1. Place, Time Climate policy mix

2. 2 Imprint Published by: Contact adelphi Caspar-Theyss-Strasse 14a 14193 Berlin / Germany T +49 30-8900068-0 F +49 30-8900068-10 E clifit@adelphi.declifit@adelphi.de I www.adelphi.dewww.adelphi.de Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH CF Ready Program Godesberger Allee 119 53175 Bonn/Germany T +49 228-24934-111 F +49 228-24934-215 E info@giz.deinfo@giz.de I www.giz.dewww.giz.de Dennis Tänzler E clifit@adelphi.declifit@adelphi.de T +49 30-8900068-20 www.clifit.org Dorit Lehr E cf-ready@giz.decf-ready@giz.de T +49 228 24934-133 http://www.giz.de/exper tise/html/3041.html Any content written by named authors do not necessarily reflect the views of adelphi nor GIZ nor of the German Federal Ministry for Economic Cooperation and Development. Although the authors take all possible care to ensure the correctness of published information, no warranty can be accepted regarding the correctness, accuracy, reliability and completeness of the content of this information. August 2015

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5. 5 Objective of this session Policy instruments overview Mapping and selecting policy mix Key questions Content

6. 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. 7 Policy instrument overview

8. 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 2007IPCC 2007

9. 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. 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 2014 Green 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 time AnalysisStakeholder Engagement

11. 11 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 Instruments IPCC 2014. Working Group III. Chapter 15. National and Sub-national Policies and Institutions Butzengeiger 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 generating innovative approaches to mitigation and/or the physical and social infrastructure to reduce emissions Focus of this presentation

12. 12 Source: World Bank 2014 World Bank 2014 Link between national policies and international finance Regulation Economic instruments Information instruments R&D support International cooperation & finance 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. 13 Policy instruments

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

15. 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 codes Regulation Concessional loans Construction companies Households Financial instruments Construction and purchase of new energy efficient housing

16. 16 Economic instruments Source:World Bank. Training course Policy Instruments for Low Emissions Development: From Design to ImplementationWorld 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 arrangements IPCC 2914. Working Group III. Chapter 15. National and Sub-national Policies and Institutions Policies that affect the relative costs of mitigation actions or adaptation measures Examples: 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 market Examples: Emission trading schemes Quantity instruments

17. 17 Source:CPI 2012. The Landscape of climate finance in Germany Feed-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 Bill paymentsSales revenue Bill payments FIT re- distribution

18. 18 Source: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

19. 19 Source:WRI 2014 http://www.map.ren21.net/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

20. 20 Source: 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

21. 21 Source: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

22. 22 Source: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.

23. 23 Source: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

24. 24 Source:World Bank 2014. State and Trends of Carbon PricingState 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. 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. 26 * Result of cap and allocation Source: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. 27 Source:International Carbon Action PartnershipInternational Carbon Action Partnership 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 Institutions GIZ 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 activities Economic:  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

28. 28 Source:https://icapcarbonaction.com/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. 29 Selecting policies

30. 30 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 Institutions World Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to Implementation Butzengeiger 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. 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 Institutions World Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to Implementation Butzengeiger 2011. Application of economic instruments for adaptation to climate change

32. 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 process

33. 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. 34 Example of a policy map Buildings & urban structure EnergyIndustryTransportWasteAgriculture and forestry Building codes Vehicle standards Carbon tax/energy tax Concessional loans Grants Land-use regulation Performance standards Low-cost debt Feed-in-Tariff Emission trading scheme Grants 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 Institutions World Bank 2013. Training course Policy Instruments for Low Emissions Development: From Design to Implementation Sectors Mitigation policies Adaptation policies

35. 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. 36 Thank you for your attention!!!

37. 37 BACK UP

38. 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. 39 Identifying climate policy needs Key steps 1.Analyse current emissions data and future projections 2.Assess reduction potentials and priorities 3.Review existing policy landscape 4.Identify policy gaps for successful implementation 5.Develop / select policy(ies) to close the gap Take into consideration: National Communications Low-Emission Development Strategy (LEDS) Nationally Appropriate Mitigation Actions (NAMAs) Key steps 1.Analyse climate change impacts and vulnerabilities 2.Identify adaptation priorities & potential areas for policy contribution 3.Review existing policy landscape 4.Identify policy gaps for successful implementation 5.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. 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 emissions Charges 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 Africa Asia Latin America

41. 41 Source:World Bank 2013 IPCC 2007 Butzengeiger 2011 Feasibility: Institutional requirements and economic cost Quantity instruments Institutions requiredPublic costPrivate cost Tradable CertificatesManaging authority Administrative cost Total investment cost Emission Trading Scheme Managing authority Administrative cost Total investment cost Subsidy/GrantsFund/Public bank Administrative cost Grant/subsidy amount Remaining investment cost Low-cost loansFund/Public bank Administrative cost Interest rate buy-down Remaining investment cost Feed-in-TariffsManaging 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 Price instruments