Chapter 5 - The Financing Tools …

Summary

In the previous chapter it was established that NAMA financing is a public sector activity. This may be at odds with the general understanding, but it is helpful in clarifying which financing is being referred to, and helps in shaping the financing landscape for NAMAs. Notably, it also clarifies which financing is not being referred to – for instance, not the billions of renminbi that are being invested in Chinese wind power, nor the billions that are being channelled through to African hydropower. It is not the energy efficiency investments in the cement industry, or any other profitable efficiency investments in other industries, either. Instead, NAMA financing is the public sector ‘contribution’ that ensures these investments take place, and that they do so on the basis of otherwise normal profitability considerations.

It is how public sector financing is injected into the system that constitutes the financial engineering of NAMAs. There are many instruments available to the public sector, and they are quite traditional. It is not so much about inventing new instruments, as it is about using the existing ones in new and possibly unexplored ways. Sometimes it is about challenging the mandates given to public sector financing institutions (see Chapter 8).

As indicated in Table 1 (Chapter 2), some of the instruments need not be financial – which could challenge the above definition. ‘Hard’ regulation, e.g., imposing efficiency investments in industry, has no financing implications for the regulator, if the entire investment is imposed on the private sector, and no grants, financing model or instrument is offered. In the case of energy efficiency, most of such investments would be profitable, when seen in isolation. From an incremental cost consideration based on calculations of the net present value, the incremental cost is negative and, thus, no climate finance will have gone into it. That is a disturbing conclusion, particularly because these investments for the private sector will occupy financing capital that otherwise would have been prioritized for investment in core business – the prime reason for omitting profitable efficiency investments in the industry in the first place.

So, does the definition need to be altered? No. There is a tendency to label all investments, capital and financing, which may result in emissions reduction, as ‘climate finance’. That inflates the term.