1ECOPLAN

WP1: Indicators of Investment Climate

Robert Oleschak

ECOPLAN, Economic Research and Policy Consultancy

TETRIS project meeting

Amsterdam

20-21 June 2006

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Research Objectives1 Introduction

Develop a composite indicator of the investment climate for GHG

abatement projects

Compile indicators for a broad range of countries

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Setting the Stage1 Introduction

Investment risk is (besides abatement costs)… – one of the main determinant of investment in climate change mitigation

– and plays an important role in determining the distribution

Challenges in measuring investment risk:– Multidimensional nature of the concept being measured (different factors,

which can interact in various ways)

– Difficulty in measuring some dimensions (e.g. policy related risks)

– Different perspectives across firms and activities (not all indicators being

measured are important for investment in climate change mitigation)

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2 Timetable and Milestones

Work Package 1

Milestones / ActivitiesJun 05Jul 05 Literature Review

Aug 05 Literature Review

Sep 05 Literature Review

Okt 05 Collecting Data

Nov 05 Draft Indicator Concept

Dez 05 Collecting Data

Jan 06 All Data Available

Feb 06 Building composite indicator

Mrz 06 Building composite indicator

Apr 06 Building composite indicator

Mai 06 Sensitivity Analysis

Jun 06 Draft report

Jul 06 Last data update

Aug 06 Final report

Sep 06Okt 06Nov 06

WS 5: Dissemination

WS 2: Data Collection and Data Handling

WS 3: Building Indicator

WS1: Indicator Concept

WS 4: Final Indicator

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3 Status of Work / Progress Against Planning

Main Activities, Problems

Main activities– Review of literature has been conducted

– Data has been collected

– Composite indicator has been compiled

– Statistical analysis has been conducted

– Steps involved in compiling composite indicator have been described

Available Documents– Draft report

Delays / Difficulties– Data is fast out-of-date=> update is planned before submitting final report

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Indicator of Investment Climate – Building Blocks4 Composite Indicator

The indicator consists of three main building blocks:

Institutional Environment

Political / Regulatory Environment

Economic Environment

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Institutional Environment4 Composite Indicator

Kyoto ratification (Yes/No) DNA established (Yes/No) National registry established (Yes/No) National communication submitted Number of capacity-building programs MoUs with number of countries

JI Institutions

JI policy expressed in NC (Yes/No) Kyoto ratification (Yes/No) DNA established (Yes/No) National communication submitted Number of capacity-building programs MoUs with number of countries

CDM Institutions

CDM policy expressed in NC (Yes/No) Number of AIJ-projects implemented JI

Experience Number of JI-projects at validation Number of AIJ-projects implemented Number of CDM-projects at validation CDM

Experience Number of CDM-projects validated (re-quest for registration or under review)

Number of CDM-projects registered

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Political / Regulatory and Economic Environment4 Composite Indicator

Political / Regulatory Environment

Economic Environment

Number of procedures to enforce a contract Days to enforce a contract Enforcing

Contracts Cost to enforce a contract (% of debt amount) Number of procedures to start a business Days to start a business Starting a

Business Cost to start a business (% of income per capita) Number of procedures to register property Days to register property Registering

Property Cost to register property (% of property value)

Inflation (average last 10 years) External debt (% of GDP) Economic and

Default Risk Corruption perception index (10=highly clean, 0=highly corrupt)

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Types of indicator– Indicator with ordinal scale: allows rating, limited information on “how much

better”

– Two separate indicators for Annex I and Non-Annex I countries

Geographical Scope– Very broad: 143 countries are covered (Annex I: 37; Non-Annex I: 106)

– No differentiation between industries

Temporal Dimension– Snap-shot of the current situation

– Last update: March 2006

Properties of the Composite Indicator4 Composite Indicator

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Main Results: Annex I4 Composite Indicator

Rank Nation CPI Rank Nation CPIInstitution Policy Economy Institution Policy Economy

Belarus -0.99

19 France 0.12

18 Austria 0.14 37

Turkey -0.87

17 Lithuania 0.16 36 Croatia -0.97

16 Japan 0.17 35

Greece -0.41

15 Germany 0.19 34 Ukraine -0.43

14 Latvia 0.22 33

Bulgaria -0.34

13 Estonia 0.23 32 Portugal -0.40

12 Netherlands 0.23 31

Slovenia -0.30

11 UK 0.26 30 Poland -0.31

10 Iceland 0.26 29

Spain -0.12

9 Slovakia 0.29 28 Russian Fed. -0.14

8 Norway 0.31 27

Belgium -0.08

7 Canada 0.35 26 USA -0.10

6 Czech Rep. 0.36 25

Ireland -0.04

5 Switzerland 0.37 24 Italy -0.06

4 Finland 0.38 23

Australia 0.03

3 Sweden 0.44 22 Hungary -0.01

2 Denmark 0.53

20

21

Score of Components Score of Components

1 New Zealand 0.53 Romania 0.03

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Main Results: Non Annex I4 Composite Indicator

Rank Nation CPI Rank Nation CPIInstitution Policy Economy Institution Policy Economy

18 Nicaragua 0.29

19 El Salvador 0.29

16 Nepal 0.30

17 Uganda 0.30

14 Colombia 0.36

15 Bolivia 0.31

12 Tunisia 0.43

13 South Korea 0.41

10 Thailand 0.45

11 Argentina 0.45

8 South Africa 0.51

9 Costa Rica 0.50

6 Morocco 0.67

7 Singapore 0.56

4 Chile 0.76

5 Brazil 0.68

2 Mexico 0.96

3 China 0.85

Score of Components

1 India 1.70

21 Jamaica 0.26

20 Malaysia 0.27

23 Sri Lanka 0.25

22 Armenia 0.25

25 Mongolia 0.22

24 Peru 0.25

28 Honduras 0.20

27 Viet Nam 0.21

30 Georgia 0.19

29 Panama 0.20

32 Mauritius 0.12

31 Israel 0.16

34 Moldova 0.11

33 Philippines 0.12

36 Botswana 0.10

35 Uruguay 0.10

38 Iran 0.07

37 Jordan 0.08

40 Fiji 0.06

39 Guyana 0.07

42 Kenya 0.06

41 Ecuador 0.06

44 Egypt 0.03

43 Oman 0.05

46 Mali 0.02

45 Zambia 0.02

48 Samoa 0.01

47 Saudi Arabia 0.01

50 Azerbaijan 0.00

49 Taiwan 0.01

Senegal -0.01

51 Albania -0.01

5226 Guatemala 0.21

Score of Components

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Main Results: Non Annex I4 Composite Indicator

Rank Nation CPI Rank Nation CPIInstitution Policy Economy Institution Policy Economy

53 Ghana -0.01

54 Bhutan -0.02

55 Pakistan -0.02

56 Namibia -0.02

57 Mauritania -0.03

58 Madagascar -0.03

59 Cambodia -0.04

60 Solomon Islands -0.05

61 Benin -0.05

62 Papua N. Guinea -0.05

63 Ethiopia -0.06

64 Yemen -0.06

65 UAE -0.07

66 Malawi -0.08

67 Tanzania -0.09

68 Indonesia -0.09

69 Burkina Faso -0.11

70 Dom. Rep. -0.11

71 Tonga -0.12

72 Niger -0.13

73 Macedonia -0.13

74 Rwanda -0.14

75 Guinea -0.14

76 Bangladesh -0.14

77 Lesotho -0.16

78 Kazakhstan -0.17

79 Kyrgyzstan -0.17

80 Kuwait -0.19

81 Eritrea -0.19

82 Paraguay -0.20

83 Uzbekistan -0.20

84 Lebanon -0.23

85 Venezuela -0.23

86 Cameroon -0.24

87 Togo -0.25

88 Algeria -0.26

89 Zimbabwe -0.27

90 Burundi -0.27

91 Mozambique -0.30

92 Afghanistan -0.31

93 Serbia-Monten. -0.34

94 Lao -0.36

95 Iraq -0.42

96 Bosnia Herz. -0.43

97 Syria -0.45

98 Côte d'Ivoire -0.46

99 Central. Afr. Rep. -0.48

-0.54

101 Haiti -0.59

Score of Components

104 Sierra Leone -0.79

102 Chad -0.75

103 Congo

Score of Components

106 Dem. Rep. Congo -1.40

105 Angola -1.28

-0.79

100 Nigeria

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5 Steps5 Methodology

Steps taken Outcome

Step 1Selection of countries

Out of 193 countries 143 meet data-requirements criteria.

Step 2Imputation of missing data

Remaing missing data had to be imputed:- Different methods checked (regression imputation, hot deck imputation)- Finaly settled for simple unconditional median imputation- Decision has minor effect on composite indicator

Step 3Transformation and normalisation

Transformation: Data meets principle "the more the better"Normalisation: Variables are made comparable. Often used z-scores method is being applied.

Step 4Weighting

Weights of our composite indicator are based on statistical model (Principal Component Anlysis). Antother often used weighting method (equal weighting) will be looked at in the sensitivity analysis.

Step 5Aggregation

Summation of weighted and normalised variables

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6 Sensitivity Analysis

Annex I

NZL DNK CZE SWE NOR FIN ISL CHE CAN GBR DEU NLD EST AUS AUT LTU JPN SVK FRA

USA LVA IRL HUN ROM BEL ESP ITA RUS POL PRT SVN UKR GRC BGR TUR HRV BLR

0

510

15

20

2530

35

40

0

5

10

15

20

25

30

35

40

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6 Sensitivity Analysis

Non Annex I

IND MEX CHN CHL BRA MAR SGP ZAF CRI THA ARG TUN KOR COL BOL NPL UGA NIC SLV MYS JAM ARM LKA PER MNG GTM

VNM HND PAN GEO ISR MUS PHL MDA URY BWA JOR IRN GUY FJI ECU KEN OMN EGY ZMB MLI SAU WSM TWN AZE ALB SEN

0102030405060708090

100110

0102030405060708090

100110

0102030405060708090

100110

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6 Sensitivity Analysis

Non Annex I

GHA BTN PAK NAM MRT MDG KHM SLB BEN PNG ETH YEM ARE MWI TZA IDN BFA DOM TON NER MKD RWA GIN BGD LSO KAZ KGZ

KWT ERI PRY UZB LBN VEN CMR TGO DZA ZWE BDI MOZ AFG SCG LAO IRQ BIH SYR CIV CAF NGA HTI TCD COG SLE AGO COD

0102030405060708090

100110

0102030405060708090

100110

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Input for WP 6 (Quantitative Analysis of International Emissions

Trading)– Composite Indicator is of use to investors

– Results will be applied in quantitative analysis in WP6

Linkage with WP3 (Permit Supply for the CDM)– Country-coverage of indicator has to be matched with WP3

– Transaction costs: is being incorporated into WP3

– Technological risk: Input from WP3 into WP1, but not part of the indicator

Linkages to other WP7 Linkages