rolling stock over five years, rather ten. Case 4: The government pays wind power producers 5 cents per kilowatt hour, which is equal to the cost of conventional power generation, but too low to attract investment in wind power. Carbon finance could help increase the tariff to 8 cents and trigger some new investments. CTF funding that bridges the gap to bring the tariff to 10 cents per kilowatt hour could attract significant investor interest in the near-term, accelerating the adoption of the technology. Case 5: A consortium of private lenders is financing a large-scale geothermal power project. The lenders would like to have the benefit of an MDB guarantee against certain non-commercial risks relating to the loan, such as those related to breach of contract by government on power purchase agreements and feed-in tariffs. In addition, there are specific risk barriers that are characteristic of geothermal technology that translate into higher financial costs and result in a financing gap. Such risks include construction delays, increase in O&M costs, performance degradation, and inadequate resource supply, and where the operator has refused to guarantee additional cost coverage because of new technology. The MDB would deploy CTF resources to extend a partial risk guarantee to cover construction and operating risks, alongside the MDB guarantee from its own resources for conventional non-commercial risks. 47. Results Framework The CTF will assess operational quality and outcomes by tracking results. The purpose of the CTF results measurement framework will be to: (a) monitor achievement of results and enable funding or activities to be adjusted as necessary; (b) promote accountability for resource use; and (c) document, provide feedback on, and disseminate results and lessons learned. Proposals for funding by the CTF will include: (a) precisely defined indicators and targets; (b) implementation status reports with satisfactory baseline data for outcome monitoring; and (c) implementation completion reports with satisfactory data on project outcomes. 48. The results measurement system will be approved by the Trust Fund Committee. It will measure results at three levels, including: (a) fund impact indicators, such as demonstrating and deploying low-carbon technologies aggregating electricity production per 18

27 year and representing a measured share of electricity production in the recipient countries, measured reduction in average carbon intensity of recipient countries, and GHG emission, reduction per dollar of CTF funding; (b) country outcome indicators, such as reduction in average carbon intensity in key sectors of the country, share of low carbon technologies in electricity production or installed capacity, increase in transmission and distribution efficiency, energy consumption per unit of outputs in industrial and building sectors, and additional financing leveraged from private and public sectors; and (c) portfolio performance indicators such as development outcomes, risk to development outcomes, aggregate GHG emissions reductions, projects at risk, and elapsed time. B. The Proposed Strategic Climate Fund 49. Objectives and Scope. The SCF will provide financing to pilot new development approaches or scale-up activities aimed at a specific climate change challenge or sectoral response (Annex 2). The SCF will aim to: promote international cooperation on climate change and support progress towards the future of the climate change regime; provide experience and lessons in responding to the challenge of climate change through learning-by-doing; promote and channel new and additional financing for addressing climate change through targeted programs to be established as part of the SCF or through separate funds like the CTF or other funds addressing climate change, such as the Forest Carbon Partnership Fund (FCPF); utilize the skills and capabilities of the MDBs to raise and deliver concessional climate financing at a significant scale to unleash the potential of the public and private sectors to achieve meaningful reductions of carbon emissions and greater climate resilience; provide incentives for scaled-up action and transformational action (both mitigation and adaptation) and for solutions to the climate change challenge and poverty reduction in developing countries, consistent with poverty reduction and sustainable development strategies that are robust to climate change; provide incentives to maintain, restore and enhance carbon-rich natural ecosystems to prevent these carbon sinks from becoming sources of increased emissions, and to enhance all the services they provide, including climate resilience or adaptive capacity, and thereby support sustainable development; complement other multilateral financial mechanisms, such as the GEF and the Adaptation Fund, and bilateral sources of financing and seek co-financing where appropriate; and 19

28 (h) maximize co-benefits of sustainable development, particularly in relation to the conservation of biodiversity, natural resources ecosystem services and ecological processes. 50. Governance Structure. The SCF will have eight donors and eight recipients on its Trust Fund Committee, as well as non-voting representatives of the World Bank, MDBs, the UN, and a CSO representative. The SCF differs from the CTF in that each SCF program will have its own sub-committee, again with balanced participation from donor and developing countries. For the Pilot Program for Climate Resilience, for example, it is proposed that membership on the sub-committee include six recipient and six donor representatives and the developing country Chair or co-chair of the Board of the Adaptation Fund. Other partners will be invited as observers of the sub-committee, including all pilot countries under the program, MDBs, UNDP, UNEP and GEF, and civil society. Decisions of the Trust Fund Committee and the Sub-committees will be taken by consensus. 51. Pilot Program for Climate Resilience. The first program of the SCF to be established will be the Pilot Program on Climate Resilience (PPCR). The proposed Pilot Program for Climate Resilience (PPCR) is designed to provide programmatic finance for country-led national climate resilient development plans. Such programmatic finance is expected to add value recognizing that most of the existing dedicated adaptation financing is project specific. The PPCR aims to provide transformational and scaled-up support for both the development and implementation of national climate resilient development plans. This experience will be gained through scaled-up interventions covering a full range of sectors and sources of financing, and with sufficient resources to move quickly from planning to action. This pilot program has been designed to support, rather than compete with, the Adaptation Fund.(see paragraphs 67 and 68). It will provide lessons over the next few years that might be taken up by countries, the development community, and those negotiating the future of the climate change regime, including the Adaptation Fund, as well as broad based development programs like those supported by IDA and its equivalents in other MDBs. 52. The PPCR will pilot and demonstrate ways to integrate climate risk and resilience into core development planning, complementing other on-going activities. The pilots will be country led, will build on National Adaptation Programs of Action and other relevant country studies and strategies and will be strategically aligned with the Adaptation Fund and other donor funded activities to provide pilot finance in the short term so as to learn lessons that will be useful in designing scaled-up adaptation finance, including in the context of international climate negotiations. 53. The PPCR will move quickly to provide about 5 to 10 countriesg with scaled-up support for integrating climate resilience into their development planning and financing. Pilot countries will be selected by the Sub-committee of the PPCR on the basis of recommendations from an expert group. In providing guidance on country selection, the expert group will consider: (a) transparent vulnerability criteria; (b) country preparedness and ability to move towards climate resilient development plans, taking into account efforts The PPCR-SC will determine the number of countries in the pilot program taking into account, among other things, the resources available for the program and the objective of providing scaled-up resources in the pilot countries.. 20

29 to date and willingness to move to a strategic approach to integrating climate resilience into development; and (c) country distribution across regions and types of hazards (as appropriate to a pilot program). Where relevant, cooperation will be established with other on-going national adaptation programs. 54. Two types of activities will be supported over the next three to five years in pilot countries: (a) (b) The first will provide support for technical assistance to enable developing countries to build upon existing national work, including the National Communications and NAPAs, to integrate climate resilience into core development plans and financing. This phase will provide support for technical assistance and capacity building needs as identified by the pilot country, to enable the government to plan for climate resilient development, with input from national civil society and the private sector. Pilot countries will identify preferred partners for this technical assistance and capacity building work. This may draw upon expertise from, for example, UNDP, UNEP, civil society organizations, research institutes, private sector agencies and MDBs. It will include support to assess and reform institutional arrangements to facilitate the inclusion of climate risk (and opportunities that may arise from climate change) in development planning and in decision making by civil society and the private sector. The bulk of this work should be completed within about one year of the recipient country being identified. There should be an emphasis on placing the strategic planning in a long-term context. Technical support to the planning process may continue throughout the life of the pilot. The second type of support will provide additional financial resources to help fund public and private sector investments identified in the climate resilient development plans. There will be an emphasis on budget support, sector-wide approaches, and coordinated investment programs across key sectors, and blending with national financing and/or existing international support mechanism. The level of investment will vary according to country circumstances and will be provided in accordance with the Paris Declaration on Aid Effectiveness. This support can begin as soon as climate resilient development plans are in place, and it should begin within about a year of the recipient country being identified The PPCR is designed to be complementary to existing sources of adaptation funding, such the three funds managed by the GEF, the Least Developed Countries Fund, the Special Climate Change Fund, the Adaptation Fund, and IDA. Given the multi-sectoral nature of adaptation measures, MDBs are well positioned to mainstream adaptation efforts into country development programs. However, the full integration of climate resilience in the development portfolio will require further progress in discussions on the future of the climate change regime as well as a better understanding among donor and recipient countries on how to promote an integrated, as opposed to vertical, response to climate change impacts. In the interim, the PPCR will serve as a pilot to generate lessons for mainstreaming climate risk into 21

30 country programs, thus complementing the core functions of MDB s. Resources from the PPCR will be blended with other resources from the MDBs and other international support mechanisms and with national resources to promote institutional change, capacity building and learning through implementation of climate resilient national development priorities. Lessons learned from the PPCR will be shared with other sources of adaptation financing. 56. The Sub-committee for the PPCR (PPCR-SC) will have strong developing country participation and will work closely with the Board of the Adaptation Fund to ensure that the PPCR pilot programs are complementary to the work of the Adaptation Fund and strengthen the knowledge-base for future Adaptation Fund actions. The Board of the Adaptation Fund will be invited to be an active participant in the design, governance and monitoring and evaluation of the PPCR, through representation on the PPCR-SC, involvement in an expert group and through PPCR providing information to the Adaptation Fund Board on programs, achievements and lessons learned. The Sub-committee of the PPCR will be responsible for ensuring complementary between activities foreseen for the PPCR and activities of other development partners active in the field of climate change adaptation, including the GEF and the UN, and ensuring effective cooperation between the PPCR and the GEF and UN country activities to maximize synergies and avoid overlap. 57. Other SCF Programs. The SCF anticipates creation of two additional programs: one for sustainable forestry; another for greening the energy access agenda for the poorest. The scope and objectives of these programs will be approved by the SCF Trust Fund Committee. 58. Sustainable Forestry. Deforestation and degradation account for about 18% of total carbon emissions. The Bali Action Plan calls for consideration of policy approaches and positive incentives on issues relating to reducing emissions from deforestation and forest degradation in developing countries, and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries. Strategies for addressing climate change therefore need to include actions to reduce deforestation and forest degradation and to promote improved sustainable forest management. 59. A Forest Investment Fund/Program is expected to be established by the end of 2008 to mobilize significantly increased funds to reduce deforestation and forest degradation and to promote improved sustainable forest management, leading to emission reductions and the protection of carbon reservoirs. This Forest Investment Fundprogram will be developed based on a broad and transparent consultative process, recognizing the need to harmonize the design of the program with forestry activities of GEF, UN agencies, and bilateral programs. The consultative process will reach out to, among others, interested recipient countries, potential donors, UNFCCC, UN agencies, the GEF, the Collaborative Partnership on Forests, civil society, including indigenous /forest peoples organizations, local and international NGOs and the private sector. The design and implementation of the program will take into account country led priority strategies for the containment of deforestation and degradation, and it will build upon complementarities between existing forest initiatives. 60. Greening Energy Access. Energy access in developing countries, including both electrification and access to household fuels for heating and cooking, represents a long term 22

31 challenge of international development. Climate change considerations are playing an increasingly important role in energy access decisions. Often, a low-carbon path towards achieving access targets has high immediate costs hindering their adoption by developing countries. Coupled with high investment needs for meeting regional energy access agendas, this presents a key challenge towards making low-carbon energy access, through renewable energy and energy efficiency technologies, cost comparable to carbon intensive sources of energy. Therefore, work is also on-going on a proposal for a program to support investments in low income countries for energy efficiency, renewable energy and access to modern sustainable energy. 61, Criteria for Other Possible SCF Programs. Programs in addition to those listed above may be considered in accordance with the following criteria: (a) (b) (c) (d) (e) multiple donor interest in establishing a program; broad applicability of lessons to be learned; sufficient resources to finance activities at scale; complementary to any other multilateral financial mechanism or initiative; and link between climate change and development. 62. The scope and objectives for such new programs will be developed in consultation with key stakeholders, approved by the Trust Fund Committee of the SCF and submitted to the Executive Directors of the WB for information. 63. Target Size of the SCF. The World Bank will work with donor countries to mobilize new and additional funding for the SCF Programs. For the PPRC, the Bank anticipates mobilizing between $300 million and $500 million. Funding targets for other programs will be agreed during design of the programs based on an analysis of the funding needs and donor interest. 64. Results Framework. Each SCF Program will have include as part of its detailed design a system to assess operational quality and outcomes by tracking results. For example, the PPCR results measurement framework will be designed to focus on: (a) outcomes at the country-level in terms of strengthening the NAPA and its impact on PRSP; the degree to which the Program Response Strategy Paper (PRSP) and sector development strategies are adjusted to account for near and medium-term climate impacts; the decisions and actions by government to strengthen the policy, regulatory, institutional, and budget systems to facilitate climate resilient development; and the adjustments made for immediate investments to reduce risk to climate impacts in highly vulnerable sectors; (b) extent to which lessons learned are utilize to strengthen MDB focus on climate resilience in MDBs, particularly IDA; and (c) degree to which the pilots are able to support the evolving development of the program of support by the Adaptation Fund. Each pilot will include precisely defined indicators and targets based on the recipient country s particular circumstances. 23

32 v. MEETING CHALLENGES AND MANAGING RISKS 65. Constructive Engagement with UNFCCC. The CIF may be viewed as impinging upon the functiondmandate of the UNFCCC, the forum in which international agreements are negotiated on climate change, and the GEF, which is the financing mechanism of the UNFCCC. This risk is managed through the CIF design and the steady engagement of the Bank with the UNFCCC and GEF Secretariats. The design provides for the necessary interaction with various stakeholders to ensure that the operations are indeed supportive of the UNFCCC negotiations and in particular, in the immediate-term, facilitate positive progress on the Bali Action Plan. Close consultations have been and will continue to be maintained with the UNFCCC Secretariat and GEF. GEF will be invited as an observer on the Trust Fund Committees. Finally, the funds incorporate clear sunset clauses that provide that the funds will take the necessary steps to conclude their operations once a new financial architecture is effective so as to not pre-judge the outcome of any future international climate agreement 66. On the other hand, a recognized purpose of the CIF is to demonstrate to negotiators what is possible if significant new financing and innovative financing instruments are made available, in combination with existing resources, to address climate change challenges. To achieve maximum impact, it will be imperative for the funds to become operational and to make financing commitments commensurate with the level of available funding as quickly as possible so as to contribute lessons to the UNFCCC process. 67. Supporting the Adaptation Fund. The PPCR under the SCF was designed to ensure that it does not risk undermining the Adaptation Fund. The Adaptation Fund, established under the Kyoto Protocol, is to be financed with a share of proceeds from CDM project activities and is able to receive funds from other sources. The share of proceeds amounts to 2% of certified emission reductions (CERs). The Board and the management arrangements for the Adaptation Fund (AF) were agreed at the Bali Conference of the Parties in late The Board has majority representation from developing countries, reflecting that the core source of funding arises from CDM activities within those countries. The AF is expected to become the largest financing vehicle for adaptation under the UNFCCC. Its operating procedures and priorities are still in the early stages of formulation, and resources for the AF are likely to build slowly as CDM activity builds though the first commitment period and CERs are converted to cash. The value of the CERs currently held is a few tens of millions of dollars, and the initial focus of the Board of the AF is likely to be establishing a working framework, identifying a set of activities that will help establish priorities and developing links with other adaptation relevant actors. Estimates of the size of the AF vary according to estimates of the scale of the CDM and prices for CERs, but are expected to be several hundred millions of dollars in the first commitment period and possibly significantly larger in the future of the climate change regime. 68. It is critical that the PPCR is not seen as a competing vertical fund but instead is properly positioned as a learning pilot that will help development partners learn together how climate resilience could be built into regular development processes, thus providing lessons for IDA and similar instruments. Importantly, a close working relationship between the 24

33 PPCR and the AF Board is envisaged. The PPCR will build upon the NAPAs, will be implemented in a manner consistent with the Paris Declaration on Aid Effectiveness, and will complement the existing adaption funds and IDA, which continue to serve essential roles in tackling climate change. The PPCR will involve the AF Board in its governance, including through reporting to the AF Board and selection of pilot countries. In this way it is hoped that the pilot program will strengthen the ability of the MDBs and the AF to provide accelerated support for climate resilient development in the most vulnerable countries. 69. Enhancing Coherence across Financing Windows. While the financing gap is well recognized, and additional resources are needed, there will be a need to manage fragmentation and coordination risks associated with the increased number of large funds supporting similar or linked activities in support of mitigation and adaptation. For example, the World Bank has sought to progressively engage financiers of various funds in joint dialogue to promote coordination and these efforts to promote a sector-wide approach will be continued. In addition, as a way of improving coherence, climate change related funds administered by the World Bank will be systematically mainstreamed into Country Assistance Strategies and trust fund management action plans as required by the Bank s new Trust Fund Management Framework. As part of this effort, opportunities for harmonizing and streamlining the allocation and access rules for these funds - both by client countries and implementing agencies - will be explored. 70. Achieving Appropriate Levels of Concessionality. Excessive concessionality in the CTF could lead to market distortions. CTF financing will provide a grant element tailored to cover the identifiable additional costs of the investment necessary to make the project viable, thereby providing the appropriate incentive to facilitate deployment of low-carbon technologies at scale. The CTF will utilize a range of concessional financing instruments, such as grants and concessional loans, and risk mitigation instruments, such as guarantees and equity. The choice of financing instruments should be flexible and differentiated among sectors. The specific application of these principles to the CTF will be approved by the Trust Fund Committee, taking into account the project or program. Full economic and financial analysis will be conducted to understand the additional costs of moving to low-carbon investments, and tailoring the grant element to cover only this. The program proposals would also need to describe how they would seek to minimize or avoid distorting markets, displacing private sector investment or reducing market competitiveness. Concessionality will be calibrated to the country, sector and project context, by taking into account the marginal abatement costs of the technology and by adjusting the proportion of CTF concessional financing in the overall financing plan of an investment. Experience generated from GEF operations will inform CTF s approach to determining concessionality Avoiding or Managing Potential Conflicts of Interest. An analysis of potential conflicts of interest identified a few low- to medium-risk challenges, and the design has included risk mitigation and management measures as follows: (a) The Bank s role in hosting the Administrative Unit, acting as Trustee and serving as one of the implementing agencies might be perceived as a conflict of interest. To address this, the Administrative Unit will have no responsibility 25

34 for screening proposals for CIF funding. Each MDB will present proposals directly to the Trust Fund Committee and will assume responsibility for ensuring consistency with CIF criteria and priorities. Staffing for the Administrative Unit will be on a competitive basis (and could include staff from other MDBs), following WB procedures. Furthermore, (i) for the CTF, a joint MDB programming approach will be followed, with the Trust Fund Committee approving use of the CTF funds to co-finance programs and projects; (ii) there will be independent evaluation of activities financed by the CIF; (iii) MDBs will be represented in the MDB Committee and will agree on one representative on the Trust Fund Committee; and (iv) the Trustee will enter into financial procedures agreements with all MDBs. There is a risk that the Bank s role as an implementing agency may (i) influence country selection for the programs and (ii) conflict with monitoring and evaluation of the programs. This risk is mitigated by the proposal to follow the IBRD/IDA country-driven model. This will help ensure that CIF country programs are tailored to country needs and meet country development priorities. Project monitoring and evaluation will be the responsibility of the borrower, as in IBRDADA operations, with the Bank reviewing the borrower s M&E reporting. Independent evaluations of CIF operations will be conducted by IEG, along-side the IBRD/IDA co-financed projects. In the case of the PPCR, country selection and approval of all programs will not led by the Bank. Countries will be recommended by an Expert Group (of which members will be nominated by the Board of the Adaptation Fund), with final selection of priority countries made by the Sub-committee. VI. NEXT STEPS 72. Following Board approval of the establishment of the CIF, a Governance Framework document will be prepared for each fund based on the agreed terms included in the proposals annexed to this the Board paper. The Governance Framework will be a legal document, which will set out the overall framework of the governance and operation of each fund and will serve as a constituting document for the partnership among the participants in each fund. The Trustee will also agree with each MDB on a Financial Procedures Agreement to enable their participation in the CIF. 73. In parallel, the Bank will work with prospective donors to finalize agreement on amount and timing of contributions to the CIF. Subsequently, the Trustee will enter into a Trust Fund Administration Agreement with each donor to the CTF or the SCF. 74. The first Partnership Forum will be convened in the third quarter 2008 so as to agree on representatives to serve on the Trust Fund Committee for each fund, and the first meeting of each Trust Fund Committee will be convened in conjunction with the Partnership Forum. 26

35 ANNEX 1: PROPOSED CLEAN TECHNOLOGY FUND Background 1. A consensus is growing that moderating and managing climate change i s central to every aspect of poverty reduction, economic growth and development, and that climate change disproportionately affects the urban and rural poor worldwide. Climate change can be addressed through multilateral action involving policy incentives and deployment on a global scale of clean technologies in a number of sectors. 2. The Fourth Assessment Report of the IPCC found that warming of the climate change system is unequivocal, and that delay in reducing emissions significantly constrains opportunities to achieve lower stabilization levels and increases the risk of more severe climate change impacts. Under the first principle of the UNFCCC, it is recognized that Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof. 3. Arresting increases in GHG concentrations translates into significant emission reductions by developed countries and curbing growth in GHG emissions by developing countries, with eventual stabilization in the long term. Dynamic growth in demand for energy in power, transport, building and industrial sectors in developed and developing countries in the next years provides a finite window of opportunity for developing countries and development institutions to demonstrate and invest in ways that provide energy services and other infrastructure services, reduce emissions, and prevent irreversible climate change. However, there is a gap in the international architecture for development finance for funding available at more concessional rates than standard MDB terms and at the scale necessary to help provide incentives to developing countries to integrate nationally appropriate mitigation actions into sustainable development plans and investment decisions. 4. The UNFCCC recognizes the need for financial resources to be provided to developing countries to assist them in meeting the costs of mitigation and adaptation measures to respond to the challenge of climate change. Pursuant to article 11 of the UNFCCC, the GEF has been designated as the financial mechanism of the Convention. GEF, under its mandate in the climate change area, provides new and additional financing: (a) (b) to pilot and demonstrate innovative technologies; to remove barriers to transform markets, particularly for renewable energy and energy efficiency; and lo United Nations Framework Convention on Climate Change, Article 3( 1). 27

36 (c) for capacity building, in particular the creation of an enabling environment, including establishment of codes, norms and standards. 5. In addition to the financial mechanism defined under article 11 of the UNFCCC, paragraph 1 l(5) stipulates that developed country parties may also provide and developing country Parties avail themselves of financial resources related to the implementation of the Convention through bilateral, regional and other multilateral channels. 6. Article 4(1) (c) of the UNFCCC provides for all Parties to promote and cooperate in the development, application and diffusion, including transfer, of technologies, practices and processes that control, reduce or prevent anthropogenic emissions of greenhouse gases not controlled by the Montreal Protocol in all relevant sectors, including the energy, transport, industry, agriculture, forestry and waste management sectors. 7. Article 4(7) of the UNFCCC recognizes that the extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer to technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties. 8. Consistent with the provisions of the UNFCCC, the Clean Technology Fund has been developed to demonstrate new approaches and provide lessons to contribute to the negotiations under the Bali Action Plan, including the following that are to be addressed, inter alia, in the comprehensive process launched by the Conference of the Parties: A shared vision for long-term cooperative action, including a long-term global goal for emission reductions, to achieve the ultimate objective of the Convention, in accordance with the provisions and principles of the Convention, in particular the principle of common but differentiated responsibilities and respective capabilities, and taking into account social and economic conditions and other relevant factors. Enhanced nationalhternational action on mitigation of climate change, including, inter alia, consideration of: (i) Measurable, reportable and verifiable nationally appropriate mitigation commitments or actions, including quantified emission limitation and reduction objectives, by all developed country Parties, while ensuring the comparability of efforts among them, taking into account differences in their national circumstances; (ii) Nationally appropriate mitigation actions by developing country Parties in the context of sustainable development, supported and enabled by technology, financing and capacitybuilding, in a measurable, reportable and verifiable manner; 28

37 Cooperative sectoral approaches and sector-specific actions, in order to enhance implementation of Article 4, paragraph l(c), of the Convention; Various approaches, including opportunities for using markets, to enhance the cost-effectiveness of, and to promote, mitigation actions, bearing in mind different circumstances of developed and developing countries; Economic and social consequences of response measures; Ways to strengthen the catalytic role of the Convention in encouraging multilateral bodies, the public and private sectors and civil society, building on synergies among activities and processes, as a means to support mitigation in a coherent and integrated manner. (c) (d) Enhanced action on technology development and transfer to support action on mitigation and adaptation, including, inter alia, consideration of: (0 Effective mechanisms and enhanced means for the removal of obstacles to, and provision of financial and other incentives for, scaling up of the development and transfer of technology to developing country Parties in order to promote access to affordable environmentally sound technologies; (ii) Ways to accelerate deployment, diffusion and transfer of affordable environmentally sound technologies; (iii) Cooperation on research and development of current, new and innovative technology, including win-win solutions; (iv) The effectiveness of mechanisms and tools for technology cooperation in specific sectors. Enhanced action on the provision of financial resources and investment to support action on mitigation and adaptation and technology cooperation, including, inter alia, consideration of: (0 Improved access to adequate, predictable and sustainable financial resources and financial and technical support, and the provision of new and additional resources, including official and concessional funding for developing country Parties; (ii) Positive incentives for developing country Parties for the enhanced implementation of national mitigation strategies and adaptation action; (iii) Innovative means of funding to assist developing country Parties that are particularly vulnerable to the adverse impacts of climate change in meeting the cost of adaptation; 29

38 (iv) Mobilization of public- and private-sector funding and investment, including facilitation of climate-friendly investment choices. 9. The need for mobilizing greater and more innovative financing for climate change actions is a critical lesson of the Clean Energy Investment Framework (CEIF). The CEIF has provided the basis for definition of a range of possible initiatives to be developed within each multilateral development bank with a set of concrete results and impacts in terms of scale-up. The scale of action required points to the need to take the important lessons learned from pilot and prototype projects and programs and capacity building efforts, such as those supported by the Global Environment Facility (GEF), to broader programs that help reduce poverty, foster growth and increase energy access using new low-carbon approaches to development. 10. Consistent with the experience of the CEIF, and recognizing that the Bali Action Plan decides to launched a comprehensive process by addressing, among other things, ways to strengthen the catalytic role of the UNFCCC regime in encouraging multilateral bodies to support adaptation and mitigation in a coherent and integrated way, the World Bank Group, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank (hereinafter referred to as the MDBs), are actively pursuing ways to increase the availability of innovative financing through existing and new instruments and to accelerate the access of developing countries to carbon finance, building on comparative advantages of the various institutions and their strong development policy dialogue with client countries. 11. Within this context, the World Bank Group, in consultation with the regional development banks and developed and developing countries, and other development partners is seeking to establish a Clean Technology Fund as one of two strategic Climate Investment Funds (CIF) * and programs. Recognizing that UNFCCC deliberations on the future of the climate change regime include discussions on a future financial architecture and funding strategy for climate change, this fund is an interim measure for the MDBs to fill an immediate financing gap. The fund, therefore, includes a specific sunset clause linked to the agreement on the future of the climate change regime (see paragraph 56-57) Pending final agreement on the future of the climate change regime, the CTF will seek to demonstrate how financial and other incentives can be scaled-up to accelerate deployment, diffusion and transfer of low-carbon technologies. The 2005 Gleneagles G-8 Summit in July 2005 stimulated a concerted effort by the development community to broaden and accelerate support to developing countries relating to energy access and climate change through the Clean Energy Investment Framework (CEIF). It is proposed that the portfolio of funds/programs initially include, if donor support warrants: a. the Clean Technology Fund, b. the Strategic Climate Fund, including programs for Climate Resilience, Greening Energy Access, and Sustainable Forest Management. 30

39 Clean Technology Fund Principles 12. In developing a proposal for a Clean Technology Fund (CTF), the following principles have been taken into account: The core mission of the MDBs is sustainable economic growth and poverty reduction. Climate change mitigation and adaptation considerations need to be integrated into the sustainable development process as addressing these issues contributes to the basic human needs of the poorest who are disproportionately impacted by the negative effects of climate change; Multilateral development banks can and should play a role in ensuring access of developing countries to adequate financial resources and appropriate technology for climate actions; The MDBs should mobilize new and additional financing for adaptation and mitigation programs to address climate change that are country-led and designed to support sustainable development and poverty reduction. Activities financed by the fund should be based on a country-led approach and should be integrated into country-owned development strategies, consistent with the Paris Declaration; Achieving sustainable outcomes will require sustaining the total wealth - produced, human, institutional and natural - on which development depends; The UN is the appropriate body for broad policy setting on climate change, and the MDBs should not preempt the results of climate change negotiations. Actions to address climate change should be guided by the principles of the UNFCCC; The MDBs, in collaboration with other development partners, should assist developing countries to build country-level knowledge, capacity and development project experience; It is appropriate for the MDBs to build partnerships with each other and a wide range of institutions and stakeholders on climate change, including the private sector. In doing so, each MDB should remain accountable to its governing body; Complementarities between activities foreseen for the CTF and activities of the GEF and the UN, especially at the country level, should be identified, and effective cooperation established, to maximize synergies and avoid overlap; and The CTF should provide for transparency and openness in its governance and financing operations. Objectives of the Clean Technology Fund 13. The Clean Technology Fund (CTF) will aim to finance transformational actions by: 31

40 providing positive incentives for the demonstration of low carbon development and mitigation of greenhouse gas emissions through public and private sector investments; promoting scaled-up deployment, diffusion and transfer of clean technologies by funding low carbon programs and projects that are embedded in national plans and strategies to accelerate their implementation; promoting realization of environmental and social co-benefits thus demonstrating the potential for low-carbon technologies to contribute to sustainable development and the achievement of the Millennium Development Goals; promoting international cooperation on climate change and supporting agreement on the future of the climate change regime; utilizing skills and capabilities of the MDBs to raise and deliver new and additional resources, including official and concessional funding, at significant scale; and providing experience and lessons in responding to the challenge of climate change through learning-by-doing. Types of Investment 14. The Clean Technology Fund will invest in projects and programs that contribute to demonstration, deployment and transfer of low carbon technologies with a significant potential for long term greenhouse gas emissions savings. As country circumstances differ, investment programs will be developed on a country-specific basis to achieve nationallydefined objectives. The range of options include: (a) (b) (c) (d) (e) programs and large-scaled project^'^; at the sectoral or sub-sectoral level in a given country; sub-nationally, by focusing activity on a particular province/state/municipality ; regionally, particularly where regional cooperation is required; through the private sector, or public-private partnerships. 15. Investment selection criteria will be developed to assess the potential for greenhouse gas reductions, demonstration potential, development impact and implementation potential. Investments may include, among others, low carbon actions addressing the power sector (renewable energy, as well as increased efficiency in generation, transmission and distribution); transportation (modal shifts to public transportation, improved fuel economy, and fuel switching); and large scale adoption of energy efficient technologies and other l3 Recognizing that pilot projects are funded by the GEF and that the CTF would support scale-up. 32

41 demand management techniques in the industrial and commercial and residential building sectors. 16. It is recognized that with respect to enhanced technology development and transfer, the Bali Action Plan calls for cooperation on research and development of current, new and innovative technology, including win-win solutions, and collaboration by institutions in developed and developing countries on technologies for mitigation. There is a gap in national and international financing for research and development. It is proposed that the World Bank collaborate with other relevant international institutions with a view to proposing innovative means to address the financing gap. Country Access 17. Country access will be based on: (a) ODA-eligibility (according to OECDDAC guidelines); and (b) an active MDB country program When a country expresses interest in accessing CTF financing, the MDBs concerned will conduct a joint mission, involving other relevant development partners, to discuss with the government, private industry and other stakeholders how the fund may help finance scaled-up low carbon activities. The Trust Fund Committee will be kept informed of country expressions of interest and planned joint missions. The outcome of the joint exercise will be an investment plan, developed under the leadership of the recipient country, for the use of CTF resources in major sectors of the economy through a joint MDB program. The investment plan should build on existing country-owned strategies or action plans and demonstrate how it is complementary to activities under other available programs, including those that are aimed at enhancing the enabling environment. Investment plans will be submitted to the Trust Fund Committee to endorse further development of activities for Trust Fund co-financing and to facilitate prioritization of the pipeline of projects. 19. Subsequently, a proposed program or project, developed pursuant to the investment plan, will be submitted by the relevant MDBs, prior to its appraisal, to the Trust Fund Committee for approval of trust fund financing. The further processing of a program or project will follow the MDB s polices and procedures for appraisal, MDB Board approval and supervision. 20. The joint missions will build on activities, experience and knowledge gained by other agencies and organizations, like the GEF and the UN organizations, in planning and executing climate change programs, including enhancement of enabling environments. The implementation of programs at country level will be actively coordinated with other multilateral agencies, such as UNDP and UNEP. The MDB joint missions will also work closely with bilateral development banks that have significant climate financing programs to identify opportunities for co-financing of CTF programs and projects. Where co-financing of l4 An active program is where a MDB has a lending program andor an on-going policy dialogue with the country. 33

42 a project by two or more MDBs occurs, there will be coordination of the applicable operational policies and procedures, with a general approach that the more stringent agency policy will apply. Private Sector 21. As the foundation of economic growth, the private sector has a significant role to play in climate change mitigation and adaptation. In pursuing a strategy that will combine public sector reform and private sector action, the CTF will seek to provide incentives necessary to engage private sector actions in achieving the objectives of the Fund. It is recognized that funding structures for engaging the private sector will need to be different to the structures applied for public sector proposal financing. Financing 22. The CTF will seek, through the MDBs, to: (a) (b) (c) (d) finance at scale in the near-to-medium term to meet investment needs to support rapid deployment of low carbon technologies and increase energy efficiency; optimize blending with MDB financing, as well as with bilateral and other sources of finance, to provide incentives for low carbon development; provide a range of financial products to leverage greater private sector investments; and provide financial instruments integrated into mainstream development finance and policy dialogue. 23. CTF financing will provide a grant element tailored to cover the identifiable additional costs of the investment necessary to make the project viable, thereby providing the appropriate incentive to facilitate deployment of low carbon technologies at scale. The CTF will utilize a range of concessional financing instruments, such as grants and concessional loans, and risk mitigation instruments, such as guarantees and equity. The choice of financing instruments should be flexible and differentiated among sectors. CTF financing should avoid crowding out the private sector. In keeping with MDB practice, investment projects and programs may include complementary financing for policy and institutional reforms and regulatory frameworks. To the extent GEF funding is available for capacity building, in particular for the creation of an enabling environment, including establishment of codes, norms and standards, efforts will be undertaken to maximize GEF financing through such partners as UNDP and UNEP. Organization of the CTF 24. Bearing in mind the goals of the CTF, it is proposed that the fund operate in accordance with the following organizational principles: 34

43 (a) maintain an efficient business model that does not duplicate existing procedures or lengthen the project development and approval process; (b) respond effectively, consistent with investment plans, to country demand in both public and private sectors and facilitate rapid deployment of fund resources in coordination with other available funding sources; (c) operate through a close partnership with other relevant development partners at the national level; (d) separate responsibilities for resource allocation, fiduciary responsibilities and administrative functions; and (e) ensure full transparency and openness in governance, oversight and evaluation processes. 25. Based on these principles, it is proposed that the CTF be governed by a Trust Fund Committee and serviced by an MDB Committee; an Administrative Unit; and a Trustee. CTF Trust Fund Committee 26. A CTF Trust Fund Committee will be established to oversee the operations and activities of the trust fund. Recognizing the need for efficient and business-like operations, it is proposed that the Trust Fund Committee be limited in membership. 27. The Trust Fund Committee will consist of: (a) (b) eight representatives from donor countries or groups of such countries to the CTF identified through a consultation among such donors 6, and eight representatives from eligible recipient countries or groups of such countries identified through a consultation among interested recipient countries; provided; however, (i) if there are less than eight donor countries contributing to the CTF during the first year of the CTF operations, potential donor countries, identified through a consultation among the donor and potential donor countries, may serve as representatives from donor countries, and (ii) if there are less than eight donor countries contributing to the CTF in the subsequent years, the number of donor country representatives and recipient country representatives, respectively, shall be reduced to equal the number of actual donors contributing to the CTF. Representatives will serve for two year terms, except that they may serve for a one year term for the first year of the CTF operations and terms will be staggered so not all representatives are replaced each year. Representatives may be reappointed; whenever the Trust Fund Committee considers an investment plan for a country or a program or project to be financed by the fund, the recipient 15 For purposes of this note, MDBs include: the African Development Bank, the Asian Development Bank, the European Bark for Reconstruction and Development, the Inter-American Development Bank and the World Bank Group. l6 Selection of donor country representatives is to be primarily guided by total contributions to the CTF. 35

44 (c) (d) country concerned will be invited to participate in the Trust Fund Committee during its deliberations on the work program, program or project; a senior representative of the World Bank, recognizin the role of the World Bank as the overall coordinator of the CIF partnership; a representative of the MDB partners to be identified b the MDB Committee l i and chosen on the basis of rotation among the MDBs Members of the MDB Committee and the Trustee may attend the Trust Fund Committee as observers. 29. To ensure good linkages with key partners so as to promote the efficient use of resources and complementarity with other sources of financing, the Trust Fund Committee will invite to its meetings the GEF as an observer. A representative of the UN will be invited as an observer at Trust Fund Committee meetings for which broad strategic discussions are included on the agenda. Representatives of other institutions with a mandate to promote investments in clean technology to address climate change may also be invited as observers at Trust Fund Committee meetings. Recognizing the special areas of competence of the observers, the Trust Fund Committee will invite observers to engage in an active dialogue. Chair of the Trust Fund Committee 30. The Trust Fund Committee will elect two co-chairs from among its members for the duration of the meeting. One co-chair will be a representative of a recipient country and the other co-chair will be a representative of a donor country. Decision Making 31. Decision-making will be by consensus of the voting members of the Trust Fund Committee. Consensus is a procedure for adopting a decision when no participant in the decision-making process blocks a proposed decision. For the purposes of the CTF, consensus does not necessarily imply unanimity. A dissenting decision maker, who does not wish to block a decision, may state an objection by attaching a statement or note to the decision. If consensus is not possible, then a proposed decision will be postponed or withdrawn. Functions of the Trust Fund Committee 32. The Trust Fund Committee will be responsible for: 17 The role of representatives of the World Bank and the MDB partners will be similar to that of non-voting members of other Boards. Same as above 36

45 (a) approving programming and pipeline priorities, operational criteria and financing modalities; (b) ensuring that the strategic orientation of the CTF is guided by the principles of the UNFCCC; (c) endorsing further development of activities in investment plans for trust fund financing; (d) approving trust fund financing for programs and projects; (e) approving trust fund financing for administrative budgets; (0 providing guidance on the convening of the Partnership Forum; (g) ensuring monitoring and periodic independent evaluation of performance and financial accountability of MDBs; (h) approving annual reports of the fund; (i) ensuring that annual reports and evaluations, including lessons learned, are transmitted to the UNFCCC; (i) reviewing reports from the Trustee on the financial status of the fund; and (k) exercising such other functions as they may deem appropriate to fulfill the purposes of the fund. Frequency of Meetings 33. The Trust Fund Committee will meet at such frequency as it may decide, but not less than once a year. The Trust Fund Committee may review and approve trust fund financing for programs and projects as needed, at a level and through means and procedures appropriate to project or program review. Monitoring and Evaluation 34. Monitoring and evaluation of results will be critical for the Trust Fund, and each MDB will follow its procedures for monitoring and evaluation. There will be annual reporting by the MDBs to the Trust Fund Committee, and an independent evaluation of the operations of the Trust Fund and the impacts of its activities will be carried out jointly after three years of operations by the independent evaluation departments of the MDBs. Results achieved through the fund will be published and publicly available. Full reporting criteria will be agreed by the Trust Fund Committee. Partnership Forum 35. A Partnership Forum, a broad-based meeting of stakeholders, including donor and eligible recipient countries, MDBs, UN and UN agencies, GEF, UNFCCC, the Adaptation 37

46 Fund, bilateral development agencies, NGOs, private sector entities, and scientific and technical experts will be convened annually to provide a forum for dialogue on the strategic directions, results and impacts of the CIF. The Partnership Forum will be co-chaired by the World Bank Vice President for the Sustainable Development Network and a country representative elected by countries participating in the Partnership Forum. At the Partnership Forum, donor and recipient countries will agree, within their respective caucuses, on their representation on the Trust Fund Committee. 36. The implementation of the CTF may benefit from advisory inputs from qualified individuals invited from a wide cross-section of expertise. The Partnership Forum will provide an opportunity for independent scientific, technical and other advice on major issues of implementation in integrating climate change and development. UNEP will be invited to collaborate with the Administrative Unit in proposing to the Trust Fund Committees ways to ensure scientific and expert input, based on personal qualifications and experience of experts and a balance of developed and developing country expertise, into the Partnership Forum. 37. The Partnership Forum will be a meeting for dialogue and consultation and will not lead to written outcomes, such as agreed texts or declarations, which could be used as a basis for discussions in the UNFCCC. Supporting Units Established Under the CIF 38. Bearing in mind the objectives of: minimizing transaction costs, and following to the extent possible the MDB processes rather than establishing separate institutional structures, it is proposed that the following units will provide services to the hnds and programs to be established under the CIF, including the CTF: (a) (b) (c) MDB Committee; Administrative Unit; Trustee. MDB Committee 39. The aim of the CIF is to ensure speed and alignment with development programs by building on the structures and normal processes of the MDBs. Therefore, it is proposed that the MDBs have fair and equitable opportunity to propose programs and projects for financing from the funds and rely on their own policies and procedures in developing and managing activities that the funds will finance. The share of funding allocated to an MDB will be based on country requests, the quality of proposals, the comparative advantage of the MDB and experience in a regiodcountry. The MDBs will report directly to the Trust Fund Committee on operational matters and will be invited to present their views on items under consideration by the Trust Fund Committee. 38

47 40. To facilitate collaboration, coordination and information exchange, a MDB Committee comprising representatives of the MDBs will be established. The MDB Committee will meet with such other frequency as deemed necessary by the committee but not less than once a year. The MDB Committee will: identify specific areas of MDB cooperation to harmonize their climate change programs and actions, linking their initiatives with CTF programs and projects; prior to each meeting of the Trust Fund Committee, review a provisional agenda and documentation prepared by the Administrative Unit; review recommendations proposed by the Administrative Unit on program criteria and priorities and the activity cycle for approval by the Trust Fund Committee; monitor progress in implementing programs and report to the Trust Fund Committee on compliance with approved policies on the use of trust fund resources; review a draft annual consolidated report on the CTF activities, performance, and lessons, including details of the fund s portfolio, status of implementation, funding allocations for the previous period, pipeline of projects and funding projections, administrative costs incurred, and other pertinent information; serve as a forum to ensure effective operational coordination, exchange of information and experience among the MDBs; liaise with other development partners, including bilateral development agencies/banks, for purposes of promoting co-financing of activities through an annual consultation between the MDBs and development partners, including bilateral development banks; advise the Administrative Unit on its work program, including the implementation of a comprehensive knowledge management system, results measurement system and learning program, taking into account opportunities for synergies with the activities of the MDBs; perform any other functions assigned to it by the Trust Fund Committee. Administrative Unit 41, A CIF Administrative Unit will be established to assist the work of the CIF, including the CTF, and to support Trust Fund and other committees. With respect to the CTF, the Administrative Unit will: (a) prepare, in consultation with the MDB Committee, all documentation required for review by the Trust Fund Committee, including developing an agenda for the Trust Fund Committee meeting; 39

48 make recommendations, in consultation with the MDB Committee, on program criteria and priorities and the activity cycle for approval by the Trust Fund Committee; conduct background research and analyses as requested by the Trust Fund Committee; prepare an annual consolidated report on the trust fund s activities, performance, and lessons, including details of the trust fund s portfolio, status of implementation, funding allocations for the previous period, pipeline of projects and funding projections, administrative costs incurred, and other pertinent information; manage a comprehensive database of the trust fund activities, knowledge management system, result measurements system and learning program; service the meetings of the Trust Fund Committee; manage partnerships and external relations, including convening meetings of the MDB Committee and the CIF Partnership Forum; collaborate with the Trustee to ensure that the Trustee receives all the information necessary to carry out its responsibilities; and perform any other functions assigned to it by the Trust Fund Committees. 42. The IBRD will serve as Trustee for the CTF. The Trustee will act as financial intermediary with respect to the CTF proceeds administered by other MDBs and, in that capacity, will have no responsibility to the CTF contributors for the use of such proceeds over and above those responsibilities contained in the trust fund administration agreement, agreements with MDBs, and relevant World Bank policies and procedures. Each MDB will be responsible for the use of funds transferred by the Trustee in accordance with its own fiduciary framework, policies, guidelines, and procedures. The Trustee will be accountable to the Trust Fund Committees for the performance of its fiduciary responsibilities. The Trustee will submit regular reports to each Trust Fund Committee on the financial status of the respective fund. 43. IBRD, in its capacity as the Trustee, will hold in trust, as a legal owner, and administer the funds, assets and receipts, which constitute the CTF trust fund. Contributions 44. Donors may make contributions in cash, or, with the agreement of the Trustee, by the delivery of promissory notes or similar obligations to the Trustee. Further, donors may make 40

49 contributions in one lump sum or in installments on the terms agreed with the Trustee. In the event that a part of the donor s contribution is subject to legislative approval, the donor may enter into a trust fund administration agreement with the Trustee for the total amount of the contribution, but qualify the portion of the contribution, which is subject to legislative approval. 45. In order to be selected as a representative from donor countries to the Trust Fund Committee pursuant to paragraph 28(a), a donor or group of donors will be required to make a commitment, by way of entering into a trust fund administration agreement(s), to provide to the CTF a minimum contribution to be determined by the donors or such other amount, as may be determined by the Trust Fund Committee; provided, however, that if the donor that has not unqualified the portion of its contribution in the amount of no less than the minimum contribution within 18 months of the effectiveness of the trust fund administration agreement, the donor will not be eligible to apply for a seat at the Trust Fund Committee for the subsequent term until and unless the minimum contribution is unqualified. In no case will a donor that has not unqualified a portion of its contribution in an amount no less than the minimum contribution serve as a representative from donor countries to the Trust Fund Committee for the period exceeding two years. 46. If there are less than eight donor countries or group of donor countries making commitments equal to, or greater than, the minimum contribution to the CTF during the first 18 months of the CTF operations, potential donor countries, identified through a consultation among the donor and potential donor countries, may serve as representatives from donor countries, pursuant to paragraph 28(a). 47. Donor countries will ensure that the above contributions are new and additional resources supplementing existing ODA flows otherwise available for developing countries. 48. Bilateral development agencieshanks, are encouraged to contribute to the achievement of the objectives of the Trust Fund through bilateral projects or co-financing of projects funded by the Trust Fund. Donors may report on this bilateral financing to the Trust Fund Committee for its review and confirmation that such bilateral financing conforms to the objectives of the Trust Fund. Activities confirmed by the Trust Fund will be included in the annual report on the Fund. Commitment of Trust Fund Resources 49. In approving financing for programs and projects, the Trust Fund Committee will seek to achieve an allocation of resources so that no one country receives more than approximately 15% of the Trust Fund resources. 50. The Trust Fund Committee may approve allocation of CTF resources for programs, projects and other activities, subject to the amount of resources available in the trust fund. The Trustee will make commitments to MDBs for transfer of funds in accordance with 41

50 approval of the Trust Fund Committee, but only to the extent that such resources are available in the trust fund. Reflows 5 1. Donors will have beneficiary interests in any reflow of funds returned to the CTF, together with other funds held in the CTF, on a pro-rata basis. Where a donor has made a contribution to the CTF through the SCF, the donor s pro-rata share will be returned to the SCF in accordance with the terms of the CTF. 52. Upon termination of the CTF, the Trustee, on behalf of donors, will endeavour to transfer donors pro-rata shares to another fund which has a similar objective as the CTF as determined by the Trust Fund Committee, unless a donor otherwise agrees with the Trustee. 53. In the event that a donor decides to withdraw its contribution to the CTF prior to the termination of the CTF, the Trustee will return to the donor: (a) its pro-rata share of the outstanding unallocated balance, including any reflow of funds received, at the time of the donor s withdrawal, and (b) its pro-rata share of any reflows of funds received by the Trustee after the date of withdrawal, to the extent that such reflow of funds is received from the financing made prior to the date of the withdrawal. Administrative Fees 54. The Trustee, the Administrative Unit, and the MDBs will perform specific administrative services and project related activities. Consistent with MDB policies on management of trust funds, compensation for administrative services and project related activities will be on the basis of full cost recovery for the entities but should be guided by the principles of value for money, reasonableness, and transparency. The costs of the Partnership Forum will be included in the administrative budget of the Administrative Unit and will be shared between the CIF funds. Sunset Clause 55. Recognizing that the establishment of the trust fund is not to prejudice the on-going UNFCCC deliberations regarding the future of the climate change regime, including its financial architecture, the CTF will take necessary steps to conclude its operations once a new financial architecture is effective. Specifically, the Trustee will not enter into any new agreement with donors for contributions to the trust fund once the agreement is effective. The Trust Fund Committee will decide the date on which it will cease making allocations from the outstanding balance of the Trust Fund. 42

51 56. Notwithstanding the above paragraph, if the outcome of the UNFCCC negotiations so indicates, the Trust Fund Committee, with the consent of the Trustee, may take necessary steps to continue the operations of the CTF, with modifications as appropriate. Legal Document and Amendments 57. The terms of the governance arrangements of the CTF will be set out in the governance framework document. The Trust Fund Committee may recommend amendments to any terms of the governance framework document which will become effective with the consent of all donor countries to the CTF, all recipient countries that have been allocated funding from the CTF, and the Trustee. 58. In addition, the Trustee will enter into a trust fund administration agreement with each donor, which sets out the terms and conditions of administration of donors contributions. 59. The Trustee will enter into a Financial Procedures Agreement with each MDB, which will set out the terms and conditions of commitment and transfer of funds by the Trustee to the MDB as well as financial reporting from the MDB to the Trustee. 43

52 ANNEX 2: PROPOSED STRATEGIC CLIMATE FUND The Challenge 1. A consensus is growing that moderating and managing climate change is central to every aspect of poverty reduction, economic growth and development, and that climate change disproportionately affects the urban and rural poor worldwide. Continued greenhouse gas (GHG) emissions at or above current rates would cause further warming that would threaten the development gains hard-earned by developing countries over the past decades and progress towards achieving the Millennium Development Goals. 2. The Fourth Assessment Report of the Intergovernmental Panel on Climate Change found that warming of the climate change system is unequivocal, and that delay in reducing emissions significantly constrains opportunities to achieve lower stabilization levels and increases the risk of more severe climate change impacts. Under the first principle of the United Nations Framework on Climate Change (UNFCCC), it is recognized that Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects there~f. ~ 3. The impacts of climate change include, among others: increased frequency and severity of droughts, floods and storms, water stress, decline in agricultural productivity and food security, collapse of ecosystems, and further spread of invasive species and waterrelated diseases, particularly in tropical areas. The poorest countries and communities are already feeling the impact of climate change and will suffer the hardest because of their geographical location, low incomes, and low institutional capacity, as well as their greater reliance on climate-sensitive sectors like agriculture. Addressing climate change is therefore central to the development and poverty reduction agenda. 4. Early mitigation of GHG emissions causing changes in climate will significantly decrease future adaptation costs, and especially the burden on the poor. However, even if efforts to reduce GHGs are successful, some degree of climate change impacts will continue to occur in the next decades. An effective response to climate change must combine both mitigation - to avoid the unmanageable - and adaptation - to manage the unavoidable. 5. The UNFCCC conference of the Parties meeting in Bali agreed to launch negotiations towards long-term cooperative action to transform the paths of economic development. The key areas for negotiations include mitigation of climate change, adaptation, technology development and transfer, and provision of financial resources in support of developing countries actions. The urgency to initiate transformation towards low carbon and climate resilient development requires immediate financing and incentives that can act as a bridge l9 United Nations Framework Convention on Climate Change, Article 3( 1). 44

53 while negotiations take place and until carbon markets, other financial mechanisms and policy signals have matured. Background 6. The UNFCCC recognizes the need for financial resources to be provided to developing countries to assist them in meeting the costs of mitigation and adaptation measures to respond to the challenge of climate change. Pursuant to article 11 of the UNFCCC, the GEF has been designated as the financial mechanism of the Convention. The GEF also manages two funds established by the Conference of the Parties to the UNFCCC and which provide financing for climate change activities: the Special Climate Change Fund and the Least Developed Countries Fund. 7. In addition, the Adaptation Fund has been established by the Parties to the Kyoto Protocol of the UNFCCC to finance concrete adaptation projects and programs in developing countries that are Parties to the Kyoto Protocol. The Adaptation Fund is to be financed with a share of proceeds from Clean Development Mechanism (CDM) project activities and is able to receive funds from other sources. The share of proceeds amounts to 2% of certified emission reductions. 8. In addition to the financial mechanism defined under article 11 of the UNFCCC, paragraph 1 l(5) stipulates that developed country Parties may also provide and developing country Parties avail themselves of, financial resources related to the implementation of the Convention through bilateral, regional and other multilateral channels. 9. Article 4(1) of the UNFCCC provides for all parties to: develop, periodically update, publish and make available... national inventories of anthropogenic emissions by sources and removals by sinks of all greenhouse gases not controlled by the Montreal Protocol; formulate, implement, publish and regularly update national and, where appropriate, regional programmes containing measures to mitigate climate change by addressing anthropogenic emissions by sources and removals by sinks of all greenhouse gases not controlled by the Montreal Protocol, and measures to facilitate adequate adaptation to climate change; promote and cooperate in the development, application and diffusion, including transfer, of technologies, practices and processes that control, reduce or prevent anthropogenic emissions of greenhouse gases not controlled by the Montreal Protocol in all relevant sectors, including the energy, transport, industry, agriculture, forestry and waste management sectors; promote sustainable management, and promote and cooperate in the conservation and enhancement, as appropriate, of sinks and reservoirs 4s