National climate funds can vary con

National climate funds can vary considerably in terms of objectives, legal status, type of fund, trustee arrangements, capitalization and beneficiaries. This section discusses design features of national climate funds and provides concrete examples from seven national funds that are analyzed in the case study analysis.
Different types of funds
There are three main types of national funds: endow- ment, revolving and sinking funds. The types of national funds will determine the capitalization process and the structure of the governing body.
Sinking fund. A sinking fund consumes the principle capital and investment income (if the fund is invested) over a fixed time period. This type of fund should be regarded as a short-term initiative and not sustainable in the long run because the capital of the fund will be disbursed entirely within a fixed period of time. An example of a sinking fund is a multi-donor trust fund, where it pools financial resources committed by various donors and channels them to intended beneficiaries through one gateway to ensure better aid coordination. The Cambodia Climate Change Alliance (CCCA) Trust Fund and Indonesia Climate Change Trust Fund are an
example of a multi-donor trust fund for climate change.
Revolving fund. Revolving funds are those in which the principle capital and the investment income (if the fund is invested) are consumed entirely but a replenishment source (a tax or external source) exists and contributes regularly to the funds. The principal
capital can be further invested in various types of risk-free financial instruments (such as in commercial bank deposits) to generate additional income (i.e. the CCDM fund) or not invested further (i.e. the ENCON fund).
Endowment fund. A fund is considered an endowment fund when the principal capital is kept in perpetuity and not consumed under any circumstances and only the investment income is used to provide grants. As there is no regular source to replenish the capital, therefore, an endowment fund depends on the interests or dividends generated from the investments and/or additional funds mobilizing by fund managers (i.e. the BTFEC and the TTF).
In many countries, it is common to find a combination of two types of funds in one institution, including:
•An endowment fund and a sinking fund (i.e. the MCT and the EPF). One of the reasons for combining an endowment fund and sinking fund is that many national funds in least developed countries (LDCs) depend on external sources and many times such funds come in the form of time-bound and ear-marked grants. An initial endowment fund would at least help to cover the core administrative costs to ensure sustainability of a fund, while the sinking fund can receive and disburse the time-bound and earmarked grants when these come in.
•An endowment fund and a revolving fund (i.e. the TTF). The TTF is an endowment fund, which makes distributions to a revolving fund. These two funds draw on the comparative advantages of both types of funds, for instance, an endowment fund is useful for long-term planning and can earn investment income (capital appreciation and dividends); while a revolving fund provides more flexibility to distribute incomes generated from the main trust fund (or the endowment fund).
Sources of capital can come from international (bilateral and multilateral) and domestic sources including government budget, private sector (i.e. the EPF receives contributions from private companies) and individuals. The capitalization process can be built up over a certain period of time, or provided at the beginning (establishment) of funds, or a mix of the two options.
Table 2 shows different sources of capital of the seven national funds mentioned before.
Government budget. For a revolving fund, the capital can come from a portion of government taxes or levies (i.e. on petroleum products in Thailand or on CDM projects in China) and loans. The ENCON fund and the CCDM fund provide examples for countries on how to identify potential sources of revenue for financing climate actions. Revenues can be collected from industries and sectors that are the main emitters of greenhouse gasses. The collected revenues can further be earmarked for activities that directly contribute to low carbon and climate- resilient development at the national and local levels.
External sources. The sources of finance can also be mobilized through development partners and vertical global funds.
Dividends and interests from investments. For an endowment fund, the initial capital can be invested in a financial market in instruments such as stocks and bonds with a greater risk involved or in bank deposits and other less risky instruments.