International Guidebook of Environmental Finance Tools

7/27/2019 International Guidebook of Environmental Finance Tools

1/13

e n v i r o n m e n t a n d e n e r g y

U n dp P

international gUidebook ofenvironmen tal financ e toolsa sectoral aPProach: Protected areas, sUstainable

forests, sUstainable agricUltUre and Pro-Poor energyf , p :

v vw

DirectorEnvironment and Energy Group

United Nations Development Programme

Bureau or Development PolicyOne United Nations Plaza

New York, NY, 10017 USA

Tel: +1 212 906 5081 eXecUtive sUmmary


2/13

contents

Ovrvw a scop: Coo s vrota ac toos 3

Gra cocsos 4

Chags to sccss ptg vrota ac toos 8

Sctora cocsos 13

K crtra or ptg a too: Rtr o vstt, rsk a capact 17

A portat sso: Spr = asr = astr 18

Appx: Faca too tos a cas sts 19

Acros 24

2

aw: This Executive Summary introduces a ve-chapter report preparedby the Environmental Finance Center West at the School o Business & Leadership,

Dominican University o Caliornia. The ull report is available at http://www.undp.org/

content/undp/en/home/librarypage/environment-energy/environmental_nance/international-guidebook-o-environmental-nance-tools-/

sp au: Sarah Dieendor, Lauralee Barbaria, Nancy Roberts, and Floyd Fox,Environmental

Finance Center, Dominican University o Caliornia

UndP Pu : Andrew Bovarnick, Laura Hildebrandt, Marjolaine Cot andSerena Bedwal

e: Emily Schabacker

d u: Rebecca Buttrose

c: d ep/UndP P

d: The views expressed in this publication are those o the authors and do notnecessarily represent those o the United Nations or UNDP.

aUgUst 2012


3/13

3 4

commonly Used environmental finance toolsThe International Guidebook o Environmental Finance Tools provides guidance to countries in

developing and implementing the most commonly used, widely applicable, and potentially high-impact

environmental nance tools. It does not oer a comprehensive list o all the environmental nance tools

available to developing countries. Rather, it aims to dene and analyse the primary tools that are already

in use and that can be applied globally to advance sustainable development.

The tools explored in the Guidebook have been successully applied to protect the environment and

promote pro-poor and predominantly rural development. They were identied through a review o over

100 environmental nance case studies rom over 30 developing countries across our sectors: pro-poor

energy, protected areas, sustainable agriculture and sustainable orestry.

Although the ull array o environmental nance tools is wide-ranging, only a handul o options are

commonly used in each sector in developing countries. The Guidebook ocuses on the most requently

used tools: loans, ees, subsidies, and to a lesser degree taxes and payments or ecosystem services.

Three other tools are also included in recognition o their potential to address climate change concerns:

market-based mechanisms, clean development mechanisms and voluntary emission reductions.

The Guidebook uses case studies to analyse the implementation and eectiveness o the tools it considers.

Through this analysis, certain patterns emerge. Dierent sectors tend to rely on dierent nancial tools.

Indeed, or the most part, each sector relies on just one or two nancial tools. Loans and subsidies are

most commonly used in the energy sector, or example, while ees predominate in the protected areas

sector.

This Executive Summary provides a concise overview o the Guidebook, including a review o its key

ndings. It summarizes the challenges to the successul implementation o the tools it considers, and

highlights the key criteria or their successul implementation. It oers sectoral conclusions unique toenergy, agriculture, protected areas and orestry, as well as general conclusions that apply to all our

sectors. Denitions o the nancial tools discussed in the Guidebookare located in the appendix, along

with a list o country case studies.

The complete International Guidebook o Environmental Finance Tools is available at http://www.undp.

org/content/undp/en/home/librarypage/environment-energy/environmental_nance/international-

guidebook-o-environmental-nance-tools-/

Ovrvw a Scop

3

Noting that developing countries ace numerous obstacles to environmental nance, the Guidebookestablishes ve general conclusions.

Conclusion 1: Only a handul o nancial tools loans, ees and subsidies are implemented

in most cases.

Although a wide array o nancial tools was initially considered or inclusion in the Guidebook, research

revealed that only a small number o options are requently used in each sector in developing countries:

loans, ees and subsidies. Among the tools considered, some patterns emerged rom the case studies. As

shown in table 1, certain sectors tend to rely on some nancial tools more than others. Indeed, or the

most part, each sector relies on just one or two nancial tools.

TAble 1: FRequenCy OF TOOl uSe, by SeCTOR

F a c a t oo S st a a

agrctr

Protct aras Sstaa

orstr

Pro-poor rg

Fees

Loans

PES*

MBM/CDM/VER**

Subsidies

Taxes

= predominant tool = secondary tools = rarely used tool

* Payment or ecosystem services (PES)

** Market-based mechanism (MBM), clean development mechanism (CDM), voluntary emission reduction (VER)

Overall, energy and sustainable agriculture rely most heavily on loans and subsidies. The up-ront capital

provided by loans and subsidies enable scaling, implementation and market growth, allowing the sectors

to become nancially sel-sustaining over time Energy also benets rom the ability to extend patient,

long-term loans and credit to customers, without which energy services would be unaordable.

Protected areas and sustainable orestry rely on the collection o ees and, to a lesser degree, PES. Protecting

habitat and orests and encouraging their restoration oten requires nancial ows rom the collection

o upront ees rom users (such as industry or tourists) and potential users to encourage preservation. Only

a ew developing countries use taxation as a tool to preserve orests and protected areas.

Conclusion 2: Even the most straightorward tools can take years to successully implement.

There is one critical element that spans all sectors and aects every step o implementation: time. Even

the most enthusiastic and experienced project directors have been stymied by the amount o time

needed to bring an environmental nance tool to sustainable ruition. Time is required to collect and

analyse stakeholder input, develop nancial and physical inrastructure, and pass necessary regulations.

4

Gra Cocsos


4/13

Even i a tool is launched relatively quickly (less than a year), it is likely that the necessary inrastructure to

support the tool has been developed over many years prior to the actual start date. Furthermore, in the

case o newly introduced technologies or processes, such as organic agriculture or RET, the dissemination

o innovation through education takes time.

As demonstrated by the case studies in the Guidebook, the time required to implement a nancial tool is

directly related to the nancial, inrastructural and technical capacities already in place. In complex cases

requiring legislation to support the tool, ollowed by stakeholder understanding and support, success

has taken decades. In other instances, where additional education has been critical to the execution o

the tool, actual implementation has been delayed up to six years. Basic inrastructural needs, such as

roads and other supply chain requirements, have stalled a tool or ve years.

While there is no rule to guide decision makers, there are basic questions they can ask that may helpthem gauge the time it will take to implement a tool. I all o the questions below can be answered in the

afrmative, then a tool may be launched within a year or less. However, i the answer to even one question

is no, a tool may be delayed by years, or even ail.

Is there a supporting policy/regulatory ramework in place?

Are there internal and/or external institutions that can manage nancial transactions including

local collections, disbursements and penalties?

Is there market access and an adequate transportation inrastructure?

Are there signicant educational gaps in the target market (will the market understand and use

the nancial tool)?

Is there strong stakeholder engagement and support rom government to local community?

Conclusion 3: Rather than creating new and complex tools, decision makers should look to

maximize impacts by improving the most common tools already in use.

When assessing nancial tool options, decision makers should consider innovating existing tools rather

than developing new ones.

For example, adapting a loan programme to local needs has proven ar more eective in nancing pro-poor

energy programmes than introducing a new and complex approach such as CDM. For protected areas,

implementing a ee that incorporates willingness-to-pay studies and secure, transparent transactions

has generated more revenue than PES or MBM. Indeed, adding complexity to a nancial tool requently

requires international support rom NGOs or development agencies, which in turn increases cost, time

and risk. Simplied approaches such as loans, ees and subsidies allow implementation by national and

subnational agencies and actors, increasing the likelihood that the tools will be developed and modied

to suit local needs and behaviour.

Conclusion 4: Tools do not stand alone. Efective combining and sequencing may mean the

diference between success and ailure.

When considering nancial tools or developing countries, it should be recognized that none stands

alone. And while grants are not within the scope o the Guidebook, it is important to note that in all o

the case studies, the nancial tool required initial support beore implementation almost always in

the orm o a grant. Grants are most oten used to build capacity and educate, but they may also act as

a subsidy to reduce the cost o a product or service. Once a tool has been implemented, it is requentlyone o several combined to support sustainable agriculture and orestry, pro-poor energy access, and

protected areas.

For example, successul loans or pro-poor energy and sustainable agriculture are oten reinorced

through grants, ees and/or subsidies. MBM have not yet generated sufcient revenue to sustain

protected areas and orests, and must be augmented by ees and sometimes taxes. Consequently, when

developing a nancial tool, it is important to consider the optimal sequence and combination o tools

to enable eective implementation. In most cases, a tool to strengthen capacity (usually a grant) will

support the implementation o the primary tool, such as a loan. The primary tool may then be augmented

by secondary tools, such as government subsidies or MDM. Table 2 presents potential sequences and

combinations or the our sectors.

TAble 2: SequenCe And COmbinATiOn OF FinAnCiAl TOOlS

Capact

vopt too

Prar too Scoar toos

Energy Grant + Loan + Subsidy + MBM

Protected areas Grant + Fees + MBM/PES + Tax

Agriculture Grant + Loan + Fees + Grant

Forests Grant + Fees + MBM/PES + Tax

65

Photo credit: Adam Rogers/ UNDP Photo


5/137 8

Conclusion 5: Financial, technical and inrastructural capacity development is essential to the

sustainability o the tools.

Without capacity to support nancial tools, pro-poor environmental nance will likely ail. For example,

governments that rst establish an enabling environment through policies, regulations and targeted

actions or capacity development will reduce nancial risk and enable eective environmental nance.

With that in mind, the implementation o environmental nance tools in the our sectors can be viewed

through the lens o three general categories o capacity: nancial, technical and inrastructural.

Faca Capact

Financial institutional involvement and access to nancial services and capital are essential to market

development but can be especially challenging or poor rural communities. The lack o widespread

nancial inrastructure means that government agencies, NGOs and entrepreneurs must requently either

build local resources or rely on international nancial institutions beore a tool can be implemented. This

can add greatly to project costs and time, and reduce the interest o investors.

In addition, reliance on single nance mechanisms and tools oten leaves projects vulnerable to price and

political uctuations over which a developing country has little control. A diversied nancial portolio

reduces exposure to risk. However, diversication options are limited when only a handul o tools (ees,

loans and subsidies) are available; nancial inrastructures are weak; and education and business skills

are poor.

Tchca Capact

Basic business skills, such as accounting, nancial management and marketing, are oten lacking at the

implementation level. Young entrepreneurs who want to design and sell more efcient cookstoves, or

villages that want to oer ecotourism options to international tourists, have little access to business

training programmes.

Lack o basic education is also a key barrier to successul tool implementation across all our sectors. As

one entrepreneur states: imagine trying to explain the contractual implications o selling your carbon

rights in return or a more efcient cookstove to a young mother who can barely read or write because

she has never had access to a good education.

irastrctra CapactAs evidenced by the case studies, bottom-up management o community-based resources is almost

always more eective, efcient and equitable than management at the national level. Strengthening

ground-level capacity is critical to sustaining environmental investments and securing support rom the

private sector.

Technological and inrastructure barriers need to be addressed along with the nancial tool. For example,

beore a ee can be implemented, a protocol and system or collection and distribution requently needs to

be established. Creating an eective loan programme that supports rural consumers can be prohibitively

expensive i a weak transportation and distribution system raises costs and reduces protability.

7

the challenges

Financing sustainability can be difcult. In many developing countries, governmental capacity to collect

revenues and distribute unds is weak, independent nancial institutions are limited to urban centres, and

physical inrastructure is lacking. Even the most common environmental nance tools can ace signicant

barriers when implemented in developing countries. The challenges most oten aced in implementing

each nancial tool are discussed below.

FeeS

Fees can be sel-assessed (community orest ees or agricultural cooperative ees, or example) or imposed

on others (entry ees or departure ees). The case studies show that explaining the rationale or the ee to

the payer can reduce resistance, especially i the payer perceives a benet rom the ee.

Although ees provide a useul stream o revenue, they are rarely sufcient to cover the ull costs o a

programme. Farmer cooperative ees, or example, may not cover the ull cost o transitioning to organic

production methods, and entry ees rarely cover the ull cost o maintaining a protected area.

8

Photo credit: Edwin Human/ World Bank

iptgevrotaFac Toos


6/13

1 Reducing Emissions rom Deorestation and Forest Degradation ( REDD) is an approach to providing nancial incentives or

reducing greenhouse gas emissions rom deorestation and orest degradation. REDD+ covers not only deorestation and orest

degradation, but also conservation a nd the sustainable management o orest resources.1

Disch, David; Kavita Rai and Shachi Maheshwari (December 2010), Carbon nance: A guide or sustainable energy enterprisesand NGOs. Available at http://www.ashden.org/les/pds/reports/Carbon_nance_guide.pd

Challenges in implementing ees include:

Sttg th Although seemingly straightorward, it can take years to establish stakeholder support or

a ee. Determining what a potential user is willing to pay may require signicant research and stakeholder

input, and is an inexact science at best. Fee analyses such as willingness-to-pay studies are time consuming

but critical to setting the right ee and maximizing revenue.

Coctg th A ee collection inrastructure that ensures the transparent and accurate accounting

o revenue is essential. Simply collecting the money at the gate does not guarantee that the revenue will

reach its intended target.

esrg strto o os or th t prpos As with taxes, ee revenue can be redirected

to other purposes when remitted to a central government. A local third-party organization established

to manage ee collection and distribution can help ensure that ee revenue reaches its intended target.

Corrpto/cr ca thrat cocto/strto Fees can generate millions o dollars in revenue

and are susceptible to corruption and crime. Again, establishing an accountable and transparent system,

such as electronic credit card readers (so that no money changes hands), can help support a ee collection

and distribution system.

lOAnS

Environmental nance loans can range rom multimillion-dollar World Bank investments in national

energy projects to micronance programmes that oer small loans to individuals. Loans may also take

the orm o credit, where a buyer receives a product up ront (such as a solar home system) and repays

the cost, plus interest and/or ees, over time. Patient loan programmes have proven successul, allowing

borrowers several years to repay relatively small amounts. In some cases, long-horizon repayment terms

have turned loans essentially into grants, particularly in the sustainable orestry sector.

Some o the challenges with implementing a loan are:

Sttg oa aots a trs Loans are a nancial investment and require sophisticated contractual

agreements that must be both appropriate or the borrower and attractive to the lender. As with a ee,

how much debt a borrower can accept and how long it will take the borrower to repay the loan should be

determined in advance. Lenders must determine the level o risk they are willing to assume, the interest

rate or ee, and the return on investment required to maintain a sustainable programme.

dg coatra Loan programmes normally require collateral to help guarantee repayment and

reduce risk. Collateral is a borrowers pledge o specic property against which a loan is made. The

property can be a home, tractor, or any other item with an equal or greater resale value as the original

loan. In developing countries, many borrowers have no collateral to oer, which increases the risk to the

lender.

dt pats Delinquency is a persistent concern or lenders. Beore a loan programme is

implemented, terms governing delinquency including penalties should be established. Lenders

must also develop protocols or repossession o products when buyers become delinquent.

dvopg aca rastrctrs Because so many developing countries lack local banks to provide

credit and accept payment, grassroots nancial inrastructures requently need to be developed beore

loan programmes can be launched.

PAymenTS FOR eCOSySTem SeRViCeS And mARKeT-bASed meCHAniSmS

Considering the time and money invested, payments or ecosystem services (PES) and market-based

mechanisms (MBM) have been slow to achieve anticipated revenue levels.

Market-based mechanisms are generally large-scale, voluntary or involuntary, with potential or long-

term nancial sustainability, but subject to market uncertainty. In the new rontier o applying value to

the uture price o carbon, risk is inherent.

In contrast, PES transactions ocus on behaviour change at the individual level that maximizesenvironmental protection, such as not arming on protected land.

Some o the challenges in implementing MBM and PES include:

Goa vrat The ow o revenue rom MBM is vulnerable to global trends (such as droughts or

dips in global tourism), and to drastic price uctuations, as evidenced by the carbon market over the past

decade. Regulatory changes and international accords such as the Kyoto Protocol and REDD+1 can create

or destroy mechanisms or the trade o ecosystem services, which depend on agreed-upon certication

standards. The vagaries o the international carbon and other ecosystem credit markets (voluntary and

involuntary) lend a high degree o risk and uncertainty to these types o nancing arrangements.

Copx toos MBM and PES are complicated to set up and run. Because the revenue stream usually

ows rom developed to developing countries, they require an international inrastructure. MBM and PES

are nancially sophisticated tools but are oten applied in countries with limited nancial capacity. They

normally entail third-party involvement or certication, verication and monitoring, which adds another

layer o complexity.

Hgh rskBecause o their vulnerabilities and complexity, both MBM and PES are seen as potentially risky

tools, especially when applied to developing countries, where tracking and ensuring results may be

difcult. In response, PES and MBM projects oten include additional reporting requirements, creating yet

another hurdle or developing countries.

CleAn deVelOPmenT meCHAniSm And VOlunTARy emiSSiOn ReduCTiOnS

Clean development mechanisms (CDM) and voluntary emission reductions (VERs) can be valuable tools

or lowering the cost o an emissions-reducing product or process, such as an efcient cookstove. They

are especially attractive to investors and businesses that may be incentivized to invest in new markets

in developing countries that were traditionally considered too marginal or nancially risky. However,

accessing carbon markets is not easy. For a project or product to qualiy or CDM, a rigorous monitoring

process must be implemented, strict rules and guidelines must be ollowed, and complicated deals

including terms and prices must be negotiated. Indeed, as o 2010, the majority o CDM projects were

concentrated in only our countries: Brazil, China, India and Mexico.2

109


7/13

By denition, VERs are not bound by the same requirements as CDM. Nevertheless, to maximize revenue

and the highest possible (premium) price per ton o carbon dioxide (CO2), many project developers ollow

the same guidelines as CDM, even using the same third-party certiers, such as the Gold Standard. Gold

Standard certication is an internationally recognized best practice methodology that provides a high-

quality carbon credit label or both Kyoto and voluntary markets. Thus the challenges o implementing

CDM and VERs are becoming virtually the same.

These challenges include:

Provg atoat CDM proponents must establish that their project could not or would not occur

without carbon nance. Proving that a project would not happen without the expectation o carbon

credits has proven to be a ormidable challenge, especially in the orestry sector. Proving additionality

requires: 1) identiying alternatives (without which there cannot be additionality); 2) preparing an

investment analysis to determine that the proposed activity is not the most economic or nancially

attractive; and 3) investigating barriers and common practices.

bas sts To determine the amount o carbon emission reductions a project can oer, a baseline

o existing emissions must rst be quantied. In the cookstove example, project developers need to

know how much wood a village uses on an annual basis to cook meals, how much CO2

is emitted rom

using that wood, and to what extent CO2

emissions will be reduced by the introduction o more efcient

cookstoves. Assessing the baseline requires rigorously tested products (to conrm that they are capable

o reducing emissions) and village surveys and monitoring to quantiy wood use beore and ater the

introduction o the stoves.

motorg ovr t Following the baseline study, applicants must prove that they can monitor and

veriy carbon emission reductions rom their projects over a period o many years.

T. Proving additionality, preparing a baseline analysis and establishing a long-term monitoring

programme are complicated and lengthy endeavours. Few projects are certied in less than two years

and the process can be prohibitively expensive.

Thr-part crtcato Projects must be veried, monitored and certied by a third party, which adds

to the cost and the overall uncertainty o the eort, thus increasing risk.

Goa vrat Like MBM and PES, revenue ows rom CDM and VERs are vulnerable to global

trends and price uctuations. Furthermore, uncertainty about the path o the Kyoto agreement ater 2012

makes CDM a risky option. In two o the case studies in the Guidebook, (Mexico/Sierra Gorda and Bolivia/

ArBolivia), CDM was abandoned in avour o VERs.

SubSidieS

Subsidies are direct transers, usually rom government to consumers or producers to lower their costs or

augment their income. In environmental nance, subsidies oten aim to encourage a particular behaviour;

or example, avoiding deorestation or using less pesticide. Subsidies can protect and support the growth

o a young industry, but they can also create reliance on below-market prices.

Challenges with implementing subsidies include:

Unintended consequences. Subsidies set articial prices that do not accord with the market. As a result,

they can have unintended consequences, such as encouraging overproduction, reducing innovation and

preventing competition.

Potca fcts Politically, subsidies are very difcult to eliminate once they are put in place, yet they

are costly or governments to maintain over time.

markt spprsso Subsidies that support specic products may suppress the market that might

otherwise have developed; there is no incentive or competitive products, which typically bring down

prices.

TAXeS

Taxes usually require large-scale, national-level implementation, which may pose a problem or

developing countries. Taxing its citizens can be difcult or a government when most workers are

employed in agriculture or inormal enterprises and when their earnings are largely o the books. At

the same time, tax development and administration requires experienced and highly trained sta, and,

ideally, computerized systems to collect statistics and track revenue. Even taxes that are relatively easy

to implement because the collection mechanisms are already in place (such as departure taxes where

revenue is collected at the airport), may ace opposition rom law makers who are beholden to special

interests or rom businesses wary o losing customers.

Other challenges with implementing taxes include:

Cocto a strto Because most developing countries lack sophisticated tax systems to track

and monitor the collection and distribution o unds, monies are oten diverted to non-intended uses.

Taxes also all prey to competing legislative agendas that seek to reassign revenue to other areas.

Rg o tr rv Reliance on a steady stream o tax revenue can be risky i the tax amount is

xed and not structured to reect economic uctuations and ination. Taxes should be implemented so

that they can rise and all as necessary in order to guarantee a certain level o income.

Taxs o g Once a tax is implemented there is a risk that unds originally assigned to

environmental sustainability will be redirected elsewhere. I tax revenue alls, the environment will suer.

Faca atg Most developing countries would benet rom strengthened capacity to perorm the

necessary nancial audits to track revenue generation and distribution.

1211


8/1313 14

The Guidebook draws sector-specic conclusions or each o the our sectors it examines. An overview othose conclusions is provided here.

PRO-POOR eneRGy

Bringing energy to rural areas oten means developing a business strategy that includes everything rom

identiying, training and hiring entrepreneurs, to establishing local nancial institutions. Most oten, the

strategy must be built rom the ground up, and there may be a number o hurdles to be cleared beore a

successul energy programme can take o. Some o those hurdles are described here.

Most o-grid, rural, pro-poor energy projects involve some orm o renewable energy technology

(RET), which is oten unamiliar and thereore potentially risky to mainstream nancial

institutions. Many investors doubt the nancial viability o RETs because they lack exposure to and

knowledge o these technologies.

The isolation o rural communities creates a number o barriers beyond their distance rom the

national grid. Because most pro-poor energy projects rely on loans, the market must be attractive

to investors. That requires enough customers to support a supply chain including manuacturers,

retailers and maintenance. Servicing multiple small and dispersed communities is rarely cost eective

and banks will normally view such a project as too risky to invest in.

Commercial nancial institutions may not maintain branches outside o populated areas and may be

skeptical o engaging with marginal communities. While some countries have developed their own

micronance institutions, commercial banks are rarely interested in promoting low-value credit and

unprotable loan schemes or technologies such as RETs, which they may not understand.

In addition, RETs such as solar and micro-hydro carry high upront costs that must be recovered

rom nancially high-risk customers with no collateral. As a result, investors who establish pro-poor

energy programmes nd it exceedingly difcult to access star t-up capital and are requently orced to

nance their operations through grants and other support rom international aid and development

organizations. Once unding has been secured, the lead organization will oten nd itsel responsible

or establishing and overseeing a nance structure that supports various loan schemes, such as credit,

layaway, installments or long-term loans.

There is an imperative need to strengthen existing capacities. Delivering a product to market requires

a sophisticated supply chain including designers, manuacturers, suppliers, resellers and transport. I

this supply chain does not already exist, it must be built. Introducing sophisticated RETs can be even

more difcult, involving the additional eort and cost o importing supplies. Capacity development

needs may also extend to the market, which is requently suspicious o new RET products.

Investors have ound that in order to be successul, they must oten be many things at once:

entrepreneur, nancial institution, development worker and possibly even environmental expert.

Sctora Cocsos

Photo credit: PARTHA PRATIM SAHA / UNDP

PROTeCTed AReAS

Many protected areas rely on government unds or survival. To supplement inadequate national and

regional budget allocations, nancial strategies or protected areas should include mechanisms to sel-

generate and retain revenues. They should also lay the oundation or more complex unding options as

they become available through climate policy, investor interest and government support.

The conclusions below address unding shortalls or protected areas.

Fees typically are not a signicant source o unding or managing and operating protected

areas. However, eective implementation o ee structures can create the ramework needed or

more productive nancial tool implementations in the uture.

Entrance ee research shows that there is room or revenue growth within existing

implementations. The ability to capture and analyse tourism volumes and market segmentations

is essential or ees to reach their ull revenue potential as a nancial tool.

The decentralized management o protected areas requires more coordination and technical

inrastructure to capture and report nancial and tourism inormation. This inormation can be

used to prioritize capital outlays and uture nancial tool implementation choices.

Taxes can generate substantial revenue. Stakeholder approval can be acilitated by establishing

a mechanism with external oversight (such as a trust und) to receive and allocate the unds.

1413


9/13


10/13

retUrn on investment, risk and caPacityEnvironmental nance tools should be viewed as nancial investments, and the criteria that dene a

good investment should be present beore a tool is implemented. Investors generally ollow dened

standards in deciding whether to invest in a programme, project or product, and they expect a viable

return, be it nancial, social or environmental. The easibility o that return depends on the level o risk

and whether there is sufcient capacity to support the nancial tool. Thus beore implementing any tool,

decision makers should ask: who are the investors, what will they want in return, and can the tool achieve

that end?

More specifcally, decision makers should consider the ollowing key actors:

Lenders will require an adequate monetary return on investment beore they will nance and

launch a loan programme, and they will expect sufcient capacity and low levels o risk beore

they are likely to invest.

Fee payers should be seen as investing in an environmental or social system or programme (such

as a national park or an agricultural cooperative) rom which they expect to receive a service or

benet. They are unlikely to pay in the ace o high risk, limited capacity and no return.

Subsidies acts as an investment in a product or process to help reduce prices, expand the

accessibility o the oering, and grow the market. For investors non-governmental

organizations (NGOs), governments, taxpayers the most successul return may be that the

subsidy is ultimately phased out. In this situation, the risk is that the subsidy may become

indenite.

PES, MBM and CDM all involve public and private sector investors, usually rom other countries.

These investors must be assured that local capacity is sufcient or success and that the nancial,

environmental or social return is satisactory. The complexity o these tools is their highest risk;

they demand an enabling environment and institutional capacities.

Even taxes should be subject to investor standards. Taxpayers demand that their hard-earned

income is applied eectively and that the return is worth the burden. Failure to meet investor/

taxpayer expectations can have dire consequences or governments.

In sum, to ensure an adequate nancial, social or environmental return on investment, decision

makers should assess the levels o risk associated with a tool and whether the appropriate

technical, nancial and inrastructural capacity exists to mitigate that risk and guarantee an

acceptable return.

K Crtra oriptg a Too

17

simPler = easier = fasterResearch shows that the our sectors analysed in the Guidebook pro-poor energy, sustainable

agriculture, protected areas and sustainable orestry are more alike than not. Decision makers should

bear this in mind when weighing the appropriate nancial tool or a particular sector. Regardless o the

sector, eective nancial tool implementation relies on three critical capacity actors: nancial, technical

and inrastructural.

As evidenced by the case studies listed in the appendix, the opportunities are many, but so are the

barriers. For every value proposition that shows the potential or a high rate o return, there are just

as likely to be a host o hurdles to overcome, rom the political to the educational. However, with the

appropriate investments in capacity development, environmental nance tools can help countries realize

both sustainable development and acceptable nancial, social and environmental returns.

Many o the lessons learned seem obvious, yet in reality they are rarely ollowed. As the world grapples

with complicated environmental and social threats, there is a trend towards increasingly complex nancial

tools, as opposed to innovating the simple approaches that are already working.

The more complex the tool, the longer it takes to implement. However, there are relatively simple tools

in use in developing countries today that can be expanded within existing national capacities without

signicant international input or support. Loans, ees and subsidies are the most common and successul

tools already used to protect the environment and advance sustainability. Taxes a tool that all

governments implement but rarely use to protect and preserve the environment should be added to

the mix. Taken together, these our tools should move rom rare to routine, and be improved as necessary

to respond to local needs and capacity.

Decision makers should consider this simple but powerul lesson:

The simpler the tool, the easier it is to adapt to local circumstances and the

sooner countries can get on track to building their green economies.

A iportat lsso

18


11/13

financial tool definitions and case stUdiesFEES

F to A ee is a compulsory charge levied by a governing body (government or organization)

or a specic purpose and or which a specic return (quid pro quo) is provided to the payer. Examples o

ees include membership ees, entry ees, annual ees and user ees. Case studies in the Guidebookthat

include ees are listed below.

Appx

FeeS CASe STudieS

Cotr Sctor Too Cas st

Senegal Agr icul ture Mem ber ship ee Or ganic Ba nana Far mer s Ta rge t Financi al

Independence in Senegal

Cambodia Agriculture Membership ee An Organic Producers Association Provides

Marketing Assistance, but Member Fees Fall

Short

Bel ize Protected areas Departure ee Fiteen Years o Revenue: Conservation Fee

Portion o Departure Tax Funds Protected Area

Trust

I ndonesi a Pro te ct ed ar ea s Ent ry ee Decentra li zat io n a nd Ta gs: E ecti ve Fe e

Collection in Bunaken Marine Park

Kenya Protected areas Entr y ee Technology and Entry Fee Collec tions: More

Options or Revenue

Cameroon Forestry Annual ee NGO Oversight Required To Ensure Annual

Forestry Fee Revenues Reach Village Level

Nepal Forestry Community ee Community Forest Fee is Popular but Not

Enough

LOANS

loa to A loan is the distribution o asset rom lender to borrower with an expectation o

repayment over time. Loans are perhaps the most commonly used environmental nance tool in the

developing world, and there are many variations and innovations on loan structures. Loans can be short-

or long-term and can include micronance, credit, rent, customer advances and installments, and supplier

and trade nance. Case studies in the Guidebookthat include loans are listed in the table below. In our o

the case studies, loans are bundled with subsidies to make them more aordable.

lOAn CASe STudieS


Bangl ad es h Energy Mi cro inance Gra mee n Shakti Finance s 500,000 Sol ar Hom es in

India

Honduras Energy Credit Rural Communities Discover Biouel as an

Aordable Answer to Energy Needs (GotaVerde)

Kenya Energy Installments Business in a Box Thinks Out o the Box to Provide

Solar to Rural Poor (ToughStu)Lao PDR Energy Rent Village Energy Committees Bring Light to Rural

Communities (Sunlabob)

India Energy Patient loan Biogas Domes Reduce Waste and Bring Light

(Ministry o New and Renewable Energy)

Haiti Energy Subsidized loan Entrepreneurs Bring Light to Rural Haiti (Sirona

Cares)

Tunisia Energy Subsidized loan Subsidizing Solar in Tunisia (PROSOL)

India Energy Subsidized loan Indian Solar Home Program (UNEP)

Ghana Energy Sub sidi zed lo an Achi ev ing the 4 Es : Ene rgy, Efcie ncy, Empl oyme nt

and Environmental Protection (Toyola)

Bhutan Forestr y Patient loan Organic Lemongrass Oil Certication Suppor ts

Sustainable Forestry Practices and Boosts VillageRevenues

India Forestry Patient loan Sot Loan Supports Forests While Alleviating

Poverty

Morocco Agriculture Customer

advance

Consumer Bridge Loans: Community-Supported

Agriculture Aids Farmers and Develops Local

Market

Uganda Agriculture Supplier loan Taking Money Out o the Equation: Fruits o the

Niles Non-Monetary Loans To Farmers

Peru Agriculture Trade nance Suppor ting Cocoa and Coee Over Cocaine

through Trade Finance Loans

Tanzania Agriculture Trade nance Built to Last: A Long-Term Lending Relationship

Leads to Sustainable Local Enterprise

2019


12/13

PAYMENT FOR ECOSYSTEM SERVICES (PES) AND MARKET-BASED MECHANISMS(MBM)

mbm to For purposes o the Guidebook, MBM are processes that match buyers and sellers o

intangible ecosystem products, in which prices uctuate. The market or carbon osets is one example.

PeS to A well-accepted denition o PES is a payment or environmental services scheme that is:

1. a voluntary transaction in which

2. a well-dened environmental service, or a orm o land use likely to secure that service

3. is bought by at least one environmental service buyer

4. rom a minimum o one environmental service provider

5. i and only i the provider continues to supply that service (conditionality).

PES and MBM variations include ecotourism, ecosystem service certicates, preservation incentives and

carbon credits. Guidebookcase studies that include PES/MBM are listed below.

PeS/mbm CASe STudieS


Cambodia Protected

areas

Ecotourism Nest Eggs: Payment or Ecosystems Services (PES)

Ecotourism Builds Linkages Between Conservation

and Economic Improvement

Mexico Protected

areas

Premium carbon Premium Osets: Sierra Gorda Carbon/Integrated

Osets

Madagascar Protected

areas

Carbon credits Carbon Credits Bring Beneits to Forest Villages

Ecuador Forestry Preservation in-

centives

Paid to Preserve: Ecuadors Programa Socio Bosque

Incentivizes Landholders to Halt Deorestation

Pa ra gua y Fo res tr y Ca rbo n cre dit s Oil Indu str y Ser vice Prov id er Se eks Ca rbo n

Neutrality by Funding Preservation o Paraguay

Rainorest

CLEAN DEVELOPMENT MECHANISMS (CDM) AND VOLUNTARY EMISSIONREDUCTION (VER)

Cdm to CDM allows a country with an emission-reduction or emission-limitation commitment

under the Kyoto Protocol to implement an emission-reduction project in developing countries. Such

projects can earn saleable certied emission reduction credits, each equivalent to one ton o CO2, which

can be counted towards meeting Kyoto targets. A CDM project must provide emission reductions that are

additional to what would otherwise have occurred.3

VeR to VER is a general term used to describe a class o carbon credits produced outside a legal

ramework such as the Kyoto Protocol. In the past decade, the VER market has grown rapidly in response

to an increased demand or VERs in the voluntary oset market. Project developers generate VERs. They

are then usually sold to retailers or aggregators, who can sell them to individuals and organizations as

carbon osets (in which case they are taken o the market and c annot be resold) or to investors who hold

them or uture use.

Guidebookcase studies that include CDM/VER are listed in the table below.

VeR/Cdm CASe STudieS


Mexico Protected

areas

VER Premium Osets: Sierra Gorda Carbon/Integrated

OsetsBrazil Energy VER Subsidizing Eicient Cookstoves with Carbon

Credits

Bolivia Forestry CDM/VER CDM-Approved Investments Fund Saplings in

Bolivia

China Forestry CDM Restoring Degraded Land: The Worlds First

Clean Development Mechanism Forest Project in

Southern China

SUBSIDIES

Ss to Subsidies come in many orms and are usually used to supplement another nancial

tool, such as a loan. Subsidies may be a direct payment rom the government or a tax reduction to aprivate party or implementing a practice the government wishes to encourage. Subsidies can also be

realized through CDM and VERs when carbon reduction revenue is used to lower the price o a product,

or through start-up grants and other tools, such as a sliding scale where wealthier clients pay more to

oset prices or those with less. Guidebookcase studies that include subsidies are listed in the table below.

1 UNFCCC: http://unccc.int/kyoto_protocol/mechanisms/clean_development_mechanism/items/2718.php.

2221


13/13

SubSidy CASe STudieS


Brazil Energy VERs Subsidizing Eicient Cookstoves with Carbon Credits

Brazil Energy Sliding scale Hydro System Lets Users Pay What they Can (CRELUZ)

Haiti Energy Grant Entrepreneurs Bring Light to Rural Haiti (Sirona Cares)

Tunisia Energy Grant/

government

Subsidizing Solar in Tunisia (PROSOL)

India Energy Governmentsubsidy

Indian Solar Home Programme (UNEP)

India Energy Government

subsidy

Biogas Domes Reduce Waste and Bring Light

(Ministry o New and Renewable Energy)

Ghana Energy VERs Achieving the 4 Es: Energy, Efciency, Employment

and Environmental Protection (Toyola)

Kenya Agriculture Insurance pre-

mium sharing

Input Insurance Programme Grows with Shared

Premiums and Mobile Technology

China Agriculture Input Community-wide Conversion: Local Government

Supports an Entire Townships Transition to Organic

Tunisia Agriculture Investment Applying Foreign Investment Incentives to Organic

Agriculture

Phil ip pi nes Agr icul ture Gove rnmentsubsidy

Supporting Urban Agriculture by Providing PlasticPots and a Savings Scheme

TAXES

Tax to A tax is a compulsory charge levied by a government on an individual or organizations

product, income or activity to nance government activity. A departure tax that supports protected

areas is an example o an environmental nance tax. There are myriad variations and innovations o taxes

worldwide including departure, uel and hotel taxes. Guidebookcase studies that include taxes are listed

in the table below.

TAX CASe STudieS


Palau Protected

areas

Departure Gone but Not Forgotten: Addition o Green Fee to

Departure Tax Support Protected Area Network

Macedonia Pro te ct ed

areas

Ho tel Be d Ta x t o Su pp or t Pro tected Ar ea s in Macedonia

Starting in 2011

Costa Rica Forestry Fuel A Little Goes a Long Way: Small Percentage o Fuel

Tax Pays or Sustainable Forestry

acronyms

CDM Clean development mechanism

CO2

Carbon dioxide

MBM Market-bas ed mechanisms

NGO Non-governmental organization

PES Payments or ecosystem services

REDD Reduced Emissions rom Deorestation and Forest Degradation

RETs Renewable energy technolo gies

VER Voluntary emission reductions

2423

Documents

International Guidebook of Environmental Finance Tools