METHODOLOGY FOR ASSESSING INVESTMENT AND FINANCIAL FLOWS TO ADDRESS CLIMATE CHANGE

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METHODOLOGY FOR ASSESSING INVESTMENT AND
FINANCIAL FLOWS TO ADDRESS CLIMATE CHANGE
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INTRODUCTION
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WHY?
Why undertake an IFF assessment?

• To articulate national needs to address climate
  change in key sectors in a systematic way
• To encourage long-term sectoral planning that
  incorporates climate change investment decisions
• To yield more detailed estimates of the
  incremental investment needed to address climate
  change ? can feed into National Adaptation
  Programmes of Action, National Communications,
  or Technology Needs Assessments
• To estimate the magnitude of national efforts
  required to address climate change in a
  standardised, objective manner and inform
  national negotiators
• To engage policy-makers in making climate
  investment decisions that are driven by national
  development and poverty reduction priorities

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WHAT?
What does a national assessment of investment
financial flows seek to answer?
From a development perspective, what does my
country need to do to address climate change in
selected key sectors, and what financial
landscape will be required to achieve those needs?

• The IFF assessment considers
• What are the adaptation/ mitigation options for
  selected key sectors in the next 25 years?
• Who is investing in the sector ? Who are the
  major players funding sources?
• What shifts/increases in IFF will be needed in
  the sector?
• What will be the overall needs for additional
  IFF to address climate change?

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WHO?
IFF assessment requires a multi-disciplinary
team

• For each sector
• Environmental/climate specialists to build
  scenarios under climate change
• Planning experts to
• Assess implications of the scenarios on existing
  development plans in chosen sectors consider
  how mitigation or adaptation measures would be
  implemented
• Finance/economics experts to cost the measures
• Representatives from all relevant ministries
• Academic, NGO, and private sector inputs also
  useful

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HOW?
UNDP IFF methodology

• Provides approach through which countries
• Take investment and financial decisions for
  mitigation and adaptation in priority sectors
  over next 25 years based on national development
  priorities
• Build a mitigation or adaptation scenario for
  each sector
• Cost their needs against a baseline scenario
• Engages directly with policy-makers to ensure
  that decisions are country-led and driven by
  national priorities
• Captures the full financial needs of countries
  methodology includes both specific physical
  investments and the wider financial flows for
  non-physical expenditures

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General Vision
METHODOLOGY

• 1. For each sector, evaluate investments and
  financial flows for two policy scenarios
• Baseline Scenario
• Adaptation or Mitigation Scenario
• 2. Estimate (cost) the additional flows needed to
  implement new adaptation or mitigation measures
  (that is, the difference between flows for the
  two scenarios).
• 3. Breaks spending down across three entities
  government, corporations (including NGOs), and
  households

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1 What is my cumulative incremental IFF over
time?
Projected amount of IFF (in US)
adaptation scenario baseline scenario
Incremental cost
2005
time (in years)
2030
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2 How would annual investments change (per
year)?


Projected amount of IFF (in US) in a year
baseline scenario mitigation scenario
additional investments
less investments
additional investments
investment entity
households corporations
government
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IFF ASSESSMENT MAIN CONCEPTS
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Defining Investment and Financial Flows?

• IFF Monetary flows needed to implement
  policy options in key sectors from the national
  perspective.
• Investment Flow (IF) capital cost of a new
  physical asset (buildings, equipment, software,
  etc.) with life of more than one year.
• Financial Flow (FF) expenditure not related to
  the purchase of physical assets (typically
  programmatic expenditures, e.g. vaccination
  campaign).
• Operation Maintenance Costs (OM) for physical
  assets (salaries, raw materials, taxes,
  insurance, etc.)

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Examples of investment financial flows
Sector / Approach Adaptation/Mitigation Measures Investment Flows (FI) Financial Flows (FF) Operation and maintenance Costs (OM)
ENERGY (MITIGATION) Increased energy efficiency Energy saving appliances Training programmes for auditors / Information campaigns OM of new appliances
ENERGY (MITIGATION) Wind farm Windmills   OM of windmills
WATER (ADAPTATION) Water conservation   Information campaigns  
WATER (ADAPTATION) Rainwater harvesting Storage mediums (tanks, jars, etc.) Information campaigns OM of storage mediums
COASTAL ZONES (ADAPTATION) Monitoring of infrastructure New monitoring equipment Monitoring campaigns OM of new equipment
COASTAL ZONES (ADAPTATION) Raising dock levels Construction costs   OM of new infrastructure
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What is a scenario?

• An internally consistent and plausible
  characterization of future conditions over a
  specified time period (2005-2030).
• Baseline Scenario reflects business-as-usual
  conditions. Describes what can occur without new
  policies to address climate change.
• Mitigation Scenario incorporates new measures to
  mitigate (reduce) greenhouse gas emissions.
• Adaptation Scenario incorporates new measures to
  respond to the potential impacts of climate
  change.

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Scenarios and policies - Example

• Example - Water Sector
• Baseline Scenario provide water to a growing
  population by extracting it from an aquifer
  (usual practice in the last years).
• Adaptation Scenario Climate change will
  reduce aquifer refill, so it is decided to build
  a dam.
• The additional investment flows will be the
  costs of building the dam (versus the investment
  needed to keep on extracting water from the
  aquifer)

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METHODOLOGY
Steps to conduct sectoral IFF Assessment
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IFF METHODOLOGYSTEP BY STEP
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Step 1 Establish key parameters of the
Assessment
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• The team should decide
• Sector scope (activities, geographical areas,
  etc.) and overlaps avoidance
• Analysis period
• Key mitigation/adaptation measures (preliminary
  list)
• Analytical approach for defining future
  scenarios

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Identify potential sectoral overlaps
Water
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Step 2 Compile historical IFF data and other
inputs for scenarios
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Compile annual IFF data

• Compile historical annual data (IFF and OM) to
  address the following questions
• How much was invested in each sector (in recent
  years)?
• What are the main types of investment in each
  sector?
• Who has undertaken the investment?
• What is the usual life of investments and
  duration of programmes?
• Suggested period 1995-2005
• Data should be collected for 3 - 10 years.

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Step 3 Define Baseline Scenario
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• Describe what is likely to occur in the
• absence of ADDITIONAL policies to address
  climate change
• Baseline scenario should reflect
• Current sectoral national plans
• Expected socioeconomic trends
• Expected investment trends (for each subsector)

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Step 4 Derive IFF and OM for baseline
scenario
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• Estimate IFF for the sector up to 2030
• Information should be disaggregated by
• Year
• Investment entity (Corporations, Government,
  Consumer)
• Source of funds (national, Foreign Direct
  Investment, Official Development Assistance)

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Step 5 Define Mitigation or Adaptation Scenario
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• Describe the situation where new measures are
  taken to adapt to/mitigate climate change

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• 1. Reevaluate and reprioritize the
  mitigation/adaptation measures previously defined
  according to
• Develpment plans/experience.
• Technological and socio-demographic tendencies
  identified for baseline scenario.
• New information gathered during the project.
• 2. Include qualitative information regarding
  benefits (health, other sectors, etc.)
• 3. Redefine measures in order to classify them
  in
• New measures (eg. new dam)
• Measures that are extensions of measures
  included in baseline scenario (eg bigger dam)

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Step 6 Derive IFF for Adaptation/Mitigation
Scenario
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• Project the IFF and OM associated with the
  mitigation/adaptation measures selected.
• Disaggregate flows by
• Year
• Investment entity and source

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Step 7 Estimate additional IFF needed to
implement adaptation/mitigation measures
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• Subtract the baseline IFF from the
  mitigation/adaptation IFF

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7. Estimate additional IFF for
adaptation/mitigation
Estimate additional IFF

• Additional IFF
• IFF estimated for Adaptation/Mitigation Scenario
  
• minus
• IFF estimated for Baseline Scenario
• IFF are estimated for
• Each of the sectors selected (per year -
  cumulative)
• Each of the adaptation/mitigation measures
  selected
• New investment and programmes
• Extended investment of programmes included in
  baseline
• All investments and all programmatic expenditures
  (detailed per investment entity and financing
  source)

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Step 8 Evaluate policy implications
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• Re-evaluate adaptation/mitigation measures, given
  costs and national development objectives.
• Identify the entities responsible for incremental
  changes in IFF and the main sources of
  investment/programme funding
• Determine policy instruments and measures to
  encourage changes in IFF.
• Discuss potential implementation barriers.

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Step 9 Synthesize results in report
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• Objectives of reporting
• Compare additional IFF between sectors, years,
  entities and sources and between adaptation and
  mitigation.
• Provide relevant information for decision making
  at local level
• Compare results among countries
• Document and archive results