TEAP XXV/8 Task Force Report SUPPLEMENT to the Assessment of the Funding Requirement for the Replenishment of the Multilateral Fund for the Period 2015-17 M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 1 1

Mandate TEAP was to prepare a supplementary report on a number of issues as listed in the OEWG-34 meeting report The Replenishment (RTF), XXV/8 Task Force dealt with these requests Studies were done in the course of August-September The report was submitted for review by TEAP The report was submitted to Parties late September 2014 A small Addendum Report was published in October 2014 on the equal distribution of funding M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 2 2

Total funding requirement The estimated total funding requirement for the triennium 2015-2017 (and subsequent triennia) does not change compared to what was reported in the May 2014 Task Force report: Total requirement for replenishment of the Multilateral Fund (US$ millions) 2015-2017 2018-2020 2021-2023   Case 1 609.5 550.6 636.5 Case 2 489.7 485.8 3 M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 3

Cases 1 and 2 The phase-out to be addressed in a stage II HCFC Phase-out Management Plan (HPMP) can be defined in two ways Case 1 “commitment-based” phase-out the HPMP stage I Agreement for a non-LVC country includes a table defining the level of HCFC phase-out to which that country has committed Case 1 funding for stage II HPMPs addresses the difference between the total reduction ‘committed to’ in the stage I agreement (in %) and the 35% reduction level for 2020 (all in ODP tonnes) M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 4 4

Cases 1 and 2 (cont’d) Case 2 “funding-based” phase-out Total funding in many stage I HPMPs was based on funding assessments for sub-sectoral reductions in consumption that, in total, exceeded the aggregate reductions committed to in the Agreements Case 2 funding for stage II HPMPs addresses the difference between the total of the forecast reduction (in each sub-sector) on which stage I funding is based and the 35% reduction level for 2020 (all in ODP tonnes) M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 5 5

Cases 1 and 2 (cont’d) For many non-LVC countries the stage II HPMP consumption to be addressed in Case 2 is significantly lower than that to be addressed in Case 1 -- because additional phase-out occurs in the stage I HPMP For a few non-LVC countries no additional funding will be needed for the 2020 reduction target, since they are expected to exceed their 2020 reduction target in Stage I In both Case 1 and Case 2, all other (non-HPMP) funding components including existing funding obligations, LVC requirements, production and supporting activities are identical M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 6 6

Case 1 example M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 7 7

Case 2 example M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 8 8

Case 1 and 2 comparison M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 9 9

Average It will be clear why Case 2 funding is lower than Case 1 funding For Case 1 the average weighted (in % baseline, rounded) is reductions committed reductions to be funded 15% 20% For Case 2 the average weighted (in % baseline, rounded) is reductions funded reductions to be funded 23% 12% M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 10 10

Disbursement In the May Report three annual disbursement schedules were considered 40-25-25-10% (1) 50-20-20-10% (2) 30-30-30-10% (3) This report adds one more schedule, 25-25-25-25% (4) The result of less front loading, from (2) to (3), results in a reduction of US$ 50 million for the first triennium with an addition of that amount to the next triennium Schedules (3) and (4) are not consistent with project implementation practices, where procurement needs to take place in the first one or two years M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 11 11

Foam percentage in total A variation of the foam proportion (from the one used in Task Force calculations) to be addressed in the HPMP stage II will lead to significant differences in funding (in the two next triennia) For Case 1, based on a 50% foam percentage, a 10% increase (to 60%) results in a decrease of about US$ 53 million, a 10% decrease (to 40%) results in an increase by about US$ 59 million (due to higher cost of RAC projects) For Case 2, based on a 50% foam percentage, a 10% increase (to 60%) results in a decrease of about US$ 33 million, a 10% decrease (to 40%) results in an increase by about US$ 38 million (due to higher cost of RAC projects) M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 12 12

Avoiding climate impact The calculation for different foam proportions also results in different climate impacts Reducing the foam percentage from 60 to 40% results In Case 1, in an increase in the avoidance from 105 to 130 Mt CO2-eq. In Case 2, in an increase in the avoidance from 69 to 86 Mt CO2-eq. Both have a climate cost effectiveness of about US$ 4.8 per t CO2-eq. In both cases, this is due to an increase in the proportion of RAC Further specific numbers given in the report for the avoidance (for 100 and 50% avoidance in RAC), as well as the resulting climate cost effectiveness -- done for various foam Cost Effectiveness (CE) values M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 13 13

The funding profile Funding equalisation options presented in the May and Supplement report included re-distribution of existing funding commitments Options for equalisation presented in the Addendum all assume that existing funding commitments are not re-distributed Key scenarios for the triennia 2015-17 and 2018-20 are: 1. Base case - funding for HPMP II different over the next two triennia 2. Equal distribution of funding for HPMP II over the next two triennia - funding for 2025 commitments deferred until 2021. 3. Equal distribution of funding for HPMP II over the next two triennia plus part of the funding for 2025 commitments included in the second triennium (2018-2020). 4. HPMP II funding and part of the funding for 2025 commitments combined and averaged over the next two triennia. M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 14 14

The funding profile (2) Scenario 1 15 M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 15

The funding profile (3) Scenario 3 16 M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 16

The funding profile (4) Scenario 4 Some text is cut off by the edge of the table. 17 M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 17

The funding profile (5) As can be seen in the tables: Scenario 1, the base calculation of funding for Case 1 and 2, results in a very uneven distribution with a large funding amount remaining in triennium 2021-23 Scenario 2, the equal distribution for HPMP II, while considering part of the funding for 2021-23 in the second triennium only, gives an uneven distribution as well Scenario 3, distributing the funding equally over the first and second triennium, yields gives a much better outcome The Task Force therefore confirms its previous recommendation for the funding given in the May report M o n t r e a l P r o t o c o l O E W G - 3 4 m e e t i n g, 1 4 - 1 8 J u l y 2 0 1 4, P a r i s 18 18

Total funding requirement The estimated total funding requirement for the triennium 2015-2017 (and subsequent triennia): Total requirement for replenishment of the Multilateral Fund (US$ millions) 2015-2017 2018-2020 2021-2023   Case 1 609.5 550.6 636.5 Case 2 489.7 485.8 19 M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 19

Impact of HPMP stage I funding An in-depth study was performed on the impact of the funding of existing HPMP stage I agreements on the decrease of consumption in selected years (funding for non-LVCs and LVCs) Given that a number of parameters cannot be estimated, the Task Force is not able to give any quantitative results Funding will very much depend on consumption levels reported for those years, which are difficult to estimate for the future It will also much depend on the infrastructure of a country when these HPMP stage I agreements are addressed and executed M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 20 20

Servicing and type of enterprises Servicing RAC equipment more low GWP technologies may lead to increased funding requirements, to address safety and health issues the Task Force did not derive recommendations beyond those under Decision 60/44 Extensive considerations have been given for multinational and non- eligible enterprises Many multinational operations are taking place in countries that have already committed to large reductions Non-eligible enterprises may still need to be considered in future, but it will much depend on the infrastructure of a country when these are to be addressed M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 21 21

High GWP surveys A cost estimate for conducting surveys of high GWP alternatives to ODS and to prepare projects has been provided This estimate is based on the levels of funding provided following in Decision 71/42 on the preparation of stage II HPMPs A total funding allocation of US$ 10.45 million may be required Such a survey could also address the current consumption of low GWP substances in Article 5 countries M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 22 22

Conversion away from high-GWP The long-term development in cost effectiveness factors is difficult to forecast The “usual” cost effectiveness factors are therefore important for the determination of the funding for stage II HPMPs Avoidance of 50% of high GWP alternatives in RAC would equal to about 95 Mt CO2-eq. in Case 1, about 63 Mt CO2-eq. in Case 2 (climate CE about US$ 5.9 per tonne CO2 (CE of US$ 10.1/kg)) Avoidance of 100% high GWP alternatives in RAC would lead to a climate CE of about US$ 4.8-5.5 per tonne CO2 (depending on the CE of projects, varying from US$ 10.1 to US$ 13.35/kg) M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 23 23

High-GWP substances and alternatives Production capacity for HFCs is estimated to grow by a factor of two in the next decade, especially in Article 5 countries This is mainly due to the increase in demand for new equipment, not for the conversion of existing HCFC based production lines Supporting the maximum possible phase-in of low-GWP alternatives may be the most practicable way forward to limit increases in HFC consumption Not-in-kind technologies are unlikely to deliver a substantial saving potential in the near term Different methods to provide heating and cooling (district cooling) may provide additional savings potential M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 24 24

Swing plants HCFC production in swing plants other than China was about 40,000 tonnes in the year 2012 (which was down from a level of 66,000 tonnes in 2009) If funding for swing plants was to be based on a level of 50,000 tonnes capacity, at a cost of US$ 1-1.5 per kg, it would add a funding requirement of US$ 9.5-14.5 million per triennium The total funding for production phase-out --as given in the May report-- would then increase to US$ 82-87 million for the first (2015-2017), and to US$ 75-80 for the second (2017-2020) triennium M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 25 25

Concluding remarks The most significant impact on the replenishment will be the way Case 1 and Case 2 will be considered for the next two triennia Any major change in the proportion of foams versus RAC will have an impact on relative funding levels for the next two triennia, but not on the overall funding requirement All other issues investigated by the Task Force have only minor effects on replenishment levels There is a need to consider the longer term operation of the Multilateral Fund, and how the Fund actually operates in real terms, including where it relates to agencies’requirements for disbursement schedules and other parameters M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 26 26

Thank you ! M o n t r e a l P r o t o c o l M O P - 2 6, 1 7 - 2 1 N o v e m b e r 2 0 1 4, P a r i s 27 27