Progress and key findings – Phase 1 February 2012

Eight tasks – three elements

Creation of a Kenyan financing mechanism Five key decision points: Should the financing mechanism be a funding entity or an implementing entity? Funding decisions vs. project management. We recommend the latter: greater say in projects and better access to funding. Should it be housed in an existing or a separate institution? Existing line ministry and budget: good alignment. We recommend the creation of a separate institution, as climate change is a cross-cutting, inter-departmental institution. The relationship between this institution and the government is to be discussed.

Creation of a Kenyan financing mechanism It will be funded initially mostly by bilateral development partners, and later by the likes of the Green Climate Fund and/or domestic sources. Flexibility. Co-existence with current flows and architecture. What should the mechanism fund? Analysis of NCCRS (see overleaf): $1.5 billion worth of actions Determination of priorities: mix of mitigation and adaptation Who should be the implementing agents? Mix of line ministries, NGOs / CSOs and the private sector.

Creation of a Kenyan financing mechanism NCCRS analysis:

Creation of a Kenyan financing mechanism Currently $2.5 billion of funds in development partner climate change projects:

Creation of a Kenyan financing mechanism Lessons from Bangladesh and Indonesia: Development partner involvement will likely be necessary but should be limited. Grant financing has predominated in national funds established to date. The fund needs to be developed in conjunction with the climate change action plan. Decision-making needs to be as transparent as possible and with ‘whistle-blowing facilities’ easily available.

Carbon trading platform Good performance by Kenya. As of end-2012, 5 registered projects and 21 in pipeline Relative to emissions, top performer in Africa. $1.5 billion worth of investment by 2020. Efficient Designated National Authority Capable project developers. BUT...EU legislation on post-2012 registered, non-LDC credits is a threat. The EU accounts for 80% of demand. Kenya should lobby the EU for a bilateral deal, perhaps with other African countries.

Carbon trading platform Another negative factor is the unfavourable supply vs. demand balance... ...as is the low availability of early stage finance and poor understanding of CDM. Kenya should also focus on: Premium CDM credits with substantial co-benefits Forestry and premium credits in the voluntary market Bilateral schemes, e.g. Japan’s Bilateral Offset Credit Scheme

Carbon trading platform The above recommendations favour the creation of a ‘secondary carbon trading platform’: One-stop-information-shop on the CDM Guidance on methodologies and emissions factors Guidance on finance In time, matching of developers and buyers This is likely to be more successful than a ‘primary platform’ of exchange and purchase Lack of proximity to demand Insufficient liquidity

Carbon trading platform Lessons from other countries that have gained access to carbon markets: Identify, and create a coherent policy framework for, the sectors of the economy and types of project that the government is most keen to see access international carbon market finance. Increase knowledge of the CDM and carbon markets. Further improve the efficiency of the DNA. Continue to promote both public and private sector, as well as both local and international, participation. Consider ways in which the financing of emissions reductions activities might be improved.

Investment climate for climate investment There is much that is positive, especially in renewable energy sectors: Unbundling of generation and transmission has created a market for independent power producers. KPLC , Geothermal Development Corporation and feed-in tariffs work relatively well. Two areas of contention: regulation and finance. Regulatory issues: Feed-in tariff is low and acts as a ceiling. Regulatory process with KPLC can be long and onerous. Lack of one-stop-shop. Doubt over the bankability of power purchase agreements and lack of sovereign guarantees. MIGA. Tax and duty exemptions and subsidies.

Investment climate for climate investment Finance issues: Difficulty of acquiring finance at long tenor, low interest and low collateral. Little project finance. Causes: poor understanding of climate investment and start-up needs; risk averseness; other. Initial solutions: concessional finance to banks; early stage investment fund; capacity building to banks and firms. International perspective: Poor communication with government on priorities. Cooperate with IFIs on incentives, e.g. MIGA and CMCI