Report from the workshop on "Financing Climate Protection in Central and Eastern Europe"

The Regional Environmental Center for Central and Eastern Europe (REC) and the World Resources Institute (WRI) held a workshop to promote discussion and dialogue on the opportunities for and experience in financing climate protection in Central and Eastern Europe.

Participants at the workshop included representatives of CEE governments and NGOs, donor agencies involved in Activities Implemented Jointly in CEE, OECD/Annex I Expert Group, the European Commission, the European Bank for Reconstruction and Development, the World Bank, the International Finance Corporation and CEE and West European companies implementing AIJ projects and their countries' climate policies.

The workshop agenda was organized round the following main themes:

• CEE and donor experience in Activities Implemented Jointly as a project-based financing mechanism;
• Energy reform, accession to the EU and climate protection;
• Finance institutions and climate protection.

Other issues such as industry's response to public policies in the energy sector, the role of Export Credit Agencies in financing AIJ and other climate-friendly projects in CEE and possible synergies between the Environment for Europe process and climate protection were also discussed in the context of the three main themes.

The workshop presentations and discussions illustrated that there is significant financing available for AIJ/JI projects and that both investor and recipient countries are rapidly learning to implement the mechanism. However, significant institutional obstacles and uncertainties still have to be overcome to investment through JI feasible.

Activities Implemented Jointly: CEE and donor experience in financing climate objectives.

Presenters included representatives of the Annex I working Group Secretariat, CEE NGO partners in this project, a utility implementing an AIJ project, and the Dutch AIJ program at the Ministry of Economic Affairs. Presentations focused on CEE and donor experience in AIJ and institutional and policy barriers that need to be overcome so that AIJ and JI in CEE become attractive for both donor and recipient countries.

The main issues in the presentation and the subsequent discussion included:

• Currently transaction costs are high and decisions are often politically driven. National systems for AIJ/JI in CEE, including clear selection criteria and approval procedures; local experts and COP-approved rules for baseline and additionality assessment are needed to reduce these costs. CEE countries should learn from experience, make decisions whether they want to engage in JI and invest in institutional infrastructure so that their involvement can be meaningful for their national objectives.
• The Dutch Ministry of Economic Affairs is launching a new AIJ program which is designed to reduce costs and finance AIJ projects by both Western and Eastern companies. CEE countries and companies should use the opportunity to shape and finance AIJ projects;
• AIJ and subsequently JI have to meet different interests - those of donor and recipient countries. These different interests are expressed by concerns over the price of credits, credit-sharing during the budget period, project life-times and stable baselines.
• Currently, capacity-building efforts are to large extend funded by donor countries. CEE countries, wishing to engage in AIJ/JI, should strengthen their institutional and expert capacity for AIJ/JI;
• AIJ-facilitated investment so far has not always brought the best technology or gone to projects feasible both from the point of view of climate protection and development. Countries engaged in AIJ/JI should promote investment compatible with technology and economic development trends and objectives.

Public policies, accession to the EU and climate protection

The presentations by the European Commission, WRI, the Foundation for Energy Efficiency in Poland and the Energy Efficiency Program in the Czech Republic focused on the requirements for accession and impact of integration policies on the energy and transport sectors in CEE. Opportunities to use accession funding for building capacity, especially for measurement and reporting were also outlined. Other presentations discussed the opportunities of addressing climate objectives through regional development in CEE countries. The subsequent discussions and conclusions from the presentations suggest that:

• Integration into the EU is the most important process for the CEE countries in the next decade and beyond. The enlargement of the EU is a dynamic process whereby each candidate country is required to develop political, economic and social reforms to meet membership criteria. The enlargement process can support the implementation of national climate protection strategies. For this purpose however, candidate countries in CEE are advised to clearly define their national strategies and objectives and identify synergies between accessions and these strategies;
• Energy sector development in EU and CEE follow similar patterns. This will ultimately assist the integration of CEE countries in the common energy market. An early integration in the EU energy market is, however, likely to affect negatively efficiency measures and the switch to more climate-friendly fuels and renewable energy in CEE for the following reasons: The creation of a common EU market has lead to low electricity prices and in result gas is not competitive. The market currently gives wrong signals to industry for climate protection. On the other hand, compliance with some EU directives (e.g. on Large Combustion Plants) requires from accession countries investment that can be more effective elsewhere in achieving environmental and climate objectives.
• Accession funds from the EU are available for capacity building. EU support should be used to train local experts and build local capacity, especially for tracking transactions, measurement, monitoring and reporting respectively under the Convention and the Protocol.
• Emissions from the transport sector in CEE are steadily increasing though they are still below those in OECD countries. However trends to greater reliance on private rather than public transport are likely to continue for two main reasons: reduced public spending for public transport and extensive investment in highway infrastructure. CEE countries need to adjust their investment policies in infrastructure to promote public transport now rather than having to adjust later.

Finance institutions and climate protection.

Presentations and discussions under this theme focused mainly on the new funds set up respectively by the World Bank (Pilot Carbon Fund - PCF), the European Bank for Reconstruction and Development (EBRD - Energy Efficiency and Emissions Reduction Fund DEXIA) and the Renewable Energy and Energy Efficiency Fund (REEEF) of the International Finance Corporation (IFC). The role of Export Credit Agencies (ECAs) in promoting company involvement in AIJ/JI as well as the need to mainstream climate-friendly investment in the policies of finance institutions were also discussed. The presentations and discussions focused on:

• Projects in energy efficiency, renewable energy and ESCOs require public financing or/and incentives for private capital. The new funds managed by the three finance institutions - the World Bank, EBRD and IFC respectively - are early experiments which, can mobilize public and private finance for such projects. ECAs are also likely to be instrumental for mobilizing private capital for investment in climate-friendly projects in CEE by providing guarantees for the non-additional components of AIJ/JI projects.
• Projects currently financed by the MDB and IFC funds spread in most CEE and NIS countries and are characterized by: high diversity, relatively small size, difficulties in project identification, high risk, all of which are associated with high costs.
• CEE countries are invited to consider further involvement of the existing national Environmental Funds into AIJ/JI. The Funds could help to reduce costs by establishing systems for project identification and packaging of numerous smaller projects into single financing packages.

The workshop allowed participants to inform each other of financing opportunities and limitations for climate protection, express a diversity of interests and views and share opinions about the ways in which national systems, financing mechanisms and country programs can be adjusted to make AIJ investment more efficient and effective in reducing GHG emissions.