Implementation of the National Climate Change Response White Paper:

Resource Mobilisation and Tracking

Public Hearings of the Portfolio Committee on Water and Environmental Affairs

7 June 2012

Sharlin Hemraj | National Treasury

Outline

• Introduction • Resource mobilisation and current priority programmes

– Climate change related programmes and funding allocations

• Overview of climate related capital projects • Financing mechanisms:

• Green Fund • Proposed Renewable Energy Fund

• Climate finance flows and tracking • Concluding remarks

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Introduction

• The National Climate Change Response White Paper provides an important framework to ensure climate policy coherence and affirm our commitment to our voluntary pledge to reduce emission by 34 per cent by 2020 and 42 per cent by 2025 subject to adequate financial, technological and capacity building support from developed countries.

• Appropriate carbon pricing coupled with policies to support low carbon technologies is crucial to facilitate our transition to a low carbon, climate resilient economy.

• Currently, support is provided for climate change through funding allocations for priority programmes on budget and via intergovernmental fiscal transfers in line with the budgetary process and within the Medium Term Expenditure Framework.

• To support the transition, additional financing mechanisms are under consideration.

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• Financing National Climate Change Response Policy and long term funding framework for climate change:– Mainstream climate change response into the fiscal and budgetary

process and so integrate the climate change response programmes at national, provincial and local government and at development finance institutions and state-owned entities.

• Near Term Priority Flagship Programmes for:– Climate Change Response Public Works – Water Conservation and Demand Management – Renewable Energy – Energy Efficiency and Demand Side Management– Transport – Waste Management – Carbon Capture and Storage– Adaptation Research

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National Climate Change Response White Paper: Finance and Flagship Programmes

2012 MTEF allocations per sector

Sector/Function 2012/13

R’000

2013/14

R’000

2014/15

R’000

Total MTEF

R’000

Energy 3 230 811 3 497 368 3 786 561 10 514 740

Water and Sanitation 3 736 040 4 186 519 4 681 463 12 604 022

Environment 1 739 699 2 106 310 1 748 418 5 594 427

Transport 4 988 103 5 549 981 5 870 846 16 408 930

Disaster Management 510 000 540 000 572 400 1 622 400

Climate change

Programmes 31 186 33 016 34 956 99 158

Biodiversity 486 367 511 361 541 597 1 539 325

TOTAL 14 722 206 16 424 555 17 236 241 48 383 002

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National Government funding (2008/09 – 2014/15)

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SECTORS R‘000

Energy15 314 969

Water20 146 061

Environment8 464 082

Transport36 936 119

Disaster management2 397 400

Climate Change (policy/ co ordination)331 558

Biodiversity3 161 025

Total86 751 214

DEA Programmes

• Programme 1: Administration is allocated R776m during 2012/13 financial year.

• Programme 2: Environmental Quality and Protection is allocated R346m in 2012/13, some of the funds will be used to improve air and atmospheric quality and improve compliance with legislative timeframes in terms of the National Environmental Management Air Quality Act and Waste Act (2008).

• Programme 3: Oceans and Coasts allocated R222m for ocean and coastal research and maintenance of the Polar research vessel

• Programme 4: Climate Change with a budget of R31m for the climate change management, mitigation and adaptation coordination.

• Programme 5: Biodiversity and Conservation with a budget of R486m. This included the renovation of accommodation and tourist facilities in the Kruger National Parks.

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Expanded Public Works Programme

• Programme 6: Environmental sector Programme and Projects is allocated R2.7bn for 2012/13 financial year (includes EPWP projects).

• Main Programmes: • Working for Coast• Working for Water• LandCare• Working on Fire

• Natural Resource Management (NRM) is allocated R1.5bn, of which R1.1bn for Working for Water (WfW) and R341m for Working on Fire (WoF).– WfW: launched in 1995 aimed at removal of alien invasive species. – WoF aims to enhance the sustainability and protection of life, livelihoods, and

ecosystem services through integrity fire management.• National Resource Management (NRM) created 12 858 full time equivalent jobs

against the target of 18 304 through EPWP projects during 2011/12 financial year. NRM received an additional R230m (WfW R150m and WoF R80m) for

FY12/13.

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• Develop a climate finance strategy that contextualises and integrates existing and emerging policy and financing instruments including the role for market-based instruments to achieve desired economic and social changes.

• Government will, among others,:– Create a transitional climate finance system to support implementation of the priority

mitigation and adaptation actions.– Partner with domestic financial institutions to fastrack and mainstream climate

resilient development.

• Recognises that public finance can support climate change through the procurement of sustainable technologies by Government as well as developing catalytic projects and programmes.

– International and corporate grant-providers are necessary to support the comprehensive financing package necessary for the scale of mitigation and adaptation interventions that South Africa needs.

•

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National Climate Change Response White Paper: Mobilising financial resources

Climate Change Response and Infrastructure development

• Infrastructure development in the energy, water and transport sectors are critical and should as far as possible be aligned with the broader sustainable development and climate change objectives of the country.

• Building in renewable energy capacity, shifting to natural gas and more efficient coal based electricity generation, promotion of energy efficiency interventions and rail capacity for passenger and freight transport have been prioritised.

• Appropriate carbon pricing will begin to internalise the external costs of climate change and send price signals that influence long term investment decisions by producers and consumers.

• To enhance the effectiveness of the carbon price in the medium to long term, these capital project initiatives could provide suitable low carbon alternatives.

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Current major infrastructure projects

Project Cost(bill)

Objective Status

Energy: Renewable Energy Independent Power Producers

120 3 725MW of renewable energy procured into national grid by 2016

Tender process underway, 1415MW of bids in first procurement round confirmed

Ingula pump storage scheme (Eskom)

21.4 Build 1332MW hydroelectric power station to begin operating in 2014

Dam constructed, pipe installation in progress

Transport:Passenger railways

80 Acquire new fleet of rolling stock over 20 years

Procurement has commenced

Rolling stock and locomotives for freight rail

7.7 Acquire rolling stock and locomotives for general freight rail

Procurement underway

Water: Lesotho Highlands Water Project phase II

7.5 Generation of hydroelectric power and development of water transfer scheme

Financing options being explored

Sedibeng regional sanitation scheme

5 Increasing capacity of wastewater treatment system

Appointment of service provider in progress

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Renewable Energy Projects (concept, pre-feasibility, and feasibility stages)

Sector Project cost (‘bill)

Objective Status

Grand Inga 200 First phase of hydroelectricity project of 40000MW

SA assessing support options

Imported Hydro Electricity Options (Eskom)

52.2 Hydroelectric, gas and coal projects in Southern Africa

Options of off take agreements and financial support for projects being considered

Solar Park (Central Energy Fund)

200 Build 5GW scale solar park in Northern Cape

Feasibility study to be completed in 2012

Closed Cycle Gas Turbine

13.6 Construction of 2 450MW additional gas turbines by 2029

Option under Integrated Resource Plan

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General Financing Options for Large, Capital Projects

• Options for financing public infrastructure include:

– Fiscal revenues: could be used to finance capital costs of infrastructure for projects that contribute to redistribution, generate large external benefits to society, address market failures.

– Public entities: finance infrastructure from internal reserves and debt raised in capital markets. repayment requires that tariffs reflect the full financial costs (capital, operating and maintenance) of providing the good or service

– Hybrid financing: of public finances and user charges or tariffs for projects implemented by public entities. Example, water infrastructure connections for households partly funded on budget.

– Private sector participation: public private partnerships place the risk and responsibility for infrastructure development with the private sector, while retaining long term public ownership.

• Options exist to raise debt or equity for infrastructure through commercial banks, capital markets, and development finance institutions.

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Project development stages and financing options

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Options to finance capital investments in low carbon technologies

• Internal finance:– Company balance sheets – Government balance sheet

• External finance:– Debt (bank or bond issue) or equity (private or public)– Banks: Loans, project finance– Investors: Venture capital– Capital markets: equity and bond insurance– Public Private Partnerships– Global bilateral and multi-lateral funds: Strategic Climate Change

Fund, possible Green Climate Fund

Key design considerations for environmental funding mechanisms

• Expenditures should be targeted to meet environmental priorities and promote projects with large environmental benefits relative to their costs.

• Environmental Funds should :– play a catalytic role in financing, offering no more support for projects than is

necessary and adapt to changing economic conditions.– be used in conjunction with, and reinforce, other environmental policy

instruments, such as regulations or economic instruments.– develop an overall financing strategy, follow clear and explicit operating

procedures for evaluating and selecting projects, and adopt effective monitoring and evaluation practices.

– not compete with emerging financial markets but should leverage financing from private sector enterprises and financial institutions for environmental investments.

– ensure transparency and should be accountable to government, parliaments and public for their actions.

Source: OECD, 1995a

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Funding Mechanisms: Green Fund and Renewable Energy Fund •Green fund is allocated R800m (R300m in 2012/13 and R500m 2013/14).

•DBSA is responsible for implementing, operating and reporting on the objectives of the Green Fund to the Management Committee.

•The Green Fund aims to achieve the following objectives:a. Promoting innovative high impact green programmes and projects;

b. Strengthening institutional and technical capacity to mainstream green and climate issues into the economy and society;

c. Reinforcing climate policy objectives through green interventions;

d. Building an evidence base for the expansion of the green economy; and

e. Attracting additional resources to support South Africa’s green economy development and climate change response.

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Proposed Renewable Energy Fund

• Treasury is developing a fund that will combine fiscal, concessional and commercial funding to provide cheaper finance and project preparation technical assistance to RE IPPs.

• This constitutes the “financing leg” of the South African Renewables Energy Initiative (SARI). – Reducing the levelised cost of electricity production is most effective where

the capital costs of production are reduced, economies of scale are generated (technology learning curves are improved), new technology development and supply chain improvements.

– Initial launch aimed at small IPPs in second half of 2012 “small REIPP Programme”.

• The National Treasury is engaging in consultations with the DBSA on the establishment of the fund which will support the RE IPP procurement process overseen by the Department of Energy.

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Challenges for putting together climate change funding mechanism:

• Challenges for putting together climate change funding mechanism:• Donors are willing to participate, but have their own terms & conditions, policy objectives,

reporting requirements – negotiation is required• Bilateral funding is relatively small compared to multilateral sources – these require very

different approaches to access• Grant-funding is relatively small, especially compared to the large-scale funding

requirements of areas such as renewable energy• Loans and concessional finance will be the main means of accessing large-scale finance –

this requires a different set-up for both accessing and disbursing funds to that of grants – probably more like a banking structure

• Hybrid climate change funding mechanisms that can mix commercial loans, concessional loans, bilateral donor grants, multilateral funds, equity investment and fiscal grants are at an early stage of development globally. Hence, South Africa’s initiatives are still embryonic and aimed at getting experience and learning best practice…these will grow into larger, more sophisticated mechanisms capable of supporting bigger and more numerous projects

• Lack of sufficient local project pipeline to match funds with to date – but this is improving (especially with RE IPP momentum)

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• Immediate Transition: Government will establish an interim climate finance co-ordination mechanism to – secure necessary resources for mitigation and adaptation priority

programmes. – also establish a climate finance tracking facility to track the use and

impact of funds. • Government will create a transitional tracking facility for climate

finance mechanisms and climate responses that will monitor and coordinate existing climate finance flows.

• National Treasury will identify the initial custodian of the coordination mechanism.

• Currently, Official Development Assistance flows through the Reconstruction and Development Fund. In the case of climate finance, some funds flow directly to line departments and other entities which makes tracking of funds difficult.

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National Climate Change Response White Paper: Climate finance coordination and tracking

Climate finance coordination and tracking (2)

• The National Treasury facilitated discussions between DEA and Development Partners (DPs) on the white paper.

• Key outcomes from the discussion:– Consistent implementation of the NCCRWP requires long term

framework for institutional coordination of mitigation and adaptation actions and implementation, MRV of climate change actions and efforts for further research, development and technology innovation and promotion.

– DPs require further clarity on the implementation of flagship programmes and DEA has agreed to engage DPs

– Consideration could be given to centralised donor coordination on climate finance and funded projects and programmes.

• As an interim arrangement, consideration could be given to ensuring that climate finance flows through the RDP for tracking purposes.

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Concluding remarks

• To facilitate the transition to a low carbon economy, both domestic and international support is needed.

• In the short tem, it is important that current climate related expenditure progammes are evaluated in terms of their mitigation potential and consideration given to upscaling or reforming these initiatives in line with the White Paper.

• The green fund and the proposed renewable energy fund present key funding mechanisms that could be used to support low carbon programmes and attract possible international support.

• As an interim arrangement, the flow of climate finance could be reviewed to ensure that funding is recorded, similar to ODA.

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TTHANK YOU.

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