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Climate Change Financing in Nepal

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Climate Change Financing in Nepal Policy and planning Keywords: Climate change, finance, adaptation, Briefing mitigation, Nepal 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 climate finance, 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 Download the pdf at http://pubs.iied.org/17229IIED IIED Briefing Investment Funds through the Scaling Up agencies also play a disbursing role, often in Renewable Energy 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- Forest Fund. Bilateral energy from the SREP and climate resilience 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 forests and rangelands. National sources include funding from the national • Food and Agriculture 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 flood 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 landscape. 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
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