Place, Time

Climate policy mix

4

5

• Objective of this session

• Policy instruments overview

• Mapping and selecting policy mix

• Key questions

Content

6

What you can expect to learn from this session and exercise

• Gain an overview of climate change policy instruments and their characteristics

• Understanding of how to map and select policies for your country

• Get an idea of the relevance of climate policies for climate financing and your adaptation and mitigation objectives

7

Policy instrument overview

8

Definitions

Policy: “In UNFCCC parlance, policies are taken and/or mandated by a government - often in conjunction with business and industry within its own country, or with other countries - to accelerate mitigation and adaptation measures.” (IPCC 2007)

Source: IPCC 2007

9

Climate policy challenges for decision-makers

Mitigation: Moving beyond business-as-usual (BAU): delivering transformational change (as

opposed to incremental) Adressing high upfront policy cost: allocating public funds for projects with

medium and longer term benefits (as opposed to immediate benefits) Phasing out polices that are working against climate agenda, e.g. fossil fuel

subsidies, and moving clean energy objectives high up on policy agenda

Adaptation Ensuring a clear understanding of climate risks and vulnerabilities Engaging more directly with scientific and modelling communities in planning

and policy processes

And for both areas: Tackling lack of institutional and technical capacities to develop and implement

these polices

Source: Amal-Lee Amin, E3G 2015.

10

The role of policy

• National adaptation and mitigation strategies need comprehensive and coherent policy portfolios to enable transformational change

• National polices and actions designed according to international frameworks, e.g. NAMAs or NAPs, can help to facilitate support from international finance for their implementation

Vision• Set goals and targets

Source: Adopted from: World Bank 2014Green Growth in Practice. Lessons from Country Experiences, E3G 2014

Strategy • Select a portfolio of

complementary policy instruments

• Customize instruments through policy design

• Consider how to reform the strategy over time

Action • Implementing policies• Measuring and evaluating

progress and success• Adjusting policy design

over timeAn

alys

is

Stak

ehol

der E

ngag

emen

t

11Source: IPCC 2007. Working Group III. Chapter 13. Policies, Instruments and Co-operative Arrangements

IPCC 2014. Working Group III. Chapter 13. International Cooperation: Agreements and Instruments

IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and InstitutionsButzengeiger 2011. Application of economic instruments for adaptation to climate change

Policy types

Regulation Conventional regulatory approaches that establish a rule and / or objective that must be fulfilled by the liable parties with penalties for non-compliance

Economic instruments

Also sometimes called ‘market-based’ instruments; include price instruments (e.g. taxes or subsidies) and quantity instruments (e.g. emissions trading)

Information instruments

Policies targeting asymmetric information problems, e.g.:- raising public awareness and concern about climate change, - identifying environmental challenges, - better designing & monitoring the impacts of environmental policies, - providing relevant information to inform consumption and

production decisions

R&D support Direct government funding and investment aimed at generatinginnovative approaches to mitigation and/or the physical and social infrastructure to reduce emissions

Focu

s of

this

pre

sent

ation

12Source: World Bank 2014

Link between national policies and international finance

Regulation

Economic instruments

Information instruments

R&D supportInte

rnati

onal

coo

pera

tion

& fi

nanc

e

Developing national policies in line with international policy frameworks…• Low-emission Development Strategy (LEDS)• Nationally Appropriate Mitigation Actions (NAMAs)• National Adaptation Programmes of Action (NAPA) • National Adaptation Plans (NAPs)• Monitoring and Evaluation framework

… facilitates co-financing from international sources:• UNFCCC funds (Green Climate Fund, Global

Environmental Facility, Adaptation Fund etc.)• Bi- and multilateral financing institutions, e.g. Clean

Investment Funds, NAMA Facility, multilateral development banks, international cooperation agencies etc.

International policies and treaties trigger (more ambitious) national policies and vise versa

13

Policy instruments

14

Regulation instruments

Definition: establish a rule and / or objective that must be fulfilled by the polluters who would face a penalty in case of non-compliance with the norm

Mitigation examples:• Efficiency standards• Building codes• Vehicle efficiency standards• Biofuel standards• Emissions standards

Adaptation examples:• Integrating climate change

considerations into land-use regulation and coastal area regulations

• Regulations on water resource management

• Regulations on the management of forest resources, forestry policies

Benefits• Low administrative cost• May be tailored to a specific sector / firm

/ activity• Certainty of the environmental outcome

Challenges • Environmental effectiveness depends on

their stringency

Source: IPCC 2007. Working Group III. Chapter 13. Policies, Instruments and Co-operative Arrangements IPCC 2014. Working Group III. Chapter 13. International Cooperation: Agreements and

InstrumentsIPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and InstitutionsButzengeiger 2011. Application of economic instruments for adaptation to climate change

15

Complementing regulation with other policies

• Regulation itself is often not enough• Additional financial instruments can create synergies and encourage

private investment by providing a more targeted approach to overcoming risk and / or financial barriers

• Example:

Building codesRegulation

Concessional loans

Construction companies

Households Financial instruments

Construction and purchase of

new energy efficient housing

16

Economic instruments

Source: World Bank. Training course Policy Instruments for Low Emissions Development: From Design to Implementation

IPCC 2007. Working Group III. Chapter 13: Policies, instruments, and co-operative arrangementsIPCC 2914. Working Group III. Chapter 15. National and Sub-national Policies and Institutions

Policies that affect the relative costs of mitigation actions or adaptation measuresExamples:• Low-cost loans• Subsidies / Grants• Taxes and changes• Feed-in-Tariff• Other financial support tools

Economic instruments

Price instruments

(Tradable) quotas for emissions reductions or absolute quantity for renewable energy production driving a compliance marketExamples:• Emission trading schemes

Quantity instruments

17Source: CPI 2012. The Landscape of climate finance in GermanyFeed-in Tariffs, Discussion Paper. Tasmania Department of Infrastructure, Energy and Resources 2013

Feed-in-Tariff (FIT)

How does the power flow? How does the money flow?

Generating for own needs

Buys additional electricity

Sells excess generation

kWh

kWh

Bill paymentsSales revenue

Bill payments

FIT re-distribution

18Source: A Policymaker’s Guide to Feed-in Tariff Policy Design, NREL 2010

Pros and Cons of Feed-in-Tariff (FIT)

BENEFITS: Encourages uptake of the targeted

technology; stimulates growth of local industry and job creation

Unlocks private investment by creating a secure and stable market through fixed-price benefits

Makes small-scale renewable generation economically feasible

Performance-based and measurable, only cost money if projects actually operate

Enhances grid and market access for investors and participants

CHALLENGES: Long-term policy commitment to

renewable energy development required Costs incurred by the utility in paying out

feed-in tariffs are transferred to the entire energy consumer base

Not “market-oriented”; FITs are often independent from market price signals

May distort electricity prices, especially with rapid growth in emerging (i.e., higher-cost) RE technologies;

Requires up-front and continuous administrative commitment to accurately set payments. Excessively high FIT payments can lead to higher policy cost

FIT access to grid can impact grid reliability

19Source: WRI 2014 http://www.map.ren21.net/1 for solar photovoltaic technology

Solar PV Feed-in-Tariff World Map

• 56 countries worldwide• 5 in Africa: Algeria, Ghana, South Africa, Uganda, Kenya• 11 in Asia & Pacific: China, Mongolia, Kazakhstan, India,

Pakistan, Indonesia, Thailand, Philippines, Malaysia, Japan, Australia

20Source: Nannette Lindenberg 2014: Public instruments to leverage private capital for green investments in developing countries. Bonn: DIE

Concessional loans

BENEFITS: lower capital financing costs obligation to repay can give incentives

for project viability

CHALLENGES: need for due diligence increases costs degree of concessionality is hard to

estimate

• To mobilise private capital, i.e., public donors often provide a loan that has to be repaid (with interest).

• These loans are often concessional or flexible and can thus be repaid with a lower than market-rate interest rate or with an extended repayment schedule.

Relevant for: projects of relatively large scale and/or more developed projects

21Source: Adelphi

Low-cost loans example - Mongolia

Global Climate Partnership Fund

Xac Bank(Eco Banking Department)

$20m lending facility

Low-cost loans

Households

Energy efficient housing

Small and Medium Enterprises (SMEs)

Energy efficiency, improvement of processes, production and sale of energy efficient products

Success factors:• Lending facility structure

enabled low interest rates• Strict approval, monitoring

and reporting requirements

Results: • Strong growth of the

mortgage market• Up to 80% of energy savings

from more energy efficient housing

Next steps: • Leadership in green growth

financing in Mongolia• Advisory agreement with IFC

for capacity building and financial product development

22Source: GIZ CliFIT training in Togo, 2014

Concessional loans for agricultural climate policy measures, e.g. adaptation

Development bank (bi- or multilateral)

National agriculture bank

Lending facility

Concessional loans

Small-scale farmers

Installation of irrigation systems, innovative seed technologies, changing crop species, installation of

rainwater harvesting systems etc.

23Source: Adelphi

Butzengeiger 2011. Application of economic instruments for adaptation to climate change

Earmarking tax revenues for climate expenditures

Environmental charges

Revenues from fees imposed on polluter for the treatment or the disposal of pollution

Energy taxes

Revenues from taxation of energy from conventional generation

Carbon taxes

Revenues from taxation of emissions produced by companies

Dedicated budget lines on adaptation programmes

Public budget

24Source: World Bank 2014. State and Trends of Carbon Pricing

IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and Institutions

Carbon tax

Carbon taxes around the world and the estimated share of GHG emissions covered (%) Puts a direct price on

carbon Provides certainty in the

marginal cost faced by emitters

Broad scope covering all technologies and fuels

Simplicity in implementation

BUT Does not guarantee a

maximum level of emission reductions

Hard to define the appropriate tax rate

Potential opposition from private sector

25

Taxes and fees example – Tanzania and Vietnam

Source: Environmental Fiscal Reform. Case studies. GIZ 2013

Tanzania • Environment related taxes in force:

- excise duty on plastic bags- VAT and excise duty on petroleum- motor vehicle taxes- fuel levy

• Three taxes provide significant revenues:- motor vehicle taxes- excise on petroleum- fuel levy

• None of the revenues is earmarked for environment related expenditures

• Improvement potential:• earmarking environment related taxed for

environmental expenditures• complementing excise taxes and fuel levy

by a CO2 tax

Vietnam • Environment related taxes in force:

- taxes on energy (refined fuels and coal)- taxes on environmentally harmful

substances, selected pesticides and soft plastic bags

- taxes on coal and on refined fuels

• Taxes levied on consumed physical units rather than on percentages of prices – in line with international best practices as the actual amounts harm the environment, independent of prices

• Revenues are not earmarked for environment related expenditures, but distributed among national and local budgets

• Tax burden is carried by enterprises and private households equally

26* Result of cap and allocationSource: DEHSt and BMU Emissions Trading Capacity Building Program, 2014

Emission Trading Scheme (ETS)

Cap is defined by a regulator and sets an upper limit of emissions that may be emitted in selected sectors of an economy. Emission permits are given out or sold to the entities covered by the ETS.

By the end of a defined period, each covered entity must surrender a number of allowances corresponding to their emissions.

Entities that have emitted less than their number of allowances can sell any excess to other participants in the scheme. Entities with low abatement costs therefore have an incentive to reduce their emissions.

27

Source: International Carbon Action PartnershipIPCC 2007. Working Group III. Chapter 13. Policies, Instruments and Co-operative Arrangements IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and InstitutionsGIZ 2013. Environmental Fiscal Reform. Case studies

Emission Trading Scheme (ETS)

BENEFITS:

Environmental: Sets clear emission reduction targets and

provides certainty of achieving them Gives an incentive for companies to account

for the environmental cost of their activitiesEconomic: Delivers emission reductions targets at the

lowest cost Offers companies flexibility in their

abatement options Provides regulatory predictability and stable

framework for investment choices. Auctioning revenues can be used for

environmental action

CHALLENGES: Do not stimulate innovation and low-

carbon technologies investment if carbon price is not high enough

Administrative cost: competent authorities, MRV system, compliance enforcement

Market liquidity: trading works only if there is sufficient certificate demand and supply now and in the future

Price volatility and uncertainty for emitters

Surplus supply of certificates (excessively high cap) can undermine the scheme

Carbon leakage: risk of emitters relocating outside of the regulated area

28Source: https://icapcarbonaction.com/

Emission Trading Schemes (ETS) around the world 17 ETSs around the world, mostly in developed or emerging economies Various sectors covered: energy, industry, transport, waste, buildings and agriculture Implemented on the national, subnational or city levels

29

Selecting policies

30Source: IPCC 2007. Working Group III. Chapter 13. Policies, Instruments and Co-operative Arrangements

IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and InstitutionsWorld Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to

ImplementationButzengeiger 2011. Application of economic instruments for adaptation to climate change

Comparing different policy instruments

• Regulatory measures and standards generally provide some certainty of reaching environmental objectives, but their environmental effectiveness depends on their stringency

• The cost of regulation instruments to the government is likely relatively low

Regulation instruments

Economic instruments

• Direct subsidies, grants, concessional loans help facilitate additional private investment and are often critical to overcoming the barriers to the penetration of new technologies. Their economic costs are generally higher, but they are easier to implement politically than other instruments

• Taxes and charges are generally cost-effective, but they cannot guarantee a particular level of emissions, and they may be politically difficult to implement and, if necessary, adjust. Their environmental effectiveness depends on stringency

• Emission trading schemes ensure certainty and cost-efficiency of achieving environmental goals, but are institutionally and administratively costly and may not stimulate innovation and investment in low-carbon technologies

• Feed-in tariffs require an up-front and continuous administrative commitment, but encourage uptake of the targeted technology, stimulate growth of local industry, and unlock private investment, including small-scale actors

31

Comparing different policy instruments

• All instruments can be designed well or poorly and to be stringent or lax and politically attractive or unattractive.

• All instruments must be monitored and enforced to be effective.

• Climate policies are seldom applied in complete isolation – they overlap with other national polices relating to the environment, forestry, agriculture, waste management, transport and energy. In addition, they should be aligned with international policy frameworks, e.g. NAMA or NAP

• For an environmentally effective and cost-effective instrument mix, there must be a good understanding of the environmental issue to be addressed the links with other policy areas and the interactions between the different instruments in the mix.

• Applicability in specific countries, sectors and circumstances – particularly developing countries and economies in transition – can vary greatly, but can be enhanced when instruments are adapted to local circumstances

Source: IPCC 2007. Working Group III. Chapter 13. Policies, Instruments and Co-operative Arrangements IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and InstitutionsWorld Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to

ImplementationButzengeiger 2011. Application of economic instruments for adaptation to climate change

32

Developing / selecting appropriate policy/policy mix

Source: World Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to Implementation

• Appropriate policy mix will vary from country to country• Policy selection is an iterative process, commonly has several steps:

• Multi-stakeholder processes are necessary to ensure that all relevant voices provide input on how and which policy instruments are selected

• An effective multi-stakeholder process can build support for eventual policy and lead to policy options that best reflect local priorities

1. Define policy evaluation criteria

2. Weigh evaluation criteria according to local priorities

3. Assess trade-offs between different policy options

4. Evaluate expected performance of policy

5. Select policy mix

Multi-stakeholder p

rocess

33

Defining evaluation criteria

Examples of evaluation criteria:

• Environmental effectiveness• Cost efficiency• Feasibility: economic, institutional, political• Investment security• Opportunity to leverage international finance• Coverage: sectors, market barriers • Co-benefits• Complementarity with other policies/synergies

Source: World Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to Implementation

34

Example of a policy map

Buildings & urban structure

Energy Industry Transport Waste Agriculture and forestry

Building codes

Vehicle standards

Carbon tax/energy tax

Concessional loans

Concessional loans

Grants

Labelling, capacity building, information campaigns

Land-use regulation

Research and development grants

Performance standards

Low-cost debt

Feed-in-Tariff

Emission trading schemeGrants Economic

instruments

R&D support

Information and training

Regulation

Source: IPCC 2007. Working Group III. Chapter 13. Policies, Instruments and Co-operative Arrangements IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and InstitutionsWorld Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design

to Implementation

Sectors

Mitigation policies

Adaptation policies

35

Key questions to recap

• What climate policy instruments (regulations and market-based instruments) do you already have in your country? What is working? What needs changing/improving?

• What criteria would you use when selecting specific policy instruments? Why are these criteria important?

36

Thank you for your attention!!!

37

BACK UP

38

The role of public policy

• National adaptation and mitigation strategies require comprehensive and coherent policy portfolios that can enable transformational change across the economy

• National polices and actions designed in line with international frameworks, e.g. NAMAs or NAPs, enable access to co-financing by international finance for their implementation

Current economy

Green economy

Increasing immediate and long-term private investment + Public finance

exit strategy

Enabling policy framework

Source: Adopted from: Green Growth in Practice. Lessons from Country Experiences, E3G 2014

International finance

Government financial

incentives

Public budget support

39

Identifying climate policy needs

Key steps1. Analyse current emissions data and future projections2. Assess reduction potentials and priorities3. Review existing policy landscape4. Identify policy gaps for successful implementation5. Develop / select policy(ies) to close the gap

Take into consideration: • National Communications• Low-Emission Development

Strategy (LEDS)• Nationally Appropriate

Mitigation Actions (NAMAs)

Key steps1. Analyse climate change impacts and vulnerabilities2. Identify adaptation priorities & potential areas for

policy contribution3. Review existing policy landscape 4. Identify policy gaps for successful implementation5. Develop / select policy(ies) to close the gap

Take into consideration: • National Communications• National Adaptation

Programmes of Action (NAPA)

• National Adaptation Plan (NAP) process

Source: Adelphi GIZ 2012. Steps for Moving a NAMA from Idea towards Implementation

Mitigation

Adaptation

40

Taxes and fees examples

Source: Environmental Fiscal Reform. Case studies. GIZ 2013

Taxes on natural resource

extraction

Taxes on products

Taxes on pollutants and

emissionsCharges and fees

Burkina Faso

Morocco

South Africa

Tanzania

Uganda

China

Vietnam

Bolivia

Brazil

Colombia

Nicaragua

x

x

x

x

x

x

x

x

x

x

x

Afric

aAs

ia

Latin

Am

eric

a

41Source: World Bank 2013

IPCC 2007Butzengeiger 2011

Feasibility: Institutional requirements and economic costQ

uanti

ty

inst

rum

ents

Institutions required Public cost Private cost

Tradable Certificates Managing authority • Administrative cost • Total investment cost

Emission Trading Scheme

Managing authority • Administrative cost • Total investment cost

Subsidy/Grants Fund/Public bank • Administrative cost• Grant/subsidy amount

• Remaining investment cost

Low-cost loans Fund/Public bank • Administrative cost• Interest rate buy-down

• Remaining investment cost

Feed-in-Tariffs Managing authority • Administrative cost • Total investment cost• Energy price change

Taxes and fees/tax cost support

Tax authority • Administrative cost• Tax revenue/tax

revenue loss

• Remaining investment cost

Building codes

Regulation instruments

Managing authority • Administrative cost • Total investment cost

Market-based instruments

Pric

e in

stru

men

ts