Asia Pacific Finance and Development Center (AFDC) 2010 Biennial Forum

 Fiscal and Financial Policies for Low-

carbon Economic Development

Session I:

Fiscal and financial policies for low-carbon economic development: challenges and opportunities

CLIMATE CHANGE AND ECONOMIC POLICIES IN APEC

ECONOMIES – Initial Findings from World Bank Studies for FMPI 9

Ede IjjaszSector ManagerChina and Mongolia Sustainable Development The World Bank

Ahmad Ahsan, Lead Economist, East Asia and Pacific Region

Organization

Background Main Messages Large “no-regrets” zones Need for a full range of policy instruments Potential of Climate-Friendly Technologies Policy for Market Readiness Increased climate variability and policy responses Regional Cooperation

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1. Background

Finance Ministers’ Policy Initiative 9 (2008) Under this initiative the World Bank was

asked to prepare studies on the current state of economic policies concerning climate change and recommendations for strengthening these policies.

…A Forward looking agenda: Policies, Capacity Building Needs and Market Readiness Diagnostics

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1. Background

Four background studies:– Climate Change and Fiscal Policy – Trade and Investment Policies to Promote

Climate Friendly Technologies in APEC – Assessing Capacity Building Needs for the

Use of Market-Based GHG mitigation Instruments

– The Impact of Extreme Climate Events on the Poor and Policy Responses

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Central Role of APEC on climate change: source of 60% of global emissions

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APEC Will Also Be Highly Affected Top Ten Countries Vulnerable to Climate Change

Drought Floods Storms Sea Level Rise

Malawi Bangladesh Philippines All Low-Lying Island States

Ethiopia China Bangladesh Vietnam

Zimbabwe India Madagascar Egypt

India Cambodia Vietnam Tunisia

Mozambique Mozambique Moldova Indonesia

Niger Laos Mongolia Mauritania

Mauritania Pakistan Haiti China

Eritrea SriLanka Samoa Mexico

Sudan Thailand Tonga Mynamar

Chad Vietnam China Bangladesh

Source: World Bank, Sustainable Development Network, Environment Department, 2008

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APEC Economies Have Already Set Ambitious Targets for 2020

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2. Main Messages Synergies of national goal create a large zone of “no-

regrets” policies. Most APEC economies, especially the developing

economies, have established ambitious targets to cap and reduce green house gas (GHG) emissions. – However, these targets will not be achieved unless the full range

of policies are considered and implemented.

Fiscal Policy will be central – and carbon pricing essential but not sufficient– It will need to be complemented by broader reforms to liberalize

financial and energy markets and strengthen independent regulators to allow pass through of carbon prices.

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Main Messages (Continued) There is a diverse range of climate friendly technologies (CFTs)

used and produced in APEC economies and they are well placed to exploit these technologies.

Market-readiness to finance and trade clean projects and carbon caps will be crucial

Fiscal policies concerning adaptation will need to go beyond costing of climate change and consider the cost and benefits of adaptation strategies under conditions of uncertainty.

APEC is well positioned to use regional cooperation to advance climate change policies. – Several APEC economies and the East Asia region can already

now use fairly advanced market mechanism to achieve mitigation in domestic markets or in bilateral trading.

– But for this to happen, they will need to build institutional, technical and political capacity to manage the complexities of these systems.

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3. Synergies that create large “no-regrets” zone Across Multiple Policy Goals

First, countries are seeking to tackle national environmental problems: e.g. CC mitigation goals and air pollution reduction goals have synergy.

Second, addressing energy security is another important goal, as dependence on energy imports and global energy prices rise. Apart from Russia, Canada, Australia, and Brunei, APEC economies either already are or will become energy importers.

Third, countries are also seeking technological advantage and new sources of growth, and see low-carbon technologies as a growth opportunity for the future.

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4. The ambitious emissions targets of APEC economies will not be achieved unless the full

range of policy instruments is used.

Many developed countries’ inability to reduce emissions in line with their Kyoto Protocol targets, as well as the challenges facing China

Need to go beyond low-cost policies: – energy efficient buildings– higher cost policy interventions with fewer

immediate co-benefits (but long-term market opportunities), such as CCS

Opportunities for a green growth vision12

Overview of Fiscal Policy Instruments

Carbon pricing Technology-based

Fiscal Led Regulations-Led- Emissions trading-Carbon tax-Hybrid trading-tax schemes

- Demonstration grants-Public R&D-Investment subsidies-Public investment in Venture Capital-Public investment vehicles-Feed-in tariffs-Tax credits-Public procurement-Renewable energy certificate trading-Subsidies for energy-efficiency purchases

-Improving information availability-Technology performance standards-Renewable fuel/energy standards-Building regulations-Automobile regulations-Information standards

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Fiscal Policy and Pricing will have Central Role

Low Energy Prices vs. Energy Efficiency

–

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Can Have Gains – even double dividends

– Global action on climate change by pushing down global energy prices can raise revenues from 0.5% to more than 2% of GDP

– Could improve the terms of trade for most net energy importing APEC developing countries.

– Use of carbon revenue to offset other taxes• A Bank CGE modeling study for South Africa concluded that a

reasonably high carbon tax combined with reductions in taxes on labor and labor market reforms was actually welfare-improving (ignoring climate benefits)

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Carbon Pricing Will Be Essential But Not Sufficient–

- May not lead to Pass Through- Under Rationing response may be different– Inferior substitution to biomass or to oil– Energy security issues

Liberal energy policies, Independent Regulators, offsetting assistance

Complementary Technology Supporting Policies

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5. Large Potential of Climate-Friendly Technologies

“Win-win” measures–examples of countries provided. But Strong Policy and Institutional Requirement

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APEC countries are leaders in climate friendly technologies

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TOWARDS SUSTANABLE DEVELOPMENT

CO

2 A

bat

emen

t c

ost

Energy Efficiency

Renewable Energy

• Regulations and financial incentives• Financing mechanisms• Institutional reform

• Feed-in Tariff or Renewable Portfolio Standard• Tax on fossil fuel

• Support for R&D• Financing incremental cost • Technology transfer

New Technologies

Energy pricing reforms

Overview

World Bank Group

Green Growth is not “cost neutral” (eg Energy)But there are tools to help manage this

Investment Policies to Support CFTs

Clean Development Mechanism (CDM) permits investment in ventures that reduce emissions in developing countries: hydroelectric power, wind power, bio-mass methane avoidance projects. China, Indonesia, Thailand, Vietnam

Public investment and subsidy programs in CFTs have played a leading role – China: hydro-electric and (fit) PV Solar Power; Thailand – tax, tari

Private Investment: total investment in clean energy increased from approximately USD 33 billion in 2004 to approximately USD 148 billion in 2007

Investment Certainty -current costs of CFTs, their financing require a policy environment that encourages more certainty on investment incentives: a number of countries practicing this.

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Menu of Financing Gap “bridging factors”Menu of Financing Gap “bridging factors”

Green Bank•Guarantees•Grants•Concessional Loans

• Renewable Energy Credits• Feed-In Tariffs• Technology Risk Guarantees• Incubation• R&D Co-Funding

• Fiscal Subsidies• Tax Incentives• Energy Efficiency Tax Credits

Carbon Offsets•Carbon fund•Carbon Exchange

Renewable Energy

Green Buildings & Urban Space

Energy Efficiency

Alternative Fuels

Policy & RegulatoryPolicy & Regulatory

• Green Building Codes• Zoning and Land Use

• Legislative Mandates• Renewable Portfolio

Standards (RPS)• Qualifying Projects

• Green Specifications• Policy Targets

• Alternative FuelObligations

• Reducing Emissions from Deforestation and Degradation

Green Growth through Mitigation

World Bank Group

6. Policy For Market Readiness

Importance of Markets and Financing Offset mechanisms like CDMs,

Reformed CDMs Sector-based crediting and trading Crediting/payment systems based on

nationally appropriate mitigation actions (NAMAs)

Allowance-based emissions trading systems (cap and trade)

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International Deployment of Selected Market Mechanisms

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TYPE OF SYSTEM COUNTRIES/REGIONS

National emission trading systems(in implementation) European Union, New Zealand

National emission trading systems Japan, Korea, Australia (concrete plans stopped recently)

Regional emissions trading systems USA

Company level GHG emission reporting Mexico

Energy efficiency certificate trading China (trial system), India (to be operational end of the year)

Renewable certificate trading EU (some member states), India (operational end of the year)

Market Readiness Cycle

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Selection of instruments

Monitoring, reporting and verification

system

Assessment of technical and

political context

Compliance and enforcement

system

Implementation framework

Social, economic and

environmental impact

Identify key stakeholders

Capacity BuildingExisting capacity

Required capacity

Evaluate results and

identify gaps

Design capacity building

programs

Implement programs

Monitor and evaluate

effectiveness

Question-naire

Reportingtemplate

Identify key stakeholdersIdentify key stakeholders

Capacity BuildingExisting capacityExisting capacity

Required capacityRequired capacity

Evaluate results and

identify gaps

Evaluate results and

identify gaps

Design capacity building

programs

Design capacity building

programs

Implement programsImplement programs

Monitor and evaluate

effectiveness

Monitor and evaluate

effectiveness

Question-naire

Reportingtemplate

Stakeholder Consultation and Participation Selection of instrumentsSelection of instruments

Monitoring, reporting and verification

system

Monitoring, reporting and verification

system

Assessment of technical and

political context

Assessment of technical and

political context

Compliance and enforcement

system

Compliance and enforcement

system

Implementation framework

Implementation framework

Social, economic and

environmental impact

Social, economic and

environmental impact

Identify key stakeholders

Capacity BuildingExisting capacity

Required capacity

Evaluate results and

identify gaps

Design capacity building

programs

Implement programs

Monitor and evaluate

effectiveness

Question-naire

Reportingtemplate

Identify key stakeholdersIdentify key stakeholders

Capacity BuildingExisting capacityExisting capacity

Required capacityRequired capacity

Evaluate results and

identify gaps

Evaluate results and

identify gaps

Design capacity building

programs

Design capacity building

programs

Implement programsImplement programs

Monitor and evaluate

effectiveness

Monitor and evaluate

effectiveness

Question-naire

Reportingtemplate

Stakeholder Consultation and Participation

7. Extreme Climate Events and Policy Responses

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Annual Natural Disaster Economic Loss (in US$ millions)

Country

Annual mean (’80-’0

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2008

1. USA 18.000 57.290

2. China 10.700 109.520

3. Japan 7.100 0

4. Italy 2.000 0

5. India 1.600 0 6. Germany

1.200 1.200

7. France 1.000 0

8. UK 1.000 3

9. Mexico 900 75 10. Turkey

800 0

In 2008, natural disasters cost the world US$200 billion. USA and China bore 90% of this burden

China’s Vulnerability

Vulnerability of China to meteorological hazards:

70% of land area

50% of population

80% of industrial and agricultural areas

Source: China Meteorological Administration

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Fiscal Policy and Adaptation: In addition to considering costing, decision making will

be Important. A First Approach to Investment Principle Under Uncertainty

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Policy & RegulatoryPolicy & Regulatory

• Unlock Urban Land Values

• Zoning and Land Use

• Legislative Mandates• Privatize landfill/STP

management• Establish PPP arrangements

• Set Abatement Specifications• Pay on abatement• Establish insurance

mechanisms

Menu of Financing Gap “bridging factors”Menu of Financing Gap “bridging factors”

Redevelop Urban Land •Guarantees•Private financing•Concessional Loans for public good aspects

Redefine Roles and Responsibilities for BrownAgenda

Pay for achieving national abatement standardsEstablish Catastrophic Risk Financing arrangements

Solid Waste Management

Sanitation and wastewater

Vulnerability to disasters

Green Growth through Adaptation

World Bank Group

8. APEC’s Regional CooperationAPEC may be well positioned to use

regional cooperation to advance climate change policies. Its voluntary and non-binding framework may give it advantage to progress in these regional cooperation areas in four areas

Harmonizing trade policies regarding

climate friendly technologies would be to review and remove tariff peaks on environmentally friendly goods.

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AND…. Increasing coordination among

regulatory systems that will that will enable the growth of regional markets for climate friendly products

Strengthening regional climate monitoring efforts to inform progress in mitigation efforts and long-run adaptation decisions

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