Linking the Green Climate Fund (GCF) and Clean Development Mechanism (CDM) is becoming increasingly important for policymakers and project developers. COP21 mandated the CDM Executive Board to investigate the links between market mechanisms and climate finance, in particular the GCF. During the intersessional UNFCCC negotiations in May 2016, the CDM Executive Board held an in-session workshop in which relevant initiatives were presented. However, there is still no common understanding on how to operationalize linkages between them. The findings of this study contribute to this debate, notably by examining the compatibility of CDM activities with GCF investment criteria and the operational modalities of both institutions, proposing financial and non-financial engagement models.

Specifically, the study finds that by linking GCF to high-quality CDM activities with scaling up potential could offer the following mutual benefits:

• Strengthening the results-orientation of the GCF by applying UNCCC-approved CDM MRV methodologies, thereby enhancing the transparency of verified mitigation outcomes.
• Harnessing the mitigation potential of the CDM pipeline, which is at risk from low CER prices, with GCF resources.
• Providing incentives for new private sector investments.
• Providing bridge financing to support the transition from the current CDM to the new generation of Paris Agreement policy instruments without sacrificing lessons and human capacity built under the CDM.

Based on the GCF’s approved financial instruments (grants, debts, green bonds, and equity financing, as well as guarantees), the study develops six applied models on how the CDM can be used for GCF resource allocation. All models are based on the precondition that any issued CERs resulting directly from mitigation outcomes supported by the GCF would need to be cancelled in order to avoid receiving two sources of financial support for the same activity (commonly known as double dipping). The study thus proposes the following models:

1. Grant financing, where grant disbursements are linked to GHG impacts, either indirectly (when delivered upfront) or directly (via results-based payments);
2. Debt funding, where the Fund pegs its debt terms and conditions to GHG mitigation results tracked under the CDM;
3. Green Bond financing, where the Fund provides a partial credit guarantee to facilitate the marketability of the green bond to investors;
4. Equity financing, where the Fund pegs its equity terms and conditions to GHG mitigation results tracked under the CDM;
5. Price guarantees, whereby the Fund offers revenue support through price guarantees linked to CERs; and
6. MRV: A non-financial engagement model which applies CDM methodologies to streamline MRV activities within GCF-funded activities.

This publication is part of a BMUB-supported project to strengthen the CDM pipeline in Africa, which is being carried out by Climate Focus, Perspectives and the AERA Group. The project also provides active support for identifying suitable pilot activities in Africa and enabling their access to climate finance. Furthermore, the project contributes to practical linkages between CDM and GCF at country level, as well as to the public debate on linking market mechanisms and climate finance.

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