Cambodia Needs to Seize the Opportunities in Climate FinanceApr 20, 2016
Cambodia has now reached a key stage of its development. It has joined the ranks of Lower Middle Income Countries and is expected to graduate from the United Nations’ list of Least Developed Countries (LDCs) over the next decade. The share of traditional development assistance in Cambodia’s GDP has been reduced to less than 10% in recent years, and Cambodia now needs to attract other sources of financing to support its economic and social development.
In this context, climate finance represents a major opportunity which Cambodia cannot afford to miss. At the global level, the Paris Agreement on Climate Change – which will be open for signing on the 22nd of this month in New York – reaffirms the commitment of developed countries to provide US$ 100 billion annually by 2020 for developing countries, with additional commitments expected after 2020. Cambodia is already on the map as one of the most climate-vulnerable countries in the world, primarily due to low-adaptive capacity and heavy reliance on rain-fed agriculture. It is also at an early stage of industrial development, with an opportunity to bypass the fossil fuel development stage by embracing a more sustainable, low-carbon development model.
For Cambodia, investing in climate-smart technologies and programmes is not just an environmental priority but a social and economic necessity. The Climate Change Financing Framework developed by the National Council for Sustainable Development (NCSD) estimates that without investment in adaptation, climate change could cost Cambodia 1% of GDP every year by 2030, and that economic growth could be almost entirely offset by climate change impacts by 2050. This is assuming that the Paris Agreement objective of a less than 2oC temperature increase over pre-industrial level is met. Losses from the 2013 floods alone cost Cambodia over 2% of its GDP. As the impacts of climate change become more acute, climate-smart investments will provide relatively higher social and economic benefits.
The availability of climate finance, both public and private, can help reduce the costs of these investments. Public climate finance has grown significantly in recent years with the establishment of a number of bilateral and multilateral funds. The largest of these funds is the Green Climate Fund, with an initial capitalization of over $10 billion.
To access these funds, Cambodia must demonstrate the capacity to identify, manage and track the performance of climate-smart investments. Significant steps have already been taken including the development of a 10-year Cambodia Climate Change Strategic Plan and corresponding action plans in 14 ministries. With support from the Cambodia Climate Change Alliance (CCCA), the Ministry of Economy and Finance conducts annual reviews of climate public expenditure, while the NCSD is supporting key ministries to integrate climate change concerns in their budgeting decisions.
In the context of a rapidly growing national budget, 25% of climate-related public expenditure is funded by domestic resources. The other 75% remain funded by development partners. However, many climate-relevant programmes are not yet climate-smart. The government and its development partners need to put in place mechanisms to ensure that programmes impacted by climate change (or those with an impact on climate change) are identified at an early stage and designed accordingly, so that climate funds can be brought into the mix to co-finance these investments. This includes among others public investments in infrastructures (irrigation, roads, energy), agriculture and natural resources management, management of climate-sensitive diseases, and urban development.
While there is ample scope to better harness these public resources, the largest potential definitely lies on the private finance side. Globally, two-thirds of climate finance comes from the private sector. The NCSD recently commissioned a mapping of private sector contribution to the climate change response in Cambodia, uncovering a number of opportunities.
One, investors are actively looking for projects in the region, for example in the solar energy sector where Cambodia has one of the best potentials in Southeast Asia. Case studies on energy efficiency in industries demonstrate very high returns on investments.
In agriculture, several business models are being tested to support a shift towards climate-smart practices. Other initiatives target the tourism, transportation or urban development sectors, just to name a few. The role of the government here is to provide a favorable environment for investments, through regulations (e.g., on energy efficient appliances, vehicles or fuels), economic and fiscal incentives, education and training, and by helping to develop the market for climate-smart products through awareness-raising for businesses and the general public.
Finally, the potential for the banking sector to fund this type of investments must be unleashed. This requires a combination of capacity development — for key financial institutions to develop an expertise on climate-smart financial products — and mechanisms to reduce the risk of such investments for banks and insurance companies, for instance, through a guarantee fund.
At this critical juncture in a competitive regional context, Cambodia could seize the opportunity of climate finance by taking high-visibility policy decisions to clearly signal to public and private investors that climate-smart investments will find a favorable environment in the country.
Julien Chevillard is the Cambodian Climate Change Alliance Trust Fund Administrator for the United Nations Development Programme in Cambodia.