Asia Pacific Finance and Development Center (AFDC) 2010 Biennial Forum Fiscal and Financial Policies for Low-carbon Econ

1. Asia Pacific Finance and Development Center (AFDC) 2010 Biennial ForumFiscal and Financial Policies for Low-carbon Economic Development Session I: Fiscal and financial policies for low-carbon economic development: challenges and opportunities

2. CLIMATE CHANGE AND ECONOMIC POLICIES IN APEC ECONOMIES – Initial Findings from World Bank Studies for FMPI 9 Ede Ijjasz Sector Manager China and Mongolia Sustainable Development The World Bank Ahmad Ahsan, Lead Economist, East Asia and Pacific Region

3. 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

4. 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

5. 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

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

7. APEC Will Also Be Highly Affected Top Ten Countries Vulnerable to Climate Change Source: World Bank, Sustainable Development Network, Environment Department, 2008

8. APEC Economies Have Already Set Ambitious Targets for 2020

9. 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.

10. 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.

11. 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.

12. 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 vision

13. Overview of Fiscal Policy Instruments

14. Fiscal Policy and Pricing will have Central Role • Low Energy Prices vs. Energy Efficiency

15. 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)

16. 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

17. 5. Large Potential of Climate-Friendly Technologies“Win-win” measures–examples of countries provided. But Strong Policy and Institutional Requirement

18. APEC countries are leaders in climate friendly technologies

19. Overview Green Growth is not “cost neutral” (eg Energy)But there are tools to help manage this TOWARDS SUSTANABLE DEVELOPMENT Energy Efficiency Renewable Energy New Technologies CO2 Abatement cost Energy pricing reforms • 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 World Bank Group

20. 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 CFTshave 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.

21. Green Growth through Mitigation Policy & Regulatory Menu of Financing Gap “bridging factors” • Green Building Codes • Zoning and Land Use • Green Bank • Guarantees • Grants • Concessional Loans Green Buildings & Urban Space • Legislative Mandates • Renewable Portfolio Standards (RPS) • Qualifying Projects • Renewable Energy Credits • Feed-In Tariffs • Technology Risk Guarantees • Incubation • R&D Co-Funding Renewable Energy • Green Specifications • Policy Targets Energy Efficiency • Alternative FuelObligations • Fiscal Subsidies • Tax Incentives • Energy Efficiency Tax Credits Alternative Fuels • Carbon Offsets • Carbon fund • Carbon Exchange • Reducing Emissions from Deforestation and Degradation World Bank Group

22. 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)

23. International Deployment of Selected Market Mechanisms

24. Market Readiness Cycle

25. 7. Extreme Climate Events and Policy Responses

26. Annual Natural Disaster Economic Loss (in US$ millions) In 2008, natural disasters cost the world US$200 billion. USA and China bore 90% of this burden

27. 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

33. Fiscal Policy and Adaptation: In addition to considering costing, decision making will be Important. A First Approach to Investment Principle Under Uncertainty

34. Green Growth through Adaptation Menu of Financing Gap “bridging factors” Policy & Regulatory • Redevelop Urban Land • Guarantees • Private financing • Concessional Loans for public good aspects • Unlock Urban Land Values • Zoning and Land Use Sanitation and wastewater • Legislative Mandates • Privatize landfill/STP management • Establish PPP arrangements Redefine Roles and Responsibilities for Brown Agenda Solid Waste Management • Set Abatement Specifications • Pay on abatement • Establish insurance mechanisms Pay for achieving national abatement standards Establish Catastrophic Risk Financing arrangements Vulnerability to disasters World Bank Group

35. 8. APEC’s Regional Cooperation APEC 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.

36. 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