Policy and planning

Keywords: , finance, adaptation, Briefing mitigation,

Issue date April 2014

Policy Climate change financing pointers in Nepal

Policymakers could use Nepal is determined to address the impacts and opportunities of climate Nepal’s planning and budgeting systems to change, and has taken the remarkable step of introducing a climate change ensure more effective use budget code to prioritise and track climate-sensitive initiatives and of , unlocking capital and expenditure. The government allocated 10.3 per cent of its budget to supporting longer-term investment. climate change in 2013/14, while total adaptation-friendly commitment from international sources was US$236.62 million for 2009–2012. Establishing a climate Although the wide range of intermediaries, instruments and planning change fund as envisaged by the climate change systems used by Nepal have been effective to date, increasing synergy policy would help policymakers leverage between them would help avoid fragmentation and duplication in resource better synergy between allocation and disbursement. Establishing a climate change fund to pool and different sources of finance. disburse resources and building local capacity would also help the government reach its target of investing 80 per cent of climate-sensitive Using additional budget at a local level. economic and financial instruments could help leverage or incentivise Nepal has adopted a low-carbon climate-resilient US$350 million; addressing local adaptation private sector investment development (LCRD) pathway to address the priorities will also have specific financing needs. in climate change-related impacts and opportunities of climate change. The A recent Oxfam report1 indicates that between initiatives in the long term, while continuing to country’s National Adaptation Programme of 2009 and 2012 Nepal received a total leverage additional public Action (NAPA) addresses immediate adaptation commitment of approximately US$236 million sources in the short and needs. It has a well-defined climate change policy from international sources to finance its climate medium terms. and a climate budget code to prioritise and track change adaptation initiatives.2 climate change-related fund flow to different The government of Nepal works with a number of Building institutional and sectors and ministries. personnel capacity, financial intermediaries, economic and financial particularly at local level, Nepal’s recent approach paper for its 13th instruments and financial planning systems to could ensure effective three-year plan explicitly indicates the country’s mobilise resources from various sources for financial resource commitment to adopting a green economy to investment in LCRD. This briefing provides policy management. Addressing procedural delays in minimise the impacts of climate change on its pointers to help ease Nepal’s transition to a project and programme natural resources and sustain the economy. Its climate-sensitive development pathway. implementation would also National Framework for Local Adaptation Plan of lead to more effective Action (LAPA) aims to provide a bottom-up Sources of climate finance investments. approach by channelling at least 80 per cent of Nepal accesses various international sources of funds to support local adaptation. climate finance. Multilateral and bilateral public sources committed a total of US$236.62 million But this transition to a green economy has for adaptation between 2009 and 2012. significant costs. The cost of implementing the Multilateral finance comes from the Climate NAPA priorities alone has been estimated at

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Investment Funds through the Scaling Up agencies also play a disbursing role, often in Program in Low-Income partnership with national financial agencies. For Countries (SREP), the Pilot Program for Climate example, the World Bank, Asian Development Resilience (PPCR), the Bank and International Finance Corporation all The government needs to Least Developed draw from the multilateral Climate Investment Countries Fund and the Funds to leverage investment into renewable build the capacity of local- Fund. Bilateral energy from the SREP and funds come from the from the PPCR. The following UN agencies have level institutions to enable United Kingdom and also been successful in drawing down on them to manage resources European Union, primarily resources from the Least Develpoed Countries through the National Fund to implement NAPA projects: Climate Change Support •• UN Environment Programme: US$5.75 Programme (NCCSP); the United States through million for catalysing ecosystem restoration for its fast-track finance initiative; Switzerland, resilient natural capital and rural livelihoods in Germany, Korea, Finland and Cyprus. degraded and rangelands. National sources include funding from the national •• Food and Organization: revenue. The government allocated 10.3 per cent US$2.95 million for reducing vulnerability and of the national budget to climate change-related increasing adaptive capacity to respond to the investments for the 2013/14 financial year.3 impacts of climate change and variability for Added to the funds from international on-budget sustainable livelihoods in the agriculture sector. sources of climate finance, it totals approximately US$550 million. This includes climate-sensitive •• UN Development Programme: US$6.93 expenditure through the budget code, but million for community-based and glacial excludes the annual block grant to local bodies for lake outburst risk reduction. development activities. National government agencies also act as financial Nepal is also actively involved in the carbon intermediaries, mobilising and disbursing climate market. By March 2014, six projects and one finance. For example, the Ministry of Finance programme of activities had been registered by accesses multilateral finance from the PPCR, the executive board of the UN Framework SREP and bilateral climate finance from the UK/ Convention on Climate Change (UNFCCC) Clean EU NCCSP through a special account created in Development Mechanism, and another two the Nepal Rastra Bank. The Ministry of Science, projects had requested registration. Clean Technology and Environment plays a key role in Development Mechanism investment comes from coordinating the allocation and disbursement of what is referred to as innovative or carbon these resources. Local bodies will also play a key finance. These funds are in addition to public and role in mobilising, managing and disbursing private finance. financial resources in LCRD investments. Intermediaries Specialised funds and national intermediaries are emerging in Nepal’s climate finance . As well as mobilising resources to LRCD in SREP funds will flow through the Ministry of Nepal, multilateral and bilateral banks and Finance and the Nepal Rastra Bank into the

Table 1. Nepal’s climate change financial landscape

Sources of finance Intermediaries Economic and Financial planning systems Uses and users of financial instruments and institutional finance arrangements International public Multilateral agencies Economic: Policy systems: Adaptation finance (multilateral and banks Targeted subsidies Periodic plans Mitigation and bilateral funds) Bilateral development Tax concessions NAPA Government agencies National public partners Tax exemptions LAPA (national and local) finance National government International non- (government Financial: Climate change policy agencies governmental revenue) Grants (mostly) Budget and planning National financial organisations Carbon finance Concessional loans systems: institutions Non-governmental Medium-term expenditure (commercial banks) organisations framework Multilateral agencies Annual budget Climate change budget codes IIED Briefing

Central Renewable Energy Fund (CREF), a small Table 2. General trend of climate budget in Nepal over three years fund mechanism for the renewable energy sector. SREP will provide subsidised long-tenure loans 2011/12 2012/13 2013/14 via the CREF to pre-qualified partner commercial Annual budget 384,900,000 424,824,700 517,240,000 and development banks, which will on-lend to (thousand NPR) commercial hydropower developers, making CREF the core financial mechanism responsible GDP 1,375,000,000 1,536,000,000 1,702,200,000 for the effective delivery of subsidies and credits (thousand NPR) to the renewable energy sector.4 The government Climate budget 27,628,848 27,282,629 53,482,516 also proposes to use a trust fund model to secure (thousand NPR) and disburse REDD+ funds, making payments on the basis of a public carbon registry maintained Climate budget 7.2 6.74 10.3 by the REDD cell.5 (% of total budget) Establishing a national climate change fund to act Climate budget 2.0 1.78 3.1 as a chief intermediary for the country’s climate (% of GDP) finance would help increase synergy between Ministries with climate 8 9 11 intermediaries, enabling more effective LCRD budget allocation financing and avoiding fragmentation and duplication in resource allocation and Budget heads 83 99 124 disbursement. Source: National Planning Commission, 2013 (see note 3) Economic and financial instruments climate change. Table 2 shows that this budget Nepal mainly uses grants, and occasionally loans, has increased over the years, as have the to finance its transition to LCRD. With its focus on number of ministries with a climate change adaptation rather than mitigation, these allocation and the number of climate-relevant instruments are better suited to the country’s budget heads. needs. Almost all (91 per cent) of Nepal’s Tracking climate-sensitive expenditure within the adaptation projects are financed through grants; national budget enables policymakers to assess 9 per cent are funded through loans.1 The the cost of addressing climate change and the government has decided not to take any further effectiveness of targeted investments. Similarly, loans for climate change initiatives, so grants are integrating LCRD interventions into a broader likely to remain the dominant financial instrument portfolio of investment will help unlock other in the foreseeable future. However, there is sources of public capital. another option: as the private sector is the engine of growth, the government could consider Because climate finance is a cross-cutting issue, accessing national and international private all sectors of development — including trade and finance in the form of equity or other instruments commerce — should understand and address the to incentivise private sector investment in Nepal’s key challenges of climate change in Nepal. The LCRD pathway. agencies concerned may need guidance in how to mainstream climate finance, and tracking aid Financial planning systems and that is currently outside of government channels institutional arrangements would help bring it within the climate code frame. The government relies on a number of financial Nepal has a number of institutional arrangements and institutional arrangements to mobilise and in place to ensure that climate finance flows to manage climate finance. Its periodic plans targeted sectors and areas (see Box 1). This has prioritise and allocate resources to sector- increased coordination between implementing specific programmes and budgets, which are all institutions, enhancing the effectiveness of brought together by the medium-term climate-sensitive activities. expenditure framework — a three-year rolling Nepal’s climate change policy states that 80 budget system that bridges its periodic plans and percent of climate-sensitive budget should be annual budget to ensure that resources are allocated at the local level. Nepal’s LAPA mobilised in priority sectors. framework guides bottom-up adaptation planning In 2012, the government introduced a climate and implementation, giving local bodies the change budget code into the planning and mandate to coordinate adaptation planning. But budgeting system, enabling ministries to climate finance and impact both remain poorly prioritise, allocate and track expenditure against understood at the local level. To date, 70 LAPAs activities that will reduce the negative impacts of have been prepared in four districts and one IIED Briefing

Box 1. Climate change: institutional set up Ministry of Science, Technology and Environment (MoSTE): the UNFCCC’s focal point and climate change coordination ministry. Knowledge Climate Change Management Division, led by the MoSTE joint secretary: coordinates climate Products change responses in Nepal. Climate Change Council, headed by the prime minister: offers strategic and political guidance. The International Institute Climate Change Initiatives Coordination Committee, chaired by the secretary of MoSTE: for Environment and coordinates with different ministries and development partners. Development (IIED) promotes sustainable Alternative Energy Promotion Centre: works to develop and promote renewable and alternative development, linking local energy technologies in Nepal. priorities to global challenges. We support some of the world’s most municipality, to be funded by US$21.5 million resources, and thus leverage better synergy vulnerable people to from the EU and the UK. However, for 2013/14, between different sources of finance. It will also strengthen their voice in decision making. only 12 out of 124 programmes identified as encourage development partners to channel climate-sensitive by the climate budget code are aid through the government system. Off- local. That is around 11 per cent of the climate budget aid is one of the challenges to aid Contact change budget. mobilisation in Nepal. Hari Prasad Sharma The dearth of elected local bodies over the last •• Widen the economic and financial instruments [email protected]; [email protected] 11 years — the result of political transition — has it uses to draw down climate finance to hampered local capacity. But the Prime Minister leverage and incentivise both public and private Nanki Kaur has indicated that holding local elections is a sector investment. Instruments such as grants [email protected] priority, with these likely to take place in the next and loans are more friendly to public, rather 80–86 Gray’s Inn Road six to twelve months. At the same time, the than private, sources of finance. The London, WC1X 8NH United Kingdom government needs to step up its efforts to build government should consider introducing equity the capacity of local-level institutions and staff to and other instruments to access private as well Tel: +44 (0)20 3463 7399 enable them to absorb, manage and disburse as public sources. Fax: +44 (0)20 3514 9055 www.iied.org resources. It should also consider dealing with •• Build institutional capacity — including climate procedural delays and project staff transfers, IIED welcomes feedback change awareness — particularly at local level. via: @IIED and which both hamper progress. This will ensure effective financial resource www.facebook.com/theiied Recommendations management by enhancing absorptive and management capacity of local bodies. This research was funded The government of Nepal aims to graduate from Coordinating with concerned stakeholders will by UK aid from the UK least developed to developing country by 2022. allow the government to address the frequently Government, however the This briefing recommends that by taking the views expressed do not mentioned procedural delays in project and following steps, the government could use necessarily reflect the views programme implementation. climate finance to reach this goal: of the UK Government.

•• Use existing planning and budgeting systems Hari Prasad Sharma to unlock capital and support longer-term Hari Prasad Sharma is a section officer in the Ministry of Finance’s investment. The climate budget code already International Economic Cooperation Coordination Division (IECCD). helps identify and prioritise each ministry’s This briefing is an outcome of an action-learning writeshop climate-sensitive activities every year and for organised by the Government Network on Mainstreaming Climate Change in Addis Ababa from 14–21 March 2014. Public policy the longer term. The government can use this planners from Bangladesh, Kenya, Nepal, the Gambia and Zanzibar for its strategic climate-sensitive planning. used a ‘financial landscape framework’,6 adapted to include the role of financial planning systems to assess their respective •• Establish a climate change fund, as envisaged governments’ plans for financing their transition to a climate- resilient green economy. Its policy recommendations were in its climate change policy. Such a fund would developed after a learning and experience exchange with around 35 allow the government to pool and disburse people from finance ministries, national planning commissions and research and civil society organisations following the writeshop.

Notes

1 Oxfam Country Office Nepal. 2014. Stocktaking study on climate change adaptation finance in Nepal (Draft under consultation). / 2 These figures around the demand and supply of climate finance are an estimate only. / 3 National Planning Commission. 2013. Climate change budget code application review. / 4 CREF. 2013. Central Renewable Energy Fund – financial intermediation mechanism. Final draft prepared by CREF senior advisor and working group. Alternative Energy Promotion Centre. / 5 Government of Nepal, Ministry of Forests and Conservation. 2010. Nepal’s readiness preparation proposal REDD 2010-2013. Available at: http://mofsc-redd.gov.np/wp- content/uploads/2013/11/RPPNepal.pdf / 6 Buchner, B et al. 2013. The global landscape of climate finance. Climate Policy Initiative. http://climatepolicyinitiative.org/wp-content/uploads/2013/10/The-Global-Landscape-of-Climate-Finance-2013.pdf

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