Modalities for results-based financing related to REDD

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Date produced: 02/05/2013

What modalities and procedures exist for results-based financing of REDD+ mitigation activities by developing countries, and in particular related to the transfer of public and market-based finance?

Summary: With the REDD+ mechanism under the United Nations Framework Convention on Climate Change (“UNFCCC” or the “Convention”) pending, there are various REDD+ financing modalities currently existing on a bilateral or multilateral basis. There are also a number of private sector financing arrangements in connection with voluntary carbon markets. These financing modalities were developed parallel to, and in anticipation of, the creation of REDD+ under the Convention. They mostly focus on the implementation of the REDD+ funding preparation Phases 1 and 2. As to Phase 3, “performance-based” funding for the implementation of concrete REDD+ projects and programs on the ground, this financing will largely depend on whether the parties to the Convention will reach a legally-binding agreement for the post-2012 period with binding emission reduction targets for industrialized nations. The modalities and procedures for results-based financing of REDD+ activities under the Convention are currently being further discussed and negotiated with a view to adopting decisions at the nineteenth session of the Conference of the Parties to the Convention (“COP”) to be held in November 2013 at Warsaw, Poland.

Advice:

We will briefly discuss: 1) what results-based financing means; 2) which financing activities are currently being developed; and 3) what is the status of the negotiations on the modalities and procedures for results-based financing under the Convention.

What is results-based financing of REDD+ activities?

The COP established in the Cancun Agreements a phased approach to funding REDD+ in developing countries:

Phase 1: funding for public planning, organization and initial capacity-building;

Phase 2: funding for the implementation of national REDD+ strategies by governments; and

Phase 3: “performance-based” funding for the implementation of concrete REDD+ projects and programs on the ground.

The phased approach allows countries to build portfolios for both funds as well as market-based sources. The idea is that eventually, in the third phase, performance-based or results-based REDD+ payments could be linked to compliance markets. In order to receive REDD+ payments, developing countries would have to demonstrate that they are reducing emissions from deforestation or enhancing or conserving the role of forests as carbon pools.

While there is agreement that Phases 1 and 2 can only be funded with public finance, there are diverging views on how Phase 3 activities (which will require the bulk of the total, cumulative REDD+ funding) should be financed.

Current REDD+ financing modalities

Pending a formal agreement on the REDD+ mechanism, and encouraged by the COP a series of REDD+ financing modalities has been initiated parallel to and in anticipation of a legally binding REDD+ mechanism under the Convention. As such, public finance for Phases 1 and 2 currently consists of bilateral arrangements (between a developed country and a developing country) and multilateral arrangements (between a multilateral entity and a developing country). The Global Environment Facility, Forest Investment Program, Congo Basin Forest Fund, World Bank BioCarbon Plus Fund, and the Forest Carbon Partnership Facility of the World Bank (“FCPF”) are examples of multilateral entities that focus on financing predominantly Phases 1 and 2, in short, the preparation of developing countries for the full implementation of Phase 3 of the REDD+ mechanism, once adopted by the COP (“REDD+ readiness”).

A few bilateral and multilateral arrangements also include pilot projects focused on Phase 3 funding, based on verified emission reductions. Examples are the Norway-Guyana REDD+ Agreement and the FCPF pilot projects under its Carbon Fund. Almost all the existing Phase 3 financing is private sector originated, with project-based transactions of carbon credits in voluntary carbon markets. The Carbon Fund however focuses on large-scale programs at the administrative jurisdiction or national level. It is intended to provide early learning opportunities for Phase 3 result-based funding.

Status of the modalities and procedures for results-based financing of REDD+ mitigation activities

The COP started the development of modalities and procedures for results-based financing established by the Cancun Agreements during its sixteenth session (COP16).

The COP at its seventeenth session (COP 17), during its meeting held in Durban in December 2011 requested the secretariat to organize a workshop on financing options for the full implementation of results-based actions relating to REDD+, including modalities and procedures for financing such actions, before the session of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention at its fifteenth session (AWG-LCA 15) to be held in conjunction with the COP’s eighteenth session (COP 18).

The workshop was held during the informal additional session of the ad hoc working groups, in Bangkok, Thailand, on 30 August 2012. Technical presentations made by Parties addressed three thematic areas, relating to: financing options and enabling conditions; private-sector participation; and a framework for financing the full implementation of results-based actions relating to REDD-plus. Many Parties expressed interest in using the Green Climate Fund to fund REDD+, creating a REDD+ window, at least in part and often together with other financing options. Further, Many Parties expressed an interest in employing market mechanisms and the new Market Mechanism process is intended to develop the new UNFCCC mechanism.

During COP 18 held in 2012 in Qatar, the COP decided to undertake a Work Program on results-based financing in 2013, including two in-session workshops, to progress the full implementation of the activities under REDD+ (as referred to in decision 1/CP.16, paragraph 70); the aim of the Work Program is to contribute to the ongoing efforts to scale up and improve the effectiveness of finance for REDD+ activities.

The Work Program shall address options to achieve this objective, taking into account a wide variety of sources, public and private, bilateral and multilateral, including alternative sources and with consideration of both market-based and non-market based approaches (referring to decision 2/CP.17 paragraphs 65, 66 and 67); including: (a) ways and means to transfer payments for results-based actions; (b) ways to incentivize non-carbon benefits; and (c) ways to improve the coordination of results-based finance.

The co-Chairs, supported by the Secretariat, have been asked to prepare a report on the workshop for consideration by the COP at its nineteenth session to be held in Warsaw, Poland in November 2013 (COP 19), with a view to the COP adopting a decision on this matter.