Financing Sources Climate

The Interface Between Mozambique and the Climate Management Fund

Climate finance in Mozambique

Mobilize Resources for a Future Resilient

Mozambique faces increasing impacts of climate change, from extreme cyclones to prolonged droughts. To meet these challenges and ensure sustainable development, the country has been mobilising different sources of climate finance, both internal and external. This page presents the mechanisms in use, the funds available and the ways to access this strategic support.

+1,3 B USD

Mobilized between 2012 and 2024

+35 Projects

Funded by Multilateral Funds

8 Sources

International Climate Funding

Disaster Management Funding

Mozambique is a country vulnerable to climate disasters. Factors such as its location along the coast of the African continent make the country susceptible to events such as cyclones and tropical storms.

 

As a way to deal with the losses and damage resulting from these events, the country created, through the Decree No 53/2017 of 18 October 2017, Calamity Management Fund (FGC), to ensure the timely and predictable availability of resources to strengthen the national capacity for prevention, readiness, operation and response to natural disasters.

 

In compliance with the Decree No 62/2022 of 25 November, the Government allocates annual minimum appropriations corresponding to 0.142% of the State’s tax revenue, to ensure the stability of the fund.

 

A Disaster Risk Management and Reduction Act — Law No 10/2020 of 24 August emphasizes, beyond the management of calamities, the management and reduction of disaster risk, the construction of resilience and adaptation to climate change.

About financial and fiscal management of disasters, the Law explicitly mentions three types of sources of resources:

  • Disaster insurance — risk transfer;
  • support from partners;
  • Calamity Management Fund (FGC).

Within the framework of the operationalisation of the Financial Disaster Protection Plan — PPFD 2022-2027, the Government signed, at the end of 2022, with two national insurers, parametric risk transfer insurance for cyclones, based on the wind index, with a weight of 80%, and the precipitation index, with a weight of 20%. The value of the policy was USD 4 million. The insurance contract became effective on 1 December 2022 and expired until 30 November 2023. Subsequently, it was renewed, and the 15 December 2024, for the period 2024-2025.

 

With ratification by the Assembly of the Republic in May 2023 of the Agreement for the establishment of African Risk Capability — ARC, a specialised African Union agency that provides insurance and reinsurance against extreme weather events and natural disasters, the country has strengthened its operational disaster risk management mechanisms.

In this context, the Government concluded a drought insurance contract for the agricultural year 2023-2024, in the value of USD 2 million, based on four agroecological zones. The insurance resulted in a payout In two areas, the overall value of USD 5.5 million, due to the scarcity of precipitation associated with the phenomenon El Niño.

 

For the agricultural year 2024-2025, the insurance contract with the CRF was renewed, maintaining the same premium level, and resulted in a payout USD 1.88 million. They are also active for the period 2025-2026. sovereign drought insurance of USD 2 millionand sovereign insurance against tropical cyclones, worth USD 2.5 million.

 

Internally, the access to disaster management funds may be conditioned by limited technical capacity the country for the accounting of losses and damage, including economic and financial damage, such as loss of income, revenue and production resulting from natural disasters.

Integration of Climate Change in Planning and Public Budgeting
Challenges in Integrated Climate Funding Management

Despite advances in mobilizing climate finance, Mozambique faces significant limitations in the integration of these resources the national public administration system.

Some of the main challenges include:

  • the absence of a standardised climate budgetary tracking system;
  • institutional fragmentation between ministries and cooperation partners;
  • Lack of national indicators to monitor climate investment impacts;
  • Technical and human capacities still limited at central and provincial level.

These obstacles reduce the efficiency of allocation of funds, hinder the evaluation of results and create dependence on non-predictable external funding.

To overcome the challenges identified, national experts and institutions propose various measures to strengthen the integration of climate finance:
  • Development of a national climate finance strategy, linking internal and external resources.
  • Implementation of a climate tracking system in the public budget (climate budgeting tag).
  • Continuing institutional training in sectoral ministries and decentralized levels.
  • Establishment of harmonised reporting mechanisms with development partners and international climate funds.
Effective integration will allow allocate resources based on national priorities, increase transparency and ensure efficient use of funds mobilised.
Insurance
The Financial Disaster Protection Plan (PPFD) 2022-2027

It is an instrument that describes the financing mechanisms for disaster management, aiming to strengthen the state’s financial response capacity to disasters, to improve post-disaster interventions, to relieve the pressure of the State Budget and to consolidate the construction of resilience as an integral part of management and reduction of disaster risk.

The PFPD adopts risk transfer instruments whose disaster management is structured according to the frequency and severity of the multiple relevant threats in the country, which allows the optimization of the portfolio of financial instruments, providing agility and flexibility for the allocation of resources according to the needs identified after each event. For low-risk events (high frequency and low severity), risk retention, with the use of quota credits and budgetary instruments, in particular through the FGC, annual sector budgets and budget revisions.

For high-risk events (low frequency and high severity), such as large floods or cyclones, transfer of risk to the private sector, through instruments such as sovereign insurance, is a viable alternative.

Article 51 of Law No 10/2020 determines that it is for the government to approve instruments for parametric disaster insurance.

In 2022, the Government concluded a contract with two national insurers for a parametric risk insurance based on wind (80%) and precipitation (20%) indices, with a 4 million USD. The insurance was active from 1 December 2022 ed 30 November 2023 and has been renewed to apply from 15 December 2024 (age 2024/2025).

Mozambique has been exploring innovative climate finance mechanisms, such as carbon markets, climate debt exchanges and sustainable obligations.

 

Carbon markets

Carbon markets are a specific type of carbon pricing mechanism through which carbon credits are being generated and marketed (other price fixing mechanisms are carbon taxes, including European Union Carbon Border Adjustment Mechanism).

Carbon markets are emerging as another important instrument to finance low carbon transitions and to contribute to the implementation of the countries' Nationally Determined Contributions (NDCs) to the Paris Agreement.

Carbon credits can be generated in two ways:

  • In a system of Cap-and-trade
  • Under a basic reference and credit mechanism

The carbon credits generated by projects in Mozambique are all based on reference and credit-based mechanisms. Historically, carbon credit generation in Mozambique has been low, mainly due to lack of institutional resources and lack of specific projects. However, since 2022 there has been a significant increase, with a total of 2.4 million carbon credits generated in the last two years by 41 projects and initiatives.

Although Mozambique has great advances, the potential for carbon credits production is much greater. According to initial estimates of McKinsey, Mozambique has a technical potential to generate between 85-90 million carbon credits per year, with greater potential in the forestry and renewable energy sectors.

Reduction of Emissions by Deforestation and Forest Degradation (REDD+)

A specific type of carbon credits is related to the Reduction of Emissions by Deforestation and Forest Degradation (REDD+). In the last 15 years, Mozambique has invested significant resources in creating systems needed to generate carbon credits from REDD+. This included:

  • Development and validation of a national Forest Reference Level;
  • Creation of a specific Monitoring and Verification Unit (MRV); and
  • Adoption of a dedicated REDD+ Decree (Decree 23/2018) regulating the generation and approval of carbon credits of REDD+ projects in Mozambique.

As a result of these efforts, Mozambique was the first country to receive payments from the World Bank’s Forest Carbon Partnership Fund (FCPF) in 2021 for reducing emissions of approximately 1.28 MtCO2and a REDD+ project in the province of Zambézia.

There are currently more than 36 proposals for REDD+ projects in the portfolio of projects of which 33 are in the feasibility studies phase and 3 in the evaluation phase for approval and authorisation.

Challenges for the exploration of carbon markets in Mozambique

A recent assessment by USAID (2023) identified that the main challenges for the operation of carbon markets in Mozambique include:

  • Development of a regulatory framework for carbon markets, with clear guidelines for the sectors of GHG (Agriculture, forests and land use, Energy, Waste and Industry), aimed at creating a favourable environment for carbon investments.
  • Limited institutional capacity within the main government bodies at all operational and decision-making levels on carbon processes, emission reduction, data collection and management.
  • Limited capacity of measurement, recording and verification systems (MRV) GHG emissions and project monitoring data for all sectors (AFOLU, energy, waste, direct industrial processes).

It allows a country to redirect debt payments to finance climate projects. It can occur via bilateral agreements or with intervention by international organizations, combining debt relief with environmental investment.

Financial instruments intended to finance projects with environmental benefits. They include green obligations (environment and climate) and blue obligations (sea resources). In Mozambique, legal regimes for issuing this type of instrument are under preparation.

Mozambique has benefited from International climate funds, supporting projects for mitigation, adaptation and institutional strengthening.

Key operational mechanisms include:

From 2010 to 2024, Mozambique mobilised over USD 1 billion for climate projects. Of this amount, around 245 million USD came directly from international funds, with the rest being provided as co-financing.

Projects include from coastal adaptation, food resilience and green infrastructureuntil institutional training and energy transition.
Despite the positive impact, application and access procedures vary between funds and still present technical and coordination challenges at national level.

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