Financing Climate Change Adaptation in Transboundary Basins

22 Financing Climate Change Adaptation in Transboundary Basins 2.5 Concessional Loan Financing Concessional loans are provided to borrowers on terms substantially more generous than loans based on market rates. Concessionality may be achieved through inter- est rates below those available on the market or by grace periods, or a combination. Concessional finance is available through international and regional devel- opment banks and partners, as well as through some national banks with loans having long grace periods. In the transboundary river basin context, access to con- cessional financing can provide much needed finance to complement limited budgets and available resources for climate finance. Many developing countries access mainly nonconcessional financing for their develop- ment. Even LICs that have previously been largely dependent on concessional finance have recently been diversifying resource mobilization to less con- cessional and nonconcessional sources, includ- ing multilateral, bilateral, and commercial creditors as well as international bond markets. 2.6 Climate Bonds and Other Bond Options Climate bonds, or “green bonds,” can help mobilize resources from domestic and international capital mar- kets for adaptation, renewable energy, and other climate-friendly projects. They resemble conventional bonds, except that the proceeds are invested in projects that generate climate benefits. A bond issuer raises a fixed amount of capital, repaying the capital (principal) and accrued interest (coupon) over a set period of time. The issuer must generate sufficient cash flows to repay interest and capital. Climate bonds are innovative financial instruments wherein proceeds are invested exclusively in climate proj- ects that generate climate or other environmental bene- fits for hydropower, energy efficiency, sustainable waste management, sustainable land use (forestry and agricul- ture), biodiversity, and clean water. Their structure, risks, and returns are otherwise identical to those of traditional bonds. For an example of how these could be used by an RBO see box 2.6. Globally, climate-aligned bonds stand at US$895 billion, of which labeled green bonds stand at US$221 billion outstanding issuances and unlabeled climate-aligned bonds at US$674 billion in 2017 (Climate Bonds Initiative 2018). (See table 2.2.) The use of climate bonds is growing globally for a wide array of sectors, including water. While only a small per- centage of climate bond issuances has been related to adaptation projects, the water sector is perhaps the most attractive and viable (see figure 2.3). This finan- cial tool could offer an opportunity for leveraging pri- vate finance for water supply and treatment projects, as well as other blended projects such as energy or agriculture, thus providing a source of co-financing that could make a project more bankable. BOX 2.6. Climate Bonds for Adaptation in the Water Sector Water scarcity is a threat to many regions of the world, which is increasing steadily with climate change. In most poor regions, water use is highly inefficient due to the high cost of efficiency technology. An RBO could create a basin water facility financed by water bonds, which would generate a guaranteed feed-in tariff for water supplies. The fund would guarantee a minimum price for water provided by a company proportionate to the region’s water availability. As regional economies grow, so will the beneficiaries’ ability to pay, enabling them to eventually pay the fees, at which point the tariff would become redundant. Such an arrangement could attract private investment to provide sustainable water, because there would be a guarantee of payment, and could furthermore enhance food security if designed with agricultural objectives.

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