Managing the Transition to a Low-Carbon Economy

Managing the Transition to a Low-Carbon Economy Managing the Transition to a Low-Carbon Economy Managing the Transition to a Low-Carbon Economy Perspectives, Policies, and Practices from Asia Perspectives, Policies, and Practices from Asia Asia must be at the center of the global About the Asian Development Bank fight against climate change. It is the ADB’s vision is an Asia and Pacific region free world’s most populous region, with high of poverty. Its mission is to help its developing economic growth, a rising share of global member countries reduce poverty and improve the quality of life of their people. Despite the greenhouse gas emissions, and the most region’s many successes, it remains home vulnerability to climate risks. Its current to the majority of the world’s poor. ADB resource- and emission-intensive growth is committed to reducing poverty through pattern is not sustainable. This study inclusive economic growth, environmentally recognizes low-carbon green growth sustainable growth, and regional integration. as an imperative—not an option—for Based in Manila, ADB is owned by 67 members, developing Asia. including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, Asia has already started to move toward equity investments, guarantees, grants, and low-carbon green growth. Many emerging technical assistance. economies have started to use sustainable development to bring competitiveness to About the Asian Development Bank Institute their industries and to serve growing green ADBI, located in Tokyo, is the think tank technology markets. of ADB. Its mission is to identify effective development strategies and improve The aim of this study is to share the development management in ADB’s developing member countries. ADBI has an experiences of developed Asian economies extensive network of partners in the Asia and and the lessons they have learned. The book Pacific region and globally. ADBI’s activities assesses the low-carbon and green policies are aligned with ADB’s strategic focus, which and practices taken by developed Asian includes poverty reduction and inclusive countries, identifies gaps, and examines economic growth, the environment, regional cooperation and integration, infrastructure new opportunities for low-carbon development, middle-income countries, and green growth. private sector development and operations.

Asian Development Bank Asian Development Bank Institute 6 ADB Avenue Kasumigaseki Building 8F Editors Mandaluyong, 1550 Metro Manila 3-2-5 Kasumigaseki, Chiyoda-ku Philippines Tokyo 100-6008 Venkatachalam Anbumozhi Tel: +632 632 4444 Japan [email protected] Tel: +813 3593 5500 Masahiro Kawai www.adb.org [email protected] Bindu N. Lohani www.adbi.org

Managing the Transition to a Low-Carbon Economy Perspectives, Policies, and Practices from Asia

Editors Bindu N. Lohani Masahiro Kawai Venkatachalam Anbumozhi

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Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5, Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan www.adbi.org Contents

List of Figures, Tables, and Boxes v

Foreword xi

Preface xii

Contributors xvii

Abbreviations xxii

PART I: Concepts and Measurements of Low-Carbon Green Growth

Chapter 1: Pro-Growth, Pro-Job, Pro-Poor, Pro-Environment Emil Salim 3

Chapter 2: Toward a Low-Carbon Asia: Challenges of Economic Development Venkatachalam Anbumozhi and Masahiro Kawai 11

Chapter 3: Green Growth and Equity in the Context of Climate Change Jeffrey D. Sachs and Shiv Someshwar 45

Chapter 4: Evaluation of Current Pledges, Actions, and Strategies Stephen Howes and Paul Wyrwoll 85

PART II: Driving Forces and Incentives of Low-Carbon Green Growth

Chapter 5: Co-benefit Technologies, Green Jobs, and National Innovation Systems Sivanappan Kumar, Naga Srujana Goteti, and Prathamesh Savargaonkar 149

iii iv Contents

Chapter 6: Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy Brahmanand Mohanty, Martin Scherfler, and Vikram Devatha 175

Chapter 7: Reforms for Private Finance toward Green Growth in Asia Takashi Hongo and Venkatachalam Anbumozhi 251

Chapter 8: Flexible Incentives for Low-Carbon Inclusive Growth Venkatachalam Anbumozhi and Armin Bauer 279

PART III: Regional Cooperation for Managing the Transition

Chapter 9: Climate Finance and the Role of International Cooperation Tomonori Sudo 309

Chapter 10: Regional Cooperation toward a Green Asia: Trade and Investment Kaliappa Kalirajan 335

Chapter 11: Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems Heinrich Wyes 355

APPENDIX

Low-Carbon Green Growth in Asia: Policies and Practices 381 Figures, Tables, and Boxes

Figures

2.1 Carbon Emissions of Selected Asian Economies 13 2.2 Changes in Carbon Intensity, Realized and Projected 14 2.3 Energy Use, Emissions, and Economic Growth 16 2.4 Decoupling of Economic Growth and Emissions in Japan 18 2.5 Emission Reduction Potential for Major Emitters 21 2.6 Geographical Distribution of CDM Projects and Sectoral Distribution in the PRC 24 2.7 Revenues from Environmental Tax 29

3.1 Estimates of the Global Damage of Climate Change 55 3.2 Equivalent Annual Cost of Climate Change in Africa, as a % of GDP 56 3.3 Mean Impact of Climate Change on Southeast Asian Countries and at the Global Scale, as a % of GDP 56 3.4 Adaptation Cost Estimates Based on Various Methodologies 57 3.5 Total Annual Cost of Adaptation for the National Center for Atmospheric Research (NCAR) Scenario, by Region and Decade 58 3.6 Costs from Stabilizing Long-Run GHG Concentration at 550 ppm Across Regions 60 3.7 Colorado Water Compact of 1922 68

4.1 Projected Energy Demand in the PRC, India, and Other Non-OECD Asia 89 4.2 Energy Import Dependency in Emerging Asia 90 4.3 Domestic Coal Reserves in Developing Asia Are Limited and/or Depleting Rapidly 91 4.4 World Energy Prices: Volatile and Rising 92 4.5 Global Emissions Projections: The Gap between Planned and Required Action 104 4.6 Mitigation in Developing Economies Only will be Insufficient 105 4.7 The Additional Transformation Required for Emissions Profiles Across Asia 111

v vi Figures, Tables, and Boxes

4.8 The Additional Transformation Required in the Power Generation Mix across Asia 113 4.9 Global Emissions Reductions by Source 114 4.10 The Additional Transformation Required for Energy Demand Profiles across Asia 114 4.11 The Innovation Chain for a New Mitigation Technology 117 4.12 The PRC’s Future: Low Energy Prices or High Energy Efficiency? Cross-Comparison of Electricity Prices, Gasoline Prices, and Energy Intensity 124 4.13 The Ratio of Investment to GDP for Developing Asia and the Average for OECD Economies 137

5.1 Technology Promotion and Innovation Policy Framework in Asia and the Pacific 168

6.1 Population Growth for World Regions, 1950–2050 177 6.2 Proportion of Urban Population, 1950–2050 178 6.3 Annual Per Capita Electricity Consumption, 2007 and 2030 181 6.4 Cars per 1,000 Population, 2014 182 6.5 Lifecycle Energy Use in Buildings 183 6.6 Municipal Waste 184 6.7 Projected Impact of Climate Change 186 6.8 Income and Happiness in the United States 187 6.9 Share of the World’s Private Consumption 189 6.10 Annual Energy Performance of a Net Energy Positive House in India, 2014 206 6.11 Creating and Satisfying Demand for Green and Fair Products 220

7.1 Financial Flows to Developing Countries 254 7.2 Banks’ Outstanding Loans to Asia and the Pacific 255 7.3 Changes in Carbon Price 259 7.4 Carbon Market after 2014 263 7.5 Structure of a Green Credit Line 264

7.6 CO2 Reduction: Case of Performance-Based Incentive 267 7.7 Carbon Market and Performance-Based Incentive System 268 7.8 Green Climate Fund and Its Performance-Based Incentive System 269 7.9 Feed-in Tariff (FIT), Green Certificate Market, and Viability Gap Fund 272 7.10 Forest Eco Fund 273 7.11 Transformation of Money Market 274 Figures, Tables, and Boxes vii

8.1 Carbon Dioxide Emissions and Gross Domestic Product per Capita in Selected Economies of Asia and the Pacific 281 8.2 Pervasive Energy Subsidies and Fiscal Debt in Selected Asian Economies 292

9.1 Climate Change Related Aid, 2008–2013 311 9.2 Share of Foreign Direct Investment Flows into Asian Developing Economies, 2013 315 9.3 Share of Climate Change Official Development Assistance Flow into Asian Developing Countries, 2013 315 9.4 Allocation of Climate Change ODA Flow into Asian Developing Countries 316 9.5 Breakdown of Amount Disbursed in Asia and the Pacific and Contribution from Each Fund 317 9.6 Sources of Climate Change Finance 319 9.7 Grouping of Developing Asian Countries 321 9.8 Financial Flows to Developing Countries 324 9.9 The Co-benefit Approach 325 9.10 Role of International Cooperation 328 9.11 Potential Framework of a Climate Change Finance Facility in Asia 330

10.1 Mean Inefficiency in Export Flows in LCGS across Emerging Asian Countries 348

11.1 Institutional Framework of ASEAN for Environmental Issues 364 11.2 Structure of ASEAN Legislation on Environmental Issues 365

Tables

1.1 Changing Gini Coefficient in Asia, 1987–2012 4

2.1 Carbon Dependency of Global and Regional Economies 15 2.2 Impact of Subsidies on Economic Growth and Emissions in Selected Economies in 2011 28

2.3 Energy-Related CO2 Emissions in ASEAN, the PRC, and India 31 2.4 Public-Private Partnership Mechanisms for the Economy- Wide Uptake of Low-Carbon Technologies 34 2.5 Surplus Savings in Selected Asian Countries 38 viii Figures, Tables, and Boxes

3.1 Estimated Global Macroeconomic Cost Estimates of Mitigation Scenarios in 2030 and 2050 59 3.2 Incremental Mitigation Costs and Associated Financing Requirements for a 2°C Trajectory: What Will Be Needed in Developing Countries by 2030? 61 3.3 Climate Change Financing 64 3.4 “New and Additional”—Fast Start Funds, 2010–2012 66 3.5 Illustration of Proposed Green Fund Assessment Rates 78

3.6 Potential Green Fund Revenues Based on CO2 Levy 78

4.1 Economic and Social indicators for Developing Asia in Context 86 4.2 Summary of Indicators for Carbon Dioxide Emissions and Energy 87 4.3 Summary Statistics for Air Pollution, Deforestation, and Land Degradation 96 4.4 Climate Change Mitigation Targets for Major Asian Economies 103 4.5 Classification of Climate Change Mitigation Instruments 116 4.6 Technology-Based Climate Change Mitigation Policies in the PRC, India, Indonesia, Thailand, and Viet Nam 122 4.7 Status of Carbon Pricing in Developing Asia 125 4.8 Revenue from $20 Carbon Price and Government Revenue as a Proportion of GDP in Developed and Developing Asia, 2009 126

5.1 Standard and Abstract Co-Benefits Available from Low- Carbon Technologies 152 5.2 Estimated Job Creation Co-Benefits from Low-Carbon Technologies 155 5.3 Case-Based Health Co-Benefits from Low-Carbon Measures 156 5.4 Case Study Matrix for Co-Benefits Evaluation and Quantification 158

6.1 Lifestyle Changes and Associated Factors for Food 193 6.2 Lifestyle Changes and Associated Factors for Water 196 6.3 Lifestyle Changes and Associated Factors for Energy 199 6.4 Lifestyle Changes and Associated Factors for Travel 204 6.5 Lifestyle Changes and Associated Factors for Buildings and Construction 208 6.6 Lifestyle Changes and Associated Factors for Waste 210 6.7 Behavioral Changes and Associated Factors for Communities 219 Figures, Tables, and Boxes ix

7.1 Estimation of Global Investment Cost Requirements to Combat Climate Change 253 7.2 Options for Low-Carbon Financing 260 7.3 Comparison of Clean Development Mechanism and JBIC- Monitoring Reporting and Verification (J-MRV) Systems 265 7.4 Portfolio of the Green Credit Line 266

8.1 Tiers of Development Structure 282 8.2 Total Primary Energy Supply, Share of Renewable Energy, Electricity Consumption, and Electrification Rates of Selected Countries in Asia and the Pacific 285 8.3 Different Subsidy Models Proposed by Refocus, 2001 287 8.4 Changing Perceptions of Business and Policy Makers in India 289 8.5 Summary of the Potential Benefits of the Clean Energy Investment Program for Low-Income Households in the United States 290 8.6 Estimates of Relative Subsidies to Energy Sources 293 8.7 Components of Government Spending, Emissions, and Public Debt 296 8.8 Double Employment–Environment Dividend: Practice in Europe during the 1990s 298

9.1 Estimated Volume of Mitigation and Adaptation Finance, 2013 311 9.2 Gaps between Expectation and Reality on Climate Change Finance 318

10.1 Estimates of Determinants of Total Exports of LCGS across Countries 342 10.2 Potential Exports of LCGS under Different Scenarios 344

Boxes

2.1 How Japan Achieved “Decoupling” 19 2.2 Tokyo’s Cap-and-Trade Program 26 2.3 Social Safety Net and Energy Subsidy Reforms in Indonesia 31 2.4 An Example of Long-Term Investment: The Norwegian Pension Fund 36

4.1 Energy Efficiency in Developing Asia: A Principal Concern for Economic Growth, Local Environmental Sustainability, and Climate Change 93 4.2 Hydropower and Hydraulic Fracturing: Green Growth? 99 x Figures, Tables, and Boxes

4.3 Modeling of Alternative Scenarios in the World Energy Outlook 2011 106 4.4 Deforestation and Land-Use Change in Indonesia 109 4.5 Increasing the Efficiency of Coal-Fired Power Generation 112

5.1 Cooking Stoves in India 156 5.2 Energy Generation Systems in the People’s Republic of China Reduce Dependence on Fossil Fuels 157 5.3 Projects Based on a Co-Benefits Approach 170

6.1 Lifestyle Choices: Food and Diet 191 6.2 Lifestyle Choices: Energy 198 6.3 Lifestyle Choices: Travel 203 6.4 What Makes Buildings Green? 205 6.5 Lifestyle Choices: Buildings and Habitat 207 6.6 Lifestyle Choices: Waste 209 6.7 Mitigating the Urban Heat Island Effect 215 6.8 Behavioral Changes at the Community Level 218 6.9 Green Initiatives by Companies 220 6.10 Policy Actions for the Food Sector 226 6.11 Policy Actions for the Water Sector 227 6.12 Policy Actions for the Electricity Sector 230 6.13 Policy Actions for the Transport Sector 231 6.14 Policy Actions for the Construction Sector 233 6.15 Policy Actions for Urban Planning 234 6.16 Policy Actions for the Waste Sector 235 6.17 Policy Actions for Awareness Campaigns 237

9.1 Principles of the Paris Declaration on Aid Effectiveness 322 9.2 Climate Change Program Loan 326

Foreword

Climate change is one of the most pressing developmental challenges of our time. While the literature on tackling climate change and accelerating low- carbon green growth is vast, little attention has been devoted to current and future low-carbon green growth in developing countries, especially in the Asia and Pacific region. The Asian Development Bank Institute in Tokyo and the Asian Development Bank in Manila have teamed up with 18 regional think tanks to begin to fill this gap. The papers in this volume were presented at two conferences attended by leading experts on climate change mitigation. The meetings addressed how emerging economies can position themselves to maximize the potential for regional cooperation and to develop new international climate regimes. This book uses the notion of transition to provide a fresh perspective on moving to long-term low-carbon and sustainable growth. The analysis is undertaken at three levels. A general discussion of low-carbon green growth is followed by an analysis of national and subnational policy actions toward a low-carbon economy. The final part covers the cross-cutting themes of technology, finance, and regional cooperation that will be needed to accelerate the transition. We are confident that this book will contribute to policy development and academic understanding in an area where new insights and coordinated policy actions are badly needed. This book is also intended to serve as a catalyst for further collaborative research. We hope this book will help countries in Asia and the Pacific scale up their actions and implement robust institutional frameworks for accelerating low-carbon green growth, and to manage their resources sustainably for the long-term development of their people.

Bindu N. Lohani Masahiro Kawai Former Vice-President Former Dean and CEO (Knowledge Management Asian Development Bank Institute and Sustainable Development) Asian Development Bank

xi Preface

Venkatachalam Anbumozhi, Masahiro Kawai, and Bindu Lohani

Asia’s economic success over the past 5 decades has been coupled with remarkable achievements in reducing poverty and improving the quality of life. But the region’s economic growth has also resulted in a significant increase in global warming greenhouse gas emissions. Asia’s share of worldwide emissions increased from 8.7% in 1973 to 28% in 2010, and is expected to increase to 40% by 2030 if present industrial production and energy consumption growth rates continue. Asia needs to switch to a less polluting pattern of production and consumption while maintaining the growth and social development it requires. Energy consumption, the burning of fossil fuels in particular, is the main source of human-induced greenhouse gas emissions—the main cause of climate change. But energy is also a fuel for growth, particularly for the rapidly developing economies of Asia. The challenge for developing Asia is to maintain economic growth while reducing the carbon content of energy and increasing the efficiency of resource use. The way in which Asia manages its future developmental activities in a low-carbon resource-efficient way is critically important, as the world increasingly looks to Asia for its growth. Asia can also be a model for measures to mitigate climate change.

Low-Carbon Green Growth in Asia

In 2013, the Asian Development Bank and the Asian Development Bank Institute in close collaboration with 18 regional think tanks published Low-Carbon Green Growth in Asia: Policies and Practices. This volume took the approach that many of the policies Asia needs to move toward low-carbon growth are already known. Pricing, including carbon taxes, tradable emission permits, incentives for climate- friendly technology innovations, standards, and regulations—all of these

xii Preface xiii instruments are helping emerging economies to tackle climate change and accelerate green growth. However, an effective economic strategy to deal with climate change is not only about identifying the best tools; above all it is about combining and deploying the various available instruments in a coherent way. Low-Carbon Green Growth in Asia demonstrated that Asia has already started doing this to meet individual developmental needs while still achieving the overall objective of ambitious emission reductions. While these policies are replicable and can be scaled up, better regional cooperation is clearly needed. A summary of the book is available in the appendix.

About This Book: Managing the Transition to a Low-Carbon Economy

The papers in this volume form a companion book. They were presented and discussed at two workshops on Climate Change and Green Asia held in Beijing and New Delhi in 2011. The two workshops:

• assessed the scope and merits of current pledges, programs, and strategies for climate change mitigation; and • provided strategic directions to reduce greenhouse gas emissions without adversely affecting economic growth.

This volume of edited papers focuses on the importance of adopting a broad approach to climate mitigation that extends across all sectors of the economy and involves all levels of government. The issues that cut across sectors are technology, finance, and regional cooperation. The book has three parts: (1) concepts and measurement of low- carbon green growth, (2) driving forces and incentives of low-carbon green growth, and (3) regional cooperation for managing the transition.

Concepts and Measurement of Low-Carbon Green Growth

Part 1 provides an overview of the opportunities low-carbon green growth offers and a critical analysis of various ambitious attempts in Asia to achieve a fundamental change in energy demand and supply. The papers are united by a belief that addressing climate change and accelerating inclusive growth is an endogenous feature of economic xiv Preface systems and that therefore technological change needs to be induced by economic policies. The papers provide a fresh perspective on realizing fundamental changes in Asia’s economies and societies and offers innovative views on the role and content of public policies. The three papers in this part also provide empirical analyses of countrywide actions in the People’s Republic of China, India, Indonesia, Thailand, Singapore, and Viet Nam, focusing on energy supply, energy efficiency, transport, waste management, and agricultural land use. These are crucial sectors, as they determine the overall trend in emissions reductions. Many of the models of policy reforms and sectoral case studies are potentially of global importance as they are replicable and scalable. One conclusion is that the level of progress across Asia differs widely and the potential for it to grow is high if successful efforts are scaled up and replicated. These papers also critically evaluate organizational structures, pledges and mandates, budgets, human resources, and technical skills.

Incentives and Driving Forces of Low-Carbon Green Growth

The lifestyle choices of individuals and technologies that are available to them will shape markets and emissions. Part 2 analyzes and compares actions taken at the local level and identifies and assesses driving forces at national and local levels. Urban contributions to carbon emissions depend on the size and structure of the economy. Public– private partnership programs offer a long-term sustainable approach to improving low-carbon initiatives, enhancing the value of public assets, and making better use of public resources. In developed countries, such initiatives can be found in waste management, transport, and public buildings, among others. In the context of lifestyle responses to climate change, two types of behavior are especially relevant for emerging economies. The first is efficiency—the substitution of more energy- efficient appliances, motor vehicles, or other devices for less efficient ones. The second is the curtailment of resource use. In both cases, policies need to enable and reward low-carbon lifestyles. If implemented in the right way, innovations in low-carbon technologies and green services will become key drivers of growth, competitiveness, and employment. The chapters on technology examine co-benefit technologies (offering social, economic, and local environmental benefits) from a regional perspective, demonstrating that such benefits can be achieved effectively with the appropriate technical, Preface xv financial, and institutional support. Investment in climate change mitigation results in many broad societal and sustainable development benefits in the fields of environment, health, economic and social welfare, as well as energy security. While developed countries expect technology to be transferred through business-to-business transactions, developing countries anticipate that governments will play a major role. Although some developing countries see intellectual property rights as hindering access to technologies, they need not necessarily affect technology transfer transactions. National innovation systems, through policy interventions, can also facilitate technology transfer. Factors that have engaged the private sector to tackle climate change include the growing market demand for renewable energy, an increasing focus on higher energy efficiency, and a greater role for the carbon market. However, private sector participation in low-carbon green growth initiatives is hindered by limited financing options and access to technology in developing countries, biased supply chain dependence on imports, limited partnerships between the public and the private sectors, a lack of capacity, regulatory uncertainty, and the absence of a long-term price signal for the carbon market. This part also discusses how to unlock public, private, and international finance to accelerate low-carbon green growth. It assesses how the “cap-and-trade” scheme, a market-based approach, shall be used to control carbon emissions by providing economic incentives for achieving emissions reductions, thus lowering overall costs. A carbon tax can boost energy security, stimulate economic growth, increase fiscal revenues, and at the same time tackle climate change. If and when it is combined with revenue neutrality in budget formulations, the introduction of a carbon tax can also generate indirect benefits by decreasing corporate and household income taxes and can support environmentally friendly projects. To maximize private sector participation, policy actions that facilitate public finance are highly recommended. Case studies are used to illustrate these points. The public sector plays a crucial role in mobilizing climate change, but private capital is also essential to meet the huge demand in developing countries. Market-based mechanisms such as the Clean Development Mechanism are important to attract investment to the carbon market. The Clean Development Mechanism also speeds up technology transfer through joint projects between firms in developed and developing countries. To use public and private financial resources efficiently, a well-designed measurement, reporting, and verification system is essential. xvi Preface

Regional Cooperation for Managing the Transition

Part 3 focuses on how to seize the opportunities that lie across national boundaries—both market-based opportunities such as trade and investment flows in low-carbon green products and services, and nonmarket opportunities for regional collective action (joint research, finance mobilization, policy networking, and knowledge sharing). The need for a system of measurement, reporting, and verification as a policy management tool for understanding the impact of these strategies is emphasized. Strategies must be embedded in economic policies, regulations, and new investment programs. They cannot be an afterthought, but must be an integral part of the national development strategy. There is great potential to develop a regime that is regional in focus but has an international perspective. Regional governance systems and national institutional frameworks to accelerate green growth such as the South Asian Association for Regional Cooperation, the Asia- Pacific Economic Co-operation, and the Association of Southeast Asian Nations already exist and can be used more extensively. The region has seen strengthened cooperation, especially in policies on forests, energy, and water. The contributors to this volume illustrate that a balance between economic growth and social and environmental costs is possible. Notwithstanding the generally positive framework available, the Asian way of designing low-carbon green growth policies also highlights the untapped potential that can be accelerated through regional cooperation by mobilizing knowledge, technology, and finance. We are grateful to all the project participants who not only shared their ideas, but were also willing to spend many months in writing up their chapters so their ideas can be presented in an easily accessible way. Special thanks are due to the steering committee and working group members, discussants at the conferences, and reviewers of the papers, who offered challenging and sometimes provocative thoughts that helped us to shape our own ideas. In particular, we would like to thank Xianbin Yao, Director General of the Pacific Department, ADB and Naoyuki Yoshino, Dean of ADBI for championing the study and inspiring support. Contributors

Venkatachalam Anbumozhi is senior economist at the Economic Research Institute for ASEAN and the East Asia (ERIA). Previously he worked at the Asian Development Bank Institute in Tokyo. He received his doctorate from the University of Tokyo, where he also subsequently taught resource management, international cooperation, and development finance. He has written books, research articles, and project reports on natural resource management, climate-friendly infrastructure design, and private sector participation in green growth. He was a member of the APEC Expert Panel on Green Climate Finance and the ASEAN panel for promoting climate-resilient growth.

Armin Bauer is a principal economist in the ADB poverty reduction and inclusive growth team. Previously he worked for the German development cooperation organizations KfW and GTZ. He holds a PhD in development economics and a master’s degree in public policy and administration.

Vikram Devatha has 12 years of experience in business and managing general administration for a multinational company based in India. He is currently engaged in project management and renewable energy research studies with Auroville Consulting. He has a degree in International Business and Economics from the Queensland University of Technology in Australia.

Naga Srujana Goteti obtained her master of engineering in energy at the Asian Institute of Technology (AIT), Thailand. She has worked in the IT industry and as a research associate at AIT contributing to the study on indicators for low-carbon green growth.

Takashi Hongo is a senior fellow at the Mitsui Global Strategic Studies Institute, where he has been involved in projects and policy measures on climate change, water security, and bio diversity. Previously he worked for the Japan Bank for International Cooperation and designed projects on power, energy, and mineral resources, among others. He has written numerous articles and is a member of the Board of Directors of the International Emission Trading Association, Private Sector Advisory

xvii xviii Contributors

Committee for Global Green Growth Institute, and Technical Evaluation Committee of the New Energy and Industrial Technology Development Organization in Japan.

Stephen Howes is a professor of economics at the Crawford School of Public Policy at the Australian National University. He is director of the international and development economics teaching program at the Crawford School, and also director of the Development Policy Centre. Previously he was chief economist at the Australian Agency for International Development and worked for the World Bank, in Washington and Delhi. In 2008, he worked on the Garnaut Review on climate change. He received his master’s in economics from the Australian National University, and his PhD from the London School of Economics.

Kaliappa Kalirajan is a professor of applied economics and a policy analyst at the Crawford School, Australian National University. Previously he was professor of international economics at the Foundation for Advanced Studies on International Development and the National Graduate Institute for Policy Studies in Tokyo and worked at the Australia South Asia Research Centre at the Australian National University. His main areas of interest include macroeconomic and trade policies and reform, poverty reduction, and sources of growth. He has published numerous books. He received master’s degrees from Madurai University and his PhD from the Australian National University.

Masahiro Kawai is a professor of economics at the University of Tokyo. He was previously dean of the Asian Development Bank Institute and head of the ADB Office of Regional Economic Integration. He has also served as deputy vice minister of finance for international affairs of Japan’s Ministry of Finance and chief economist for the World Bank’s East Asia and the Pacific region. He was a consultant at the Board of Governors of the Federal Reserve System and the International Monetary Fund and special research advisor at the Institute of Fiscal and Monetary Policy in Japan’s Ministry of Finance. He has a PhD in economics from Stanford University.

Sivanappan Kumar obtained his PhD from Institut National Polytechnique du Toulouse, France, and is a professor at the Asian Institute of Technology, Thailand. He specializes in renewable energy resources and technologies, climate change and greenhouse gas mitigation, and energy and sustainable development. He has published extensively. Contributors xix

Bindu N. Lohani is the former Asian Development Bank (ADB) vice- president for knowledge management and sustainable development. Previously he was the director general of the ADB Regional and Sustainable Development Department and the chief compliance officer and special advisor to the president on clean energy and environment. Before joining ADB, he worked for the Government of Nepal and the Asian Institute of Technology. He holds a PhD in engineering. He is an elected member of the US National Academy of Engineering and a diplomat of the American Academy of Environmental Engineers and Fellow of the American Association for the Advancement of Science Council.

Brahmanand Mohanty is the regional adviser for Asia for the French Environment and Energy Management Agency. He is a visiting faculty at the School of Environment, Resources and Development of the Asian Institute of Technology. He obtained his PhD in energy from the Institut National Polytechnique, France in 1985. He has undertaken professional assignments for about a dozen of bilateral and multilateral funding agencies in about 20 countries in and outside Asia. He is the author/co- author of a number of journal/conference articles and books on topics related to energy technology, efficiency and management, sustainable urban energy, energy, and the environment.

Jeffrey D. Sachs is the director of The Earth Institute, Quetelet Professor of Sustainable Development, and professor of health policy and management at Columbia University. He is a special advisor to United Nations Secretary-General Ban Ki-moon on the Millennium Development Goals, having held the same position under former Secretary-General Kofi Annan. He is the director of the UN Sustainable Development Solutions Network, co-founder and chief strategist of the Millennium Promise Alliance, and director of the Millennium Villages Project. He is also one of the Secretary-General’s MDG Advocates, and a Commissioner of the ITU/UNESCO Broadband Commission for Development. He has authored three New York Times bestsellers in the past seven years: The End of Poverty (2005), Common Wealth: Economics for a Crowded Planet (2008), and The Price of Civilization (2011). His most recent books are To Move the World: JFK’s Quest for Peace (2013) and The Age of Sustainable Development (2015).

Emil Samil is the advisor for environment and sustainable development issues of the Advisory Council to the President of Indonesia. He has held a number of governmental positions, including minister of state for population and the environment, minister of state for development xx Contributors supervision and the environment, minister of communication, minister of state for the improvement of the state apparatus, vice chairman of the National Development Planning Agency, chairman of the technical team of the Council for Economic Stability and a member of the Gotong Royong Parliament, member of the team of advisers to the Minister of Manpower, and member of the team of economic advisers to the President. He graduated from the Faculty of Economics of the University of Indonesia, and received his PhD degree in economics from the University of California, Berkeley.

Prathamesh Savargaonkar obtained his master’s in business administration from the Asian Institute of Technology in Thailand. He was a research associate at AIT and contributed to a study on indicators for low carbon green growth.

Martin Scherfler is a co-founder of Auroville Consulting. A sociologist and researcher, he has wide experience in coordinating educational programs in the area of sustainability. He is currently engaged in project management related to efficient and sustainable use of energy, water and engages in urban farming initiatives. He holds a master’s degree in sociology from the University of Vienna.

Shiv Someshwar is research faculty at Columbia University in New York. At the Earth Institute, he is also director of climate policy at the Center on Globalization and Sustainable Development, and senior advisor of the Sustainable Development Solutions Network. An expert in climate and development policy, he has led numerous multidisciplinary efforts to build resilience to climate risks in developing countries. He advises governments on identifying and implementing climate and sustainable development action priorities, and served as an advisor to the Bureau of Crisis Prevention and Recovery for the United Nations Development Programme to integrate climate adaptation and disaster risk reduction efforts. Previously, he was at the Rockefeller Foundation and at the World Bank. He received his PhD in environment and public policy from the University of California, Los Angeles, and was a MacArthur Bell fellow at Harvard University.

Tomonori Sudo is senior research fellow of the Japan International Cooperation Agency Research Institute. His work focuses on development cooperation and effective financial mechanisms addressing environment and climate change issues. He is a member of the Environment and Development Cooperation Network of the Organisation for Economic Co-operation and Development (OECD) Contributors xxi

Development Assistance Committee. He was seconded to the African Development Bank to promote private sector development in Africa. He received his BA from Osaka University, his MSc in from University College London, and his PhD from Waseda University.

Heinrich Wyes is deputy executive director of the Central Asian Regional Environment Centre (CAREC). Previously, he worked for the United Nations Environment Programme, the World Health Organization, the Consultative Group on International Agricultural Research, and as a spokesperson of the German Ministry of Environment. Currently he lectures at the German–Kazakh University in Almaty. He holds a master’s degree in geology and has conducted postgraduate studies in system analysis and macroeconomics. In 2011, Mr. Wyes won the Swiss ReSource Award for innovative ideas on watershed management.

Paul Wyrwoll is a PhD candidate at Australian National University. He is an environmental and resource economist whose research focuses on the integration of environmental water flows into hydropower operations. He is the general manager of the Food, Energy, Environment and Water (FE2W) Network and the managing editor of the Global Water Forum. Abbreviations

ADB Asian Development Bank ADBI Asian Development Bank Institute APEC Asia-Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations CDM Clean Development Mechanism CFL compact fluorescent lamp

CO2 carbon dioxide ETS emissions trading scheme EU European Union FDI foreign direct investment FFV fuel flexible vehicles FIT feed-in tariff GCF Green Climate Fund GDP gross domestic product GEF Global Environment Facility GHG greenhouse gas IEA International Energy Agency IPCC Intergovernmental Panel on Climate Change JBIC Japan Bank for International Cooperation kg kilogram LCGS low-carbon goods and services LDC least developed country LDCF Least Developed Country Fund m3 cubic meter

xxii Abbreviations xxiii

MDG Millennium Development Goal MRV measurement, reporting, and verification mtoe million tons of oil equivalent ODA official development assistance OECD Organisation for Economic Co-operation and Development PPP public–private partnership PRC People’s Republic of China R&D research and development REDD Reducing Emissions from Deforestation and Forest Degradation SAARC South Asian Association for Regional Cooperation SMEs small and medium-sized enterprises UNDP United Nations Development Programme UNEP United Nations Environment Programme UNESCAP United Nations Economic and Social Commission for Asia and the Pacific UNFCC United Nations Framework Convention on Climate Change US United States

PART I Concepts and Measurements of Low-Carbon Green Growth

Chapter 1 Pro-Growth, Pro-Job, Pro-Poor, Pro-Environment Emil Salim

1.1 Introduction

While the United States and many European economies experienced low growth, high unemployment, and high current account deficits for several years after the global financial crisis of 2008, the People’s Republic of China and most Association of Southeast Asian Nations (ASEAN) economies recovered more quickly. This is in line with the Asian Development Bank’s projection of an “Asian Century,” in which Asian gross domestic product (GDP) per capita in purchasing power parity terms will rise significantly from $6,700 in 2010 to $40,800 in 2050. The same report projects that Asia’s share of global output will increase from 27.7% in 2010 to 52.3% in 2050. By mid-century, Asia will become the major driving force of global growth (ADB 2011). If this is to happen, Asia as a whole has to combat poverty eradication and increasing inequality, while countries with wide social, ethnic, cultural, religious, and racial divisions have to forge social cohesion in unifying their nation. During the last decade, income inequality in countries like Indonesia has increased (National Statistical Bureau of Indonesia 2011). For example, the Gini coefficient, a measure of the income distribution of a country’s residents, increased to 35% in 2012 as a result of unbalanced growth. The same can be observed in other emerging economies of the region (Table 1.1). Economic disparities between Asian countries have also widened, creating different levels of economic development with each country pursuing different policies to meet its own specific trade and investments interests with industrialized countries.

3 4 Managing the Transition to a Low-Carbon Economy

Table 1.1: Changing Gini Coefficient in Asia, 1987–2012

Country 1987 1994 2004 2009 2012 Cambodia … 38.28 35.53 34.67 31.82 (2011) PRC 29.85 35.5 (1993) 42.48 (2005) 42.63 (2008) 42.06 (2010) Rural 29.45 33.84 35.85 (2005) 39.40 (2008) 38.50 (2011) Urban 20.2 29.22 34.80 (2005) 35.15 (2008) 35.56 (2011) India 31.88 30.82 (1993) 33.38 33.9 … Rural 30.13 28.59 (1993) 30.46 29.96 31.12 (2011) Urban 35.57 34.34 (1993) 37.59 39.28 39.05 (2011) Indonesia 29.27 29.19 (1993) 34.01 (2005) 35.57 (2010) … Rural 27.73 25.97 (1993) 31.45 34.02 Urban 32.78 35.34 (1993) 39.93 (2005) 38.13 42.15 Lao PDR … 30.43 (1992) 32.47 (2002) 35.46 (2007) 36.22 Malaysia 47.04 47.65 (1992) 37.91 46.21 … Philippines 40.63 (1988) 42.89 44.04 (2006) 42.98 43.03 Thailand 43.84 (1988) 43.47 42.35 (2006) 39.37 (2010) … Viet Nam … 35.68 (1992) 35.81 39.25 (2010) 35.62

… = not available, Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China. Note: All data are based on consumption, except for Malaysia where they are based on income. Source: World Bank PovcalNet. http://iresearch.worldbank.org/PovcalNet/index.htm?0.

While the economic model of developed countries with its emphasis on a single linear track of growth has raised material wealth to unprecedented levels, the impact on social equity and poverty eradication has been negative. Most disturbing of all, these models have wrecked the equilibrium of ecological systems, eroding biological diversity, endangering the sustainability of nature’s life support system, and leading to global warming and climate change. It is time to abandon this creative destruction approach to development and explore avenues of growth that are more in line with so-called “Asian values,” which hold that the meaning of development has three dimensions: material wealth creation in economic terms, enhancing social cohesion in social terms, and preserving ecological equilibrium in environmental terms. However, Asia is already confronted with the grim reality that the air is heavily polluted by greenhouse gas emissions caused by the burning of fossil fuels, which has wide repercussions for global warming and climate change. This will have serious consequences, Pro-Growth, Pro-Job, Pro-Poor, Pro-Environment 5

including changing monsoon patterns, which will have negative impacts on food production. Sea levels are expected to rise and floods will hit coastal populations. Weather-related diseases will particularly affect the vulnerable poor. Asia needs to pursue a development path that conserves precious natural life-supporting systems, preserves biological diversity, controls greenhouse gas emissions, and strives for ecological sustainability. Many theoretical models have been developed since the concept of sustainable development was launched at the Rio Summit, Brazil, June 1992. It is now time to put these into practice and to explore policies that can meet the challenge of climate change.

1.2 Indonesian Triple Track Development

Based on countries’ economic performance since 1970, the Asian Development Bank has classified the region’s 49 economies into three groups based on economic performance: (i) “high-income developed economies,”1 (ii) “fast-growing converging economies,”2 and (iii) “slow- or modest-growth aspiring countries”.3 From these three groupings, the “fast-growing converging countries” today produce 52% of Asia’s GDP and comprise 77% of its population. Indonesia belongs in this category and its efforts to pursuing sustainable development are worth examining.

1.2.1 Setting the Overall Targets of Sustainable Development

Since 2004, the Indonesian government has pursued a “Pro-Growth, Pro-Job, Pro-Poor and Pro-Environment” agenda. It aims to increase the 5% growth rate in 2004 to 7% in 2014, reduce open unemployment from 9.9% (2004) to 5% (2014), reduce the percentage of the population living below the poverty line from 16.7% (2004) to below 10% (2014), and

1 Brunei Darussalam; Hong Kong, China; Japan; Republic of Korea; Macau, China; Singapore; and Taipei,China. 2 Armenia; Azerbaijan; Cambodia; People’s Republic of China; Georgia; India; Indonesia; Kazakhstan; Malaysia; Thailand; and Viet Nam. 3 Afghanistan; Bangladesh; Bhutan; Cook Islands; Democratic People’s Republic of Korea; Fiji; Iran; Kiribati; Kyrgyz Republic; Lao People’s Democratic Republic (Lao PDR); Maldives; Marshall Islands; Federated States of Micronesia; Mongolia; Myanmar; Nauru; Nepal; Pakistan; Palau; Papua New Guinea; Philippines; Samoa; Solomon Islands; Sri Lanka; Tajikistan; Timor-Leste; Tonga; Turkmenistan; Tuvalu; Uzbekistan; and Vanuatu. 6 Managing the Transition to a Low-Carbon Economy cut greenhouse gas emissions by 26% from their 2000 levels (assuming business-as-usual) and by 41% (assuming aid) by 2020. Since the 1950s, Indonesian development has mainly taken place in the western part of Indonesia on the islands of Java, Sumatera, and Bali, which have fertile soil and oil resources. This has stimulated infrastructure development and attracted migrants from all parts of Indonesia. As a result, today roughly 80% of Indonesian GDP is produced by Java and Sumatera, which are the home for 80% of the 250 million Indonesian people. The rest of the Indonesian GDP is produced by the islands of Borneo, Celebes, Nusa Tenggara, Moluccas, and Papua. The distance between west and eastern Indonesia is the same as that from London to Mecca. To cope with this unequal distribution of growth, Indonesia is complementing its macromodel with a subnational regional development model. The country is to be divided into six major corridors as locations for major growth centers in each main island, to be linked with other transportation and communication networks covering the whole country. This subnational regional development model approach is necessary not only to achieve growth targets, but also to reach the poor scattered across numerous islands and to improve social cohesion among Indonesia’s diverse and widely distributed ethnic, racial, cultural, and religious groups. This approach will also help identify unique natural resources with the potential to be developed.

1.2.2 Get the Macromodel in Place

To ensure growth that unifies the nation, a solid Indonesian macromodel based on prudent fiscal and monetary policies needs to be established. This model should have the following major principles: (i) a controlled inflation rate, (ii) a national budget with a deficit below 3% of GDP, (iii) a manageable sovereign debt to GDP ratio, (iv) a reduction in government subsidies, (v) an increase in the allocation of incentive funds to provincial and district governments, (vi) an allocation of 20% of the development budget for education, (vii) an annual increase in the proportion of the development budget against routine budget, and (viii) foreign reserves that are more than the value of 6 months’ imports.

1.2.3 Planning through the Market

With these macromodel policies set, the next step is to devise a system of “planning through the market.” Although the market operates freely, the government can guide development through the budget using the market. The budget is the government’s main lever to obtain social and Pro-Growth, Pro-Job, Pro-Poor, Pro-Environment 7 environmental objectives. The second is state enterprises. In a country with backlogs in infrastructure development, most economic players are eager to carry out infrastructure development. Through a tripartite arrangement of (i) public state enterprises, (ii) private enterprises, and (iii) government partnership, infrastructure development can be combined with the creation of special development zones. The development budget can be used to leverage public–private partnership to promote economic development that stimulates job creation and poverty eradication while raising the value added of unique natural resources in outlying areas over the whole country.

1.2.4 Unique Resource Enrichment

Indonesia’s unique tropical resources can give the country a competitive edge. Rattan is a plant that is widely used for furniture and housing. Many fruits, herbs, and microorganisms that live in the forests are ingredients for products in the pharmacy, cosmetic, horticulture, and food industries. Deep-sea fish contain omega-3 and squalene with health-giving properties. The key notion is that resource development leads to economic benefits through a combination of using society’s local wisdom and creatively applying innovative science and technology.

1.2.5 Local Wisdom as Source of Innovation

As a tropical country, Indonesia has rich natural resources and a wealth of local wisdom. Rural communities have survived for centuries by living from nature. This can be tapped and transferred into viable models, tools, food, medicine, and other products and enriched through science and technology. However, many local communities are left behind not only in their exclusion from science and technology, but also because they suffer from severe poverty.

1.2.6 The Many Faces of Poverty

A 2008 survey on the conditions of 76,000 Indonesian villages by the Central Bureau of Statistics revealed that poverty was due to the following causes:

(i) a lack of basic means of connectivity, such as roads, harbors, vehicles, ships, and telecommunications; (ii) a lack of basic facilities for human capability development, such as educational and health facilities, schools, and reading materials to enhance a person’s maximum capacity; 8 Managing the Transition to a Low-Carbon Economy

(iii) the absence of financial facilities, such as banks, cooperatives, and credit unions to enable them to join the financial flow; (iv) poor human settlement facilities, such as housing, drinking water, sanitation, and electricity to enable them to live a decent and healthy humane life; and (v) proper access to human security, law protection, and government services to enable them to live as rightful citizens.

These five basic requirements for a civilized life need to be addressed in development plans, policies, and projects.

1.2.7 The Cluster Approach

There are, however, other features of poverty that require special efforts. The Indonesian government has devised four pro-poor programs organized in clusters as a package of activities to combat poverty.

(i) Cluster Program I is aimed at meeting the special needs of the individual poor. It includes distributing food, providing scholarships, building health facilities, and cash transfers. (ii) Cluster Program II is focused on empowering the poor as a group by funding cooperative actions by the poor. (iii) Cluster Program III aims at institutional development, such as creating credit unions run for and by the poor. (iv) Cluster Program IV is devoted to developing infrastructure that is reachable by the poor, such as affordable clean drinking water, low-cost housing, cheap transport, affordable electricity, and special programs for poor fishermen and slum dwellers.

The government fully finances these cluster programs. It also provides incentives to companies so they can provide corporate social responsibility facilities. These are not stand-alone programs, but form part of a triple approach of economic, social, and environmental development.

1.2.8 Promoting Low-Carbon Growth

The need to reduce greenhouse gas emissions is an integral part of these programs. Indonesia has set a target of reducing greenhouse gas emissions by 26%–41% from 2000 levels by 2020. The Ministry of the Environment has assessed Indonesia’s greenhouse gas emissions to total 1.34 million tons of carbon dioxide

(CO2) equivalent. This is made up of CO2 (80.5%), methane (12.5%), and Pro-Growth, Pro-Job, Pro-Poor, Pro-Environment 9 nitrous oxide (2%). The main contributing economic sectors were land use change and forestry, followed by energy, peat-fire-related missions, waste, agriculture, and industry (BAPPENAS 2013). The ministry has indicated the need for a well prepared resource use spatial plan, with clear reasoning on what resources to conserve and what to exploit, where to operate, and benchmarks that combine economic goals with social and greenhouse gas reduction programs.

1.2.9 Intersector Matrix Tracing with Stakeholders

An intersector synchronization of Indonesia’s development plan can be scientifically worked out using a dynamic general equilibrium model. This should be complemented by a simple three-factor matrix, consisting of economic growth, social development, and environmental conservation. The intensity of the interdependency with relevant stakeholders can then be traced. For example, economic growth has an impact on GDP (economic factor), jobs (social factor), and CO2 emissions (environmental factor). Social development affects growth through education, health, capacity building, and poverty eradication (social factor) and local wisdom for resource enrichment (environmental factor). Environmental conservation has an impact on growth through resource efficiency (economic factor), provision of resources for job creation (social factor), and sustaining life support system (environmental factor). The interdependency between the economic, social, and environmental factors highlights the need to arrive at a working arrangement in implementing sustainable development.

1.3 Projecting the Future

Sustainable development is a long-term process taking at least 20 years. There is a need to explore the limits of currently available usable natural resources. How long will they last, how can the maximum productivity of the current known resources, such as land, water, clean air, and livable space, be raised to support the ever increasing global population? Is the era of unlimited consumption coming to an end? Is it feasible to end poverty in growing Asia? There may be no one solution. Asian nations are not growing at the same speed or in the same direction but moving in waves of variable quality. Low-income nations can learn from and avoid the mistakes made by the middle-income nations, who can also learn from the experiences of the high-income economies. 10 Managing the Transition to a Low-Carbon Economy

It is in this context that this book provides valuable insight into “Asia 2050,” on the lessons learned. This would enable all Asian countries to strive to meet the challenges of living sustainably on our planet.

References

Asian Development Bank. 2011. Asia 2050: Realizing the Asian Century. Manila. Government of Indonesia, BAPPENAS. 2013. National Agency for Economic Planning. Jakarta. Government of Indonesia, National Statistical Bureau. 2011. Monthly Report of Social Economic Data. Jakarta.

Chapter 2 Toward a Low-Carbon Asia: Challenges of Economic Development Venkatachalam Anbumozhi and Masahiro Kawai

2.1 Introduction

Our society stands at a major crossroads. The Fourth and Fifth Assessment Reports of the Intergovernmental Panel on Climate Change (IPCC) stated unequivocally that the atmospheric system was warming and that the carbon dependency of the world economy was the cause. Even the most conservative prediction of future climate change foresees that the average global temperature at the end of this century will rise by 1.8oC– 6.0oC from the average at the end of the 20th century (IPCC 2007). However, recent climate studies (ADB 2009, 2012, 2013a) suggest that both the IPCC reports significantly underestimate the potential severity of global warming, primarily because developing Asian countries like the People’s Republic of China (PRC) and India have experienced a huge upsurge in electric power generation, almost all of it fired by fossil fuels. This is confirmed by other studies about the negative impacts of increased greenhouse gases (GHGs) on the climate; there is an urgent need for concentrated international efforts to curtail global emissions of GHGs. A number of studies indicate that the current pattern of carbon- intensive economic development is unsustainable and that global warming has the potential to derail many social advances (UNEP 2008; UNDP 2009; MGI 2013). An increase in temperature has the potential to disrupt rainfall patterns, cause sea levels to rise, and produce significant changes

11 12 Managing the Transition to a Low-Carbon Economy in agricultural production. Other expected impacts include changes in crop yields, modifications to shipping lines, glacier melt, biodiversity loss, and an increase in diseases because of vector mutations. These events have the capacity to destroy lives, force vulnerable people to migrate, and contribute to food and water shortages. About 40 million people are exposed to coastal flooding events and by the 2050s the population exposed could rise to 150 million (Nicholls et al. 2007). Collectively, these climate challenges will severely constrain the ability of developing Asia to sustain its recent economic prosperity. The Stern Review (Stern 2006), IPCC reports, and ADB studies have all confirmed that not only is the cost of action far smaller than the cost of inaction, but even the most aggressive action on climate change would have an almost imperceptible impact on the anticipated 150% growth of the world economy by 2050. The Stern Review argued that reductions of 75% or more from the 2000 level of global emissions would be required by 2050. It is imperative that countries in Asia take actions to build a climate- resilient low-carbon society over the coming years. A low-carbon society can be defined as one that makes an equitable contribution from all sections of the economy, toward the global effort to stabilize the atmospheric carbon dioxide (CO2) and other GHGs at a level that will avoid dangerous climate change, through deep cuts in global emissions (Skea and Nishioka 2008). Patterns of consumption and behavior that are consistent with low levels of GHG emissions need to be adopted. The premise of this chapter is that such an approach would generate both environmental and economic benefits. It analyzes the key operating principles that are necessary for all economies to achieve the objectives of a low-carbon society. It assesses the various policy challenges faced by Asian developing economies in realizing a low-carbon society, and how the international community can help various barriers to be overcome.

2.2 Cumulative Emissions and Carbon Dependency in Asia

The critical objective of a low-carbon society is to reduce global GHG emissions. In 2010, the main CO2 emitters were advanced industrialized economies (e.g., the United States, members of the European Union, and Japan) and fast growing emerging economies (e.g., the PRC, India, Russian Federation, Brazil, and Indonesia). Together the top emitters accounted for over 70% of the world’s total GHG emissions. However, as shown in Figure 2.1, over the last three decades of sustained economic growth and industrial development, emissions by Asia’s major emerging economies rose by over 25%, and by even more in the PRC. Asia currently Toward a Low-Carbon Asia: Challenges of Economic Development 13

Figure 2.1: Carbon Emissions of Selected Asian Economies

(Mt CO2-e) ,

PRC India Japan Republic of Korea

Indonesia Malaysia Philippines Singapore Taipei,China Thailand Viet Nam

PRC= People’s Republic of China. Source: US Energy Information Administration (2013). 14 Managing the Transition to a Low-Carbon Economy consumes around 2,655 million tons of oil equivalent (mtoe) of energy per year, accounting for 27% of the world’s total energy consumption. Energy use is the source of about 80% of GHG emissions in Asia, and its share of worldwide emissions increased from 8.7% in 1973 to 26.4% in 2009 (EIA 2013). This is expected to increase to 28% by 2015, 30% by 2030, and 57% by 2050, if the current rate of economic growth continues (OECD 2011).

Because CO2 alone accounts for nearly 73% of the world’s GHG emissions, and together with other global warming gases for over 90% of total emissions, the CO2 equivalent measure of GHG emissions is a good approximation of the overall carbon dependency of economic activities. This dependency is characterized by carbon intensity, measured by carbon emissions related to GDP. From 1990 to 2010, all the top 10 carbon-emitting countries reduced their carbon intensity, with the largest decrease occurring in the PRC and India (Figure 2.2). The rest of the world, however, reduced carbon intensity only modestly, by around 14%. Overall, the global decline in the carbon intensity was about 20%.

Figure 2.2: Changes in Carbon Intensity, Realized and Projected

(tons of CO2 per 2005 $ ’000) . . . . . . . . . . .

US Europe South Asia PRC Japan

PRC = People’s Republic of China, US = United States. Source: OECD, Environmental Outlook (2011). Toward a Low-Carbon Asia: Challenges of Economic Development 15

Although carbon intensity is declining, the absolute levels of carbon emissions have risen at an alarming pace (Table 2.1). Emissions are projected to rise by more than 55% over the next 30–40 years, as economies continue to consume fossil energy, populations continue to expand, emerging economies keep growing, and poorer economies continue to develop. Overall de-carbonization of emerging and developing economies cannot be achieved unless concrete stabilization efforts are made. Several projections indicate that increases in carbon emissions for most economies will continue until 2030. Accelerating economic growth in emerging economies like the PRC and India will contribute to both the rising demand for and the combustion of fossil fuels such as coal, which

will eventually increase CO2 emissions. At the end of 2050, these two countries will account for nearly 40% of world emissions (IEA 2012). By that time, a carbon-dependent Asia will produce close to 60% more CO2 from energy combustion than it did in 2010. Growth in carbon emissions will occur in the high-income industrialized economies as well, but by only 17% compared with today. The carbon emissions of the US, Europe, and Japan may fall while a large increase in carbon emissions is likely to come from developing Asia (IEA 2012).

Table 2.1: Carbon Dependency of Global and Regional Economies

Total Growth 2010 2050 (2010–2050)

CO2 World Carbon World Carbon Carbon

Emission Share Intensity CO2 Share Intensity CO2 Intensity (Gt) (%) (kg/$) (Gt) (%) (kg/$) (%) (%) US 7.12 17.0 0.60 8.15 14.6 0.24 27.34 –60.0 EU28 4.72 13.1 0.50 6.10 10.9 0.26 29.23 –48.0 Japan 1.40 3.9 0.35 1.56 2.8 0.26 11.42 –25.7 PRC 7.49 20.87 2.76 10.95 19.7 0.78 78.92 –71.7 South 2.16 6.1 2.6 5.68 10.2 0.96 162.96 –63.1 Asia World 35.88 100.0 1.01 55.67 100.0 0.49 55.16 –51.48

CO2 = carbon dioxide, EU = European Union, Gt = gigaton, kg = kilogram, PRC = People’s Republic of China, US = United States. Notes: (i) The EU28 includes all 28 members of the European Union. In 2010, the top three emitters in

the EU were Germany (9777.4 million tons of CO2 equivalent), the United Kingdom (639.8 million tons), and Italy (565.7 million tons). (ii) South Asia includes Bangladesh, India, Pakistan, Nepal, and Sri Lanka. In 2005, India was the major emitter with 1,147 million tons.

(iii) Data from International Energy Agency (IEA) projections for CO2 from energy sources, which excludes land use as a source of GHG emissions. In 2010, CO2 consisted of 72.5% of total GHG emissions. Source: International Energy Agency (2011). 16 Managing the Transition to a Low-Carbon Economy

Per capita energy use and emissions are very low in developing Asia, compared with those in developed economies (Figure 2.3). However, by 2050 carbon emissions will more than double in the developing world, led by substantial increases in Brazil, Russian Federation, India, and the PRC, the BRICs (Wilson and Purusothaman 2003). By then, emissions from developing countries will account for most global emissions.

Figure 2.3: Energy Use, Emissions, and Economic Growth

Australia Russian Federation GermanyIreland Japan UK Greece Rep. of Korea France emissions per capita (metric tons) emissions PRC MalaysiaMexico CO Thailand Brazil India GDP per capita (PPP, )

PRC = People’s Republic of China, UK = United Kingdom, US = United States. Source: World Bank (2006).

In the business-as-usual scenario, rapid economic growth led by manufacturing in carbon-dependent Asia will continue to contribute to greater carbon emissions. Asia’s economic activity has been dominated by manufacturing, which accounts for 36%–42% of total energy consumption in many countries. Heavy industries like chemicals and petrochemicals, iron and steel, cement, and paper and pulp account for 60%–75% of energy consumption in large economies like the PRC and India (IEA 2007; MGI 2013). For example, the iron and steel industry consumes about 19% of total energy and produces about 25% of direct

CO2 emissions in India (Anbumozhi 2007). In Asia, a substantial amount of energy is wasted by inefficient production processes, Toward a Low-Carbon Asia: Challenges of Economic Development 17

obsolete technologies, and low-quality raw materials. To reduce carbon dependency in developing Asia, and the world in general, significant efforts are needed to improve energy efficiency, avoid energy wastage, and develop non-carbon sources of energy. These steps need to be taken to establish a low-carbon society.

2.3 Building Blocks of a Low-Carbon Society

A low-carbon society can reduce carbon emissions and at the same time boost economic and environmental gains. Achieving the goal of a low- carbon society should be based on the following operating principles:

• decoupling of economic growth from carbon emissions; • providing co-benefit options; and • achieving energy security, including affordable energy services to the poor.

2.3.1 Decoupling of Economic Growth from Energy Use

The “decoupling” of economic growth from carbon emissions is the main plank of a low-carbon society. Decoupling means that the rate of economic growth is faster than the rate of increase in carbon emissions (Ockwell 2006). The relationship between economic growth and sulfur

oxide (SOx) and CO2 emissions in Japan is an example of decoupling (Figure 2.4). To overcome serious environmental challenges and cope with oil price shocks, in 1970s Japan introduced pollution control measures and advanced the development and introduction of energy- saving, efficient manufacturing processes. The high price of oil played a significant role in facilitating these innovations. In the case of SOx emissions, Japan achieved a high-level of decoupling as result of deploying new green technologies. To create a low-carbon society that ensures compatibility between environmental conservation and economic growth and development, the current model of economic development—in which economic growth is always accompanied by increased consumption of fossil fuel—needs to be transformed by decoupling economic growth from

CO2 emissions. Box 2.1 shows that, by adopting comprehensive energy efficiency measures, Japan was successful in decoupling its economic growth and energy use, so that growth in industrial output was offset by a decrease in energy intensity and an improvement in energy efficiency. Japanese energy efficiency improvement programs also produced long- lasting improvements to industrial processes, new product designs, and 18 Managing the Transition to a Low-Carbon Economy

Figure 2.4: Decoupling of Economic Growth and Emissions in Japan

. . . . . . . .

GDP Sox emissions Sox emissions per GDP

GDP CO emissions per GDP CO emissions

Source: Ministry of the Environment, Japan (2009).

business models that save energy without reducing levels and quality of service. The high price of oil and energy in the 1970s and the early 1980s forced such fundamental changes.

2.3.2 Co-benefit Options

A co-benefit is an activity that delivers several benefits at the same time. Here it refers to the needs of developing countries to continue Toward a Low-Carbon Asia: Challenges of Economic Development 19

Box 2.1: How Japan Achieved “Decoupling”

The oil price hikes of the 1970s led Japan to focus on energy saving, resulting in an energy conservation law enacted in 1979. This energy conservation law stipulates the need to (i) identify energy intensive sectors; (ii) appoint licensed energy managers for energy-intensive industries; and (iii) buy and use products that meet mandatory energy performance standards. In 1999, Japan adopted the “Top Runner Programme” to push manufacturers to meet energy-efficiency standards by identifying the production process with the highest efficiency in the market at the time of standards setting and by evaluating the potential for further efficiency improvement. This ensured that target values were set at high levels. Amended six times, the law includes a variety of fiscal incentives, such as tax exemptions, special depreciation allowances, and soft loans to promote energy conservation by designated industrial sectors. A reduction of 1% per year in energy consumption by all designated factories was one of the main goals of the new law. The law also introduced special tax measures such as a rebate equal to 7% of the purchase price of high-efficiency equipment and loan support for energy efficient investments by industry. The government offered a low interest rate loan of 2.2% to industry for up to half the cost of such equipment for a period of 1–30 years, to get adopted. Since the enactment of the law in 1979, emissions from industries have been reduced from 52,423 million tons carbon dioxide equivalent per year

(tCO2e/yr) in 1997 to 49,851 million tCO2e/yr in 2003, despite the fact that Japan’s economy continued to grow. Today Japan is a leader in energy conservation and has developed an industrial system that continuously improves its energy efficiency. Importantly, the industrial structure of Japan has also changed over the last three decades, as more energy- intensive sectors have shifted overseas for economic reasons.

Source: Sugiyama and Oshita (2006).

economic development in an environmentally sustainable way and to reduce emissions for the purpose of climate change mitigation. Despite the rising awareness of climate change, developing Asia in general tends to place the highest priority on growth and development, and a relatively low priority on mitigating global warming. Domestic concerns are more important than global concerns for most developing countries. However, an increasing number of developing countries have begun to consider as important domestic priorities the preservation of the natural environment, a reduction in pollution, and protection of the safety and health of people. Rapid industrialization, spectacular economic growth, and deforestation have created air, water, and soil pollution and damaged the natural environment. As a result, policy makers have been forced to respond by taking corrective measures. 20 Managing the Transition to a Low-Carbon Economy

These corrective measures—including anti-pollution measures to contain air pollutants (such as particulate matter (PM) 2.5) and reforestation measures—do have positive impacts in reducing carbon and other GHG emissions, demonstrating that measures that fulfill domestic objectives of pursuing environmentally sustainable development can contribute to the global objective of mitigating global warming. This “co- benefit” approach to arresting carbon emissions, which addresses local environmental and health concerns, is an effective way to reduce carbon emissions (Kawai 2009). For example, a comprehensive environmental improvement project in Guiyang, PRC, reported that the project’s retrofitting of equipment and introduction of anti-pollution measures have not only drastically reduced SOx and NOx emissions but also CO2 emissions by 1,076,400 tons (UNEP 2009).

2.3.3 Energy Security and Poverty

A low-carbon society is not just about reducing GHG emissions. An increasing number of studies (Ausubel et al. 2008; Singh et al. 2009; Hultman 2013) have emphasized the importance of adopting a low- carbon developmental pathway as a means of enhancing energy security at the national level. The risk of disruptions to imported energy supplies, mainly oil, has been growing in recent years and will continue to grow in coming years, given the continued demand for fossil fuels and concerns on energy security by carbon-intensive economies such as the PRC, India, and Indonesia. Import dependency on fossil fuels is reaching 100% for small island countries and about 75% of energy consumption in the most vibrant economies of the region, such as the PRC, India, Indonesia, Philippines, Thailand, and Viet Nam. This energy insecurity problem may be exacerbated by a decline in the production of oil in a few major-exporting countries. Moving toward a low-carbon society will shield Asian economies from the risk of future disruptions to the global fossil fuel supply (IPCIC 2010). A low-carbon society also requires effective use of locally available renewable resources, with significant implications for Asia’s poor. An estimated 1 billion people in the Asia and Pacific region remain without access to electricity. Millions of those with access often pay high prices for erratic and unreliable services. The energy poor include 1.8 billion people living on less than $2 per day and relying on traditional biomass fuels for cooking and heating (Lohani 2008). These two factors—extreme poverty and low human development— limit the capacity of poor people to adapt to rising energy costs and increasing climate risks. Moving toward a low- carbon society is not only necessary to address mounting concerns about energy security; it is also a socioeconomic imperative for improving the human development prospects of marginalized people and communities. Toward a Low-Carbon Asia: Challenges of Economic Development 21

2.4 Key Challenges and Issues Facing a Low-Carbon Society

Establishing a low-carbon society poses a number of policy challenges and difficulties for emerging and low-income economies. Many studies indicate that significant potential for emission reductions exists in all economies in the order of 25%–27% per sector (ADB–ADBI 2013, IEA 2013; World Bank 2010), of which only a fraction has been achieved so far. Figure 2.5 depicts the reduction potential available for major economies. Chemicals, iron and steel, and cement are among the major industrial

sectors that can reduce CO2 emissions in a significant way. Rising use of fossil fuels in these sectors and transport, buildings, and agriculture will continue to drive up emissions. Total final energy consumption will grow at an average annual rate of 2.4% through 2035. The manufacturing sector and industrial units remain the largest end-users, with demand growing just over 80%. Strong growth in the vehicle fleet will push up energy demand by 77% in the transport sector. Building sector energy consumption will also rise substantially (IEA 2013).

Figure 2.5: Emission Reduction Potential for Major Emitters

US PRC Russian Federation Japan India

PRC = People’s Republic of China, US = United States. Source: International Energy Agency, World Energy Outlook (2012). 22 Managing the Transition to a Low-Carbon Economy

The carbon intensity of developing Asia remains 1.4–4 times greater than that of the G7 industrialized countries. The opportunities available for a low-carbon society have remained largely unexploited because of scientific, economic, and geopolitical uncertainties about:

• domestic and international access to financial resources; • the nature, timing, and extent of local biophysical impacts as a result of climate response; • the development and costs of new technologies that will reduce reliance on carbon-intensive processes; and • the level of ambition and the likelihood of international cooperation to reduce carbon emissions

2.4.1 Access to Finance

A low-carbon society needs clean technologies, green production, sustainable consumption systems, and a huge amount of capital. Asian economies aiming to reach a target of 20% of total supply from clean energy sources by 2020 would require an investment of almost $1 trillion by 2030 (IPCC 2007). Similarly, if all developing countries are committed to the International Action Programme (IAP), which aims to strengthen the international effort by member countries to increase new energy resources, an additional 120 GW of renewable energy capacity will be needed by 2030, necessitating an additional $10 billion per year in investment (World Bank 2009). The IEA has estimated that $20 trillion worldwide is required by 2030. Of this, more than 60% will have to be invested in developing Asia. Funding for renewable energy supplies currently constitutes a fraction of official development assistance (ODA) programs. Sufficient financing may be available from the private capital markets, but only if developing economies can provide a business-friendly regulatory framework for investment, favorable market incentives and conditions, and reduced uncertainty about long- term carbon prices.

2.4.2 Availability of Technology

In addition to the financing gap, there is also a substantial technological and innovation gap for Asian economies in developing and adopting clean low-carbon technologies (Anbumozhi 2008; Khor 2009; Imura et al. 2012) that facilitate a low-carbon society. Most developing countries in Asia—with the exception of the PRC and India—spend little on research and development (R&D) on low-carbon technologies and have a chronic shortage of competent scientists, engineers, and managers with the skills needed to develop and apply low-carbon technologies. Toward a Low-Carbon Asia: Challenges of Economic Development 23

Instead, these countries rely on imported technologies and skills originating in developed countries. The transfer of new technologies and entrepreneurial skills facilitates the establishment of an indigenous technological capacity that enables long-term adaptation of green technologies and future innovations. But most developing economies in Asia lack even the minimum capacity to utilize advanced foreign technologies fully.

2.4.3 Enabling Market Mechanisms: Clean Development Mechanism

The Clean Development Mechanism (CDM) is an important market- based mechanism for achieving a low-carbon society in a developing country. Since its inception in the late 1990s, the CDM has enabled the financing and transfer of low-carbon technologies in developing countries and created a global market place for carbon trading. The current CDM system suffers from several problems. First, the distribution of CDM projects is skewed toward a handful of large emerging economies such as the PRC, India, and Indonesia. Such projects are virtually absent in small and medium-sized low-income countries (Figure 2.6). Second, most of the certified emission reduction (CER) credits earned by 2012, when the Kyoto Protocol expired, were from large-scale energy projects, such as grid-connected renewable energy systems and methane capturing. The difficulty of applying CDM to the transport sector and to energy conservation projects limits the economy-wide spread of the mechanism. Third, there is growing investment uncertainty over the future of CDM and the global carbon market post-2012. This uncertainty has arisen from the lack of an international consensus to date on the post-Kyoto regime. Fourth, the satisfaction of the strict “additionality” criteria of the mechanism by the United Nations CDM board has been one of the major obstacles in developing viable projects. To many, the CDM is a win–win solution for all countries as it provides developed countries with low-cost abatement opportunities and a way to engage emerging economies in mitigation efforts by providing them with funding for low-carbon technologies. CDM can maximize its potential, if all these concerns are addressed. Nevertheless, countries such as Japan are not participating in the second commitment period of the Kyoto Protocol which started in 2013 and thus are not allowed to trade their carbon emission credits internationally. The balance between the demand and supply of credits is severely affected and the carbon price is falling drastically. This may result in a large decline in the future expected number of CDM projects approved and CERs earned. 24 Managing the Transition to a Low-Carbon Economy

Figure 2.6: Geographical Distribution of Clean Development Mechanism Projects and Sectoral Distribution of Projects in the People’s Republic of China CDM

PRC India Brazil Rep. of Korea Mexico Argentina Chile Indonesia Malaysia Others

Distribution

HFC Reduction Methane recovery and utilization Hydro Biomass Biogas

N Reduction Waste gas Wind Fuelswitch Others

CDM = Clean Development Mechanism, HFC = hydrofluorocarbon. Source: UNFCCC (2012).

Japan has proposed a new approach called the joint crediting mechanism (JCM)/bilateral offset credit mechanism (BOCM). In order to contribute to global actions for emission reductions and removals by sinks, JCM/BOCM provides opportunities for both developed and Toward a Low-Carbon Asia: Challenges of Economic Development 25 developing countries, to meet their emission reduction targets by flexibly and quickly facilitating the diffusion of low-carbon technologies, products, systems, services, and infrastructures, and by carrying out measurement, reporting, and verification (MRV) of these reduction effects. Despite the potential benefits and simplicity of this approach, issues relating to the MRV accounting rules, implications for carbon markets, and the overall integrity of the United Nations Framework Convention on Climate Change (UNFCCC) process mean that its implications need to be examined carefully.

2.4.4 Cap and Trade Program for Low-Carbon Cities

Unstoppable urbanization means that cities in developing Asia will see a rapid expansion and increasing investment over the next few decades. The impact of buildings will therefore be key to efforts to build low- carbon cities. The building sector is the fastest growing contributor to Asian emissions. The introduction of market-based instruments such as tradable permits can address the economic invisibility of emissions and is being increasingly used to reduce emissions (Box 2.2). As opposed to carbon taxes (which set a price for emissions at a high level and then allow the market to determine the level of emissions), cap and trade systems first establish an overall target level of emissions and then let the open market determine the price. The Tokyo Cap-and-Trade Program did not emerge overnight. Its forerunner, the Tokyo Carbon and Reduction Reporting Program, which was launched in 2002 and revised in 2005, laid the groundwork for the cap-and-trade scheme. It required large facilities with high levels of CO2 emissions to report their emission profiles to the authorities and 3-year plans to reduce emissions. Emission reductions were voluntary, but the 2005 revision added a rating and web-based public reporting system that gave the Tokyo government greater powers to issue guidance and to make reductions mandatory. The new mandatory reporting program heightened the awareness of facility owners and managers about their own energy performance and the need for energy conservation. Based on data received, the government prepared benchmark performance criteria in each building category, such as offices and residential properties. This type of feedback was effective in promoting emission reductions. The Cap-and-Trade Program uses a similar approach: the Tokyo government accumulates data and experience and builds relationships with facility managers, particularly for the setting of fair and effective emission caps and emission allowances. 26 Managing the Transition to a Low-Carbon Economy

Box 2.2: Tokyo’s Cap-and-Trade Program

The Tokyo Cap-and-Trade Program, launched on 1 April 2010, is the world’s

first urban cap-and-trade program. It aims to reduce CO2 emissions from urban facilities, focusing on end users of energy. The Tokyo Metropolitan Government sets a cap at the city level on emissions from large commercial and industrial buildings. The owners of these buildings are required to meet their emission reduction targets through onsite energy efficiency

measures or through emission trading. The program covers large CO2 emitting facilities that consume 1,500 kiloliters of energy or more per year. The program applies to about 1,300 facilities. Total emissions from

targeted facilities account for 40% of all CO2 emissions from commercial and industrial sectors in the Tokyo area. The cap was set at 6% below base-year emissions for the first compliance period (2010–2014), based on Tokyo’s emission reduction goal for 2020. During this period, facilities

were required to reduce their total CO2 emissions by 6% (office buildings with other facilities by 8%) from their base-year emissions. They are allowed to select the average of any three consecutive years from 2002 to 2007 to define their own base-year emissions, a flexible and fair approach based on their differing business conditions. A facility that has already achieved high-energy efficiency can be certified as a top-level facility. For such a facility, the reduction target is reduced to between half and three quarters, depending on a detailed review. To achieve their required reductions, in addition to the introduction of energy-efficiency measures and renewable energy use at the site of covered facility, each facility can purchase excess reductions from other facilities as well as four types of offset credits: emission reductions credits from small and medium- sized facilities, renewable energy credits, emission reductions credits for areas outside Tokyo, and credits for Saitama, a neighboring prefecture’s carbon trade program. As a result of the program, an approximately 10% reduction in emissions was reported to have been achieved in 2011.

Source: TMG (2012).

2.5 Policies for Achieving a Low-Carbon Society in Asia

If it is to form a low-carbon society and reduce emissions drastically, Asia has to change its energy mix. Today, Asian industries depend on fossil fuels for more than 70% of their primary energy needs, so the adjustment will have to be massive. Coal remains the major source of energy for the PRC (70%) and India (37%). To cut emissions, these economies will either have to reduce fossil fuel consumption drastically or strictly limit energy Toward a Low-Carbon Asia: Challenges of Economic Development 27 demand by conserving it. Basic manufacturing industries will certainly continue to grow in Asia, which will stimulate energy demand. Thus, developing Asia faces enormous challenges in reducing coal-fired thermal power generation and expanding power supply from renewable sources— which currently represent less than 5% of total supply. The good news is that the barriers to building a low-carbon society in developing Asia are by no means insurmountable. The region already has the technologies—many operating at commercial scale—to provide 70% of the necessary emission abatement. Recent studies (OECD 2008; NIES 2008; ADB 2013) have shown that this is possible only if stringent policy decisions are made and implemented. A combination of regulatory and market-based policies is needed to realize a low-carbon society. Regulatory responses take the form of putting restrictions on particular items from the set of product choices available to consumers and/or licensing particular technologies or production techniques used by firms operating in the domestic economy. Market-based policies use markets, price, and other economic variables to reduce negative environmental externalities. They seek to address the market failure by incorporating the external cost of consumption activities through taxes or charges on processes or products, or facilitating the establishment of a proxy market for the use of low-carbon services. Realizing a low-carbon society hinges on the following key policy choices:

• instigating fiscal incentives to harness market forces; • creating safety nets for socially vulnerable people; • improving energy efficiency for high impact sectors; • avoiding carbon leakages; and • using public funding for low-carbon technologies.

2.5.1 Fiscal Incentives

There is a wide range of fiscal options available for emerging and low-income countries. Removal of fossil fuel subsides is an important component of any carbon pricing policy for most developing countries in Asia. Under-pricing of fuels through government subsidies is a serious impediment to establishing a low-carbon society as it sets artificially low fuel prices for consumers, thus undermining emission reduction efforts. In many parts of Asia, energy prices are under government control and are underpriced through producer or consumer subsidies, in the range of 10%–30% (Table 2.2). Although governments have compelling sociopolitical reasons for providing such perverse subsidies to fossil fuel users, they often do not pay 28 Managing the Transition to a Low-Carbon Economy

Table 2.2: Impact of Subsidies on Economic Growth and Emissions in Selected Economies in 2011

Average Rate Annual Reduction Average Price of Subsidy Economic in Energy Reduction

of Gasoline (% of Market Gain Consumption in CO2 Country ($/l) Price) (% of GDP) (%) Emissions PRC 0.58 10.9 0.4 9.4 13.4 India 1.22 14.2 0.3 7.2 14.1 Indonesia 0.48 27.5 0.2 7.1 11.0 Iran 0.11 80.4 2.2 47.5 49.4 Kazakhstan 0.79 18.2 1.0 19.2 22.8 Russian Federation 0.77 32.5 1.5 18.0 17.1

CO2 = carbon dioxide, GDP = gross domestic product, l = liter, PRC = People’s Republic of China. Source: UNEP (2006); ESCAP (2010).

sufficient attention to the negative impact on fuel consumption and 2CO emissions. Subsidies to state-owned electricity utilities are another source of carbon price distortion. Such subsidies have direct implications for energy consumption and raise the dependence on imported fuel. An IMF study (IMF 2008) found that the removal of consumption subsidies can reduce energy use by 13%, lower emissions by 16%, and increase GDP by almost 1%. The financial savings arising from the removal of these subsidies could be redirected toward investments in clean technologies and R&D, which would further contribute to the transition to a low-carbon society. Putting a price on carbon through a cap-and-trade system or a carbon tax will be critical for reducing carbon emissions. The Kyoto Protocol, through which almost all countries have committed themselves to engage in global emission reductions through trading, has proven to be an effective first step. With the emergence of an international emissions trading mechanism, capital is effectively being transferred from advanced economies to developing economies for investment in projects that reduce carbon emissions there. It is estimated that international carbon trading and carbon finance has the potential to generate up to $100 billion in new investments. However, this scale of investment and the positive impact it will create for a low-carbon society will only occur if there is certainty about the nature of the future international climate change regime. Both a cap-and-trade system and a carbon tax will generate sizable budget revenues, which can be mobilized to finance a number of low- carbon infrastructure investments. A few countries, including the Republic of Korea, Malaysia, and Singapore are experimenting with fiscal incentive Toward a Low-Carbon Asia: Challenges of Economic Development 29 systems, such as energy taxes to achieve higher energy efficiency, because of their potential economic and carbon benefits. However, such systems sometimes face difficulties in achieving their targets when the fees are too low. Emitting industries in Republic of Korea, for example, are prepared to pay the low fees for being allowed to emit more, rather than investing in energy efficiency. Opponents of such market-based instruments argue that they will affect the competitiveness of domestic industries, which risk being wiped out by multinationals if such policies are introduced. The use of other fiscal incentives such as tax credits and accelerated depreciation that reduces the taxable value of low-carbon project assets has also been a challenge in several countries. Incentive schemes may not work as intended as they may support investment—such as deployment of technologies—that would have been made anyway. The identification and effective targeting of clearly defined industrial beneficiaries is needed in designing fiscal incentives. European experiences suggest that, as economies and governments become more familiar with the use of market-based instruments such as carbon tax and cap-and-trade, they tend to develop complimentary pricing policies and improve their effectiveness (Fig 2.7). An evaluation by the European Environment Agency (EEA 2012) found that, since

Figure 2.7: Revenues from Environmental Tax (% of GDP)

of GDP

Italy Spain Japan France Poland Turkey Ireland Greece Austria Mexico Iceland Finland Canada Norway Sweden Belgium Portugal Hungary Australia Denmark Germany Switzerland Luxembourg New Zealand New Rep. of Rep. Korea United States United Czech RepublicCzech Slovak RepublicSlovak United Kingdom United The Netherlands

Note: Environmental taxes are excise taxes on environmental pollutants such as carbon or on goods whose use produces such pollutants. Source: Authors’ calculation from OECD economic indicators. 30 Managing the Transition to a Low-Carbon Economy late 1990s, the increased use of a variety of market-based instruments in a growing number of economies has augmented national wealth by 3%–6% of GDP. The extra revenue is reinvested in identifying and implementing low-carbon society pathways.

2.5.2 Social Safety Nets for Poor

Safeguarding the poor from hikes in fuel prices due to the removal of subsidies and the introduction of carbon taxes is critical in all developing economies. Their lack of financial and human capital makes poor people particularly vulnerable to low-carbon society initiatives. Facing rises in energy prices, poor people often take drastic action to salvage their livelihoods, such as selling their important assets and foregoing educational opportunities for children. Therefore, appropriate social safety nets need to be put in place so they can effectively act as insurance for those who lack the means to cope, or who face high costs as a result of low-carbon society initiatives. Unfortunately many developing countries in Asia have weak social safety net programs and offer limited protection to the poor. Governments often implement inefficient programs hastily and as a result they are very expensive, rarely benefit the poor, and are difficult to reverse once introduced. However, it is possible to design effective and efficient safety net programs for the poor and socially vulnerable—such as targeted direct cash transfer programs—that adequately insure them during the period of transition to a low-carbon society (see Box 2.3).

2.5.3 Improving Energy Efficiency in High Impact Sectors

Energy generation and demand are growing steadily in the region. The combined energy needs of the Association of Southeast Asian Nations (ASEAN), the PRC, and India are expected to increase by 83% during the period to 2030 (IEA–ERIA 2013). The region’s energy-related carbon emissions will almost double from 33.7% in 2010 of global emissions to 46.1% in 2030. Emission growth by sectors is presented in Table 2.3. Promoting energy efficiency in high impact sectors, such as power generation, transport, and agriculture, is key to a successful transition to a low-carbon society. Fossil-fuel-based power generation is projected to account for about 80% of the region’s total electricity supply in 2030 (IEA 2012). A coal-based plant built now will continue to generate GHG for 50 years and beyond. There is a need to adopt clean coal technologies quickly, such as super and ultra-critical boilers, Toward a Low-Carbon Asia: Challenges of Economic Development 31

Box 2.3: Social Safety Net and Energy Subsidy Reforms in Indonesia

In 2014, the fuel subsidy cost of the Government of Indonesia was Rp250 trillion, 15% of the national budget. Subsidies have kept fuel prices low in a country where about half of the 250 million population lives at or below the poverty line. In January 2015, the government made a decision to abolish the fuel subsidy. Subsidy removal programs are integrated with stronger social protection programs. When Indonesia reduced its energy subsidies and raised fuel prices in October 2005, the government established a program to transfer unconditional quarterly payments of $30 to 15.5 million poor households. The same move was undertaken when fuel prices were raised in May 2008, with $1.52 billion being allocated as direct cash transfers to low-income households. The proxy means testing method that was used to identify poor households was subsequently adopted by the government in its design and trial of the ongoing conditional cash transfer programs—the Hopeful Family Program, intended to increase the levels of education and health of poor communities. Payments are made to female household heads through post offices on the condition that they use the cash to purchase health and educational services.

Source: Hutagalung et al. (2009); Putunru(2012).

Table 2.3: Energy-Related CO2 Emission in ASEAN, the PRC, and India

CO2 Emission (million tons) Percentage Energy Sector 1990 2010 2020 2030 1990 2010 2020 2030 Power generation 7,471 11,896 14,953 17,824 36 41 43 44 Other energy sector 1,016 1,437 1,755 1,993 5 5 5 5 Industry 3,937 4,781 5,571 6,152 19 17 16 15 Transport 4,574 6,623 7,733 9,332 22 23 22 23 Residential 1,891 1,877 2,031 2,198 9 7 6 5 Services 1,066 878 972 1,096 5 3 3 3 Agriculture 405 433 423 437 2 2 1 1 Non-energy use 581 900 1,087 1,195 3 3 3 3 Total 20,941 28,825 34,525 40,227 100 100 100 100

ASEAN = Association of Southeast Asian Nations, CO2 = carbon dioxide, PRC = People’s Republic of China. Source: Fan and Bhatacharya (2011). 32 Managing the Transition to a Low-Carbon Economy and integrated gasification combined cycle (IGCC) plants. Newly built coal plants should also aim to capture carbon, which can be sold at market prices. Retrofitting and modernization of existing power plants should also be accorded high priority. Simultaneously, investments in renewable energy such as wind, solar, bio-fuel, and geothermal need to be expanded to their full potential. Industry is the second largest emitter of carbon after the energy sector. Its energy demand will grow at 2.7% per year on average over 2009–2030 as the region shifts from labor-intensive to more energy- intensive production. Growth in industrial emissions will slow with time, if energy efficiency measures are introduced. Regional emissions from the building sector will increase by 1.8% per year, rising by 52% overall by 2030. The transport sector currently contributes about 20% of global GHG emissions and is the fastest growing producer of carbon emissions. Transport now represents about one fifth of total global energy consumption, and is projected to account for over 60% of the increase by 2025, with much of this growth expected to occur in ASEAN, the PRC, and India (WBCSD 2010). By 2035, the number of private vehicles in the PRC will be 15 times higher that in 2005, and in India it will be 13 times higher. Since the urban vehicle fleet uses 3.5 times more energy than urban bus travel and 6.6 times more than electric train travel (IEA 2012), well designed mass public transit systems in Asia’s major cities are essential. Much of the rural population in developing Asia depends directly on agriculture and livestock raising, which accounts for 14% of total GHG emissions. Investments to improve energy efficiency in these sectors—promoting bio-fuel production, enhancing irrigation systems, and reducing fertilizer use—not only reduces emissions but also has positive socio-economic impacts because it creates new jobs at all skill levels.

2.5.4 Avoiding Carbon Leaks

Trade-exposed, emission-intensive industries represent a special challenge for Asian economies. All other factors being equal, if enterprises in such industries are subject to stricter emission reduction targets and face higher carbon prices domestically than their competitors in other countries, they will relocate emission-intensive activities to other less regulated countries. Such a relocation means global emissions may not decrease. This is an argument for forging sector-level agreements and targets at the regional level, especially between countries in similar situations who compete with each other (Imura et al. 2012), Toward a Low-Carbon Asia: Challenges of Economic Development 33

Emerging economies can show global leadership in pursing such arrangements (MGI 2013), but in the meantime, developing countries must implement nationally appropriate mitigation actions (NAMAs). Introducing incentives for energy-efficiency improvements in traded goods to attain NAMA targets should be based on competitiveness and not on a false promise of compensation for lost profitability. The introduction of disincentives such as carbon pricing will make the losers lobby intensively at the national level. Establishing sector-level emission targets and carbon pricing arrangements among countries that compete by producing similar, carbon-intensive products and services in global markets is an urgent matter. An integrated, international carbon market would help policy makers at the national level because then they could resist political pressures for ad hoc and generous international assistance arrangements to protect these industries.

2.5.5 Public Funding for Low-Carbon Technologies

Carbon-emission-reducing technologies are important for achieving a low-carbon society. Globally available low-carbon technologies need to be transferred to developing countries, where energy use is expected to grow quickly. Developed countries and the private sector should support transfers of new and better low-carbon technologies. Mechanisms need to be developed to finance the additional cost of developing and disseminating new low-carbon technologies and business models. Asia has a long record of reducing the cost of new technologies, from computer chips to cars, which has benefited the entire world. R&D investments in limited but key priority sectors can achieve huge cost savings, if the low-carbon technologies prove successful and are exported. There are several mechanisms for directly supporting the private sector to bring these technologies to the market (Table 2.4). Public financial support for low-carbon technology innovation can potentially benefit the entire world. “Match funding” is a form of public–private partnership, wherein national and local governments provide guarantees to national financial intermediaries that can ensure that private sector operators continue to bear and manage the risks associated with bringing new low-carbon technologies to the market (Anbumozhi et al. 2011; Kolk and Pinkse 2005). However, the government institution that administers the public funds should operate at arm’s length from government to insulate it from political processes and to stimulate competiveness and innovation in the private sector. 34 Managing the Transition to a Low-Carbon Economy

Table 2.4: Public–Private Partnership Mechanisms for an Economy- Wide Uptake of Low-Carbon Technologies

Category Policy Instrument Description Tax Tax concession Allows companies to claim deduction for low- instruments carbon technology investment, usually as a proportion of total cost Accelerated Allows companies to accelerate depreciation for depreciation investment in technologies with high capital costs Niche Technology target Establishes guaranteed markets for particular market schemes categories of low-carbon goods and services creation Guaranteed revenue Provides innovative companies with revenue certainty through regulated prices or tariffs Government Provides a niche market for low-carbon technologies patronage and products through public procurement policies and advanced purchasing contracts Direct Competitive grants Promotes specific low-carbon technologies funding selected by merit based on low-carbon society criteria through subsidies Income targeted Compensates venture capitalists and innovators contingent loans through government sharing of some short-term exposure risks and through guarantees Co-financing and Stimulates diffusion, demonstration, and match funding commercialization by lowering the costs associated with being first mover, by some fixed proportion of total cost

Source: Authors.

2.6 Role of the International Community Policy reforms at the national level are necessary to accelerate the transition toward a low-carbon society, but they are not sufficient. The international community also needs to contribute by:

• facilitating global political agreement; • enlarging carbon finance; and • promoting effective governance systems.

2.6.1 Global Political Agreement

Improving the global architecture is crucial to implement actions for a low-carbon society. Developed economies like those in the G7 need to demonstrate environmental leadership by urging other countries to agree on the scope and shape of a post-Kyoto deal against a backdrop of Toward a Low-Carbon Asia: Challenges of Economic Development 35 challenging domestic economic conditions. It is critical that the major emerging economies such as Brazil, the PRC, India, Mexico, and South Africa join the climate negotiations in a constructive manner. These large economies can be major drivers of innovation for a low-carbon society. Developing countries will only be persuaded to take part in the transition to a low-carbon society if both the historical responsibility of the developed world and the needs of the developing world are clearly recognized. A combination of the historical responsibility of the developed countries in terms of the accumulated GHGs since the industrial revolution and the need to accelerate growth, development, and poverty reduction in the developing world implies that the required cuts in emissions will have to be fair across countries and contingent on available financial, technical, and institutional support. The existing international framework is weak and inadequate, but a better architecture will come only from building on, rather than overturning, already established efforts. A post-Kyoto regime based on common but differentiated responsibilities is clearly needed. The 2015 United Nations COP 21 meeting in Paris will be an important watershed in the attempt to find a basis for a mutually binding global agreement. The international community needs to reach an agreement to reform and expand market-based mechanisms in terms of the coverage of sectors and geography as well as criteria for eligibility. Going forward, it is important to engage countries like the PRC, India, and Indonesia in building consensus on their national targets in a progressive manner (Kawai 2008). Although they continue to reject containment of emissions through mandatory targets, they have made important and ambitious domestic commitments as reflected in NAMA. The most likely global policy platform for promoting urgent international action to facilitate transition to a low-carbon society would be the G20 forum.1 As the G20 economies account for nearly 80% of world carbon emissions, it is easier to forge a meaningful agreement on emission reductions by taking account of individual countries’ circumstances and preferences in the G20 than through the United Nations process, where more than 160 countries are involved. Agreements reached between major developed and emerging economies

1 The G20 includes systemically important, major economies. Six countries in Asia and the Pacific are members: Australia, the PRC, India, Indonesia, Japan, and the Republic of Korea. In September 2009, the Pittsburgh G20 meeting made progress not only in strengthening cooperation on macroeconomic policies but also in giving the major developing economies of Asia a more influential agenda-setting role on energy subsidies. The 2011 G20 Summit gave developing countries an opportunity to review the economic policies of the developed countries—thus making the process more transparent and accountable. 36 Managing the Transition to a Low-Carbon Economy within the G20 have the potential to break deadlocks and give fresh impetus to global negotiations on emission reductions and low-carbon technology transfer.

2.6.2 Carbon Finance

Massive investments in large-scale development, deployment, and diffusion of low-carbon technologies are needed over the coming decades. The IEA (2007) has estimated that $20 trillion will be needed globally until 2030. Of this, more than half will be needed in developing Asia. Some of this finance will come from public sources, but the largest share will have to come from private capital. Financial firms that manage trillions of dollars are positioned to provide the bulk of financing for low-carbon investment. Long-term institutional investors such as pension funds (Box 2.4) and life insurance companies are building up low-carbon portfolios. Government guarantees on green bonds and low- carbon investments can ensure that these investments are sufficiently attractive in the long-term. Similarly, commercial banks are increasingly bringing low-carbon considerations into their lending policies and are designing low-carbon financial products. It is crucial to send a long-term price signal that gives confidence to both public and private sector operators considering making investments in low-carbon technology and in financing low-carbon society activities. An international agreement would be essential to support carbon markets and pricing.

Box 2.4: An Example of Long-Term Investment: The Norwegian Pension Fund

The Norwegian Pension Fund Global, one of the largest sovereign wealth funds in the world, has a broad ownership in more than 8,400 companies worldwide. As a universal owner, the fund seeks to ensure that good corporate governance and environmental and social responsibilities are taken into account. Fiduciary responsibility for the pension fund includes safeguarding widely-shared environmental and ethical values. In the area of the environment, the Norwegian Finance Ministry has established a new investment program, which will focus on low-carbon investment opportunities, such as those in renewable energy, energy efficiency, carbon capture and storage, and waste management. At the end of 2010, over NKr9 billion had been invested under this program, more than originally assumed.

Source: Ministry of Finance, Norway (2011). Toward a Low-Carbon Asia: Challenges of Economic Development 37

Although eventually most financing will have to come from private sources, public financing is still essential for a low-carbon transformation. The importance of public finance was demonstrated by the several fiscal stimulus packages launched by major economies in response to the global financial crisis that broke out in 2008. Of the estimated $3.3 trillion spent as stimulus funds, almost 14% was initially allocated for low-carbon investments (Anbumozhi and Bauer 2013). These investments were made not simply as short-term responses to the financial crisis. For example, during the 12th 5-year-plan period starting in 2011, the PRC government invested $468 billion in low-carbon sectors, with the focus on renewable energy, clean technology, and waste recycling (Reichelt 2010). In countries that faced public spending constraints, subsidies and taxation policies were used to support low- carbon investments. At the international level, a process was established for a Green Climate Fund at the Conference of Parties in Cancun in 2010. The conference decided to expedite $30 billion of financing from developed to developing countries and additional commitments made in Warsaw in 2013 included a plan to raise $100 billion per year by 2020. However, developing countries must begin to deliver on their pledges on emission reductions through nationally appropriate mitigation actions (NAMAs). Multilateral and bilateral aid agencies can expand their support for a low-carbon society transition. They can, for example, adopt the goal of supporting a low-carbon society and link specific developmental targets such as low-carbon energy provision to their poverty alleviation objectives. They can also measure the net contributions of their developmental projects to climate change mitigation by improving the carbon efficiency of their project portfolio. These institutions can also influence the nature of investments and public financing through loan agreements and due diligence in their lending procedures. They can jointly define protocols for low-carbon society due diligence and measurement, reporting, and verification (MRV) standards and goals for sectors in which they have major influence and accumulated experience, such as energy, transport, and urban development. Multilateral agencies need to coordinate with a range of stakeholders—developed and developing country governments, the donor community, the capital market, and the private sector at large— to mobilize resources. Donor countries, in conjunction with the private sector, can invest in long-term carbon bonds issued by multilateral institutions. Stable and resilient capital markets supported by efficient financial intermediation will have a pivotal role in the capitalization of private funds at sufficient scale for the delivery of a low-carbon society. 38 Managing the Transition to a Low-Carbon Economy

Table 2.5: Surplus Savings in Selected Asian Economies ($ million)

2008 2009 2010 2011 2012 PRC 1,966,200 2,453,200 2,914,200 3,255,800 3,352,300 Hong Kong, China 182,539 255,816 268,731 285,408 317,336 India 252,326 277,042 303,482 294,398 292,317 Indonesia 51,639 66,105 96,207 110,123 112,781 Japan 1,030,762 1,048,991 1,096,068 1,295,838 1,268,085 Korea, Rep. of 201,223 269,995 291,571 306,402 329,398 Malaysia 91,648 96,744 106,590 133,257 139,658 Singapore 174,196 187,809 225,754 237,737 259,307 Taipei,China 291,707 348,198 382,005 385,547 403,169 Thailand 111,008 138,418 172,129 175,124 181,608 Viet Nam 23,022 14,148 12,382 13,500 25,400

Source: ADB (2013b).

Although the region as a whole needs significant investment in order to achieve a low-carbon society, paradoxically many emerging economies in the region have large current account surpluses—net surpluses of domestic savings over investment. Accumulated foreign exchange reserves in Asia amounted to $7 trillion in 2012 (Table 2.5). Foreign exchange reserves can be used to stabilize the value of a country’s currency but they can also be used for investments in public goods. This underlines the critical importance of developing a system of regional intermediation (Kawai 2013) to help meet low-carbon society objectives. A regional financial architecture would need to help connect savings and investments (Kawai and Petri 2014).

2.6.3 Effective Governance Structure

Financing is not the only constraint on developing countries as they move away from carbon dependency (Ockwell et al. 2006). The lack of an effective governance structure and institutional capacity is a major constraint. Most carbon-related ministries operate with few personnel and limited resources. Institutional coordination is also inadequate in many Asian economies. In Viet Nam, Electricity of Vietnam is implementing a national energy conservation program, while the Ministry of Industries is providing financial incentives for industries to deploy low-carbon technologies, without any links between the two Toward a Low-Carbon Asia: Challenges of Economic Development 39 programs. The budget for the Bureau of Energy Efficiency in India is only 0.3% of total government investment for improving the potential energy efficiency in the electricity sector. Enhancing the bureaucratic competence to use market-based instruments such as carbon taxes and emissions trading is very important. Governments need sufficient regulatory capacity to secure maximum benefits and to ensure their widespread distribution to the poor. In order to create this capacity, substantial assistance will be needed from developed countries. They could, for example, support government officials in developing Asia in formulating benchmarks and performance standards. Multilateral and bilateral development organizations can target their capacity building programs to support the formulation of effective policies and the establishment of institutions. Multilateral environmental agreements, which have great potential to influence the transition to a low-carbon society, have been supported by the UNFCCC. The Kyoto Protocol has already stimulated private sector investment in a number of economic sectors, such as renewable energy power generation and energy-efficient technologies, in order to reduce carbon emissions. At the global level, the reinvention of a post- Kyoto framework will be the single most significant factor in determining the scale and speed of Asia’s transition to a low-carbon society. Economic integration can have a significant influence on the transition to low-carbon society, enabling a free flow of low-carbon goods, services, technologies, and investments. Free trade agreements that liberalize the flow of low-carbon goods and services and investment across the borders into low-carbon projects offer the opportunity to accelerate the transition to a low-carbon Asia. An ADB–ADBI study (2013) found that trade liberalization could result in a 7%–13% increase in the trade volume of low-carbon goods and services. It is essential that emerging economics are supported through capacity building to fully exploit the potential gains from regional economic cooperation in the move to a low-carbon society. There is a need to integrate adaptation measures into future planning and investment. Generally, more densely populated and less developed economies are more vulnerable and less able to adapt to climate change impacts. Developing economies have underscored the importance of adaptation in several international forums including the Lima Deal, wherein more international finance is provided for actions on climate- smart agriculture, better water resource management, and vulnerability risk assessment. Multilateral and bilateral development organizations, including the Asian Development Bank (ADB), have already started to work with Asian countries to build their adaptive capacity. These capacity building efforts need to be scaled up. 40 Managing the Transition to a Low-Carbon Economy

2.7 Conclusion

A transition to a low-carbon society is not only desirable but inevitable for developing Asia. A low-carbon society has the potential to resolve many domestic environmental problems, ensuring energy security and mitigating climate change through “co-benefits.” However, developing Asia will need to decouple economic growth from carbon emissions, which also has implications for bringing energy and environmental security to the poor. Policies that favor decoupling and co-benefits are available, but political will is needed if low-carbon society objectives are to be achieved. The right price signals—removal of perverse subsidies, introduction of carbon taxes, and launching of cap-and-trade systems—can alter the energy mix and bring investments in low-carbon technologies, which are critical to starting the transition to a low-carbon society. The market- based approach needs to be complemented by adequate social sector protection, such as targeted direct cash transfer programs so the poor and socially vulnerable can cope with higher energy prices. A proactive role by the international community, including financing for technology transfer and carbon market creation, will help accelerate the transition. Multilateral and bilateral aid agencies need to implement innovative technical and economic assistance programs to support developing countries to build effective institutions. These efforts need to be tied together in a global framework which is sufficiently attractive for all countries that wish to join, and that binds them even in hard times. Many developing countries in the region have committed themselves politically to low-carbon society objectives but many have yet to match this with the necessary policy actions and financial allocations. The funds required are significant but in many cases they represent just a few percentage points of GDP. The emerging economies of Asia need to adopt the co-benefit approach at the regional level. This will make it easier for developed countries to enter into arrangements that involve large-scale human and financial resources and technology transfers to developing countries for climate change mitigation. Unilateral and regional efforts occurring in parallel with UN-led global efforts might look like a chaotic process, but it is one that increases the chance of success in the shortest time possible. Asia has the potential, through regional cooperation, to build a new financial, economic, and political architecture that would enable more efficient intermediation of the region’s savings for investments. The more Asian countries join regional efforts based on the common guiding principles outlined in this chapter, the greater the prospects for a comprehensive and ambitious future global framework. Toward a Low-Carbon Asia: Challenges of Economic Development 41

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3.1 Introduction

Green growth entails several different kinds of processes: conversion to low-carbon energy, climate resilience, and response to climate shocks. Equity implies a fair sharing of the costs, within and between countries. Equity issues have been considered in a number of ways, including implications of historic responsibility, development impacts of a carbon budget on developing countries, impacts on the poor and most vulnerable, consequences of a top-down global-benefit-oriented mitigation policy, and the implications of official development assistance (ODA) on climate finance. Fairness involves both helping to share the incremental costs of adaptation and mitigation, and compensating for damage incurred as the result of climate change. Both the mitigation and adaptation activities (and many actions involve both mitigation and adaptation) are costly. We should undertake them because the social costs of these actions are less than the social benefits they promise. Still, for developing countries, the costs are real and compound the ongoing challenges of economic development. In the first section of the paper we explore some of the ways in which equity has been considered in climate change discussions. We discuss per capita emission rights approaches, and highlight key challenges in the application of equity in global climate change negotiations. In section 2 we briefly overview key approaches to carbon financing, focusing on some recent cost estimations of potential climate change impacts, as well as of projected needs for green growth programs. We highlight the diversity of estimates and present evidence on the apparent gulf

45 46 Managing the Transition to a Low-Carbon Economy between available public financing and green growth needs. In section 3 we turn to considerations of implementing green growth, focusing on building climate resilience and responding to climate shocks. Section 4 presents an approach to a global Green Fund that would receive assessed contributions of member countries and disburse grant and loan funds to low- and middle-income countries to enable them to pursue green growth programs.

3.2 Equity Considerations in Climate Change Discussions

Unlike in global discussions of sustainable development, in climate change negotiations equity concerns have received considerable attention. In the former, the emphasis was on the global responsibility on the part of developed countries to support sustainable development, rather than on equity between countries (World Commission on Environment and Development 1987). Equity is coming to be recognized as critical for the effective linking of environmental, economic, and social considerations, in order to achieve sustainable development (UNESCAP 2012, p. xv). Green growth strategies would help build a “green economy” while enhancing the earth’s natural capital, and reducing ecological scarcities and environmental risks. However, it is also recognized that green growth strategies will not by themselves realize sustainable development. Social policies enhancing inclusion, and addressing poverty and the needs of disadvantaged and vulnerable groups are also important. Further, especially in the Asian context, the economic, social, and environmental dimensions need practical integration into systems of governance that promote equity—in resource use and in risk sharing, between and within countries, and both between and within generations. Equity in this expanded sense is the most critical consideration for the long-term sustainability and greater socioeconomic resilience of societies. In the run up to the Rio+20 conference in 2012, a number of multilateral organizations, research institutes, advocacy organizations and governments pushed for the consideration of a “green economy” as a key framing for national development (UNEP 2011; HM Government 2012; Green Economy Coalition undated). In the United Kingdom government’s submission to Rio+20, for example, it was stated that the green economy will “maximise value and growth across the whole economy, while managing natural assets sustainably” (p. 1). Equity considerations are noticeably absent. The emphasis instead is on economic growth and wealth creation while reducing environmental Green Growth and Equity in the Context of Climate Change 47 impacts, making efficient use of natural resources, reducing reliance on fossil fuels, improving preparedness for climate change impacts, and exploiting the comparative advantage of businesses for green goods and services. The apparent jettisoning of sustainable development in favor of the green economy has made some observers nervous. As Khor notes, the hard won gains of sustainable development (such as the sustainability principle, right to development, common but differentiated responsibilities, and international cooperation that recognizes the development needs of the South) should be preserved in considerations of green economy (UN-DESA 2011). In the case of climate change, where the emission levels of developed countries are directly linked to changes in the climate, equity between countries has been seen as highly relevant in global negotiations. However, its formulation has been varied, and its application to realize the financing for implementation of climate policies on mitigation and adaptation action in developing counties has been highly uneven. In this section we provide an overview of some of the ways that equity has been considered. In the next section, we discuss global climate financing needs and its actual availability.

3.2.1 United Nations Framework Convention on Climate Change

The United Nations Framework Convention on Climate Change (UNFCC) states that developed countries need to assume responsibilities to both reduce their own greenhouse gas (GHG) emissions, and to support efforts to reduce the vulnerabilities of developing countries to climate change risks. It is widely understood that rigorous implementation of a global carbon budget in the absence of a rapid transition to a low carbon economy would seriously constrain long-term development in developing countries. Equity considerations require financial and technological support and capacity development to developing countries to help them achieve development goals on a green growth path. Climate change policies are also expected to magnify the impacts of climate vulnerability, with some of the biggest impacts on poor people resulting less from the changing climate itself than from policies to mitigate climate change. Further, a rights-based approach has been used, focusing specifically on the needs of the most vulnerable groups, advocating that they receive preferential support. Climate and development justice requires that poor communities in developing countries, who will bear the brunt of climate change impacts while contributing very little to its causes, need the world’s help first and foremost. 48 Managing the Transition to a Low-Carbon Economy

The climate system is a shared resource and its stability is affected by emissions of carbon dioxide and other greenhouse gases. The average temperature of the earth’s surface has risen by 0.74 degrees Celsius (C) since the late 1800s and is expected to increase by another 1.8°C to 4°C by the year 2100 with massive environmental and socioeconomic implications for all of humanity (Solomon et al. 2007). While “greenhouse gases” in the atmosphere, especially carbon dioxide, methane, and nitrous oxide occur naturally, the principal reasons for higher emissions over the past 150 years are associated with industrialization activities: the burning of ever increasing quantities of petroleum and coal and land use changes. Almost two decades ago, many countries joined an international treaty—the United Nations Framework Convention on Climate Change (the Convention)—to begin to consider actions to reduce global warming and to cope with whatever temperature increases are inevitable. Equity is given considerable attention in the Convention, as are the difficulties that countries (as parties to the Convention) would face in its realization. It notes that “the largest share of historical and current global emissions of greenhouse gases has originated in developed countries, that per capita emissions in developing countries are still relatively low and that the share of global emissions originating in developing countries will grow to meet their social and development needs,..” (UN 1992: 1). It continues: “[R]ecognizing further that low-lying and other small island countries, countries with low-lying coastal, arid and semi-arid areas or areas liable to floods, drought and desertification, and developing countries with fragile mountainous ecosystems are particularly vulnerable to the adverse effects of climate change,..” (UN 1992: 2) The Convention also recognizes “that all countries, especially developing countries, need access to resources required to achieve sustainable social and economic development and that, in order for developing countries to progress towards that goal, their energy consumption will need to grow taking into account the possibilities for achieving greater energy efficiency and for controlling greenhouse gas emissions in general, including through the application of new technologies on terms which make such an application economically and socially beneficial,..” (UN 1992: 3). The Convention notes that: “The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities. Accordingly, the developed country Parties should take the lead in combating climate change and the adverse effects thereof.” (UN 1992: 4) The Convention’s Principle 3 draws attention to equity issues in a number of ways. These include a focus on common but differentiated Green Growth and Equity in the Context of Climate Change 49 responsibilities and respective capabilities, the need for developed countries to take the lead in climate action, a focus on developing countries that are particularly vulnerable to climate change effects, and a recognition of the right of developing countries to development. The Convention clearly holds the industrialized countries responsible both for reducing global warming and for helping developing countries manage the impacts of global warming. However, it is in the identification of precise areas of responsibilities and in their resourcing that the equity framing begins to get diffuse, creating differences in interpretation and difficulties in being put into practice. The various proposals can be classified into two categories: resource sharing and effort sharing. The former, adopting an equal per capita approach to the sharing of the carbon budget, focuses mainly on GHG mitigation efforts. The effort sharing approaches focus on enabling development in developing countries in a carbon-constrained world. We examine a few of the more well known ones below. The earth’s atmosphere is considered a global commons, to be shared by industrialized and developing countries alike. Given the carbon- constrained nature of the atmosphere, global negotiations are intended to devise a fair means of sharing the total carbon budget. Industrialized countries have developed without having to internalize the costs of high levels of GHG emissions. With less than one fifth of the world’s population, they are responsible for almost three-quarters of all historic emissions. On a per capita basis, their historical emissions are more than 10 times those of the developing countries. Developing countries, on the other hand, need to bear the cost of carbon emissions, while at the same time growing out of poverty (Adger et al. 2006). In climate negotiations, industrialized countries have tended to seek ways to lock in high amounts of emissions for themselves based on past emission levels, making carbon budget sharing highly inequitable (Actionaid 2007; Oxfam 2008). A per capita emission approach is seen as a fairer way forward. Variations in this approach include the following.

3.2.2 Per Capita Emission Rights Approach

The Agarwal and Narain equal per capita emission rights approach is premised on the rights to the atmospheric commons. It distinguishes between “luxury emissions” and “subsistence emissions.” This allows the use of carbon (and other GHG sources) to fulfill basic human needs to be distinguished from that used to support luxurious lifestyles. All countries would be awarded emission allowances in proportion to their population, and would be free to trade them. The total number of allowances granted globally would steadily decrease along a path 50 Managing the Transition to a Low-Carbon Economy consistent with an agreed climate stabilization goal (Agarwal and Narain 1991).

3.2.3 Hybrid Contraction and Convergence Model

The hybrid contraction and convergence model was formulated by the Global Commons and presented at the second Conference of the Parties in 1996. The key idea is to help equalize GHG emissions per capita on a global scale, over time. In principle the rich would consume (gradually) far fewer resources per capita than before, while the poor would consume more than they have in the past, so that both groups can converge toward a common “fair share” level, which the planet can sustain (GCI 2008). The model envisages global emissions peaking and then gradually falling (contraction), while emission reduction would be achieved by limiting per capita emissions so they converge (convergence). It requires large cuts in per capita emissions for developed countries while allowing developing countries to continue growing their economies before they have to make cuts to reach equal per capita emissions. The “fair carbon emission per country” is calculated based on a total population cap for each country.

3.2.4 Equal Cumulative Per Capita Emission Rights Approach

The equal cumulative per capita emission rights approach extends the concept of equal per capita rights to cover the entire carbon budget from the industrial revolution onward, rather than limiting it to the near past (from the “Brazilian Proposal”—UNFCCC 1997; Bode 2004). The framing tries to account for the role of industrialized countries in emitting GHGs in the past 150 years. Such past emissions are expressed as a “carbon debt,” to be used in calculating carbon budgets as negative allocations for the future. Many large developing countries, including the People’s Republic of China (PRC) and India, have favored this approach, while making different assumptions about the year at which accounting of historical emissions begins.

3.2.5 Greenhouse Development Rights Framework

The most widely discussed effort sharing approach is the greenhouse development rights (GDR) framework (Baer et al. 2008). This is based upon national responsibility and capacity with respect to a “development threshold” that excuses the poor from any responsibility Green Growth and Equity in the Context of Climate Change 51 to bear the burdens of the climate transition. The majority of emission reductions required to prevent dangerous climate change must be made in the developed world in the coming decades. In the same period, developing countries require hugely expanded energy services to meet the developmental aspirations of their citizens. Historically, the expansion of energy services has always been accompanied by rising carbon emissions. The GDR framework proposes a climate regime structured to safeguard a right to development. It is a burden-sharing framework that defines national obligations, based on responsibility for the climate change problem and the capacity to solve it. Both are defined with respect to a “development threshold” that serves to relieve those individuals still striving for a decent standard of welfare (Kartha et al. 2009) from the costs and constraints of the climate crisis. By focusing on people rather than nation states, the GDR framework also helps focus on inequities within countries (such as the development needs of the poor in the industrialized countries). In the remainder of this section we highlight some diverse issues that make the application of equity in climate change mitigation and adaptation so challenging, even when there is broad agreement on its need.

3.2.6 Distinguishing Impacts of Anthropogenic Climate Change

The Convention (unlike the International Panel on Climate Change, IPCC) focuses exclusively on the anthropogenic forcing of climate. Natural variability is of interest only to the extent that it is modified by the anthropogenic forcing. Developing countries seeking resources and technologies through the Convention for enhancing climate resiliency need to first show the “additional” nature of impacts from anthropogenic climate change. Climate science and associated vulnerability studies have not progressed to the extent that this is possible. Especially in the least developed countries (LDCs), climate variability continues to be a key driver of development risk. Does this mean that these countries should not be allowed to access Convention climate funds to manage climate risks?

Sustainable Development The Convention is specific on the right of developing countries to sustainable development. However, for the purposes of identifying and costing technologies and practices, there is little guidance on what constitutes an acceptable level of sustainable development. This is complicated by the high diversity underlying ecosystems. Perhaps attainment of Millennium Development Goals (MDGs) or a certain level 52 Managing the Transition to a Low-Carbon Economy of development according to the Human Development Index could be considered as a proxy for sustainable development in climate finance calculations.

Per-Capita-Based Calculations Per-capita-based formulations for making available funds for adaptation programs (or per capita emissions in the case of mitigation) in developing countries privilege larger and more populated countries. Smaller countries and those projected to face catastrophic changes to their ecosystems or territorial extents are not well served by such formulations.

Historical Start Date for Calculating Obligations What start date should be used in calculating the obligation of industrialized countries for the existing atmospheric carbon stock? For “full” responsibility, the date should be farther back. How far back? Perhaps frameworks should differentiate “basic” from “luxury” historical emissions, with the latter identified for obligation calculations.

Share of the Positives of Industrialization If carbon stock is the negative effect of industrialization, should the positives of industrialization (such as science, technology, medicine) and their benefits to developing countries also be accounted? This also raises intellectual property rights, since these are often controlled by the private sector, and have bedeviled international science and technology transfer efforts.

Policies for Tackling Mitigation The literature points to the availability of a number of policy instruments for tackling GHG emissions, including carbon taxes, emission trading schemes, standards, and technology support. However, there are also a number of existing policies, with economy-wide implications, that make mitigation difficult. They include energy and agricultural subsidies, emissions from deforestation, and barriers to trade in emissions- reducing technologies. Equity considerations of policy changes are as important as devising cost-effective mechanisms.

Adverse Impacts of Climate Change Policy Response There is growing concern that developing countries, and especially the poorer populations, may be adversely impacted less by the direct impacts of climate change than by the policy responses engendered in response to climate change. From 2005 to the middle of 2008, international prices of major food cereals surged upward, causing a major panic in Green Growth and Equity in the Context of Climate Change 53

food-importing countries. Along with a number of other causes, a major reason for the steep increase was the rise in energy prices, leading to a surge in demand for biofuels made from maize and oil seeds (Headey and Fan 2010). This has generated much discussion on the potential impacts of biofuels on long-term food security. The potential for adverse impacts on local communities from the Reducing Emissions from Deforestation and Forest Degradation (REDD)+ programs in areas of poor governance and uncertainty in access are other areas of high equity concern. Barr et al. (2009) note “inequitable distribution of REDD payments could increase disparities in the forestry sector, and could displace and impoverish forest-dependent peoples.”

Governance of Diverse Stakeholders, Active Across Multiple Scales Climate governance, from global to local levels, requires the working of a diversity of actors, from the purely private to the state. Rather than state-led efforts alone (the staple of development), there is increasing recognition that guided market-based approaches are required to tackle climate change and build climate resilience. In addition, the challenges of mitigation and adaptation need approaches to work across traditional boundaries imposed by the nation state, requiring a transnational governance architecture that is at the same time respectful of the nation state. The international climate change negotiations, being state-led, have yet to consider these governance challenges in-depth.

3.3 Low Carbon Financing: Impact Costs, Needs, and Availability

In this section we provide an overview of some recent cost estimations of potential climate change impacts, as well as some projected needs for adaptation and mitigation.1 We highlight the high variance in the estimations as well as the gulf between the costs of climate change and public financing for adaptation and mitigation from the industrialized countries currently on the table. At the end of the paper, we propose a methodology and architecture for a global Green Fund to promote discussion.

1 The climate change focus here precludes discussion of green economy transition cost estimates. Interested readers may consult the IEA Blue Map scenario and the UNEP green economy study for global green economy cost estimates. 54 Managing the Transition to a Low-Carbon Economy

3.3.1 Climate Change Impact Costs and Projected Needs for Adaptation and Mitigation

Costs of climate change have been calculated for overall impacts, for adaptation, and for mitigation activities. Cost estimates have rapidly evolved as understanding of complex systems and associated modeling capabilities have improved, along with further refinement in policy options. Despite these improvements, as we discuss below, significant variations in cost estimates remain. Some of the key reasons for the variations are in accounting for uncertainties (in projections of the GHG emission mix and GHG emission impacts on climate processes, especially on temperature and precipitation amounts and trends, and valuation), time horizons being considered (50, 80, or 100 years), and the aggregation of socioeconomic impacts (e.g., the mix of market and non-market, discount rates adopted). There are also large variations in the different general circulation models (GCMs) on the state(s) of the future climate. Averaging across the GCMs, as has been often done, does reduce the uncertainties. A significant potential source of variation in impacts and associated costs is the specific climate characteristic being considered. Calculations of temperature-driven impacts would be quite different from those derived from precipitation variations, leading to further uncertainties (and confusion).

Impact Cost Estimates Predicting the economic costs of climate change involves modeling a large number of variables. They include changes in emissions scenarios, projections of precipitation, temperature and sea levels, technology changes, population growth, and idealized levels of adaptation. Most integrated impacts cost assessments have used relatively simple models, using a single climate variable (generally global mean surface temperature), aggregating sectoral impact studies, and simplistic treatment of uncertainty such as of climate sensitivity and the potential irreversibility of impacts (Jamet and Corfee-Morlet 2009). Figure 3.1 illustrates significant variation in cost estimates, based on expected global temperature change, impact studies used, and inclusion of nonmarket and catastrophic event damages. In addition to the variations across models and methodology, significant disparities are expected in impact costs across geographic regions. While some studies use sectoral analyses to illustrate differences across regions (such as Stern et al. 2006; Jamet and Corfee- Morlet 2009; UNDP 2007) others provide detailed analysis at a regional scale. Figures 3.2 and 3.3 show the application of multiple models to estimate impact costs for Africa and Southeast Asia, respectively Green Growth and Equity in the Context of Climate Change 55

Figure 3.1: Estimates of the Global Damages of Climate Change (% of world GDP)

–

– IPCC () IPCC () Stern ( ) Stern ( ) IPCC ( ) baseline high climate

Total impact Risk of catastrophe

Nonmarket damages Market damages

IPCC = Intergovernmental Panel on Climate Change. Note: IPCC estimates represent the consensus among experts of the impact of climate change. IPCC (1996) estimates only include market impacts. IPCC (2007) estimates are the average of the range of possible values quoted in the report (from 1% to 5%). The Stern “baseline” scenario produces an average mean warming of 3.9° relative to the preindustrial period in 2100 while temperature changes are pushed to higher levels in the Stern “high climate” scenario through the action of ampli- fying feedbacks in the climate system. Source: Jamet and Corfee-Morlet(2009).

(Watkiss et al. 2010; ADB 2009). The latter study, of four countries in Southeast Asia, found significant gross domestic product (GDP) impacts over the coming decades. A recent study by Brown et al. (2010) finds that precipitation, rather than temperature, is the dominant influence on economic growth. Since estimations of climate change impacts on economic growth often use projected temperature changes, this finding suggests an underestimation of impacts.

Estimates of Adaptation Costs Estimates of adaptation costs carry great uncertainty. Adaptation involves responding to context specificities of vulnerabilities and development risks. A number of criteria need to be considered in the 56 Managing the Transition to a Low-Carbon Economy

Figure 3.2: Equivalent Annual Cost of Climate Change in Africa, as a % of GDP . Business as usual scenario .

. . . . .

. .

Annual Cost, as a of GDP Annual Cost, as a of .

Major (catastrophic) Nonmarket Market

IPCC = Intergovernmental Panel on Climate Change. Note: Using PAGE Model and the Business as Usual A2 IPCC emissions scenario. Shows 5% to 95% range. Source: Stockholm Environment Institute, n.d.

Figure 3.3: Mean Impact of Climate Change on Southeast Asian Countries and at the Global Scale, as a % of GDP

A. The Four Countries B. Global – – – – – – Percent of GDP of Percent – GDP of Percent – – –

Market Market Nonmarket Market Nonmarket Risk of catastrophe

Note: Using a modified PAGE2002 Model and the BAU A2 IPCC emissions scenario. The four countries are Indonesia, Philippines, Thailand, and Viet Nam. Source: ADB (2009). Green Growth and Equity in the Context of Climate Change 57 planning and implementation of adaptation efforts, including economic benefits and their distribution, relation to development objectives, spillover effects, and capacities. Assessments at the global scale and across sectors are relatively recent, with two significant reports in 2006 (World Bank Investment Framework and the Stern Review) leading to a number of responses and revised estimates. The estimates of annual adaptation investments vary widely, even when the core methodology remains similar (Figure 3.4).

Figure 3.4: Adaptation Cost Estimates Based on Various Methodologies

UNDP ()

Oxfam ()

UNFCCC Global estimate ()

UNFCCC LDCs estimate ()

World Bank ()

Stern review ()

Upper bound Lower bound Primary research

Source: ECA (2009).

The UNDP 2007 Human Development Report suggests that donor countries will need to increase adaptation financing to $86 billion annually by 2015 (with $44 billion to “climate-proof” development investments, $40 billion to adapt poverty reduction activities, and $2 billion to strengthen disaster response). A number of critiques have 58 Managing the Transition to a Low-Carbon Economy been leveled against the climate change cost estimate literature. While some raise concerns about the limited treatment of uncertainty or the vast array of adaptation options (Parry et al. 2009), others note “issues of double counting, and scaling up to global levels from a very limited (and often very local) evidence base” (Agrawala and Fankhauser 2008: 77). More recently, the World Bank completed an Economics of Adaptation to Climate Change study (World Bank 2010a). In addition to country-level adaptation cost analyses and better cost estimates, the study uses two models to create future climate scenarios: a drier scenario, developed at the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO), which results in lower adaptation costs, and a wetter scenario, developed by the US National Center for Atmospheric Research (NCAR), which leads to high adaptation costs, largely due to sharply higher infrastructure costs (Figure 3.5). These two scenarios capture in some ways the potential range of costs. The total estimated costs for 2010–2050 using the CSIRO model are approximately 14% less than those using the NCAR model.

Figure 3.5: Total Annual Cost of Adaptation for the National Center for Atmospheric Research Scenario, by Region and Decade ($ billions at 2005 prices, no discounting)

– – – –

Years

EAP ECA LAC MNA

SAS SSA

EAP = East Asia and Pacific, ECA = Europe and Central Asia, LAC = Latin America and Caribbean, MNA = Middle East and North Africa, SAS = South Asia, and SSA = Sub-Saharan Africa. Source: World Bank (2010a). Green Growth and Equity in the Context of Climate Change 59

Estimates of Mitigation Costs Cost projections for mitigation vary significantly depending on the greenhouse gas stabilization target, desired stabilization year, emission reduction strategies employed, population and economic growth assumptions, and climate model. The IPCC review (2007) suggested mitigation costs by 2030 would range from -0.6% to 3% of GDP, relative to baseline emission scenarios, depending on the stabilization target (see Table 3.1).

Table 3.1: Estimated Global Macroeconomic Cost Estimates of Mitigation Scenarios in 2030 and 2050

Range of GDP Reduction of Median GDP reductionb average annual GDP reductiona (%) (%) growth rates (%)c,e Stabilization levels 2030 2050 2030 2050 2030 2050 (ppm CO2-eq) 445–535d Not available <3 <5.5 <0.12 <0.12 Slightly 535–590 0.6 1.3 0.2 to 2.5 negative <0.1 <0.1 to 4 590–710 0.2 0.5 -0.6 to 1.2 -1 to 2 <0.06 <0.05 Notes from original figure: Costs are relative to the baseline for least-cost trajectories toward different long-term stabilization levels. Values given in this table correspond to the full literature across all baselines and mitigation scenarios that provide GDP numbers. a) Global GDP based on market exchange rates. b) The 10th and 90th percentile range of the analyzed data are given where applicable. Negative values

indicate GDP gain. The first row (445–535 ppm CO2-eq) gives the upper bound estimate of the literature only. c) The calculation of the reduction of the annual growth rate is based on the average reduction during the assessed period that would result in the indicated GDP decrease by 2030 and 2050, respectively. d) The number of studies is relatively small and they generally use low baselines. High emissions baselines generally lead to higher costs. e) The values correspond to the highest estimate for GDP reduction shown in the third column. Source: IPCC (2007).

Some studies break these costs down by region and country. Figure 3.6 reveals the significant variation across countries and country groups given a set of Organisation for Economic Co-operation and Development (OECD) modeled policies to achieve a stabilization target of 550 ppm. Using the 2009 pledges (Copenhagen Accord), with the aim of limiting average global temperature increase to 2oC, an OECD study estimates that, while Annex I countries could lose 0.3% of GDP by 2020 due to the pledges, introducing a carbon pricing and trading system could lead to GDP increases of more than 1% in 2020, amounting to more than $400 billion (Delink et al. 2010). 60 Managing the Transition to a Low-Carbon Economy

Figure 3.6: Costs from Stabilizing Long-Run Greenhouse Gas Concentration at 550 ppm Across Regions – – – – – – – – – US PRC India Brazil Japan ( deviation from BAU baseline GDP) BAU ( deviation from Canada countries EU EFTA Oil exporting Oil Australia and Australia New Zealand New Non-EU Eastern Non-EU Rest of the world of Rest Russian Federation Russian European countries European

Cumulative –

BAU = business as usual; EU = European Union; EFTA = European Free Trade Association. Note: Scenario “550ppm-base” (Scenario A) and “2050” denotes the cost as a percentage of GDP in 2050 relative to BAU baseline. “Cumulated 2005–2050” denotes the cumulated costs over 2005–2050 and represents the gap (in %) between the (undiscounted) sum of annual GDPs over 2005–2050 in the “550ppm-base” scenario and the corresponding sum in the BAU scenario. Source: OECD (2009).

Some studies vividly illustrate the critical role played by policy instruments at the international, national, and sectoral levels (see OECD 2009; McKinsey 2009). Table 3.2 provides a summary of incremental annual cost estimates of mitigation in dollar terms and the upfront investment necessary to enable mitigation activities.

3.3.2 Available Public Finance for Mitigation and Adaptation

The previous discussion provided an overview of the costs of potential impacts of climate change, and the financial needs for adaptation and mitigation. We now briefly discuss the public climate financing that is currently being discussed—both financing that has been pledged or committed and financing that is now in the planning stages (such as that arising from the Copenhagen Accord). Green Growth and Equity in the Context of Climate Change 61

Table 3.2: Incremental Mitigation Costs and Associated Financing Requirements for a 2°C Trajectory: What Will Be Needed in Developing Countries by 2030? (constant 2005 $)

Model Mitigation cost Financing requirement IEA ETP 564 McKinsey 175 563 MESSAGE 264 MiniCAM 139 REMIND 384 Note from original table: Sources: IEA ETP: IEA (2008c); McKinsey: McKinsey & Company (2009) and additional data provided by McKinsey (J. Dinkel) for 2030, using a dollar-to-euro exchange rate of $1.25 to €1; MESSAGE: IIASA (2009) and additional data provided by V. Krey; MiniCAM: Edmonds and others (2008) and additional data provided by J. Edmonds and L. Clarke; REMIND: Knopf and others (forthcoming) and additional data provided by B. Knopf. Both mitigation costs and associated financing requirements are relative to a business-as-usual baseline. Estimates are for the stabilization of greenhouse

gases at 450 ppm CO2e, which would provide a 40%–50% chance of staying below 2°C warming by 2100. “Mitigation cost” refers to the incremental annual costs, while “Financing requirement” is the upfront investment necessary to enable the mitigation activities. Source: World Bank (2010b).

Attention is drawn here to the findings of the UN High Level Advisory Group on Climate Change Financing (AGF 2010). Following the Copenhagen Accord, a UN Advisory Group on Climate Change Financing was established by the UN Secretary General to identify potential sources of finance in order to mobilize $100 billion per year by 2020. Four potential types of finance were analyzed, including public sources for grants and highly concessional loans (including carbon taxation and auctioning of emission allowances, removal of fossil fuel subsidies, other new taxes such as a financial transaction tax, and general public revenues through direct budget contributions), development- bank-type instruments, carbon market finance, and private capital. A substantial share of the revenues was considered likely to remain in

developed countries. Carbon prices of $20–$25 per ton of CO2 equivalent in 2020 were used in calculating potential revenues. A range of $81 billion–$91 billion was identified as being available annually for “international climate action” in 2020. This is broken down as follows:

• $30 billion annually from auctions of emission allowances and domestic carbon taxes in developed countries (at 10% of total revenues); 62 Managing the Transition to a Low-Carbon Economy

• $10 billion annually from redeployment of fossil fuel subsidies in developed countries or from a financial transaction tax; • $10 billion annually from international transportation (allocating between 25% and 50% of total carbon pricing revenues); • $10 billion to $20 billion annually from private net capital flows (allocating 10% of total revenue); • $10 billion annually from carbon market flows (from a likely total of $30 billion to $50 billion); and • $11 billion net flows from multilateral development banks.

The findings seem to reflect a group consensus, with no major breakthroughs. The revenue streams identified are quite modest. Further, follow up actions on the report seem uncertain. The UN Secretary General writes in the foreword “I hope Governments respond positively to the Advisory Group’s findings, and I encourage other key stakeholders, including civil society and the business community, to give this report full consideration” (AGF 2010: 2). Most available public climate finance is for mitigation activities (e.g., energy and transportation, with forestry recently included in the mix). Other than a few bilateral programs (and with the exception of the extremely modest Adaptation Fund), funds are managed by multilateral development banks (MDBs) with a smaller number by other multilateral institutions. A handful of donor governments provide the bulk of the climate funds (Tables 3.3 and 3.4). While developing country governments and other accredited institutions are eligible to apply for funding, there seems to be a wide diversity in requirements along with time-consuming and multistep processes. While this is generally a hallmark of public finance institutions, the particular nature of uncertain and context-driven specificities of climate resilience and green growth seem to have further reinforced the tendency. It is perhaps not surprising that LDCs and low-income countries are often frustrated in accessing the very finds that ostensibly have been set aside specifically for them. While most funds are open to supporting programs ranging from the multiregional to the local, most efforts seem to be at the subnational scale, often within a strong sectoral orientation (e.g., agriculture, health, water, energy, and transport). Programs tackling systemic climate change impacts that cascade across multiple spatial scales and administrative levels are a rarity, donor rhetoric not withstanding. Access to the global best science and technology on green growth issues is not systematically Green Growth and Equity in the Context of Climate Change 63 organized. Programs managed by bilateral organizations and multilateral organizations (with the exception of MDBs that seem to depend to a greater extent on internal staff resources) appear to depend more on project-defined consulting, often from the private sector with the rules of engagement privileging “value for money.” Such an approach seriously undermines the ability of developing countries to access the best and most relevant science. “Commodifying” science also disables the free exchange of project experience and best and worst practices. Most project and program reports (at least those publicly available to developing country stakeholders) glow about their “successes.” A key issue with respect to climate change funding is its relation to official development assistance. As discussed earlier, UNFCCC principles require that funding is distinguished from development funds, and must be accounted for as “additional” to overseas development assistance (ODA) already being provided to developing countries. The equity issues underlying this distinction—namely, that the burden of addressing climate change should fall on industrialized countries that bear primary responsibility for the problem—are quite valid. However, this has often resulted in awkward calculations. In the case of the Global Environment Facility, funding required for “adaptation” is separated from that required for “development,” despite their interconnectedness. In the Fast Start Finance pledges, for example, it is not clear how much of Japan’s pledge under the Cool Earth initiative is new and additional. There are also a number of other questions at hand: how much of the pledged funds are “re-routed” ODA? A relative drop in ODA would have serious implications, especially for the LDCs. Another issue is “conditionalities.” Since climate funds are a result of the “common but differentiated responsibility” principle laid out in the UNFCCC, the nature of the conditionality between donor and recipient countries would need to be markedly different (relative to ODA). For the purposes of discussion, at the end of this paper we suggest one approach for a global Green Fund—based on a carbon levy and with assessments paid by member countries determined according to each country’s CO2 emissions and GDP per capita. Perhaps the time is now ripe to distill a similar regional approach that exploits the many potential revenue flows for climate change financing, while mindful of global flows of technology, capital, and political will. 64 Managing the Transition to a Low-Carbon Economy $310 million pledge, million $225 deposits SCF – $1.891 billion pledged, $1.150 billion deposits CTF – $4.399 billion pledge, $2.558 billion deposits TF – $2.17 billion pledges, $1.886 billion deposits – $180 million SCCF $143 million pledges, deposits LDCF – $324 million $253 millionpledges, deposits continued on next page on next continued funds funds of Volume Pathways to access to access Pathways Through National National Through Entity Implementing Environment (e.g., Ministry) or (e.g., multilaterals WFP) UNDP, governments National submit country strategies/ investment plans with MDB Project National requests Proponent GEF of assistance agency implementing ADB). UNDP, (e.g., activities SCCF, For on must focus costs’ ‘additional climate imposed by change on the baseline development levels Implementation Implementation National, subnational, subnational, National, community subnational, Regional, and private national, sector TF - Global, regional, and sub-national national - National SCCF with governments, project subnational activities LDCF - National planning (preparation with sub- NAPA), of and community national implementation Eligibility Developing country country Developing the Kyoto to parties are that Protocol most particularly vulnerable eligible for Countries Development Official based (ODA) Assistance guideline, on OECD/DAC MDB with an active program country / criteria TF - UNFCCC funds receive eligibility to Bank or World through UNDP - Non-Annex SCCF eligible. 1 countries Emphasis on most in countries vulnerable Asia, and the SIDS Africa, LDCF - The 49 LDC UNFCCC to parties Table 3.3: Climate Change Financing Change 3.3: Climate Table entities Management Management Adaptation Fund Fund Adaptation Bank World Board, as trustee Multilateral development banks (World ADB, Bank, AfDB, IDB, and EBRD) GEF with World Bank as trustee Funding sources Funding From sales of CDM sales of From certified projects’ reductions emissions Donor (CERs); (Spain, governments Sweden..) Germany, government Donor UK, (majority from US, and Japan, Germany) TF - National government (largecontributions fund overall to amounts and US, Japan from Germany) - National SCCF (majority governments Norway, Germany, from US, and UK) LDCF - National (majoritygovernments US, Germany, from and Canada) Denmark, Name Fund Adaptation Climate Funds Investment Climate - Strategic Fund - Clean Technology Fund) GEF Funds Fund - Trust Change Climate (TF) Area Focal - Special Climate TF - National government contributions (SCCF) Developed - Least Fund Countries (LDCF) Green Growth and Equity in the Context of Climate Change 65 $150.8 million million $97 pledges, deposits GCF – ($100 billion - in 2020) finalized Not FSF - $30 billion $621 pledges, million delivered. calculate to Difficult of plethora given and some initiatives, with overlaps funds funds of Volume Pathways to access to access Pathways National governments governments National with UN work to Team Country National establish REDD Steering Committee. GCF – ($100 billion yet - Not in 2020) finalized FSF - Varies, depending on donor country Some have independent mechanisms: e.g., Initiative Hatoyama International (Japan), (UK), Fund Climate Climate International (Germany), Initiative Global Climate (US), Change Initiative MDG Achievement (Spain). Fund country Developing NGOs governments/ levels Implementation Implementation Global, regional, Global, regional, and national, subnational finalized GCF – Not FSF – Global to with focus community, on national Varies and national, Regional, subnational Eligibility National programs in 13 programs National and additional countries for programs regional sharing knowledge country Developing some governments, multilateral through institutions country – Donor Various criteria developing vulnerable and general countries, to support dialogue others entities Management Management UNEP and FAO UNEP and FAO with UNDP as Administrative Agent GCF – World Bank, interim trustee FSF – Donor government agencies governments EuropeAid 18 most to Support Funding sources Funding EU and donor (Norway) governments GCF – Donor (not governments finalized) FSF - Donor (Japan, governments UK) US, France, governmentsDonor Donor EC Union, European Funding, Start Fast governments Donor Sweden) (Ireland, Name UN Programme on Reducing from Emissions and Deforestation Degradation Forest in Developing Countries (UN– REDD) Copenhagen Accord instruments Climate - Green (GCF), Fund in currently development - Fast-Start (FSF)**Financing funds as Climate aid bilateral of part package Global Climate Alliance Change Table 3.3 continued Table Source: Individual fund websites, www.climatefundsupdate.org, www.faststartfinance.org www.faststartfinance.org www.climatefundsupdate.org, fund websites, Individual Source: 66 Managing the Transition to a Low-Carbon Economy global) (in addition to Geographic focus focus Geographic Not specified Not specified Not Africa, SIDS and SIDS Africa, LDCs in Asia specified Not Africa, Asia, Africa, SIDS Pacific Africa SIDS Africa, and some Africa SE Asia efforts All regions specified Not and Africa SIDS REDD+12% €350 million Funding Areas Funding Mitigation 52% Mitigation Mitigation 65% Mitigation energy €20 million energy 2010 Mainly REDD+ 2010: Adaptation 35% 2010: Adaptation Sustainable landscapes 20% landscapes Sustainable 2010: Adaptation €25 million 2010: Adaptation 2010: Adaptation 35%, Mitigation 53% 53% 35%, Mitigation 2010: Adaptation 2010: Adaptation 40% Mitigation 60% 40% Mitigation 2010: Adaptation Sustainable forests /REDD+: €10 million forests Sustainable Mitigation €18 million, REDD+ €7 million Mitigation 2010: Adaptation 35%, Clean Energy 45% 35%, Clean Energy 2010: Adaptation 2010–2012: Mitigation At least €280 million At 2010–2012: Mitigation 2010: Adaptation and Capacity Building 48% 2010: Adaptation Adaptation 3% Mitigation >95% (REDD+ $223 million) >95% (REDD+ $223 3% Mitigation Adaptation 2010–2012: Adaptation 50%, Mitigation 50% and REDD 50%, Mitigation 2010–2012: Adaptation specified Not 2010–2012: REDD 20%, Adaptation at least 45% in 2010 at 2010–2012: REDD 20%, Adaptation Africa 2010–2012: Adaptation 20%, Mitigation 60%REDD+ 20% 20%, Mitigation 2010–2012: Adaptation Asia Africa, 2010-2012: Adaptation 35%, Energy-related mitigation and REDD mitigation 35%, Energy-related 2010-2012: Adaptation 2010: Adaptation €10 million, Capacity building €2 million; Renewable €10 million, Capacity building €2 million; Renewable 2010: Adaptation 57 53 35 72 165 €347 million, REDD €11 million €59 million, Adaptation 2010: Mitigation Africa 192 162 NA 510 601 382 929 648 REDD+ 24% 24%, Growth Emission 52%, Low 2010–2012: Adaptation SIDS 400 1,704 7,200 ($ million) 2010–2011 Requested / Requested committed for for committed Table 3.4: “New and Additional”—Fast Start Funds (2010–2012) Funds Start and Additional”—Fast 3.4: “New Table 157 231 215 215 159 414 537 640 1,145 1,705 1,804 1,804 1,000 15,000 ($ million) 2010–2012 Pledged for for Pledged US Australia Canada Norway Switzerland United KingdomUnited 2,454 Party European Commission Belgium Denmark Finland France Germany The NetherlandsSpain Sweden 444 Japan REDD = Reduced Emissions from Avoided Deforestation, SIDS = Small Island Development States. Development = Small Island SIDS Deforestation, Avoided from Emissions REDD = Reduced here. listed 2010–2012 are than $150 million for more pledges of with total Funds Note: http://www.wri.org/publication/summary-of-developed-country-fast-start-climate-finance-pledges www.faststartfinance.org; www.climatefundsupdate.org; Sources: Green Growth and Equity in the Context of Climate Change 67

3.4 Implementing Green Growth: Some Observations on Building Climate Resilience and Responding to Climate Shocks

Adaptation to climate risks requires consideration of a continuum of risks across critical time scales—covering seasons, years, and decades. Adaptation involves building climate resilience in sectors and social economic systems as well as responding to climate shocks. We highlight here some of the critical issues involved in their practice.

3.4.1 Toward Practice of Climate Risk Management

Limitations of Current Risk Management Efforts Managing current climate risks establishes a sound base for adaptation to climate change. However, as noted elsewhere, it does not by itself form the entirety of activities needed for adaptation for several reasons (Someshwar 2008):

Effective management of current climate risks is still an emerging field. Innovation and strategic demonstration are needed. While indigenous coping strategies are valuable and need to be better appreciated, most societies are still far from successfully managing current climate risks. Famines and floods associated with the El-Niño Southern Oscillation (ENSO) cycle continue to affect millions of people worldwide, and countries continue to operate only in a reactive mode.

“Static” accounting of climate. In development programs, climate tends to be accounted for in a static rather than a dynamic mode. In common with farming communities, policies and plans of governments are based on an understanding of immediate past climate. Observed climate data, generally for the past 30 years, is used to calculate key statistics of weather and climate—average conditions, maxima and minima of temperature and precipitation across seasons, anomaly content and timing (e.g., onset delays, dry or wet spell lengths and breaks, timing and intensity of frost). Climate-dependent environmental information such as stream flow and aquifer recharge capacities is also based on immediate past climate.

Limits of systems resiliency. An appreciation of the limits of climate buffering of cities and regions from current planning and infrastructure systems is badly needed. It requires a thorough examination of variability characteristics (at weather and climate scales) that underlie 68 Managing the Transition to a Low-Carbon Economy infrastructure systems and resource transfer agreements (Someshwar 2010). Decisions and policies on future resource availability typically use statistical averages of past years. For example, the Colorado Water Compact of 1922 used average flows of the preceding 30 years to design water allocations (Figure 3.7). A more historically informed view tells us that the design period was “above normal.” Systems should hence be prepared to handle more years of water scarcity in the future.

Figure 3.7: Colorado Water Compact of 1922

PDSI = Palmer Drought Severity Index. Source: Drawn from Goddard et al. Near Term Climate Change: IRI-PRED Priority Area presentation (2010), based on Stahle et al., 2007.

Limits of responding to climate “surprises.” When climate anomalies occur, plans are in place to manage impacts of climate “surprises.” The success of many governments in Asia in preventing famines, despite deep and widespread droughts, is mainly due to policies based on the internalizing of variability in the immediate past climate in the policy-making process (Kaosa-ard and Rerkasem 2000). However, the approach of using deterministic information to mobilize action— launching emergency food security operations after a drought has occurred, for example (p.11)—means that institutions are not geared to handle uncertain forecasts. As Miles et al. (2006) observe, “Despite the increasing predictability of climate … Every empirical study conducted to date has shown that climate forecasts are not used to their full potential.” While disaster response efforts will still be needed, managing (future) uncertainty requires an appreciation of potential risks and the adoption of anticipatory risk management, prior to actual impacts. Green Growth and Equity in the Context of Climate Change 69

Climate is not the only dynamic element that communities and nation states need to respond to. Demographic pressures that intensify resource demands, declining terms of trade for cereal production and natural resources, rapid urbanization, societal upheavals due to religious, sectarian and class differences, are some of the dominant dynamic drivers of development. In designing systems for managing the impacts of climate change it is important to consider non-climate shocks and or trends as well. For many existing climate-sensitive systems, such as water supply systems, changing demands from population growth and higher levels of per capita demand often impose higher burdens than those due to changes in the climate. This is especially the case in the near term (to about 30 years) in rapidly growing regions of the world (such as cities in Asia). Often, discussions of adaptation seem oblivious to the real world non-climate shocks that systems must respond and “adapt” to.

Effectively managing shorter-term climate risks does not always translate to building effective long-term resilience. The amplitude, pace and frequency of hazards in future may be quite different from those experienced by societies in the recent past. Adaptation measures undertaken for today’s hazards may well be insufficient, and in some cases may even compound risks from more intense and frequent hazards. Climate change is also expected to bring new kinds of hazards for which societies have no prior experience, such as from sea level rise and glacial melting.

Need for Improved Climate Risk Management From the point of view of adaptation to climate change, managing current climate risks is important for at least two reasons. First, the operational use of strategies and programs that build resilience to current climate hazards (such as floods, droughts, and heat waves) can be applied to climate change risks since they are heightened variations of past climate anomalies. Second, stronger climate resilience helps countries realize a higher level of socioeconomic development, affording social and economic climate buffers at household, community and societal levels. A specific application of this method can be seen in the work of the Earth Institute in Indonesia to help reduce the risk of peat forest fires in Central Kalimantan (Someshwar et al. 2010). The methodology, valid for a range of low- and medium-income countries, involves the following:

• Spatial analysis of historical and current climate impacts, integrating climate and socioeconomic data to arrive at past and current impacts; 70 Managing the Transition to a Low-Carbon Economy

• Estimations of ranges of future climate conditions and their reliability, using past climate data as well projections to identify ranges of uncertainty, including sea level rise and frequencies of extreme events; • Assessment of likely impacts on development from a changing climate, derived by stakeholders placing estimates of future climate risks in the context of policies and development plans over the next 30 years, with a particular emphasis on planned policy initiatives to help achieve selected MDGs; and • Identification of a suite of anticipatory risk management considerations in each country to address priority risk areas.

3.4.2 Engaging the Form and Function of Policy Making for Climate Resiliency

Departures from historic climate averages due to long-term anthropogenic changes to the global climate system pose critical management challenges to agencies and institutions. When the very basis for the climate and environmental characterizations that underpin resource availability and their management (for example, reductions in return periods of drought and floods, major alterations in the spread and timing of the Asian monsoon systems, alterations in the hydrology of river basins) is being altered by climate change, planning and management need to be reimagined. The extensive and deep nature of potential changes calls for a large-scale shift away from (current) reactive climate management and toward anticipatory risk management. Many adaptation programs are less based on development aspirations of communities and policy makers than on long-term development scenarios characterizing a more or less uniform future. The approach can be defended perhaps over the very long term, given the apparent economic “convergence” of societies. However, this does not mean ignoring the diversity in country situations of the drivers of vulnerability. Green growth needs to be built on localized aspirations of long-term development. Regional development, for example, is realized by plans with a time horizon of about 20 to 30 years. Infrastructure, land use, housing, and alternate growth centers need to be planned for. In investigating the socioeconomic future of a place, we need to consider the available development plans as a starting point in order to arrive at likely estimates of specific place-based development futures. Spatial modeling of environmental, socioeconomic, market and policy variables will be needed in the context of the economic future laid out in the development plan. Green Growth and Equity in the Context of Climate Change 71

Uncertainties in characterizing future climate and development futures require systematic engagement with a critical body of key development stakeholders in the country. This will help leverage expert opinion, experience and intuition, permitting use of the limited available information in order to develop forecasts of development. Such an approach requires analyses of the policy, institutions, and decision landscapes characterizing socioeconomic development in each country, leading to the identification of a matrix of institutions that are currently critical for disaster risk reduction and climate risk management, a typology of policies that are considered critical to manage disaster and climate risks, a typology of vulnerable geographies (highland, coastal, delta, and riverine systems, for example), and the nature of institutions and development policies needed to build resilience to emergent climate risks. Scenarios developed in a participatory mode, including use of Delphi techniques, can yield invaluable insights on current and past development trends, policies, and trajectories.

3.4.3 Risk Management Institutions in Practice

The interdisciplinary nature of policy development is both a strength and a weakness. It is a strength because it affords a chance to draw on the insights of a number of disciplines such as economics, sociology, history, and political science. It is a weakness since it prevents the development and use of common shared standards. Given the dominance of economics, many climate-resilient policies are evaluated solely for their efficiency, optimization, marginal cost, and marginal utility. Power relations and the risk averseness of institutions that influence their functioning and efficacy, to name two issues, are rarely studied. Governance institutions are struggling to keep pace with complex and fast-changing ground realities. The nature of many risks—including those related to climate—is dynamic, the result of many factors that are themselves undergoing change. For example, in urban areas in many Asian countries, increased frequency of flooding cannot be solely attributed to a changing climate. Wetland loss, a greater paved area, ever growing landfills to accommodate waste, groundwater extraction, and other factors all figure in the calculation. Climate change adds a new layer of complexity, and uncertainty. In this light, it is all the more urgent to develop scientific and institutional capacity to enable managers to understand and make use of risk management approaches and tools (see discussion on risk transfer mechanisms below). Adaptation programs that recognize institutional issues tend to focus on facilitating the creation of an evidence base of climate impacts, enhancing data availability, and training on tools and methods for better management of 72 Managing the Transition to a Low-Carbon Economy climate risks. A minority of programs also attempt to engage institutions across individual operations by creating new coordinating entities, often with limited success. A smaller number attempt to refocus agencies by reengineering incentives that are at the very core of institutional productivity and efficacy. Political economy considerations that govern institutional efficacy are often ignored in climate change adaptation efforts.

Regional Risk Transfer and Insurance Mechanisms Natural disasters can result in crippling financial and human losses. National governments typically bear the greatest costs and responsibilities in managing recovery efforts. While many developing countries often receive emergency relief funds and donor aid for recovery efforts, they are either insufficient or arrive too slowly. Many governments also require immediate funds to continue functioning. Sovereign insurance options typically require evidence of loss, which can cause significant delays. Depending on the risk profile of the country, premium rates for individual country insurance policies can be prohibitively expensive. Regional catastrophe risk insurance facilities are a recent innovation, and aim to provide immediate resources and liquidity following a disaster, expedite payments by relying on predefined indexes of events and losses, diversify the overall risk portfolio by aggregating risk spatially (e.g., across countries), and improve premium stability through guaranteed donor capital, reinsurance protection, and capital market investments. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is often cited as a good model for similar entities in other regions, including in Asia. Contributions from donor governments, the World Bank, and the Caribbean Development Bank coupled with membership fees paid by the 16 government members helped create a Multi-Donor Trust Fund at CCRIF. 2 Originally designed to cover hurricane and earthquake events, the facility may also cover excess rainfall events in the near future. In order to expedite payouts, CCRIF uses parametric triggers based on a suite of independently verified catastrophe risk models.3 Low and stable premiums are afforded by pooling risks. Since it is highly unlikely that all member countries would be affected by major anomalies in the

2 For details, see www.ccrif.org and World Bank. 2010. A Review of CCRIF’s Operation after Its Second Season. Washington, DC. 3 Input parameters have been developed for exposure, vulnerability, damage, and losses for each hazard type. Public sources are used for data to run the models after a disaster event. By using public information and predefined parameters, the facility is able to avoid reliance on loss adjusters, reduce delays, and eliminate subjective loss assessment. Green Growth and Equity in the Context of Climate Change 73 same year, the diversified regional risk portfolio reduces reinsurance costs. Importantly, CCRIF funds are not intended to cover all losses in the event of a catastrophe; the payout is only meant to provide short- term liquidity for disaster response and basic government functions. For 2007–2014, the total payout amount was around $35 million for 12 events, of which 9 were cyclone and monsoon trough system related.4 CCRIF is serving as a model for similar efforts in development in other regions. These include:

• The Inter-American Development Bank and the reinsurance company Swiss Re launched the Regional Insurance Facility for Central America or RIFCA (Inter-American Development Bank 2011). This is intended to complement the IDB’s Contingent Credit Facility, which finances loans up to $100 million per country for natural disasters. • The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) is a joint effort by the World Bank, ADB, and the Pacific Islands Applied Geoscience Commission (SOPAC), with funding by the Government of Japan and the World Bank’s Global Facility for Disaster Reduction and Recovery. The goals of PCRAFI is to provide the Pacific island countries with disaster risk modeling and assessment tools, and to engage in a dialogue with them on integrated financial solutions for the reduction of their financial vulnerability to natural disasters and to climate change.5 • At the 2010 Ministerial Conference on Disaster Risk Reduction in Africa, ministers recommended that the African Union Summit “explore the feasibility of continental financial risk pooling in working towards the creation of an African-owned Pan African disaster risk pool” (UNISDR Secretariat—Africa 2010). • In April 2011, ASEAN Finance Ministers tasked their insurance officials “to explore risk financing options and mechanisms that can be developed as part of the regional framework for disaster management and disaster risk reduction” (ASEAN 2011). ASEAN, World Bank, and UNISDR followed up by jointly hosting the ASEAN Disaster Risk Financing and Insurance Forum in November 2011.6

4 See http://www.ccrif.org/content/about-us. 5 See http://pcrafi.sopac.org. 6 See http://www.worldbank.org/en/news/press-release/2011/11/08/world-bank- gfdrr-asean-and-unisdr-cooperate-to-strengthen-fiscal-resilience-to-natural- disasters. 74 Managing the Transition to a Low-Carbon Economy

• ADB is pursuing parallel efforts to create regional disaster risk solutions in Indonesia, the Philippines, and Viet Nam, including the possible use of parametric triggers for insurance or contingent credit mechanisms (ADB 2011).

While the insurance mechanisms discussed so far focus on addressing disaster impacts for national level governments, the South East Europe and Caucuses Catastrophe Risk Insurance Facility Project (SEEC CRIF) of the World Bank is pursuing a different model.7 The project supports countries in the region to join and benefit from the Europa Reinsurance Facility (Europa Re), with the goal of increasing the number of individuals and small and medium enterprises (SMEs) insured by the private insurance market against catastrophic risks. While countries are the top-level participants in the facility, the ultimate beneficiaries are individuals and small and medium-sized enterprises (SMEs). Europa Re and the SEEC CRIF were partly, though not explicitly, motivated by climate change risks. The Horn of Africa Risk Transfer for Adaptation (HARITA) project, Oxfam and Swiss Re along with International Research Institute for Climate and Society for Climate and Society of the Earth Institute as a technical partner have successfully applied an index-based weather insurance scheme at the farm level to help farmers smooth risks and access credit. It is now being scaled up across the region in partnership with the World Food Program.8

3.4.4 Building Urban Climate Resiliency

The year 2007 marked the first time in history that over one-half of the world’s population lived in urban places. By 2030, 60% of the world’s population—almost 5 billion people—will live in cities. By mid-century the forecast is for two of every three people to be living in urban places. In Asia alone, 1 billion more people will live in cities in 2030 than in 2005. By 2015, there will be 22 mega-cities with populations of 10 million or more; 12 of these will be in Asia. In most developing and some industrialized countries, urban areas are already stretched, due to population growth, in-migration, increasing per capita demands on precious resources such as land and water and

7 See https://www.thegef.org/gef/content/regional-southeastern-europe-and- caucasus-catastrophe-risk-insurance-facility-crif. 8 See http://www.oxfamamerica.org/issues/private-sector-engagement/weather- insurance. Green Growth and Equity in the Context of Climate Change 75

on urban service systems such as transport and health, in combination with the rapidly deteriorating condition of the infrastructure due to ageing. Cities in both developing and industrialized countries are also marked by deep inequalities, with the poor living in marginalized areas where water, sanitation, and housing infrastructure is almost non- existent and access to other forms of infrastructure-dependent services such as transport, health, and education is severely limited. Ecosystems supporting current urban areas are already under stress. Infrastructure is one of the defining features of urban life and landscapes, and plays a critical role in shaping social resilience as well as the economic dynamism of cities. Infrastructure reflects the choices that governments make, both economically and socially, and provides insight into issues of equity, governance, and the strength of local institutions. Fast paced growth, both in terms of spatial area and resource demands, will outstrip the capacity of existing infrastructure to provide water, sanitation, and transportation, and will strain the carrying capacity of ecosystem services. It is already hard to argue that urban development in Asia in the 21st century is sustainable. When we overlay climate hazards, their situation is even more acute.9 Thus, even as urban growth exacerbates existing vulnerabilities under current climate conditions, decision makers must also grapple with an uncertain future climate. The patterns of inequitable development that characterize much of the present growth in urban areas in Asia are likely to be exacerbated by such changes. Pressures may include increased flooding and storms in coastal areas, where many cities are experiencing rapid population growth, and increased frequency of breakdown in vital urban infrastructure as a result of climate anomalies, in the context of increased fiscal pressure on urban policy makers to reduce GHG emissions and “go green.” Rather than being centers of innovation and engines of compact and efficient economic growth and well being, the impacts of a changing climate could well propel the cities of the global South into increasing poverty and endemic strife. Cities are enormously important as engines of economic and social growth, especially for the low- and middle-income countries

9 The lack of climate-smart infrastructure is not just a problem in the global South—it is endemic in the industrialized countries as well. New York, for example, is struggling to adapt current infrastructure to the future effects of floods and storms, and to better plan future infrastructure projects. The transit, water supply, and sanitation infrastructure, among others, are all extremely vulnerable to the effects of climate change and the city is ill-equipped to handle even today’s severe weather events, let alone increased severity and frequency of storms and sealevel rise in the future. 76 Managing the Transition to a Low-Carbon Economy of the global South. Careful planning and investment will be required to realize their potential, particularly if it is to be achieved without increased inequities. Urban climate resilience efforts require a problem- driven approach that takes into account the historic evolution of the cities, the sociocultural fabric of city making, economic inequities, and institutional decision making. All too often urban adaptation efforts focus solely on climate as the dominant driver of urban economic and social risk. Urban mitigation efforts, on the other hand, focus exclusively on GHG emission reductions in transportation, building efficiency and energy generation sectors. Green growth efforts need to inform better urban governance and management and finance, and to enable economic growth with equity—a set of converging goals along with GHG emission reductions and the creation of climate resilient cities.

3.4.5 On the Architecture of Green Growth Governance

The emphasis in global negotiations has been on making climate change financing from the North available for adaptation and mitigation programs in the South. Given the poor demonstration record of many developed countries in fulfilling their stated commitments, such an emphasis is very appropriate. The global and regional architecture of finance utilization are also very significant. It has been assumed that the selected administrative agent (such as a multilateral institution) would impose its administrative and fiscal management on the climate fund. The limited absorptive capacity of developing countries for the effective use of climate finance is a serious concern. One response on the part of the donors has been to exercise more control on all aspects of the program, often deploying consultants from developed countries. While this may make for more effective projects, overall it perpetuates poor capacities in developing countries. Project-based capacity building efforts are simply not sufficient. Many green growth efforts are consciously aligned to respond to demands of the developing country clients. Unfortunately, the clients are often not able to access the full range of scientific and technological options available globally, nor to fully assess their fit in the local socioeconomic and environmental context. Also, access to knowledge alone does not promise that the right choices will be made. Scientific and technical expertise, independent of the donors, needs to be made available to developing country clients, along with the long-term programs to build their capacity. Green Growth and Equity in the Context of Climate Change 77

3.5 The Green Fund: An Approach Based on the Principles of “Common but Differentiated Responsibilities” and Equity

Purpose: The Green Fund will receive assessed contributions of member countries and will disburse grant and loan funds to low-income and middle-income countries to pursue programs of climate-change mitigation and adaptation.

Duration: The Green Fund will operate until the sustainable reduction of GHG emissions is sufficient to meet the objectives of the UNFCCC. This is targeted to occur no later than 2050.

Members: All signatories of the UNFCCC are members of the Green Fund.

Governance: The governing board will include two representative countries of each regional development bank. Each bank will select its representatives according to procedures set by the governing boards of the respective banks. The representatives will serve for 2 years. At least one of the two countries sending representatives will be a recipient country of the Green Fund. Each bank will have a non-voting representative, as will relevant UN agencies.

Funding: The Green Fund will be funded by assessments paid by member countries. Assessments will be determined according to each

country’s CO2 emissions and the country’s GDP per capita (World Bank Atlas method). The formula is as following for country i:

Assessment (i) = CO2 Emissions (i) x CO2 Assessment Rate x GDP Factor (i)

The assessment rate is expressed in $/tons of CO2 The GDP Factor is as follows: High-income country (>$12,276): 1.0 High middle-income country ($3,976–$12,275): 0.5 Low middle-income country ($1,006–$3975): 0.25 Low-income country (<$1,005): 0.0 78 Managing the Transition to a Low-Carbon Economy

Table 3.5: Illustration of Proposed Green Fund Assessment Rates

CO2 Assessments emissions Total as % of GDP (million tons GDP/capita Assessment (PPP Country per year) Ranking GDP Factor (at $2/ton) equivalent) Upper Middle- PRC 7,710 Income 0.5 $7.7 billion 0.08% Lower Middle- India 1,602 Income 0.25 $0.8 billion 0.05% Lower Mozambique 2.35 Income 0 0 0 United Higher Kingdom 520 Income 1 $1.0 billion 0.05% Higher United States 5,420 Income 1 $10.8 billion 0.07% Source: Authors.

Consider the illustration in Table 3.5 for an assessment rate of $2 per ton, based on national CO2 emissions in 2010 from the consumption of energy resources. The assessment rate will be fixed every 5 years to produce the targeted funding stream. Note that a modest assessment rate will produce significant revenues for the Green Fund, at very low cost to the consumer. A $1 levy per ton produces $24 billion worldwide. The implied levy per gallon of gasoline is 0.9 US cents for high-income countries, as shown in Table 3.6. (To convert to cents per liter, multiply cents per gallon by 0.26.)

Table 3.6: Potential Green Fund Revenues Based on CO2 Levy

Cents Per Cents Per Gallon in Total Cents Per Gallon in Upper- Cents Per Green Fund Gallon in Low Middle- Middle Gallon in Revenues Low-Income Income Income High-Income

$/ton of CO2 Worldwide Countries Countries Countries Countries 1 $24 billion 0 0.2 0.4 0.9 2 $42 billion 0 0.4 0.9 1.8 3 $72 billion 0 0.7 1.3 2.6 4 $96 billion 0 0.9 1.8 3.5 Source: Authors. Green Growth and Equity in the Context of Climate Change 79

Disbursements: All low-income countries will be eligible for grant financing from the Green Fund. Middle-income countries will be eligible for loan financing on the terms of the respective MDBs.

Criteria: The Green Fund will finance both mitigation and adaptation projects, 50% to each category. Each multilateral development bank will set guidelines for the suitability of projects, based on criteria including cost effectiveness, social equity, and environmental impacts.

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Chapter 4 Evaluation of Current Pledges, Actions, and Strategies Stephen Howes and Paul Wyrwoll

4.1 Introduction

The 2015 United Nations Framework Convention on Climate Change conference in Paris obscured an important outcome. In a substantial break with existing conventions, the governments of major developing economies are to announce quantitative national targets for climate change mitigation. Nowhere is this shift more significant to global action than in the engine of the global economy: developing Asia. An unparalleled economic expansion is underway in this region that encompasses a third of the world’s population. If this development follows the carbon-intensive trajectory of today’s high-income countries, catastrophic global climate change would seem unavoidable. Acknowledging this international reality and acting on related domestic concerns, governments in the region have begun developing an ambitious climate policy agenda. Although a start has been made and the present course in developing Asia may be encouraging, the urgency of extensive global action means that current efforts are insufficient: the level of ambition will have to be raised even further. That the burden, financial or otherwise, of reaching higher objectives should not overly impinge on economic development is well accepted; developed countries must provide substantial support. However, outside assistance will be a necessary but not sufficient condition for extensive mitigation activities; the relevant actions will primarily be developed internally and with specific, domestic policy considerations in mind.

85 86 Managing the Transition to a Low-Carbon Economy

This chapter provides an overview of the domestic policy settings for climate change mitigation and green, or environmentally sustainable, growth within the major economies of developing Asia: the People’s Republic of China (PRC), India, Indonesia, Thailand, and Viet Nam. Although these countries possess different social and economic characteristics (Table 4.1), they share a common role as driving forces within the global economy, today and for decades to come.

Table 4.1: Economic and Social indicators for Developing Asia in Context

GDP Growth 2009– % Median Urban 2020 Country Population Population Age Population GDP per (2009– or Area (billion) <$2 a day (years) (% of total) Capita GDP 2035) PRC 1.39 36% 35 44% $7,535 $1.01*1013 8.1% (5.9%) India 1.17 75% 26 30% $3,585 $4.20*1012 7.7% (6.6%) Indonesia 0.24 51% 28 52% $4,428 $1.03*1012 - Thailand 0.07 27% 34 33% $8,612 $5.87*1011 - Viet Nam 0.09 38% 27 28% $3,129 $2.77*1011 - Japan 0.13 0% 45 66% $34,012 $4.33*1012 1.7% (1.4%) Australia 0.02 0% 37 88% $39,415 $8.65*1011 - Rep. of 0.05 0% 38 82% $27,133 $1.42*1012 - Korea OECD - - - - - 2.4% (2.2%) Non------7.4% OECD (5.7%) Asia World 6.86 - 28 51% $11,128 $7.63*1013 4.2% (3.6%) GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China. Notes: GDP is adjusted for purchasing power parity and measured in international dollars (see World Bank 2011 for further details). All data are current unless otherwise specified. GDP growth projections originate from the International Monetary Fund and are adapted from IEA (2011a). “% population <$2 a day” indicates the percentage of a country’s population estimated to live off $2 dollars a day, adjusted for purchasing power parity. Source: World Bank (2011), IEA (2011a), CIA (2011). Evaluation of Current Pledges, Actions, and Strategies 87 - - - - - 912 478 478 1,464 2035 2035 (Mtoe) Demand Total Energy Energy Total - 59 198 107 130 472 784 784 1,472 669 850 Energy Energy (Mtoe) Demand 2009 Total 2009 Total - - 597 597 609 904 2009 Electricity per Capita (kWh/capita) (kWh/capita) Consumption - - /unit of of /unit 0.41 2,073 0.32 7,833 2 GDP) Emissions Emissions (tCO Intensity 2009 Intensity

2 - 0.40 - - 0.38 - - 0.56 11,038 - 0.45 8,980 2.11 8.15 4.14 4.14 0.45 2,730 12,271 16,748 7.39 7.39 0.60 2,648 2,271 3,835 2.34 0.35 Capita (t/capita) (t/capita) 2035 CO 2035 Emissions per Emissions

2 1.31 1.37 5.14 5.14 1.64 1.49 3.36 9.96 8.58 Capita (t/capita) (t/capita) 2009 CO Emissions per Emissions

2 - - - - 17.87 - 10.57 918 (Mt) (Mt) 2035 CO 2035 Emissions Emissions 2 114 Table 4.2: Summary of Indicators for Carbon Dioxide Emissions and Energy Emissions Carbon Dioxide for Indicators of 4.2: Summary Table 515 376 395 227 1,565 2,899 1,548 3,535 2,021 2,021 1,655 1,088 1,088 6,877 10,253 (Mt) (Mt) 28,999 35,442 4.29 Emissions Emissions 2009 CO a e: IEA (2011a). = carbon dioxide, Mt = megaton, Mtoe = million tons of oil equivalent, kWh = kilowatt-hour, OECD = Organisation for Economic Co-operation and Development, and Development, Co-operation Economic for = Organisation OECD kWh = kilowatt-hour, oil equivalent, of = million tons Mtoe = megaton, Mt dioxide, = carbon 2 World PRC PRC India India Indonesia Indonesia Thailand Viet Nam Nam Viet Non-OECD Asia PRC) India, (ex. Japan Japan Australia Australia Rep. of Korea Korea of Rep. Asia OECD Oceania OECD Asia Oceania reports aggregate data for Japan, Australia, the Republic of Korea, and New Zealand. and New Korea, of the Republic Australia, Japan, for data aggregate reports Asia Oceania OECD

PRC = People’s Republic of China, t = ton. of Republic = People’s PRC 3. see Box details For further Outlook 2011. World Energy the IEA’s from Policies Scenario” for the “New are Projections only. emissions for energy-related are figures All emissions Notes: CO a Sourc 88 Managing the Transition to a Low-Carbon Economy

The potential surge in global emissions1 from Asia’s growth reflects the enormous rise in income, economic activity, and, consequently, energy consumption that is occurring (Table 4.2). As incomes rise, consumers will use more energy-intensive goods and industry will require more energy to meet the heightened demands of the economy. Similarly, projections of motor vehicle ownership estimate a rise in vehicles on the PRC’s roads of 130 million to 413 million between 2008 and 2035, and a corresponding increase of 64 million to 372 million in India (ADB/DFID 2006). Although emissions per capita are currently low in reference to developed countries, the PRC and India are respectively the first and third largest aggregate source of national emissions already. Developing Asia as a whole accounts for nearly one third of global emissions today; by 2035, even accounting for recent policy announcements, that figure is estimated to rise to 42%. The challenge of shifting developing Asia’s major economies toward a sustainable, low-carbon trajectory amidst rapid economic growth and burgeoning demand for energy is the focus of this chapter. Section 2 outlines the domestic motivations behind recent policy announcements. Section 3 surveys the climate change mitigation targets across the five study countries, including an assessment of their adequacy in the context of necessary global action. Section 4 outlines the additional transformation required with respect to emissions, the composition of the power generation mix, and energy demand. Section 5 reviews the available policy instruments and their use in developing Asia. Section 6 examines the challenges involved in expanding the deployment and effectiveness of technology-based and carbon-pricing policies, including: energy sector reform, economic reform, strengthening institutional capacity, and securing international support. Section 7 concludes the chapter.

4.2 Motivations for Climate Change Mitigation and Green Growth

In recent years, climate change mitigation and green growth have emerged on the agendas of governments in developing Asia. Policy making in these areas reflects a range of motivations. National economic self-interest has dictated the need for policies that: promote energy security, pursue technological advantage, and address local

1 This paper focuses on energy-related CO2 emissions: the largest and fastest growing component of total greenhouse gas emissions (IPCC 2007a). Evaluation of Current Pledges, Actions, and Strategies 89 environmental problems. In addition to being the principal source of future carbon emissions, emerging Asian economies are also highly vulnerable to climate change damage. The convergence of these, by and large, domestic concerns with global efforts to address climate change is advantageous, but this convergence is not inevitable and trade-offs may sometimes be necessary, most notably between the broader objectives of climate change mitigation and green growth.

4.2.1 Energy Security

Access to sufficient and affordable energy is critical to the continued economic expansion of emerging Asia. Figure 4.1 shows substantial projected growth in energy demand over coming decades. Failure to meet this rising demand would seriously constrain economic growth and, in the domestic energy sector, undermine rising living standards. Domestic fossil fuel reserves will be insufficient to meet such expansion, and rising energy demand, without changes to the composition of the power generation mix, will increase dependency on energy imports.

Figure 4.1: Projected Energy Demand in the PRC, India, and Other Non-OECD Asia

Energy Demand (Mtoe) Energy

PRC India Other Non-OECD Asia

Notes: “Other Non-OECD Asia” refers to aggregate energy demand across non-OECD Asia minus the PRC and India. In 2009, Thailand, Viet Nam, and Indonesia comprised 47% of aggregate energy demand across these 32 countries (IEA 2011b). Projections are for the IEA “New Policies Scenario” which represents an extrapolation of recently announced policies concerning energy efficiency, climate change mitigation, and renewable energy (See Box 4.3 for further details). Source: IEA (2011a). 90 Managing the Transition to a Low-Carbon Economy

Figure 4.2: Energy Import Dependency in Emerging Asia

–

Energy imports ( of energy use) energy imports ( of Energy –

–

Thailand India PRC Viet Nam Indonesia

Source: World Bank (2011).

Over the last two decades, the PRC has joined India and Thailand in being a net importer of energy (Figure 4.2). The other two study countries are likely to follow suit as their economies grow: Viet Nam’s domestic oil production is declining, and Indonesia, already a net importer of oil, has limited reserves of coal. Concerns over energy security in emerging Asia have often centered upon oil, but coal has become increasingly important as a, or the, principal fuel in electricity sectors.2 Figure 4.3 demonstrates that domestic coal supplies in all five countries are either limited in size, or won’t last long. Domestic supplies can also be costly to access, such as the deposits in western PRC, and the extractable volume may be, in the case of India, significantly overestimated (see TERI 2011). The major disadvantages of energy import dependence are two-fold. First, securing foreign supplies is costly, in terms of logistics and also

2 Coal is currently the dominant fuel source for electricity generation in the PRC, India, and Indonesia, respectively comprising 79%, 69%, and 41% of total generation capacity (IEA 2011b). The situation is different in Thailand and Viet Nam where gas is more widely used, and coal has a share of around 21% in both cases. Evaluation of Current Pledges, Actions, and Strategies 91

Figure 4.3: Domestic Coal Reserves in Developing Asia Are Limited and/or Depleting Rapidly

US PRC India Russian Australia Indonesia Thailand Viet Nam Federation

Reserves to production ratio (years, right-hand-side axis) Share of worlds total coal reserves (, left-hand-side axis)

PRC = People’s Republic of China, US = United States. Notes: Reserves are proven reserves at end of 2008. Reserves to production ratio is the number of years proved reserves would last if production at 2008 rates continue. See Howes and Dobes (2011) for further details. Source: Howes and Dobes (2011), Figure 1.9. because of the lack of certainty that future domestic demand can be met.3 Second, and perhaps more important, net energy importers are subject to the high volatility of global fossil fuel prices (see Figure 4.4). Among other economic costs, rising energy prices can cause large, sudden, and damaging inflation. Given the progressive scarcity of total fossil fuel reserves, particularly oil, and continuing global growth in demand,4 energy-price-based economic instability looms as a significant future issue worldwide, not least in the rapidly expanding economies of Asia.

3 The issue of supply certainty is perhaps more pressing for oil than coal, as much of the remaining global reserves can be found in relatively “safe” exporting countries such as Australia and the United States (see Figure 4.3). 4 The IEA projects that global demand for fossil fuels, even taking into account recent ambitious climate change targets, will continue rising to 2035. See IEA (2011a, p. 544) 92 Managing the Transition to a Low-Carbon Economy

Figure 4.4: World Energy Prices: Volatile and Rising Index 1990s = 100

World prices for crude oil, LNG, and coal, adjusted for inﬂation ()

Liqueﬁed natural gas Crude oil Coal

Notes: Data are quarterly. See Howes and Dobes (2011) for further details. Source: Howes and Dobes (2011), Figure 1.11.

The risks inherent to fossil fuel import dependency highlight the great potential for renewable energy within developing Asia.5 Both the PRC and India have large potential resources of solar and wind-based power generation. Indonesia has the greatest potential geothermal capacity of any country worldwide, of which it has only exploited around 3% to date (MoF 2009), while Viet Nam and Thailand have considerable untapped hydropower potential, among other renewable resources available. However, fossil fuels will certainly remain a substantial component of the power generation mix over the next three decades, even in the event of more ambitious climate change mitigation (Figure 4.8). Nevertheless, exploiting such opportunities, in conjunction with improving the efficiency of energy use (Box 4.1) will restrict the rise in energy imports and, consequently, reduce the exposure of these economies to energy insecurity as energy demand grows rapidly.

5 See Krewitt et al. (2009) and IPCC (2011) for surveys of the large technical potential of renewable energy in developing Asia. Evaluation of Current Pledges, Actions, and Strategies 93

Box 4.1: Energy Efficiency in Developing Asia: A Principal Concern for Economic Growth, Local Environmental Sustainability, and Climate Change

Policies to promote energy efficiency are a major component of the economic and climate change agenda in developing Asia. If energy demand growth corresponds to or rises with rapid increases in economic growth, then costly, and equally rapid, infrastructure investment is required. Short-term difficulties in matching surging energy demand with new supply create bottlenecks, market distortions, and act as a drag on growth. In the longer term, where supply is fossil-fuel-intensive, spiraling demand increases exposure to energy insecurity, increases environmental pollution, and, of course, prompts swift growth in carbon emissions.

Decoupling the link between economic growth and energy demand through greater efficiency of energy usage therefore fulfills a range of economic, environmental, social, and climate change objectives. In addition to being very beneficial at the broad social level, energy efficiency measures often involve low or even negative costs because they have long-term economic benefits that eventually exceed the initial cost or investment that is required. For a consumer or business, roof insulation and other building efficiency measures will reduce all future energy bills. In transport and coal-based power production, investment in fuel efficient technology significantly reduces future fuel expenditure.

Given that energy efficiency measures often involve net economic benefits, rational economic analysis would expect that consumers and producers of energy would pursue such measures of their own accord. That this is not the case reflects a range of market and informational barriers, such as the inability to afford the initial investment, lack of awareness of potential benefits, technology unavailability, and psychological resistance to change. Government policy has an important role in correcting such distortions, particularly in developing Asia where actions to achieve energy efficiency, despite concerted efforts in recent times, lag behind those in developed countries. Given the large co-benefits involved, energy efficiency measures are often referred to as ‘low-hanging fruit’ in the context of climate change mitigation, meaning that they are attractive, relatively easy to implement measures in the short term.

Consequently, much of the mitigation activity in developing Asia currently focuses on energy efficiency. This is particularly the case in the People’s Republic of China (PRC), where energy intensity (i.e., the amount of energy used for a given unit of GDP) surged at the start of the century. A number of government initiatives were successful in reducing

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Box 4.1 continued

national energy intensity by close to the targeted 20% over the course of the 11th Five Year Plan (2006–2010). This success and the great potential to further reduce environmental and economic problems, as well as address climate change, are reflected in new energy intensity targets (see Table 4.4). The Indian government also has instituted substantial energy efficiency measures. Rai and Victor (2009) argue that there are very large efficiency gains to be made in India’s power sector, particularly through transmission infrastructure improvements and greater efficiency of coal- fired power plants.

Source: Authors.

4.2.2 Technological Advantage and Renewable Energy as a Growth Engine

It is not only Asia’s emerging economies that recognize the advantages of renewable energy, but much of the world. Clean energy and low- carbon technology is widely viewed as the driver of the next wave of innovation and economic growth. Most governments are acutely aware of the benefits of obtaining market share at an early stage, and many are taking action. For example, the Government of the Republic of Korea sees offshore wind power as its next big export industry, and is vigorously investing in the establishment of companies as major global players (see GGGI 2011). Many European countries have similar objectives, as does Australia, and even the United States and Canada have burgeoning renewables industries, despite the influence of the powerful oil lobby. Emerging Asia is increasingly prominent in this clean energy race. The PRC leads the world in renewable energy investment and in 2010 accounted for half of all global manufacturing of solar modules and wind turbines, with the majority of solar technology production made for export (PCT 2011). The government has frequently articulated its goal for PRC companies to dominate clean energy markets and demonstrated its sense of purpose through ambitious policies. Elsewhere, India is now ranked 10th globally in clean energy investment, and Indonesia had the fourth largest growth in this area from 2005 to 2010 (PCT 2011). Whether for export or to meet domestic expansion, growth in the renewable energy sector will be an important stimulus for domestic manufacturing, and economic growth more generally. At the domestic level, proliferation of renewable energy technology is a significant opportunity for increasing access to modern energy services. It is estimated that over 675 million people in developing Asia Evaluation of Current Pledges, Actions, and Strategies 95 do not have access to electricity (IEA 2011a). Extending national grid infrastructure to remote areas is proving to be a difficult, costly, and time-intensive process in many countries, perpetuating poverty and the damages from traditional biomass cooking practices (see below). De-centralized, off-grid technologies such as small-scale solar and biogas present a very real opportunity for remote communities to share the rising living standards being experienced elsewhere, and further promote national economic expansion.

4.2.3 Local Environmental Problems and “Green Growth”

Much of developing Asia’s recent economic growth has come at the expense of the environment. Heavy air pollution, degraded water resources, and clear-felled forests have become characteristic features of the natural landscape. Increasingly, policy makers are appreciating that long-term growth requires sustainable use of natural resources, and that pollution bears economic costs, even in the short term.6 What’s more, the burden of environmental damage weighs far greater on low- income communities, whose welfare is disproportionately dependent on ecosystem services. Consequently, sustainable or “green growth” is now a central feature of the development agenda in the PRC, India, and other emerging Asian economies (see NDRC 2011; Government of India 2009; ASEAN 2007). In this arena the objectives of climate change mitigation and green growth frequently intersect. Urban air pollution from vehicles and industry causes major health damages, as well as increasing greenhouse gas emissions. Similarly, a vast proportion of the population in emerging Asia burn solid fuels for household energy (see Table 4.3), creating indoor air pollution that is estimated to cause over 1 million deaths every year (WHO 2011). These same emissions send black carbon particles into the atmosphere, a major driver of both global and regional climate change. In addition to releasing sequestered carbon, deforestation, where fire- clearing methods are used, can also create black carbon emissions. At the local level, tree-clearing degrades land and forest-based resources, causes flooding, and damages groundwater aquifers. Burning coal for energy produces acid rain, which, in turn, pollutes waterways and

6 For example, the PRC government’s single attempt to calculate “Green GDP” estimated that environmental pollution cost 3.05% of GDP in 2004, or around one- third of GDP growth in that year (Government of the PRC 2006). It is indicative of the true magnitude of damages that this particular figure encompassed only direct economic losses (such as agricultural production and health) and not natural resource degradation or long-term ecological damage (see Government of the PRC 2006). 96 Managing the Transition to a Low-Carbon Economy degrades land. As governments in emerging Asia have begun addressing the causes of these local environmental issues, particularly deforestation (see Table 4.3), a significant and extensively self-publicized co-benefit has been the advancement of the global climate change mitigation agenda.

Table 4.3: Summary Statistics for Air Pollution, Deforestation, and Land Degradation

Issue/Variable Location Description/Value Source

3 Average PM10 230 Asian cities 89.5 μg/m Clean Air Initiative concentration (WHO standard is (2010) 20 μg/m3) Percentage of Asian 230 Asian cities 24% Clean Air Initiative cities exceeding WHO (2010)

SO2 concentration standards Acid rain PRC 258 of 488 cities Ministry of experienced acid Environmental rain in 2009. In 53 Protection (2010) of these cities >75% rainfall was acidic. Proportion of PRC 71% (rural), World Health population using solid India 48% (total) Organization (2011) fuels (2007) Indonesia 88% (rural), Thailand 59% (total) Viet Nam 79% (rural), 58% (total) >45% (rural) Annual rate of change PRC 1.6% (2,986,000 ha) Food and in forest area (2000– India 0.5% (304,000 ha) Agriculture 2010) Indonesia -0.5% (-498,000 ha) Organization Thailand ~0% (-3,000 ha) (2011a) Viet Nam 1.6% (207,000 ha) Percentage of national PRC 22.86% Bai et al. (2008) territory subject to land India 18.02% degradation (1981– Indonesia 53.61% 2003) Thailand 60.16% Viet Nam 40.67%

PM = particulate matter, PRC = People’s Republic of China, SO2 = sulfur dioxide, WHO = World Health Organization. Notes: The 230 Asian cities referred to in rows 1 and 2 are from the PRC; India; Indonesia; Thailand; Malaysia; Philippines; the Republic of Korea; and Taipei,China. See Clean Air Initiative (2010) for further details. PM10 refers to particulate matter <10 μm in diameter. SO2 is the principal cause of acid rain. Evaluation of Current Pledges, Actions, and Strategies 97

4.2.4 Vulnerability to Climate Change Damages

Developing Asia is highly vulnerable to damage from climate change. Due to both geographic factors and past human activities, natural resources are characteristically sparse. Continuing population growth will compound this scarcity in the future. The region contains around two thirds of the world’s poorest people, many of whom are already exposed to significant food and water insecurity, both of which are likely to intensify as the climate changes. Many major population centers are coastal and highly exposed to rising sea levels and storm surges. Ocean fisheries are a principal source of animal protein in coastal areas, and ocean acidification may prove the catalyzing factor for their complete depletion after a prolonged period of over-fishing. While the full force of impacts will not be realized for many decades, climate change adaptation is already a contemporary issue within the five study countries. Rising maximum temperatures and changing rainfall patterns are already affecting agriculture and food security, and the effect of these changes will escalate to 2030 (Lobell et al. 2008). For example, it is estimated that yields of important crops will decline in parts of Asia by 2.5% to 10% by the 2020s (IPCC 2007b). Within the study countries, commonly voiced concerns for the near future include: greater intensity of extreme weather events, increasing incidence of flooding and tropical disease, and decline of marine ecosystems (see ADB 2009, IPCC 2007b). Looking toward 2050 and beyond, the scale of potential damage magnifies at an escalating rate (see IPCC 2007b). As principal sources of future global emissions,7 the PRC and India in particular will play a decisive role in how large this future damage becomes. Therefore, at some level, extensive climate change mitigation activities are a matter of self-interest. The process of lifting the standard of living in these countries, and developing Asia more generally, simply cannot follow the carbon-intensive trajectory laid out by today’s high-income economies. Such a path would likely result in debilitating food and water insecurity, environmental refugees and conflict, among other damaging economic impacts from climate change. Therefore, assuming high-income countries play their part, domestic development objectives must also motivate climate change mitigation activities in the PRC and India (Hepburn and Ward 2010).

7 See Table 4.2 in Section 4.1 and Figure 4.6 in Section 4.3. 98 Managing the Transition to a Low-Carbon Economy

4.2.5 The Limitations and Benefits of Domestic Motivations for Climate Change Mitigation

Any discussion of the largely domestic motivations outlined above must be tempered by the acknowledgement that they are not always aligned with the climate change agenda. Co-benefits are common across climate change mitigation and sustainable use of the local environment, but they are not inevitable and there are numerous examples where these objectives diverge. In the power generation sector, large-scale hydropower and hydraulic fracturing (“fracking”) are two examples where climate change mitigation is pursued at great risk to the local environment (Box 4.2). In transport, biofuel production is a major driver of deforestation and biodiversity loss, and can also cause land to be converted from food production, raising food prices and promoting food insecurity. Despite, by and large, being less emissions-intensive than fossil fuel use, the local effects of such activities can, in certain cases, be anything but sustainable or consistent with “green growth.” Aside from the divergence between climate change and green growth, it must also be recognized that the domestic motivations outlined in this section may not always lead to the same outcomes. For example, if energy security were the central concern, priority would be given to reducing oil consumption8. If climate change mitigation and the local environment took precedence, reducing coal use would be paramount. If technological advantage in global markets were most important, the level of renewable energy consumption in export markets may be the main issue. Such divergence may at first glance appear a weakness. However, this mix of motivations can be a strength. Instead of being contingent upon a single driving force, the climate change mitigation agenda has several. In such a situation, a range of different targets and policy actions to achieve them is desirable, re-balancing responses to the various motivations back toward the climate change agenda. In fact, this is precisely the approach that has transpired in emerging Asia. One cannot assume that the economic benefits of these domestic motivations will be sufficient to immediately stimulate the full scale of potential climate change mitigation activity. There will be a significant time delay in the full benefits being realized, yet the required up front- investments may be significant and immediate. Therefore, future benefits are likely to be heavily discounted, especially when there still exist more immediate social welfare concerns in emerging Asia. It would be disingenuous to suggest that governments of countries with low per capita incomes, such as India, would or even could pursue climate

8 Oil combustion is less emissions-intensive than combustion of most types of coal in the majority of industrial or commercial applications. Evaluation of Current Pledges, Actions, and Strategies 99 change mitigation without regard for short-term costs to growth or social welfare. Strong climate change mitigation represents an opportunity for green jobs, but it also entails job losses in emissions-intensive industries. Removing energy subsidies would increase the efficiency of energy consumption, but at the social cost of higher household prices. Such costs can be minimized or, perhaps, even avoided through well- designed policies, but only if the existence of potential trade-offs is acknowledged in the first place. Where a large gap exists between the required domestic investment in mitigation from a global perspective and the investment stimulated by domestic motivations, there is a strong case for international assistance.

Box 4.2: Hydropower and Hydraulic Fracturing: Green Growth?

Although hydropower involves the release of far less greenhouse gas emissions than fossil fuels, the local effects of dams can be far more damaging. Dams obstruct the fundamental processes underpinning river ecosystems, such as: water and sediment transfer, and species migration (particularly fish). Downstream erosion and alteration of natural flow regimes impacts on agriculture, with diminished fisheries further straining food security. The impacts are most keenly felt in developing countries, where riparian communities often subsist on river-based resources. Aside from flooding upstream areas, the broader impacts can extend hundreds of kilometers downstream. Recognition of these environmental hazards and their damaging social impacts prompted a significant global pause in large-scale dam construction for much of the first decade of the 21th century, except in the PRC. However, spiraling energy demand and the need for less-carbon intensive energy sources is now driving a major expansion in hydropower development across the world, particularly in Southeast Asia, the PRC, Africa, and South America.

Much less is known about the local environmental impact of hydraulic fracturing or “fracking” than dams, but the early indications are concerning. This process involves a mixture of water, sand, and chemicals being injected into the ground under high pressure to release natural gas from underground formations such as coal-beds. Although technically feasible in the past, this procedure has only recently become economically viable; consequently, the scale of fracking activities is expanding rapidly across the world. The United States has the largest fracking industry at present, but it is believed that there are large exploitable reserves in Australia, the PRC, India, the United Kingdom, and many other countries. The local environmental damage largely relates to water. Although the injected liquid is removed from the bore-well during the extraction

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process, it also leaks into the soil and surrounding aquifers. Moreover, fracking alters the composition of the water table, connecting or releasing pressure from different aquifers, causing land subsistence, and reducing the productivity of groundwater outlets from affected aquifers.

A large volume of water is consumed during the process: it is estimated that drilling and fracking a single bore-well requires 19 million liters of water (Chesapeake Energy 2011). Such large volumes may be diverted from other uses, such as agriculture or the environment. Once the gas is extracted this now contaminated water has to be disposed. Recent studies by US environmental regulatory authorities show the contamination of drinking water by chemicals used in fracking and released methane (EPA 2011), and the devastating impacts that fracking fluids have on trees and plants across a wide area (Adams et al. 2011). There have also been reports of household bores yielding flammable water in the United States. Aside from concerns regarding local environmental damage, the benefits of fracking for climate change mitigation are also questionable. Howarth et al. (2011) estimate that the large volumes of methane which leak from fracking wellbores render natural gas extracted by fracking at least, and potentially more, greenhouse gas emissions intensive than coal-burning.

Source: Authors.

4.3 Country Pledges and Targets

The motivations outlined in the previous section have given rise to a range of pledges and targets relevant to climate change mitigation. Achieving these goals would represent a fundamental shift in the emissions and development trajectories of these economies. This section reviews these various goals, and concludes with a discussion of their adequacy.

4.3.1 Climate Change Mitigation Targets

All five of the countries under review have articulated targets relevant to climate change mitigation. Table 4 summarizes these objectives across four major indicators: emissions, renewable energy, energy efficiency, and deforestation. Many of these broad objectives are accompanied by sector-specific or policy-specific objectives which are unable to be reviewed in depth here due to space limitations. What follows is a brief overview of policy developments in each country.9

9 These summaries draw heavily on the country background papers of the ADBI Climate Change and Green Asia project: Chotichanathanwewong et al. (2011), Mathur (2011), Patunru (2011), Toan (2011), and Zhu (2011). Evaluation of Current Pledges, Actions, and Strategies 101

In recent years, the PRC has set increasingly ambitious targets across a variety of issues. Recognizing the unsustainable trajectory of soaring energy use and local environmental degradation, the 11th Five Year Plan (2006–2010) set out a number of targets relating to energy efficiency, renewable energy use, and afforestation. Of these, the most prominent achievement was the 19.1% reduction in energy intensity, just missing the target of 20%. Most notably, however, in the lead up to the UNFCCC Copenhagen conference, the PRC, for the first time, articulated a specific target for reducing carbon emissions. Subsequently, the 12th Five Year Plan revealed a further series of relevant targets to 2015. In addition to those shown in Table 4.4, the government aims to reduce nitrous oxide emissions (a greenhouse gas) by 10%, install extra capacity of non-fossil fuel power generation (i.e., wind, 70 GW; solar, 15 GW; hydropower, 120 GW; nuclear, 40 GW), amongst other quantitative targets (see NDRC 2011). Over recent decades the Indian government has instituted a series of targets and plans to promote energy efficiency which have had co- benefits with respect to emissions reductions. Prior to its voluntary Copenhagen pledges, the Indian government announced its National Action Plan on Climate Change in 2008, covering both mitigation and adaptation issues. This document included the targets for renewable energy, energy efficiency, and deforestation shown in Table 4.4. A major focus is for India to become a global leader in solar energy deployment through the extension of electricity access. Targets relating to this objective include: 2 GW of off-grid solar plants, and 20 million solar lighting systems to be created and distributed in rural areas, saving about 1 billion liters of kerosene every year. Indonesia has voluntarily pledged to reduce its emissions from a business-as-usual approach by 26% in 2020, and up to 41% with international support. At present, land-use and land-use change (particularly forestry and peatland) lead to 85% of national carbon emissions. Consequently, the government plans to achieve 87% of its emissions reductions for both higher and lower targets in these sectors. However, energy-based emissions are the largest source of emissions growth, and are projected to reach parity with land-based emissions by 2020. In response, the government has formulated the energy-specific targets shown in Table 4.4, and, in 2010, formulated the goal of tripling geothermal energy generation to 4 GW by 2015, and up to 9 GW by 2025. As the energy requirements of Thailand’s industrializing economy have grown, the government has instituted ambitious energy efficiency and renewable energy targets. For the economy-wide energy efficiency targets shown in Table 4.4, 44% of the savings are intended to be found in the transport sector, followed by industry (37%), and buildings (17%). For renewable energy, 3.7 GW of the targeted 5.6 GW of renewable energy is assigned to biomass, and then, in descending order, wind 102 Managing the Transition to a Low-Carbon Economy

(0.8 GW), solar (0.5 GW), hydropower (0.32 GW), and methane from municipal waste (0.16 GW). Viet Nam’s government estimates that, under current policies, energy demand will grow four-fold and coal consumption will double between 2010 and 2030, with the country becoming a net energy importer by 2015. Consequently the government has passed several laws relating to energy efficiency and conservation, in addition to specific environmental laws and a National Target Plan to Respond to Climate Change, where the latter sets national ministries, provinces, sectors and cities with the task of developing concerted plans to reduce carbon emissions. The discussion in this section has primarily focused on national- level actions. Our analysis is therefore incomplete because of two connected issues. Firstly, subnational action is very important:10 effective implementation of nationwide policies and targets requires the participation of provincial and local authorities. What’s more, co-benefits are more readily apparent at the local level and the cumulative impacts of consequent small-scale mitigation activities are very significant. Second, subnational action is already occurring and much more is being planned. For example, Chotichanathanwewong et al. (2011) outline the mitigation plans and actions of Bangkok and other Thai provinces and cities. At the subnational level in India, a notable policy achievement has already occurred in Delhi where the city’s fleet of three-wheeler taxis has been successfully converted to natural gas, concurrently reducing local air pollution and greenhouse gas emissions. Similarly, Delhi has recently introduced a modern rail transport system that is growing rapidly. The PRC is planning pilot emissions trading schemes in seven municipalities or provinces (Xinhua 2011). Moreover, the 12th Five Year Plan mentioned above contains specific targets for each province related to energy intensity and emissions of nitrous oxide, sulfur dioxide, and other air pollutants (see Government of the PRC 2011). For the purposes of comparison across countries, targets are also shown in Table 4.4 below for the major OECD economies in Asia: Japan, Australia, and the Republic of Korea.

10 See Ostrom (2010). Evaluation of Current Pledges, Actions, and Strategies 103 Deforestation forest cover by 40 million ha by cover ↑ forest 2005 level from 2020 by 2015, 21.7% to by cover ↑ forest 20.36% in 2010 From 20 million ha by by cover ↑ forest 2010 level from 2020 sink by as net carbon Forestry 2030 total be 40% of to cover Forest in introduced (target land mass is 37%, up from 1991, 2010 level 25% in 1998) 16.2 million ha to cover ↑ forest 14.3 million ha from in 2020 (2010) − of scheme as part Planned offset market domestic carbon − Energy Efficiency Energy energy intensity intensity 16% ↓ energy (2010 → 2015) by savings energy MW 10,000 2020 (2005 → 2025) intensity electricity/GDP to ↓ elasticity of <1 (2025) intensity 8% ↓ energy (2005 → 2015), 15% ↓ (2005 → 2020) 25% ↓ (2005 → 2030) electricity/GDP ↓ elasticity of 2 (2010) from 1 (2020) 1.5 (2015), to to intensity 30% ↓ energy (2006 → 2030) − − Renewable Energy Targets Energy Renewable 11.4% by 2015 11.4% by 2020 15% by 8.3% in 2010 up from 2020 15% by ~ 4% (2010) up from 2020 solar by MW 20,000 (incl. nuclear) 2025 15% by annual ↓ energy 1% average 2022 20.3% by 2020 5.6% by 2030 by 9.4% 3% (2010) up from 2014 TWh by 16.0 2020, 20% by 8% in 2007 up from 2020, by 6.08% 2.7% in 2009 up from Table 4.4: Climate Change Mitigation Targets for Major Asian Economies Major Asian for Targets Mitigation Change 4.4: Climate Table Emissions (2005 → 2020) intensity 17% ↓ emissions (2010 → 2015) (2005 → 2020) BAU BAU 2000 levels below 2000 levels in BAU below 30% ↓ emissions 2030 PRC PRC intensity 45% ↓ emissions 40% to India intensity 25% ↓ emissions 20% to Indonesia below 41% ↓ emissions to 26% Thailand below emissions 30% ↓ energy Nam Viet − Japan Conditional 25% ↓ emissions Australia below 25% ↓ emissions 5% to of Rep. Korea BAU = business-as-usual, GDP = gross domestic product, ha = hectare, MW = megawatt, PRC = People’s Republic of China, TWh = terawatt-hour. of Republic = People’s PRC = megawatt, MW ha = hectare, domestic product, = business-as-usual, GDP = gross BAU the to refers intensity Energy GDP. per unit of produced emissions carbon of the volume to refers intensity otherwise. Emissions stated unless 2020 by targets All emissions Notes: target. national of a stated the absence rather of policy, an absence does not indicate issues for particular targets specific of The absence GDP. per unit of consumed energy of volume target. national a specific have but does not efficiency, energy to policy actions relating number of a large is implementing Korea of the Republic of example, the Government For (2011); Toan (2011); Patunru et al. (2011); Mathur (2011); Chotichanathanwewong and Dobes Change (2011); Howes on Climate Convention Framework Nations United Sources: (2011); and Zhu (2011). 104 Managing the Transition to a Low-Carbon Economy

4.3.2 Adequacy of Current Climate Change Mitigation Targets

The various targets set by emerging Asian economies reflect a fundamental change in emissions and development trajectories. Conversion of the various pledges to common metrics demonstrates that the PRC in particular is embarking on mitigation activity commensurate, in both outcome and relative cost, with that being planned in developed countries (Jotzo 2010; McKibben et al. 2011). The important question is not, however, whether anything significant is being done, but whether it is going to be enough? Numerous studies have shown that the aggregate effect of the Copenhagen pledges by all countries will not be sufficient to avoid breaching what has become the international standard for dangerous climate change: 2ºC of warming or atmospheric greenhouse 11 gas concentration of 450 parts per million (ppm) CO2-equivalent.

Figure 4.5: Global Emissions Projections: The Gap Between Planned and Required Action World

emissions (Gt) emissions

Global energy-based CO Global energy-based

Current Policies New Policies ppm

Gt = gigaton, ppm = part per million. Notes: See Box 4.3 for a description of the different modeling scenarios and underlying assumptions of the IEA’s World Energy Outlook 2011. Source: IEA (2011a, Figure 6.2).

11 For example, see UNEP (2010), Dellink et al. (2010), IEA (2010a), Nordhaus (2010). Evaluation of Current Pledges, Actions, and Strategies 105

Recent International Energy Agency (IEA) projections of future global emissions in Figure 4.5 demonstrate the change in trajectories from anticipated, new policies (i.e.,, the difference between emissions in the “Current Policies” and “New Policies” scenarios), and the much bigger change that will be required, i.e., the gap between the “New Policies” and the “450 Scenario” (450 ppm). Although future action is likely to reduce emissions substantially, twice the effort is required. The same study estimates that, under the “New Policies” scenario, emerging Asia as a whole will account for 46% of global energy emissions in 2035, and the combined value for the PRC and India will be 38%. Figure 4.6 shows that, even if today’s developing economies (i.e., members of the Organisation for Economic Co-operation and Development, or OECD) reduced their emissions to zero by 2035, this action would be insufficient to achieve the global target for a 450 ppm trajectory of annual emissions falling to 21.7 Gt of carbon dioxide (Figure 4.5). Given that the world needs to act further, including in developing countries, it will be necessary for emerging Asia to upscale its ambition beyond existing targets.

Figure 4.6: Mitigation in Developing Economies Only will be Insufficient

emissions (Gt) emissions

Global energy-based CO Global energy-based New Policies New Policies

OECD Other Other Non-OECD Asia India PRC

OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China. Notes: See Box 4.3 for a description of the different modeling scenarios and underlying assumptions of the IEA”s World Energy Outlook 2011. Other Non-OECD Asia refers to developing Asia minus the PRC and India. In 2009 Indonesia, Thailand, and Viet Nam jointly comprised 46% of emissions from this group. Source: IEA (2011a). 106 Managing the Transition to a Low-Carbon Economy

4.4 Additional Transformation

This section outlines different elements of the additional transformation required in developing Asia to limit global warming to 2°C.12 The principal topics covered are: emissions trajectories, the power generation mix, and energy demand. Additional focus is given to: energy subsidies, advanced coal technologies, and deforestation in Indonesia.

Box 4.3: Modeling of Alternative Scenarios in the World Energy Outlook 2011

The projections of emissions and other related variables used in this report originate from the IEA’s World Energy Outlook 2011. The IEA models three different scenarios across 2010 to 2035.

The “Current Policies Scenario” envisages the world if policies enacted by mid-2011 continued in their present form without any additional policies. The generated emissions trajectory is consistent with long-term global warming of 6°C.

The “New Policies Scenario” incorporates all stated plans or commitments, even where there are not specific policy actions to implement them as yet. It acts as a baseline, or a business-as-usual scenario that incorporates anticipated changes. The generated emissions trajectory is consistent with long-term global warming of 3.5°C. As many stated plans extend only to 2020, extrapolation is made from 2020 to 2035 of emerging trends such as, for example, declining global energy intensity. Given the uncertainty surrounding implementation, the “New Policies Scenario” is a conservative interpretation of stated plans; for example the lower end of the Copenhagen commitments is assumed to be met.

The “450 Scenario” (or “450 ppm” in the current study) describes the least-cost pathway by which the world has a 50% chance of limiting

greenhouse gas concentrations to 450 ppm CO2-equivalent, analogous to 2°C of global warming above preindustrial levels. The upper end of international pledges is assumed to be met. Potential mitigation measures are identified across countries and sectors and are implemented according to the greatest reductions per unit cost.

continued on next page

12 The following draws heavily on the modeling undertaken in the IEA’s World Energy Outlook 2011 which is described in Box 4.3. Evaluation of Current Pledges, Actions, and Strategies 107

Box 4.3 continued

Other greenhouse gas emissions are included in the modeling, but are not the focus of policy constraints in the 450 Scenario. Emissions from land- use, land-use change, and forestry are assumed to decline at the same rate across all three scenarios.

Important policy assumptions for the different scenarios include the following.

Current Policies: realization of the energy targets in the PRC’s 12th Five Year Plan; phasing out of fossil fuel subsidies in all non-OECD countries with current plans to do so.

New Policies: carbon pricing in the PRC covering all sectors by 2020, starting at $10 and rising to $30 in 2035;a removal of fossil fuel subsidies in all non-OECD net energy importing countries by 2020, and all net-exporters with current plans to do so; a shadow price of carbon of $15 in the US by 2015 affecting investment decisions; 70 to 80 GW of nuclear power in the PRC by 2020; 20 GW of solar energy production capacity in India by 2022.

450 Scenario: carbon pricing for power and industry in US and Canada (2020—$20, 2035—$120), Japan (2020—$35,2035—$120), the PRC, Russian Federation, Brazil, and South Africa (2020—$10,2035—$95); all trading schemes are linked at a regional level and all have access to carbon offsets (leading to some convergence in carbon prices); international sectoral agreements; widespread deployment of carbon capture and storage in power generation by 2020.

While the discussion in the present study largely focuses on the transition from the New Policies to the 450 Scenario, it should be noted that even fulfilling the assumptions of the New Policies Scenario may turn out to be ambitious.

While the World Energy Outlook specifically provides comprehensive results for some major countries, it does not provide them for all. Consequently, the presentation of IEA modeling for Indonesia, Thailand, and Viet Nam in the present study appears in a proxy referred to as “Other Non-OECD Asia.” This grouping describes data aggregated across all Non-OECD Asian countries except for the PRC and India, of which the three other study countries accounted for 46% of carbon emissions and 47% of energy demand in 2009 (IEA 2011b).

For further details of the modeling assumptions and procedures see IEA (2011a, Chapter 1 and 6).

a All quoted carbon prices are in terms of US 2010 dollars per ton of carbon dioxide.

Source: Authors. 108 Managing the Transition to a Low-Carbon Economy

4.4.1 Emissions Trajectories

The observation that an additional transformation is required in developing Asia beyond the currently planned or contemplated level of mitigation prompts two questions. When should this additional action occur? And, perhaps more importantly, how substantial does this additional action need to be? The answer to the first question is straightforward: as soon as possible. As well as making it more difficult to achieve the required transformation, a delay would make the future rate of change more sudden and more expensive (Hepburn and Ward 2010). Given the massive expansion in energy demand in developing Asia, it is not so much the present sources of emissions that are the principal issue but the infrastructure that is yet to be constructed (Davis et al. 2010). Once built, infrastructure investments like power plants and factories have many years of use. If they had to be retired or retro-fitted before their useful life was over because they are emissions-intensive, some proportion of the initial investment would be wasted. The IEA estimates that the world has only until 2017 to shift to a 450 ppm trajectory before the “lock-in” effect of existing infrastructure necessitates that all investments made between 2020 and 2035 must involve zero emissions (IEA 2011a). For every $1 needed to achieve the additional transformation that is not spent before 2020, the IEA estimates that another $4.30 will have to be spent afterward to offset the increased emissions. Although the up-front cost to developing economies of immediate action is high, the costs of delay are even higher still. For example, Bosetti et al. (2009) estimate the additional cost to be as much 33%. The natural counterpoint to the above discussion is that developing economies, particularly ones with a low per capita income such as India, may be willing to incur the higher costs of retiring infrastructure at a later date; rapid economic growth and future wealth will render this adjustment more affordable. However, such an argument ignores the benefits of mitigation outlined in Section 2, as well as the emerging avenues for developed country assistance, and, of course, the declining window for stringent global action. The importance of developed country assistance is also highly relevant to the second question: how substantial does the additional transformation need to be in developing Asia? The required shifts in emissions to a 450 ppm trajectory for the study countries shown in Figure 4.7 are steep. By 2035, the IEA estimates that the PRC would need to further reduce emissions by about half, with the corresponding reduction for India and the rest of developing Asia being around 32%. It is important to note that the IEA modeling allocates such large emission Evaluation of Current Pledges, Actions, and Strategies 109 reductions without regard for any notion of cumulative emissions, historical responsibility, or consumption-based emissions accounting. Rather, it identifies from a global perspective the least-cost pathway to a 450 ppm trajectory. That large cuts are required in the PRC, India, and the rest of developing Asia does not mean the full burden of this transition has to fall on these developing countries. Since bringing about a plateau in India’s emissions, from a global perspective, is likely to be cheaper than the adjustment involved in, say, achieving zero emissions in some OECD countries by 2020, there is a very strong case for developed countries to provide assistance. The issue of seeking out the least-cost emissions reductions is significant at a domestic level as well. Early identification of areas where mitigation produces co-benefits, such as those outlined in Section 4.2, will help achieved the forward momentum required for a large shift. Particular actions may be low-cost in relative terms, or even have net benefits, such as addressing deforestation in Indonesia (see Box 4.4) and greater energy efficiency (see Box 4.5). But this “low-hanging fruit” will not be ever-present and extensive mitigation will unavoidably involve trade-offs with growth or social welfare at some point.

Box 4.4: Deforestation and Land-Use Change in Indonesia

The present study focuses primarily on energy because this sector is the largest source of growth in carbon emissions, for the study countries and the world as a whole. However, emissions from land-use, land-use change, and forestry (LULUCF) are central to Indonesia’s short-term mitigation activities. In the last 20 years the country’s forested area has declined by 24 million hectares, equivalent to around 26% of the forest remaining today (FAO 2011).

It is not simply the loss of forest as a carbon sink that creates LULUCF emissions, but the way in which it occurs. Fire is commonly used to clear land for expansion of agricultural activities and to provide access to timber, sending black carbon particles into the atmosphere. When this practice occurs on carbon-rich peat-land, which is also often drained, the fires can burn underground for an extended period. The combination of peat fires, fire-clearing, and logging meant that LULUCF emissions accounted for 85% of Indonesia’s emissions in 2005 (Panturu 2011). Once land-based emissions are taken into account, Indonesia is the world’s third highest source of carbon emissions.

continued on next page 110 Managing the Transition to a Low-Carbon Economy

Box 4.4 continued

Given the prominence of this issue in its current emissions profile, it is unsurprising that the government plans for 88% of its planned emissions reductions to 2020 to be achieved within the LULUCF sector. What’s more, the marginal cost per ton of abatement from forestry and peat in Indonesia is much less than that in, say, transport and industry (see Panturu 2011). However, preventing deforestation has proved a very difficult task to date due to: institutional incapacity, including widespread corruption; local poverty encouraging unsustainable practices; illegal logging; and the decentralization of government authority following the Suharto regime’s collapse. Moreover, strong action to reverse deforestation in nearby countries, such as the PRC and India, has essentially exported deforestation from those countries to Indonesia, particularly as demand for palm oil has risen.

The Indonesian government has targeted forestry to become a net carbon sink by 2030. Reversing deforestation will not be easy; at current rates, the 52% of its land mass still covered by forest will not last long. Encouragingly, the Reducing Emissions from Deforestation and Land Degradation (REDD) mechanism is progressing within the international climate policy architecture, and a recent bilateral agreement with Norway has produced a government moratorium on new clearing permits, with Indonesia to receive $1 billion if deforestation rates decline within 2 years. Yet, in 2010 the forestry sector was estimated to be worth US$9.5 billion, or 2.5% of GDP (FAO 2011), not accounting for the goods produced on cleared land such as palm oil. As long as there are economic incentives for unsustainable forestry practices, and a lack of strong government regulation to constrain them, deforestation will likely retain its dominant position in Indonesia’s emissions profile.

Source: Authors.

It should be emphasized that achieving such large, additional shifts in emissions trajectories is not going to be an easy task in developing Asia. That is not to say, however, that it is an impossible one. Rather, the large scale of the task befits an appropriate response. Narrowly-focused policies that avoid or do not address fundamental issues will not be sufficient. A whole-scale approach across all sectors will be required and is, in fact, beginning to emerge on the policy agendas of the study countries. In Section 6 of the present study the major policy challenges to achieving this additional shift in emissions trajectories are outlined.

4.4.2 Power Generation Mix

An important element of shifting emissions trajectories and avoiding the infrastructure “lock-in” discussed earlier is the future composition Evaluation of Current Pledges, Actions, and Strategies 111

Figure 4.7: The Additional Transformation Required for Emissions Profiles Across Asia

PRC India . . emissions emissions (Gt)

emissions (Gt) emissions

. Indias of Projections . Energy-based CO energy-based CO energy-based

OECD OECD Asia Oceania . emissions (Gt) emissions

emissions (Gt) emissions . .

Energy-based CO Energy-based Energy-based CO Energy-based

Current Policies New Policies ppm

Gt = gigaton, OECD = Organisation for Economic Co-operation and Development, ppm = part per million, PRC = People’s Republic of China. Notes: See Box 4.3 for description of the different modeling scenarios. In some cases emissions appear higher in the “New Policies” scenario compared to the “Current Policies” scenario before 2020 due to missing data points for the latter scenario. Source: IEA (2011a).

of the power generation sector. At present this sector accounts for 48% of developing Asia’s energy-related carbon emissions. In the PRC and India, the generation mix is currently dominated by coal (see Figure 4.8). In the rest of developing Asia, gas is the dominant fuel for power plants, although coal and oil are also prominent. As electricity demand increases, investment decisions will be made regarding the deployment of different technologies. On the current trajectory (the New Policies Scenario), renewable and hydropower capacity will be greatly extended across the region. However, fossil fuel use, particularly coal, is also set to rise. In India the generation capacity of coal-fired power plants is projected to rise by 350% between 2009 and 2035, with the equivalent figure in the PRC being 178%, and in the rest of developing Asia, 311%. This trend does not necessarily mean the volume of emissions from coal-based power generation would rise in an identical fashion (Box 4.5). But it does substantially undermine the mitigation benefits of an expanded deployment of renewable technologies. 112 Managing the Transition to a Low-Carbon Economy

Switching to a 450 ppm trajectory will require different transitions. In the PRC, wind power capacity would have to increase by 52% in 2035 compared to the current trajectory. Compared to the current value, the final capacity would be over 18 times higher. In India and the rest of developing Asia, hydropower would need to expand greatly, in aggregate terms and with respect to total generation capacity.

Box 4.5: Increasing the Efficiency of Coal-Fired Power Generation

Aside from the expansion of renewable energy, the investment decisions made regarding coal-fired power generation technology are critical to developing Asia’s future emissions trajectory. The PRC, India, and Indonesia all have significant domestic reserves of this cheap fuel. It is projected that these three countries will account for 80% of global growth in demand for coal to 2035 (IEA 2011a, p. 380). Coal will likely remain a substantial component of the power generation mix in the region, even on a 450 ppm trajectory (see Figure 4.8).

There are different types of coal-fired power plants, each with different characteristics. The least fuel- efficient, least infrastructure cost, and most emissions-intensive are subcritical plants. Better performing and higher cost technologies (on an ascending scale) include: supercritical, ultra-supercritical, and integrated gasification combined cycle (see IEA 2011a, Chapters 10 and 11 for an overview of the issues surrounding coal-based energy production).

Given the large expansion of coal-fired power generation underway in the PRC, India, and Indonesia, a priority for climate change mitigation must be investments in more efficient technologies. Although this is certainly occurring in the PRC, most newly built plants in India and Indonesia continue to be subcritical. Fuel efficiency and local environmental considerations dictate that altering this trend will have significant benefits beyond climate change mitigation.

A further consideration is the deployment of carbon-capture and storage

(CCS). This technology is designed to collect and store CO2 emissions from power generation or industry. There exist over a dozen pilot projects, but the technology is yet to be commercialized. Haszeldine (2009) argues that much greater investment in demonstration projects is required for CCS to play a significant role in emissions abatement in the near future. The IEA modeling of a 450 ppm scenario discussed in the present chapter requires CCS to begin deployment by 2020 and to account for 22% of global mitigation by 2035 (see Figure 4.9). The same study estimates that a 10 year delay in deployment will increase the global cost of reaching a 450 ppm trajectory by 8%, due to large reductions in coal-fired power generation and more rapid expansion of renewable energy.

Source: Authors. Evaluation of Current Pledges, Actions, and Strategies 113

Figure 4.8: The Additional Transformation Required in the Power Generation Mix Across Asia

PRC India Electrical capacity(GW) Electrical capacity (GW) ppm ppm ppm ppm New Policies New Policies New Policies New Policies New

Other Non-OECD Asia OECD Asia Oceania Electrical capacity (GW) Electrical capacity (GW) ppm ppm ppm ppm New Policies New Policies New Policies New Policies New

Coal Oil Gas Nuclear Hydropower Biomass and waste

Wind Geothermal Solar PV CSP Marine

Gt = gigaton, GW = gigawatt, OECD = Organisation for Economic Co-operation and Development, ppm = part per million, PRC = People’s Republic of China. Notes: See Box 4.3 for a description of the different modeling scenarios and underlying assumptions of the IEA’s World Energy Outlook 2011. Source: IEA (2011a).

4.4.3 Energy Demand

A principal feature of developing Asia’s economic expansion is substantial growth in industrial energy usage, power generation, transport, and all other components of energy demand. Figure 4.9 shows the substantial shifts required under the different IEA modeling scenarios. As outlined in Box 4.1, reducing energy demand through more efficient usage is a prominent, low-cost measure that meets a range of economic and environmental objectives. This observation is supported by the dominant share of efficiency measures as a source of global abatement shown in Figure 4.10. 114 Managing the Transition to a Low-Carbon Economy

Figure 4.9: Global Emissions Reductions by Source

Gt Reference Scenario Share of abatement Eciency End-use . Gt Power plants . Gt Renewables Biofuels Nuclear CCS Scenario

Notes: See Box 4.3 for description of the modeling and underlying assumptions of the IEA’s World Energy Outlook 2011. Source: IEA (2011a).

Figure 4.10: The Additional Transformation Required for Energy Demand Profiles Across Asia

PRC India

Energy demand (Mtoe) Energy Energy demand (Mtoe) Energy

Other Non-OECD Asia OECD Asia Oceania demand (Mtoe) Energy Energy demand (Mtoe) Energy

Current Policies New Policies ppm

Gt = gigaton, CCS = carbon capture and storage, PRC = People’s Republic of China, Mtoe = million tons of oil equivalent, OECD = Organisation for Economic Co-operation and Development, ppm = parts per million. Notes: See Box 4.3 for a description of the modeling and underlying assumptions of the IEA’s World Energy Outlook 2011. Source: IEA (2011a). Evaluation of Current Pledges, Actions, and Strategies 115

Although achieving greater energy efficiency is notionally a cheap form of mitigation, it will not always be easy to implement. This is particularly the case in developing Asia, where fossil fuel and electricity subsidies have become entrenched. In all five of the study countries, cheap energy has generally been seen as a form of social welfare, providing a disincentive for conservation. However, less than 10% of the total value of fossil fuel subsidies in each study country benefits the poorest 20% of the population (IEA 2011a). Due to this leakage of subsidy benefits to the wealthy, Arze del Granado et al. (2010) argue that reform toward more effective forms of social welfare will generate high economic returns provided that short-term adjustment costs for the poor are compensated. From the perspective of government finances, this is particularly the case in net-energy importing countries (i.e., most if not all of the study countries in the near future) where governments currently absorb international price rises. Moreover, any future move toward carbon pricing in the region (discussed in Sections 4.5 and 4.6) will require energy prices to be liberalized and higher fossil fuel-based generation costs to be passed on to consumers.

4.4.4 Policy Instruments

This section reviews the policy instruments that governments in the study countries are using to meet the climate change mitigation targets set out in Section 4.3. The sheer volume of different activities being undertaken prohibits a complete overview of all relevant policies in each country.13 Rather, this section will review the most prominent instruments across countries, including the reasoning behind their application. Following Howes and Dobes (2011), the following analysis is divided into a discussion of technology-based policies and carbon-pricing policies. Technology-based policies are so called because they typically favor the adoption of a particular technology or class of technologies. Whereas carbon pricing relinquishes decision making on how emissions reductions occur to market forces, technology policies such as feed-in tariffs or research and development funding involve explicit intervention by the government in favor of a particular technology or project. Both carbon pricing and technology policies are designed to correct market failure, albeit in different ways. Carbon pricing policies are by definition

13 For a complete overview of individual country policies see the country papers which this paper surveys: Chotichanathanwewong et al. (2011), Mathur (2011), Patunru (2011), Toan (2011), and Zhu (2011), and also the IEA Policies and Measures database (IEA 2011c), and government websites. For a thorough review of policy instruments for promoting renewable energy see IPCC (2011, Chapter 11). 116 Managing the Transition to a Low-Carbon Economy

Table 4.5: Classification of Climate Change Mitigation Instruments

Carbon Pricing Technology-based Fiscal Fiscal Regulatory Emission trading Demonstration grants Technology performance Carbon tax Public R&D standards Hybrid trading-tax Investment subsidies Renewable fuel/energy schemes Preferential tax treatment standards Government investment in Building regulations venture capital Automobile regulations Public investment vehicles Information standards Feed-in tariffs Tax credits Public procurement Renewable energy certificate trading Subsidies for energy-efficiency purchases

R&D = research and development. Source: Howes and Dobes (2011).

fiscal (i.e., concern government revenue), while technology policies can be either fiscal or regulatory instruments (i.e., mandated laws specifying particular actions). Table 4.5 lists a variety of common climate change policy instruments under this categorization. Complementary policies or actions, discussed further in Section 4.6, are likely to be critical to the effectiveness of these instruments.

4.4.5 Technology-Based Policies

The already extensive deployment of technology-based policies in developing Asia reflects a range of factors. First and foremost, governments have acted on the more immediate motivations discussed in Section 4.2 (i.e., energy security, local environmental problems, and technological advantage) by setting the targets shown in Table 4.4. As discussed further below, carbon pricing remains largely a prospective activity in developing Asia; therefore technology instruments are the only real means to pursue these targets at present. There are numerous dimensions to the general rationale for applying these instruments.14 The broadest is simply the correction of various

14 The following discussion draws heavily on Howes and Dobes (2011, Chapter 2.3.1), and Garnaut (2008, Chapter 18). See these earlier works for a more detailed discussion of these issues. Evaluation of Current Pledges, Actions, and Strategies 117 market failures that arise along the innovation chain between early research and the extensive deployment of a climate change mitigation technology (see Figure 4.11). Such innovations generate social benefits that are external to the private costs and benefits of firms, financiers, and consumers. Government intervention can internalize these social benefits, or positive externalities, within the decision making of the various economic agents involved.

Figure 4.11: The Innovation Chain for a New Mitigation Technology

Demonstration and Early research Market uptake commercialization

Basic research Technology Market Commerciali- Market and research and Diusion development development demonstration zation accumulation

Supply-push Demand-pull

Source: Garnaut (2008, Figure 18.1) adapted from Grubb (2004).

Private firms have strong disincentives to underinvest in research and development. Not only do they face uncertainty over whether their investment will yield sufficient private returns, any progress or invention they instigate may benefit their competitors. Knowledge generated at the early stage of the innovation chain is often a non-excludable, public good, which can easily be adapted and used by other firms at little cost. Moreover, early stage research on a particular innovation generates a skills base which can be applied to other innovations. As the total social returns on developing new technologies exceed the benefit to an individual firm, there is strong case for public funding to make up for this under-investment in basic research. The transition from research idea to demonstrated technology presents similar challenges. Demonstration projects for renewable energy projects typically involve large up-front costs and significant risk. Traditional lenders in capital markets are often unwilling to take such large risks. Firms also face disincentives similar to those during early research. “First-movers” generate knowledge about how and, perhaps more importantly, how not to convert an idea into a commercial project; knowledge that competitors can later use at low or no cost. Other upfront costs to first movers which generate externalities include: developing 118 Managing the Transition to a Low-Carbon Economy a skills base, negotiating new regulatory and legal frameworks with government, developing support industries, and achieving social acceptance. Even once a technology is demonstrated and commercially proven, it faces significant barriers to being disseminated in the market. In the absence of a carbon pricing, the consumer price of emissions intensive goods will not reflect their external social costs and, conversely, the price of mitigation technologies will not reflect their external social benefits. Therefore, governments can intervene to rebalance this relative cost differential in favor of higher social welfare. Stimulating demand for new technologies has the added effect of generating economies of scale and further driving their relative cost lower. In addition to addressing market failure with regards to prices, policy instruments can also address informational and agency barriers that prevent consumers from adopting known mitigation technologies, even though they are cheaper.15 The policy instruments used across the innovation chain can be divided into two varieties. Supply side, or “supply-push,” measures reduce the private cost of producing a technology. Demand side, or “demand-pull,” measures increase demand for a technology. Typically, supply-side policies aim to correct market failures that arise between the early stages of research and market demonstration, and demand side policies focus on market uptake (Figure 4.11). The following discussion selectively reviews demand-pull technology policies (i.e., feed-in tariffs, renewable energy certificates, standards and regulations) and supply- push technology policies (i.e., investment subsidies and tax incentives, and public finance for research and development) that are being used in the major economies of developing Asia.16

Feed-in Tariffs Feed-in tariffs (FITs) are a commonly used instrument wherein renewable energy generators receive favorable terms. Although the exact arrangements can vary, FITs generally share three standard characteristics: guaranteed access to the electricity grid; long-term contracts; and generated power being purchased by grid companies at higher prices than that from fossil fuel sources, reflecting the relatively higher generation costs of renewables. Table 4.6 shows that

15 Howes and Dobes (2011) cite the examples of landlords not having an incentive to invest in energy efficient capital because tenants pay electricity bills, and consumers judging the cost of durable goods, such as electrical appliances, on the basis of their up-front cost and not the total cost of their use over time. 16 See Azuela and Barroso (2011), IPCC (2011) Table 11.2, and REN21 (2011) for a more comprehensive overview. Evaluation of Current Pledges, Actions, and Strategies 119

FIT arrangements are already extensively used in the study countries. This instrument has played an important role in the rapid development of the PRC’s wind power industry (Ma 2011), and the government has recently expanded their coverage by allowing them for non-tender solar power generators (IEA 2011b). The effectiveness of FITs, however, can be limited by inappropriate design. For example, the feed-in tariff may be too low to stimulate investment, or, as in the case of Indonesia, grid companies may be insufficiently compensated by government to incur the higher costs of an FIT and be unwilling to participate in the arrangement for financial reasons (see Howes and Dobes 2011, Box 4.2).

Renewable Energy Certificates and Other Market-Based Mechanisms Renewable energy certificates (RECs) create a market mechanism for utility companies to meet mandated targets for renewable energy, or “renewable portfolio standards.” Renewable energy generators are issued with credits proportional to the amount of electricity they produce, and these credits can then be purchased and/or traded by utilities in fulfillment of their portfolio obligations. This system provides incentives for renewable energy generators to compete with each other in lowering their costs. However, if multiple forms of energy are covered by the same scheme, the lowest cost type of technology will generally be favored, often wind power. In 2011, India was the first of the study countries to launch an REC scheme, providing a means for states and utilities to meet previously set portfolio standards. The implementation of RECs in India accompanies a similar scheme directed at energy efficiency, namely the Perform, Achieve, and Trade (PAT) Mechanism, wherein India’s largest energy users are set benchmark efficiency levels, with trade occurring between participants who exceed their targets and those who fail to meet them. The PAT instrument echoes a voluntary mechanism developed earlier in the PRC, known as generation rights trading (GRT), in which coal-based electricity generators are assigned tradable quotas and the efficiency of electricity production is increased. High-efficiency generators are able to buy quotas from low-efficiency counterparts, achieving mutual profit, with the overall level of electricity production constant. In 2007, it was estimated that the use of GRT across 23 PRC provinces involved a total transaction quantity of 54 TWh, saving 6.2 x 106 tons of coal equivalent (Ciwei and Wang 2010).

Regulations and Standards The governments of emerging Asia have introduced many different forms of regulations and standards relevant to climate change 120 Managing the Transition to a Low-Carbon Economy mitigation. As opposed to incentives, which usually involve some element of voluntarism, regulations and standards are mandatory for affected parties. Such instruments are prevalent across various sectors, especially: transportation, construction, heating and cooling of commercial buildings, and the energy sector. Examples include: ethanol blending in fuel; emissions and fuel economy standards for cars; minimum efficiency standards and compulsory labeling of energy appliances; compulsory closure of small, inefficient fossil fuel based power plants; among many others. There are numerous prominent examples of regulatory instruments in the study countries. In the PRC the energy saving power dispatch (ESPD) mechanism prioritizes dispatch to the energy grid by different generators, based on their efficiency and the emissions each produces. Priority is given to nonadjustable sources of renewable energy (such as solar and wind), then adjustable renewable sources (such as hydropower), nuclear, and so on, with coal and oil lowest in the ranking. In India, government regulations have been effective in the conversion of Delhi’s three-wheeler taxis to natural gas, among other policies to reduce urban air pollution.

Subsidies, Tax Incentives, and Lending for Deployment and Creating Market Demand A variety of subsidies and incentives are used to reduce the costs of investing in technology demonstration and deployment. Examples include: reduced taxes on inputs, tax holidays, accelerated depreciation, matched investment funding, and import duty exemptions. Governments can also offer concessional loans to reduce firm costs, or loan guarantees to reduce financier’s risks. For example, Thailand’s Revolving Fund provides capital to banks which is made available to borrowers at concessional rates, with the repayments from existing borrowers financing new projects. Equally, subsidies and incentives can be used to create market demand. For example, government rebates on energy efficiency devices or domestic solar panels, low-interest “green” loans on retro-fitting projects, and, from above, feed-in tariffs. Government intervention brings the effective price down for users of a technology, which in turn can assist the accumulation of economies of scale by producers and place further downward pressure on prices, further stimulating demand.

Public Finance for Research, Development, and Deployment (RD&D) The public good characteristics of research and development represent an attractive use of public finance. Various instruments can serve this Evaluation of Current Pledges, Actions, and Strategies 121 purpose, such as: national research institutes, direct government grants, matched investment funding, student scholarships, tax subsidies, among many others. All of the study countries have some form of RD&D funding. Aside from developing new technology, it is also necessary for research to focus on adapting imported technology, a prominent issue in the later discussion of technology transfer (see Section 4.6).

Targets and Policy Processes as Instruments It is useful to recognize that targets and policy processes can also be described as instruments, insofar that they galvanize action. A good example of this is the provincial targets set by the central PRC government for environmental and energy efficiency. Promotion for senior government officials within the bureaucracy has long been dependent upon the achievement of centrally determined targets. Until the 11th Five Year Plan (2006–2010) such targets almost exclusively focused on macroeconomic figures, such as GDP growth. However, today promotion requires achievement of environmental targets, thus building strong incentives for provincial officials to meet targets or follow through on central government initiatives. At the international level, for all of the study countries, targets are a means by which actions and progress can be judged externally, even if these targets or pledges are voluntary. Of course, the effectiveness and desirability of all of these different technology instruments can vary greatly, across countries and time. In essence, these policies are designed to correct market failure; but they in turn can also result in government failure. Any situation where government finance and regulations create profit opportunities is susceptible to rent-seeking by lobby groups. Poorly designed programs may not be cost-efficient, such as high solar feed-in tariffs in Germany and Australia, or have unintended consequences, such as biofuel mandates encouraging deforestation and food insecurity. Whilst it is beyond the current scope to comment on the broad success or failure of technology-based policies to date, in developing Asia or otherwise, it is important to recognize their potential limitations, especially as this is the area where greatest progress has been made so far. Table 4.6 indicates the current application of the above instruments within each of the study countries.

Technology Transfer In addition to the above domestic technology policies, an important issue for developing countries is technology transfer from developed countries. The former have fewer resources to innovate and develop technologies than the latter, and, consequently, there are significant 122 Managing the Transition to a Low-Carbon Economy

Table 4.6: Technology-Based Climate Change Mitigation Policies in the PRC, India, Indonesia, Thailand, and Viet Nam Rebates Efficiency or Grants Certificates Tax Incentives Tax Feed-in Tariffs Feed-in Renewable Energy Energy Renewable Portfolio Standards Portfolio Renewable Quotas/ Renewable Emissions Standards Emissions Fuel Economy/vehicle Economy/vehicle Fuel Public R&D Institutions Public Public Investment, loans, Investment, Public Capital Subsidy, Grants, or Grants, Capital Subsidy, Trading Markets for Energy Energy for Markets Trading Mandated Biofuel Blending Biofuel Mandated

PRC Wind, solar, − •••••••• biomass India Wind, solar, biomass, ••••••••• small-hydro Indonesia Renewable − − − •••••• (incl. geothermal)

Thailand Wind, solar, biomass/ − − − •••••• gas, waste

Viet Nam − − − − − ••••• PRC = People’s Republic of China, R&D = research and development. Notes: Information accurate as of the middle of 2011. Planned policies are not included. Sources: REN21 (2011); Clean Air Initiative (2011); International Energy Agency (2011c); Chotichan- athanwewong et al. (2011); Mathur (2011); Patunru (2011); Toan (2011); Zhu (2011).

benefits to be had from the transfer of knowledge concerning renewable energy technologies. In essence, significant technology transfer would explicitly distribute many of the externalities involved in the supply- push phase (see Figure 4.11); in practice, there are significant obstacles to transferring intellectual property rights, not least of them being commercial concerns (see ICTSD 2008 for an overview). At present a technology transfer mechanism is still developing under the auspices of the UNFCCC, although there are other operational initiatives such as the Asia-Pacific Partnership on Clean Development and Climate.

Carbon Pricing This section focuses predominantly on technology-based policies simply because little progress has been made on carbon pricing in developing Asia, or, for that matter, in any major economy outside Evaluation of Current Pledges, Actions, and Strategies 123

Europe.17 However, given the scale of the additional transformation that is required (see Section 4), carbon pricing will have to become a major component of the policy agenda in the study countries at some stage, and preparations will have to begin soon. Economists view pricing carbon as a necessary, albeit not sufficient, policy action to bring about strong mitigation of climate change. Technology-based policies may address distortions that carbon pricing may not completely overcome (e.g., underinvestment in R&D, financial shortfalls due to risk, or informational barriers), but the former will be insufficient to drive the substantial, necessary shifts in the behavior of industry and consumers: carbon pricing is essential. The OECD (2011: 47) summarizes the issue as follows: “only a strong and lasting carbon price signal will achieve the major transition required in carbon- intensive sectors.” Well designed and well supported carbon pricing is the most efficient way of incorporating the social cost of greenhouse gas emissions into firm and household decision-making. Placing a value on emissions (and consequently raising the price of emissions-intensive inputs, goods, and services) shifts the preferences of consumers toward cheaper low-emissions goods and away from emissions-intensive inputs, and investors toward low-emissions projects with, now, higher returns. What is more, carbon pricing provides a signal for innovators to develop new technologies that will meet the preferences of the other three groups. Placing a price on carbon would certainly seem to be critical to achieving greater energy efficiency, a principal part of the mitigation challenge outlined in Section 4.4. Figure 4.12 compares the PRC (and Taipei,China and the Republic of Korea) to two sets of developed economies: the US and Canada on the one hand, and the EU and Japan on the other. The US and Canada have cheap energy (low electricity and petroleum prices) and a high energy/GDP ratio. By comparison, the EU and Japan have expensive energy and a low energy/GDP ratio. The PRC, with relatively low energy prices and high energy intensity, currently looks much more similar to the US and Canada than it does to Europe and Japan. But the PRC’s mitigation objective requires that it ends up looking more like Europe and Japan in terms of its energy to GDP ratio. It will not get there without higher energy prices.

17 New Zealand and some US states also currently operate emissions trading schemes. Australia and California have legislated carbon pricing to begin in 2012 and 2013, respectively, whilst legislation is currently under consideration in the Republic of Korea for an emissions trading scheme to begin in 2015. 124 Managing the Transition to a Low-Carbon Economy

Figure 4.12: The PRC’s Future: Low Energy Prices or High Energy Efficiency? Cross-Comparison of Electricity Prices, Gasoline Prices, and Energy Intensity (Ratio of Energy Use to GDP)

. . . . . . . . OECD US Canada Japan PRC Taipei,China Rep. of Europe Korea

Industrial Electricity Price ( ) Gasoline Price ( ) Energy Intensity ( )

GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Develop- ment, PRC = People’s Republic of China, US = United States. Notes: Energy prices measured in current US dollars, using market exchange rates. Energy intensity is the ratio of energy consumption to GDP measured using purchasing power parity. All OECD Europe values are normalized to one. Sources: IEA (2009, 2010a).

There are two main types of carbon pricing: a tax and an emissions trading scheme (ETS). Many variations or combinations of the two are possible and, in theory, the outcomes should be the same. In practice, the choice is between price certainty, or certainty over the final level of mitigation. A carbon tax fixes the increase in prices, but without knowing what the final reduction in emissions is going to be. An ETS involves a specific level of economy-wide emissions being set, with permits being allocated or sold to industry and businesses such that aggregate emissions equals the set level. Permits can be sold and bought by participants in the market, thus encouraging firms with low marginal mitigation costs to sell the right to emit to firms with relatively higher costs, with trade producing mutual benefits. The carbon price is determined by the market and the aggregate level of emissions can be reduced over time, encouraging successively greater mitigation.18

18 See Stern (2007), Garnaut (2008) for a more detailed explanation of carbon pricing mechanisms. Evaluation of Current Pledges, Actions, and Strategies 125

Table 4.7: Status of Carbon Pricing in Developing Asia

Policy Description

PRC Pilot emission trading schemes occurring in seven provinces and cities, beginning in 2013 and covering energy production and other emissions-intensive industry. Government officials have indicated 2015 as a provisional starting date for a national scheme.

Electricity levy of CNY0.002/kWh to subsidize renewable energy. India Coal producers pay a levy, or tax, of about $1. Revenue is used to finance clean energy projects. Indonesia In 2009, Ministry of Finance Green Paper proposed carbon tax

of about $10 per ton of CO2, rising by 5% per annum to 2020. No legislation currently under consideration. Thailand Levy on petroleum products of B0.04/liter which contributes to energy conservation fund.

Viet Nam Proposed levy on petrol and diesel (between VND500 and VND4,000 per liter), as well as coal (between VND6,000 and VND30,000 per ton).

CO2 = carbon dioxide, PRC = People’s Republic of China. Sources: Ministry of Finance, Government of Indonesia (2009); Xinhua (2011); The China Daily (2011); Mathur (2011); Howes and Dobes (2011).

At present, experience with carbon pricing, whether a tax or trading scheme, is fairly limited worldwide.19 This is particularly the case in the study countries, although proposals do exist and carbon price style instruments do exist, mostly in the form of levies on electricity or fossil fuels. Progress is being made, however, most notably in the PRC where pilot schemes are being set up, including in the nation’s most industrialized region, Guangdong province, and also in Beijing. Table 4.7 provides further details. It is beyond the scope of this chapter to comprehensively examine the implications of carbon pricing for each of the five study countries. However, several issues require specific attention. The first is cost. Most modeling studies have shown that carbon pricing will be more costly to developing than to developed economies (see Howes and Dobes 2011 for a review). This is largely because, in general, lower-income economies are more emissions-intensive and greater adjustment occurs in response to a carbon price (Stern and Lambie 2010). However, most modeling studies do not consider the revenue implications of a carbon price. Table 4.8 shows the hypothetical

19 See Howes and Dobes (2011, Box 2.2) for a review of real-world experience with carbon pricing. 126 Managing the Transition to a Low-Carbon Economy

Table 4.8: Revenue from $20 Carbon Price and Government Revenue as a Proportion of GDP in Developed and Developing Asia, 2009

$20 US Carbon Government Carbon Revenue as Price Revenue as a Revenue as a % of a % of Government % of GDP GDP Revenue PRC 2.75 20 13.78 India 2.44 18.1 13.52 Indonesia 1.39 16.5 8.46 Thailand 1.72 20.1 8.56 Viet Nam 2.44 24.4 10.03 Australia 0.80 33.5 2.38 Japan 0.43 29.7 1.46 Republic of Korea 1.23 23 5.37 GDP = gross domestic product, PRC = People’s Republic of China. Note: GDP is measured in US dollars, measured in market prices. Source: IMF (2011), authors’ calculation. proceeds of a $20 carbon price on emissions for the study countries in 2009. Clearly, the revenue implications would have been substantial, in terms of overall government revenue and when compared to developed countries in Asia. If carbon price revenues were used to reduce other taxes, or, for example, finance government spending in health and education, then the net costs of mitigation will be reduced, potentially even to the point of a net economic gain.20 A further consideration is the likely benefits to energy importers of a global carbon price. IEA (2011a, p. 227) analysis indicates that carbon pricing in major economies consistent with a 450 ppm trajectory would significantly decrease international fossil fuel prices (before factoring in carbon pricing), and, consequently, decrease import bills and energy insecurity.21 For example, the preceding analysis estimates that the PRC and India would reduce their oil-import bill by around one third in 2035.

20 See Howes and Dobes (2011, p. 25) for an extended discussion of evidence concerning the welfare impacts of carbon pricing. 21 Another important consideration is that a national carbon price would increase demand for energy from renewable sources and more efficient coal technology, as well as reducing overall demand through greater efficiency. These factors would also reduce total energy demand and, consequently, expenditure on fossil fuel imports. See also Howes and Dobes (2011, Box 1.1) for a discussion of the positive impact on the terms of trade for energy importers through pricing carbon. Evaluation of Current Pledges, Actions, and Strategies 127

As the deployment of carbon pricing draws closer to becoming a practical reality, further studies will need to consider the above issues on a country-level basis. An existing example is the Indonesian Ministry of Finance Green Paper (see MoF 2009). The results of this study indicate net gains in GDP growth and poverty reduction in 2020 from the imposition of a modest carbon price of approximately $10/ton CO2 from 2013, with the size of the gains dependent upon how revenue is divided between sales tax reductions and income transfers, and also whether energy subsidies are removed. Finally, the design of a carbon-pricing mechanism is critical to its effectiveness. The over-allocation of free permits in the first two phases of the European Union emissions trading scheme has facilitated a characteristically low carbon price, reducing the environmental effectiveness of the scheme. Other considerations include: degree of coverage across emissions-intensive sectors, incorporation of carbon offset schemes, international linkages, and, of course, supporting infrastructure for monitoring and compliance. As the European Union experience has demonstrated, it will be more difficult to correct design flaws after the fact.

4.5 Policy Challenges

Achieving the additional transformations set out in Section 4.4 will require expansion of the use of policy instruments set out in Section 4.5. This will not be an easy task. The economies, institutions, and, particularly, energy sectors of developing Asia exhibit a number of characteristics which will present significant challenges to effective policy making. In this section we present some of the important challenges to scaling up technology-based and carbon pricing policies and outline the issues which policy makers will have to engage with, namely: energy sector reform, economic reform, institutional reform, and international support.

4.5.1 Technology-Based Policies

Extensive climate change mitigation in developing Asia will require extensive transfer of intellectual property rights for renewable technologies. In the context of global mitigation, an outstanding and significant issue remains, at the time of writing, the prospect of extensive transfer of intellectual property rights (IPR) for renewable technologies. If patent protection limits the ability of domestic manufacturers in 128 Managing the Transition to a Low-Carbon Economy

Asia to adapt externally developed technologies, then, of course, their dissemination is likely to be more limited. In order to mitigate this obstacle, Mathur (2011) proposes that developing countries be involved in international collaborative partnerships from the research and development stage.

Effective technology transfer is conditional on sufficient adsorptive capacity in developing countries. Technology transfer is critical to the proliferation of renewable energy in developing Asia. This process involves much more than simply transferring technology blueprints from developed countries. Achieving widespread dissemination of a renewable technology in developing countries also requires: the development of a local manufacturing base and associated supply chains; systems for maintenance and marketing; a labor force that can build, use, and maintain the technology; and, in many cases, the adaption of technology to local conditions. Without the capacity to absorb and use transferred knowledge, the returns to technology transfer will be limited. Ockwell et al. (2008) therefore argue that domestic and international policy intervention must have a central role in building this capacity.

More research, development, and demonstration (RD&D) spending is required globally, including in developing Asia. Globally, demand-pull policies have been more heavily favored by governments than supply- push policies; there is a strong case for a more balanced approach. In order to meet a 450 ppm target, the IEA (2010b) estimates that an extra $40 billion to $90 billion will have to be spent annually on clean energy RD&D to 2050. While developed countries will likely account for the bulk of future expansion, increasing RD&D in developing Asia will likely be necessary as well. From above, special local conditions, such as Indonesia’s vast geothermal resources, justify targeted investments. Domestic investments will diminish some of the difficulties associated with IPR transfer. Attaining commercial advantage provides another motivation; despite being a leader in production volumes and investment, much of the PRC’s wind turbine technology is well behind the technological frontier (see UNDP 2010).

Public–private partnerships are an important mechanism for leveraging private investment. Section 4.5 outlined the significant barriers to socially optimal private RD&D investment in clean energy technology. Public–private partnerships are an attractive option for leveraging this private investment. Government finance and support provides greater assurance of private returns. Private companies have Evaluation of Current Pledges, Actions, and Strategies 129 a natural advantage in driving efficiency and cost reductions, thus increasing the prospects of commercialization as compared to a solely public financed and operated project. Public–private partnerships have been extensively used in the past to finance expensive public investments in developing Asia, such as major infrastructure projects, and the existing familiarity of governments and industry with this mechanism is highly advantageous.

Policy rigor is important: effectiveness and efficiency requires technology-based policies to be scrutinized. As noted in Section 4.5, the environmental effectiveness and cost-efficiency of technology-based policies cannot always be guaranteed. Governments need transparent, independent processes to assess the costs and benefits of policies before, during, and after their implementation. Transparency will help to reduce rent-seeking activities. Post hoc analysis will yield important lessons for future policy, domestically and in countries pursuing similar policies. There are many different technology-based policies available to governments, picking the right ones, designing them well, and ensuring that they complement each other is critical. In addition to these technology-specific factors, other issues that also relate to carbon pricing are outlined later in this section.

4.5.2 Carbon Pricing

Despite the existence of political obstacles, the introduction of carbon pricing is a necessary, long-term concern across developing Asia. Given the scale of the additional transformation outlined in Section 4.4, as well as the efficiency arguments discussed in Section 4.5, carbon pricing is a necessary item on developing Asia’s climate change mitigation agenda. However, effective policy implementation will involve domestic and international political challenges. Domestically, carbon pricing will raise the cost of electricity and fossil fuels; a politically dangerous proposition given that many low-income households in developing Asia rely on energy subsidies, and that the welfare of the many without grid access, particularly in rural India, would benefit if they could switch from traditional biomass to cheap electricity. Significantly reducing the welfare of the domestic poor in the interests of international climate change mitigation is neither desirable nor feasible for regional governments. Moreover, energy is a luxury good in much of developing Asia: wealthier households are more likely to own cars and household electrical appliances. If the share of household expenditure on energy rises with income, then wealthier households, who are likely to be more politically powerful, will also be opposed to rising prices. 130 Managing the Transition to a Low-Carbon Economy

From an international perspective, the ambition of developing country governments is unavoidably bound by progress on carbon pricing, and mitigation more generally, in developed countries. Outside Europe there has been little progress in rich countries, and within Europe itself carbon prices are, at present, very low. High and effective carbon prices would achieve significant mitigation; developing countries will, and perhaps should, follow developed countries’ progress on both issues. Therefore, unless significant progress is made elsewhere, the introduction of carbon prices in developing Asia would be likely to occur at a low level, rendering them less effective, if they are introduced at all. Over time, however, the international obstacles will be less important. Although current action is relatively limited, developed countries will increasingly introduce carbon prices as climate change becomes more evident and they ramp up their mitigation activities; upon committing to substantial mitigation it is only natural that they should seek the most efficient means. Domestic political constraints may be more difficult to overcome. From the perspective of poor households, absolute welfare concerns may diminish as living standards continue to rise, but perhaps not if energy consumption continues to rise. For both poor and wealthier households, political support for carbon pricing may be contingent upon the development of compensation instruments, a topic considered in the discussion of economic reform further below.

Effective carbon pricing would require a range of supporting instruments and changes: a wholesale package of reforms will be needed. In an abstract sense, carbon pricing is a very straightforward proposition. Its practical application is a much more complicated issue. Not only are there many design considerations, such as the coverage or size of a carbon price, but a range of supporting institutions and processes are also required. For example, electricity price rises must be passed through to consumers, generators must have incentives to switch to renewables, a capable bureaucracy must be present to measure emissions and ensure compliance, and so on. In the following subsections of this chapter, we argue that the underlying requirements for effective carbon pricing are, by and large, not yet present in developing Asia, particularly in the energy sector. What’s more, economic reform, institutional reform, and greater international support from developed countries will be critical to the implementation of carbon pricing and, by extension, substantial mitigation in the region.

Although effective carbon pricing may be a longer-term objective, creating the necessary conditions is an immediate concern. Before turning to the specific policy challenges below, their immediacy must Evaluation of Current Pledges, Actions, and Strategies 131

be highlighted. This chapter does not argue that carbon pricing should or could be implemented at once within developing Asia. Efficiency and effectiveness in the long-term will require the challenges outlined below to be addressed first. This preparatory reform will not be easy; therefore it must begin now to ensure that carbon pricing is a realistic policy option as soon as possible.

4.5.3 Energy Sector Reform

The structure of the energy sector in developing Asian economies is critical to the effectiveness of carbon pricing. Howes and Dobes (2011) outline 12 general characteristics which distinguish energy sectors in developing economies from those in most developed economies, using the PRC, Viet Nam, and Indonesia as case studies.22 For the purposes of the current discussion we focus on 10 of these:

• Rapid rate of energy growth. Energy demand grows rapidly in developing economies, with the electricity sector growing even more rapidly. Figure 4.10 in Section 4.4 of this chapter demonstrates the large projected rise of future energy demand in developing Asia. • Presence of energy subsidies. Petroleum products, coal, and electricity are all commonly subsidized. Four of the study countries rank among the 15 countries with the highest expenditure on fossil fuel subsidies: India (4th, $22 billion a year), the PRC (5th, $21 billion), Indonesia (9th, $15 billion), and Thailand (14th, $8 billion). Consequently, subsidies are a significant claim on government budgets, increasingly so when international energy prices rise. Household electricity prices are significantly below those in developed countries, particularly in Indonesia where they are about half the price (see Howes and Dobes 2011, p. 46). Lower household electricity prices are often funded by cross-subsidies, i.e., industrial prices are pushed up. • Politicization of energy pricing. Price-setting is often conducted in an ad hoc manner by governments. For example, electricity price rises in Indonesia have to be approved by

22 The degree to which these general characteristics apply will, of course, vary between countries, provincial regions, and across time. They are, however, broadly relevant to the current situation of the countries considered in the present report, including India and Thailand. See Howes and Dobes (2011, Chapter 3) for supporting evidence for these general characteristics with specific reference to the study countries; the following provides a summary of the key points. 132 Managing the Transition to a Low-Carbon Economy

Parliament and are, unsurprisingly, uncommon. Despite the existence of a formula to increase the electricity price if coal prices rise by 5% in 6 months, the PRC government has changed it only three times even though the condition was met 10 out of 12 times from the end of 2004. As a result of these and similar circumstances, price rises for petroleum or coal are not fully passed onto consumers. • Presence of energy rationing. Power rationing is a common problem affecting the major economies of developing Asia. High growth in demand is a common problem, while subsidies can also limit the financial capacity of utilities to expand supply. Black-outs and brown-outs can consequently be an important constraint on business activity. In the PRC, power shortages have re-emerged recently as generators have chosen to withdraw from the market rather than endure losses arising from government-set electricity prices that have not kept pace with rising coal prices. • Reliance on captive power. Unreliable power supply and high prices arising from cross-subsidies can often drive industry to become self-reliant through captive power generation. It is estimated that captive power comprises 20% of total power generated in India (Joseph 2009); the corresponding figure for Indonesia is estimated to be 42% (Howes and Dobes 2011). • Constraints on flexibility in dispatch. Weak transmission grids with limited inter-regional connectivity commonly constrain the ability to transfer generated electricity within developing economies. Furthermore, policy-induced inflexibility may be present; in the PRC, for example, generators sell to the grid under a quota system and no extra payments are made for providing additional capacity. • Dominance by state-owned vertically-integrated utilities. The most common model for the electricity sector in the study countries is a state-owned monopoly responsible for generation transmission, and distribution, supplemented by private companies that can sell into the grid. The PRC is something of an exception, having separated generation from transmission, but all the major grid companies and generators are state- owned. • Reliance on central planning in the electricity sector. Investment decisions are commonly made through government- controlled sectoral plans, such as those contained within the PRC and India’s respective Five Year Plans. Evaluation of Current Pledges, Actions, and Strategies 133

• Divergence from commercial orientation. A result of state involvement in the energy sector is that public enterprises, such as state-owned distribution companies, can be confident that the government will bail them out if they fail financially. That being said, energy companies will need to negotiate this assistance, with the likely result that governments will resist meeting the full divergence between costs and low consumer prices. • Political difficulty of reform. Although attempts are being made to reform the power sectors in the major economies of developing Asia, overcoming powerful interest groups and securing sustained political commitment has proved difficult.

Taken together, these features limit the likely impact of carbon pricing. We explore their collective role below, as well as the need for and potential impact of energy sector reform.

Insufficient mechanisms exist for cost-pass-through of carbon pricing. Given the politicization of energy pricing and subsidies, there would seem little certainty that a carbon price would be passed on to customers, in full or at all. In recent years, economies with regulated fuel prices have found it difficult to pass on rising global fuel prices into domestic retail prices. As mentioned above, electricity price rises in developing Asia will meet fierce political resistance. The larger the carbon price, the greater the political consequences, and the less likely cost-pass-through would occur.

Carbon pricing will not be credible without cost-pass-through. Recall that one of the objectives of carbon pricing is to shift consumer preferences away from carbon intensive goods or activities. Without cost-pass-through, consumer prices will not change and there will be no incentive for consumers to change behavior. What’s more, if carbon prices are not passed through, energy companies will not be able to pay their carbon bill to government. Instead of receiving extra revenue, and as a consequence of the lack of commercial orientation, governments may be called upon by utilities to cover their extra costs. With the government covering extra costs through, for example, free permits in a trading scheme, utilities would lack incentives to reduce emissions.

Developing economies may have limited capacity for the dispatch order in the electricity sector to change in favor of less emissions- intensive sources. As noted earlier, shortage of supply is a common 134 Managing the Transition to a Low-Carbon Economy feature of the power sector in the study countries. In the short term, and where there is excess demand, any extra capacity will likely be used, whether it attracts a carbon price or otherwise. A further issue is that renewable energy technologies, such as wind and solar, often occur in remote areas and may be available only intermittently; weak transmission grids and/or inflexible dispatch may limit the capacity for renewable energy to receive priority over fossil fuels.

Governments are already shifting toward gas and renewable energy without a carbon price, if renewable energy is introduced at a low level (as seems likely), then any additional effect on investment decisions may be negligible. Section 3 of this chapter outlined some of the national targets and planning processes committed to in developing Asia. These targets incorporate a range of environmental and economic motivations that assign an implicit carbon price, particularly on coal. Any explicit carbon price is likely to be low, and probably lower than the implicit price already driving energy investments.

Investment decisions made by utilities will not incorporate a carbon price, explicit or otherwise, if it is not credible. Utilities have significant discretion in implementing government plans. For their investment decisions to incorporate a carbon price, the utility must follow an investment plan which deviates from least financial cost. They are only likely to do so if the carbon price is credible. We argued above that utilities are unlikely to believe that they will be able to pass through the carbon price to customers. Given the lack of commercial orientation, they will probably remain reliant on government subsidies, although there is a risk that such subsidies would only be partial and would not cover the full extent of the carbon price. The economy-wide pressure to expand supply and avoid shortages reassures loss-making utilities of continuing government support, but, given that support is likely to be only partial, utilities will still have strong incentives to pursue expansion at least financial cost (i.e., building new coal-fired power plants rather than wind farms). Without credibility, a carbon price does not change the financial reality facing utilities and their investment decisions are unlikely to change significantly, regardless of central planning directives.

The impact of carbon pricing will be heightened by energy sector reform. The characteristics of the energy sector in developing economies which limit carbon pricing are, therefore, important targets for reform. Energy sector reform, particularly in the power sector, typically encompasses: the development of cost-pass-through mechanisms (through, for example, price liberalization or the establishment Evaluation of Current Pledges, Actions, and Strategies 135 of independent regulators), privatization, and the introduction of competition to increase commercial orientation. Such reforms would encourage cost-pass-through, as well as making investment and dispatch decisions more responsive to a carbon price.

Energy sector reform is also important for technology-based policies. The weakness of the energy sector can also undermine the impact of technology-based policies. For example, captive power is prevalent in some economies; the costs of complying with renewable energy mandates typically fall on grid companies who, in turn, pass on these costs to industrial consumers, creating incentives for the latter to rely on captive power. Politicized pricing may undermine feed-in tariffs: utilities may have insufficient incentive to purchase renewable energy at a suitably high feed-in tariff if they are unable to pass on their higher costs to consumers and/or they do not believe that the government will compensate them for these higher costs.

Reform of the energy sector will be difficult and some measures, on their own, could actually increase emissions. As noted earlier, reform of the energy sector has proved a difficult undertaking in the major economies of developing Asia, notwithstanding previous attempts. There is an economic case for continued reform efforts, which is now augmented by the issue of future carbon pricing. It should be noted, however, that reform, particularly in the power sector, will not be easy and, from the perspective of climate change mitigation, results may not always be desirable. For example, without rationing, price increases would be expected to reduce electricity demand. With rationing, however, price increases could stimulate investment in new fossil- fuel generation, increase total energy supply, and reduce rationing constraints, thereby fulfilling previously unmet demand and increasing emissions. Incomplete or only partial reform may, in some cases, be detrimental.23

4.5.4 Economic Reform

Factor market distortions in some economies are facilitating energy and emissions intensive growth. Figure 4.13 shows that some developing Asian economies, particularly the PRC and Viet Nam, have very high levels of investment. In the case of the PRC, Huang (2010) explains high investment as a symptom of the limited liberalization

23 See Howes and Dobes (2011, pp. 65–66) for a discussion of the negative environmental impacts of the PRC’s partial reform of the electricity sector. 136 Managing the Transition to a Low-Carbon Economy of factor markets. Low interest rates and land and energy prices have encouraged capital-intensive production. The combination of low wages and limited social security encourages greater household saving at the expense of consumption, furthering lowering the cost of capital. Consequently, much of the PRC’s recent economic growth has been led by the expansion of capital, energy, and emissions-intensive heavy industry.24 Energy use per unit of GDP, which fell by around 5% per year from 1970 to 2001, actually increased by 3.8% per year between 2002 and 2005 (Zhou et al. 2010); a considerable break with national and international trends which have almost always seen energy intensity fall as GDP rises. In recognition of this unsustainable trend, and the worrying consequences for energy security and the local environment, a centerpiece of the PRC government’s 11th Five Year Plan (2006–2010) was a successful, sectoral-based energy efficiency drive.25 Despite the government’s success in increasing efficiency in, for example, steel manufacturing and coal-fired power plants, Howes and Dobes (2011) argue that a broader approach is needed. Rebalancing the entire economy toward services and away from export-oriented manufacturing will be crucial in reducing emissions. Indeed, the economic importance of this shift is well recognized in the PRC, as are the significant co-benefits for climate change mitigation. While the PRC may be something of an extreme case in terms of the dominant position held by capital-intensive industry in the recent past, there are important lessons to be learned for other economies in developing Asia. Viet Nam and Indonesia could be heading in a similar direction, and India, if large inefficiencies in the power sector are rectified, could find itself in a situation where manufacturing increasingly erodes the currently large economic share of the services industry.

Effective social security policy is critical to the feasibility of carbon pricing, as well as economic rebalancing. A principal consideration in the discussion of controlling investment is, of course, the importance of adequate social security to stimulate household consumption and reduce savings. This is an even more important issue if one considers the prospects for implementing carbon pricing. As mentioned earlier, there is likely to be significant political resistance to the higher prices for energy arising from a carbon price. Low energy prices are a common,

24 See Rosen and Hauser (2007) for an overview of this trend. 25 See Zhu et al. (2011) for a quantitative analysis of the success of the energy efficiency targets. Evaluation of Current Pledges, Actions, and Strategies 137

Figure 4.13: The Ratio of Investment to GDP for Developing Asia and the Average for OECD Economies

Investment/GDP Investment/GDP ()

OECD members PRC India Indonesia Viet Nam Thailand

GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Develop- ment, PRC = People’s Republic of China. Notes: Investment is measured as gross capital formation. See World Bank (2011) for further details. Source: World Bank (2011).

albeit inefficient, form of social security. In order to secure political support for higher energy prices, governments will need adequate compensatory instruments; those which would be used in developed economies, such as lower income taxes or direct welfare payments, may not be available or have insufficient scope. The proposition that social welfare reform may be a necessary precondition for carbon pricing to be politically feasible and socially desirable is a challenging one, but worthy of further research. This is particularly the case in the PRC, where a national emissions trading scheme is provisionally planned for 2015, and there exist significant gaps within the social welfare system, particularly for migrant workers, and in health care (see Huang 2011). 138 Managing the Transition to a Low-Carbon Economy

4.5.5 Institutional Reform

Effective and efficient operation of a carbon price, whether a tax or trading scheme, would demand substantial institutional capacity. A carbon price would be a fundamental reform affecting the entire economy; proper management of such a large reform demands substantial institutional capacity. Not only would systems need to be put in place to design and manage the mechanism over time, government bureaucracy would need to monitor emissions by affected business entities, ensure compliance through credible enforcement, monitor the economic and social impact, and so on. Creating the necessary additional institutions in a developing country may be hard enough, doing so in developing countries where institutional capacity may already be lacking would be harder still. A large body of skilled bureaucrats with ample resources would be required. Coordination between different government departments and provincial and local authorities would be necessary. In some cases, where government is based on a federalist system, fundamental changes may be necessary to put in place responsibility for taxation arrangements and other domains of economic and social governance. None of these conditions or requirements are likely to come about easily; improved governance is a much sought after, yet elusive objective in many developing economies. Fortunately, however, developing Asia is gaining increasing experience with market-based mechanisms within the domain of climate change mitigation—the Perform, Achieve, and Trade Mechanism in India, generation rights trading and the pilot emissions trading schemes in the PRC, or the various fossil fuel taxes in all countries—and the lessons learned and extra capacity created will facilitate future institutional reform. Corruption remains a common problem and will undermine future climate change mitigation policy. Public sector corruption is a significant issue in Asia’s major developing economies. Transparency International’s (2011) recent rankings of 182 countries on a scale of 0 to 10, with 0 being highly corrupt, represent all five countries poorly: Thailand (rank 80, score 3.4), the PRC (75, 3.6), India (95, 3.1), Viet Nam (112, 2.9), and Indonesia (100, 3). It is not necessary however to look to ratings by international think tanks; the scale of the problem has been self-evident from, for example, large-scale public protests against government corruption in India and the PRC over recent years. Table 4.8 indicated the large potential increases in government revenue associated with carbon pricing; capture of this extra revenue by corrupt officials would reduce the benefits of extra revenue and increase the national costs of mitigation. Rent-seeking involving corrupt activities Evaluation of Current Pledges, Actions, and Strategies 139 could generate inappropriate technology-based policies, or government investment decisions. Companies may underreport emissions in order to avoid compliance. Although these propositions are generalized and hypothetical, the risks are clear. Moreover, corrupt practices may prove a disincentive to foreign investment and act as a barrier to acceptance into international markets for carbon offsets and emissions reductions, thereby limiting the economic benefits of a domestic carbon price.

4.5.6 International Support

Financial support from developed countries is necessary and justified. It is in the developed world’s interests for developing Asia to cut emissions; therefore it is imperative for developed countries to finance the significant gap between the up-front benefits and costs of mitigation. The domestic motivations outlined in Section 4.2 of this report, such as energy security and improved local environmental conditions, involve substantial benefits over time, but probably not enough in the short term to drive the major, additional transformations required. Substantial additional investments in, for example, renewable energy need to occur soon to avoid locking-in future emissions. While sufficient resources may be available, at least in the PRC, to pursue some of the large necessary investment independently, developing Asian economies have other, more immediate priorities than future climate change; chief among them is raising the standard of living. As arrangements for the UNFCCC Green Climate Fund progress in a risky global economic environment, it is important that developed countries fulfill their climate finance commitments; the major economies of developing Asia cannot and should not be expected to carry the full burden of their mitigation costs alone.

Non-financial forms of assistance could be, in some cases, even more important. Achieving extensive technology transfer will require new arrangements and, perhaps, willingness on the part of developed countries to forgo some commercial advantage for their own industries. The earlier discussion highlighted the significant institutional capacity requirements of carbon pricing; technical assistance from developed countries and multilateral organizations will therefore be very advantageous. Of course, developing countries would benefit greatly from the knowledge created by the experience of carbon pricing and substantial mitigation activities in developed countries; a key driver for mitigation in developing Asia will therefore be the establishment of ambitious carbon pricing in developed countries. 140 Managing the Transition to a Low-Carbon Economy

Regional cooperation will promote climate change mitigation in developing Asia. International support extends beyond developed countries. Despite variability in economic structure and society, the major economies of developing Asia share two important characteristics: high rates of growth and the need to alter their development trajectories. Achieving the latter transformation amidst the former trend will throw up many policy challenges, above and beyond those mentioned in this report. The exchange of knowledge on how to overcome these many challenges will be mutually beneficial, particularly with regard to technology adoption, difficult reform processes, and minimizing mitigation costs. Coordination of national policies may reduce the prospect of intraregional carbon leakage. If and when national carbon prices arise, regional linkages could reduce mitigation costs by exploiting areas of comparative advantage in reducing emissions, such as deforestation in Indonesia, agriculture in Viet Nam, or the efficiency of coal-fired power plants in India.

4.6 Conclusion

The preceding analysis of major policy challenges facing developing Asia may appear, at first glance, to cast a pessimistic light on the prospects for extensive action on climate change. This is not the intention of this chapter. Rather, the purpose is to highlight the importance of a broad-scale approach to mitigation that extends across all levels of the economy and government. Isolated or sector-focused policies will not be sufficient for the major switch to a low-carbon, environmentally sustainable trajectory. Carbon pricing, a transformative policy that will be necessary in the future, is instructive in this regard: a large number of complementary reforms will be required for extensive carbon pricing to even be a feasible policy option. This chapter also emphasizes the importance of governments in developing Asia continuing to increase their level of ambition. It is certainly the case that recent policy announcements and targets have already transformed emissions trajectories and developing Asia is making a major contribution to collective global efforts. The problem is, however, that the current course remains insufficient. Developing Asia is the engine of today’s emissions-intensive global economy. The limits of the climate system prohibit a region containing one third of the world’s population, including the majority of the global poor, from following the same development path of today’s high-income countries. The countries considered in this report are the principal Evaluation of Current Pledges, Actions, and Strategies 141

source of future emissions and, in the case of the PRC and India, among the largest contemporary sources. Analysis in this report shows that if zero emissions could be achieved in developed countries, and the current trajectory continued in developing Asia, aggregate global action would likely still be insufficient. Further action is needed, and quickly, to avoid locking-in emissions intensive infrastructure as Asia’s energy demand surges, and to reduce the costs of mitigation. The central role of the study countries in global mitigation efforts points toward the final central message of this report: considerable international support is required for developing Asia to reach a low- carbon trajectory. There are substantial domestic benefits to mitigation, but likely not enough to drive the large, up-front investments that, in the global interest, are needed to develop Asia’s energy infrastructure. Given the necessity of meeting short-term social priorities, such as raising living standards, governments in developing Asia will not and should not bridge the gap between costs and benefits alone. If it is in the interests of developed countries to see extensive climate change mitigation in developing Asia, then it is in their interests to provide substantial assistance, financial or otherwise.

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Chapter 5 Co-Benefit Technologies, Green Jobs, and National Innovation Systems Sivanappan Kumar, Naga Srujana Goteti, and Prathamesh Savargaonkar

5.1 Introduction

Technological measures, whether to promote low-carbon green growth or rapid industrialization, have unintended side-effects. These can be both negative (co-damages) and positive (co-benefits). In many analyses of the effects of current environmental policies, these side effects are often considered only partly or not at all. Furthermore, interactions among different technology measures can influence and be influenced by the environment and the socioeconomic system. Therefore, there is an urgent need for a methodological framework that considers all side effects to enable a better evaluation of technologies for all stakeholders at local, regional, and national levels. When implementing and creating initiatives that promote the development and use of low-carbon technologies, robust methods are needed to identify, categorize, and quantify their co-benefits and co- damages. Interest in co-benefits is increasingly becoming a crucial factor for enabling successful greenhouse gas (GHG) mitigation strategies that do not compromise national economic development plans (TERI 2010). However, policy makers need a way of quantifying the co-benefits from each low-carbon technology on a common platform so they can be evaluated against cost-efficient traditional technology projects. A

149 150 Managing the Transition to a Low-Carbon Economy methodology is provided here to evaluate the co-benefits of low-carbon technologies, paving the way for investments and policy developments in developing countries, and thus to create an economy that is resilient to climate change. Specifying the co-benefits associated with a low-carbon technology can only help improve its potential for implementation. To assist in the promotion of low-carbon technologies using quantified co- benefits, economic, management and institutional approaches can be identified through national innovation systems, defined as systems ”of interconnected institutions to create, store, and transfer the knowledge, skills, and artifacts which define new technologies” (Metcalfe 1995; OECD 1999, p. 138). The proposed methodology is based on the hypothesis that low- carbon green growth is an imperative for the Asia-Pacific region, especially since the emerging economies of Asia are heavily dependent on limited resources. Well timed policy interventions and defined targets can boost carbon efficiency, increase economic growth, and help solve societal problems (Yohe 2007). An evaluation of these individual approaches is necessary to identify relevant approaches to maximize available benefits. Thus, a comprehensive evaluation of co- benefits means an appropriate incentive-based system of approach and intermediaries can be designed within the national innovation systems framework. This will promote investment in low-carbon technologies, thus enabling GHG emissions mitigation. The framework links various components of the national innovation systems in areas related to technology innovation and transfer policies, and the transfer chain participants. Thus, this chapter can be explained as an analysis of the diffusion of low-carbon technologies based on country competencies for creation and innovation through various technology transfer mechanisms and policies. The chapter thus aims to review the current status and cost of prevalent low-carbon technologies and existing innovative approaches and policies for low-carbon technology promotion. It then:

• identifies and analyzes the effect of co-benefit technologies and their potential for low-carbon green growth, • quantifies the co-benefits from the technologies, and • identifies various economic, institutional, and management approaches for mobilizing resources in stimulating innovation at the regional level. Co-BenefitT echnologies, Green Jobs, and National Innovation Systems 151

5.2 Analysis of Co-Benefits from Low-Carbon Technologies

The co-benefits of any technology may be large and diverse. They may be direct or standard (which can be quantified) or abstract (which are not easily quantified). Also, co-benefits may be direct in the sense that they affect the participating stakeholders directly or abstract in the sense that they are ancillary to the stakeholder or sector but affect the economy (multiplier co-benefits). Co-benefits can vary based on investment, purpose, and location. The study focuses only on level 1 and level 2 co- benefits. The three levels are defined as follows:

• Level 1. Standard co-benefits are roughly proportional to the amount of investment, irrespective of the source, e.g., job creation and health benefits. • Level 2. Abstract co-benefits only happen above a certain level of investment and occurrences (e.g., time or implied assumptions). They are not proportional to the scale of the investment, but require it to reach a critical level, or may demonstrate a snowball effect. • Level 3. Multiplier co-benefits are interlinked and not easy to quantify. Innovation can lead to capacity building as well as improved productivity, which in turn can boost market growth, with additional co-benefits, e.g., new jobs.

Table 5.1 provides a detailed analysis of co-benefits of low-carbon technologies in the Asia-Pacific under the technological approach. The direct approach defines generic level 1 co-benefits, while the indirect approach defines generic level 2 and level 3 co-benefits.

5.2.1 Job Creation Co-Benefits

Job creation is one of the most important co-benefits of low-carbon and renewable energy technologies. However, these technologies have both positive and negative impacts, as job creation by the low-carbon technologies offsets jobs in the fossil fuels sector and thus it is important to measure the net impact. A literature review suggests there are two complementary approaches for estimating job creation resulting from renewable energy projects (Ecofys 2010):

• The simplified methodology of the Renewable Energy Policy Network for the 21st Century (REN21 2011) is an analytical 152 Managing the Transition to a Low-Carbon Economy continued on next page on next continued Level 2 and Level 3 2 and Level Level Jobs are created in collection schemes, sorting plants, plants, sorting schemes, in collection created are Jobs paper mills recycled offset and pulp are wood of prices Import resources natural use of in overall Decrease and advertising, in design, marketing, creation Job paper recycled distribution of disposable cheaper than trash are services Recycling services public health Improved development community Rural availability power and reliable Stable a of the form among farmers—in organization Increased markets energy to gain access can union so they diversification Industrial of burning temperature efficiency and the volumetric High cooler. valves gasoline which keeps than regular is cooler and better power increased to This also contributes productivity emissions of reduction by gas savings Greenhouse components Biodegradable agricultural for markets alternative of Creation commodities Technological Analysis For Co-Benefits For Analysis Technological Level 1 Level Increase in cost efficiency due to reduction in use of reduction in use to efficiency due in cost Increase wood virgin and expensive precious produce to is required energy as less savings energy Better paper recycled environmental fewer have plant recycled from Effluents impacts wear with reduced engine components of life Increased and tear monoxide and carbon hydrocarbons of emissions Reduced soil conditions Improved fuel imports fossil Decreased urban air quality Improved without bad odor exhaust Non-toxic in industrial sectors creation Job incomes farm Increased security energy Increased fuel exports Increased Table 5.1: Standard and Abstract Co-Benefits Available From Low-Carbon Technologies Low-Carbon From Available Co-Benefits and Abstract Standard 5.1: Table Low-Carbon Technology Energy intensive industries intensive Energy as an paper recycling (advanced enabling technology) Sector Transportation (biodiesel production) Bio-ethanol Production sectors and forestry in agricultural creation Job Co-Benefit Technologies, Green Jobs, and National Innovation Systems 153 Level 2 and Level 3 2 and Level Level Better biodiversity, soil recovery and regeneration of land of and regeneration soil recovery biodiversity, Better something useful producing land for marginal of Use small entrepreneurs and boost to creation Job generators act as power can Biofuels aesthetics Better GHG emissions lower due to Cleaner climate better leading to residuals disposal of risks for Lower acceptance R&D initiatives of and furthering Enabling development due to parties private for development Sustainable products marketable Technological Analysis For Co-Benefits For Analysis Technological Level 1 Level Methane use use carbon due to reduction Wastage resources) of utilization oil (Better cooking of Recycling Clean of and promotion GHG emissions Zero women and children for benefits life Quality of Mechanism methodologies Development lands used agricultural algae as fuels thus savings of Use biodiesel fuel production for wastage Lower economic improved leading to generation Revenue efficiency electricity be used for which can syngas of Generation conventional to as compared residuals of Reduction technologies cost capital Low in odor and dust Reduction Low-Carbon Technology Household Sector Household stoves) cooking (improved Sector Industrial management) (solid waste Table 5.1 continued Table gas. GHG = greenhouse and http://cleanair- http://climatetechwiki.org sources: (2010). Online Parliament (2010); Climate UNEP-IETC (2011); IPCC (2007); Japan the Environment, Ministry of Sources: initiative.org 154 Managing the Transition to a Low-Carbon Economy

approach using employment coefficients based on information on labor in person-years per MW of installed capacity, and data on expenditure necessary to support a full-time job (person- years per $ invested). • Another methodology uses New Energy Finance (NEF 2009) data for the wind and solar photovoltaic (PV) sector, taken from published accounts and interviews with representatives of leading companies. NEF takes a global approach although most of the projects and companies it covers are in developed countries

The first approach provides an estimate of job creation within a range. The second, which is available only for some renewable energy technologies, provides examples with which the data can be compared. Table 5.2 provides data for different technologies. The following comments relate to the data in Table 5.2.

Solar PV The cost per MW installed varies in each developing country, but also depends on the size of the installation. For example, 1 MW installed in Abu Dhabi as part of a 40 MW project costs $3.3 million; 1 MW installed in Southern Africa for a 1 MW project costs $ 4.5 million. The cost can reach $9 million per MW for small roof-top installations.

Wind NEF estimates that a total of 10.2 full-time equivalent jobs are created for each MW installed, taking into account direct jobs in companies supplying materials (0.6 jobs), components, subassemblies and assemblies for wind turbine manufacturing (7.5), plus those in firms developing and servicing (0.2), research (0.1) and constructing wind farms (1.6), and those in the operation and maintenance of wind assets (0.2).

5.2.2 Health Co-Benefits

Previous studies have translated the available co-benefits into a monetary value. In this study, we have quantified the health co-benefits qualitatively and quantitatively (realistic measures) since assigning monetary measures to health co-benefits is highly controversial. Health co-benefits can be directly linked to the implementation of low-carbon technologies in the sense that they reduce air pollution arising from the GHG emissions of traditional technologies. Hence, these co-benefits are important not only because they may provide an additional rationale for Co-BenefitT echnologies, Green Jobs, and National Innovation Systems 155

Table 5.2: Estimated Job Creation Co-Benefits from Low-Carbon Technologies

Range of jobs Estimated by New created per MW Energy Finance Measure new capacity (2009) Manufacturing and installation of solar photovoltaic power plants 7.1–36.4 1. Rooftop installation 36.4 2. Other installation sites 21.4 Operation and maintenance of solar photovoltaic power plants 0.1–2.5 0.6 Manufacturing and installation of solar thermal electricity power plants 6.25–22.4 22.4 Operation and maintenance of solar thermal electricity power plants 0.7–1.58 0.8 Manufacturing and installation of wind power plants 2.6–37.5 10 MW = megawatt. Source: TERI (2010); NEF (2009). pursuing mitigation strategies, but also because progress has been slow in addressing international health priorities such as the UN Millennium Development Goals (MDGs) and reductions in health inequities. Careful selection of climate change mitigation measures will benefit both the environment and public health (Haines et al. 2009). In the low-income countries of Asia-Pacific, the products of incomplete combustion in traditional solid fuel stoves lead to heart and respiratory problems. National programs offering low-emission stove technologies for burning local biomass fuels in poor countries could, over time, avert millions of premature deaths, and constitutes one of the strongest and most cost-effective climate–health links of low-carbon technologies. Box 5.1 illustrates the health co-benefits resulting from improved cooking stoves in India. Energy generation, transportation, agriculture, and food production contribute to a large amount of GHG emissions. Use of low-carbon technologies in these areas can lead to important co-benefits. In the city of Delhi, for example, it has been estimated (IAMP 2010) that use of low-carbon measures in transportation could bring a cut of 10%–25% in heart diseases and stroke along with a 17% fall in the risk of diabetes. Haines et al. (2009) present data on health co-benefits from low-carbon measures in household cooking, transport, and low-carbon technologies (Table 5.3). 156 Managing the Transition to a Low-Carbon Economy

Box 5.1: Cooking Stoves in India

Indoor air pollution in India and other developing countries is largely due to the inefficient cooking technologies used widely in the rural areas of the country generating energy from semi-burnt fossil fuels. It is

estimated that almost 29% of CO2 emissions in India can be attributed to these technologies. Indoor air pollution from inefficient cooking stoves increases the risk of acute respiratory tract infections in children younger than 5 years and chronic respiratory and heart disease in adults older than 30 years. It is noted that “...by 2020, the cumulative effect of the proposed Indian stove program would enable the country to lower the national burden of the three diseases mentioned above by about a sixth. This would be equivalent to the elimination of nearly half the country’s entire cancer burden, while reducing its GHG emissions”.

Source: Lancet (2009).

Table 5.3: Case-Based Health Co-Benefits from Low-Carbon Measures

Measures Country/City Health Effect Reduction in exposure to Clean-burning stoves India indoor pollution

Less air pollution, changes Low-carbon and more Delhi, India in injury risk, changes in active transport physical activity

Low-carbon fuels and Reduced (particulate) air PRC and India technologies pollution PRC = People’s Republic of China. Source: Lancet (2009).

5.2.3 Economic and Energy Security Co-Benefits

Energy security is defined as ensuring the availability of diverse energy resources in sustainable quantities at affordable prices, supporting economic growth, assisting in poverty alleviation measures, not harming the environment, and taking note of shocks and disruptions (Shrestha and Kumar 2008). Energy security co-benefits are implied and indirect, so quantifying them is very difficult. Studies have noted various energy security co-benefits, some of which are as follows (IPCC 2007): Co-Benefit Technologies, Green Jobs, and National Innovation Systems 157 increased dependence on renewable energy sources helps to reduce import dependency and in many cases minimizes transmission losses and costs; electricity, transport fuels, and heat supplied by renewable energy are less prone to price fluctuations, although they have higher initial costs; implementation of low-carbon technologies are usually accompanied by liberalization and privatization policies that lead to free energy markets which provide greater market competition and lower consumer prices. Box 5.2 contains an example of energy security benefits in the PRC.

Box 5.2: Energy Generation Systems in the People’s Republic of China Reduce Dependence on Fossil Fuels

In the largest coal-producing province of the People’s Republic of China (PRC), an ADB-supported project is demonstrating the latest technologies in capturing methane and turning it into a clean, safe, and cheap fuel. The PRC is the world’s largest producer and consumer of coal and sends more than 13 billion cubic meters of methane annually into the atmosphere. More than 70% of the PRC’s energy supply comes from coal, which produces methane, a greenhouse gas (GHG) about 22 times more potent than carbon dioxide. Largely as a result, many cities fail to meet minimum standards for air quality and acid rain falls on about a third of the country. The ADB provided a $117.4 million loan for a project to capture this excess methane and use it in the process of energy generation. The project captures and produces coal mine methane for a 120-megawatt power plant and distributes it to consumers in Jincheng. It also produces coal bed methane, mostly as transport fuel. Significantly, as a means to mitigate climate change, the project avoids GHG emissions from 265 million cubic meters of methane or at least 4.4 million tons of carbon dioxide emissions as it saves the burning of over 430,000 tons of coal a year, according to experts. Additional benefits from the sale of carbon credits under the Clean Development Mechanism will provide an estimated total revenue of more than $100 million until 2012.

Source: ADB (2010).

Co-benefits need to be quantified based on the relevance and efficiency of outputs to the stakeholder as the co-benefits for the same technology may differ widely. Table 5.4 gives some examples of different low-carbon technologies in Asia with varying co-benefits. 158 Managing the Transition to a Low-Carbon Economy Additional Additional Co-Benefits Quantification of Quantification A beneficiary management has committee with been formed from representatives offices government hill tracts and local communities. 1. Rebates available available 1. Rebates at installation for the about 30% of cost system installed 2. A photovoltaic solar electric system home value increases each for $20,000 by in annual $1,000 operating reduced costs continued on next page on next continued Global 1. Transmission losses losses 1. Transmission savings spending on 2. Lower health policies due health reduced to hazards of 3. Creation employment opportunities value 4. Property and appreciation new selling addition of features 1. Less currency currency 1. Less due to exposure dependence reduced for on oil imports energy generation 2. Revenue and via net metering systems tariff feed-in Economical Local 1. Maintenance 1. Maintenance so almost zero free costs operating hazards safety 2. No in health so reduction risks cost of 3. Creation employment opportunities 4. Sustainable property of reduction costs management 1. Revenue generation generation 1. Revenue opportunities work 2. Productive and time enhanced saved Co-Benefits Global 1. Lower energy energy 1. Lower demand and consumption carbon 2. Enhanced market trading to efficiency due CDM number of large projects waste 3. Reduced 1. Offsetting of GHG 1. Offsetting emissions 2. Enhanced of sustainability resources Environmental Local 1. Better security, security, 1. Better transportation and business opportunities chemical 2. Lower pollution due to environmental friendly disposal excavation 3. No electric supply for so better via cables resource natural conservation 1. Cleaner environment utilization 2. Arid area noise of 3. Reduction silent pollution due to operation BPDB had installed BPDB had installed of capacity a total solar-powered 7.2 kW in lights street subdistrict Jurachari hill Chittagong of area tract By January 2005, January By Bangladesh Power Board Development (BPDB) had installed solar about 2,100 in home systems hill tract Chittagong (Juraisarichub, area Belaichari and Borkol subdistricts) Technology Specification Study Case 36 kW solar home systems Table 5.4: Case Study Matrix for Co-Benefits Evaluation and Quantification Evaluation Co-Benefits for Matrix 5.4: Case Study Table End Use End Use Application Street lightsStreet kW 7.2 2005, January By Solar home system Location Country and Bangladesh, Chittagong hill tract Bangladesh, Chittagong hill tract Technology Technology Name Photovoltaic Photovoltaic Technology Photovoltaic Photovoltaic Technology Co-Benefit Technologies, Green Jobs, and National Innovation Systems 159 Additional Additional Co-Benefits Quantification of Quantification 1. Accelerated helps indepreciation project of recovery within 3 yearscosts enabled credit 2. Tax 100 smallover entrepreneurs the promote to technology 3. 3-5 jobs for andmaintenance createdinstallations The committee The committee for is responsible collections revenue the solar from electricity consumers, and operation the of maintenance SPV and systems the future also for expansion of further more to the systems households. continued on next page on next continued Global 1. Larger market for for market 1. Larger goods pharmaceutical equipment 2. Longer better leading to life conservation resource Economical Local 1.Accelerated 1.Accelerated depreciation enables technique higher business opportunities credit 2.Tax on the available enabling systems entrepreneurship promotion running and 3. Lower costs maintenance present which were due to previously outages power Co-Benefits Global 1. Increased longevity 1. Increased human and better health quality of 2. Elimination material hazardous being exposed to environment Environmental Local 1. Better health 1. Better emissions 2. Lower to when compared and diesel powered powered kerosene refrigerators installed six sets of six sets of installed refrigerators vaccine Barkal in Jurachari, and Thanchi subdistricts Technology Specification Study Case 360 Wp 2008, BPDB had By End Use End Use Application Vaccine Vaccine refrigerators health for system care Location Country and Bangladesh, Chittagong hill tract Technology Technology Name Photovoltaic Photovoltaic Technology Table 5.4 continued Table 160 Managing the Transition to a Low-Carbon Economy

2 /year when /year 2 /year when /year 2 Additional Additional Co-Benefits Quantification of Quantification 1. Reduction of 56% in of 1. Reduction non-methane organic 46% CO compounds, replacing kerosene replacing replacing gas and replacing 510kgCO and 34% methane 4. Typical carbon 4. Typical around are savings 230 kg CO continued on next page on next continued Global 1. Promotion of of 1. Promotion gender equality and due empowerment earning enhanced to women for capacities market 2. Enhanced enterprises for access Economical Local 1. Micro enterprise enterprise 1. Micro development safety 2. Better and education due opportunities night of operation to school of 3. Creation jobs permanent Co-Benefits Global 1. Cleaner and more 1. Cleaner and more efficient energy- due to environment waste non-burning of generation. heat for air quality 2. Improved Environmental Local 1. Arid area utilization utilization 1. Arid area soil preventing erosion of GHG 2. Offset from emissions of transportation the fuels to fossil region access difficult had installed had installed AC centralized electrification market about 200 for system in shops in a market district Jurachari Technology Specification Study Case 10 kW 2008, BPDB By End Use End Use Application Centralized Centralized electrification for commercial purposes Location Country and Bangladesh, Chittagong hill tract Photovoltaic Photovoltaic Technology Technology Technology Name Table 5.4 continued Table Co-Benefit Technologies, Green Jobs, and National Innovation Systems 161 equivalent/year Additional Additional 2 Co-Benefits Quantification of Quantification 4.100% depreciation depreciation 4.100% enables opportunity entrepreneurship promotion 1. This wind farm is 1. This wind farm $2 India’s of a part billion clean energy program. Nadu Tamil 2. Today about contributes wind India’s 40% of energy 3. The Muppandal farm wind energy about 50,000 offsets t CO continued on next page on next continued Global 1. Successful 1. Successful of implementation plant wind power mix of with right financial incentives and adequate the from support government local foreign motivated invest to investors in the wind farms for Nadu Tamil of returns. greater 2. The successful of implementation wind farm Muppandal the use accelerated wind technology of Tamil of in the state Nadu. Nadu 3. Tamil wind promoted with the right energy policies and mix of it is a nodal today many for point wind energy giant such manufacturers Gamesa as Suzlon, and Vestas. Economical Local 1. Heavy power power 1. Heavy industries consuming and such as textile industries cement captive consume this wind from power farm. shedding 2. Load during summer was heavy to a handicap consuming power industries but it was by wind energy, offset which peaks during summer 3. Agricultural rural productivity, health industries, and educational could opportunities the benefit from low- of availability and this power cost the rural down slowed exodus Co-Benefits Global emission levels emission 2 1. Direct reduction in reduction 1. Direct CO Environmental Local 1. Local ground water water ground 1. Local not soil are and top polluted use of 2. Reduced non-renewable energy lands farm 3. Wind be effectively can and farming used for grazing Gamesa Eolica Gamesa Eolica (Spanish company) supplied G58-850kW Indian turbines to Pioneer company Asia wind turbines of the erection for wind turbines in in area Muppandal Tamil of the state Nadu Technology Specification Study Case 22 MWe MWe 22 wind onshore farm End Use End Use Application Local villageLocal electrification Location Country and Technology Technology Name Wind Power Wind Table 5.4 continued Table 162 Managing the Transition to a Low-Carbon Economy Additional Additional Co-Benefits Quantification of Quantification 1. Average annual 1. Average production: heat kWh 2,055 period: 2. Payback 3. Carbon 15 yrs 398 kg offset: continued on next page on next continued Global 1. Creation of green green of 1. Creation jobs 2. Revenue through generation CDM projects Economical Local 1. More productive productive 1. More time and for opportunities women generation 2. Heat food local promoted industry processing 4. New startups like like startups 4. New and Infotech Sterling also Lietner have manufacturing started wind turbines in the Nadu Tamil of state of the success after which this project, many by followed was other projects 5. The local Tamil of government a tax provides Nadu about for holiday and a total 5 years about of depreciation 100% Co-Benefits Global 1. Cleaner air health improving quality safety 2. Better during workers of due to manufacturing parts moving lack of 3. Land conservation as generating coal electricity from as much or requires land per unit of more (if delivered energy the land used in strip into mining is taken account) Environmental Local 1. Almost zero GHG 1. Almost zero emissions sanitation 2. Better reducing facilities pollution utilization 3. Arid area n/a flat flat 2 Technology Specification Study Case plate solar plate hot water system End Use End Use Application Location Country and Sri Lanka Domestic 4.5 m Technology Technology Name Solar Thermal Table 5.4 continued Table Co-Benefit Technologies, Green Jobs, and National Innovation Systems 163 Additional Additional Co-Benefits Quantification of Quantification 1. Average annual 1. Average production: heat kWh 4,096 period: 2. Payback 10.6 years 3. Carbon offset: kg 794 1. Saving of time of 1. Saving of and convenience technology—farmers about 1–2 hours/ save and 15–30 days/ day to compared year usage of conventional and charcoal firewood household 2. Per $12 to $1.18 of saving as compared per plant and firewood to batteries continued on next page on next continued Global 1.Creation of green green of 1.Creation jobs of 2. Promotion industries such as tourism 3. R&D and transfer technology incentives 1. Entrepreneurship 1. Entrepreneurship sale from opportunity slurry of animal 2. Better leading sanitation animal enhanced to husbandry production operation 3. Efficient subsidy tax of policies as they simultaneously to contribute of growth economic the region Economical Local 1. Creation of jobs and of 1. Creation female of promotion entrepreneurship 2. Cheapest energy for source generation locals 1.Saving of productive productive of 1.Saving time and convenience jobs of 2. Creation and cheaper than methods traditional 3. Enhanced productivity Co-Benefits Global 1. Cleaner air health improving quality 1. Lower GHG 1. Lower by- due to emissions generation product bio-fertilizer, of the need reducing manufacture to a fertilizer, artificial highly GHG-intensive process Environmental Local 1. Almost zero GHG 1. Almost zero emissions 1. Fewer GHG 1. Fewer emissions 2. Cleaner air respiratory 3. Fewer diseases tract rate growth 4. Better crops harvested of n/a Participants in the Participants Biogas National (NBP) Program a study conducted districts in the four province Takaev of biogas on rural in 2009 application flat flat 2 ) 3 Technology Specification Study Case Chinese model based (4–6 digester m plate solar plate hot water system 8 m End Use End Use Application Cooking stoves, lighting and Commercial Location Country and Takaev Takaev province Sri Lanka Domestic Technology Technology Name Biogas Cambodia, Solar Thermal Table 5.4 continued Table 164 Managing the Transition to a Low-Carbon Economy Additional Additional Co-Benefits Quantification of Quantification 1. Payback period of period of 1. Payback of with cost 4.5 years $30/tonne fuel at project of cost 2. Total is $16 million of 3. Annual revenue $3 million over on 4. Return 22% at investment 16 of 5. Creation jobs and permanent 450 jobs total 6. Cost per household at in the project $11,765 1. Electrification of 1. Electrification 500 homes which earlier had no access electricity to 2. About 161 families receiving are daily education on environment conservation continued on next page on next continued Global 1. Creation of waste waste of 1. Creation jobs management in the economy offsetting unemployment of 2. Provision the to diversity offsetting farmers, value their market risks 1. Enables better 1. Enables better access energy market improving global for opportunity manufacturers huge 2. Involves and thus investments boosts the economy Economical Local 1. Generation of more more of 1. Generation to jobs as compared other low-carbon technologies generation 2. Revenue from the locals for daily waste 1. Improved 1. Improved and recreational environmental attractiveness revenue generating permanent 2. Creates other jobs unlike energy renewable methods Co-Benefits Global 1. Biomass fuels 1. Biomass no virtually produce and sulfur emissions acid rain help mitigate energy 2. Perennial (grasses crops and distinctly have trees) environmental lower impacts than farm conventional Energy crops. less require crops and fertilization herbicides and greater provide 1. Community of awareness resources natural conservation accidents 2. Reduced and health hazards otherwise occurring firewood from collection Environmental Local 1. The recycling of of 1. The recycling wastes biomass the need to mitigates new landfills create of the life and extends existing landfills 2. Biomass produces combustion and ash than coal, less ash disposal reduces and landfill costs requirements space ash 3. The biomass also be used as can in a soil amendment land farm 1. Reduced drudgery 1. Reduced in the families 2. Enhanced and communication awareness MPPL’s Gold standard Gold standard MPPL’s Clean Development in Mechanism project with an annual India Rs.45 addition of GDP rural million to Mallanadu Society Development a installed (NGO) project micro-hydro a in Thulappaly, village in the remote Kerala. of part western is The village location unlikely hilly and very central receive to grid connection. was This project in 1999 implemented Technology Specification Study Case 4.5 MW 4.5 MW Waste Incineration Device (WID) biomass system with boiler of availability and 87.71% efficiency 76.54% of (2004–2005 figures) 20 kW (two 20 kW (two turbines installed)- micro-hydro project End Use End Use Application n/a television television and radio, pump water Location Country and India, KeralaIndia, Lighting, Technology Technology Name Biomass India Hydropower Table 5.4 continued Table Co-Benefit Technologies, Green Jobs, and National Innovation Systems 165 Additional Additional Co-Benefits Quantification of Quantification 7. Annual income Annual income 7. the households from $2,609 at biomass 8. For it is systems, power six full that estimated created time jobs are of each MW for capacity installed upon Depending 9. this the capacity, figure employment includes 15–20 or personnel more plant the power at of and the balance people hold jobs in and fuel processing delivery continued on next page on next continued Global Economical Local Co-Benefits Global vegetative cover cover vegetative the year, throughout protection providing against soil erosion quality and watershed as well deterioration, wildlife as improved cover

2 Environmental Local emitted is equal to is equal to emitted absorbed the amount the atmosphere from during the biomass phase growth 4. Biomass fuels 4. Biomass atmospheric “recycle” minimizing carbon, global warming zero impacts since dioxide “net” carbon during is emitted combustion, biomass CO of the amount i.e, Technology Specification Study Case End Use End Use Application Location Country and Technology Technology Name Table 5.4 continued Table 166 Managing the Transition to a Low-Carbon Economy

2 Additional Additional Co-Benefits Quantification of Quantification equivalent/ year for for year equivalent/ technology the given over of 2. Creation jobs, 320 permanent including direct, and implied induced of 3. Reduction 4%-5% emissions other poisonous of gases as compared traditional to technologies 4. Cheap construction due the plant of labor, abundant to the total reducing about 18% by costs with OECD compared countries 1. Estimated annual 1. Estimated about of reduction t CO 248,569 = cubic meter, MW = megawatt, = megawatt, MW = cubic meter, 3 Global 1. Better market market 1. Better opportunity technology for manufacturers 2. Enhanced transfer technology the for opportunity stakeholders 3. Significant example promoting in the investments sector carbon low Economical = square meter, m meter, = square 2 Local 1. Earnings for the 1. Earnings for through locals CDM approved credits project 2. Enhanced employment for opportunities locals subsidies 3. Financial the government by of enable promotion investment Co-Benefits Global 1. Better power power 1. Better efficiency generation GHG and lower emissions pollution 2. Less and no odor due to reductions substantial of in emissions sulfide hydrogen Environmental Local 1. Cleaner as environment with compared standards previous diesel use of due to generators Ninghai ultra- Ninghai supercritical project power by developed was Zhejiang Guohua Zheneng Power in located Generation Zhejiang City, Ningbo A total Province. units were two of operating developed of capacity a total at are They MW. 2,000 deliver to estimated GWh about 10,367.5 East China Grid. to in unit was First 2009 by operation Technology Specification Study Case 1,000 MW1,000 Zhejiang Guohua = carbon dioxide, GDP = gross domestic product, GHG = greenhouse gas, GWh = gigawatt-hour, kW = kilowatt, m kW = kilowatt, GWh = gigawatt-hour, gas, GHG = greenhouse domestic product, GDP = gross dioxide, = carbon 2 End Use End Use Application Power Power generation Location Country and PRC, PRC, Zhejiang province Technology Technology Name Coal-based super critical and ultra super critical plants power Table 5.4 continued Table CDM = Clean Development Mechanism, CO CDM = Clean Development OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China, R&D = research and development. and development. China, R&D = research of Republic = People’s PRC and Development, Co-operation Economic for = Organisation OECD (1999); programme small grants (2010); UNDP, (2009); UNFCCC Authority Energy CWET (2010); Sri Lankan Sustainable (2007); UNDP (2011); Alison Doig (2010); SGP, Institute REPP (2009); Appraisal Source: (2011). UNFCCC Co-Benefit Technologies, Green Jobs, and National Innovation Systems 167

5.3 Innovative Technology Mobilization Measures and Policies for Asia and the Pacific

Technology has always been important to growth and development; it not only contributes to economic growth but also to improvements in the quality of life and societal values. Mansfield (1975), p. 9 pointed out that:

“One of the fundamental processes that influence the economic performance of nations and firms is technology transfer. Economists have long recognized that the transfer of technology is at the heart of the process of economic growth and that the progress of both developed and developing countries depends on the extent and efficiency of such transfer. In recent years, economists have also come to realize (or rediscover) the important effects of international technology movements on the patterns of world trade.”

The Asia-Pacific has been long been known to have a high rate of technological transfer and a low rate of innovation development due to its unique mix of labor-intensive factors and low level of technological resources. Over time, economies in Asia have emerged as low-cost producers of goods that are exported worldwide. However, innovation is concentrated in lower-level technologies and efforts are required to change this. Some countries have developed their own approaches to promoting innovation at local levels through national innovation systems or technology innovation policies. Singapore and the PRC have well developed national innovation systems. Climate change is not only an environmental problem but an economic issue, since the cost of combating climate change is far lower than the cost of facing it. This chapter evaluates the specific policy and multidimensional approaches that have been followed by countries in the Asia-Pacific in order demonstrate what countries have been doing to address climate change. Figure 5.1 summarizes current innovation and technology promotion policies in the Asia-Pacific. National technology policies have been divided into categories that are specific for low-carbon technologies. Three levels of technology policies in the Asia-Pacific can be identified:

• international technology adaptation and cooperation policies, • national assessment and planning, and • financial incentives and local participation. 168 Managing the Transition to a Low-Carbon Economy

These policies are implemented by various measures which define the framework for innovation and the promotion of low-carbon technologies. Innovative approaches can be very useful in the Asia- Pacific for promoting low-carbon technologies but they need to be implemented effectively, within a properly designed and established framework, including the transfer of technology from developed to developing countries.

Figure 5.1: Technology Promotion and Innovation Policy Framework in Asia and the Pacific

Adaptation of low-carbon technologies

International Application of low-carbon technologies

National resource planning and assessment National Policies assessments and planning Legislative framework for requirement plannings

Reduction of subsidy on fossil fuels Financial incentives and local participation Strengthening of "low-carbon technology market"

Source: Developed by authors.

According to Ramanathan (2011), the barriers that exist for the successful transfer of eco-sensitive technologies are as follows:

• Developed and developing countries have different perceptions of technology transfer. Developed countries perceive it from the point of view of business-to-business transactions, while developing countries assume the government will play a major role (Chung 1997). • The purpose of technology transfer becomes controversial when there is a conflict between short-term profit maximization by private firms and long-term capacity building for self-reliance by the receiving country. • Resources dedicated to human skill development are not given due importance, which makes it difficult to make continuous improvements for a better performance. Co-Benefit Technologies, Green Jobs, and National Innovation Systems 169

• On small enterprises, Ramanathan notes that although “… small enterprises could well be aware of the importance of eco- innovation, they lack skills and finance to plan and implement TT projects. Also, the absence of a coherent policy mix that explicitly prioritizes preferred technologies, establishes carbon standards, and provides targeted financial and fiscal incentives further aggravates the problem. This is a key issue that the national innovation systems of developing nations needs to address.“ (Ramanathan 2011, p. 17). • Intellectual property can be a barrier for technology transfer. However, several useful technologies are available in the public domain.

Ramanathan has also suggested the following measures to overcome the barriers for a better national innovative system through technology transfer. The interventions are:

• Examine the current capacity of national innovation systems in tackling climate change and promoting green growth with specific reference to technology transfer. • Examine ways to accelerate the diffusion of internationally available carbon efficient clean technologies by building technology transfer capacity for small and medium-sized firms, improvising innovations to be commercialized and encouraging “innovation hubs” for the increased sharing of innovations between developing nations. • Explore market, trade, and investment related issues that need to be addressed to facilitate technology transfer for eco- innovation. • Elaborate possible approaches to manage intellectual property issues to facilitate technology transfer.

Box 5.3 presents some of the co-benefit projects implemented by Japan in the PRC and Malaysia after the implementation of successful Clean Development Mechanism (CDM) projects. Policies promoting low-carbon technologies can be further strengthened by considering the benefits to stakeholders and society due to the many associated co-benefits of particular low-carbon technologies. Thailand’s alternative energy policy on the usage of gasohol is a good example. The Thai government aims to promote use of E20 and E85 at the expense of current gasoline usage and to increase the number of fuel flexible vehicles (FFV) to about 1,070,000 by 2022). The government will promote cars fuelled by high proportions of ethanol. The strategy 170 Managing the Transition to a Low-Carbon Economy

Box 5.3: Projects Based on a Co-Benefits Approach

Saving energy with high efficiency boilers and processes Air pollution has become a serious problem in many countries, especially where rapid industrial development is taking place. For the industrial sectors, energy efficiency improvements offer other co-benefits in terms

of better air quality, energy saving, and reduced CO2 emissions. Cleaner production processes and high-efficiency boilers (including biomass- powered boilers) are examples of the co-benefits approach. One such project was implemented in the PRC, in cooperation with Japan, as a Japan International Cooperation Agency (JICA) cooperation project and yen loan project.

Improving transportation systems by utilizing non-food products such as waste cooking oil as fuel Rapid economic growth in developing countries has resulted in economic, social, and environmental problems related to urban transportation. Traffic congestion has many negative impacts, and air pollution is an urgent challenge. The production and utilization of biodiesel in the transport sector can be considered a co-benefits approach if the biodiesel is derived from sources that do not compete with food production. Possible co-benefits include cleaner air, more effective use of energy resources, and reduced GHG emissions. Japan International Cooperation Agency offers a training course on community-based systems for the collection and utilization of waste cooking oil for use as a biodiesel fuel.

Source: Government of Japan, Ministry of the Environment (2008).

will support car makers to increase domestic FFV production lines and to increase the number of E20 and E85 service stations. As for FFV cars fuelled by E85, a 3% excise tax reduction for 1,780–3,000 cc cars has been announced. Blending of 5% palm oil in diesel was made mandatory in order to produce “green diesel” by 2011. There is support for research on the ethanol and biodiesel production from third generation resources, such as micro algae and weeds. The direct benefits associated with this policy are a better environment and improved energy security. However, there are also co-benefits such as job creation, income generation, health, and education. When these co-benefits are taken into account, the sectors that are positively impacted by the implementation of this policy can be targeted. In this case, for example, incentives can be allocated to the FFV manufacturers encouraging them to develop FFV cars, and research grants can be used to improve the efficiency of these vehicles. An analysis Co-Benefit Technologies, Green Jobs, and National Innovation Systems 171 of a low-carbon technology’s life cycle helps in understanding possible co-benefits at various stages, and their impact on the stakeholders. In the case of Thailand, encouraging the use of FFV also encourages greater production of ethanol. Thus, farmers growing ethanol crops will benefit financially. Implementation of a policy should consider all co-benefits at various stages, and should identify the important stakeholders who are affected by the implementation of a policy.

5.4 Conclusion and Recommendations

The lack of quantification for co-benefits from low-carbon technologies can be explained by the difficulty in assigning a value to many of these co-benefits and by a greater interest in economic than in societal and social benefits. The quantification of co-benefits at a global level is especially difficult because the delivery of co-benefits is very dependent, for example, on location-based factors, purpose of use, overlap with other policies and initiatives, and type of funding. A focus on green growth is of vital importance to mitigate climate change effects in the near future. If developing regions can continue to grow at the same rapid pace using clean technology, this will enable development of economies that are resilient to climate change effects for the future, making their development sustainable. Although there has been progress on the identification and quantification of co-benefits associated with green technology, standard frameworks and methods for their financial quantification need to be developed. Further, a diffusion of technology can be possible via the creation of markets and innovative approaches that are widely dispersed only when the three basic sectors—private, public, and social—are able to work together to make investing in clean technology lucrative for the private enterprises. The chapter leads into the following conclusions:

1. A more strategic focus on the role of technology policies for innovation in delivering co-benefits is necessary at the national level. 2. Broadening industrial policies to foster R&D beyond science and technology is required at the sectoral level and these policies can then evolve at the firm level. 3. Greater and more coherent policy attention needs to be paid to the creation of green jobs and new firms and their role in technology deployment. 4. New approaches and governance mechanisms for regional cooperation in science and technology will help address climate change issues and share costs and risks. 172 Managing the Transition to a Low-Carbon Economy

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Alison Doig. 2007. Solar Photovoltaic Refrigeration of Vaccines. Technical Brief. ADB. 2010. Asian Development Bank. Clean Energy in Asia Case Studies of ADB Investments in Low-Carbon Growth. Manila. Centre for Wind Energy Technology (C-WET). 2010. Indian Renewable Energy Status Report. NREL/TP-6A20-48949. October. Chung, R.K. 1997. Government Role for Technology Transfer. Feasibility study conducted by the Government of Korea. UN Publications. Climate Parliament. 2010. Promoting Renewable Energy: Co-benefits for India. Ecofys. 2010. Co-benefits of Private Investment in Climate Change Mitigation and Adaptation in Developing Countries. http://www.ecofys.com/files/files/2010ecofys_ cobenefitsprivateinvestmitigationadaptationdevelopingcountries_ website.pdf Government of Japan, Ministry of the Environment. 2008. The Co- benefits Approach for GHG Emission Reduction Projects. Tokyo. Haines, A., et al. 2009. Public Health Benefits of Strategies to Reduce Greenhouse-Gas Emissions: Overview and Implications for Policy Makers. Lancet 374: 2104–14. Inter Academy Medical Panel (IAMP). 2010. Inter Academy Medical Panel Statement on the Health Co-Benefits of Policies to Tackle Climate Change. http://www.interacademies.net/File. aspx?id=14748 Intergovernmental Panel on Climate Change (IPCC). 2007. IPCC Fourth Assessment Report. Geneva, Switzerland. Lancet. 2009. Health and Climate Change. An Executive Summary for the Lancet Series. Mansfield, E. 1975. East–West Technology Transfer Issues and Problems, International Technology Transfer Forms, Resource Requirements and Policies. American Economic Review 65(2): 372–76. Metcalfe, S. 1995. The Economic Foundations of Technology Policy: Equilibrium and Evolutionary Perspectives. In Handbook of the Economics of Innovation and Technological Change, edited by P. Stoneman. Oxford, UK and Cambridge, MA: Blackwell Publishers. New Energy Finance (NEF). 2009. Job Creation to 2025. London: Bloomberg. Organisation for Economic Co-operation and Development (OECD). 1999. National Innovation Systems. Paris: OECD Publications. Ramanathan, K. 2011. Eco-innovation and International Technology Transfer. Background paper prepared for the ADB/I Study on Climate Change and Green Asia. Co-Benefit Technologies, Green Jobs, and National Innovation Systems 173

Renewable Energy Policy Network for the 21st Century (REN21). 2011. Renewables Global Status Report. Paris: REN Secretariat. http://www. ren21.net/Portals/0/documents/Resources/GSR2011_FINAL.pdf Shrestha, R.M., and S. Kumar. 2008. Energy Security for Developing Countries. Presented at the GNESD expert meeting and assembly, 9 December, Poznan, Poland. Small Grants Programme. 2011. Community-Based Rural Micro-Hydro Project, India. The GEF Small Grants Programme. Sri Lankan Sustainable Energy Authority. 2009. Solar Thermal Projects Case Study. http://www.energy.gov.lk/sub_pgs/develop_energy. html (accessed 24 Dec 2011). The Energy and Resources Institute (TERI). 2010. Joint Policy Research on Co-Benefits in Tackling Climate Change and Improving Energy Efficiency in India. Prepared for the Institute for Global Environmental Strategies (IGES), Japan. New Delhi: TERI Publishing Press. United Nations Environment Programme (UNEP). 2010. Cambodia. Digesters for Cambodians. http://www.unep.org/ietc/Portals/136/ Other%20documents/Other%20projects/Ecological%20 sanitation%20-%20Philippines/Case%20studies%20from%20 Cambodia/08%20KH_SNV_NBP_Project_Case_Study.pdf UNEP-IETC. 2010. Waste and Climate Change. Global Trends and Strategy Framework. International Environmental Technology Centre. Osaka/Shiga, Japan. United Nations Framework Convention on Climate Change (UNFCCC). 2011. CDM Project Design Document. https://cdm.unfccc.int/ filestorage/U/L/5/UL5D7KQZ92XCMYTH06P81F4ROSWA3V/ PDD_01_%26%2320844.CEC%5CCDM%20 Interface%5CACM0013%20Clarification%5CPDD_01_%26%23208 44?t=Znh8bnBtd3BifDBfeAKc0RyitA0-jPd7FDch Yohe, G.W. 2007. Thoughts on the Social Cost of Carbon: Trends, Outliers and Catastrophes. Cincinnati, OH: Wesleyan University Press.

Chapter 6 Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy Brahmanand Mohanty, Martin Scherfler, and Vikram Devatha

6.1 Introduction

Asia represents about 30% of the world’s landmass, 60% of its population, and 30% of the global consumption of energy (Mohanty 2010). Most countries in the region are in the process of development. The urban population in Asia is expected to grow to 2.7 billion people by 2030. Although Asia’s per capita contribution to climate change is relatively small at present, this is expected to change as a result of rapid population growth and urbanization. Asian cities have become engines of economic growth, producing 80% of the region’s gross domestic product (GDP). However, along with this growth, poverty and income disparities are becoming more common—over 40% of the urban population lives in slums and lacks access to basic amenities and services. The wealth generated in the cities is at the cost of a high use of resources; cities account for 67% of all energy use and 80% of all greenhouse gas (GHG) emissions (ICLEI 2011), two-thirds of which are contributed by fossil energies that have become a necessity for modern-day living. Industrialized nations went through three distinct phases of development—poverty alleviation, industrialization and mass production, and consumption. Asia is experiencing a simultaneous occurrence of all three phenomena—while per capita energy consumption is low and

175 176 Managing the Transition to a Low-Carbon Economy poverty is rampant, there is massive growth in production, mostly to cater to the industrialized world. To satisfy their needs and aspirations, the urban upper and middle classes are adopting lifestyles comparable to those of developed countries. In spite of the fact that Asia’s average per capita ecological footprint is still relatively light, there is a need for serious reflection on whether it is wise to continue with the present exponential growth pattern that aims for a lifestyle that is unsustainable. The western world is undergoing tremendous pressure to adjust to a lifestyle that matches the earth’s carrying capacity, and several governments have initiated policies and programs in this direction. There have also been some interesting and successful initiatives, although limited in nature, to adopt the so-called “one planet living” lifestyle. Growth patterns have demonstrated that it is not necessary to consume excessively in order to improve the Human Development Index (HDI) of the United Nations Development Programme (UNDP), which is used widely as a yardstick to measure the level of development in a country. Cuba, for instance, has achieved a high HDI while remaining within the stipulated average bio-capacity threshold per person (WWF 2006).1 Along with the economic growth that is taking place in cities, there is a trend to depend on more resources and produce more waste. On one hand, the present models of development tend to favor large centralized systems that offer economies of scale. On the other hand, thanks to the technological progress made in the last few decades, it is now possible to find solutions that are decentralized, efficient, reliable, cost-effective, and well suited to developing countries’ context. Moreover, governments have to understand that they cannot address climate change challenges without promoting significant behavioral changes as well as active participation of the population. This chapter attempts to identify some lifestyle changes at the individual level, and behavioral changes at the community level that could offer high carbon abatement potential. It also provides some best practices of public policies and policy recommendations that can be pivotal in strengthening the collective awareness and decision making of people to change their lifestyle in lieu of climate change.

1 In the 2006 Living Planet Report, Cuba was listed as the only country to fall into the “sustainable 14 category” with both a low ecological footprint and a rather high quality of living. By 2010 Cuba had slipped just out of the sustainable category (WWF 2010). Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 177

6.2 Review of the Current Situation

6.2.1 Demographic Considerations

The 20th century can be described as an era of population explosion. At the beginning of the century, the world population was about 1.6 billion and it had grown by almost four times, to about 6.1 billion by 2000. In addition, the global economy grew sevenfold from 1950 to 2000 (GIZ 2010). The magnitude of this population change and economic growth is unprecedented in human history. In 2011, the Earth’s population exceeded 7 billion and according to United Nations (UN) population projections, it will cross 9 billion by the middle of this century (United Nations 2011a). Much of this projected increase in population will come from countries in Africa, Asia, Latin America, and Oceania. Asia, the world’s largest and most populous continent, covers 29.9% of the world’s land area and hosts 60% of the world’s current population (about 4 billion). It is not only the most populated continent but also has the highest population density per square kilometer—2.5 times the world average. Asia’s population is expected to grow by another billion by 2050, putting heavy pressure on the planet’s bio-capacity (Figure 6.1).

Figure 6.1: Population Growth for World Regions, 1950–2050 (billion)

World Africa Asia Latin America & the Caribbean North America Europe

Source: Adapted from United Nations, Department of Economic and Social Affairs Database. http://esa.un.org/unpd/wpp/unpp/panel_population.htm (accessed March 2015). 178 Managing the Transition to a Low-Carbon Economy

6.2.2 Urbanization Trends

In 2014, about 3.78 billion people, representing more than half of the world’s population, lived in cities (United Nations 2014b). By 2050, another 3 billion people are expected to be living in urban areas, which will make a total of 6.3 billion urban dwellers or about 68% of the global population (Dodman 2009). Figure 6.2 shows the projected increase of urban populations by continent till 2050. As a result, the size of built-up areas is bound to increase; urban centers will continue to absorb the hinterland, and thereby reduce the bio-capacity of the region. According to UN estimates, the total built-up area of urban spaces will triple by 2033 (United Nations 2011a). The 21st century will symbolize urban development. Cities need vast amounts of water and energy for transportation, infrastructure, housing, and food supply. Ironically, while cities become economic powerhouses of the world and account for a large percentage of the global consumption, many of their inhabitants remain below the poverty line. The way we cope with the social, cultural, and environmental challenges of the future will have tremendous impact on the planet as well as on the future of humanity.

Figure 6.2: Proportion of Urban Population, 1950–2050 (%)

World Asia Africa Latin America Europe North America

Source: Adapted from United Nations, Department of Economic and Social Affairs Database.http:// esa.un.org/unpd/wpp/unpp/panel_population.htm (accessed March 2014). Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 179

In Asia, the urban population is expected to increase from 3.4 billion in 2009 to 6.3 billion in 2050. For the first time, more people will be living in urban areas than in the countryside. Immigration from rural areas will be triggered mainly by the pursuit of employment and a better quality of life. Most of this growth will take place in informal settlements and slum areas. In 2012, about 1 billion urban dwellers lived in slums, representing nearly a third of all urban dwellers worldwide. The following sections illustrate the current state in key areas, drawing from figures and statistics of the previous decades, and forecasting further into the 21st century.

6.2.3 Food

Feeding the projected population of 9 billion in 2050 would require a 60% increase in global food production from current levels. But even in 2015, with a global population of over 7.3 billion, 1 billion people did not receive the required daily calorie intake. Paradoxically, many of them are farmers themselves (Organisation for Economic Co-operation and Development and Food and Agriculture Organization of the United Nations 2010). The challenge then, will be to feed the existing population as well as the projected increase of 3 billion people in the coming decades. This will lead to a higher demand for energy and land resources, in an era when the present usage already has adverse impacts on the environment. The global arable land per capita is projected to shrink from 2.00 hectares to about 0.18 hectare by 2025 (Kwang 2011). That means that there will be more mouths to feed, with less land available for crops or rearing livestock. Increases in disposable income tend to induce a change in diet, such as a higher intake of meat, dairy, and vegetable oil products. Meat and dairy production requires a relatively high level of energy, cereal, and water input. It takes an average of 3 kilograms of grain to produce 1 kilogram of meat. If the cereal that is used to feed animals was instead used to feed the human population, the annual calorie requirement of more than 3.5 billion people could be provided for (Nellemann et al. 2009). In Asia, demand for meat products and processed foods will exacerbate the demand for arable land. Since arable land for agricultural expansion is extremely limited (especially in countries like the People’s Republic of China [PRC], India, and Indonesia), Asia will not be able to meet this demand on its own, but will have to start importing food from the global market, leading to rising food prices. 180 Managing the Transition to a Low-Carbon Economy

6.2.4 Water

Water is one of the fundamental supporters of life and a basic commodity for mankind. Water resources are generally renewable, but water availability differs widely. The Asian continent, which supports about 60% of the world’s population, has only 36% of the world’s fresh water resources. The per capita water availability for the PRC is about 2.138 cubic meters (m3) per person a year; it is less for India at 1.719 m3 and nearly five times more for the United States (US) at 10,231 3m (FAO 2011). In 2015, about 1.6 billion people are affected by severe water shortages. The number is projected to increase to about 3 billion people by 2025 (International Energy Agency 2009). About 90% of the 3 billion people who are expected to be added to the population by 2050 will be in developing countries, many in regions where the current population does not have sustainable access to safe drinking water and adequate sanitation.

6.2.5 Electricity

Global electricity production and consumption are not sustainable. The main sources for energy are fossil fuels such as coal, oil, and gas, which make electricity production one of the largest and fastest growing contributors to carbon dioxide (CO2) emissions. These are finite resources that are being depleted at a rapid pace. According to forecasts by the International Energy Agency (IEA 2006), world energy demand will grow by almost 60% between 2002 and 2030. Population and economic growth in developing countries will drive most of this increase, with much coal-based generation capacity driving up CO2 emissions. The IEA (2009) further estimates that under the current business-as-usual scenario, energy use in Asia will increase by 112% between 2007 and 2030 (Figure 6.3). India and the PRC are expected to triple their per capita electricity consumption between 2007 and 2030 (IEA 2009).

6.2.6 Transport and Mobility

Transport is a key component of today’s economic development, and its volume and intensity is increasing around the world. The problems and challenges associated with transport are growing equally quickly— including air pollution, GHG emissions, petroleum dependency, traffic congestion, traffic fatalities, and infrastructure costs. These are especially pronounced in developing countries that have rapidly growing economies and population. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 181

Figure 6.3: Annual Per Capita Electricity Consumption, 2007 and 2030 (kWh)

, , , , , , , , , , , , , India World OECD PRC

OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China. Source: Adapted from IEA (2009a).

Asia is experiencing a vehicle boom. From 1977 to 2008, the PRC’s vehicle ownership increased by a factor of 51, from 1 million to 51 million. According to J.D. Power, PRC and Indian consumers bought about 19.9 million new passenger vehicles in 2010, which is 70% more than in the US (China–Mike 2011). The PRC has become the largest auto market in the world. The increase in global vehicle ownership combined with an increase in the overall distance that people travel has driven up the demand for oil. Figure 6.4 shows the car ownership for various geographical regions, indicating that some regions still have a long way to go to reach European or North American car ownership rates. The Asian Development Bank (ADB 2007) estimates that the demand for oil in 2030 will be three times greater than it was in 2007. Urbanization and globalization have increased the need for the transportation of goods. The World Economic Forum and Accenture (2009) estimate that the logistics and supply chains contribute 5.5% of the global GHG emissions. In terms of emission intensity per ton- kilometer (km), airfreight is the most carbon-intensive, followed by road freight. On average, logistics and transport emissions account for 5%–15% of product lifecycle emissions (World Economic Forum and Accenture 2009). Given the current dependence on oil, the global transport sector faces a challenging future. 182 Managing the Transition to a Low-Carbon Economy

Figure 6.4: Cars per 1,000 Population, 2014

No. of cars per , of No.

PRC North Europe and Italy India America Central Asia

Source: Macro Economy Meter (2014).

6.2.7 Housing and Construction

Most human needs (food, energy, water, and transport) revolve around the place of living and activity. Buildings are the convergence of humanity’s end use of resources; they consume large amounts of raw materials, energy, and water, and generate immense quantities of waste and pollution. The way we build is shaped by geography, by cultural values, and by the availability of material resources. Buildings usually have a long life span, hence their effect on people and the environment is long and continuing; this makes the building sector a particular issue in terms of sustainability. According to a life cycle analysis (Adalberth 1997), more than 80% of energy is used in operations such as heating, ventilation, and hot water (Figure 6.5). The International Energy Agency (2006) estimates that current trends in energy demand for buildings will stimulate about half of the energy supply investments to 2030. Buildings (both commercial and residential) account for about 40% of energy used, particularly in developed countries. In Asia, where large parts of the population are still not connected to the grid, and live in traditional houses, this figure is much lower but is likely to evolve rapidly with growing affluence. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 183

Figure 6.5: Lifecycle Energy Use in Buildings

Manufacturing, Use (heating, Maintenance and transport, and ventilation, hot water, renovation construction electricity)

Source: Adalberth (1997).

More than 50% of all new buildings constructed are in Asia. Construction is booming, especially in rapidly developing countries such as the PRC and India (Langer and Watson 2006). Construction alone is responsible for about 20% of global GHG emissions (Veolia 2008). According to the IPCC (2007) report, buildings have the largest potential of any sector for reducing GHG emissions, estimated at 30% by 2030 (Metz et al. 2007).

6.2.8 Waste

In the past, resources were regarded as rare and precious and each resource, including much of what we would now define as waste, was used and reused, transmuting it into a new resource. This attitude of careful resource management still exists today in some cultures and especially in villages in developing countries, where everything has a value and the material cycle is completed, imitating the ecosystem. We distinguish roughly between two different kinds of waste— municipal waste and industrial waste. It is estimated that the total 184 Managing the Transition to a Low-Carbon Economy amount of municipal and industrial waste produced annually is about 4 billion metric tons (Chalmin and Gaillochet 2009), and this figure does not include waste from construction, mining, agriculture, and forestry. The amount of municipal waste is directly linked to the standard of living, the level of commercial activities, consumption patterns, and lifestyle choices as well as the longevity of products. The total municipal waste collected worldwide in 2006 was estimated at 1.24 billion metric tons (Chalmin and Gaillochet 2009). Low-income households have a higher percentage of organic waste than higher income households, which discard more plastic, glass, paper, and metal. In Europe, almost half of the generated municipal solid waste originates from packaging material (Eawag and Sandec 2008). Figure 6.6 illustrates the amount of municipal waste collected per inhabitant per year for selected economies. Chalmin and Gaillochet (2009) estimate the industrial waste collected to be 1.4 billion metric tons. That does not include hazardous waste (about 300 million tons), agricultural waste, waste from forestry, or from construction and mining activities. About 70% of untreated industrial waste in developing countries is disposed of in water, contaminating existing water supplies; this leads to a loss of crop

Figure 6.6: Municipal Waste (kg/inhabitant year)

US PRC EU Japan Thailand Indonesia India (rural) India India (urban) India Hong Kong, China Kong, Hong

EU = European Union, PRC = People’s Republic of China, US = United States. Source: Adapted from Chalmin and Gaillochet (2009). Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 185

productivity in agriculture and to contamination of the food chain, among other things. Processing of waste has a negative effect on global climate change because of its high GHG output, especially of methane, which is known to have 21 times greater global warming potential

than CO2. ADB (2007) lists the global landfill sector as the third largest anthropogenic emission source, accounting for 12% of global methane emissions in 2005.

6.2.9 Carrying Capacity

According to the Global Footprint Network (2011), humanity today uses the equivalent of 1.5 planets to provide the resources we consume and to absorb the waste we produce. Scenarios suggest that by 2030 we will need the equivalent of two Earths to support us—provided our current population and consumption trends continue. We are facing a global ecological overshoot, by consuming resources faster than the planet needs to replenish those resources in return. Some of the most

noticeable effects of this overshoot are the buildup of CO2 emissions and global climate change, the depletion of groundwater reserves, declining reserves of mineral resources, the loss of soil, and the depletion of forest cover. The existing world population cannot be brought up to the living standards of developed nations by using present technologies and consumption levels. For humanity to live within the boundaries of the planet’s carrying capacities, new green technologies and smarter policy implementation will have to go hand in hand with lifestyles that promote less consumption and actively promote “prosumption.”2 The buy-and-discard principle of the developed world cannot be the model for the future, for neither developed nor developing countries.

6.2.10 Cost of Climate Change

Climate change is a real and major threat to improving prosperity in the world and in Asia. If current trends continue, the GHG emissions of Asia and the Pacific will soon be comparable to those of Europe and North America. The region is responsible for 42% of all global energy- related emissions. Emissions from energy use alone are projected to be 127% higher in 2030 than they were in 2012 (ADB 2007), growing at 2.3% per year under business-as-usual scenarios. The costs of adapting

“ 2 Prosumption” emphasizes producing what one consumes. The prosumption index can be used as a yardstick to measure what is produced as a share of resources consumed. 186 Managing the Transition to a Low-Carbon Economy

Figure 6.7: Projected Impact of Climate Change

Global temperature change (relative to preindustrial) °C °C °C °C °C °C °C Falling crop yields Food Possible rising yields in some Falling yields in many high latitude regions developed regions

Decreases in water Sea level rise threatens Water Glaciers disappear availability major coastal cities

Ecosystems Damage to Coral Reefs Rising number of species face extinction

Extreme Rising intensity of storms, forest ﬁres, droughts, ﬂooding Weather Events and heat waves Risk of Increasing risk of abrupt, large-scale climatic shifts Irreversible Changes

Source: IPCC (2007a).

to climate change will be colossal: it has been suggested that, by 2030, the world may need to spend more than €200 billion a year on measures such as building flood defenses, transporting water for agriculture, and rebuilding infrastructure affected by climate change (Martin et al. 2009). An ADB (2009) study estimates that, by the end of this century, the total economic cost of climate change could be equivalent to an annual loss of 6%–7% of GDP of Asian countries. Decisive mitigation actions taken now can lower this impact. Figure 6.7 illustrates the projected impact of climate change. More intense typhoons, droughts, heat waves, landslides, and other natural hazards are results of accelerated global warming. Climate change threatens health, safety, and livelihood of people. Coastal cities are vulnerable to climate change since the rise in sea level causes flooding and coastal erosion. Many coastal cities in Asia have tropical hot and humid climates in low-lying land, which heighten their vulnerability. Nowhere in the world are as many people affected by climate change as in Asia and the Pacific (ADB 2009a).

6.2.11 Conventional and Alternative Indices of Progress and Development

There seems to be a paradox connected to consumption and in the way we measure progress. Gross domestic product (GDP)—is the sum Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 187 total of goods and services consumed by a nation in a given year, and is currently the most important measure of economic growth. As per this definition, the more we consume, the higher the GDP. If we were to consume less, then the economy is adversely affected, but continuing our current consumption pattern will exhaust the planet’s carrying capacity. Obviously under this measure of economic progress consumption is the top priority. The more we produce and consume, the more we prosper. External costs like environmental pollution, human well-being, happiness, the distribution of income and wealth are not taken into account. We also fail to distinguish the costs incurred to compensate for undesirable events such as environmental or natural disasters, which tend to inflate GDP since large sums are spent in mitigating such disasters. Is it worthwhile pursuing further economic growth in developed countries? Does economic growth improve people’s well-being after a certain point? Data from surveys conducted in the United Kingdom (UK) and US reveal that life satisfaction has been stagnating in those countries since the 1950s, even though economic output per capita has tripled since then (Figure 6.8). When people’s basic needs are met and they have enough goods and services, economic growth fails to improve people’s well-being (O’Neill, Dietz, and Jones 2010). An alternative to the endless economic growth paradigm is a steady state economy. Steady state economies aim at stable levels of resource consumption, a stable population, with resource use within the planet’s ecological limit, and equity in the distribution of wealth. The pursuit

Figure 6.8: Income and Happiness in the United States

Real income per person Percentage very happy Percentage very happy

Source: Layard (2005). 188 Managing the Transition to a Low-Carbon Economy of maximizing economic output is replaced by the goal of maximizing human well-being and quality of life (O’Neill, Dietz, and Jones 2010). Indicators for measuring progress arise from a shared set of values; they also create and enhance those values in return. Changing indicators can be one of the most powerful and at the same time one of the easiest ways of making system changes (Meadows 1998). Over the past 20 years, new indicators of measuring human progress have been emerging. Some focus on selected aspects such as the environment (GHG emissions, eco- footprint), human well-being (including indexes to measure happy life years, quality of life, human happiness, and better life), or the economy (economic self-sufficiency). Others try to integrate different aspects, e.g., the happy planet index or Bhutan’s gross national happiness index. These indicators may eventually replace or at least complement GDP. The European Union (EU), for instance, has identified 10 headline indicators (and subindicators) that should lead EU countries to a more sustainably integrated development (European Commission 2011):

1. socioeconomic development, 2. sustainable production and consumption, 3. social inclusion, 4. demographic change, 5. public health, 6. climate change and energy, 7. sustainable transport, 8. natural resources, 9. global partnership, and 10. good governance

To be truly effective, these indexes need to be supported by strong policy frameworks and policy actions by governments at the national, state, and city level.

6.3 Ecological Lifestyle Choices

The rapidly escalating population growth in developing countries has often been named as one of the main causes of increasing demand for consumer goods and services and thereby pollution. However, 78.6% of the world’s resources are consumed by 20% of the world’s wealthiest people (World Bank 2008), demonstrating the close correlation between wealth and consumption (Figure 6.9). This also begs the question—what are the real needs and wants of human beings in terms of consumption and individual lifestyle choices? Making people aware of their needs Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 189

Figure 6.9: Share of the World’s Private Consumption

Worlds poorest consume .

Worlds middle consume .

Worlds richest consume .

Source: Adapted from World Bank. 2008. World Bank Development Indicators 2008 – Poverty Data: A Supplement to World Development Indicators 2008. Washington, DC: World Bank.

and contrasting them with their wants, paired with a supportive policy environment, may have the potential to transform lifestyles toward a low-carbon society. Globalization and economic integration are giving consumers access to more goods and services. The media has increased its reach in many Asian nations, and this has had an unprecedented influence on the aspirations of consumers and their ways of life. Global middle-class consumers and global elites have become the target market for many consumer brands. The demand for consumer goods is rising rapidly. The PRC and India alone claim more than 20% of the global total—with a combined consumer class of 362 million (a mere 16% of the region’s population), more than all of Western Europe (Worldwatch Institute 2011). The consumption patterns of these millions are merging with those of Western countries—especially those of the younger generations of urbanites who share lifestyles that are independent of culture or nationality. Lifestyles are also largely driven by materialistic cultural values. Traditional Asian lifestyles were frugal, and are still common in many 190 Managing the Transition to a Low-Carbon Economy countries. These are generally less damaging to the environment and climate. For example, there is more communal living than individual housing in Asia, the number of occupants per unit is much higher, and traditional construction is based on natural materials like wood and mud. For food, there is less packaging and refrigeration, less processing, and fewer “food miles.”3 In the transport sector, private car ownership is still the exception rather than the norm (SWITCH–Asia Network Facility 2010). The sections that follow identify a few lifestyles changes among individuals and communities that could help to mitigate carbon use. Current policies that address GHG emissions are top–down in nature; they identify industries that emit the largest amount of GHGs and try to promote technologies that can reduce the emissions. However, bottom-up approaches to policy making could have an equally important effect, especially if they acquire a critical mass. These should emphasize nontechnical measures such as individual habit changes and improved knowledge. Available low-carbon technologies or appliances usually demand a high up-front investment, even though they prove to be energy- and cost-efficient in the long run. These high initial costs are a barrier for implementing these technologies, especially in low-income countries. For example, compact fluorescent lamps (CFLs) are affordable for most people in high-income countries, but out of reach for most people in low-income countries. Hence, policies that promote innovative business and market models need to be formulated. As it has been recently demonstrated through the Demand Side Management based Efficient Lighting Program (DELP) in India, Light Emitting Diode (LED) bulbs which are even more expensive than the CFLs can be handed out by power companies and paid back by the consumer in installments through monthly savings in electricity bills. This will not only result in higher energy efficiency and GHG emission reductions, but will also avoid the need for additional power generating capacity. Another new market mechanism to support ecological lifestyle changes and GHG emission reductions is the product service system (PSS). This shifts the focus from selling products like washing machines to selling services, e.g., a laundry service. The equipment (washing machines in this case) may still be at the client’s home, but the company retains ownership, maintains and stores the cleaning equipment, will be responsible for the quality of the appliance, and will take care of waste disposal. This incentivizes the company to prolong the use of the product, reuse components, and recycle materials. At the same

3 The distance that food travels before it is eaten. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 191 time, the consumer’s costs are spread over time, which make it easier to opt for low energy and carbon-intensive solutions (United Nations Environment Programme 2001).

6.3.1 Food and Diet

Many individual lifestyle changes linked with food will have a positive impact on the eco-footprint or GHG emissions. Some of those choices require a dietary shift, while others require a change in habitual shopping practices. The carbon impacts of the meat industry are known to be significant, not only from its high energy use, but also from its land use impacts. The Food and Agricultural Organization (FAO) estimates that direct and indirect emissions from the livestock sector contribute 18% of global GHG emissions. An Indian, for instance, consumes around 1/11th of the meat eaten by an average Chinese and 1/25th of that eaten by an American. A global transition to a low meat-diet would drastically reduce mitigation costs (Rao, Sant, and Rajan 2009).

Box 6.1: Lifestyle Choices: Food and Diet

• Reduce food miles by eating locally grown food. DeWeerdt (2015) estimated that replacing imported food with equivalent items locally grown in the Waterloo (Ontario) region would save transport-related

emissions equivalent to nearly 50,000 metric tons of CO2, or the equivalent of taking 16,191 cars off the road. • Switch to organic food as organic farming consumes 30% less energy than conventional farming (Rodale Institute 2005) • Reduce consumption of meat and dairy products, which are responsible for 18% of global greenhouse gases and are a major drain on water supplies (Food and Agriculture Organization 2006). • Grow your own food in the garden and do not waste food: Combining these actions could reduce our footprint by 11% (WWF 2011). • Promote community kitchens, and save on bulk purchases and distribution. • Promote food courts in public spaces—these have common maintenance facilities, a common dining area, and common cutlery, and help to reduce energy consumption, transportation requirements, and wastage.

Source: Authors. 192 Managing the Transition to a Low-Carbon Economy

Example: Buying organically produced food Opting to buy organic food products can reduce an individual’s personal carbon footprint. It is estimated that organic farming uses about 30% less energy to yield the same amount of products as conventional agriculture. Artificial fertilizers used in conventional agriculture are the largest source of nitrous oxide, a GHG that is 310 times more potent than CO2 (Soil Association 2011). Synthetic fertilizers are also a source of water pollution and soil degradation. Organic agriculture contributes to the restoration of soils and to the building up of carbon storage. Table 6.1 lists lifestyle changes related to food, potential hurdles that are associated with such changes, policies that can support these changes, and example policies.

6.3.2 Water

Each individual can contribute to protecting water resources. Two main actions can be taken—reducing the demand for water through efficiency and conservation, and harvesting rainwater. As with all lifestyle choices, these actions are dependent on socioeconomic status and geographical region.

Example: Changing dietary habits Changing dietary habits by reducing meat and dairy products can significantly reduce the water footprint. Meat production requires a relatively high level of energy, cereal, and water input; and agriculture accounts for 70% of the global water withdrawal (FAO 2011). The Water Footprint Network estimates the global average water footprint at 15,500 liters of water for every kilogram (kg) of beef, 5,000 liters of water for a kg of cheese, 3,900 liters for a kg of chicken meat, and 1,300 liters of water per kg of barley (Water Footprint Network 2011). Rockström (2003) estimated that a diet consisting of 80% of plant-based foods and 20% meat (in industrialized countries, the proportion of meat is 30%– 35%) requires 1,300 m3 of water per year, whereas a purely vegetarian diet requires around half this amount (Rockström et al. 1999).

Example: Water savings at the household level Adopting a no-drip policy is vital, since all leaks waste water round the clock and need to be repaired. Other water saving options include low- flush toilets that use less water, dry compost toilets, water-efficient showerheads, and energy-rated washing machines (since they not only use less energy per load but also less water). Simple actions like turning off running taps while washing dishes, having a shower, or brushing teeth, or collecting unused water from the tap and using it to water plants will Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 193 Level continued on next page on next continued Local middle- and high- National; groups income Local National and National Local Examples Rome, Italy: Public Food Food Public Italy: Rome, schools tries for Procurement food produced use locally to (Liquori, as much possible n.d.) organic has strong Denmark labeling and support agriculture organic for (www.Organic. development dk) Community Kitchen lunch offers India Auroville, 800 up to and dinner for (www.auroville. people a day org) in Cuba agriculture Urban with the allocation increased food urban land for of and strong production, seed and tool for support and centers, training banks, (Pinderhughes corporations et al. 2000) Policies and Initiatives Policies Offer free space for farmers farmers for space free Offer awareness events, markets, mile labeling food campaigns, labeling, Comprehensive agriculture organic of support financial incentives, through building and market capacity creating and campaigns Awareness the strengthen that events community sense of and on meat taxes Higher awareness dairy products, campaigns land use plan, Mixed infrastructure, supportive rooftop for building codes and training gardening, building capacity Hurdles Table 6.1: Lifestyle Changes and Associated Factors for Food for Factors and Associated Changes Lifestyle 6.1: Table preference lack of costs, Higher availability lack of awareness, food values Cultural lack of Land use patterns, awareness Lifestyle Change Lifestyle food produced Buy locally personal knowledge, Lack of food Buy organic Community kitchens quality of values, Cultural of consumption Reduce and dairy products meat promote prosumption, Food edible landscaping 194 Managing the Transition to a Low-Carbon Economy Level Local and national Local and national Local Local Examples Simply Bulk Market in Simply Bulk Market States United Colorado, only bulk purchase offers com) (simplybulkmarket. beverage for system Deposit in Germany containers 2011) (Ankerandersen to boost scheme Certification practices the environmental in Singapore courts food of 2012) (Eco-business.com Policies and Initiatives Policies Legislation for supermarkets supermarkets for Legislation in food items certain offer to incentives like bulk or awards supermarkets for containers packaging, provide a deposit require that support, management certification Hurdles Inconvenient, forgetfulnessInconvenient, and plastic Ban plastic covers infrastructureLack of and Infrastructure Lifestyle Change Lifestyle groceriesBulk buying of Logistics and packaging material Take while shopping containers environment- Promote in public courts friendly food spaces Table 6.1 continued 6.1 Table authors. Compiled by Source: Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 195

help reduce water usage. The treatment and reuse of grey water4 for flushing toilets needs to be considered. Householders can grow native plants in their gardens since these usually have lower water requirements. Owners of cars and bicycles can either bring their vehicles to a carwash that uses recycled water or wash their vehicles themselves using a sponge and rinsing sparingly. Recycling will enable households to increase consumption without having to spend additional money. Table 6.2 introduces a few lifestyle changes associated with water, along with possible hurdles in implementing those changes.

6.3.3 Electricity

Individuals can significantly reduce their carbon footprint by lowering their electricity consumption. This may entail using better appliances, but much can be achieved with higher awareness of the issues involved, along with motivation for adapting good practices.

Example: Energy-efficient appliances Many opportunities for higher efficiency do not involve one large investment with a substantial return. Instead, they consist of many small actions that add up to significant energy savings. The most common household appliances—including lamps, fans, fridges, televisions, washing machines, water heaters, and computers—are still quite energy-inefficient and draw electricity in excess of what is normally required for using the appliance. Most of these appliances are left in standby mode, thereby offering the convenience of turning them on in an instant when required. It is estimated that turning off appliances at plug point would result in saving over 133 kg of

CO2 emissions per household annually (Centre for Environment Education 2010), and an immediate reduction in electricity bills.

Example: Compact fluorescent lamps Another area of energy savings is to switch from incandescent bulbs to compact fluorescent lamps (CFLs). CFLs are five times more efficient than regular incandescent bulbs. They last longer and therefore create

less waste. A switch offers an annual saving of 83 kg of CO2 for every 100 watt (W) bulb that is replaced by a 20 W CFL (Centre for Environment Education 2010). On the negative side, CFLs are more expensive, and have high mercury content. The future of lighting may lie in light- emitting diodes (LEDs). However, at present the benefits of energy efficiency from CFLs, far outweigh their costs.

4 Grey water refers to “waste” water that is generated in homes and commercial buildings as a result of laundry, dishes and bathing. Grey water can be efficiently treated and utilized for a variety of purposes such as irrigation or toilet flushing. 196 Managing the Transition to a Low-Carbon Economy Level continued on next page on next continued Local and national Local Local and national Local Example (Centre for Science Science for (Centre 2 & Environment 2011) & Environment Toronto, Canada has Toronto, a citywide implemented to system metering water water of track better keep the city across consumption losses water detect and to 2012) Toronto of (City project eco-town Erdos is a full-scale in the PRC with area urban residential dry toilets, urine diversion human excreta, of recycling treatment water and grey Sanitation (Sustainable 2011) Alliance made Ahmedabad, India rainwater-harvesting all buildings for mandatory over of an area covering 1,500 m Policy and Initiatives Policy Mandatory water metering, metering, water Mandatory pricing water purchase for incentive Tax education and installation, campaigns, and awareness in installation mandatory public buildings correct state, by Directive pricing water Hurdles Table 6.2: Lifestyle Changes and Associated Factors for Water for Factors and Associated Changes 6.2: Lifestyle Table costs of lack retrofitting, for psychological knowledge, of availability barrier, technology lack of growth, Unplanned knowledge lack of space, Lifestyle Change Lifestyle fix leaks water, Conserve initial awareness, of Lack toilets dry compost Use space lack of Inconvenient, rainwater Harvest Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 197 Level Local and national Local or and national Local middle- and high-income groups Local and national Local Example Jordan has implemented has implemented Jordan buildings that for new codes efficiency include water 2012) (DAI standards machine rebate Washing to scheme in Sydney, of the availability increase efficient and energy water About 43% of machines. are machines in the market (Sydney 4.5 or greater star 2011) Water demand Singapore, In is management using an by implemented water block rate increasing structure tariff (Tortajada 2006) all sewer PRC, Tianjin, In will be collected, water back to and sent treated toilets flushing for families (Liu 2011) Policy and Initiatives Policy Correct water pricing, water Correct financing innovative the mechanism where paid for are installations in savings monthly through for bill, mandatory the water new buildings pricing, water Correct financing innovative the mechanism where paid for are installations savings the monthly through bill in the water pricing, water correct campaigns awareness pricing, water Correct financing innovative the mechanism where paid for are installations savings the monthly through bill, legislation in the water Hurdles Initial investment, lack of lack of investment, Initial awareness lack of investment, Initial awareness inertia awareness, Lack of metering, water Mandatory lack investment, Initial lack of awareness, of infrastructure = square meter, PRC = People’s Republic of China. of Republic = People’s PRC meter, = square 2 Lifestyle Change Lifestyle efficient water- Install flushes and showerheads compliant Energy-Star Use machines and washing dishwashers tap while brushing off Turn and shaving teeth, dishes washing water grey and reuse Treat flushing for Source: Compiled by authors. Compiled by Source: Table 6.2 continued Table m Notes: 198 Managing the Transition to a Low-Carbon Economy

Numerous initiatives in Asian countries have encouraged the substitution of incandescent lamps by CFLs. In Bangladesh, which has long hours of power outages throughout the year, the World Bank supported the free distribution of 10 million CFLs to consumers to bridge the gap between demand and supply. Rather than giving away CFLs for free, governments or power utilities could also have a buy-back policy for old bulbs, or could even rent CFLs to households as a means of financing these initiatives. This would address the high adoption cost of these technologies and lead to a better appreciation of their benefits by end-users. Another initiative that would help finance these schemes would be to charge a token deposit that is refunded when the bulbs are returned after their use. Box 6.2 introduces individual lifestyle choices related to energy, whereas Table 6.3 lists hurdles to such lifestyle choices, supportive policy actions, and examples from policies around the world.

Box 6.2: Lifestyle Choices: Energy

• Use of pressure cookers instead of regular cooking pots has a carbon reduction potential of about 125 kilograms (kg) of carbon dioxide

(CO2) per household per annum (Singer, Denruyter, and Jeffries 2011) • Solar appliances such as cookers, water heaters, and lamps offer immediate carbon reductions. A single solar water heater, for

instance, offers an annual saving of 687 kg of CO2 emissions per year (Centre for Environment Education 2010). There are over 180 million households in India. If 1% of these households switch to

solar cookers, there could be a saving of over 1 million tons of CO2 emissions per year. • Refer to energy labels when making purchasing decisions. An energy-efficient refrigerator or air conditioner offers savings of over

250 kg of CO2 emissions per year, amounting to over $30 savings in the annual electricity bill per appliance. A switch from desktop to

notebook computers will result in over 275 kg of CO2 abatement per cathode ray tube (CRT) monitor per year (Centre for Environment Education 2010). The high up-front costs are negated by the long-run savings from lower running and maintenance costs. • Optimizing the settings in household appliances can also lead to great carbon emission savings. Using a cold cycle in a washing machine for washing day-to-day clothes will use less electricity and result in

about 100 kg of CO2 saving per annum. In the United Kingdom, it has been estimated that turning down the thermostat by 1°C will reduce the heating bill by 10%, amounting to a saving of £50 per year, as well

as cutting down on CO2 emissions (SOL2O). • Encourage sport and outdoor entertainment rather than computer

games. This can save up to 90 kg of CO2 emission per child per year (Centre for Environment Education 2010).

Source: Authors. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 199 Level continued on next page on next continued Local Local and and national Local middle- and low-income class and middle- and National class high-income Examples Efficiency Energy National Campaigns Awareness in Malaysia (SWITCH!) 2011) (www.switch.org phase out Scheme to bulbs incandescent homes and replace from them with CFLs in India. by Clean financed Partially Mechanism Development 2010a) (Chadha labeling program Energy and houses, appliances for energy of promotion efficiency in home design, and public awareness in Thailand campaigns 2009) Parliament (Climate Policies and Initiatives Policies Mandatory number Mandatory spaces recreation of certain for playgrounds densities and regions. campaigns, Awareness support programs, training companies service energy schemes based on Payback through savings monthly subsidies, government CFLs, campaigns, awareness incandescent phase-out of bulbs light and standards National service labeling, product as market systems incentives, mechanism, tax credits soft Hurdles Table 6.3: Lifestyle Changes and Associated Factors for Energy for Factors and Associated Changes 6.3: Lifestyle Table Lack of infrastructure, poor infrastructure, Lack of government city plans, priorities and knowledge Lack of awareness initial investment High groups, low-income for awareness lack of investment, up-front High lack of awareness, lack of standards uniform Lifestyle Change Lifestyle Encourage sport and sport Encourage entertainment outdoor in settings Optimizing household appliances compact to Switch (CFLs) lamps fluorescent energy-efficient Use appliances 200 Managing the Transition to a Low-Carbon Economy Level Local and low-income class and low-income Local and national Local Examples Renewable Energy & Energy & Energy Energy Renewable Partnership Efficiency CFLs, (REEEP) promotes stoves, cookers, pressure systems. and solar lighting applying a sustainable, By supply chain replicable model in business (Renewable India Karnataka, Efficiency & Energy Energy 2011) Partnership financing Sustainable delivering mechanisms for systems energy renewable in incentives and fiscal e.g., Eskom South Africa, solar Scheme for Incentive Renewable heaters, water Subsidy Finance Energy tax incentives and Office, efficiency energy for (Thabethe 2010) Policies and Initiatives Policies Payback schemes based Payback fuel savings on monthly pressure usage of through awareness cookers, campaigns tax provide systems, Loan and exemptions incentives and use, installation for corporate to rooftops rent grid- will install that entities solar panels connected Hurdles low-income groups, groups, low-income awareness lack of initial investment, High lack of awareness, lack of availability Lifestyle Change Lifestyle Use of pressure cookers cookers pressure of Use for initial investment High such solar appliances of Use solar heaters, as water solar solar lamps, cookers, panels photovoltaic Table 6.3 continued Table authors. Compiled by Source: Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 201

6.3.4 Transport

With rising populations and numbers of vehicles on the road and more frequent travel, it is critical that individuals learn to change their behavior and lifestyles and become more efficient in their transport habits. Successful initiatives around the world have shown that individuals and communities are capable of altering their lifestyles and travel habits to become more environmentally friendly. This can take various forms, including reduced car usage by taking a smaller number of road trips, better coordination with colleagues and partners in day-to-day travel, green driving, as well as walking and cycling for short trips. In the long term, homes and workplaces can be brought closer together and working from home can increase. According to Anable (2008), individual travel behavior change can manifest itself in a variety of ways to help in carbon abatement. Although some of these may appear to be small measures, when implemented at a city level or even at the community level, they can result in large carbon reductions.

Example: Walking and cycling Walking and cycling are often neglected, as they are viewed as modes of transport for short distances only. However, studies in the UK have shown that the average car journey is less than 3 km and over half of all car trips are for distances less than 8 km (Department for Transport 2006). It has been estimated that: “Around half of all local car trips could be replaced using existing facilities by walking, cycling and/or public transport, although this potential varies between urban areas” (Socialdata and Sustrans 2005: 12). It is likely to be the same in Asia, i.e., most trips will be for short distances. The status associated with owning a big car must be replaced with values and ideologies that are in tune with the environment. Emissions are high for short journeys, especially when the engine is cold and the fuel catalyst is not yet working at full efficiency. As a result, if bicycles replaced motorized vehicles for short distances, the benefits would be particularly high. These benefits include better health, air quality, zero carbon emissions, and cost savings (Anable 2008).

Example: Green driving Changes to the way in which vehicles are driven are crucial in securing emission reductions. The Driving Standards Agency in the UK found that eco-driving training yields at least an 8% improvement in fuel efficiency, reducing fuel bills by over £2 billion. Eco-driving or green driving includes regular servicing to ensure fuel efficiency, keeping tires correctly inflated since underinflated tires increase drag, removing any 202 Managing the Transition to a Low-Carbon Economy extra luggage from the vehicle and combining many short trips into one long trip (AA 2011). Turning off the engine at traffic lights saves 63 kg of carbon emissions per car per year, translating into about $30 at 2010 fuel prices (Sodhi et al. 2010). Many metropolitan cities now feature a traffic light change counter (a timer that counts down to the next light change). This is helpful in reminding people how much longer they will need to wait for the lights to change, and encourages them to turn off their engines. Driving smoothly, with smooth acceleration and reducing unnecessary braking, being conscious of the air conditioning in the car and changing gears early are all fuel-efficient measures.

Example: Carbon offsetting at Intrepid Travel, Australia Intrepid is a “sustainable travel company” that tries to minimize the negative impact of climate change. All intra-trip travel including flights is offset; the company measures its footprint, and avoids activities that contribute to emissions and reduce carbon emissions of its essential activities. In 2009, approximately 5,000 tons of CO2 were offset through 38 carbon-offset trips. With the expansion of carbon offset across the majority of their portfolio in 2010, Intrepid expects to offset 25,000 tons of carbon emissions by the end of the year, equivalent to taking 4,800 passenger cars off the road for a year (Mitrovic 2010). A unique selling point of Intrepid is its sustainability campaign; it caters to customers who understand the environmental issues at stake. More and more businesses are discovering this niche market, and contributing to the cause. Box 6.3 refers to travel- and mobility-related lifestyle choices. Table 6.4 provides mobility-related lifestyle choices, hindrances in implementing them, supportive policy actions, and existing policies from around the world.

6.3.5 Building and Construction

Buildings and habitats contribute a large proportion of carbon emissions. There are two ways in which buildings consume energy and hence have the potential for mitigation and adaptation interventions: (i) energy used for the construction, including the embodied energy in building materials used; and (ii) energy consumed during operation and maintenance. Although buildings are market-driven, many of the lifestyle choices in this sector are largely dependent on policies, market creation, and capacity building of builders and architects. The easiest carbon saving interventions for individuals seem to be energy cost saving measures and retrofitting of existing buildings with greener technologies. A study Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 203

Box 6.3: Lifestyle Choices: Travel

• Restrict air travel; use land and rail transport for short distances as these emit less carbon: A passenger on a flight from London to Paris

is responsible for 10 times more carbon dioxide (CO2) emissions than a person using the Eurostar train for the same route (WWF 2011). • Adopt green driving practices: in the United Kingdom (UK), “Forum for the Future” has demonstrated a 7% cut in emissions from ecodriving (Royal Mail, 2008). • Use public transport and reduce dependence on private vehicles: a single person who switches from a 32 km round trip commute by car

to existing public transportation can reduce his or her annual CO2 emissions by 2,180 kilograms (kg) a year (CUNY and SAIC 2007) • Use home delivery for routine purchases. Home delivery has been found to be four times more efficient than individual shopping trips, resulting in a 13 mega tons of global carbon reduction potential (World Economic Forum and Accenture 2009). • Walk or cycle short distances: emissions are high for short journeys, especially since the engine is still cold and the fuel catalyst is not yet working at full efficiency. As a result, if these trips are replaced by bicycles for short distances the benefits gained are particularly high (Anable 2008). • Work from home when possible and reduce travel miles. Tele- conference rather than commuting to meetings.

Source: Authors.

by the World Business Council for Sustainable Development (WBCSD 2009) concluded that technology alone is unlikely to guarantee building energy performance: “Wasteful behavior can add one-third to a building’s designed energy performance, whereas conservation behavior can save a third” (WBCSD 2009: 62). On the whole, wasteful behavior uses twice as much energy.

Example: Local materials Locally available materials like wood, mud, and stone do not need a large amount of external energy to keep temperatures inside buildings comfortable. Conventional building methods use tremendous quantities of material, many of them nonrenewable and toxic, and pay little attention to the impact the building has on the environment. Switching to green building methods and technologies can offer significant benefits. Box 6.4 lists “What Makes Buildings Green?” by the Ministry of New and Renewable Energy, India. 204 Managing the Transition to a Low-Carbon Economy Level Local and national, middle and national, Local class income class high income National, Local middle and upper- Local, class income Local middle and upper Local, class income Local Examples and Initiatives Asia-Europe Foundation Foundation Asia-Europe driving in green initiative Nations in Beijing (United 2011) Program Development being and fees Taxes using passengers to charged air miles in the UK (Gordon 2011) in India IT sector in store delivery Home (Grocbay.com Bangalore 2011) congestion area Cordon and pricing in Singapore (Transportation London 2011) Alternatives in service hire cycle Vélib 2010) (Velib Paris in India IT sector Policy Mandatory component for for component Mandatory a driving license, acquiring smart campaigns, awareness signage air miles a number of certain transport rail promote year, as alternative internet High-speed awareness connections, campaigns delivery motor- city centers Make for tax entry free, vehicle integrated vehicles, private solutions public transport pedestrian- Implement and bicycle-friendly or make environment, smart paths, bicycle improve city planning, and compact hire for bicycles provide internet High-speed awareness connections, campaigns Hurdles Table 6.4: Lifestyle Changes and Associated Factors for Travel for Factors and Associated Changes 6.4: Lifestyle Table Lack of awareness and awareness Lack of knowledge alternatives lack of Culture, a exceeding for Taxes policies Corporate unavailableInfrastructure home for incentives Tax public transport Poor solutions city planning, Poor existing e.g., urban sprawls, is not infrastructure conducive policies Corporate Lifestyle Change Lifestyle Adopt green driving Adopt green practices air travel Restrict than rather Teleconference conferences for commuting for home delivery Use purchases routine and public transport Use on dependence reduce vehicles private short or cycle Walk distances home from Work Source: Compiled by authors. Compiled by Source: Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 205

Box 6.4: What Makes Buildings Green?

The following measures should be considered while designing and constructing a green building:

• Site selection—easy availability of public transport and public conveniences. • Soil and landscape conservation. The topsoil and existing vegetation need to be preserved during construction. Changes to soil conditions can affect the ecosystem, which takes a long time to revive itself. • Conservation and efficient utilization of energy and resources. Water used during construction should be recycled and reused as much as possible. Proper measures should be taken to harvest rainwater even during the construction phase and wastage should be curbed. • Waste generated during construction should be recycled and reused.

Source: MNRE and TERI (2010).

Initiative: Auroville Earth Institute, Auroville, India The Auroville Earth Institute in India has been extensively researching and promoting earthen blocks as building material. These technologies have been found to be both cost-effective and energy-efficient. The main task is finding ways to minimize the use of steel, cement, and reinforced cement concrete and to replace them with composite blocks (earth, fibers, and stabilizer). The institute is also researching a “homeopathic” milk of lime and alum as an alternative to cement, along with alternative waterproofing with stabilized earth.

Example: Energy-efficient house Houses and office buildings can be converted into places of production with relatively minor alterations. By installing fuel cells, rooftop solar shingles, living machine wastewater treatment, and rooftop gardens, existing structures can minimize their dependence on fossil fuel resources and thereby reduce their carbon emissions (Milani 2001).

Case study: Energy positive house Public policies favoring prosumption can encourage households to generate their own energy. For example, in a country like India which faces a perennial shortage of electricity, power utility regulators are now promoting rooftop solar power plants through net-metering or feed- in tariffs. Increasing number of households are responding positively. Figure 6.10 illustrates the example of how an urban household in Southern India has adopted several demand and supply side options to achieve a net energy positive status in 2014. 206 Managing the Transition to a Low-Carbon Economy

Figure 6.10: Annual Energy Performance of a Net Energy Positive House in India, 2014

Electricity Import and Export Data () , , , , , , Cumulative net export, kWh Cumulative

Electricity exported and imported, kWh – – July May June April March August January October February December November September

Cumulative net export Cumulative export Cumulative import

Source: Data gathered by the first author in his house.

The electricity demand of the household was drastically reduced by opting for the most energy efficient appliances available in the market. The electricity generated from a small solar power plant on the rooftop is not only adequate for meeting the electricity needs of the households but also takes care of the transportation needs of the family by charging their electric car and scooter. The smart grid that allows for the two- way flow of electricity helps to resolve the mismatch between electricity generation and demand. For example, the excess electricity generated during the less hot periods of the year compensates for the greater electricity needs to keep the house cooler during hotter months. Box 6.5 gives an overview of lifestyle choices related to buildings and housing. Table 6.5 presents potential hurdles for such choices, as well as supportive policy initiatives.

6.3.6 Waste

On the consumer side, individuals have a range of choices to help reduce their waste. These need to be oriented toward the 3Rs—reduce, reuse, and recycle. Wherever possible, the emphasis should first be on Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 207

Box 6.5: Lifestyle Choices: Buildings and Habitat

• Switch to green buildings and green technologies where possible. • Use alternatives to cement and steel in constructions such as rammed earth or bamboo, as those contain less embodied energy. • Use compact building spaces, and save on energy needs for heating and lighting. • Use lighter-colored cabinets and countertops to make rooms brighter so they require less lighting. • Divide the building into separate zones, each with a different indoor climate and hence different energy requirement; this will result in the best use of natural sources for heating, cooling, and lighting and can achieve up to 30% energy use (Hyde 1998). • Retrofit existing buildings with insulation: a study for Malaysia shows that mineral wool insulation of buildings would result in savings of

over 32 million tons of carbon dioxide (CO2) across Malaysia (MIMG 2009). • Capture heat from water that goes down the drain from various activities such as dishwashing, clothes washing, and showers, saving up to 60% of heat energy that is otherwise lost.

Source: Authors.

reducing one’s waste. Each income class has very different lifestyle and shopping habits; the points listed below are mainly addressed to middle- class consumers.

Example: Green shopping Changing existing shopping patterns can help in reducing waste. Smart and green shopping habits such as purchasing durable goods or equipment, and purchasing locally manufactured goods have a large impact on carbon emissions. Goods that use fewer resources for manufacturing, that are made of non-hazardous materials, and that do not produce hazardous waste can be given preference over others. Also, buying products with minimum packaging is an important choice a buyer can make.

Example: Waste segregation Waste segregation at the household level enables waste materials to be turned into valuable resources. Kitchen waste and other organic waste can be turned into compost. Special attention should be given to hazardous waste and electronic waste. Some companies have a buyback policy that allows consumers to send back old equipment, and this should be used. Segregating waste and recycling allows individuals and communities to increase their consumption without having to incur additional expenses. 208 Managing the Transition to a Low-Carbon Economy Level Local and national Local high- and national, Local class income state National, National and national Local and national Local Examples Union Gas (Canada) sells Gas (Canada) Union recovery heat water drain its customers to systems Gas 2011) (Union The German government for incentives tax provides (Climate thermal retrofitting 2012) Initiative Policy is a mandatory CALGreen building standards green (Building in California code Commission Standards 2011) bricks earth Compressed Auroville being used by India Institute, Earth Institute Earth (Auroville production 2011); cement States United in Texas, tax 2007) (Onecle Architecture Bioclimatic the National of Department Centre, Energy Renewable Spain (Zaragoza Zaragoza, 2011) buildings is of Zoning new buildings for mandatory 2008) in Shanghai (Lausten Policy and Initiatives Policy Tax incentives and special incentives Tax equipment, loans for campaigns awareness and special incentives Tax retrofitting, loans for campaigns awareness technologies green Make gated for mandatory and big communities tax housing developments, home private for incentives builders for centers Training building alternative on higher taxes materials, boost to and cement steel building the alternative market on centers training architecture bioclimatic on centers training architecture bioclimatic Hurdles Costs, availability of of availability Costs, awareness technologies, costs, initial upfront High awareness lack of higher capacity, Lack of initial costs lack of Availability, and capacity knowledge design knowledgeLack of campaigns, Awareness Table 6.5: Lifestyle Changes and Associated Factors for Buildings and Construction for Factors and Associated Changes 6.5: Lifestyle Table Lifestyle Change Lifestyle water from heat Capture the drain goes down that existing buildings Retrofit with insulation building green to Switch technologies cement to alternatives Use in constructions and steel building compact Use on energy and save spaces, needs for and lighting heating buildings of Zoning design knowledge Lack of campaigns, Awareness Source: Compiled by Authors Compiled by Source: Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 209

Box 6.6: Lifestyle Choices: Waste

• Use durable products made of nonhazardous and recyclable materials.

• Avoid heavy packaging: 540 kilograms of carbon dioxide (CO2) can be saved per annum if you cut down your garbage by 10% (Earthforce 2011). If a mere 1% of Asia’s urban population avoided heavy packaging

this would lead to an annual decrease of over 6 million tons of CO2. • Take your own bags when shopping, relying less on plastic bags. The US uses 100 billion plastic bags annually, consuming about 12 million barrels of oil. Less than 1% of plastic bags are ever recycled (WWF 2011). • Buy in bulk where possible, avoiding excessive packaging material. • Switch to e-accounts and e-statements, helping reduce paper waste. In the US, paper products make up the largest percentage of municipal solid waste, and hard copy bills alone generate almost 2

million tons of CO2 per year (WWF 2011). • Reuse cans, bags, and containers wherever possible. • Segregate household waste, making it easy to recycle material. Recycling 1 ton of paper saves 26,500 liters of water, 2.3 cubic meters of landfill space, and 4,100 kilowatt-hours of electricity (WWF 2011). • Make your own compost from waste from the kitchen. Composting

waste food can result in 0.09 kg–1.13 kg CO2 equivalent avoided per kilogram (Sang-Arun and Bengtsson 2009) • Send back old appliances like laptops to the company. About 40% of heavy metals including lead, mercury, and cadmium in landfills come from electronic equipment and discards (EPA 2008).

Source: Authors.

Box 6.6 summarizes some lifestyle choices for the waste sector. In Table 6.6, hurdles, supportive policy actions, and existing policies from around the world are listed.

6.4 Behavioral Change at the Community Level

Communities and neighborhoods can adopt significant changes in their behavior to help in carbon mitigation. Many of these will need the support of local authorities and the participation of most, if not all, residents for them to be truly successful. 210 Managing the Transition to a Low-Carbon Economy Level continued on next page on next continued National and national Local Local and national Local and national Local Examples Packaging policy in the UK Packaging on optimization focuses and improving materials of (Roberts recycling of rates 2008) sells groceries eFoodsDirect US (eFoodsDirect in Utah, 2012) management Solid waste City, in Surabaya program (Samuel 1987) Indonesia have Most EU countries taxes landfill introduced in Instruments (Economic 2010) Policy Environmental government NSW state waste purchases (Australia) for its needs paper office 2011); (NSW Government garbage (wet of segregation for and dry) is compulsory in Bangalore structures large News Herald (Deccan 2011) Service Initiatives Policies and Policies Awards for companies that that companies for Awards packaging material, reduce campaigns awareness and incentives Legislation offer to supermarkets for in bulk items food certain support provide Mandatory, compost free infrastructure, based business micro bins, composting on kitchen for refund on waste, Tax and containers bags, cans, waste of taxing Mandatory countries, in high-income in waste of purchasing and middle-income low- countries Hurdles Table 6.6: Lifestyle Changes and Associated Factors for Waste for Factors and Associated Changes Lifestyle 6.6: Table products at available Not supermarkets space, lack of Inconvenient, knowledge lack of Inconvenient infrastructure supporting Lifestyle Change Lifestyle packaging heavy Avoid design of Packaging Buy in bulk compost own your Make waste kitchen from and bags, cans, Reuse containers household wasteSegregate lack of Inconvenient, Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 211 Level National and national Local and national Local upper-income National, class Examples (Price 2011) buy back old (Price customers. from products and resell Both refurbish with a computers their own warranty 1-year extra charges Vodafone paper bills providing for 2009) (eBillingNews Ban on plastic bags in Coorg, 2011) (Coorgnews India The EU has introduced scheme a tire-labeling encourage to intended buy greener to consumers their vehicles for tires (Phillips 2009) Initiatives Policies and Policies Directive by state, provide provide state, by Directive check account to terminals those for statements access, without internet paper bills for charges extra on plastic taxes Higher ban plastic bags at bags, stores department labeling, product Stringent on such taxes lower products Hurdles Inconvenient, awarenessInconvenient, campaigns Awareness (2012) and Apple Dell Technological not implementation, to is connected everyone the internet lack of Inconvenient, awareness lack of availability, Lack of awareness Lifestyle Change Lifestyle Send back old appliances the to such as laptops company e-accounts to Switch and e-statements bags while own your Take shopping going for made products durable Use and nonhazardous of materials recyclable Table 6.6 continued Table Authors. Compiled by Source: 212 Managing the Transition to a Low-Carbon Economy

Initiative: Subsidies in Los Angeles The Los Angeles Department of Water and Power gives low-income households a new energy-efficient fridge for free or at a subsidized price: “The program hopes to remove 50,000 old, inefficient refrigerators off the market and save the City $12 million a year in fuel costs and reduce

CO2-related greenhouse gas emissions, equivalent to removing 40,000 cars off the road.” (The Scottish Government Riaghaltas na h-Alba 2009: 33)

Initiative: Top Runner program The “Top Runner” is a Japanese program addressing efficient energy use of products. Since the beginning of the program in 1999, mandatory energy performance standards were set for a variety of products. The most energy-efficient product in the market is identified as the “Top Runner” and the program sets a target year by which all other products should achieve the same level of efficiency. When that target year has been reached, the cycle starts again with the assessment of a new Top Runner product (Siderius and Nakagami 2007). The program has been very successful. The energy efficiency of video tape recorders improved by 73.6% from 1976 to 2003, which was 15% above original expectations. Similarly, personal computers achieved their Top Runner Standard well before their 2002 target year. This program is notable as it focuses on the positive incentives of being the “Top Runner” in comparison with the more negative incentives imposed by the mandatory energy performance standards in other parts of the world. Moreover, with increased awareness of products, these schemes resulted in less energy- efficient products being removed from the market in a phased manner and supported more carbon-neutral individual lifestyle choices.

Eco Villages Eco villages are communities that attempt to become socially, economically, and ecologically more sustainable. Some aim for a population of 50–150 individuals, while others have as many as 2,000 inhabitants. The main goal is to create the smallest possible ecological footprint, and to produce the lowest quantity of pollution possible, through efficient land use, recycling, composting, and converting waste to energy. Eco villages contribute to other climate change initiatives and have large carbon mitigation potential if adhered to. One large benefit is the reduction in travel time for residents in the community, as eco villages are planned around walking and cycling paths. A case in point is the Los Angeles Eco-Village located in the Korea Town area in Los Angeles, California. Distances between the various facilities are kept to a minimum, encouraging (and at times mandating) that residents either walk or cycle. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 213

At Horse-Shoe Point near Pattaya, Thailand, Cellennium Company has worked for years to establish a working model of a sustainable eco-village. Applying energy saving design and architectural features, insulated, panelized prefabricated houses have been constructed that are aesthetically appealing, comfortable, and energy efficient. Renewable energy technologies such as solar thermal and photovoltaic, biomass and electricity storage, among others, are being employed with the objective of selling excess electricity back to the grid. Water is being captured, cleaned, used, treated, and recycled. Fertilizer, bio-char, and carbon dioxide derived from solid waste generation and from biomass to power processes are captured for soil enrichment and to enhance further growth of biomass. All of these taken together create powerful regenerative forces that can sustain and enhance the bio-sphere (Cellennium Thailand 2009).

Initiative: Local currencies Local currency that circulates only within a community can greatly help reduce carbon footprints, as it encourages members of a community to buy only local products. Communities such as the Findhorn Ecovillage in Scotland have successfully implemented such initiatives, having their own bank and community currency (Findhorn Foundation 2010).

Initiative: Territorial climate and energy plan in France In France, cities are estimated to contribute directly to 12% of national emissions, while citizens’ account for over 50% of emissions. Therefore, the Government has taken initiatives to enable cities to play the role of orchestrator and promote local dynamics. For instance, a city that exceeds 40,000 people is obliged to develop and adopt a territorial climate and energy plan, in line with the national target of reducing energy consumption by a factor of four by 2050. It is widely accepted that there can be no miraculous technical solutions; instead citizens have to adopt a lifestyle that matches the reality. Media campaigns have been launched with slogans such as “Let’s act, the earth is heating up” and “Let’s reduce our waste, the garbage bins are overflowing.” Several hundred energy information centers have been established in cities to sensitize citizens to change their daily habits and adopt a lifestyle that can help reduce their ecological footprint (Mohanty 2010).

Initiative: Eco-district, Kronsberg, Germany Kronsberg is an eco-district situated in the city of Hannover, Germany, which is built on 1,200 hectares on the city outskirts and is planned for a population of 15,000 people. The emphasis is on low land occupancy, to be achieved by means of high-density construction. A direct light 214 Managing the Transition to a Low-Carbon Economy rail links the settlements to the city center; there are designated paths for cycling throughout the district and a dense layout of footpaths offers an attractive alternative to private motorized transport. Ecological standards for developers were defined in the areas of energy, construction, waste, soil management, water, and nature conservation. For the energy sector, the goal was to reduce the carbon footprint by 60% as compared to the national level, through measures such as innovative building methods and renewable energy using solar photovoltaic and wind turbines (Rumming 2007).

Initiative: Green cities Broadening the concept of eco villages and eco districts, the governments of India and Japan are planning to develop green cities, which would be planned and executed around sustainable growth. The cities would have better transport facilities and promote public transport. In addition, the micro infrastructure within the cities would be designed to be easily accessible to all residents and not to require any kind of transportation (Chadha 2010b). The government of the UK has initiated special programs to recognize the efforts of sustainable communities (Anable 2008). Three towns were chosen as “sustainable travel towns” and £10 million was made available over 5 years for promoting alternative modes of transport. This initiative saw a 12%–13% reduction in car use, the development of new cycling paths, and a big increase in alternative modes of transport.

Initiative: 2,000-watt society, Switzerland The Vision of a 2000-Watt society was formulated in Switzerland by the Federal Institute of Technology in Zurich. It entails a reduction of energy consumption by two-thirds for Switzerland. It calls for a significant lowering of energy consumption and a simultaneous rise in energy efficiency—substituting fossil fuels by renewable forms of energy, adopting a more sustainable way of life, and rethinking current business practices. Changes in the construction sector through the implementation of solar passive design, zero emission buildings, and fundamental changes in the road, transport, and freight sector are envisioned. This should be achieved by adopting already existing technologies and without compromising the present quality of life (Stulz and Lütolf 2006). Box 6.7 lists ways to mitigate the Urban Heat Island Effect through green technologies. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 215

Box 6.7: Mitigating the Urban Heat Island Effect

The urban heat island refers to an area in a city that has a significantly higher temperature than that in the surrounding areas, meaning that more energy is needed for cooling the habitat. The Heat Island Group estimates that the heat island effect costs Los Angeles a minimum of $100 million per year in energy (Chang 2000).

If more houses in the neighborhood adopt green technologies such as green roofs, curbside planting, and lighter-colored facades that reflect sunlight and absorb less heat, the heat island effect could be mitigated and the community would depend less on external energy sources (Columbia University; Hunter College – CUNY; SAIC Corporation 2006).

When a number of green buildings are located in close proximity to each other, they create a green zone, providing a much healthier environment and minimizing the heat island effect. The ultimate aim would be to create many such areas, which would help towns and cities and therefore the nation in reducing total energy requirements and the overall global carbon footprint (MNRE and TERI 2010).

Source: Authors.

Initiative: Teleconferencing Under WWF–UK’s One in Five Challenge, businesses and organizations are committing to cut 20% of their air travel by 2016. A dozen large companies have signed up for the program, including the Scottish government. Audio, video, and teleconferencing provide alternatives to face-to-face meetings (WWF, Ecofys, and OMA 2011). Corporate policies such as these will go a long way in setting examples for employees and for the population at large.

Initiative: Car pooling An online initiative in India (http://www.carpooling.in) tries to bring together people who have space available in their cars with people looking for a car ride. In the US, an organization called GreenXC has created a campaign that encourages people to adopt carpooling in order to reduce the carbon footprint. The goal is to travel cross-country and explore various national parks and forests exclusively via carpooling. Without driving or renting a car, they hope to reach their destinations with the help of others with the sole intention of being green (GreenXC 2011). Carpooling can be an effective means for individuals and communities to combat climate change. 216 Managing the Transition to a Low-Carbon Economy

Example: Sharing resources Sharing is one of the easiest and most powerful ways of conserving resources (Gardner 1999). Communities can share buildings, open areas, vehicles, tools, appliances, and other facilities to cut down on the amount of materials used and the total energy requirement. Items such as ladders, lawn mowers, saws, washing machines, and automobiles sit idle for long durations of time. Communities can initiate groups and resources to engage these idle resources and make sharing convenient for its residents. Sharing can even extend the life of these items as such pieces of equipment normally degrade when not in use (Milani 2001).

Initiative: Buying goods and services using ecological criteria in Vienna, Austria The city of Vienna purchases goods and services according to ecological criteria. A list of requirements for classifying whether a product and/or service is ecological was created, and made binding for all departments of the city administration. This ensures that ecology is sufficiently taken into consideration over the course of public procurement and tendering by Vienna city government. Vienna spends about €5 billion per year on ecological goods and services (Jerrod 2012). It can thus significantly influence the quality of products and services offered in the local market.

Initiative: Calgary, Canada Programs and initiatives that aim at increasing awareness of issues related to climate change, and options that are available for reducing carbon emissions are of crucial importance. The city of Calgary has undertaken an effort to create awareness and understanding of climate change, and to engage the private and corporate sectors in efforts to reduce carbon emissions. This includes educating the public, including the business community, about the impact of personal actions on GHG emissions, marketing ways of curbing climate change, and empowering the community to take its own emissions reduction actions (City of Calgary 2000). Undertaking campaigns such as these in urban as well as rural areas will be fundamental to securing people’s participation in combating carbon emissions. Such “soft policies” will need to be implemented frequently and at regular intervals for them to have the desired effect.

Initiative: National Public Scheme for the Conservation of Drinking Water, Egypt Training and education play an important part in sensitizing the population to the issues involved. The National Public Scheme for the Conservation of Drinking Water in Egypt aimed at conserving drinking Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 217 water, locally and nationally, through intensive public awareness and training programs for local plumbers. It also promoted the use of 16 locally developed sanitary fixtures. These measures resulted in lowering water consumption by 36 million m3 per year, with annual cost savings of about $5 million. Consequently, the load on the sewerage system was also reduced (The Together Foundation and UNCHS 1998).

Initiative: Deposit refund program, Micronesia Pacific island states are also increasingly relying on a deposit refund program as an effective means of inducing behavior change such as recycling. A deposit is collected at the time of purchase of the product if it is found to degrade the environment. This deposit is returned when the customer returns the product to a designated facility. Such programs are common in many cities today, and are usually applied to glass, aluminum cans, or polyethylene terephthalate (PET). However, the Pacific islands have taken this a step further and have started applying the same scheme to items such as automobile batteries, pesticide containers, and even electronic waste. Kiribati has introduced a deposit and refund system on car batteries, among others. A small deposit is paid on purchase and 80% of this is repaid when the items are returned to privately operated depots. The Government acts as the administrator of the fund and holds all the deposits collected. In Yap and Kosraean states of the Federated States of Micronesia, the government mandates that a recycling deposit fee of 6 cents is collected for aluminum, glass, and PET beverage containers and PET cooking oil containers. A refund of 5 cents is given for every container brought to the designated collection center. The regulations also require that the funds be deposited into a separate account, which is expressly for the use of the state’s recycling program (Richards 2009). Box 6.8 explores potential behavioral changes for carbon mitigation at the community level, while Table 6.7 lists hindrances to such changes as well as supportive policy actions and examples from around the world.

Role of Business in Influencing Change Promoting a more sustainable lifestyle needs the active participation of business, policy makers, and civil society. Sustainable consumption needs to be mainstreamed through all policy areas and linked with existing policy plans and strategies (CSCP 2010). To choose the most effective policy instruments in promoting sustainable consumption, there should be a better understanding of the needs (Figure 6.11). Policies based on dialogues with manufacturers can assist in creating a demand 218 Managing the Transition to a Low-Carbon Economy

Box 6.8: Behavioral Changes at the Community Level

• Check with your neighbor on starting a carpooling network. It has been estimated that with each car that goes off the Indian roads, about 1,300 kilograms (kg) of carbon can be mitigated per year, amounting to over $600 in fuel bills (Sodhi et al. 2010). • Share gardening and other idle household equipment with your neighbors to cut down on the amount of materials used and the total energy requirement. • Encourage children to play outside with neighbors rather than sitting in front of the television or computer. This could potentially save over

61,000 tons of carbon dioxide (CO2) emissions per year, assuming about 1 million children adopt this change (Centre for Environment Education 2010). • Plant more trees in your community to offset carbon and engage in green

community initiatives, saving 183 kg–500 kg of CO2 emissions for every 50 trees over 100 years (Centre for Environment Education 2010). • Create a community-supported agriculture program.

Source: Authors.

for sustainable products, identifying target areas for greening the supply chain and in making sustainable consumption easier for consumers. Business organizations are powerful players in today’s market- driven economies. The policies that they adopt and their goals and visions have an enduring impact on society through their large customer networks. A number of business organizations around the world have changed their practices and become more environmentally conscious. For instance, in the automobile sector, stakeholders have argued that car companies have to respond to the growing consumption of fossil fuels. However, actual market trends tell a different story: Instead of smaller and more efficient cars, customers have increasingly requested more horsepower and heavier vehicles such as sports utility vehicles (SUVs). As the public awareness for climate change increased, Toyota was one of the first companies to make innovative concepts available to meet rapidly changing demand. It was the first to offer hybrid technology and get a competitive advantage, which has increased profits due to its considerable market share (Tunçer et al. 2010). Other initiatives by companies are given in Box 6.9. Tunçer et al. (2010) have shown that business opportunities can arise from creating value in the environmental sector, such as: Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 219 Level Local Local Local Local Local Example Community- Community- agriculture supported in Portland programs Community Area (Portland Agriculture Supported Coalition, 2011), Chiang Mai, Farm Earth Thailand (Fair 2011) India—an Delhi, Leap Green the government by initiative 1 million plant to Delhi of of parts in different trees Leap in 2011 (Green Delhi 2011) India a provides ToolBank sharing tools for platform 2011) (ToolBank US Environmental Agency Protection carpool has several in programs incentive States (United Cincinnati Protection Environmental Agency 2005) Policy and Initiatives Policy Awareness programs, programs, Awareness and communication for assistance marketing community- agriculture supported programs per playground Mandatory density and region, certain clubs sport of support tree for space Assign and along streets planting organize pedestrian paths, planting, tree for events saplings provide or community- Support neighborhood-based tool banks and equipment online platforms Provide car people for connect that pooling Hurdles Lack of awareness, lack of lack of awareness, Lack of support infrastructure playgrounds outdoor Lack of leisure and outdoor opportunities land of Availability sense of Organization, maintenance ownership, tools of in big cities anonymity Table 6.7: Behavioral Changes and Associated Factors for Communities for Factors and Associated Changes Behavioral 6.7: Table Lifestyle Change Lifestyle a community- Create agriculture supported program play to children Encourage outside with neighbors TV than watch rather in your trees more Plant community and other gardening Share idle household equipment with neighbors network a carpooling Start and Communication Source: Compiled by Authors. Compiled by Source: 220 Managing the Transition to a Low-Carbon Economy

Figure 6.11: Creating and Satisfying Demand for Green and Fair Products

Challenges Policy instruments

Identifying targets areas for Guidance on hot spots greening the supply chain

Creating demand for green and - Information campaigns - Bans and standard fair products - Sustainable public procurement

Making sustainable consumption Product labeling easy

Source: CSCP (2010).

Box 6.9: Green Initiatives by Companies

• Memo’s strategy of selling most sustainable office supplies has resulted in business growth. • In 2007, Henkel, a German manufacturing company, organized a students innovative ideas competition with the focus on sustainability, creativeness, and future perspective – to “foresee” the possible needs for year 2030 or 2050. The contest was focused on beauty products initially, but later was broadened to all three main branches of activity. • SkySail’s innovative technology uses the power of high winds to save oil in cargo ships and has successfully created a new market. • RICOH relieves customers from buying, installing, and maintaining printing equipment and sells printed pages instead.

Source: Authors.

1. Designing new products and services that cater to the rising demand for “green” solutions. 2. Devising new ownership mechanisms such as service-oriented business models that provide a solution rather than a product (e.g., energy service companies that provide energy-related services instead of selling energy). This is because many Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 221

products have a high initial cost, e.g., automobiles and heating systems. 3. Providing innovative after-sales services, including a buy-back of environmentally harmful products.

As more and more businesses adopt such practices, policy makers will find it easier to support lifestyle and behavioral changes in their communities.

Initiative: Life Cycle Assessment Center, Denmark In order to identify harmful environmental impacts of consumption, the entire life cycle of products and services needs to be assessed. For a single company with limited financial and human resources, such data collection and assessment may not be possible. Governments can support business by identifying priorities for improvement, creating guidelines, and building capacity. The Danish government, for example, has established the LCA Center Denmark, a knowledge center for life cycle assessments (LCA). The center promotes product-oriented environmental strategies in private and public companies by helping them to implement life cycle thinking (CSCP 2010).

Initiative: Green label, Thailand The Thai “green label” is an environmental certificate awarded to specific products that have had the least detrimental impact on the environment in comparison with other products serving the same function. The scheme was initiated by the Thailand Business Council for Sustainable Development and launched formally in August 1994 by Thailand Environment Institute (TEI) in association with the Thai Ministry of Industry. The scheme is developed to promote the concept of resource conservation, pollution reduction, and waste management. The purposes of awarding the green label are to:

• provide reliable information and guide customers in their choice of products; • create an opportunity for consumers to make an environmentally conscious decision, thus creating market incentives for manufacturers to develop and supply more environmentally friendly products; and • reduce environmental impacts from manufacturing, utilization, consumption, and disposal of these products.

The scheme has generated product criteria for 48 different products. In June 2011, 75 companies registered over 500 products in 25 categories for the green label (TEI 2011). 222 Managing the Transition to a Low-Carbon Economy

6.5 Policies and Strategies

Given the projected impact that climate change will have on the future of the planet, decision makers need to pursue policies and legislation that can help curb carbon emissions. Policies to enable low-carbon and climate-resilient development need to be integrative and they need to be brought to the mainstream. They should provide and foster an environment for individual and collective behavioral change, offer financial incentives, promote new market and support mechanisms for industries to switch to a non-polluting mode of production, create a market for green products and services, support capacity building, promote research and dissemination of knowledge and technology, and raise public awareness. Low-income and developing countries such as Bhutan and Cuba have made significant changes to their lifestyles and economies with the use of innovative policies and demand for resources, clearly showing that successful action is possible. It is important for policy makers to recognize and capitalize on the fact that a large percentage of investments and capital flowing into infrastructure development comes from the private sector. Market distortions through subsidies on carbon- intensive technologies and products need to be dealt with and more resources will have to be directed toward climate change adaptation and mitigation. In general, there has been widespread criticism of government policies. It is a challenging task to devise and implement policies that account for all the different components of climate change and environmental degradation. When only one component or sector is addressed, it often ends up adversely affecting other sectors and components in the system. For instance, in Australia, the National Climate Action Summit of 500 participants representing 140 climate groups nationwide has condemned the cap and trade system of emission reduction that was to be introduced as law in Australia, and has successfully campaigned to prevent it from becoming law. Major concerns have been voiced on the announced targets (describing them as inadequate), granting of property rights to pollute, and providing free permits to major polluters. The Government of Japan has a clear position on building a low-carbon society which, along with the promotion of innovative technology, has been identified as the key to lowering Japan’s emissions by as much as 50% by 2050. The Ministry of the Environment of Japan is entrusted with the task of developing principles, priority areas, and strategies to achieve the target (Ministry of Environment of Japan 2007). The low-carbon society envisioned by Japan is founded on three principles: minimizing CO2 emissions from all economic sectors, Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 223 shifting from mass-consumption to a society that focuses more on the quality of life, and maintaining and restoring the natural environment. Realizing a low-carbon society involves tackling technical, economic, social, and informational barriers by formulating policies that motivate citizens and companies to act toward the ultimate goal. The four policy instruments employed by the government include:

1. putting in place institutional incentives through regulations, economic instruments, and awards and recognition; 2. creating hard infrastructure such as urban structures, buildings, transportation networks, and energy supplies; 3. adopting soft approaches such as information and sensitization, capacity building, education, and financial esources;r and 4. reinvesting in natural capital such as carbon sinks, biomass, and adaptation.

Developing countries in Asia generally adhere to the principle of “common but differentiated” responsibilities, agreed in the United Nations Framework Convention on Climate Change, which gives higher priority to economic development. For instance, even though the People’s Republic of China (PRC) accounts for the bulk of the worldwide GHG emissions, the government argues that emissions per capita in the PRC are low and that raising incomes must be their highest priority. It also argues that industrialized countries must bear the primary responsibility for the buildup of GHGs and should therefore lead the way in mitigating emissions domestically (Leggett et al. 2008). There is a general consensus in many countries that the industrialized world should assist developing countries to mitigate emissions and adapt to climate change. Regional cooperation is crucial in bringing as many countries on board as possible, so that there can be constructive and fruitful cooperation between industrialized and developing countries and exchanges of good practice among Asian developing countries. Policies to mitigate GHG emissions in one country can provide economic benefits to another country if both nations do not act together. For instance, potential climate change legislation in the United States has been influenced by the GHG emissions in PRC and uncertainty over how and when it might alter that trend. There is concern that strong domestic action taken without PRC reciprocity would unfairly favor the PRC in global trade, and fail to slow the growth of atmospheric concentrations of GHGs significantly (Leggett et al. 2008). Governments need to come to a common understanding over not only the causes and impacts of GHG emissions, but also the path for curbing them. 224 Managing the Transition to a Low-Carbon Economy

The following sections highlight some of the policy options available to governments in the food, water, electricity, transport, construction, urban planning, and waste sectors.

6.5.1 Food

Policies in the food sector will have to address food security, management of food waste, and healthy food and pollution control as well as the conservation of agricultural land and biodiversity.

Example: Develop policies to promote and support urban agriculture Urban agriculture can have a positive impact on a region’s food security, reducing food miles and organic waste in landfills. It would also improve the quality of urban life by greening city spaces. Urban agriculture needs to be incorporated in a city’s land use plan. A legal framework that allocates idle and/or under-used urban land for food production would support the development of urban agriculture. Building codes need to be adapted so that they reflect the actual structural contingencies for rooftop gardening. Institutions will need to conduct research on urban agricultural techniques and food processing, and centers for training, dissemination and soil testing need to be established. Creating a support infrastructure for urban farming that includes tool banks and input material such as compost, seeds, organic fertilizers, and pesticides will have to be supported. The unemployed can be trained in food-related business. Financial mechanisms such as start-up capital or special loan schemes need to be established. Public institutions can be encouraged to buy locally produced food from urban farmers. Cooperation with the municipal waste collection system for collecting and composting organic waste can be forged to close the material loop. Cuba has an outstanding history in developing urban agriculture. By 2003, urban agriculture provided 60% of the vegetables consumed by Cuban city dwellers. The planting of several million trees (including fruit and nut trees) in and around Havana has recharged groundwater and improved water security and the water quality of Cuban citizens (Wolfe 2005). In 2013, Havana counted 97 high-yielding organoponics, which produce vegetables such as lettuce, chard, radish, beets, beans, cucumber, tomatoes, spinach, and peppers (FAO 2015). The total area under agriculture in Havana is estimated at around 35,900 hectares, or half the area of Havana Province. Production in 2012 included 63,000 tons of vegetables, 20,000 tons of fruit, 10,000 tons of roots and tubers, 10.5 million liters of cow, buffalo, and goat milk, and 1,700 tons of meat. In Cuba as a whole, agriculture is now practiced by about 40,000 urban workers on an area estimated at 33,500 hectares. This includes 145,000 small farm plots, 385,000 backyard gardens, 6,400 intensive gardens, and 4,000 high-yielding organoponics (FAO 2015). Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 225

A feature of urban and peri-urban agriculture in Cuba is the high degree of local autonomy, which is seen as a key to ensuring food security. Cuba’s strategy is to promote agriculture in small, local areas with a large number of producers who grow food for their own consumption and to meet the food needs of their neighborhood (FAO 2015).

Example: Policies to promote organic farming Organic agriculture should no longer be considered an alternative to conventional agriculture but a mainstream agricultural approach. Tailored policy instruments need to be flexible and region-specific, making reference to geographical, natural, and socio-cultural conditions (Niggli, Schader, and Stolze 2011). A multi-objective policy instrument can capture the strong interrelations and potential trade-offs between food security, biodiversity, and climate. Governments will have to play an important role in providing a supportive framework for organic farming. In most countries practicing successful organic farming, similar policy measures exist, such as strategic action plans, redirection of agriculture subsidies to organic farmers, organic labels and standards, organic research and education programs, as well as marketing campaigns. A plan for phasing out existing subsidies and redirecting them to the organic agriculture sector needs to be drafted and the feasibility and potential risks for the food security of a given country need to be considered. Support mechanisms and incentives for farms that convert from conventional to organic farming need to be created. Marketing of organic agricultural products, creating consumer demand, should be supported by the state as well, especially in the initial phase. Coherent labeling of organic products and stringent internationally accepted quality standards need to be adopted. Another interesting tool for stimulating demand is integrating organic produce into public procurement (e.g., schools, government institutions, and hospitals). Besides stimulating demand, it may also help to raise consumer awareness. One important policy option for public decision makers to support organic agriculture is accurate pricing that considers environmental services, carbon sequestration, clean air, and clean water. Top priority should be given to achieving prices and fees that reflect the full economic and environmental costs, including all externalities.

Initiative: Organic agriculture in Austria Austria is one of the best performing countries in Europe when it comes to organic agriculture. Twenty per cent of its agricultural land is under organic production. The per capita consumption of organically produced food is among the highest in Europe and demand keeps rising. The market entry of major retail chains has significantly contributed to the creation and stabilization of this market. Support for conversion and management, the creation of markets, clear target plans, awareness 226 Managing the Transition to a Low-Carbon Economy campaigns, training and capacity building, market development, research, and increases in farm efficiency are behind the success of organic agriculture in Austria (Lehner 2010). Although Asia has a very active organic movement, the total area under organic cultivation is relatively small, over 400,000 hectares, of which 75% is in the PRC. Several Asian countries have developed national regulations for organic agriculture, to increase export and domestic consumption. The Indian National Programme for Organic Production (NPOP) was launched in April 2000. This includes the framing of national standards for organic production, processing, and certification. Regulations for the use of the trademark “India Organic” have also been put in place (IFOAM 2003). Box 6.10 summarizes policy actions related to the food and agricultural sector that offer potential for carbon mitigation.

Box 6.10: Policy Actions for the Food Sector

• Promote organic farming policies. • Promote urban agriculture through the city’s land use plan, building codes, supportive infrastructure (e.g., tool banks for input material, training), and financial support mechanisms. • Create agro-eco-industrial parks. • Tackle food waste: put in place a national policy to reduce food waste in the entire food cycle, invest in agricultural infrastructure, (through technological skills and knowledge, storage, transport, and distribution), provide special subsidies, loans, and grants for small farmers and food producers, give awards for the best performing food processors. • Improve water resource management: support improved irrigation technologies (drip irrigation systems), carry out training programs in water management, support passive rainwater harvesting, promote synergies between industries and agriculture to use effluent wastewater, scale pricing of water or electricity that is used to pump water.

Source: Authors.

6.5.2 Water

Managing water resources is essential if the world is to achieve sustainable development. Governments must make immediate investments in water management and water-related infrastructure. Corruption remains a stumbling block in the water sector. This can lead Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 227 to “uncontrolled pollution of water sources, over pumping and depletion of groundwater, lack of planning, degradation of ecosystems, weakened flood protection, urban expansion leading to heightened water tensions, and other harmful effects” (United Nations 2009b: 3). The financial costs of managing water can be met through tariffs, taxes, and transfers through external aid and philanthropy (United Nations 2009). Policy makers need to decide on the trade-offs between different objectives for the water sector and who will bear the costs.

Example: Losses in water distribution A conservative estimate of the global annual water losses in distribution is estimated to be 35% of the total water supplied. For some low-income countries the loss may be up to 80%, amounting to nearly $9 billion per year in Asia (Kingdom, Liemberger, and Marin 2006). Indian cities like Delhi and Indore lose about 50% of their water production, which contrasts with the losses of cities that have successful water resource management such as Berlin (3.0% losses) or Singapore (2.5%) (WWF 2009). Reducing total water losses by half would help utilities to serve 150 million more people, and would cost about $20 billion. In addition, the total revenue of Asia’s urban water facilities will increase by $4.3 billion annually (GIZ, Federal Ministry for Economic Cooperation and Management, VAG 2006). Currently, investments in water infrastructure are spent more on increasing production than on maintenance, improvement, and extension of the existing system. By reducing water losses, water utilities will have additional supply to enable them to expand services to underserved areas. Water scarcity is not only an issue of the availability of water, but lack of appropriate management and governance. Repairing only the visible leaks will not be sufficient to curb water loss. Box 6.11 summarizes policy actions for the water sector.

Box 6.11: Policy Actions for the Water Sector

• Make rainwater harvesting mandatory. • Encourage recycling of grey water in households and for industries. • Make water saving devices for toilets, flushes, sinks, and washing machines mandatory. • Support farmers to adapt water saving practices like drip irrigation; provide special subsidies and innovative financing for small farmers. • Undertake measures to reduce water losses in distribution. • Consider higher pricing to reduce water consumption and wastage.

Source: Authors. 228 Managing the Transition to a Low-Carbon Economy

6.5.3 Electricity

Access to reliable and affordable energy for electricity, cooking, transport, and production is necessary to meet the basic needs and sustained economic development of Asia. Toward this end, governments should promote energy policies that help mitigate carbon emissions. Scaling up the production side needs to be accompanied by addressing losses in energy transmission and the high-energy consumption of the end users with suitable policy interventions. A long-term policy for energy development, with a strong focus on reaching a low-carbon society, needs to be formulated. Policy mixes like incentives for renewable energy development along with awareness programs have proven to be quite effective. Rather than investing in new electricity generating plants and increasing supply, governments would achieve a lot more by helping the population buy energy-saving devices such as liquid crystal displays (LCDs), compact fluorescent lamps (CFLs), and other technologies that have fewer carbon emissions but a higher up-front cost.

Example: Renewable energy Government interventions can prove helpful in encouraging the uptake of expensive renewable energy investments by low-income neighborhoods and can help in the achievement of the Millennium

Development Goals. In order to reduce CO2 emissions, governments can help install wind energy for communities, including offshore wind parks, new solar panels for existing buildings and houses, and solar water heaters for households in regions that are exposed to the sun. Although these options have high up-front costs, they offer significant potential for carbon abatement. There can be innovative ways of financing such investments. In Australia, for instance, households have the option of renting their rooftops to a company that installs the solar system and then feeds the excess electricity generated into the grid (Energy Matters 2011). Having a feed-in tariff system will help in the uptake of renewable energy ventures, which are currently not common in Asian countries. Emerging Asian countries that have already introduced feed-in tariffs include India, Malaysia, Philippines, Sri Lanka, and Thailand. In fact, fixed feed-in tariffs have proven to be one of the most effective policy actions for the promotion of renewable energy. A mandatory electricity utility quota for industries and public institutions, net metering, and financial incentives like production tax credits and capital subsidies are other interesting options for policy makers. The high initial cost of energy-efficient equipment can be overcome by making it available for hire, or by charging a deposit that is refunded when the equipment is returned after its use. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 229

Initiative: Renewable energy target in India The Government of India has set ambitious targets for the renewable energy sector. The National Action Plan on Climate Change (NAPCC) targets a 1% annual increase in renewable energy generation, which stood at about 3.5% of the total in 2008. Meeting this goal may require 40 gigawatt (GW)–80 GW of additional capacity in renewable energy capacity by 2017. To achieve this goal, a tremendous increase in renewable energy is needed. Steps for an enabling environment have been taken but significant barriers to renewable energy development remain. Renewable energy systems have high up-front capital costs. Besides financial barriers, a lack of support for infrastructure—limited grid interconnectivity, lack of quality data, and hurdles in the regulatory approval (delays in clearances)—inhibit the development of the sector significantly (World Bank 2010).

Measures to Improve the Allocation of Resources An important policy action that could motivate people to take these small measures would be to correct the pricing of energy resources. Currently, most sources of energy are subsidized by the government, but this leads to market failure and irrational allocation of resources as the user does not pay the real cost of consuming the resource. All traditional sources of energy are derived from fossil fuels, which are heavily subsidized by governments. Eradicating subsidies for fossil fuels would enhance energy security, reduce emissions of greenhouse gases and air pollution, and bring economic benefits (IEA 2010). Fossil fuel subsidies worldwide amounted to $558 billion in 2008 and $312 billion in 2009, the majority of these subsidies being in non-OECD countries (IEA 2010). Only a small proportion of these subsidies actually reach the target group they are intended for—the poor. Removing subsidies would increase the price of fossil fuel sources, and, as a result, most traditional forms of energy would become more expensive. This would prompt people to conserve energy and reduce wasteful consumption. It would also motivate them to resort to energy- efficient devices and modes of transport. The International Energy Agency has projected that removing all fossil fuel subsidies by 2020 would cut global primary energy demand by 5%, compared with a baseline in which subsidies remain unchanged (IEA 2010). Alongside the removal of subsidies, governments should actively explore increasingly taxing products that are energy-inefficient and environmentally harmful. Energy-related policy actions to reduce a nations’ carbon footprint are listed in Box 6.12. 230 Managing the Transition to a Low-Carbon Economy

Box 6.12: Policy Actions for the Electricity Sector

• Formulate a national policy on renewable energy targets. • Promote energy efficiency: green standards and labeling, subsidies, grants, and interest-free loans for products and investments that improve energy efficiency. • Promote renewable energy installations. • Correct the pricing of energy resources. • Tax products that are energy-inefficient and environmentally harmful. • Implement Smart Grid technologies: develop a national framework, create incentives for investments, and demonstrate benefits to consumers. • Undertake public awareness campaigns on measures that save electricity.

Source: Authors.

6.5.4 Transport

Given the amount of CO2 abatement potential in the transport sector, it is critical that policy makers strive to influence behavioral changes in travel at individual and community levels. Policies to address climate change will involve large sums of money. However, according to the Stern Review, incurring costs now for carbon abatement, and avoiding serious and expensive consequences at a later date, will be a wise investment (Stern 2006). Policy initiatives in the transport sector will need to be implemented at all levels—national, state, and city level; they also need to be integrated with urban planning policies. A guiding national policy law for low-carbon footprint transportation with tangible targets will provide a framework. The increase in personalized motorized vehicles especially needs to be curbed by policy to provide alternative solutions and discourage personalized motorized vehicles.

Example: Make city centers motor vehicle-free Many cities around the world have designated areas as pedestrian zones (also known as car-free zones). These areas have various policies for the use of cycles, skates, and kick scooters. Some ban anything with wheels, while others ban only certain types of traffic. Many Middle Eastern centers have no motorized traffic, but use donkeys for freight transport. European city centers, such as Venice, have a strict ban on all forms of motorized traffic. In the UK, Birmingham has turned its central area over to pedestrians. London has implemented congestion charges for vehicles accessing the city center during peak hours. Montpellier in the south of France has made its central retail and entertainment district a place for walking (Low 2007). In Japan, some streets (Nishiki, Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 231

Teramachi, Shinkyogoku) have been designated pedestrian-only streets and feature food markets and shopping facilities. By restricting traffic in city centers, either by mandate or by charging a high enough entry tax, non-motorized forms of transport are encouraged. Noise and air pollution is abated, and citizens are made more aware of the benefits and ease of walking and cycling. This could also encourage them to adopt these sustainable modes of travel in the rest of the city.

Example: Provide cycles for rent in the city center Policy makers should consider providing cycles for rent in city centers. An often-cited example is that of Paris where the metropolitan authority rents out cycles at various locations around the city. Cyclists have the option of picking up a bicycle in one part of the city, cycling around, and then dropping it off at another point close to their destination. This provides an income-generating opportunity in addition to the environmental benefits. A comprehensive global study of what happens when road space is reallocated (i.e., because of bus lanes or unexpected events) reported an average 18% of traffic went “missing” from the road network (Cairns et al. 2004 cited in Anable 2008). Policy makers could thus consider planning traffic flows so there are lanes dedicated to sustainable modes of transport, i.e., pedestrians, cyclists, and public transport. Box 6.13 lists some policies which offer carbon reduction potential in the transport sector.

Box 6.13: Policy Actions for the Transport Sector

• Formulate a national policy on a low-carbon transport system. • Promote public transport. This will require better urban planning, dedicated lanes, and improved information systems on time schedules and investment in high-speed rail infrastructure. • Make city centers motor-vehicle-free. • Provide bicycles for rent within the city center and support their uptake. • Car labeling: make information on fuel consumption and carbon dioxide

(CO2) emissions for cars compulsory, impose higher taxes on heavy vehicles. • Discourage personal motorized traffic through road pricing, higher pricing for parking, and higher taxes on vehicles. Encourage car sharing. • Change air travel policies: restrict the number of air trips per year, charge fees for additional air miles. • Promote electric cars and biofuels: require all public transport and taxi companies to use biofuels or electric cars, provide tax incentives for the purchase of electric cars, provide infrastructure support (loading stations, battery banks, biofuel stations). • Green driving: make green driving lessons mandatory. • Launch public awareness campaigns on the dangers of using fossil fuels.

Source: Authors. 232 Managing the Transition to a Low-Carbon Economy

6.5.5 Construction

Building materials and building waste, together with the energy consumed by most buildings, form a large proportion of the total GHG emissions of a region. The construction sector is a fairly unregulated sector and any policy interventions will have to work with incentives as well as mandatory regulations.

Example: Green building certification Certification and labeling of materials that are considered green”“ can help the building industry and builders to select the right material and technologies. Currently, there is a vast array of materials available, with no clear guidelines on which are environmentally sound. The state obviously has a key role to play in certification and labeling, a role that can greatly benefit local green economic development (Milani 2001). Compiling a green building directory, with details on green products, distributors, consultants, and engineers can be helpful for the industry. Such an initiative can finance itself, with sales providing a source of revenue; it will also create green jobs. The Building Construction Authority (BCA) of Singapore has developed the BCA “green mark,” which includes the following criteria: energy and water use, indoor air quality, along with other types of environmental impacts. The green mark is supported by the National Environment Agency and is applicable to new residential and commercial buildings. There is also a special version for labeling existing buildings. The “energy star” is a voluntary scheme developed by the US Department of Energy (DOE) and is awarded to new buildings with energy performances that exceed the 2006 IEEC Code by at least 15%. Energy stars are also used in labeling schemes to highlight the energy efficiency of buildings in Australia, the PRC, and India.

Example: Encourage green building standards for new buildings Policy makers could mandate that new buildings beyond a certain size or meant for a certain use have to be green. For instance, in Europe, the certification of the energy performance of buildings of more than 50 m2 in area is mandatory. The certificates must be accompanied by recommendations for the cost-effective improvement of the building’s energy performance (Directorate-General for Energy and Transport 2005). To boost the green building market, new public buildings and offices could be required to follow green building standards. Governments could also mandate old buildings to be retrofitted with insulating walls, roofs, and ground floors, energy-efficient windows, and Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 233

Box 6.14: Policy Actions for the Construction Sector

• Implement a national policy on low-carbon building and land use. • Enforce green building standards for new buildings and create green certification. • Promote sustainable building materials: create markets, build capacity, and provide training. • Enact policies to retrofit existing buildings: make this mandatory for commercial and public buildings, provide tax incentives. • Encourage reclamation of material from the construction sector: promote recycling, tax construction debris.

Source: Authors. ventilation systems. These may need to be supported by tax incentives or other types of subsidies. Energy efficiency for buildings should be made transparent so buyers and sellers can make informed choices. Currently, there is little emphasis on energy efficiency when purchasing buildings even though energy costs for the maintenance of a building are substantial. Labeling and certification of buildings should be reliable and controlled by governments (Lausten 2008). Green building standards need to be adapted to local climatic and cultural conditions, with equal emphasis given to the construction material used and the energy required for maintaining the building. Policies that support a low-carbon construction and building sector are listed in Box 6.14.

6.5.6 Urban Planning

Urban planning in future will be largely affected by environmental challenges caused by climate change and the need to reduce the overdependence on fossil fuels. Authorities must strive for a carbon- neutral city that manages its energy demands through renewable energy. Improving the eco-efficiency of the city should also be a priority, enabling waste and by-products from one section of the city to serve as inputs for other sectors of society. An example is waste being used to create biogas, or heat from electricity generation being used for district heating (UN–Habitat 2009). Urban planning needs to be integrated with policies for waste, water, transport, energy, and food.

Example: Plan cities for human beings rather than automobiles Many cities and urban areas have sprawled, making the automobile increasingly difficult to live without. If cities and neighborhoods were 234 Managing the Transition to a Low-Carbon Economy designed to be energy-efficient by offering walkable, transit-oriented options, the uptake of public transport and sustainable modes of transport can increase (UN–Habitat 2009). This will help cities reduce their ecological footprints by cutting their use of fossil fuels. Unfortunately, the reduction in car usage is not yet a priority for many cities, and as a result traffic growth and environmental impacts have become even more important. Urban planners need to start giving increasing importance to designing cities that do not sprawl, allowing more reliance to be placed on public transport, walking paths, and bicycle lanes. Policies related to urban planning that will have a positive effect on reducing carbon emissions are listed in Box 6.15.

Box 6.15: Policy Actions for Urban Planning

• Plan cities around the dimensions of human beings, rather than around the car. • Prevent urban sprawl. • Incorporate bicycle lanes and walking paths in all urban plans. • Develop sustainable modes of transport to reduce dependence on fossil fuels. • Envision at least one eco-village per district and support its growth and development. • Strive for a carbon-neutral city, reduce energy consumption by a set factor. • Make a commitment to tap the maximum amount of renewable energy. • Promote land use plans for more green areas and urban agriculture.

Source: Authors.

6.5.7 Waste

The waste sector has huge potential to be turned from a curse into a cure. A global shift on how waste is perceived—as a valuable resource instead of a nuisance—is due. Waste pervades all sectors of human production, which makes it challenging for policy makers to take comprehensive action. A national zero waste policy based on the model of a circular economy, paired with a step-by-step implementation plan and a target time line, needs to be formulated. Policies for effective handling of waste can be grouped into the following categories:

• waste prevention through eco-design or cradle-to-cradle design, • improving the availability of the resource, i.e., recycling and reclaiming materials, and • consumer awareness programs. Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 235

Example: Eco-industrial parks Eco-Industrial parks should be given priority over conventional industrial parks. Special land allocation and fast-track approvals can act as an incentive for the setting up of these parks. A policy framework, including a timeline for the transformation of the existing industrial sector into an environmentally-friendly and resource-efficient industry based on a circular economy and a zero waste approach, needs to be formulated. Financial incentives for the establishment of eco-industrial parks or the transformation of existing industries can include tax exemption or revolving loans on pollution control equipment or fixed feed-in tariffs for surplus electricity.

Example: Waste prevention and eco design Waste prevention needs to address both production and consumption. Examples of waste prevention include the design of durable, long- lasting goods or the selection of products and packaging that are free of toxic substances. There should be switching from disposable to reusable products, or redesigning a product to use fewer raw materials or to last longer. Implementing stricter environmental standards for industries that are not based on a cradle-to-cradle approach, along with support of research and knowledge dissemination in this field, need to be promoted. Policy actions related to the waste sector are listed below in Box 6.16.

Box 6.16: Policy Actions for the Waste Sector

• Adopt a zero waste policy at the national level. • Introduce laws to enforce eco-design, implement stricter environmental standards for industries, and support research and knowledge dissemination. • Transform industry into eco-industrial parks. • Mandate waste collection and segregation at the industrial and municipal level and the construction sector. • Support the development of production systems that use recycled materials. • Encourage reclamation of material for agricultural or energy use, such as eco-industrial parks. • Mandate solid waste treatment: enforce legislative measures, offer technical and managerial support, promote biogas from digestion, and initiate a fee-for-service collection. • Launch consumer awareness programs to educate people on waste management. • Ban the practice of giving plastic bags for free at shopping centers— require shopping establishments to charge the consumer for each plastic bag.

Source: Authors. 236 Managing the Transition to a Low-Carbon Economy

6.5.8 Awareness Campaigns

Any policy action that will bring about shifts in habitual practices and lifestyles needs support and acceptance among the population. Awareness campaigns that inform and educate citizens and businesses about the issues at stake and the benefits of interventions have proven to be successful in securing acceptance for hard policy interventions. Awareness campaigns are important and should be part of designing and implementing new policies. Individual choices and community behavior can be changed more easily by showing the benefits of the changes and by reducing the obstacles to acting in a low-carbon way. For example, the uptake of waste recycling can be raised by increasing the awareness of the potential of emission reduction, and by making recycling opportunities available.

Example: Desirable actions to move toward low-carbon society in Japan The Government of Japan believes citizens and businesses should initiate action proactively so Japan can achieve a low-carbon society. Various policy instruments are therefore designed to encourage citizens through “eco-participation,” “eco-thinking,” and “eco-sharing.” Citizens are encouraged to be actively involved in the creation of a low-carbon society based on the consciousness that human beings are a part of the ecosystem and are also main actors to create a coexistence society, as well as to offer a variety of ideas to reduce carbon emissions and communicate and share these ideas. Citizens need to practice environment-friendly lifestyles with accurate knowledge of the global warming issue and respect for nature as well as other people. They also need to assume responsibility for the next generation (eco-learning) and pay for the use of the planet’s limited resources such as for GHG emissions through a carbon offset system (eco-buying, eco-use, and eco-disposal).

Example: Educate population about food system issues and the value of eating local Comprehensive campaigns and education about the benefits of eating locally produced food will result in well-informed citizens and may result in citizens buying more locally produced food. Locally produced label systems or labels that indicate the food miles of a produce are an effective way to create greater awareness among the population. The negative health and sustainability impacts of the current food system can be curbed by increased awareness and activity surrounding local food accessibility. Local agriculture puts power back into the hands of the individual. It can help unveil the trail between farmer and plate and people can become more aware about the unsustainable aspects of industrial agriculture. Involvement of the community through local ties Societal Innovations and Lifestyle Choices as a Low-Carbon Development Strategy 237 to farmers can increase social relationships in an area and people can accept more seasonally grown food. Policy actions for education and awareness creation that support low-carbon development are listed in Box 6.17.

Box 6.17: Policy Actions for Awareness Campaigns

• Implement a school curriculum on the environment at the national level. • Educate the population on food system issues: food waste, food miles, organic farming, and food security. • Initiate awareness campaigns about waste issues: sensitize and inform citizens and industries about the 3Rs (reduce, reuse, and recycle), with concrete actions that can be taken. • Raise awareness of water-related issues: promote water saving technologies and practices for the recycling of water. • Launch awareness campaigns to inform people about energy issues: provide information on energy-saving appliances, carbon dioxide

(CO2) emissions, and climate change; train companies in energy- reducing practices. • Promote greener transport: celebrate cycling and walking, educate citizens about the carbon intensity of current transportation systems and green alternatives. • Inform and enhance knowledge about green buildings.

Source: Authors.

6.1 Conclusion

Current global trends are more than alarming. We are witnessing a tremendous increase in the consumption of raw materials and products. Population growth and changes to lifestyle patterns caused by economic growth account for most of this increase. The planet’s bio-capacity is limited and already overshot, raw materials are being depleted at a rapid pace, global waste production is increasing, agricultural land is being converted into nonproductive land, natural aquifers are depleted, and water bodies are polluted. Environmental pollution is on the rise; CO2 emissions are projected to increase, and global warming will result in devastating calamities for life on earth. Mitigation and adaptation strategies to tackle climate change will need to become a top priority for all governments. Since climate change is a global issue, it will also require global solutions built on common but differentiated responsibility for each nation. 238 Managing the Transition to a Low-Carbon Economy

However, the responsibility for action does not only lie with governments; each individual will have to re-examine his/her own lifestyle in terms of consumption patterns and volumes. This calls for a deep and sincere examination of the true needs of individuals versus their wants. Changing individual habits requires effort and it needs support at different levels. Governments need to create conducive environments that enable and foster lifestyle changes; strong incentives and enforcements are suitable tools for that. Businesses need to adopt strategies and pursue the creation of new business models, including environmentally friendly technologies and financial products, that facilitate the propagation of sustainable consumption practices. The concept of “fair trade practices” is better known in developed countries although it benefits developing countries even more. There is considerable scope for companies to make their businesses more viable by creating awareness and promoting “fair trade” concept among the growing upper and middle class consumers in developing countries as well as helping to connect the rich with the poor. Hegemonic cultural practices orient themselves along the lifestyles of elites. Media and advertising still promoting carbon-intensive consumption patterns will have to be redirected to promote low-carbon lifestyles. Campaigns and information on alternative options, carbon mitigation actions, and support of strong peer groups are other tools that can be used to support individuals on the path to a more sustainably integrated life. Hard and soft policy instruments, with a step-by-step action plan and tangible targets for the industrial and commercial sector to implement carbon mitigation and adaption strategies, are already being implemented in many nations, but their effectiveness as well as the speed and range of implementation needs to improve. Globally, we can learn from many initiatives and pilot projects. Some of those are at the national level, but concerned citizens who are committed to change have promoted the bulk of these initiatives. These initiatives need to be supported and can be scaled up; governments need to recognize the value of such movements by providing legal and administrative support for experimentation.

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Chapter 7 Reforms for Private Finance toward Green Growth in Asia Takashi Hongo and Venkatachalam Anbumozhi

7.1 Low-Carbon Green Growth

The debate on climate change has shifted dramatically of recent. The strong evidence presented by scientific community through the Intergovernmental Panel on Climate Change (IPCC) process has largely settled the discussion about whether the world needs to respond. The question now is what shape such a response should take. There is agreement approaching consensus that any successful program of action on climate change must support two objectives: stabilizing atmospheric greenhouse gases (GHGs) and maintaining economic growth. Research by the Asian Development Bank (ADB) and the Asian Development Bank Institute (ADBI) has found that reconciling these two objectives is possible, but that technology and finance are indispensable resources for such a low-carbon green growth paradigm (ADB and ADBI 2013).

7.1.1 Green Technology

Essential to driving low-carbon green growth will be identifying and employing appropriate technologies. The technology gap between developed and developing countries and between large and small and medium-sized companies is significant. Technology transfer offers a least-cost option for improving the level of technology globally. However, technologies are mostly developed, owned, and used by the private sector and present an investment opportunity for them. The private sector is the catalyst in transferring useful technologies through

251 252 Managing the Transition to a Low-Carbon Economy the market. The public sector’s role is to improve the investment climate for accelerating technology transfer within the private sector. In order for a sustainable technology transfer mechanism to be established, the following should be noted:

• Technology comes from a combination of hardware equipment, software and experience and expertise embodied in engineers and workforces. Cooperation between suppliers and recipients of technology is required during the operation phase (Ramanathan et al. 2012). • Technology needs to be improved continuously and new and innovative technologies developed. Technology transfer is a part of the technology cycle; research and development (R&D), commercialization, diffusion, and re-investment, are all needed to improve existing technologies and develop innovative technologies (Kumar 2013).

7.1.2 Low-Carbon Investments and Current Flows in Finance

As the world economies continue to rebalance, the emerging economies of Asia are forecast to make great contributions to the global economy. The accompanying rise in demand for energy, water, urban development, transportation, and agriculture infrastructure in developing countries in Asia to help meet this forecast is estimated to be $18.1 trillion. Greening economic growth can reduce risks from future climate change and environmental degradation, and progress is being made. In 2013, Asian investment in the renewable energy sector hit another record, up 19% on 2010—a six fold increase from 2000. However, enormous funding will be required to stabilize the temperature increase within 2ºC, beyond which worldwide social, economic, and environmental disruption occur. Table 7.1 collates the investment requirements from different sources for various sectors. The International Energy Agency (IEA) estimated that investment in energy-related climate change mitigation in developing countries of the world in 2035 would need to increase by $40 trillion.1 ADB has estimated that infrastructure investment demand for energy,

1 See IEA (2013). Over the period to 2035, the investment required each year to meet the world’s energy needs in the 2oC scenario rises steadily toward $2,000 billion and annual spending on energy efficiency increases to $550 billion. This means cumulative global investment of more than $48 trillion, made up of around $40 trillion in energy supply and the remainder in energy efficiency. Reforms for Private Finance toward Green Growth in Asia 253

Table 7.1: Estimation of Global Investment Cost Requirements to Combat Climate Change

Country/Sectoral Background Study Estimates Level Costs Assumptions World Bank, 2010 $60 billion/year Baseline investment additional investments needs for clean in the electricity energy, consistent generation sector by with stabilization of 2030 emissions at 550 ppm by 2030. United Nations $200 billion–$210 Sector Costs ($) Estimation of the net Framework Convention billion/year additional Fossil fuel supply -59 additional investment on Climate Change, investments by 2030 Power supply -7 per sector needed to 2007 Industry 36 reduce GHG emissions Buildings 51 by 25% by 2030. Transport 88 Waste 1 Agriculture 35 Forestry 21 R&D 35-45 Stern, 2007 $1,000/year - Annual global investment by 2050 macroeconomic cost required to stabilize emissions at 550 ppm levels by 2050; represents 1% of global GDP. Organisation for 0.6%–3.9% reduction Country Reduction in Estimation of global Economic Co- in global GDP by GDP by 2050 (%) cost of stabilizing GHG operation and 2050, compared with PRC 4.5 emissions at 550 ppm Development, 2009 business-as-usual India 3.8 and 650 ppm levels by baseline GDP Australia and 2050. Average GDP New Zealand 2.2 loss between 2012 Japan 0.5 and 2050 varies from 0.2%–1.7%. Results are derived from OECD ENV-Linkage model, accounting for investments required to implement multisectoral mitigation policies International Energy $10.5 trillion in the Sector Yearly Global cumulative Agency, 2009 energy sector between Incremental additional investment 2010 and 2030 Investment (450 ppm) needed in the energy 2021–2030, $ billion, sector to stabilize Transport 334.1 emissions at 450 ppm Buildings 206.5 by 2030 Power plants 141.5 Industry 88.2 Biofuels supply 37.8 GDP = gross domestic product, GHG = greenhouse gas, ppm = parts per million, PRC = People’s Republic of China, R&D = research and development. Sources: World Bank (2010); International Energy Agency (2009); Organisation for Economic Co- operation and Development (2009); United Nations Framework Convention on Climate Change (2007); Stern (2007). 254 Managing the Transition to a Low-Carbon Economy transport, and water from 2010 to 2020 will reach $8.2 trillion2 and has recommended that all investments should contribute to climate change mitigation and adaptation. Low-carbon green growth will require a significant reconfiguration of current and future investment. Public funds in emerging economies are limited. Figure 7.1 illustrates public, private, and international flows of investments at the global level. Public financing from developed countries such as official development assistance (ODA) and funding

Figure 7.1: Financial Flows to Developing Countries ($ million) million

PR Grant Private OOF ODA

ODA = official development assistance. Source: Organisation for Economic Co-operation and Development, Development Assistance Committee (OECD–DAC) Statistics (2010).

2 See ADB (2009). Between 2010 and 2020, Asia needs to invest approximately $8 trillion in overall national infrastructure. In addition, Asia needs to spend approximately $290 billion on specific regional infrastructure projects in transport and energy that are in the pipe line. Of these regional projects, 21 high-priority projects that could be implemented by 2015 cost $15 billion. This amounts to an overall infrastructure investment need of about $750 billion per year during the 11- year period. Reforms for Private Finance toward Green Growth in Asia 255

Figure 7.2: Banks’ Outstanding Loans to Asia and the Pacific ($ million) ,

e lia US UK an y

–, ra anc apan S pain st J rm Fr Au –, Ge

–,

–, Q Q

UK = United Kingdom, US = United States. Source: BIS Quarterly Report (2012).

from multilateral financial institutions such as the World Bank and ADB has been used to support projects and policies in developing countries, particularly infrastructure projects. However, these conventional sources of finance may continue to dominate because, first, traditional donor countries have budgets deficits (the supply factor) and second potential investors in developing countries are from private industry and business (the demand factor). Mobilization of all potential financial resources, including private finance, in both developed and developing countries and from funds managed by institutional investors need to be optimized through public–private finance, taxation and tax exemption, regulation, and the enhancement of voluntary actions. This is not an abstract concept. The People’s Republic of China (PRC), for example, has devoted key parts of its last three five-year plans to developing a green growth strategy for energy, agriculture, and infrastructure. Other economies such as India and Indonesia are promoting green infrastructure investments to enhance resilience. An emerging body of experience suggests there is considerable potential for closing the low-carbon investment gap by mobilizing private finance. The financial markets in emerging countries, such 256 Managing the Transition to a Low-Carbon Economy as Malaysia, Thailand, and Viet Nam are growing and private finance can be used to provide long-term financing to both infrastructure and industrial projects. Also private finance in developed countries looks at the emerging country market as a high-growth opportunity (Figure 7.2). While public–private finance mobilization and leverage ratios are difficult to calculate or compare across projects, countries, and instruments, ratios of 1:5 and above are not uncommon. A large amount of private funding is becoming available for green growth. Public finance is expected to play a catalytic role for mobilizing private finance. There are some cases of instruments, such as grants, which are used either for conducting feasibility studies or act as guarantees, catalyzing and delivering public–private ratios of 1:8 and higher.

7.2 Unlocking Private Finance

7.2.1 Measurement and Carbon Pricing

The environment is an externality and needs to be internalized into the market. The first step of this integration process is to measure the negative impact of economic activity, such as climate change and the benefits of a healthy environment so that a “price” can be determined. A base price can then be decided by regulation, for example a carbon tax, and also determined in the market by demand and supply, which are usually generated by the regulatory framework. The methodology for measuring greenhouse gas (GHG) emissions and emissions reduction—measurement, reporting, and verification (MRV)—is an essential component. From an operational perspective, it may be desirable to use the methodologies of the Clean Development Mechanism (CDM). The CDM has grown rapidly with more than 2,000 projects registered by 2012 and an increase to 7,598 projects by March 2015 (UNFCCC 2012). CDM is the most commonly used measurement and 73% of global CDM projects are in Asia. However, it has more than 200 variations in identifying emission reductions. CDM’s contributions are enormous as it is a market-based instrument, but there is still room for considerable improvement. The salient features of CDM methodology are:

• Reductions are defined as the gap between the baseline emission and the project emission. Under the CDM, the assumptions necessary for calculating the baseline emission are complex and, sometimes, unrealistic. It has been pointed out that the Reforms for Private Finance toward Green Growth in Asia 257

CDM executive board adopts a methodology that is different from the conventional approach adopted by the investors, to

demonstrate energy conservation and CO2 emission reduction effects at the project level (Hongo 2012). • The CDM methodology is based on a case-by-case approach. The benefit of this approach is its flexibility. It can take into account differences in local conditions and accommodate new types of technologies and ideas. However, it is not transparent or predictable. Investors would like to be certain about the emission reductions, particularly when reductions are converted to credits and generate additional cash flow.

7.2.2 Improvement in Measurement, Reporting, and Verification (MRV)

At the Cancun Climate change conference in December 2010, parties to the Climate Change Convention decided to establish more market-based mechanisms to unlock the potential of private finance to achieve the climate change goals for 2020. Yet today there is limited understanding of the role and definition of private financing to tackle climate change. The MRV system could be extended to include some private climate- specific flows, such as those related to CDM. In addition, foreign direct investment (FDI) can play an important role in supporting the diffusion of low-carbon technologies. However, the important role of FDI has received little systematic attention in the climate change agenda. In partnership with others, the OECD is working on how to define and measure green FDI, with a view to promoting a better understanding of the contribution FDI can make to the shift to a low-carbon economy and the role policies may play in the greening of FDI (OECD 2010). MRV is a new concept, particularly for financing. Varieties of MRV include CDM, voluntary certified standards, and J-MRV which was developed by the Japan Bank for International Cooperation for confirming GHG emission reductions in their projects. MRV is commonly understood as a series of processes to quantify GHG emissions and their change over time. It is a key instrument in understanding the level of emissions and the impact of actions aimed at changing emission levels. MRV has become important as many emerging economies introduce national emission reduction activity packages—Nationally Appropriate Mitigation Actions (NAMAs). As of today, there is no single comprehensive MRV which can cover all major investment fields from energy efficiency in the energy supply sector 258 Managing the Transition to a Low-Carbon Economy to small demand-side investment, renewable energy use, and land use change. However, financial institutions have been involved in many activities and their experience can be used to propose ideas for MRV. An MRV alliance of financial institutions could be effective for formulating practical MRV as well as for creating momentum for shifting to low- carbon investment. CDM is a good practice but it needs to be improved. An innovative MRV system needs to be constructed using the experience of CDM. The ideal MRV is a comprehensive system with clear principles. The system’s principles are crucial because they indicate the direction of solutions when difficult decisions have to be made when calculating reductions. The MRV should be simple and practical and as objective as possible. In credit mechanisms that embed MRV, the baseline setting is critical as it represents a scenario of emissions levels in the absence of the project (business-as-usual). When actual emissions from a project are below the baseline emissions, the difference between the two is eligible for credits. In penalty mechanisms, the baseline is generally a specified performance target. An entity is penalized for emissions above the baseline, and some schemes may credit for performance below the same baseline. This baseline setting should not be too complex and subjective. One of the best options for simple and practical baseline setting is benchmarking. Investors and verifiers can share views over the baseline of CO2 emission prior to verification.

7.3 Options and Outlook for MRV and Reforms in Private Financing

7.3.1 Carbon Market

Under the CDM, GHG emission reduction at project level is evaluated and converted into carbon credits. The price of credits is decided through the carbon market. This functions as a market-based incentive mechanism for energy efficiency and renewable energy projects, but it is unlikely to provide for all investment needs and should be combined with other funding sources. The carbon market encourages low-carbon investment to some extent but not enough. One controversial issue seems to be carbon pricing itself as the price has dropped below €5 per ton on the European market. As shown in Figure 7.3, the peak of CER in early September 2008 was around €21 per ton. Reforms for Private Finance toward Green Growth in Asia 259

Figure 7.3: Changes in Carbon Price

Sept. , : .

Sept. , : . –

Source: IETA (2014).

Too low a carbon price will have a negative impact on behavioral change by industry and citizens as well as low-carbon investments. A higher price will encourage industry and consumers to choose lower carbon options to mitigate the risk and increase their profits. Hence, policies that bring long-term stability to the carbon price are seriously being considered and implemented. For example, the UK adopted a

“Carbon Budget” in 2008. This stated that the allowed CO2 emissions in the UK will be reduced by 34% in 2022 compared to the 1990 level. Although this is not a direct price-setting intervention, it may have an impact on the market price of carbon price. Currently, the carbon market is deeply depressed because of the uncertainty of the regulatory framework after 2014. Demand for credits depends on the regulation for the GHG or CO2 emission and economic activities. The World Bank has estimated that the total demand for international offset credits under the Kyoto Protocol in 2008 was some 2 billion but it has since dropped to 1.2 billion. On the supply side, the number of registered projects under the Kyoto Protocol is increasing and issued credits are accumulating steadily even though its price has been dropped. The supply side of credits from the GHG emission reduction project is not as flexible as the demand side in the short term. However, in Asia, a new trend is emerging. Each country is developing its own carbon market with as yet no links to each other. Australia started 260 Managing the Transition to a Low-Carbon Economy a carbon price mechanism called Clean Energy Future (CEF) in July 2012 and this was planned to be transformed into a fully functioning carbon market in July 2015 from a fixed carbon tax system. This was suspended but other countries are moving forward. The Republic of Korea has started an emissions trading scheme (ETS) in 2015, and the People’s Republic of China (PRC) has started eight regional experimental schemes to be developed into a nationwide scheme after 2016. India has started Performance, Achieve and Trade (PAT) as a simplified version of a sectoral ETS. Parallel to national initiatives, Japan has also been promoting a new bilateral carbon offset mechanism, called the Joint Credit Mechanism (JCM). It is anticipated that, in due course, the JCM will be incorporated into a de facto global market in the post-Kyoto regime, augmenting the carbon markets created by the CDM. Given the potential for emerging carbon markets in other sectors and economies, it is better to facilitate the harmonization of fragmented carbon markets with the ultimate aim of transforming them into one universal market. The International Emission Trading Association (IETA) is facilitating such a harmonization process among many independent markets. In addition to regulatory frameworks and market-based mechanisms, voluntary action may give commercial value to reductions.

For instance, companies or individuals may offset the CO2 emissions from their activities by using carbon credits as their voluntary environmental contribution (Table 7.2). However, the magnitude of demand for this is still limited in the Asian context.

Table 7.2: Options for Low-Carbon Financing

Policy Option Characteristics Finance with measurement, reporting, and Finance after confirmation of greenhouse verification (MRV) as conditions gas (GHG) emission reduction using MRV Performance-based incentive and Green Incentives to be given based on the reduction Climate Fund amount of GHG (fixed carbon price) Tax reforms Carbon price on the emissions Tax exemption by GHG emission reductions Removal/Reduction of fossil fuel subsidies Custom duties Carbon cost adjustment Feed-in-tariff (FIT), renewable portfolio Market-based incentives system (RPS), green certificate, and Viability Gap Fund (VGF) Socially responsible investment Mobilization of the funds of institutional investors by rating or the creation of green assets Source: Authors. Reforms for Private Finance toward Green Growth in Asia 261

7.3.2 Future Carbon Market

Several emerging economies are in the process of designing national emission trading systems to reduce GHG and CO2 emissions globally. Many investors expect a carbon market to be a market-based incentive scheme. Emission trading could be a least-cost option, but there are conditions for using an emission trading scheme as a market-based reduction option. The lessons learned from ongoing efforts can be summarized as follows:

• As a long-term policy measure, carbon pricing may encourage behavioral change in industry and consumers, and it should be part of a long-term policy framework that encourages low-carbon investment. Introduction of carbon pricing should also take into consideration the lead time required for making investments as well as the payback period of the same investment. • To encourage investment, the carbon price needs to increase steadily. Price fluctuations in the market are unavoidable, but in the long term the price needs to increase. Without an expectation of price increases, low-carbon investment is not attractive. • CDM has generated many GHG emission reduction projects but there is a lot of room for improvement. For instance, the methodology for evaluating emission reductions is complicated and it takes time for incentives for reducing emissions to be received. A simple and practical methodology is needed and predictability has to be improved.

The development of a global carbon market can encourage participation by further lowering the cost of mitigation actions. In the near future, a global carbon market may gradually develop through links and crediting systems with national and regional Emission Trading Systems (ETSs). Any eventual linking of ETSs would require some international harmonization of features, including levels and/or procedures for setting emission caps, the adoption of safety valves, and the use of international offsets. By broadening participation to include developing countries and lowering the carbon price differential between participating and non-participating countries, crediting mechanisms can also extend the carbon market, thereby reducing carbon leakage and related concerns. One such crediting arrangement is the CDM, which allows the countries listed in Annex I to the Kyoto Protocol to invest in projects that reduce emissions in developing countries. 262 Managing the Transition to a Low-Carbon Economy

Analysis shows that the cost-saving potential for developed countries using well-designed crediting mechanisms could be very large (WEF 2011). However, there are serious concerns about the effectiveness and administrative burden of the current CDM, which is largely project-based. To address some of these concerns, it may be advisable to negotiate emission baselines at the sector level. Industries that reduce their emissions below the baseline would generate credits that could be sold in international carbon markets. The environmental effectiveness of emission cuts could be improved by setting these baselines significantly below the emission levels that would prevail if no further actions were to be taken. In the long run, however, to achieve ambitious global emission reductions at low cost, such approaches will need to be integrated in a unified, global carbon market, such as using binding caps with trading. Well-designed, binding sectoral caps for energy-intensive industries and the power sector in developing countries, which account for almost half of current world GHG emissions from fossil-fuel combustion, could lower the cost of achieving a given global emissions target, broaden participation in actions to tackle climate change, and alleviate leakage and competitiveness concerns. Even so, they would need to be ambitious in order to be effective. Other sectoral initiatives, such as voluntary, technology-oriented approaches, can help diffuse cleaner processes and technologies, but are unlikely to provide sufficient incentives for individual firms to reduce emissions as they put no explicit cost on carbon emissions. Although there is still some uncertainty about the international framework after 2020, national and city carbon markets in Asia will grow (Figure 7.4). Major countries that have ambitious emission reduction targets set for 2030, are expected to use international offset credit mechanisms although, its magnitude is not clear. In addition to national and subnational level markets, International Civil Aviation Organization (ICAO) is also designing an offset mechanism for keeping emission from international aviation at 2020 levels. One concern is fragmentation of the carbon market. Investors in low-carbon projects may use the carbon market but face higher risks if the liquidity of the market is low. A fragmented market is better than no market but it would be better to harmonize the different markets by:

• harmonizing the methodology for evaluating total emissions and emission reductions; Reforms for Private Finance toward Green Growth in Asia 263

Figure 7.4: Carbon Market after 2014

⇒

Kyoto Credits (CER, ERU, AAU) Kyoto Credits (CER, ERU, AAU)

EU ETS

Japanese BOCM

Australia

Rep. of Korea

PRC ( municipalities)

India (PAT )

De facto market

New international market

AAU = assigned amount unit; BOCM = Bilateral Offset Credit Mechanism; CER = certified emission reduction; ERU = emission reduction unit; ETS = Emissions Trading System; EU = European Union; PAT = Perform, Achieve and Trade; PRC = People’s Republic of China. Source: Authors.

• strengthening the legal framework of the host countries for projects, combined with technical support by countries with advanced infrastructure; and • preparing a road map for the each market and for the integration of these markets into the global market.

7.3.3 Green Finance

Many public sector banks have special facilities to support energy efficiency improvement and renewable energy projects. However they tend to select projects on a subjective case-by-case basis. However, MRV could be used to distinguish between GHG emission reduction projects clearly and objectively. When the MRV is simple and objective, investors can estimate the reduction prior to the approval of financing (Honbu 2012). Among many good practices, “GREEN—Global action for Reconciling Economic Growth and Environmental Preservation” is an 264 Managing the Transition to a Low-Carbon Economy initiative for supporting low-carbon investments by the Japan Bank for International Cooperation (JBIC), a government-owned policy-based lending bank. Under this initiative JBIC provides attractive low-interest and long-term finance to low-carbon projects directly or indirectly through intermediary banks. The project owner estimates the GHG emissions reduction and this is confirmed by JBIC. The structure of the JBIC credit line is illustrated in Figure 7.5. JBIC has developed simple and practical MRV guidelines for this initiative because it finds the CDM methodology too complicated and it feels it would be a barrier for investors. Some of its key elements have been transplanted to the MRV for Japan’s Joint Credit Mechanism.

Figure 7.5: Structure of a Green Credit Line

J-MRV CO reductions Share of J-MRV

Opinion Finance J-MRV Advisory JBIC Bank Committee Data CO reductions Data Finance (Planned and actual, Data CO reductions Energy consumption, Power generation)

Retained Consultant Project

Source: Authors.

Table 7.3 contains a comparison between the CDM and the J-MRV. In the J-MRV, actual emissions are calculated before the investment, using theoretical values. The goal is to make the process as simple and practical as possible. An example of a private sector bank supporting green growth is the rating system for sustainable buildings used by Sumitomo Mitsui Banking Corporation (SMBC). It reviews eight categories with 37 check points, including energy and water use of buildings and gives a rating out of 8. The bank will finance buildings in the top 3 grades (Table 7.4). Reforms for Private Finance toward Green Growth in Asia 265

Table 7.3: Comparison of Clean Development Mechanism and JBIC– Monitoring Reporting and Verification (J-MRV) Systems

Clean Development Mechanism (CDM) J-MRV Purpose Crediting mechanism under Confirmation of the Kyoto Protocol emission reductions, a condition of a Japan Bank for International Cooperation’s financing program (GREEN) Principle Conservative Simple and practical Means of facilitating Additional investment Emission reduction projects investment globally Reduction Baseline emission – projects Baseline emission – projects emission emission Baseline emission Emission without the Actual emission before project. the investment. National Technology and financial average or mission from additionalities will be the installations before considered investment Measurement In-situ measurement of Emissions are estimated emissions using theoretical value and sampling are allowed as practical approach Approach Bottom–up Top–down and places high priority on consistency JBIC = Japan Bank for International Cooperation. Source: Authors.

7.3.4 Performance-Based Incentive Schemes

Under traditional incentive schemes, enticements are given to projects or activities by governments directly or indirectly through implementation agencies. Determination of the amount is mostly done on a case-by- case manner based on each application. It is not easy to evaluate these applications because of the complexity of the technology involved and the different business models, so third-party experts are invited to the evaluation committee to improve its evaluation. Performance-based incentive schemes using MRV can determine the amount of incentives objectively and scientifically when the unit incentive amount is fixed

under the incentive scheme. For instance, “one ton of CO2 emission is equivalent to a fixed US dollar price, which will be determined prior to delivery.” 266 Managing the Transition to a Low-Carbon Economy

Table 7.4: Portfolio of the Green Credit Line

Cofinancing Financial Amount JBIC Finance Year Country Borrower ($ million) ($ million) FY2010 Turkey Derizekbank A.S 20 … Brazil BNDES 300 … Central and South America CAF 300 … India ICICI Bank 200 … FY2011 Mexico Nafinsa 100 … Central and South America CABEI 100 60 South Asia South Asia clean energy fund LP … 20 India ICICI Bank LTD 300 180 FY2012 Brazil PETROBRAS 1000 600 Columbia Bonca de Ba S.A 100 60 India ICICI Bank Limited 90 45 Malaysia RHB Bank Berhad 80 48 Turkey Development Bank 100 60 of Turkey FY2013 India State Bank of India 90 45 South Africa DBSA 50 30 Turkey Denizbank A.S 25 15 Total 2,855 … = not available, BNDES = The Brazilian Development Bank, CABEI = The Central American Bank for Economic Integration, CAF = Development Bank of Latin America, DBSA = The Development Bank of Southern Africa, JBIC = Japan Bank for International Cooperation, Nafinsa = Nacional Financiera. Source: JBIC (2014).

A performance-based incentive system could reduce the economic burden of adopting advanced technology by investors. The possible flow of this system is as follows.

(i) Announcement of tender for the incentive system. Aim of the project and eligible criteria are included. (ii) Applications from applicants. (iii) Review of applications by implementation agency and conditions for incentive payment agreed with applicants as contracts. (iv) After the conclusion of the contract with the agency, applicants start the project by using incentives.

(v) Monitoring of the CO2 reductions will be performed by the applicants and monitoring report with the third party’s evaluation will be submitted to the agency. Reforms for Private Finance toward Green Growth in Asia 267

(vi) The agency reviews and pays incentives to the applicants depending on the amount of the reductions. (vii) Monitoring, review and payment cycle will be implemented annually following the contract.

Figure 7.6 shows such an iterative evaluation process and the implementation of a performance-based incentive system.

Figure 7.6: CO2 Reduction: Case of Performance-Based Incentive

Application for performance-based incentives

Contract: MRV, assumption for MRV, price of CO reductions

Implementation of the projects

Annual cycle

Monitoring and reporting of CO emission reductions

Evaluation of monitoring report (conﬁrmation of reductions)

Payment of incentives

MRV = measurement, reporting, and verification. Source: Authors.

This process is similar to CDM because it operates on the basis of “project first and payment later.” However, payment of the performance- based incentive system will be made by the government through the agency. A unit incentive price denominated as price per CO2 ton can be fixed in the contract, allowing investors to avoid price fluctuation risks. Project cash flow can be improved by this scheme and private finance institutions may find it easier to provide finance (GOJ 2013). To implement this scheme, banks can submit applications and receive incentives on behalf of the project. One of the conditions of the implementation of this scheme is that financing covers the initial investment cost and incentives are paid later. From this point of view, it 268 Managing the Transition to a Low-Carbon Economy

Figure 7.7: Carbon Market and Performance-Based Incentive System

Government

Regulation Credit (Cap of emission) mechanism Credit O set Credit demand Supply Payment

Government

Reduction Contract plan

Reductions Reductions Incentive (performance) Payment

Source: Authors. is more practical when banks provide finance first and receive incentives when the loan is repaid (Figure 7.7). A performance-based incentive system is very cost-effective. However, the success of such schemes very much depends on the startup costs, being covered by the initial investment. A possible solution is combining the private finance with catalytic public finance, generated from the carbon markets. Private finance reviews the project including the incentives that the performance-based system can generate. Private finance flows into the project when sufficient and necessary cash flow exists, including these incentives. Under this scheme, a financial institutions can submit applications and get them processed on behalf of project developers and project developers will share revenue generated from the incentives indirectly with financial institutions. Based on these principles, the Green Climate Fund (GCF) can mobilize financial resources for climate change mitigation and adaptation in developing countries and is expected to play a catalytic role in mobilizing private funds. The GCF appoints intermediary banks to implement the program first. These intermediary banks provide finance to CO2 or GHG emission Reforms for Private Finance toward Green Growth in Asia 269

reduction projects when they confirm the CO2 emission reductions of the project by using MRV and assess the economic feasibility of the project. They monitor the reduction amount using MRV and report this to the GCF. The GCF reviews the report and provides the incentives to the intermediary banks who share them with the project organizers following a profit-share contract agreed prior to submitting the application to GCF. The amount is determined by the approved reduction amount (the amount of the incentive is the amount of reduction multiplied by the predetermined unit reduction price). This system works on the simple basis of “the more reductions, the more incentives” and reduces the GCF’s institutional workload. Small but efficient, the GCF’s incentive system is illustrated in Figure 7.8.

Figure 7.8: Green Climate Fund and Its Performance-Based Incentive System

Government

Regulation Credit (Cap of emission) mechanism Credit O set Credit demand Supply Payment

Government

Reduction Contract plan

Reductions Reductions Incentive (performance) Payment

Source: Authors.

7.3.5 Fiscal Policies and Tax Reform

Low-carbon green growth fiscal policy options fall into several broad categories and include: carbon taxes, tax exemptions and reductions, broader and more robust pollution charges, green subsidies, grants and subsidized loans to reward carbon performance, removing pervasive 270 Managing the Transition to a Low-Carbon Economy subsidies, and directing public expenditure at green infrastructure (Anbumozhi 2010; Hongo 2010, 2011). A carbon tax is one option for pricing CO2 emissions. The tax rate is determined by the government, e.g., the Australian carbon tax which was priced at AU$23 per CO2 ton emission in 2013. Carbon tax schemes urge installations under this scheme to reduce CO2 emissions to avoid a heavy tax burden. This scheme is similar to the ETS but the price determination mechanism is different; the carbon price under the ETS would be determined by demand and supply in the market whereas a carbon tax is determined by the government. One of the benefits of a carbon tax scheme is that it avoids the fluctuation in the carbon price and regulated companies can calculate the future tax amount and the effect of energy efficiency improvement investment. However, determining the appropriate tax rate, or carbon price, is crucial. A carbon tax scheme is easy to transform into an ETS, although Australia’s plans were canceled due to the change of government in 2014. Another approach for giving incentives through a tax system is tax exemption. For instance, in Thailand, investors in CDM funds enjoy tax incentives through tax exemptions. This kind of tax exemption scheme can be transformed into a performance-based tax exemption scheme when investors can demonstrate the reductions to the tax authority. This could be a good incentive for institutional investors and also for venture capital for clean energy projects.

7.3.6 Custom Duties

Under the UN Climate Change Conventions, two types of approaches are implemented—national approaches, which are implemented by each government, and sector-wide approaches such as international maritime and aviation regulation. Internationally traded products and services are, in principle, regulated by each country and customs at the point of import is a possible place to enforce carbon pricing of goods. The cost of carbon can be added to imported products and services. However, this is technically very complicated because it is necessary to understand the carbon impacts of the entire supply chain and the emissions at each part of the chain. A sector-wide, cross-country approach for determining the carbon price is preferable.

7.3.7 Setting Regulatory Frameworks: Feed-in Tariff, Green Certificate and Viability Gap Fund

Regulatory frameworks across capital marks are critical to facilitate large-scale private financial resources toward low-carbon development. Reforms for Private Finance toward Green Growth in Asia 271

CO2 emissions would become an explicit cost through such a regulatory framework but this takes time and this is why an incentive mechanism is required. Carbon emission trading is one of the market options for providing incentives. However, sometimes emission trading may not provide sufficient incentives for cost recovery, particularly technology development costs. The gap needs to be filled by additional incentives. The following are options to encourage market-based approaches:

(i) Feed-in tariff (FIT). FITs are widely used to support uncompetitive but climate-friendly electricity supply. FITs fix the price of the purchase of electricity power generation by using the supported energy sources, such as renewable energy. This policy provides certainty to the price of electricity generation over a long-term period and stabilizes project cash flow. This is an attractive incentive to investors. A key element of this scheme is price and tariff determination; there would be no investment if the price was too low and too much supply if the price was too high. The appropriate tariff level will be changed by technological innovations and it may be necessary to revise the tariff reflecting this. The cost of incentives is shouldered by utilities first and then transferred to consumers. (ii) Green portfolio/green certificate. This scheme decides the volume or ratio of the supply first, by setting a mandatory target for green energy. The price of the service is determined by demand and supply conditions and in the long run, the probability of oversupply and short supply is likely to be low. However, price risk is taken by investors. The cost of incentives is shouldered by utilities first and then transferred to consumers. (iii) Viability Gap Fund (VGF). This scheme is applied to the project on a case-by-case basis, and is typically used for infrastructure projects where there is a gap between the payable tariff and the tariff for cost recovery. Subsidies are necessary to recover the investment cost. One application of VGF is as follows: first, the project to be supported by this scheme is decided and then a tender is made. The lowest price offer for services which take into account all the incentives, including emission trading or other carbon-related revenue, is accepted and the gap from the payable tariff for service buyers is filled by the VGF. This scheme ensures there is enough revenue for investors and that there are cost-effective incentives. However, sufficient environmental performance, that is reduced emissions due to project implementation, is a condition for the VGF to be cost- effective. MRV can be used to check the cost performance of 272 Managing the Transition to a Low-Carbon Economy

the VGF’s incentives and to confirm the taxpayer’s burden for the incentives. The cost of incentives is funded by the host government but a part of its cost can be supported by using ODA or multilateral funds (World Bank 2012b).

A comparative evaluation of these three approaches is presented in Figure 7.9.

Figure 7.9: Feed-in Tariff (FIT), Green Certificate Market, and Viability Gap Fund

Feed -In Green Tari Tari Portfolio for investment Price Preﬁx Variable Viability recovery depending on gap supply CO Volume of Variable (short Almost assured incentives supply or oversupply) (volume or ratio)

Pros Income is Volume Payable almost necessary under tari guaranteed for the policy is investors assured Cons Cost is high if Volume and price there is risk shall be taken oversupply by investors

Source: Authors.

7.3.8 Socially Responsible Investment (SRI)

Institutional investors manage huge amounts of funds and invest in many varieties of financial products. They are aware that they can make contributions to enhance low-carbon investment and support companies that take proactive actions for green economy. Environment, social, and governance (ESG) investment is one of their initiatives. The ESG investment market is growing and it was estimated to be worth over €7 trillion in 2010 (Euro Sif 2010). The EU and US markets are leading the ESG market and their magnitude is €5 trillion and $2 trillion, respectively. Japan and other markets are very small. The European market is said to have grown faster and it reached €16 trillion in 2013. Similar initiatives are expected to be taken by the institutional investors in developing countries and this is already happening. For instance, the Principles for Responsible Investment (PRI), which is a UN-led Reforms for Private Finance toward Green Growth in Asia 273

initiative, have been signed by 22 institutions in developing countries in Asia (the total number of Asian signatories, including Japan, the Republic of Korea, and Singapore, is 206). The ESG covers a variety of corporate policies and actions but it is subjective in definition. Climate change was ranked as the top priority category in environment-related investment in a survey by PRI.3 When focusing on climate change, many innovative approaches are possible. A rating scheme for climate change and environment actions is an option. For example, Good Bankers Co. in Japan has developed a forest conservation rating system. It reviews 19 items which are considered to be forest conservation friendly actions and give them a grade. There are 15 rating grades, from AAA to C. It is assumed that this will be used in combination with conventional financial rating; fund managers can consider both financial and environment aspects in deciding whether to invest. Good Bankers released a new initiative on the Tokyo Stock Exchange in 2012 to direct the funds of the stock market to companies seeking aid in sustainable development (Figure 7.10). It reviews corporate environmental policies and actions according to replies to a questionnaire. It then publishes a table of findings with comments. This could be an incentive to companies to take action on climate change and their own sustainable growth because the reputation of the company in terms of its support for sustainability may affect its sustainability.

Figure 7.10: Forest Eco Fund

Service Forest Eco Fund Businesses Network contract Management Finances Good Fund contract Academia Bankers Manager Policies Rating Citizens evaluation Investment advice Rating System 190 items Institutional Investment reviewed Advisory Financial and Individual Fund Board review Investors

Reviewing forest- Investment friendly activities of companies

Forest-Friendly Stock Market Assets

Source: Good Bankers Co., Ltd.

3 Press release of 4 September 2012. 274 Managing the Transition to a Low-Carbon Economy

Socially responsible investment (SRI) has become measurable using a rating system but the rating process needs to become more objective. One possible solution is to construct a “Green Asset” identified by MRV (Figure 7.11). First, financial institutions invest in projects with GHG emission reductions confirmed by MRV. The investments are securitized into a green asset portfolio which would be funded by institutional investors. This concept means the creation of a new asset class market, the green asset market, for institutional investors. For instance, the green asset portfolio can be encouraged by tax exemptions which would provide a good incentive for the creation of a green asset market. A “green asset portfolio scheme” could also be developed. For example, Bank Indonesia, the central bank of Indonesia, plans to develop a green banking scheme and this can be combined with green assets, which are identified by MRV. A green asset ratio may be set as a mandatory target, like the renewable energy ratio in the electricity market. By introducing a mandatory target, the commercial value of green assets is expected to rise and then supply of funds to GHG emission reductions will increase.

Figure 7.11: Transformation of Money Market

Investment / Financing Reductio Finance Projects/Products (Public/Private)

Transformation

Negative impact of market Green Asset Market ﬂuctuations

Long-term return Tranformation Institutional Investors Money Market Short-term ﬁnancial return Household Pension System

Source: Authors.

“Green bonds” can be used to raise capital to finance or refinance investments in low-carbon or otherwise environmentally beneficial projects. They have significant potential as a means to access deep pools of relatively low-cost capital that is held by institutional investors Reforms for Private Finance toward Green Growth in Asia 275 for climate change and green projects. These investors typically avoid direct investment in low-carbon green infrastructure. Pension funds, for example, have increasingly invested directly in the carbon markets.

7.4 Conclusions and Recommendations

Greening Asian economic growth is the only way to satisfy the needs of Asia’s growing population, driving development and well-being while reducing GHG emissions. Considerable progress has been made in transitioning to low-carbon green growth, facilitated by technology and financial flow into the region. However, progress in green investment continues to be outpaced by investment in fossil-fuel-intensive and inefficient infrastructure. Private financing of much needed low-carbon green infrastructure is constrained by market uncertainty and lack of a long-term regulatory framework. MRV is a useful instrument for reforming financing mechanism by allocating a price to CO2 emitted in economic activities. The following actions are recommended for the further reform of financing:

(i) Adoption of MRV. Financial institutions can identify which low-carbon activities, products, and services to finance by reviewing the outcome of their financing activities using MRV. Tax and government incentive schemes can be transformed

to CO2 base price schemes by adopting carbon taxes and tax exemptions for green investment. MRV is in the learning-by- doing stage and further refinements can be expected. (ii) Capacity building and sharing experiences. If only a few financial institutions adopt MRV, its impact will be limited. Many institutions are needed to generate momentum. Multilateral institutions such as ADB and the GEF can provide capacity building to financial institutions that do not have enough capability to implement MRV. Leading public and private financial institutions should transfer their experience through their business activities such as cofinancing. (iii) Dialogue with industry groups. Technology information and experience in managing projects is needed to construct practical and effective frameworks. Collaboration with industry is crucial and dialogue with industry groups by policy makers and financiers is recommended. 276 Managing the Transition to a Low-Carbon Economy

References

Asian Development Bank (ADB). 2009. Infrastructure for a Seamless Asia. Manila. Asian Development Bank Institute (ADBI). 2013. Low-Carbon Green Growth in Asia: Policies and Practices. Tokyo. Anbumozhi, V. 2013. Fiscal Policies for Green Finance. APEC Report Financing Green Growth. Seoul: Ministry of Strategy and Finance, Government of the Republic of Korea. Asia-Pacific Economic Cooperation (APEC) and Global Green Growth Institute (GGGI). 2010. Green Growth Green Finance. 17th Finance Ministers’ Meeting. Kyoto, Japan. Bank for International Settlements (BIS). June 2011 and June 2012. BIS Quarterly. Basel, Switzerland. Eurosif. 2010. European SRI Study 2010 and 2014. Paris. Good Bankers. 2013. Annual Report. Tokyo. Government of Japan. 2012. Outline of the Bilateral Offset Credit Mechanism. Kyoto Mechanisms Information Platform, Japan. Honbu, K. 2012. GSEP: About Sectoral Approach. Energy Management 46(6). Hongo, T. 2011. Green Growth from Green Finance. APEC Study Group Report on Green Financing. Seoul: Ministry of Strategy and Finance, Government of the Republic of Korea. ———. 2010. Road to Market Mechanism for Sustainable Use of Biodiversity. Nagoya Parliamentarians Forum, Valuing Natural Capital to Mainstream Biodiversity, 25–26 October, Nagoya, Japan. ———. 2011. Transitional Committee for Green Climate Fund. Presented at Workshop on Green Finance, 3–4 July, Singapore. ———. 2012. Japan Goes Its Own Way. Global Carbon Markets, IETA Newsletter, January–February. Institute for Global Environmental Strategies (IGES). 2013. Measurement, Reporting and Verification (MRV) for Low Carbon Development: Learning from Experience in Asia. Hayama, Japan. International Energy Agency (IEA). 2013. World Energy Investment Outlook. Paris. International Emission Trading Association (IETA). 2012. Global GHG Market Report. Geneva. Kumar, S. 2010. Co-benefits, Green Jobs and Innovation Systems. Proceedings of Technical Workshop on Tackling Climate Change and Accelerating Green Growth: New Knowledge towards Policy Solution. 12–13 September. New Delhi, India. Organisation for Economic Co-operation and Development (OECD). 2010. Transition to a Low-Carbon Economy: Public Goals and Corporate Practices. Paris. Reforms for Private Finance toward Green Growth in Asia 277

———. 2011. Development Assistance in Charts. Paris. Principles for Responsible Investment (PRI). 2012. Press release, 4 September. London. Ramanathan, K. 2010. Eco-innovation and International Technology Transfer, Proceedings of Technical Workshop on Tackling Climate Change and Accelerating Green Growth: New Knowledge towards Policy Solution. 12–13 September, New Delhi, India. United Nations Framework Convention on Climate Change (UNFCCC). 2012. Climate Change, Carbon Markets and the CDM: Call to Action. Bonn, Germany. World Bank. 2012a. Green Infrastructure Finance. Washington, DC. ———. 2012b. State and Trend of the Carbon Market Report. Washington, DC.

Chapter 8 Flexible Incentives for Low-Carbon Inclusive Growth Venkatachalam Anbumozhi and Armin Bauer

8.1 Introduction

The Asian Development Bank (ADB) defines inclusive growth as a process and an outcome (ADB 2010). Growth is inclusive, if it is “based on inputs from a large number of people,” i.e., when it is broad- based and job-creating. In terms of outcomes, growth is inclusive if it benefits many people, especially lower-income groups, i.e., when it results in disproportionate increases in income among the poor and when inequality is declining. Inclusive growth therefore characterizes a nondiscretionary and disadvantage-reducing development path generated through economic growth (ADB 2010, p. 5).1 Inclusive growth and energy consumption and use are closely linked. One characteristic of poor people is their lack of access to affordable energy, including power- and transport-related energy. And although poor people in low-income countries contribute least to climate change, they are the ones who suffer most acutely from its effects. They are the

1 The International Policy Centre for Inclusive Growth’s work on inclusive growth starts from the premise that societies based on equality tend to perform better in development. For instance, countries with more equal income distribution are likely to achieve higher rates of poverty reduction than very unequal countries (United Nations Development Programme [UNDP] 2010). “Poverty is pronounced deprivation in well-being, and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity. Poverty also encompasses low levels of health and education, poor access to clean water and sanitation, inadequate physical security, lack of voice, and insufficient capacity and opportunity to better one’s life.” (World Bank 2010, p. 11).

35 279 280 Managing the Transition to a Low-Carbon Economy most exposed to severe air and water pollution and are more dependent on natural resources for energy (including firewood), coastal water resources, and marginal lands. The poor also indirectly exert pressure on natural resources and are a major factor in land degradation, water contamination, and resources depletion. In pursuit of economic development and poverty alleviation, there is great potential among low-income households for green consumption, production, innovation, and entrepreneurial activity. This chapter shows how green growth can be made inclusive by involving low-income households as producers, employees, and business owners. It provides examples of profit-generating firms that are running green businesses with products for the poor and produced by the poor at decent wages. Green businesses aims to satisfy their customer bases while sustaining economic prosperity, market competitiveness, environmental regeneration, and social equity, i.e., increasing social and environmental responsibility without compromising economic growth. The private sector needs to be more actively involved in promoting inclusive and green business. This can be achieved by encouraging enterprises to adopt strategic corporate social and environmental responsibility in their core business.

8.2 Redefining Economic Growth, Sustainability Concerns, and Poverty Reduction

Economic growth in Asia and the Pacific comes at major environmental and, recently, climate change costs. The economy of Asia and the Pacific today is worth about US$ 17,400 billion, which is almost five times the size it was about three decades ago. If it continues to grow at the same rate, it will be 80 times that size by 2050 (Wilson and Purushothaman 2003). This is totally at odds with our knowledge of the finite energy resource base and the fragile ecosystems on which Asian economies depend for survival. Today, many Asian countries are faced with steadily rising commodity prices; the degradation of forests, water bodies, and land; and the momentous challenge of stabilizing concentrations of carbon in the atmosphere (Figure 8.1). Growth is unsustainable when a country is consuming resources such as energy and water at the expense of future generations. Distributional patterns of growth also have deep implications for sustainability, as the poor often use products and services with a lower energy intake (e.g., in the transport sector). A rebalancing based on the environmental footprint is urgently needed, especially in countries with high and increasing inequalities. Flexible Incentives for Low-Carbon Inclusive Growth 281

Figure 8.1: Carbon Dioxide Emissions and Gross Domestic Product per Capita in Selected Economies of Asia and the Pacific

ty ci

ri PRC Thailand Malaysia New Zealand Australia Singapore lect Viet Nam e Japan Hong Kong, China Rep. of Korea to Philippines

access Sri Lanka

th Mongolia

wi India Indonesia Pakistan on i Lao PDR

at Nepal Bangladesh popul f

on o Cambodia

ti Timor-Leste

opor

Pr Myanmar , , , , , , , , , , GDP (PPP per capita)

GDP = gross domestic product, PPP = purchasing power parity. Source: The World Bank Development Indicators and IEA electricity access database.

8.2.1 Development Constraints for Low-Income Households

At the global level, 75 million–100 million households constitute tier 1, which is composed of middle- and upper-income people in developed countries and some rich people from developing Asia (Table 8.1). In the middle of the pyramid, in tiers 2 and 3, are low-income households in developed countries and middle-income households in developing economies. Tier 4 consists of about 4 billion people, whose per capita income is very low. This extreme inequality in wealth distribution reinforces the view that people with low incomes cannot participate in the regional or global economy constructively, even though they constitute the majority of the population. So even if all get richer, unless inequality is addressed, the problem of a growth path that excludes the lower half of the population remains. However, this is politically unacceptable in most countries of the region. Hence, for sustainability reasons, there is a need to address rural and slum poverty and to link this work to climate and environmental programs. 282 Managing the Transition to a Low-Carbon Economy

Table 8.1: Tiers of Development Structure

Population and Gross National Income Per Capita (2009) GNI per GDP per Capita, Atlas Capita, PPP Population Methodology (Constant 2005 Income Group (billion) (Current $) International $) High-Income 1.12 38,220 32,779 Upper-Middle-Income 1.00 7,471 10,799 Lower Middle-Income 3.81 2,298 4,299 Low-Income 0.85 503 1,053

World 6.78 8,741 9,514 Middle-Income 4.81 3,375 5,652

GDP = gross domestic product, GNI = gross national income, PPP = purchasing power parity. Source: World Bank. Data for 2009 (http://data.worldbank.org/income-level/NOC, accessed 16 November 2010).

8.2.2 Low-Carbon Green Growth in the Context of Low-Income Households

Poor people contribute less to carbon dioxide (CO2) emissions than do the rich. A white paper by the Department for International Development of the United Kingdom (DFID) defines low-carbon development in the following way:

(i) using less for growth; (ii) using energy more efficiently and sustainably while moving toward low or zero carbon energy sources; (iii) protecting and promoting natural resources that store carbon, such as forests and lands; (iv) designing, disseminating, and deploying low or zero carbon technologies and business models; and (v) developing policies and incentives that discourage carbon- intensive practices and behaviors.

Low-income households have contributed least to global environmental problems such as climate change and to local problems such as traffic, congestion, and water pollution. Low-carbon green growth is not only about cutting emissions but about providing the benefits and opportunities that come from higher economic growth, including Flexible Incentives for Low-Carbon Inclusive Growth 283 access to basic energy services and utilities that eventually improve the quality of life. In other words, to make growth inclusive, green means are necessary. Key policies and business models can be devised to link low-income households with green products and services, depending upon the community’s priorities and plans and the available funding and technologies. It is important that new services targeting those in poverty should focus on both the supply and the consumption sides of those households, and also on their ability to develop at the lowest emission and pollution levels.

8.2.3 Adoption of Green Products and Services by Low-Income Households

The consumption patterns of the urban poor and the rural poor differ. In rural settings, the amount of electricity supplied could only support a floor fan, two compact fluorescent light bulbs (CFLs), and a radio for about 5 hours per day (Kimsun and Bopharath 2013). In urban areas, consumption would also include a television and another household appliance, such as an efficient refrigerator or a computer (Patnuru 2013). At the microlevel, there has been a growing interest in efficient low-cost lighting through the distribution of CFLs in many developing countries. These high-quality CFLs are 4–5 times more efficient than incandescent bulbs, and last longer. The mass distribution of CFLs is expected to reduce peak electricity needs and costs, and presents a business opportunity for the private sector to exploit. In terms of investments, it has been estimated that a cumulative investment of $223 billion would be required between 2010 and 2015 to achieve the Millennium Development Goal of eradicating extreme poverty and hunger by 2015, and another estimated $477 billion between 2016 and 2030 to ensure universal access to electricity by 2030 (UNDP 2011). The bulk of additional household electrification in this period will be in rural areas through grid and off-grid solutions, as by 2015 (especially in Asia) most urban households are expected to have access to electricity services. High household density is the most important factor in providing electricity access through the grid, as it is cheaper to deliver electricity through an established grid than through mini-grids or off-grid systems. However, the cost of expanding the grid to less- populated areas is very high, and with transmission losses it is usually not profitable. A large share of rural households that are to be connected by off-grid and mini-grid options will use alternative sources of energy, including solar photovoltaic, mini-hydro, biomass, wind, diesel, and geothermal. The current total primary energy supply situation among 284 Managing the Transition to a Low-Carbon Economy selected countries in Asia can be seen in Table 8.2. While large Asian countries including India and the People’s Republic of China (PRC) are more dependent on coal for their energy supply, low-income countries such as Nepal and Cambodia are dependent on biomass for their energy. The bulk of investment in electrification in 2010–2020 is expected to be incurred in developing Asian countries, especially because of their rapid economic growth. Low-carbon renewable energy as a share of grid extension in rural areas is expected to increase, but at present it is not cost-effective. There are great investment and business opportunities in developing small, stand-alone renewable energy technologies that could meet the electricity needs of rural communities more cheaply. Specific green technologies have potential, including solar photovoltaic for lighting and clean drinking water. For greater load demand, other technologies such as mini-hydro or biomass might offer a better solution. Solar is expected to become more efficient and maybe used on a mass scale as prices eventually drop. The main challenge with solar and wind technologies is their high upfront cost, which demands new and innovative business models and financial tools to improve dissemination. The mini-grid is probably the best approach to rural electrification, as it can combine different sources of energy and ensure stable supply and transmission of electricity.

8.3 Green Business Models for Low-Income Households and Local Wealth Creation

Low-income households deserve to be recognized as resilient value- conscious consumers and creative entrepreneurs. They can be the engine of a new development strategy; a source of innovation for providing basic services in a green way while creating opportunities for low-income households by offering access to energy and other services and encouraging endogenous development. To understand how, the following basic assumptions hold:

(i) Low-income households present a latent market for environmental goods and services. Engaging them is a critical element of inclusive and sustainable growth, as entrepreneurship activities for this market create choices for them and foster competition among outside service providers. These characteristics of a green market economy, new to low- income households, can facilitate dramatic change. (ii) Low-income households as a market provide new growth opportunities for outside businesses and a forum for innovation Flexible Incentives for Low-Carbon Inclusive Growth 285 b .. - 11.0 11.0 32.0 32.0 56.0 56.0 65.0 65.0 99.0 99.0 20.0 20.0 % of % of 100.0 100.0 100.0 100.0 100.0 100.0 2006 2000– Electrifi- population cation Rate cation a continued on next page on next continued –19.1 2006 1990– -- Per Capita Per hours % change Kilowatt Kilowatt Electricity Consumption -

0.9 503.0 82.3 0.8 2040.0 299.1 0.0 0.0 11309.0 34.6 0.0 0.0 146.0 221.2 0.0 0.0 3388.0 187.5 98.0 17.9 17.9 8063.0 239.8 15.0 15.0 8220.0 26.7 TPES Share of of Share nuclear in - 1.1 1.1 1.3 4.1 4.1 % 12.0 12.0 Biomass Biomass and waste and waste - 1.3 energy in TPES energy 1.9 28.3 0.1 0.1 71.3 0.0 88.0 .. 0.0 0.0 3.8 0.0 1297.0 solar, solar, Share of renewable renewable of Share Hydro, Hydro, wind, and geothermal - Oil 17.8 17.8 0.5 33.7 31.6 24.1 28.4 24.0 - 19.1 Total Primary Energy Supply (TPES) Supply Energy Primary Total - Share of fossil fuels in TPES fossil of Share 15.5 18.6 33.0 3.7 29.2 0.0 530.0 228.3 54.0 Coal Gas Natural Rates of Selected Countries in Asia and the Pacific and the Pacific Selected Countries in Asia of Rates - 179.1 (millions) - Annual Total 3.4 2.8 71.7 0.0 0.0 0.0 5.0 0.0 0.0 12.8 25.0 1.4 46.6 10.7 18.2 38.6 13.2 44.9 0.0 0.3 0.0 5883.0 40.8 10.7 14.3 0.8 12.4 12.7 2.0 72.1 0.0 93.0 104.5 87.7 87.7 122.5 43.9 23.3 68.3 12.0 44.4 38.8 0.9 93.4 93.4 216.5 24.3 13.3 43.2 0.2 1990 2006 2006 2006 2006 2006 2006 2006 2006 319.9 319.9 565.8 39.4 5.5 102.8 102.8 863.2 863.2 1878.7 64.2 2.5 18.3 2.2 443.9 527.6 21.3 14.7 45.6 2.1 Tons of oil equivalent oil equivalent of Tons

Table 8.2: Total Primary Energy Supply, Share of Renewable Energy, Electricity Consumption, and Electrification Electricity Consumption, and Electrification Energy, Renewable of Share Supply, Energy Primary 8.2: Total Table Australia Economy Bangladesh Cambodia China, People’s China, People’s of Republic Hong Kong, China Kong, Hong India Indonesia Japan Korea, Republic of of Republic Korea, Lao PDR Malaysia Mongolia Myanmar 286 Managing the Transition to a Low-Carbon Economy b - 81.0 81.0 54.0 54.0 % of % of 100.0 100.0 100.0 100.0 2006 2000– Electrifi- population cation Rate cation a 2006 1990– -- Per Capita Per hours % change Kilowatt Kilowatt Electricity Consumption -

0.8 480.0 73.6 0.0 0.0 9746.0 14.5 0.0 0.0 578.0 60.7 0.0 0.0 8363.0 72.1 TPES Share of of Share nuclear in - % 6.0 6.0 0.0 0.0 26.1 26.1 34.9 Biomass Biomass and waste and waste - energy in TPES energy 3.5 0.0 0.0 22.9 22.9 24.0 solar, solar, Share of renewable renewable of Share Hydro, Hydro, wind, and geothermal - Oil 31.8 23.9 79.0 - Total Primary Energy Supply (TPES) Supply Energy Primary Total - Share of fossil fuels in TPES fossil of Share 5.4 31.6 Coal Gas Natural - (millions) - Annual Total 5.5 9.4 0.7 0.0 40.7 4.2 54.3 0.0 400.0 159.5 66.0 5.8 9.4 2.7 0.0 8.6 2.4 86.2 0.0 80.0 129.2 33.0 13.8 17.5 11.9 18.7 39.4 13.4 30.7 0.0 20.9 24.3 24.3 52.3 16.8 9.5 23.4 3.9 46.4 0.0 598.0 511.2 84.0 43.4 79.3 43.9 103.4 12.1 25.8 44.4 0.7 16.6 0.0 2080.0 181.4 99.0 26.2 26.2 43.0 13.4 5.8 1990 2006 2006 2006 2006 2006 2006 2006 2006 Tons of oil equivalent oil equivalent of Tons

Nepal Economy New Zealand New Pakistan Philippines Singapore Sri Lanka Timor-Leste Thailand Viet Nam Viet Data are for the most recent year available. year the most recent for are Data Denotes percent change in value of the variable within the given period. within the given the variable of change in value percent Denotes World Bank 2010. World Report. Development World Source: Table 8.2 continued Table a b Flexible Incentives for Low-Carbon Inclusive Growth 287

in developing green products and clean services in a cost- effective way that old and tried solutions cannot create. (iii) The green market for low-income households must become an integral part of the work of the private sector. For big companies, these households must become part of any firm’s core business; they cannot merely be relegated to the realm of corporate social responsibility initiatives. Successfully creating green markets with low-income households involves changes in the functioning of large companies as they need sustained resource allocation and senior management attention.

There are significant untapped opportunities for such value creation, at different levels and at a varying pace across Asia. Refocus (2001) argues that, most of the time, energy subsidies do not reach the poor as expected in the planning of the subsidy programs because of problems with the design of subsidy models. Businesses go after the subsidies rather than concentrating on the delivery of energy services to the poor. The energy subsidies must have two specific goals. The first is that they should assist the poor in accessing higher-quality energy services, and the second is that they should provide incentives for business to serve rural and poor consumers. Refocus suggests three subsidy models: dealer model, concession model, and retailer model (Table 8.3).

Table 8.3: Different Subsidy Models Proposed by Refocus, 2001

Model Description Dealer model The dealer model emphasizes the development of dealers that can sell equipment, usually solar photovoltaic equipment. Subsidies are provided to dealers to lower the cost of products so that the consumer demand for those products will increase. This model is used for the delivery and servicing of solar systems in several countries, including Sri Lanka, Indonesia, and Kenya. This system works well only when there is a strong dealer network. However, the early adopters are mainly more wealthy households, and it means the subsidy will go first to the more wealthy households in the rural areas. Concession model The concession model minimizes budgetary subsidies and encourages private sector participation. In Argentina, for example, franchise rights for rural service territories are being granted to concessionaires that offer the lowest subsidy to service rural households and community centers. Concessionaires can select from a wide range of off-grid technologies in a cost-effective way. The “success” of subsidies in the concession model as applied in Argentina is clearly dependent on the level of competition across the various service territories. To improve the sustainability of agricultural projects, it is a priority for national authorities to offer concessions with adequate conditions to the private sector or local cooperatives. continued on next page 288 Managing the Transition to a Low-Carbon Economy

Table 8.3 continued

Model Description Retailer model Under this model a community, organization, or entrepreneur develops a business plan to service local demand for electricity. If the plan is approved, depending on the situation a loan or a subsidy is given for the development of the business. The retailer deploys the system through a fee-based service arrangement to recover the costs, repay the loan, and earn a profit. This approach ensures significant local involvement and consumer choice. This model has been successfully implemented in several projects that generate electricity, including in India and Sri Lanka (micro-hydro component), and in a broader context in the Lao People’s Democratic Republic. This model of financing would be focused on aggregating the demand and partially transferring the problems of financing to the capacity of organization of the local communities, which would then assume part of the risk in project financing. The challenge of financing is in terms of aggregating small loans to beneficiaries that may not have a record of risk, a culture of payment, or, in many cases, a capacity to collateralize loans. In this regard the role that intermediaries (energy supply companies, suppliers of equipment, microcredit organizations) play, and the commitment from beneficiaries (associations, community organizations, cooperatives of credit, or companies of local collection) become the basis on which the projects become sustainable in the long term.

8.3.1 Flexible Incentives and Barrier Removal for Business Development

Since around 2000–2010, a slow but discernable transition has been taking place, from traditional to market-based green business development that serves low-income households. The changing perceptions of business and policy makers are shown in Table 8.4. A much needed green business development for low-income household is in its infancy in most countries. This is mainly because it is not easy to give up traditional practices, and so businesses and policy makers need to see such households as markets, and demand for green products and services needs to be stimulated through public policy. It is also difficult for a whole generation of low-income households to give up their dependence on pervasive government oil subsidies. On the other hand, subsidies targeted at specific niche populations can advance the penetration of modern energy services to the poor, especially for those in rural areas (Modi, McDade, Lallement, and Saghir 2005). Governments need to address a multitude of factors while designing specific subsidies to guarantee that the poorest fringe of the population is benefiting, rather than indirectly providing advantages to higher-income households that already consume more. Flexible Incentives for Low-Carbon Inclusive Growth 289

Table 8.4: Changing Perceptions of Business and Policy Makers in India

From To Low-income households are a problem for They represent a market. The private sector development can and should participate effectively in this process Low-income households are wards of They are active consumers and entrepreneurs the state Low-income households do not appreciate Creative bundling of low-carbon products low-carbon green technologies. Old and services with a local flavor technology solutions are appropriate Follow the urban rich model of Selectively leapfrog development Carbon efficiency in a known model Innovation to develop a low or zero carbon model Focus on resource constraints Focus on creativity and entrepreneurship Source: Authors.

8.4 Policy Framework for Business Development in An Inclusive and Green Growth Paradigm

The key economic policy issues aimed at inclusive and low-carbon green growth include market-based instruments, carbon pricing, and financing. Market-based instruments impose fees and provide incentives in order to achieve the same objectives as regulatory policies. There are two challenges to effectively implementing market-based instrument policies: (i) supporting sustainable consumption and guaranteeing that it reaches the households at the bottom of the pyramid, rather than local elites only; and (ii) subsidizing low-carbon green technologies and involving local small businesses through financial incentives to promote sustainable production. Normally, private companies seek their own profits and economic benefits rather than providing social benefits, so attracting their investments in energy production and distribution is a major challenge. Subsidizing social inclusion investments and taxing harmful environmental activities could attract more investment in the promotion of alternative energy in rural areas. Removal of fossil fuel subsidies could also be an incentive to increased use of green energy technologies (Zhang 2008). These policies can have several positive effects, as illustrated in Table 8.5. First, imposing a tax on fossil fuel use incorporates the negative environmental externalities and could be used to pay for the social cost of renewables. It also motivates consumers to use alternative energy, which results in lower carbon emissions. Second, green energy 290 Managing the Transition to a Low-Carbon Economy

Table 8.5: Summary of the Potential Benefits of the Clean Energy Investment Program for Low-Income Households in the United States

Moving from unemployment to • 1.7 million new jobs overall employment • 870,000 jobs for workers with low education levels • Newly employed low-income workers can lift themselves and family out of poverty Falling unemployment produces rising • Average low-income worker could wages see a rise in earnings of about 2% as unemployment rate falls 1% Building retrofits lower home heating and • Retrofits could reduce living costs by utility bills up to 4%, depending on the climate and quality of current housing stock. • Requires well-designed policies to create market for retrofits for homeowners and renters so benefits of retrofits are shared by renters Improved public transportation • Accessibility of public transportation could improve considerably through targeted investments • Increasing public transportation use in urban centers to around 25%–50% of total could reduce living costs by about 1%–4% • Households able to replace a car through increased public transport use could save roughly 10% of total living costs Source: Pollin, Wicks-Lim, and Garrett-Peltier (2009).

subsidies lower the cost of production and consumption, which drives investors to invest in such systems and allows poor people to consume the energy they produce. As a result, poor people will have sustainable and affordable access to energy. Third, these policies help to protect the environment because people replace fuel wood and manure by electricity for lighting, heating, and cooking, which reduces the extraction of fuel wood from forests, resulting in lower carbon emissions. At the same time, health and living standards will be improved due to a marked decrease in air pollution. Fourth, once there is sustainable energy access, many small and medium-sized enterprises and family businesses will evolve, providing job opportunities for the poor.

8.4.1 Reduction of Pervasive Subsidies

Fuel subsidies are stimulus packages that distort the price of goods and energy resources and support activities that lead to environmental Flexible Incentives for Low-Carbon Inclusive Growth 291 degradation. In emerging countries, governments commonly control the final consumer price of energy, usually by keeping it below the real market price, to promote economic growth and reduce poverty. In other words, fuel tax rebates and low energy prices stimulate the use of fossil fuels, and subsidies for road transport increase congestion and air pollution, while agriculture subsidies can lead to the overuse of pesticides and fertilizers. In 2008, non-OECD countries guaranteed $400 billion of fossil fuel subsidies that instead could have been pledged to renewable energy technology investments (IEA 2010a). The evidence shows that fuel subsidies also contribute to an expanding fiscal deficit. Policies to reform pervasive subsidies must be carefully designed; governments need to evaluate the environmental and economic impacts of reforming measures. A sudden rise in oil prices could depress consumption in countries such as the PRC and Malaysia, where additional domestic demand may be needed to compensate for slowing export growth. There is merit in some subsidies, at least in the short term. Many lower- income people cook with kerosene or get to work on motorbikes. Related fertilizer subsidies may also be necessary in the short term to sustain food output (Jozan et al. 2013). Figure 8.2 suggests that countries with high debt, such as the PRC, the Russian Federation, and Indonesia, also allocated larger budgets to energy-related subsidies. Conversely, the governments of Thailand and Viet Nam, which allocate lower amounts to subsidies, also have less fiscal debt. Reducing pretax subsidies by 50% would reduce the average projected deficit by 38% as a result of a more efficient allocation of resources across sectors (Coady et al. 2006).

These policies have direct impacts on resource depletion and CO2 emissions. Instead of subsidizing environmentally harmful activities, supporting the development of renewable energy and using energy- saving devices would be more cost-effective in the long term in removing barriers to green growth. Phasing-out fossil fuel subsidies in regions where such fuel is used for cooking and heating could lead to greater pressure on natural biomass resources and consequent deterioration of indoor air quality, even though subsidies are often intended to support poor consumers. The possible social impacts of removing pervasive subsidies increases pressure on the poor, as food and commodity prices rise and those who cannot adjust become economic losers. In practice, subsidies for oil and other energy sources mainly benefit higher-income groups and capital- intensive industries at a time when rising income differentials and job creation are bigger concerns than overall economic growth. 292 Managing the Transition to a Low-Carbon Economy

Figure 8.2: Pervasive Energy Subsidies and Fiscal Debt in Selected Asian Economies (% of GDP, 2009) Russian Federation

PRC

Indonesia

Malaysia

Thailand

Taipei,China

Viet Nam

GDP = gross domestic product, PRCFi =sc People’sal Deb Republict of China. Subsidies Source: IEA (2010) and CIA (2009).

8.4.2 Incentives and Tax Breaks

Table 8.6 shows estimates of relative subsidies available to energy produced. A global survey by Regus (2010) found that 75% of companies worldwide have declared that government tax incentives are required to accelerate low-carbon investments. The same survey revealed that only 37% of companies worldwide actually measure their emissions and only 19% measure the carbon footprint resulting from their activities; 46% of companies globally declared that they will only invest in low- carbon equipment if the running costs are the same or lower than those of conventional equipment. A disappointing 40% have invested in low-carbon equipment and only 38% have a company policy to do so. Finally, a full 100% of companies surveyed declared that, if governments offered tax incentives to invest in energy-efficient or low-carbon equipment, businesses were willing to significantly accelerate their green investments. If governments are serious about meeting ambitious carbon reduction targets and promoting green industries, they need to provide incentives for environmentally aligned corporate behavior. At the moment, low-carbon businesses are often limited in range and Flexible Incentives for Low-Carbon Inclusive Growth 293

Table 8.6: Estimates of Relative Subsidies to Energy Sources

Subsidy Estimate OECD Share Subsidies per ($ billion/ Energy of Production Energy Unit Energy Type year) Produced (2007) % ($/kWh) Nuclear Energy 2,719 TWh 45 84 0.017 electricity Renewable Energy such as solar, biomass, 534 TWh 27 82 0.050 wind, etc. (excluding electricity hydroelectricity) Biofuels 20 34 mtoe 68 0.051 Fossil fuels (non-OECD 400 4,172 mtoe n.a. 0.008 consumers) mtoe = million tons of oil equivalent. Source: preliminary estimates based on GSI (2010), available at http://www.globalsubsidies.org/files/assets/relative_energy_subsidies.pdf largely charge premium prices. Tax breaks will help accelerate take- up of clean technologies and will help create a mass market when unit prices fall, as in India (Table 8.6).

8.4.3 Introduction of Market-Based Instruments

Market-based instruments are most likely to be successful for green business development in the following situations:

(i) Policy makers are aware of the lobbying symmetry between polluters, low-carbon green technology providers, and taxpayers, so exemptions can be avoided. (ii) The level of tax or charge is high enough to accurately reflect externality costs but not so low that they become incentives for polluters. The revenue could be used to support small green businesses serving low-income households. (iii) There is no free allocation of tradable permits, which have negative effects on the cost-effectiveness and fairness of the instrument used. (iv) Market-based instruments are not introduced to replace direct regulations or other incentives but to supplement them.

In the Philippines, the Laguna Lake Development Authority levies fees on effluent discharge into the lake or distributary systems in order 294 Managing the Transition to a Low-Carbon Economy to reduce pollution, based on the tradable permit system. Further, businesses are rewarded by lower effluent fees and fewer penalties. This approach has contributed to measurable improvements in the quality of Laguna Lake (USAID 1999).

8.4.4 Financing Low-Carbon Green Business Models

Investing in appropriate green businesses that target low-income households is a new approach for the private sector and for financial institutions. Local entrepreneurs are either not familiar with, or lack the capacity to make, cost–benefit analyses or to prepare documentation for credit requests. Bankers are unaccustomed to appraising credit request proposals for new innovative businesses. As financial institutions are isolated from policy issues related to green energy and the creation of a nonpolluting environment, a working partnership between policy makers and financial institutions is needed to exchange experience, purposes, and objectives. Liming (2009) notes that, as two of the world’s leading countries in the development of rural renewable energy, the experiences of the PRC and India in financing rural renewable energy will be of interest to other developing and emerging middle-income countries. To enhance the development of rural renewable energy, the PRC and India have used many financing instruments, including grants, renewable energy service companies, low-interest and long-term loans, joint ventures, asset financing, venture capital and private equity, subsidies, import duty reduction, and reductions in value-added tax (VAT). However, financing renewable energy is still challenging. In the PRC, the main subsidies for rural renewable energy are provided by the central government, with local governments usually supporting research, development, and demonstration projects for rural renewable energy. In India, subsidies such as interest and capital subsidies, are mainly provided by the Ministry of New and Renewable Energy Sources. In the PRC, imports of renewable energy technologies are exempted from import duty; in India this is the case for renewable energy technologies not produced in India. In the PRC the rate of VAT is 17%, but for biogas it is 3.0%, for wind power 8.5%, and for small hydro 6.0%. VAT for power generation from municipal solid waste is 0%. In India, the VAT on renewable energy equipment is lower than the normal rate. Although many financing schemes and institutions designed to assist small businesses are available, their effectiveness in attracting low- income households to use green services is low. The Land Bank of the Philippines, the Small Industrial Development Bank of India (SIDBI), and the National Development Bank of Sri Lanka target small businesses to reach low-income households by providing concessional loans. Flexible Incentives for Low-Carbon Inclusive Growth 295

The SIDIBI was set up as a wholly owned subsidiary of the Industrial Development Bank of India. It is the principal financial institution for promoting, financing, and developing small-scale industries and coordinates the functions of institutions engaged in similar activities.

8.5 Financing Inclusive and Green Growth through Fiscal Reforms

If the developing countries of Asia are to meet the requirements of inclusive and green growth, they will need to invest considerable sums; many are already doing so. Table 8.7 summarizes government expenditure with implications for investment in poverty alleviation and the preservation of environmental resources. One reason why government expenditure on inclusive and green growth might fall short of expectations is that countries with high fiscal deficits have usually been advised to cut public expenditure, and the simplest cuts are often those on social and environmental expenditure. If governments are to spend more on inclusive and green growth, this should be part of a larger environmental fiscal reform program that is integrated with other environmental measures. This means environmental objectives can be pursued in combination with economic and social objectives. The EEA (2006) argues that, rather than defining the best instrument, policy makers should try to understand which mix of instruments is best applied under certain local and political conditions. The concept of an environmental fiscal reform program is the same in developed and developing countries, as the OECD has noted: “Environmental fiscal reform (EFR) refers to a range of taxation and pricing measures which can raise fiscal revenues while furthering environmental goals” (OECD 2005: 12). In other words, environmental fiscal reform describes any policy measures that overlap between environmental and fiscal policy, and implementation is not limited to developed countries but may also be in transition or developing countries as stated in recent reports published by the OECD (2005) and the World Bank (2005). Governments need to channel revenues from environmentally damaging activities to create incentives that promote environmentally friendly programs. Inevitably some economic sectors will be net losers in the sense that their tax burden will increase and, generally, trade-offs between social and environmental considerations need to be carefully analyzed. Reductions in charges, taxes, and pervasive subsidies tend to benefit the environmental dimension and to have low or moderate impacts on poverty alleviation and/or economic development strategies. 296 Managing the Transition to a Low-Carbon Economy - - 9.4 Tax Tax 16.6 (XI) 2008 Revenue Revenue (% of GDP) (% of - 3.3 - 16.6 - - - 23.1 4.1 0.4 8.2 continued on next page on next continued (X) Debt service service (% of GDP) (% of 1 4.8 12.3 1 1.2 8.8 - - 1.4 23.2 - 2 1.3 10.4 2 2 0.8 1.1 (IX) 2008 2008 Military Military (% of GDP) (% of b - - 0 0.4 3.8 10.1 0 0 3.5 2.8 (VIII) 2007 2000- lopment Research Research and Deve- (% of GDP) (% of b - 0.8 1.1 1.9 1.5 6.0 6.0 2.2 1.8 (VII) 2007 2000- Health Health (% of GDP) (% of a d 3.4 6.5 3.4 0.9 4.7 4.2 3.5 1.9 (VI) 2007 2000- Education Education (% of GDP) (% of

- 2.3 0.8 2 4.92 9.02 0.29 2.4 CO 10.31 (ton / emissions emissions per capita capita) (V) - 0.24 1.3 0.2 0.2 497 1,991 4.33 5.1 3.5 0.2 (iv) 19,162 capita 30,863 6.05 3.3 GDP per (Current $) (Current 7.10 2.70 (III) (million) Population Population 13.6 (II) 24.4 24.4 48.50 (% of GDP) (% of Public Debt Debt Public - - 50.50 - Table 8.7: Components of Government Spending, Emissions, and Public Debt and Public Emissions, Spending, Government Components of 8.7: Table 5.47 - 6.40 882 5.26 5.26 - 12.61 - 29.90 438 0.12 3.8 2.0 10.34 - 15.10 710 0.31 1.6 1.7 221.16 221.16 41.5 27.90 8,187 6.7 4.5 1.9 0.6 GDP 2008 2008 2010 2008 2008 1214.21 54.9 1,214.50 1,065 1.25 3.2 1.1 0.8 2.6 2.7 12.9 4886.97 4886.97 172.1 127.00 38,268 Billion (I) Billion Current $ Current Nepal Myanmar Mongolia Malaysia Lao PDR Korea, Korea, of Republic 931.40 Japan China, People’s China, People’s ofRepublic 4532.79 15.6 1,354.10 3,422 Indonesia 510.50 28.3 232.50 2,246 1.69 3.5 1.2 Cambodia Year India Bangladesh 79.55 39.4 164.40 Hong Kong, Kong, Hong China Australia 1039.42 14.3 21.50 48,499 18.48 Economy Flexible Incentives for Low-Carbon Inclusive Growth 297 - - 9.8 14.1 Tax Tax (XI) 2008 Revenue Revenue (% of GDP) (% of - - 14.6 31.7 (X) Debt service service (% of GDP) (% of 1.1 4.1 4.7 0.8 6.6 (IX) 2008 2008 Military Military (% of GDP) (% of b - 1.3 0.1 (VIII) 2007 2000- lopment Research Research and Deve- (% of GDP) (% of b 7.1 11.5 (VII) 2007 2000- Health Health (% of GDP) (% of a - 2.0 0.2 3.6 3.1 14.2 7.1 2.8 1.0 2.6 6.2 (VI) 2007 2000- Education Education (% of GDP) (% of

2 9.16 7.74 CO (ton / emissions emissions per capita capita) (V) (iv) capita GDP per (Current $) (Current (III) (million) Population Population (II) (% of GDP) (% of Public Debt Debt Public 40.72 81.1 20.40 2,020 0.61 90.64 48.8 89.00 1,051 1.19 5.3 2.8 0.2 2.4 1.5 165.18 165.18 51.0 184.8 994 0.81 2.9 0.8 0.7 2.6 1.8 GDP 193.33 193.33 95.9 4.80 39,950 2008 2008 2010 2008 2008 272.46 272.46 38.0 68.10 4,043 3.41 4.9 2.7 0.2 1.5 6.3 16.5 Billion (I) Billion Current $ Current Viet Nam Viet Thailand Timor-Leste 0.50 - 1.20 453 - Sri Lanka Singapore Philippines 167.49 56.9 93.60 1,854 0.8 2.6 1.3 Year Pakistan New ZealandNew 115.45 17.4 4.30 27,045 Economy Refers to an earlier year than that specified. than that an earlier year to Refers Data refer to the most recent year available during the period specified. available year the most recent to refer Data Sources: Bank Database. I: World Agency). 2010. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html?countryName=Japan&countryCode=ja®i Intelligence II: CIA (Central 2010). 15 Nov (accessed onCode=eas&rank=2#ja WB http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD. IV: IEA. Statistics. Energy World 2010 Key V: 2000) from (2006) (data Nations? of is the Wealth bank, Where The World (2008). IEA database 2010. Report Development XI: Human VI to Table 8.7 continued Table a b 298 Managing the Transition to a Low-Carbon Economy

Table 8.8: Double Employment–Environment Dividend: Practice in Europe during the 1990s

Country Tax shift Belgium The revenue of a “special levy on energy” (introduced in 1993) is paid into a special fund to finance social security expenditures.

Denmark New or increased environment-related taxes planned to increase revenues by DKr12.2 billion in 2 years’ time, with a simultaneous lowering of income tax. Since 1996, part of the revenue of the

newly increased CO2 tax on industry has been allocated to reducing employers’ social security contributions. Finland Starting in 1997, lower taxes on income and labor (Fmk10 billion– Fmk11 billion in cuts announced for 1999–2003), offset in part by new eco-taxes (e.g., a landfill tax, Fmk 300 million per year) and energy taxation. Germany From the beginning of 1999 additional taxes have been imposed on fuels with a 0.8% reduction (about DM9 billion) in National Pension contributions. Italy Over half of the revenues (about L2,200 billion) raised in the first year from a carbon tax introduced in January 1999 will go toward reducing employment charges. The Netherlands A large part of the revenue of the “regulatory tax on energy” introduced in 1996 goes toward reducing employers’ social security contributions. Switzerland Revenue from new eco-taxes on volatile organic compounds (VOCs) and extra-light heating fuels will be redistributed to households in the form of reduced compulsory sickness insurance contributions (1999). Sweden Tax reform in 1991 resulted in a kr15 billion tax shift to environment- related taxes, leading to a reduction in marginal income tax rates, among other things. A reduction in employers’ social security contributions is being considered. United Kingdom Revenue from a landfill tax introduced in October 1996 (£450 million/annum) is to be used to reduce employers’ social security contributions by 0.2 percentage points.

Source: Adapted from OECD (1997).

On the other hand, subsidies which enhance environmentally sound programs have positive impacts on the environment, poverty reduction, and economic growth. Governments should maintain revenue neutrality and ensure that they do not distort the markets. In addition, governments may also wish to provide transparent and timely information about expected impacts of reforms to stakeholders. Flexible Incentives for Low-Carbon Inclusive Growth 299

One strategy to minimize the potential negative impacts of market- based instruments is to implement well-targeted redistribution and poverty alleviation policies. Well targeted subsidies that specifically address low-income households, including multiple price systems and lifeline tariffs, usually perform better than universal subsidies. Past experience reveals that, in many developing countries, economic and fiscal priorities have been the main drivers behind fiscal policies. Nevertheless, some reforms have also had beneficial environmental impacts. Examples include reductions in pervasive subsidies and taxation of natural resources, which contribute to more rational consumption and environmental protection. Malaysia and Indonesia have sharply increased user taxes on fossil fuels and Sri Lanka has reduced tariff schemes for water supply and sanitation. However, some fiscal reforms are regressive and result in social costs, especially for people at the bottom of the pyramid. When governments introduce bulk taxes and no compensatory measures, the ramifications include increases in prices of basic goods and services consumed by poor people. Policy makers face the challenge of balancing economic efficiency and political and social acceptability with environmental effectiveness. The design of environmental fiscal reform should explicitly consider revenue neutrality, guarantee a double employment and environment dividend, avoid distributional and competitiveness effects, and address institutional limitations (Table 8.8).

8.6 Conclusions and Recommendations

Poverty is still a problem in Asia and the Pacific, despite its decreasing trend. Recent economic policies to promote growth have lacked the dimensions of environmental sustainability through green growth and inclusiveness through poverty eradication. A macroeconomy that is dependent on a continual expansion of debt is also driven by resource consumption that is environmentally unsustainable, economically unstable, and not socially inclusive. It is now time to promote growth- enhancing policies that are green, employment generating, and inclusive. There is a need to develop a new macroeconomic framework that focuses on providing access to basic services to low-income households in a cost-effective and ecologically sustainable way. International pressure to reduce carbon emissions is growing, encouraging emerging economies to make their growth paths more sustainable. What is needed is a better approach to help the poor, an approach that includes them in innovation and developing new products 300 Managing the Transition to a Low-Carbon Economy and services so they are actively engaged and, at the same time, the enterprises providing services to them are profitable. The penetration of such business models into rural areas is constrained by inherent weaknesses in terms of market responsiveness and innovative capacity. Further targeted entrepreneurship training, skill development are necessary. Most of the regulatory frameworks in developing countries were created in the last quarter of the 20th century and are characterized by prioritizing and subsidizing conventional energies and fossil fuel technologies. To move toward a sustainable energy supply requires a fundamental change in regulation—away from conventional systems (characterized by having few agents and large infrastructure projects) toward a dispersed multi-agent focus (characterized by a higher dispersion of installations and a greater number of participants). These changes will face financial, legal, and institutional barriers which need to be overcome; an equitable redistribution of subsidies and incentives to address the needs of the poorest segments of the population and their energy and resource demands will require the realignment of financing models. Financing mechanisms coupled with a revision of fiscal and regulatory policies should eliminate some of these barriers. Policy actions can help to reduce these challenges over the short to medium term. There are three important options:

(i) Flexible redistributive and transformative public expenditures to surmount the bottlenecks in the way of inclusive and green growth. Fiscal policies can redistribute the benefits of growth through pro-poor public expenditure and by providing basic amenities such as energy and water, which can be designed to be explicitly pro-poor and green through broad-based expenditure on low-carbon green resources in rural areas. This provides an important opportunity for the benefits of growth to be more inclusive, and in a manner which is not likely to have major disincentive effects for going for high carbon choices now or in the future. On the contrary, increased spending on rural green energy and clean water infrastructure is likely to be an important cornerstone for future growth. (ii) Flexible subsidies and finance sector development in order to increase the number of green enterprises and to provide jobs. New green jobs will provide opportunities for rural people to innovate and benefit from new entrepreneurial skills to move out of poverty. However, the recorded level of employment creation with green growth has been weak in many Asian economies. More entrepreneurial activity will require substantial finance sector support. Flexible Incentives for Low-Carbon Inclusive Growth 301

(iii) Broad-based fiscal reforms for inclusive and green growth. The argument for environmental tax reform—a shift from taxing economic goods (e.g., income) to taxing resource consumption and pollution and other harmful impacts—has been broadly accepted but progress toward this goal is painfully slow. There is an urgent need to change the structure of taxation so it is geared toward achieving environmental and social objectives and supporting socioeconomically disadvantaged groups.

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PART III Regional Cooperation for Managing the Transition

Chapter 9 Climate Finance and the Role of International Cooperation Tomonori Sudo

9.1 Introduction

9.1.1 Climate Change and Development

This article focuses on the role of international cooperation in mobilizing climate change finance. Following the Climate Change Conferences in Copenhagen (COP15) and Cancun (COP16), many discussions on financing have been held, without an international consensus being reached. At COP16, the establishment of the Standing Committee on Finance and Green Climate Fund was decided. The transition committee for the design of the Green Climate Fund (GCF) has finalized its report (UNFCCC 2011) and the design of the GCF was discussed at COP17 in Durban. The location of the GCF headquarters and its governing body were decided at COP18 and COP19. Initial resources of $10.2 billion were mobilized for the GCF at COP20. At COP21 in Paris, a new climate change framework will be agreed. Among others, climate finance may offer a great opportunity for developing countries to accelerate their climate change actions together with their development goals. The National Economic, Environment and Development Study (NEEDS) for climate change conducted by the United Nations Framework Convention on Climate Change (UNFCCC 2010) assessed financial resource needs for 10 developing countries, including some Asian countries. The UN Secretary-General’s High-Level Advisory Group on Climate Change Financing has analyzed potential financial sources and concluded that raising $100 billion per year is challenging

309 310 Managing the Transition to a Low-Carbon Economy but feasible. Buchner et al. (2011) have pointed out that at least $97 billion per annum of climate change finance is currently being provided to support low-carbon, climate-resilient development activities. The Asian Development Bank (ADB 2009a) has shown that a huge volume of investment is needed in the energy sector in Asia and it has also conducted an important flagship study on the economics of climate change in Southeast Asia (ADB 2009b), which pointed out that there are a large number of international funding sources and mechanisms already available for mitigation and adaptation by developing countries, but these have barely been tapped by Southeast Asian countries. Capacity Development for Development Effectiveness (CDDE 2010) has also noted the proliferation of sources of climate change finance and the burden this places on developing countries looking to access climate change finance.

9.1.2 Issues

First, even though a huge amount of climate change finance is already available, developing countries are still requesting financial contributions from developed countries. This chapter analyzes the gap between expectations and reality. It suggests ways in which international cooperation can be improved so climate change finance is used more effectively. Second, international development partners such as ADB have assisted developing countries’ efforts to alleviate poverty and have a fund of experience that can be applied to maximizing the role of international cooperation in climate change finance.

9.2 Gaps between Expectations and Reality

9.2.1 Expectations and Reality on Climate Change Finance

Scaling Up Finance for Climate Change Action Following the discussion at COP15 at Copenhagen, developed countries and multilateral financial institutions have been accelerating their financial contributions to climate change activities. At COP16 in Cancun, Mexico, world leaders pledged $30 billion to Fast Start Finance between 2010 and 2012, and committed themselves to raise $100 billion per year by 2020. Fast Start Finance successfully achieved its target, but efforts by developed countries to fulfill their $100 billion commitments toward 2020 still continue. Climate Finance and the Role of International Cooperation 311

Figure 9.1: Climate Change Related Aid, 2008–2013

illio b $

– Average – Average

Adaptation Both Mitigation and Adaptation Climate Mitigation

Source: OECD/DAC CRS (2015).

Although current systems to track climate change finance are limited, and no single system provides a complete picture of climate- specific finance flows and their trends, there has been an increase in funding, particularly through international public finance and climate- specific multilateral funds (CDDE 2010). Official development assistance (ODA) for climate activities has also increased (Figure 9.1).

Table 9.1: Estimated Volume of Mitigation and Adaptation Finance, 2013 ($ billion, %)

Source Objective Public 137 41.4% Mitigation 302 91.2% National DFIs 69 20.8% Bilateral DFIs 14 4.2% Multilateral DFIs 43 13.0% Multi-objective 4 1.2% Funds 2 0.6% Adaptation 25 7.6% Other public sources 9 2.7% Private 193 58.3% Total 331 100.0% Total 331 100.0% Source: Buchner et al. (2014). 312 Managing the Transition to a Low-Carbon Economy

According to a report by Buchner et al. (2014), around $331 billion per annum of climate change finance is being provided to support low- carbon, climate-resilient development activities (Table 9.1). The table shows the source and allocation of finance. The private sector is the largest contributor to climate change finance, accounting for more than half of the amount, but that it finances mainly mitigation activity.

Types of Financial Assistance Programs for Asian Developing Countries The Asia-Pacific Region will require billions of dollars to transition to low-carbon growth paths and to adapt to the unavoidable impacts of climate change. Nevertheless, Asian developing countries are in a good position as finance for climate change action is already available from a variety of sources. One example of climate-related financial assistance from bilateral donors is Japan’s fast-start finance (formally called the “Hatoyama Initiative”) which was announced by the Government of Japan at COP15 in 2009. Under this program, Japan pledged to provide $15 billion over 3 years (until 2012). This financial program aimed to assist developing countries to conduct several sorts of climate change activities through ODA and other official flows such as export credits. In addition to public finance, Japan also intended to encourage private sector finance leveraged by public finance. Multilateral financial institutions also provide several finance mechanisms to support developing countries; among others, ADB operates through climate-change-related funds such as the Global Environment Facility (GEF), Least Developed Country Fund (LDCF), Special Climate Change Fund (SCCF), the Adaptation Fund under United Nations Framework Convention on Climate Change (UNFCCC), and the Climate Investment Fund (CIF). In addition, ADB has developed several climate-change-related initiatives such as the Clean Energy Financing Partnership Facility (CEFPF) and the Climate Change Fund (CCF). Market mechanisms such as the Clean Development Mechanism (CDM) are an important driver for private sector investment in climate- change-related projects in the Asia and the Pacific region. Grant assistance (including technical cooperation) and concessional loans will be provided for non-profitable public projects and programs as ODA from bilateral and/or multilateral donors. Commercial term loans may be provided as public finance to leverage private sector activities and full commercial finance may be available if the projects are commercially viable. Climate Finance and the Role of International Cooperation 313

Nakhooda et al. (2011) have summarized climate change financial flows into Asia and the Pacific region based on data extracted from Climate Fund Update (CFU). This report indicated that $1.73 billion for Asian countries was approved between 2004 and October 2011 from dedicated climate change funds and approximately $866 million of this approved funding has been disbursed.

Development Perspectives Including Poverty Alleviation The World Bank (2015) reported that the proportion of people living on less than $1.25 a day fell from 43.6% in 1990 to 17.0% in 2011. It also forecasts that the extreme poverty rate will fall to 13.4% by 2015. In particular East Asia and the Pacific have made significant achievements in poverty alleviation, with the share of people living on less than $1.25 a day declining from 58.2% in 1990 to 7.9% in 2011, even though South Asia has the second largest number of extremely poor people with close to 400 million people living on less than $1.25 a day in 2011 (World Bank 2015). Although most developing Asian countries are on their way to achieving the income Millennium Development Goals (MDGs) by 2015, many still face great challenges in achieving the non-income MDGs, and they need to continue their efforts to complete the “unfinished business” under new Sustainable Development Goals. In addition, Asia is one of the world’s most vulnerable regions to climate change impact through droughts, floods, typhoons, sea level rise, and heat waves. This is because of its long coastlines; its large and growing populations; the high concentration of human and economic activities in coastal areas; the importance of the agriculture sector in providing jobs and livelihoods for a large segment of people, especially those living in poverty; and the dependence of some countries on natural resources and the forestry sector for growth and development. Climate change poses significant threats to the sustainability of the region’s economic growth, its poverty reduction endeavors, the achievement of the MDGs, and Asia’s long-term prosperity (ADB 2009). Thus, accelerating climate change actions needs to take place in conjunction with poverty alleviation. However, as Groff (2011) has pointed out: “one of the first lessons we draw from the past 50 years [of experience of development assistance] is that greater volumes of development finance do not automatically translate into better development results.”

Equity of Fund Allocation Most developing countries expect that climate change finance should be allocated to mitigation and adaptation activities according to countries’ circumstances. In particular, least developed countries where climate 314 Managing the Transition to a Low-Carbon Economy change impact is significant and where greenhouse gas (GHG) emissions are still limited expect to use climate change finance for adaptation activities rather than mitigation.1 However, most current climate change finance is directed at mitigation rather than adaptation. One reason for this is that private sector finance, the largest contributor to climate change finance, is usually directed at mitigation. Even public finance from bilateral and multilateral finance institutions is usually for mitigation. Although it is difficult to identify adaptation-specific activities, finance for adaptation tends to be less than for mitigation. Private sector finance seems to take into account countries’ economic circumstances. Figure 9.2 shows the share of foreign direct investment (FDI) inflows in developing Asian countries in 2013. According to data from United Nations Conference on Trade and Development (UNCTAD 2014), $381 billion has been invested in Asian developing countries. Of this, the majority went to the People’s Republic of China (PRC) (including Hong Kong, China). Among developing Asian countries, the top 10 recipient countries were the PRC ($203 billion), Singapore ($64 billion), India ($28 billion), Indonesia ($18 billion), Thailand ($13 billion), Malaysia ($12 billion), Kazakhstan ($10 billion), Viet Nam ($9 billion), the Philippines ($4 billion), and Turkmenistan ($3 billion). These countries share 95% of the FDI inflow in Asia. In general, the private sector tends to invest in profitable and low-risk projects, which is why FDI flows into countries where the economic scale is large and the investment environment is well established. ODA is also an important financial source of finance. Figure 9.3 shows the climate change bilateral ODA finance flow in Asia and Pacific countries. According to data from the Organisation for Economic Co- operation and Development (OECD 2015), Asian countries received approximately $11 billion for climate change activities through bilateral ODA in 2013. India, Indonesia, and Viet Nam were ranked as the largest recipients of both FDI and climate change-related ODA. On the other hand, Uzbekistan, Bangladesh, and Sri Lanka were the leading recipients of climate change ODA (these countries received limited FDI). The volume of ODA is significantly smaller than that of FDI, but it is important for low-income and least developed countries.

1 Adaptation refers to adjustments in ecological, social, or economic systems in response to actual or expected climatic stimuli and their effects or impacts. Mitigation refers to actions to limit or reduce greenhouse gas (GHG) emissions or to enhance GHG sequestration through the enhancement of sinks and reservoirs. Climate Finance and the Role of International Cooperation 315

Figure 9.2: Share of Foreign Direct Investment Flows into Asian Developing Economies, 2013 ($ million) India , Indonesia , Thailand , Malaysia , Singapore Viet Nam , , Philippines , - Kazakhstan Turkmenistan , , - PRC Others (including Hong Kong, China) , ,

Source: UNCTAD (2015).

Figure 9.3: Share of Climate Change Official Development Assistance Flow into Asian Developing Countries, 2013($ million)

Others India , ,

Sri Lanka Bangladesh Indonesia , Uzbekistan Philippines Viet Nam 902 8%

Source: OECD (2015). 316 Managing the Transition to a Low-Carbon Economy

Figure 9.4 shows the allocation of climate-change-related bilateral ODA to countries and illustrates that the allocation may depend on the countries’ situation and their policies. For example, in most of the largest climate-change-related ODA recipient countries, climate- change-related ODA was mainly for mitigation projects and programs rather than for adaptation. In some other countries, ODA was allocated to adaptation rather than to mitigation. This may be because most Asian developing countries still need to invest in the energy sector in order to alleviate poverty. In addition, as the OECD (2013) has noted, some duplication can be observed (i.e. both mitigation and adaptation are marked as objectives of the finance in single project). For example, forest management projects such as Reducing Emissions from Deforestation and Forest Degradation (REDD), may contribute to mitigation by absorbing GHGs and adaptation by protecting land from flood. Therefore, such projects contribute to both mitigation and adaptation. Figure 9.4 shows actual fund allocation among “mitigation only,” “adaptation only,” and “both mitigation and adaptation”. Furthermore, as summarized by Nakhooda et al. (2011), several dedicated climate change funds are implemented by multilateral financial institutions such as the World Bank and ADB. Nakhooda shows

Figure 9.4: Allocation of Climate Change ODA Flow into Asian Developing Countries

India

Bangladesh

Philippines

Viet Nam

Indonesia

Uzbekistan

Sri Lanka

Others

Mitigation Only Both Mitigation and Adaptation Adaptation Only

ODA = official development assistance. Source: OECD (2015). Climate Finance and the Role of International Cooperation 317

Figure 9.5: Breakdown of Amount Disbursed in Asia and the Pacific and Contribution from Each Fund

Adaptation Mitigation REDD

AF SPA SCCF MDG LDCF ICI GEF GCCA GEEREF UN-REDD IFCI

AF = Adaptation Fund (GEF acts as secretariat and World Bank as trustee), SPA = The Strategic Priority on Adaptation, SCCF = Special Climate Change Fund (hosted by the GEF), MDG = Achieve- ment Fund, LDCF = Least Developed Countries Fund (hosted by the GEF), ICI = International Cli- mate Initiative (Germany), GEF = UN Global Environment Facility, GCCA = Global Climate Change Alliance, GEEREF = Global Energy Efficiency and Renewable Energy Fund (hosted by the EIB), UN- REDD = United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation, IFCI = International Forest Carbon Initiative (Australia). Source: Extracted from Nakhooda et al. (2011).

that $588 million has been directed to mitigation activities, $89 million to REDD+, and $145 million to adaptation activities in Asia and the Pacific. As with climate-change-related bilateral ODA, the major part of climate finance from dedicated climate funds is used for mitigation activities. Figure 9.5 shows the breakdown of the amount disbursed in Asia and the Pacific and the contribution from each fund. Many of the dedicated funds have provided finance for adaptation, but more funds have been provided for mitigation. Funds for adaptation activities are still limited.

Gaps between Expectation and Reality First, climate change finance is still limited and needs to be increased from the current level of at least $97 billion per annum. Second, the volume of climate change finance will not guarantee climate and development benefits. Third, although there is an expectation that climate change finance should be allocated to both adaptation and mitigation activities equally, 95% of climate change finance is directed at mitigation rather than adaptation. Fourth, there is a gap between expectation and reality 318 Managing the Transition to a Low-Carbon Economy in country allocation of climate change finance (Table 9.2). In particular, private finance tends to be directed at low-risk and profitable projects rather than at low-profit and high-risk projects.

Table 9.2: Gaps between Expectations and Reality on Climate Change Finance

Expectation Reality Scale of finance Availability of climate Almost $100 billion is change is still limited currently available Development and climate Large volume of finance Volume of finance does change can contribute to address not necessarily result in climate change and better climate change and development developmental benefit. Fund allocation Climate change finance Finance for adaptation is should be allocated to still limited. In particular, mitigation and adaptation the private sector tends to equally, and distributed in finance mitigation rather an equal manner than adaptation. Climate finance should be The amount of climate allocated to developing change finance a country countries equally can receive may depend on its capacity such as economic scale. Private sector investment Private sector should invest Lack of social infrastructure in climate change activities and limited profitability, in developing countries often means the private sector finds climate change activities too risky Capacity Climate change finance Climate change finance should be managed through depends on absorptive countries’ own systems capacity and financial management Monitoring, reporting, and Monitoring, reporting and MRV systems often require verification (MRV) verification should be done support through countries’ own systems

Source: Author.

9.2.2 Issues

Information Gaps and Fragmentation of Fund Source There is an information gap in current climate change finance. As Buchner et al. (2011) have pointed out, there are thousands of sources of finance in the world and there is no single tracking system to capture Climate Finance and the Role of International Cooperation 319 all of them. Although the OECD has developed a policy marker (Rio Marker) under the creditors’ reporting system (CRS), it captures only a part of public-based climate change finance such as ODA. Also, OECD statistics rely on reports from donor countries, and do not necessarily reflect funds received by developing countries. However, tracking private sector finance flows in climate change activities is very challenging. Figure 9.6 shows sources of climate change finance.

Figure 9.6: Sources of Climate Change Finance

Government Capital Budgets markets

Development Bilateral Multilateral Private Domestic cooperation Finance Finance UNFCCC Sector Budgets agencies Institutions Institutions

Ocial “New and Carbon Development additional” markets Assistance climate ﬁnance CDM Levy funding the Industrialized Industrialized Industrialized Foreign Direct Adaptation countries’ ODA countries’ countries’ Investment Fund Commitments Commitments emission to “new and reduction additional” obligations Finance for climate change

Total ﬁnance available for climate change mitigation and adaptation initiatives

CDM = Clean Development Mechanism, ODA = official development assistance, UNFCCC = United Nations Framework Convention on Climate Change. Source: Sudo (2011).

The fragmentation of sources complicates access to finance as the various sources have numerous procedures, terms, and conditions, adding to transaction costs and limiting aid effectiveness (OECD 2011b). However, the fragmentation of finance sources does provide a variety of finance options; a single source of finance will provide easy access to the client, but the variety of services available may be limited. Also, if the client fails to convince finance officers of its suitability to receive finance, no other option will remain. From the view of the financier, if it is the only financial service provider it needs to take all the risks associated with climate-change related activities. 320 Managing the Transition to a Low-Carbon Economy

Different Players There is an asymmetry of information among the different players. Although players in the finance sector are familiar with financial issues, they may not know much about climate change. Players working in climate change are not necessarily familiar with the nature of finance.

Difference in the Nature of Public and Private Sectors In terms of climate change finance, the private sector is the largest contributor. However, it focuses on private rather than public benefit. Companies will conduct detailed due diligence, including risk analysis and cost–benefit analysis, for their investment decision making. As in the case of public sector projects, they will conduct environmental due diligence, such as environmental impact assessments. Corporate social responsibility (CSR) is also an important factor for the private sector.

Development vs. Climate Change Actions How can climate change finance be used to achieve both climate change and development objectives? Developing countries expect climate change finance to play an important role in assisting development and alleviating poverty alleviation as well as addressing climate change. Developing Asian countries also need to reduce the emissions of greenhouse gases without harming their development, which will be difficult if there is no coordination among development and climate activities.

Uneven Allocation of Funds In Asia, FDI is directed mainly to the PRC, India, and other large economies rather than to least developed countries. In part this may be due to the capacity of the recipients. In the case of development finance, one issue may be how the ministry of finance and the ministry of development prioritize climate change actions. Some sources of public finance such as export credits are not under the control of the recipient government, since export credits aim to support exporters rather than developing countries. Private sector finance depends on the results of risk analysis, so developing countries need to develop an enabling environment for private sector finance.

Capacity Capacity may be the most important issue affecting whether developing countries can implement climate change policy and actions and develop and deploy technology, and whether they have sufficient absorptive capacity. Such capacity relates to policy and governance, domestic financial systems, and the scale of the economy, among others. These Climate Finance and the Role of International Cooperation 321 factors will be assessed by financiers through their due diligence process to identify the risk associated with the finance. If a country’s absorptive capacity is limited, the financial volume it receives may also be limited. Strengthening absorptive capacity is as critical as creating an enabling environment for investors and financiers.

9.3 Role of International Cooperation

9.3.1 Nature of International Cooperation

Since climate change is global and cross-cutting, international collaboration is the key to tackling it. One country’s strength may help to overcome the weaknesses of others. Japan International Cooperation Agency (JICA) and OECD (2010) have tried to group the developing Asian countries according to their level of development and economic structure (Figure 9.7).

Figure 9.7: Grouping of Developing Asian Countries

Category 1: Category 2: Category 3: Category 4: Category 5: Shift from industry Rapidly Service-oriented Shift away from Limited structural to service Industrializing growth agriculture change

Category A: PRC Thailand Self sustaining economies India Malaysia Group V

Category B: Philippines Mongolia Emerging Kazakhstan Uzbekistan Pakistan economies Indonesia Tajikistan Sri Lanka Group IV Azerbaijan Viet Nam Group III Group II Group I

Category C: Bangladesh Nepal LDCs Cambodia Lao PDR

LDC = least developed countries, PRC = People’s Republic of China. Source: JICA and OECD (2010). 322 Managing the Transition to a Low-Carbon Economy

Lessons from more than 50 years’ experience of development cooperation can be applied to climate change actions. In 2005, OECD Development Assistance Committee (DAC) member countries, multilateral donors, and developing countries endorsed the Paris Declaration on Aid Effectiveness (OECD 2005) at a High Level Forum on Aid Effectiveness. The declaration has five essential tenets: (i) ownership, (ii) alignment, (iii) harmonization, (iv) management for development results, and (v) mutual accountability. JICA and OECD (2010) and CDDE Facility (2010) have argued that these principles can be applied to climate change finance (Box 9.1).

Box 9.1: Principles of the Paris Declaration on Aid Effectiveness

1. Ownership Ownership is the fundamental principle of the Paris Declaration. Development is something that must be done by developing countries, not to them. Policies and institutional reforms will be effective only so far as they emerge out of genuinely country-led processes. External assistance must be tailored toward helping developing countries achieve their own development objectives, leaving donors in a supporting role.

2. Alignment Under the Paris Declaration, the principle of alignment refers to two important changes to aid practice. The first is that donors should base their support on the partner country’s development priorities, policies and strategies (policy alignment). The second is that aid should be delivered as far as possible using country systems for managing development activities, rather than through stand-alone project structures (systems alignment).

3. Harmonization Harmonization refers to cooperation between donors to improve the efficiency of aid delivery. Donors are aware that multiple initiatives by different donors, each with their rules and procedures, can be very draining for developing country administrations. To reduce the transaction costs of aid, donors have been developing a range of new approaches, including program-based approaches, pooled funding arrangements, joint country plans and other common arrangements.

4. Managing for Results Managing for results is a general principle of management that involves using information about results systematically to improve decision

continued on next page Climate Finance and the Role of International Cooperation 323

Box 9.1: continued

making and strengthen performance. In the development field, it means ensuring that all development activities are orientated toward achieving the maximum benefits for poor men and women. It means ensuring that all initiatives, from individual aid projects through to national development strategies, are designed so as to generate performance information and use it for continuous improvement.

5. Mutual Accountability Mutual accountability is perhaps the most controversial of the Paris principles, and the most difficult to put into practice. It suggests that, in a true development partnership, there are commitments on both sides of the relationship, and both donors and partner countries should be accountable to each other (mutual accountability) for meeting those commitments. However, there are also many other accountability relationships involved in the development process that need to be taken into account. One of the innovative aspects of the Paris Declaration is that the commitments are reciprocal in nature, applying both to donors and to developing countries. This is an advance on its predecessor, the Rome Declaration, where the commitments were all on the donor side and on traditional aid practices where the obligations were mostly on recipients. Reciprocal commitments create for the first time the possibility of mutual accountability.

Source: Extracted from CDDF Facility (2010).

The 4th High Level Forum on Aid Effectiveness held in Busan, Republic of Korea (OECD 2011c), highlighted the importance of engaging a wide range of development actors, including emerging donors, civil society organizations, and the private sector. The OECD also highlighted the need to promote coherence, transparency, and predictability for effective climate finance and broader development cooperation.

9.3.2 How Can International Cooperation Fill the Gap?

Figure 9.8 shows that ODA is the main source of public finance from developed to developing countries. ODA is provided in several forms including grants, concessional loans, technical assistance, and contributions to multilateral donors and aims to assist development and 324 Managing the Transition to a Low-Carbon Economy poverty alleviation in developing countries. While export credits aim to assist developed countries’ exporters to share the risks associated with the trade of goods and services, and are directed mainly at developed countries and emerging economies where large-scale trade will take place, they make a limited contribution to least developed countries and small island countries. By contrast, ODA is designed for the purpose of development in least developed countries and has many indirect impacts, including demonstration effects, technology development and transfer, and capacity development. International cooperation through ODA and multilateral donors’ assistance can generate additional value for money, helping to bridge the gap between expectations and reality.

Figure 9.8: Financial Flows to Developing Countries ($ million)

(,)

ODA OOF Private Flows Net Private Grant

ODA = official development assistance, OOF = other official flows. Source: OECD. Stat Extracts, DAC1 Official and Private Flows2014). (

Bridging Climate Change and Development International cooperation can play a central role in bridging development and climate change issues. For example, the “co-benefit approach” is designed to generate both developmental and climate change benefits (Figure 9.9). Infrastructure development with conventional technologies Climate Finance and the Role of International Cooperation 325 may lead to fossil energy dependent technology lock-in in developing countries, and needs to be avoided. However, strong political will is needed if developing countries are to move from using conventional fossil fuel to new technologies such as renewable and energy-saving technology. Bilateral and multilateral development agencies can support a co-benefit approach.

Figure 9.9: The Co-Benefit Approach

Need to Increase Power supply New Te chnology Developmental Construction of New Te ch nology Increase of Power beneﬁt Demand, Rural New Power OD A Electriﬁcation Stations （FinancFinance ande T/A）

Increase of power supply Policy Project Implementation Development Project Objectives GHG Reduction

Mitigation of Climate Introduce climate Could it reduce Change GHG? friendly technology (Global Beneﬁt) Co-beneﬁt

GHG = greenhouse gas. Source: Sudo (2011).

A climate change program loan to Indonesia (Box 9.2) is an example of a type of development policy loan intended to promote policy and fiscal reform. Under a development policy loan, a donor provides finance (in general, budget support) if the recipient country achieves targets set by the donor and the developing country. The major differences between a structural adjustment loan and a climate change program loan are (i) policy reform is specifically about climate change, and (ii) no conditions are set. Instead, donors and the recipient country jointly conduct monitoring and dialogue to analyze why targets are not being achieved. The results of their dialogue are reflected in the next policy matrix. Ownership by recipient countries is respected and they are encouraged to overcome challenges by themselves with support from the donors. 326 Managing the Transition to a Low-Carbon Economy

Box 9.2: Climate Change Program Loan

Program loans are one of the ways for promoting proactive initiatives on climate change in developing countries. They help to prioritize developing countries’ climate change policies over other policies. Financial reform and policy implementation have been supported through development policy loans.

For example, Indonesia is one of the world’s largest emitters of greenhouse gases and levels are expected to increase with economic growth. At the same time, Indonesia is likely to be adversely affected by climate change, especially reduced rainfall and longer dry seasons. This has increased the urgency of integrating climate change into development planning at both national and local levels. In 2008 the Government of Indonesia developed, in collaboration with a group of development partners, a policy matrix that outlined concrete actions to be undertaken on climate change, complementary goals, targets, and timelines. The consultation and involvement of the National Planning Agency and line ministries created ownership over the proposed climate change actions and facilitated the alignment of these initiatives with national and sector development policies and programs.

A results-based framework was developed and agreed upon by all stakeholders. While supporting climate change policy implementation through development policy loans, donors collaborate with the government to monitor the implementation of the policies that they have mutually agreed and assess the implementation status. Based on this assessment, the donor and recipient country examine and discuss the provision of additional assistance. It is fair to say that this approach meets the “measurable, reportable, and verifiable” standard for climate change efforts.

Source: Sudo et al. (2008).

Climate Change Finance as Catalyst Although ODA is the main public source of finance from developed to developing countries, it is not necessarily a stable source of finance, since the volume of ODA depends on the budget constraints of developed countries. Nevertheless, many developing countries, particularly least developed countries, rely on ODA. Greater predictability from developed countries and more efficient and effective use of climate change finance from developing countries are needed (CDDE Facility 2010). Climate Finance and the Role of International Cooperation 327

Financial assistance through ODA can be used directly to implement climate change actions, generating economic and social benefits. In particular, adaptation activities whose nature is public and mitigation projects that are not financially bankable but which need to be implemented to meet economic and/or social needs can be supported through ODA. In addition, bilateral and multilateral donors can encourage other sources of finance to provide financial assistance by providing seed money. Even if this initial finance is only a small portion of the project cost, it can be used to leverage other finance, since the participation of bilateral and multilateral donors can have a great impact in terms of risk sharing and enabling access to developing countries’ governments. This may facilitate public–private partnerships which allow the public sector to benefit from private companies’ strengths, such as efficient project management, and private companies to generate profit. International cooperation can assist such partnerships by providing public finance and participating in the project, strengthening collaboration between public and private sectors. Bilateral and multilateral donors can support innovative activities as demonstration projects. If innovative activities are implemented successfully and generate value in terms of climate change and development, they can be diffused more widely. The Clean Development Mechanism (CDM) is one success story. CDM is an innovative activity that transforms emission reductions into monetary value in the form of certified emission reductions (CERs). When CDM was introduced under the Kyoto Protocol and the Marrakech Accords, most project developers hesitated to implement it because of the lack of a track record. However, the Prototype Carbon Fund under the World Bank has developed the capacities of project developers and there have been initial demonstrations of CDM projects in their early stages. As a result, the number of CDM projects has gradually increased and CDM has enabled developing countries to participate and enjoy benefit from their efforts. In indirect ways, international cooperation can play a role in encouraging other sources of finance to invest in climate change activities, including capacity development and better policy making through technical cooperation. Even if a country targets an increase in FDI, foreign investors may hesitate to invest there if it has investment regulations that are unfavorable to foreign investors. Policy coherence is one of the most important factors for foreign investors. In addition to providing technical cooperation so countries can develop the capacity to formulate their own appropriate climate change policies and strategies, development partners can also strengthen coordination among line ministries, civil 328 Managing the Transition to a Low-Carbon Economy society organizations, donors, and private sector financiers. International cooperation can help to create an enabling environment for the private sector and to build the social and legal infrastructure which is often an important factor for the private sector when companies make their investment decisions. Stable and appropriate governance, a steady economy, and appropriate foreign exchange controls, taxation, and subsidies are all important for encouraging foreign investors. As climate change is a global issue, experience needs to be shared. Japan, ADB, the United Nations Environment Programme (UNEP), and Sweden have developed an information sharing network in Asia and the Pacific region called the “Asia-Pacific Adaptation Network.” This forum’s gathering of experience and knowledge on adaptation among developing Asian countries is expanding to other regions such as Latin America, demonstrating South–South cooperation. The notion of triangular cooperation, with development partners facilitating cooperation between two developing countries, was highlighted at the fourth High Level Forum on Aid Effectiveness in 2011 in Busan (OECD 2011c). Figure 9.10 shows the overall picture of the role of international cooperation in bridging gaps and working as a catalyst to encourage, directly and indirectly, other sources of finance to invest in climate change.

Figure 9.10: Role of International Cooperation

T/C Enabling Promotion Private sector Environment Private Actions sector ﬁnance Implementation Development Actions Partners T/C Climate Budget Allocation (Bilateral, change policy / through Multilateral, governance Public-Private Partnership and others) Implementation Financial Public (PPP) assistance sector Finance Coordination among line Public sector T/C ministries Implementation Actions

T/C = technical cooperation. Source: Author. Climate Finance and the Role of International Cooperation 329

9.3.3 Role of International Cooperation

The Asia-Pacific Region will require billions of dollars if it is to transition to low-carbon growth paths and adapt to the unavoidable impacts of climate change. A variety of sources of finance are available, but there is still room for international cooperation to improve access to climate change finance. One option would be the creation of a new fund, but this may just add to the complexity of the existing landscape. Another would be the establishment of a new facility or platform offering information on finance sources. If this facility could receive applications for finance from developing countries and the private sector on behalf of the financial institutions, it could reduce costs both for recipients and donors and work as a facilitator for channeling climate change finance. ADB and JICA launched the now closed cofinancing facility, the Accelerated Cofinance Facility with ADB (ACFA), in 2007 as part of a joint initiative between ADB and Japan called the Enhanced Sustainable Development for Asia (ESDA), which was started during the ADB Annual Meeting in Kyoto in May 2006. One of the objectives of this facility is to “support the efforts by Asian developing countries to promote energy efficiency

including major CO2 emitting countries” (MOF 2007). Three projects (two power sector projects and one road project) have been implemented so far under the ACFA in Kazakhstan, Samoa, and Uzbekistan. They aim to improve the efficiency of energy use and, in turn, to contribute to a reduction in GHG emissions. Cofinancing can reduce the risk burden for each financier by sharing risks, enabling financiers to provide finance and to limit their country risk exposure level. In general, the lead arranger of the finance will coordinate the other participants and the capacity of the lead arranger is therefore the key to the success of cofinancing. Although ACFA is a bilateral facility between Japan and ADB, a multilateral facility to channel climate change finance could be based on its experience (Figure 9.11). The main objective would be to share information and knowledge on climate change finance among donors and recipients. Emerging donors such as the PRC and Thailand could make an important contribution as donors. Since ADB is already working as the executing agency for the Global Environment Facility and the Climate Investment Fund, it may be an appropriate secretariat of the facility. In this role it would develop a financial information platform by gathering information on financial terms and conditions and other information from each donor and on the financial demands of recipients, acting as a match maker between donors and recipients. In addition, it could work as a financial arranger and lead and/or participate in cofinancing. 330 Managing the Transition to a Low-Carbon Economy

Figure 9.11: Potential Framework of a Climate Change Finance Facility in Asia

International Framework (UNFCCC, etc.) GEF CIF GCF UN Agencies Other Donors

Asia Climate Change knowledge Exchange and Finance Facility

Asian Developing Countries ADB World Bank Group (Finance Facility Secretariat) Private FIs Public Sectors under Public Financial Management Japan-JICA-JBIC UNESCAP (PFM) framework (Knowledge Center) PRC - ChinaEXIM Climate Change Funds Republic of Korea- KOICA-Koreaexim ASEAN Secretariat Thailand-NEDA Private Sector, CSOs etc.

ADB = Asian Development Bank, ASEAN = Association of Southeast Asian Nations, CIF = Climate Investment Fund, CSO = civil society organization, FI = financial institution, GCF = Green Climate Fund, GEF = Global Environment Facility, JBIC = Japan Bank for International Cooperation, JICA = Japan International Cooperation Agency, KOICA = Korea International Cooperation Agency, UNESCAP = United Nations Economic and Social Commission for Asia and the Pacific, UNFCCC = United Nations Framework Convention on Climate Change. Source: Author.

In addition, regional institutions such as the Association of Southeast Asian Nations (ASEAN) secretariat and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) could be facilitators and knowledge providers. In particular, the ASEAN secretariat could be a key institution since it is working as a center of regional integration among ASEAN countries. Its experience will be useful in facilitating regional collaboration in the Asia and Pacific region. UNESCAP covers a wider range of countries in Asia and the Pacific region, and it provides best practices and knowledge. It can help to establish collaboration with other UN institutions, including the United Nations Environment Programme, which has established Green Economy Advisory services under its Green Economy Initiative (UNEP 2012), and the United Nations Development Program (UNDP), which, in collaboration with OECD, is helping to build the Climate Change Climate Finance and the Role of International Cooperation 331

Finance Building Block under the Global Partnership for Development Effectiveness endorsed at the High Level Forum on Development Effectiveness at Busan. Work related to climate change is fragmented among UN Agencies and UNESCAP can play an important coordinating role.

9.4 Conclusion

9.4.1 Important Role of International Cooperation

This chapter has discussed the role of international cooperation. Since there is already a stock of experience and knowledge in development cooperation, this can be brought to bear on climate change action. However, there is also scope to improve development cooperation and Kalirajan et al. (2011) have pointed out the inefficiency and ineffectiveness of much ODA. However, the most important point, as Kalirajan et al. also highlight, is how to mitigate and adapt to climate change without compromising the developmental needs of developing countries, particularly of the poorest section of society. In this context, the following policy recommendations are made.

9.4.2 Policy Recommendations

Establish an Effective and Efficient Enabling Environment An enabling environment is essential for both developing countries and donors. It should cover the investment environment and the political and social environment in which implementing climate change actions by all sorts of players can flourish. Developing countries need to integrate climate change policy into their national development policy. Since climate change is a long-term process, developing countries need to develop a long-term adaptation policy. Based on the national development policy, developing countries should implement climate change policy as a program in which all concerned ministries and stakeholders can work coherently. The social infrastructure is an important decision-making factor for private investors since a well-developed social infrastructure can reduce the risks associated with climate change. It covers not only the physical infrastructure but also the legal and banking systems and other aspects of the business environment. Some Asian countries have already developed successful social infrastructure systems and their experiences should be shared within the region. 332 Managing the Transition to a Low-Carbon Economy

Financial institutions should make financial commitments sure so that developing countries can predict the availability of finance. In addition, financial institutions need to develop more user-friendly financial facilities for their clients, including developing countries and project developers.

Bridging Public and Private Finance International cooperation can play an important role in creating an enabling environment, in particular the social infrastructure. International development partners can assist developing countries to develop better and more sustainable business and investment environments for private companies. International financial institutions and development partners can share some of the risks associated with climate change activities carried out by private companies. In general, commercial risks should be borne by the private sector, but some political and economic risks can be borne by international financial institutions, especially in public–private partnerships in climate change activities. In addition, international financial institutions and developing partners can help to close the financial gap for implementing climate change action in developing countries, for example through a climate change program loan (Box 9.2). The climate change finance facility proposed in previous section may help financial institutions to coordinate their finance and activities as they assist developing countries.

Capacity Development for Stakeholders Capacity is also a crucial factor in enhancing climate change activities in the region. First, countries need to develop the capacity to manage the finance they receive, including procurement and contract management and, in the case of loans, repayment schedule management. In addition, even if developing countries receive technology transfers, there is no guarantee they will be used appropriately. Developing countries must develop their own capacity to manage funds and technology. In addition, stronger financial management and banking sector capacity will help in mobilizing domestic financial resources for climate change actions. There is a wide variety of countries in Asia, including developed and emerging countries and great scope for sharing knowledge and experience. The Asia Pacific Adaptation Network (APAN) is a good practice that enables South–South cooperation and triangular cooperation. Sometimes developing countries’ experience can be copied easily and cheaply in other developing countries. Climate Finance and the Role of International Cooperation 333

References

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OECD. 2011c. Busan Partnership for Effective Development Cooperation. Paris. OECD. 2015. OECD Statistics on External Development Finance Targeting Environmental Objectives Including the Rio Conventions. Paris. http://www.oecd.org/environment/environment-development/ rioconventions.htm Sudo, T., A. Sato, Y. Murakami, and M. Motohashi. 2008, Promotion of Developing Country’s Climate Policy Implementation Applying Development Policy Loan. Paper presented at Annual conference of Society for Environment Economics and Political Studies (SEEPS). Osaka, Japan. Sudo, T. 2008. Role of Financial Institutions in Sustainable Development. PhD Dissertation. Waseda University, Tokyo. Sudo, T. 2009. Greening Recovery. Paper presented at an Asia-wide Regional High-level Meeting on the Impact of the Global Economic Slowdown on Poverty and Sustainable Development in Asia and the Pacific, September, Ha Noi. Sudo, T. 2011. Greening Investment and Finance. Paper presented at the Workshop on Fostering Green Growth through Cleantech Business and Investment Promotion Strategies, September, Shanghai, PRC. United Nations Conference on Trade and Development (UNCTAD). 2014. World Investment Report 2014—Investing in the SDGs: An Action Plan. New York and Geneva, Switzerland. UNCTAD. 2015. UNCTADstat. On-line database. http://unctadstat. unctad.org/CountryProfile/home/Indexen.html United Nations Environment Programme (UNEP). 2011. Green Economy Report. Nairobi. United Nations Framework Convention on Climate Change (UNFCCC). 2010. Synthesis Report on the National Economic, Environment and Development Study (NEEDS) for Climate Change Project. FCCC/ SBI/2010/INF.7. Bonn, Germany. UNFCCC. 2011. Report of the Transition Committee for the Design of the Green Climate Fund. UNFCCC/CP/2011/16. Bonn, Germany. World Bank. 2015. World Development Indicators 2015. Washington, DC. doi:10.1596/978–1-4648–0440–3. Chapter 10 Regional Cooperation toward a Green Asia: Trade and Investment Kaliappa Kalirajan

10.1 Introduction

Trade and foreign direct investment (FDI) are East Asia’s twin growth engines and they have contributed to a massive reduction in poverty in the region (Kuroda, Kawai, and Nangia 2007). As regional income increases through trade and investment growth, the demand for low-carbon goods and services (LCGS) will increase. The interesting question is whether Asian countries can close the gap between the demand for and supply of LCGS in the region. Although developing countries have a relative abundance of low-skilled labor, this will not guarantee sustained export growth if they do not have good logistics, including transportation and telecommunication infrastructure. Thus, labor availability needs to be complemented by good physical and institutional infrastructures. Regional cooperation can help build and sustain such infrastructures. The Garnaut Climate Change Review (2011) is one of a number of studies to argue that the sustained high growth of developing countries such as the People’s Republic of China (PRC) and India (together with demand from developed economies) has been exerting pressure on the global demand for energy, which has a bearing on carbon emissions. Calculations by the International Energy Agency (2007) indicate that

the PRC’s cumulative energy-related CO2 emission from 1990 to 2030 will soon catch up with those from the US and the EU. It is, therefore, imperative to intensify the use of LCGS in all economic activities. With the increasing awareness of climate change, environment protection activities such as carbon sequestration and the Clean Development Mechanism (CDM) create demand for LCGS. Some Asian

335 336 Managing the Transition to a Low-Carbon Economy countries, including the PRC, India, Japan, the Republic of Korea, and Singapore do have good potential to export such professional services, which are in great demand in the region. For example, the UK Joint Environmental Markets Unit has argued that there will be increasing demand from countries like Indonesia, Malaysia, the Philippines, and Thailand for solid-waste handling and disposal services, and also for equipment for filtration and purification of water. This is an opportunity to strengthen regional LCGS research capabilities through regional cooperation. The huge foreign reserves in Asia could be leveraged for green research and investment through regional cooperation (Kalirajan, Anbumozhi, and Singh 2010). Unfortunately, trade and investment in LCGS are very small compared with trade and investment in pollution-intensive products (Mikic 2010). Although tariffs on LCGS are low, the non-tariff barriers are very high. How can they be eliminated? This chapter attempts to show how regional cooperation can help to eliminate trade and investment barriers in LCGS by addressing the following questions.

• What will be the potential magnitude of technology and investment flows in LCGS into the region under (i) a “grand regional coalition” scenario, (ii) a “limited cooperation” scenario, and (iii) a “stand alone” scenario?1 • What are the impacts of behind-the-border constraints on potential export flows in LCGS in the Asian region? • What are the potential options and challenges associated with a “grand coalition” scenario? • How can impediments to successful cooperation among government and private enterprises be eliminated?

10.2 Methodology

The current patterns of trade and investment in LCGS in key emerging economies of Asia, which were selected based on their carbon emission capabilities, are examined. The chapter examines the PRC, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam. Export flows (EX) in LCGS between two countries (i and j) are determined by the following factors. First, the demand for and supply of goods, which are usually proxied by gross domestic product

1 Using firm-level data from East Asia, Wignaraja (2008) highlights the importance of FDI and technological innovation to export growth. Regional Cooperation toward a Green Asia: Trade and Investment 337

(GDP), and population (POP) of the exporting and importing countries, and the geographical distance (D) between countries, influence exports. These factors may be classified as “natural determinants” of export flows between countries. Second, relative prices of imported goods, which are mainly influenced by the tariff (T) structure of the importing country, also influence export flows. These can be classified as changes in “explicit beyond-the-border determinants.” Third, institutional and infrastructural rigidities in the exporting country may influence exports negatively. Such factors may be referred to as “behind-the- border determinants” in the home country, which are under the control of the exporting country. Fourth, different kinds of institutional and infrastructural rigidities in the importing country would also influence export flows negatively. These factors may be called “implicit beyond- the-border determinants,” which are beyond the control of the exporting country. Fifth, bilateral and multilateral trade negotiations in the form of improvements to the trade promotion and facilitation policies of both home and partner countries would influence export flows positively. A dummy variable (D1) can be used to represent whether there are such trade agreements between countries. The influence of these factors on exports may be classified as “mutually induced determinants (regional cooperation).” Another variable (FDI), the ratio of FDI from Asia to non-Asia FDI to the home country lagged one period, is used as a proxy for regional integration. Here, it becomes necessary to elaborate briefly on the type of FDI used in this study: “The limited understanding of the role of FDI in promoting green growth objectives is largely due to the lack of an internationally agreed definition of and relevant data on green FDI” (Golub, Kaufmann, and Yeres 2011, p.7). Further, there are no uniform data available on FDI in the WTO 153 list of LCGS for the selected emerging economies in Asia over the period of analysis: “Most importantly, particularly for FDI, green economic activity is often not associated so much with a particular good or service, but rather with a process or technology, which is very difficult to apprehend statistically. There is an important greening role for FDI in sectors and industries that are not environmental by nature but where the potential for pollution abatement is important. The latter dimension would not be captured if the definition was limited to investment in EGS” (Golub, Kaufmann, and Yeres 2011, p.16). Therefore, total FDI is used in the following model to explain the export flow of LCGS. Drawing on Kalirajan (2007), a stochastic frontier gravity equation is modelled to explain the variations in total exports of the focus country by incorporating directly the influence of ”natural determinants,” “behind-the-border determinants,” ”mutually induced determinants,” 338 Managing the Transition to a Low-Carbon Economy and the “explicit beyond-the-border determinants,” for a given level of the existing “implicit beyond-the-border determinants.”

ln EXi,j,t = B1,t + B2,t ln(PCGDPi,t ) + B3,t ln(PCGDPj,t ) + B4,t ln(DISTi,j) + B5,t ln

(Tj,i,t) + B6,t ln(FDIj,t-1) + B7,t D1 + B8,t D2 – uij,t + vij,t (1)

PCGDP refers to per capita GDP. DIST refers to the geographical distance between two major ports in exporting and importing countries. T is the average tariff rate in the importing country. FDI is the ratio of Asian FDI to total FDI in the exporting country. D1 takes the value 1, when there are trade agreements between home and partner country; otherwise it takes the value of zero. D2 is a year dummy and is equal to 1 when the relevant period is considered; otherwise it is zero. The period considered for the analysis is from 2000 to 2009. uij,t measures the negative influence of the combined “behind-the-border determinants” that exist in the exporting country on which complete information is not known; and vij,t refers to “normal” statistical error. It is assumed that uij,t takes the value zero if there is no significant negative influence of “behind-the-border determinants” and takes a positive value and thereby reduces the level of exports when there is significant negative influence of “ beyond-the- border determinants” in the exporting country. The parameter Gamma

2 – γ, is the ratio of country-specific variation (σ u ) to total variation 2 σ u ( 22 ), which indicates whether behind-the-border constraints are + σσ vu one of the determinants of total exports of LCGS. When γ is significant, it implies that beyond-the-border constraints are important determinants of LCGS exports.

Drawing on the framework used in the stochastic frontier production function models (Kalirajan, 2007), uij,t may be assumed to follow a 2 truncated normal distribution N ( , σµ u ), truncated at zero and vij,t as 2 N( ,0 σ v ). The above equation (1) is estimated through the maximum likelihood estimation method applied in the software FRONTIER 4.1.

Now, to answer the first question of what will be the potential magnitude of export flow in LCGS of the selected emerging economies in Asia to their partner countries under a grand regional coalition scenario, a limited cooperation scenario and a stand-alone scenario, the following simulations can be made using the estimated results from equation (1): Regional Cooperation toward a Green Asia: Trade and Investment 339

(i) The potential exports of home country to the relevant partner countries when there are no significant behind-the-border constraints and there is “grand regional coalition,” which is

proxied by coefficients B6 and B7 associated with variables

FDI and D1 respectively, are calculated from the estimates of

equation (1) with the assumption that uij,t = 0. (ii) The potential exports of the home country to the relevant partner countries when there are no significant behind-the- border constraints and there is “limited regional cooperation,” are calculated from the estimates of equation (1) with the

assumption that uij,t = 0 and either B6 = 0 or B7 = 0. (iii) The potential exports of the home country to relevant partner countries when there are no significant behind-the-border constraints and there is a “stand alone” attitude in the home country are calculated from the estimates of equation (1) with

the assumption that uij,t = 0 along with B6 = 0 and B7 = 0.

To answer the second question, what are the impacts of behind-the- border constraints on potential export flows in LCGS in the Asian region, the ratio of actual export flows to potential exports flows under the “stand alone” scenario (EXa/EXp) is calculated across the selected countries, which provides a measure of how much potential is achieved by the relevant country. A measure of [1 - (EXa/EXp)] X 100 shows the relevant country’s inefficiency due to its behind-the-border constraints in achieving its potential exports to its trading partners. Drawing on the evidence-based approach, the options and challenges associated with a grand coalition are discussed, along with the identification of pathways to eliminate constraints to effective collaboration between governments and the private sector.

10.3 Data

The main data sources are COMTRADE, WITS, and UNCTAD’s World Investment Reports covering the periods 2000 to 2009. The Asian emerging economies covered are: the PRC, India, Indonesia, Malaysia, Philippines, Singapore, Thailand, and Viet Nam. The LCGS covered in this study are the WTO 153 list grouped into 12 categories for analytical purposes: air pollution control; clean-up or remediation of soil and waste; cleaner or more resource-efficient technology; environmental monitoring, analysis, environmentally preferable products; heat and energy management; management of solid and hazardous waste; natural 340 Managing the Transition to a Low-Carbon Economy resources protection; natural risk management; noise and vibration abatement; renewable energy plants; and waste water management and potable water.

10.4 Current Patterns of Trade and Investment in LCGS

It is interesting to note that the PRC dominates the LCGS trade in all categories except in “management of solid and hazardous waste” which India leads from 2000 to 2009. Among the ASEAN emerging economies, Singapore dominates the LCGS trade, followed by Thailand. Given the difficulties in identifying FDI that is directly connected with the production of the list of 153 LCGS, estimates from different sources are discussed to examine the overall pattern of investment in LCGS. Using FDI data in green field projects and cross-border mergers and acquisitions data, UNCTAD has recently estimated that three LCGS (renewables, recycling, and low-carbon technology manufacturing) have attracted FDI flows amounting to $90 billion in 2009 (UNCTAD, World Investment Report 2010). Between 2004 and 2014, new financial investment in clean energy was $2,324 billion, of which $197 billion was from public markets and $87 billion was from private equity and/ or venture capital. In terms of sectors, wind attracted the largest funds, followed by solar, biofuel, biomass, and others (Mills 2015). The pattern of FDI in LCGS is diversified geographically and in terms of types of LCGS. For example, FDI in “alternative/renewable power generation” is concentrated in developed economies, although about 25% of investments are in developing countries, including the PRC, India, Indonesia, Philippines, and Viet Nam. In terms of venture investments in clean technology, North America, Europe, the PRC, and India attracted about $10.6 billion from venture capital firms (NTEC, Cleantech Ventures, and Foundation Capital). The pattern of clean technology venture investments clearly shows an increasing trend from $0.5 billion in 2001 to $2.1 billion in 2005 to $10.6 billion in 2011. The PRC and India seem to be major growth markets for clean technology investments, particularly for renewable energy technologies. Solar accounted for about 50% of total clean technology investment and investment in biofuels for 10% during 2011. The PRC invested CNY200 billion in energy-saving and emission- reduction projects, generating investment worth about CNY2 trillion during 2006–2010 (Xinhua 2010). From 2006 to 2010, United States (US) firms invested a total of $6.5 billion in India, which is now one Regional Cooperation toward a Green Asia: Trade and Investment 341

of the largest markets for the US clean energy technologies. In 2011– 2012, two of the three US financing agencies (SunEdison Inc. and First Solar Inc.) approved 173 transactions in India, totaling $1.4 billion, in solar energy. It is estimated that in the next 20 years India will need investments of over $1 trillion to improve health care, transportation infrastructure, energy production, and others. In May 2011, the World Bank approved a $15.36 million credit and $8.14 million grant for the Biodiversity Conservation and Rural Livelihood Improvement Project to support the Government of India in its efforts to conserve high-value forest areas with the objective of improving the livelihoods of forest- dependent communities. The project, which will run for 6 years, will conserve biodiversity, while improving rural livelihoods by applying culturally appropriate and tested participatory approaches from the communities to support opportunities for improving rural livelihoods.

10.5 Potential Exports of LCGS under Different Scenarios

Using unbalanced panel data for selected Asian emerging economies over the periods 2000 to 2009, equation (1) was estimated using the software FRONTIER 4.1 for total exports of LCGS and also for each of the 12 categories of LCGS exports for individual countries of the Asian emerging economies. Table 10.1 shows the results of the estimation of the equation for total exports of LCGS. All the coefficients for individual countries are statistically significant at least at the 5% level, which indicates that the model has explained the variations in export flows in LCGS through the selected determining variables.2 The statistical significance ofγ implies that behind-the-border constraints are important determinants of export flows in LCGS from the selected Asian emerging economies. This result also confirms that the selected equation (1) is appropriate to examine the determinants of export flows in LCGS from the selected countries. Other interesting results include the magnitude and significance of the variable FDI, which is the ratio of FDI from Asian countries to FDI from non-Asian countries to the relevant Asian emerging economy,

and D1, which shows the existence of trade agreements between the exporting Asian emerging economy and its trading partner countries. Taken together, these two coefficients indicate the influence of a “grand

2 Interested readers may contact the author for the panel estimation results for each of the 12 categories for individual countries. 342 Managing the Transition to a Low-Carbon Economy 7.662 7.453 ), which indicates whether behind-the-border whether behind-the-border ), which indicates 9.753 0.693 0.802 0.903 22 vu

σσ 2 u + σ 0.797 ) to total variation ( variation total ) to 2 u

σ ) j,i,t T ln ( 5,t

ij,t ) + B i, j + v ij,t DIST – u 2 ln( 4,t D 8,t ) + B + B 1 j,t D India Indonesia Malaysia Philippines Singapore Thailand Nam Viet 7,t ) + B ln( PCGDP ,t-1 3,t ) + B ln( FDIj i,t 6,t 1.056 0.768 0.825 0.856 0.845 0.918 0.822 0.851 0.815 0.675 0.642 0.788 0.525 0.844 0.616 0.589 0.815 0.786 0.882 0.867 PRC 0.672 0.543 0.572 0.618 0.438 0.712 0.453 0.426 0.892 0.675 0.558 0.618 0.457 0.915 0.584 0.595 –0.435 –0.680 –0.580 –0.553 –0.643 –0.507 –0.620 –0.614 + B Table 10.1: Estimates of Determinants of Total Exports of LCGS across Countries across LCGS Exports of Total Determinants of of Estimates 10.1: Table ln( PCGDP 2,t + B 1,t e m = B i,j,t EX PCGDP Dist (%)Tariff FDI ratio –0.765 –0.720 –0.680 –0.725 –0.831 –0.654 –0.710 -0.730 D1(PTA) D2 (Years)Gamma - γ 0.876 0.612 0.556 0.612 0.338 0.698 0.589 0.572 Coefficients PCGDP Constant 10.532 9.441 8.560 9.862 7.655

is significant, which is the case in this study, it implies that behind-the-border constraints are important important are constraints behind-the-border it implies that case in this study, which is the When γ is significant, LCGS. of exports total of the determinants one of are constraints exports. LCGS of determinants estimation. Author’s Source: LCGS = low-carbon goods and services, PRC = People’s Republic of China. of Republic = People’s PRC goods and services, = low-carbon LCGS level. at the 5% at least significant statistically are All coefficients Notes: model is as follows: The estimated ln ( variation country-specific of text. Gamma – γ is the ratio defined in the are All the variables Regional Cooperation toward a Green Asia: Trade and Investment 343 coalition” scenario on the potential export of LCGS from the concerned Asian emerging economy. Taking either of the coefficients individually indicates the influence of a “limited coalition” scenario on exports. Although these coefficients are all positive for all the Asian emerging economies, they vary in magnitude across countries. The impact of Asian FDI on exports of LCGS is largest for Singapore (0.92) and lowest for the Philippines (0.46). This means that Singapore’s LCGS exports will increase by 9% for every 10% increase in FDI from Asian countries. This clearly supports the view that Asian money could be leveraged for green research and investment through regional cooperation. Another important result that conveys the significance of regional cooperation on improving LCGS exports in Asian emerging economies concerns the positive and significant coefficient of the variable D1. The coefficient varies from 1.06 for the PRC to 0.82 for Thailand. The implication is that the PRC’s existing trade agreements with other countries have helped it to export more LCGS than other Asian emerging economies, which also have trade agreements with their partner countries. Table 10.2 shows how much of an increase in potential exports of LCGS by category in each Asian emerging economy will be achieved under the “grand coalition,” “limited coalition,” and “stand alone” scenarios. These are simulated on the assumption that there are no behind-the-border constraints to exports in the Asian emerging economies. It is clear that all Asian emerging economies will enjoy more export potential under a “grand coalition” than under a “limited coalition.” However, the percentage increase varies across countries; the PRC and Singapore appear to enjoy a greater increase in their potential exports in the majority of the categories. The implication from these results is that regional cooperation in the form of a “grand coalition” can certainly increase the export potential for LCGS in the Asian emerging economies, thereby increasing the pace of transforming Asia into Green Asia. Nevertheless, such a transformation will not come without careful tailoring of existing policies and agreements relating to matters such as preferential or free trade agreements entailing the removal of barriers to trade in goods and services. What is equally important is the elimination of behind-the- border constraints that exist within exporting countries such as poor infrastructure and inefficient institutions, which creates a gap between actually realized and potential exports. The gaps between the actual and potential exports are calculated for each year from 2000 to 2009 and the average gap for the selected eight Asian emerging economies are presented in Figure 10.1. The results indicate that the PRC’s gap between its actual 344 Managing the Transition to a Low-Carbon Economy

Table 10.2: Potential Exports of LCGS under Different Scenarios

Limited Grand Stand Alone Coalition Coalition (% increase) (% increase) (% increase) Category 2005 2009 2005 2009 2005 2009 PRC Air pollution control 20 22 26 28 32 33 Clean or remediation of soil and 30 28 32 33 35 36 waste Cleaner and more efficient 28 30 31 32 33 34 technology Environmental monitoring 40 35 42 38 44 41 Environmentally preferred products 35 33 37 35 38 36 Heat and energy management 38 35 39 36 40 37 Management of waste and 42 43 45 45 47 48 hazardous waste Natural resources protection 38 35 40 37 41 38 Natural risk management 44 42 45 43 46 44 Noise and vibration abatement 45 47 47 48 49 49 Renewable energy plant 28 27 30 28 32 30 Waste water management and 36 38 39 40 41 42 potable water India Air pollution control 30 32 31 33 32 34 Clean or remediation of soil and 31 32 32 33 34 35 waste Cleaner and more efficient 32 33 34 35 35 36 technology Environmental monitoring 40 42 42 43 44 44 Environmentally preferred products 37 38 39 40 40 42 Heat and energy management 38 37 39 38 40 40 Management of waste and 28 26 30 28 32 30 hazardous waste Natural resources protection 40 42 42 43 44 45 Natural risk management 37 35 39 37 40 38 Noise and vibration abatement 46 47 47 48 49 50 Renewable energy plant 30 32 32 33 34 35 Waste water management and 40 38 41 40 41 42 potable water

continued on next page Regional Cooperation toward a Green Asia: Trade and Investment 345

Table 10.2 continued

Limited Grand Stand Alone Coalition Coalition (% increase) (% increase) (% increase) Category 2005 2009 2005 2009 2005 2009 Indonesia Air pollution control 44 42 45 43 46 44 Clean or remediation of soil and 33 30 34 32 35 34 waste Cleaner and more efficient 35 36 37 38 38 39 technology Environmental monitoring 40 40 42 42 43 43 Environmentally preferred products 35 33 37 35 38 36 Heat and energy management 38 35 39 36 40 37 Management of waste and 45 42 46 44 47 46 hazardous waste Natural resources protection 38 35 40 37 41 39 Natural risk management 34 35 36 37 38 39 Noise and vibration abatement 46 47 48 49 49 50 Renewable energy plant 32 33 33 34 34 35 Waste water management and 40 41 42 43 44 45 potable water Malaysia Air pollution control 34 35 36 36 38 38 Clean or remediation of soil 35 36 36 37 38 38 and waste Cleaner and more efficient 35 36 37 38 38 39 technology Environmental monitoring 33 34 35 36 37 38 Environmentally preferred products 40 41 42 43 44 45 Heat and energy management 30 32 33 36 35 37 Management of waste and 38 42 40 44 43 46 hazardous waste Natural resources protection 32 35 34 37 36 39 Natural risk management 30 32 33 34 35 36 Noise and vibration abatement 38 40 39 41 41 43 Renewable energy plant 35 36 37 38 39 40 Waste water management and 42 43 44 45 45 46 potable water

continued on next page 346 Managing the Transition to a Low-Carbon Economy

Table 10.2 continued

Limited Grand Stand Alone Coalition Coalition (% increase) (% increase) (% increase) Category 2005 2009 2005 2009 2005 2009 Philippines Air pollution control 36 37 38 39 39 40 Clean or remediation of soil and 37 38 39 40 41 42 waste Cleaner and more efficient 40 41 42 43 43 45 technology Environmental monitoring 41 42 43 44 44 46 Environmentally preferred products 45 47 47 48 49 50 Heat and energy management 35 36 36 37 38 38 Management of waste and 38 40 40 42 43 45 hazardous waste Natural resources protection 40 42 43 44 45 45 Natural risk management 38 40 41 42 43 44 Noise and vibration abatement 38 40 39 41 40 42 Renewable energy plant 37 39 39 40 41 41 Waste water management and 45 46 48 48 50 51 potable water Singapore Air pollution control 23 24 25 26 27 29 Clean or remediation of soil and 30 31 32 33 34 35 waste Cleaner and more efficient 28 29 30 31 33 34 technology Environmental monitoring 27 29 29 30 31 32 Environmentally preferred products 28 29 30 31 32 33 Heat and energy management 31 32 33 34 36 35 Management of waste and 32 33 34 35 35 36 hazardous waste Natural resources protection 28 30 30 32 32 34 Natural risk management 25 27 26 28 27 30 Noise and vibration abatement 23 25 25 27 28 28 Renewable energy plant 22 23 24 25 27 26 Waste water management and 28 29 32 33 33 34 potable water

continued on next page Regional Cooperation toward a Green Asia: Trade and Investment 347

Table 10.2 continued Limited Grand Stand Alone Coalition Coalition (% increase) (% increase) (% increase) Category 2005 2009 2005 2009 2005 2009 Thailand Air pollution control 45 46 47 48 49 50 Clean or remediation of soil and 40 42 41 43 42 44 waste Cleaner and more efficient 40 42 43 44 45 45 technology Environmental monitoring 41 43 43 44 44 45 Environmentally preferred products 45 47 47 49 49 50 Heat and energy management 40 42 42 44 44 45 Management of waste and 38 39 40 41 43 44 hazardous waste Natural resources protection 45 47 46 48 48 50 Natural risk management 40 40 41 41 43 44 Noise and vibration abatement 40 42 42 44 43 45 Renewable energy plant 39 41 41 43 43 45 Waste water management and 44 46 47 48 50 51 potable water Viet Nam Air pollution control 46 47 48 49 49 50 Clean or remediation of soil and 38 40 40 42 42 44 waste Cleaner and more efficient 40 42 41 44 43 45 technology Environmental monitoring 42 43 44 45 46 48 Environmentally preferred products 40 41 42 43 44 45 Heat and energy management 38 39 39 40 40 41 Management of waste and 47 48 49 50 51 52 hazardous waste Natural resources protection 36 37 38 40 41 42 Natural risk management 38 40 40 41 43 42 Noise and vibration abatement 45 48 48 49 49 50 Renewable energy plant 34 35 37 37 39 40 Waste water management and 42 44 45 46 48 50 potable water

LCGS = low-carbon goods and services, PRC = People’s Republic of China. Source: Author’s calculations. 348 Managing the Transition to a Low-Carbon Economy

Figure 10.1: Mean Inefficiency in Export Flows in LCGS across Emerging Asian Countries (%)

a a e C ia nd di am or nes ysi la PR In N pi la hai et do nes ngap T ilip Ma Vi In Si Ph LCGS = low-carbon goods and services, PRC = People’s Republic of China. Source: Author’s estimation.

and potential exports is the smallest, which means that on average the PRC is able to realize 80% of its potential exports. Singapore is able to realize 73% of its potential exports, while the figure for India is 70%. Viet Nam appears to be realizing only about 62% of its export potential in LCGS. It would be interesting to examine the specific behind-the-border constraints that contribute to such gaps in these countries, but the lack of appropriate data across the countries over the period of analysis means that specific constraints could not be identified.

10.6 Potential, Options, and Challenges for Cooperation

In the case of environmental goods and services, FDI is determined by technological capacity. The provision of environmental infrastructure services, notably of potable water, requires complex organizational Regional Cooperation toward a Green Asia: Trade and Investment 349 capabilities, knowledge, and capital, which are typically possessed by multinational enterprises. In the absence of a proper environmental policy in the host country, a multinational may not transfer better pollution control technologies to the host country. Nevertheless, it is recognized by governments that technological upgrading is ultimately the responsibility of firms, whose operations need to be supported by governments with appropriate industrial and institutional frameworks. However, the possibility of multinationals “crowding out” domestic firms in the production and distribution of LCGS in emerging Asian economies should not be ruled out. It is imperative for the countries promoting FDI in LCGS to implement proper policies to minimize the potential negative effects of FDI. Governments in Malaysia and Singapore, for example, help small and medium-sized firms in many ways without instituting business laws to link up with the multinationals formally (Huff 1999; Rasiah 1995). The diffusion of technologies using LCGS is generally a slow process in any country. A number of factors can slow the pace of diffusion, in particular government policies that influence the price of LCGS. In this context, a country’s trade policy plays a crucial role with respect to achieving its specific environmental goals, such as emission reductions as a result of using efficient technologies and LCGS. This is because the use of LCGS and efficient technologies depends on accessibility to industries and households, which in turn is determined by the cost of production of LCGS. Only when there are no restrictions on the movement of LCGS across borders can the cost of production drop significantly. For example, tariffs on biofuel imports are high in many developed countries. The European Union and the United States have instituted mandatory requirements to use biofuels in transport. In these countries, domestic producers tend to dominate the national biofuel market at the expense of environmentally and economically more efficient imports from developing countries, where biofuels can be produced at lower costs. Such restrictions on imports of biofuels need to be eliminated. The importance of infrastructure to attract FDI in LCGS is evident in the case of India. At the South India Infrastructure Investment Summit 2011 organized by the Confederation of Indian Industries, Japan’s Ministry of Economy, Trade & Industry (METI) made the point that infrastructure development and private participation should go hand in hand: “Many Japanese companies are willing to invest in India, but the infrastructure bottlenecks are the deterrent. India spends only one-eighth of the investment the PRC makes in infrastructure development. Japan has national and international experience in developing infrastructure facilities and India could make use of that in 350 Managing the Transition to a Low-Carbon Economy several sectors like environment and energy conservation. The Japanese companies with expertise in power generation and conservation, solar and wind power, water treatment, including desalination plants, and waste management are willing to interact with Indian counterparts for possible collaboration and investments.” As multinational enterprises enjoy technical expertise in the production of LCGS, developing countries tend to rely on them to meet their demands for these products. There is therefore a danger that multinationals may crowd out domestic firms, although this can be mitigated by instituting proper FDI and research and development (R&D) policies for domestic firms. In the PRC, for example, in 2007, the Ministry of Finance set up a Fund for the Development of Renewable Energy with the aim of supporting R&D by domestic firms working in renewable energy.

10.7 Feasible Pathways to Enhance Cooperation between Government and Private Firms

Public–private partnerships (PPPs) are an effective way of producing and distributing national and global public goods such as LCGS. For example, the ASEAN Infrastructure Fund, an initiative to boost the supply of infrastructure financing, can be increased by including many private firms across the regions. The Approach Paper to the XI Plan (2012– 2017) of India highlights some of the conditions necessary to strengthen cooperation between the government and private enterprises: “PPPs are best implemented through standardized arrangements that constitute a stable policy and regulatory regime where private capital derives greater comfort and seeks the least possible risk premium. Model Concession Agreements (MCAs) including Viability Gap Funding would be used for providing a stable regulatory and policy framework.” A successful PPP working on climate change improvement is that between the World Renewal Spiritual Trust (WRST), a registered charity trust with headquarters in Mumbai and branches all over India, and the Government of India under the “One India” program. WRST explains that: “After detailed evaluation of various solar technologies, WRST selected to make use of the in-house developed 60m2 Scheffler parabolic dish in order to set up a solar thermal power plant at the Prajapita Brahma Kumaris Ishwariya Vishwa Vidyalaya (BKIVV), which is a premier spiritual university in India, in Abu Road, Rajasthan. For this project, WRST has teamed up with Fraunhofer Institute (ISE) and Regional Cooperation toward a Green Asia: Trade and Investment 351 enjoys the support of Wolfgang Scheffler. The German Ministry for Environment, Nature Conservation and Nuclear Safety (BMU) has also agreed to support this project” (http://www.wrst.in/). This is a good example of how the private sector can be engaged in a strategic way in a “grand coalition” scenario involving private, national, and international government organizations. Similar examples involving national and foreign governments can be found in other emerging Asian economies. For example, the Indonesian Government is committed to reining in deforestation and improving land management with help from Australia under the Indonesia–Australia Forest Carbon partnership.

10.8 Conclusions

There is a large gap between the demand for and the supply of LCGS. About 50% of the LCGS that will be used by 2030 are not yet available. This provides an opportunity for those emerging Asian economies that have the potential to contribute to the creation of LCGS individually and collectively by pooling their physical and human capital. Realizing this opportunity will depend on country-specific and region-specific factors. The volume of trade and investment in LCGS will be determined by whether the Asian emerging economies can work together fully under a grand coalition, or whether they will proceed under a partial coalition, or stand-alone scenario. Regional cooperation was examined under these three scenarios, which were simulated on the assumption that there are no behind-the- border constraints to exporting LCGS in the Asian emerging economies. As expected, the analysis indicated that emerging Asian economies would increase their export potential for LCGS more under a grand coalition scenario than under the partial coalition scenario, although both show more potential than the stand alone scenario. This implies that regional cooperation either fully or partially has the potential to improve the export performance of emerging Asian economies in LCGS. Economies that are more open to trade and FDI, such as the PRC and Singapore, will enjoy the greatest increase in their potential LCGS exports in LCGS. Nevertheless, such a transformation will require regional cooperation, such as preferential or free trade agreements entailing the removal of barriers to trade in goods and services (Kawai and Wignaraja 2008). The above analysis assumed that there were no behind-the-border constraints in the emerging Asian economies. In reality, there are infrastructure bottlenecks and institutional rigidities that contribute to the gap between potential and actual exports. Therefore, it is imperative to examine whether the impact of such behind-the-border constraints 352 Managing the Transition to a Low-Carbon Economy on exports is significant and, if so, what the impact on potential exports will be. None of the emerging Asian economies are able to realize their full LCGS export potential. While the PRC was able to achieve on average about 80% of its export potential during the period of analysis, Viet Nam could achieve only about 62%. Special attention needs to be paid to eliminating behind-the-border constraints to trade, including transportation and telecommunication bottlenecks. Although Asia represents a large market and has huge foreign reserves, difficult relationships between countries in the region have limited growth in intraregional LCGS trade. East Asia has demonstrated that it is possible to grow together despite differences between governments; the rest of emerging Asia needs to take its cue from East Asia and form a grand Asian coalition for the benefit of the entire region and the global economy. The East Asian experience indicates that one of the crucial factors for such a grand cooperation is maintaining an easy flow of goods and services, which very much depends on good transport and communication networks and institutional infrastructure. Global and regional institutions such as the Asian Development Bank (ADB) have been facilitating regional and subregional transportation infrastructure through project finance. The involvement of multinational companies in trade and investment in LCGS in Asia through FDI also has the potential to enlarge regional cooperation. One important pathway to increasing and strengthening regional and international cooperation is the public– private partnership (PPP) model, which has been promoted effectively by ADB and the World Bank. Further, emerging Asian economies can use greater regional cooperation to share their knowledge of policies and practices with respect to promoting LCGS with other Asian economies. Regional development organizations such as ADB can support them through capacity building and institutional strengthening.

References

Garnaut, R. 2011. Garnaut Climate Change Review 2011 Update: Progress towards Effective Global Action on Climate Change. Update paper 2. Canberra: Commonwealth of Australia. Golub, S.S., C. Kaufmann, and P. Yeres. 2011. Defining and Measuring Green FDI: An Exploratory Review of Existing Work and Evidence. OECD Working Papers on International Investment, No. 2011/2. Paris: OECD Investment Division. Regional Cooperation toward a Green Asia: Trade and Investment 353

Huff, W.G. 1999. Singapore’s Economic Development: Four Lessons and Some Doubts. Oxford Development Studies 21(1): 33–35. Kawai, M., and G. Wignaraja. 2008. Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA. Working Papers on Regional Economic Integration 14. Manila: Asian Development Bank. Kalirajan, K. 2007. Regional Cooperation and Bilateral Trade Flows: An Empirical Measurement of Resistance. The International Trade Journal 21(2): 85–107. Kalirajan, K., V. Anbumozhi, and K. Singh. 2010. Measuring the Environmental Impacts of Changing Trade Patterns on the Poor. ADBI Working Paper Series No. 239. Tokyo: Asian Development Bank Institute. Kuroda, H., M. Kawai, and R. Nangia. 2007. Infrastructure and Regional Cooperation. ADB Institute Discussion Paper No. 76. Tokyo: Asian Development Bank Institute. Mikic, M. 2010. Trade in Climate Smart Goods: Trends and Opportunities in Asia and the Pacific. Paper presented at the Regional Symposium on Low Carbon Economy organized by ESCAP in Bali, Indonesia, 13–14 October. Mills, L. 2015. Global Trends in Clean Energy Investment. Bloomberg New Energy Finance. Rasiah, R. 1995. Foreign Capital and Industrialization in Malaysia. Basingstoke, UK: Macmillan. United Nations Conference on Trade and Development (UNCTAD). 2010. World Investment Report 2010: Investing in a Low Carbon Economy. Geneva, Switzerland: UNCTAD. Wignaraja, G. 2008. FDI and Innovation as Drivers of Export Behaviour: Firm-level Evidence from East Asia. UNU-MERIT Working Paper Series 061. Maastricht, The Netherlands: United Nations University, Maastricht Economic and Social Research and Training Centre on Innovation and Technology. Xinhua. 2010. http://www.chinadaily.com.cn/china/2010-11/23/content _11595289.htm. 23 November.

Chapter 11 Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems Heinrich Wyes

11.1 Current Regional Governance Systems and National Institutional Frameworks

The interconnected and transboundary nature of environmental issues underscores the need for regional cooperation to address environmental issues, whose causes and conditions often spread across many countries and many groups, including government and industry. Most environmental problems such as loss of arable land, smog, and ecosystem destruction cut across economic, social, and political barriers. There is an increasing need for institutional strengthening to tackle environmental issues at national and regional levels. Stronger and more proactive regional institutions are required to support sustainable development and green economies and to address climate change. Environmental governance is an area of weakness in Asia, because the central concern for all Asian countries has been to achieve high rates of economic growth. However, the need for appropriate environmental institutions and good governance is being increasingly understood; countries appreciate that these are critical underlying factors for sustainable development.

355 356 Managing the Transition to a Low-Carbon Economy

11.1.1 Operational Principles for Regional Institutions

The Asian region does not share a common history. Nevertheless, although Asian countries have different political and economic environments, this should not be an obstacle to a shared vision. The more developed economies in the region can share their development experiences in the environmental sphere with the less-developed economies. Strategies that have been adopted in Asia range across the ideological spectrum, even among more developed Asian societies, and this allows a multiplicity of approaches. Yet, when working against a diverse background, certain rules that can govern the game of inducing cooperation and integration have to be understood:

• Non-dominance: When more involved decision-making is required, and there is a wide network of organizations, someone needs to take the lead. If a core group in the Asian region is to make the important decisions, no consensual decision making will result unless members of the core group can persuade other members into agreeing. This is how the European Union (EU) often functions. • Individual trajectories: Each member country will have its own trajectory, time line, and pace at which it wishes to pursue its stated objectives and these will have to be accepted by other member states. It is, of course, possible that some countries may be more reluctant than others to accept certain objectives. In the interests of good relations it is only reasonable that others’ goals and timelines be accepted, although this may slow the pace at which the region as a whole reaches its environmental goals. • Mutually agreed convergence: The question of whether Asian countries will achieve goals that have been mutually agreed upon has to be carefully considered. The answer depends mostly on organizational issues, such as who will supervise the implementation and decision-making process in the region. A realistic approach would be an overarching organization with an agenda heavily influenced by a core group of members. In this approach, the group’s leaders would determine how convergence to goals that are thought to be valuable (e.g., within an ASEAN-wide context) could be set. The manner of progress to these goals would also be guided by the core member states, as would the milestones that are to be achieved. Regional and subregional organizations with interests in specific areas of cooperation need to be established in Asia. Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 357

• Consensual approach: There are different ways in which decision making can be carried out within an overlapping architecture of organizations spanning the Asian region. Countries can either adopt a consensual approach or select a decision that the dominant members agree on. In the latter case, the more developed and earlier members of such regional organizations agree upon the agenda, and subsequently expect the other members to concur. This weakens the principle of proceeding by consensus. As the number of organizations that cut across specific functional areas increases, and as the number of subregional organizations grows, it will be more and more difficult to plan and decide entirely on the basis of consensus. This process can also be observed in the development of environmental governance in Europe. • Institutions: There are several international cooperative arrangements whose purpose is to strengthen position of their members in the world as well as to reinforce regional stability and economic exchange among member countries. Such groupings are increasingly used as platforms to implement socioeconomic reforms and environmental protection measures. There are many examples that Asian countries can draw upon.

Policy makers in the Asian region realize that regional and subregional institutions matter and are necessary for sustainable development and green growth. There are two ways in which these institutions interact with society. First, they can be the basis upon which regional decision making in the environmental sphere functions. Institutions can form the platform for the effective functioning of regional cooperation. Second, institutions can be thought of as a set of rules that influence or determine how joint activities are addressed, emphasizing that good governance is only possible if accompanied by strong institutional (regional and subregional) frameworks.

11.1.2 Regional Governance Systems in Asia

A number of multilateral cooperation arrangements currently operate in the Asian region. The biggest are the South Asian Association for Regional Cooperation (SAARC), Asia-Pacific Economic Cooperation (APEC), and the Association of Southeast Asian Nations (ASEAN). All three recognize climate change poses a major threat to their member states and are trying to step up common actions in order to tackle climate change and promote green economic development across the region. 358 Managing the Transition to a Low-Carbon Economy

South Asian Association for Regional Cooperation SAARC is an organization of South Asian nations, founded in December 1985 and dedicated to economic, technological, social, and cultural development emphasizing collective self-reliance. Its seven founding members are Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka. Afghanistan joined the organization in 2005. The 11 stated areas of cooperation are agriculture, education, culture and sports, health, population and child welfare, the environment and meteorology, rural development, tourism, transport, science and technology, and communications. The SAARC Environment Ministers meeting in Dhaka (2008) adopted the SAARC Action Plan on Climate Change. The objectives of the plan are to identify and create opportunities for activities that are achievable through regional cooperation and South–South support in terms of technology and knowledge transfer and to provide an impetus for a regional action plan on climate change through national activities. Significant progress was made at the sixteenth SAARC Summit at Thimpu, Bhutan in April 2010. The Thimpu Statement on Climate Change, adopted during the Summit, called for a review of the implementation of the Dhaka Declaration and SAARC Action Plan on Climate Change. Members agreed to establish an intergovernmental expert group on climate change to develop clear policy direction and guidance for regional cooperation.

Asia-Pacific Economic Cooperation APEC is a forum of 21 Pacific Rim countries that seek to promote free trade and economic cooperation throughout the Asia-Pacific region. APEC was launched in 1989 as a consultative body whose goal is to foster cooperation on issues of trade and investment in the Asia Pacific region. The founding members were Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, Thailand (the ASEAN countries at that time) and Australia, New Zealand, Canada, Japan, Republic of Korea, and the United States. APEC was created to work toward improving living standards and education levels through sustainable economic growth and cooperation for the sake of common interests of Asia-Pacific countries. However, diverse cultures, discordant histories, and a lack of experience with multilateral institutions have shaped an organization that is more an association than an autonomous decision-making body. APEC members have in recent years made substantial efforts to address environmental issues, including a number of initiatives and measures to address climate change. In 2007, the APEC leaders adopted a climate change program during the Sydney meeting, agreeing to tackle global warming through improvement of energy efficiency and better Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 359

forest management. APEC has also established many working groups to assist economies to meet climate change goals, including the Energy Working Group, the Asia-Pacific Network for Energy Technology and the Energy Security Initiative, to promote clean and efficient energy production and use more broadly (Sydney Declaration 2007). In November 2008, the APEC ministers adopted the Environmental Goods and Services (EGS) Work Programme Framework, aiming to support the development of the EGS sector in APEC and to link up the projects related to the EGS in separate APEC working groups (EGS Framework 2008).

Association of Southeast Asian Nations ASEAN is a geopolitical and economic organization of 10 countries in Southeast Asia, which was founded on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Since then, membership has expanded to include Brunei Darussalam, Myanmar, Cambodia, Lao People’s Democratic Republic, and Viet Nam. Its aims include the acceleration of economic growth, social progress, cultural development among its members, and the protection of peace and stability in the region by providing a forum for the member countries to discuss differences peacefully. The ASEAN Charter affirms in Article 1 that among its purposes is the inclusive goal of enhancing the “well-being and livelihood of the peoples of ASEAN.” This is a broad goal that goes beyond the achievement of higher levels of income among ASEAN’s members. Article 2 specifically states that ASEAN and its member states shall seek to adhere “to the rule of law, good governance, the principles of democracy and constitutional government.” This is a strong indication that ASEAN embraces good institutional frameworks as a set of principles that will guide its member states to achieve its economic objectives. ASEAN as a regional grouping has an important role to play in coordinating and encouraging individual states to improve their environmental structures. Specialized ASEAN-wide institutions are needed in order to set the direction for ASEAN and to meet mutually agreed goals for the region. These institutions are also needed to coordinate national initiatives and to align them with regional goals. Another key function is to contribute to the capacity-building of national agencies. Given the increasingly complex and overlapping functions that will be performed by functional institutions, there is a need for a subregional organization such as ASEAN that will play the role of facilitating and coordinating initiatives that cut across nations. The ASEAN leaders expressed their commitment for ASEAN to play a proactive role in addressing climate change through their 360 Managing the Transition to a Low-Carbon Economy declarations at the 2007 Bali and 2009 Copenhagen UN Conferences on Climate Change. These see the protection of the environment and the sustainable use and management of natural resources as essential to long-term economic growth and social development. The ASEAN Vision 2020 calls for “a clean and green ASEAN” with fully established mechanisms to ensure the protection of the environment, sustainability of natural resources, and a high quality of life for the people in the region.

11.2 Addressing Environmental Changes

11.2.1 Ecosystem-Based Adaptation

Scarcity of resources and the impending effects of climate change have made ecosystem services a focus of attention. The wide range of services provided by the ecosystems of the Asian region is one of its greatest assets. It is becoming increasingly clear that sustainable approaches for livelihood improvement and poverty reduction in the region can only be achieved through appropriate linkage with ecosystem services. Many recent climate change adaptation initiatives focus on the use of technologies and the design of resilient infrastructure. However, there is a growing recognition of the role healthy ecosystems can play in helping people adapt to climate change. As natural buffers, ecosystems are often cheaper to maintain and more effective than physical engineering solutions. They offer a way of adaptation that is readily available and addresses many of the concerns and priorities identified by the most vulnerable countries and communities. Ecosystem-based adaptation strategies can complement and enhance climate change mitigation. Sustainable management of forests can store and sequester carbon by improving overall forest health, and simultaneously sustain functioning ecosystems.

11.2.2 Payment for Environmental Services

The concept of payment for environmental services is an incentive-based mechanism for addressing both environmental problems and poverty. It is a concept that is gaining in popularity among natural resource managers and policy makers in Asia. It includes a range of institutional arrangements such as payments by direct beneficiaries of environmental services and incentives for communities to practice sustainable land use or to reduce emissions from deforestation and degradation (REDD). Payment for environmental services has the potential to minimize trade-offs between conservation and rural livelihoods. Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 361

11.2.3 Reducing Emissions from Deforestation and Forest Degradation (REDD)

Currently deforestation accounts for 18%–25% of global greenhouse gas emissions. A policy mechanism for “reducing emissions from deforestation in developing countries” (REDD) was first proposed by the UN Climate Conference of the Parties (COP 13) in Bali in 2007. The REDD mechanism estimates a financial value for the carbon stored in forests and offers developing countries incentives to reduce emissions from their forests. At COP 15 in Copenhagen in 2009, the REDD policy mechanism was expanded to REDD+ in order to include the role that conservation, the sustainable management of forests and the enhancement of forest carbon stocks can add to reducing emissions. REDD+ allows for a wider range of forest-related activities and provides opportunities for regional approaches such as community forestry, joint forest management, social forestry, and collaborative forestry (Dahal et al. 2011). The Asian region offers huge potential to benefit from REDD+ because its forests and peat lands are important carbon sinks as well as

significant sources of CO2 emissions. By avoiding further deforestation and forest carbon stock enhancement, the region has the potential

to contribute about 40% of the total global REDD+ potential for CO2 emissions reductions by 2050 (ADB 2010). Leading regional bodies in Asia and the Pacific are paying increasing attention to REDD+, which offers important opportunities for moving toward shared visions and agreements at regional and global levels—covering information exchange, identification of drivers of deforestation, transboundary forest management, and other issues. ASEAN has produced a Multi-Sectoral Framework on Climate Change: Agriculture and Forestry towards Food Security that builds on its economic, sociocultural, and political security blueprints as well as the ASEAN Integration Strategic Framework. Knowledge networks on forests and climate change, social forestry, and forest law enforcement and governance inform member states about opportunities and challenges in the forest sector. An ASEAN Forest Clearing House Mechanism provides online policy briefs on key issues.

11.2.4 Country-Level Plans for Adaptation

At present the policies and actions aimed at resilience to climate change in the Asian region are focused at the national level, with specific time frames ranging from a few years to less than 10 years. It is in the interest 362 Managing the Transition to a Low-Carbon Economy of all Asian countries to identify climate-related vulnerabilities and to prioritize adaptation measures (Rahman and Amin 2011) through national adaptation programs of action. Over the past decade it has become evident that climate change transcends national boundaries and that its consequences are regional and global. Regional policy making and national governance in the Asian region can link with global frameworks to benefit from global expertise to inform policy and assist with planning for regional mitigation and adaptation to climate change.

11.2.5 Clean Development Mechanism

The main dedicated sources of financing for mitigation at the global level include the Clean Development Mechanism (CDM) and various dedicated funds managed by the Global Environment Facility (GEF) and the World Bank. The Adaptation Fund (financed through a 2% levy on revenue generated by the CDM and through voluntary contributions) is dedicated to adaptation to climate change. Governments in many countries have also started to provide financial support for climate change mitigation and adaptation activities within their territories. These national programs and activities are the building blocks of the global collective fight against climate change. However, national and global efforts are not enough to address the climate change challenges comprehensively.

11.3 Regional Political Institutions and Financial Architecture Needed

Only strong regional cooperation oriented to tackling issues related to climate change can ensure that appropriate measures to reduce greenhouse gas (GHG) emissions will be successfully implemented. Global agreements on GHG emission reductions do not take the interactions between states within different regions sufficiently into consideration. Regional forums are well equipped to encourage suitable mitigation actions and in fact financing arrangements on climate change have already started at the regional level. More attention needs to be paid to such arrangements. Other than those offered by ADB, there are no significant financing arrangements by truly Asian institutions on climate change in the Asia region. In addition to its regular financing as a regional development bank placing increasing emphasis on climate change, ADB has several dedicated funds for financing climate change mitigation and adaptation Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 363

in the Asia and Pacific region (ADB 2009). They perform a variety of functions, including mobilizing concessional resources, catalyzing private capital, and maximizing market mechanisms. All are regional in coverage (with activities limited to Asia) and based on a mix of regional and global financing. APEC, ASEAN, and SAARC have adopted action plans on climate

change, including attempts to reduce CO2 emissions by acknowledging the importance of improvements in energy efficiency and commitment for deployment of renewable energy sources. However, most of these pledges are not specific as there is no mechanism for enforcing them. Apart from regional cooperation between states, there are also numerous international organizations supporting reductions in the carbon intensity of Asian states. Nevertheless, there is a need for a strong regional financial organization to coordinate investment in clean energy production and energy efficiency projects as, despite the many bilateral and international initiatives promoting investments in GHG reduction in Asia, they are not coordinated and often overlap.

11.3.1 Regional Institutions in Asia Involved in Climate Change Mitigation

The United Nations Framework Convention on Climate Change (UNFCCC) framework is suited to forging consensus on key issues, such as emissions targets and an equitable distribution of obligations among countries. At the regional level ASEAN, APEC, and SAARC are also interested in climate change mitigation.

Association of Southeast Asian Nations Although ASEAN still has a long way to go before it achieves the level of integration achieved by the EU, there is no better alternative for regional cooperation in Southeast Asia. ASEAN leaders have committed ASEAN to playing a proactive role in addressing climate change. The ASEAN environment ministers meet on a formal basis once every 3 years and, since 1994, have also been meeting on an informal basis annually, while the ASEAN Senior Officials on the Environment (ASOEN) meet annually and are responsible for supporting the ASEAN environment ministers in terms of formulating, implementing, and monitoring regional programs and activities. ASOEN comprises the heads of ministries, departments, or agencies who are responsible for environmental matters in their countries. ASOEN is assisted by six working groups (Figure 11.1). 364 Managing the Transition to a Low-Carbon Economy

Figure 11.1: Institutional Framework of ASEAN for Environmental Issues

ASEAN Summit (ASEAN Heads of State/Government)

ASEAN Socio-Cultural Community ASEAN Coordinating Council Council

ASEAN Ministerial Meeting on Secretary General of Environment (AMME) ASEAN

ASEAN Senior O cials on the ASEAN Secretariat Environment (ASOEN) (ASCC Department)

(Thailand) (Thailand) (Philippines) (Viet Nam) Nature Multilateral Water Costal and Conservation Environmental Resources Marine and Agreements Management Environment Biodiversity

(Brunei (Indonesia) Other (Thailand) Darussalam) Environmentally Environmental Climate Environmental Sustainable Activities (ASEAN Change Education Cities Secretariat)

ASEAN = Association of Southeast Asian Nations. Source: Letchumanan (2010).

Recognizing the importance of environmental cooperation for sustainable and regional integration, since 1977 ASEAN has cooperated closely in promoting environmental cooperation focusing on 10 priority areas of regional importance as reflected in the ASEAN Socio-Cultural Community Blueprint 2009–2015 (Figure 11.2). The ASEAN Blueprint (2009) is designed to enhance regional and international cooperation to address climate change and its impacts on socioeconomic development, health, and the environment in ASEAN member states. It is based on a mixture of mitigation and adaptation measures, based on the principles of equity, flexibility, effectiveness, common but differentiated responsibilities, and respective capabilities, and reflects the different social and economic conditions in ASEAN. It identifies 11 priority actions in response to climate change to be implemented by ASEAN member states during 2010–2015, including: Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 365

Figure 11.2: Structure of ASEAN Legislation on Environmental Issues

ASEAN Community ( )

ASEAN Economic ASEAN Socio-Cultural ASEAN Political Security Initiative for ASEAN Community (AEC) Community Community (APSC) Integration (AI)

AEC Blueprint ASCC Blueprint APSC Blueprint IAI Work Plan – (Nov ) (Mar ) (Mar ) (Mar )

. Global Environmental Issues . Human Development . Transboundary Environmental Pollution . Environmental Education . Social Welfare and Protection . Environmentally Sound Technology . Environmentally Sustainable Cities . Social Justice and Rights . Harmonization of Environmental Policies and Databases . Environmental Sustainability . Costal and Marine Environment . Natural Resources and Biodiversity . ASEAN Identity . Freshwater Resources . Climate Change . Narrowing the Development Gap . Forestry

ASEAN = Association of Southeast Asian Nations. Source: Letchumanan (2010).

• Develop regional strategies to enhance capacity for adaptation, a low-carbon economy, and promote public awareness to address the effects of climate change. • Enhance collaboration among ASEAN Member States and partner organizations to address climate-related hazards, and scenarios for climate change. • Develop a regional systematic observation system to monitor the impact of climate change on vulnerable ecosystems in ASEAN. • Conduct regional policy, scientific and related studies, to facilitate the implementation of the UNFCCC and related conventions.

ASEAN is committed to pursuing a broader approach and to taking voluntary and appropriate mitigation and adaptation measures. Technology transfer, provision of concessionary financial assistance, and capacity building are all part of its efforts to address climate change issues in a proactive and responsible manner. 366 Managing the Transition to a Low-Carbon Economy

South Asian Association for Regional Cooperation SAARC is another regional political organization in Asia with potential to influence countries within the region to take action for climate change mitigation. The sixteenth SAARC Summit in Thimpu, Bhutan in April 2010 was dedicated to the theme of climate change. The Thimpu Statement committed countries to comprehensive regional self-reliance efforts and to linking national institutions to facilitate sharing of knowledge, information, and capacity building programs in climate- change-related areas.

Asia-Pacific Economic Cooperation APEC has aspirations to become the leading regional organization and the biggest free trade market in the world. The organization is trying to address climate change mainly by increasing cooperation in the energy market (APEC Yokohama Declaration 2010). The association assists member economies to meet their climate change goals through the APEC working groups:

• Energy Working Group: informs energy policy makers, draws advice from the business community, and industry experts and collaborates with other international bodies including the International Energy Agency, the Renewable Energy and Energy Efficiency Partnership, and the Energy Charter Secretariat. • Asia-Pacific Network for Energy Technology: enables member countries to collaborate in energy research across the region, particularly in areas such as clean fossil energy and renewable energy resources. • Energy Security Initiative: comprises short-term measures and long-term policy responses to address the challenges faced by the region’s energy supply.

Another significant initiative is APEC’s Environmental Goods and Services Work Program. The APEC Trade Ministers recognized climate change as “one of the biggest challenges confronting the world” and determined to “ensure that economic growth is consistent with environmental sustainability.”

11.3.2 Regional Financial Institutions Involved in Climate Change Mitigation in Asia

The financing needs for climate change mitigation and adaptation are large. Reflecting the uncertainties associated with potential climate change scenarios and their likely impact, estimates of these needs for climate change mitigation and adaptation vary widely. The first of the Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 367

ADB funds described below covers both mitigation and adaptation, the other three focus mainly on mitigation.

Climate Change Fund (CCF) The CCF was established in May 2008 to provide grant financing for projects, research, and other activities to address the causes and consequences of climate change in ADB’s developing member countries. The CCF invests in projects that lead to a reduction of GHG emissions or climate change adaptation. It seeks to address climate change by scaling up mitigation and adaptation activities in such areas as forest and land- use management.

Clean Energy Financing Partnership Facility (CEFPF) The CEFPF was established in April 2007. It provides grant financing to ADB’s DMCs for energy security improvements and transition to low- carbon economies through cost-effective investments in technologies and practices. In addition, CEFPF resources finance policy, regulatory, and institutional reforms that encourage clean energy development.

Asia Pacific Carbon Fund (APCF) The APCF was established as a part of ADB’s carbon market initiative (CMI) in May 2007. It provides ADB’s DMCs with additional financial resources for clean energy projects. The APCF provides upfront finance for projects eligible for CDM in return for a proportion of certified emissions reduction to be generated until 2012.

Future Carbon Fund (FCF) This is a fund for projects that will generate carbon credits after 2012. The FCF will enable clean energy project developers to benefit even for post- 2012 GHG reductions, thereby inducing more investments into energy efficiency and renewable energy. It became operational in early 2009.

Poverty and Environment Fund (PEF) The PEF is a multidonor trust fund administered by ADB that promotes mainstreaming of environmental considerations, including climate change considerations into development strategies, plans, programs, and projects.

11.4 Regional Monitoring Reporting and Verifying (MRV) Systems

There is an increasing need for integrated regional systems to verify the voluntary pledges that are already in place and to plan for a better future strategy to mitigate the damaging impacts of climate change. The 368 Managing the Transition to a Low-Carbon Economy monitoring, reporting, and verification (MRV) concept was introduced within the framework of the Bali Action Plan under the UNFCCC. The Bali Action Plan foresees MRV of nationally appropriate mitigation commitments or actions for developed countries and developing countries and of financial and technical support for these commitments. When it comes to the regional MRV, the situation becomes more complex. Any such system has to be built from the bottom up. It is not possible to maintain well-functioning MRV at the regional scale if it does not operate properly at national and local levels.

11.4.1 Integrated Regional MRV Systems

A regional MRV structure could include generating a more timely picture of regional GHG emissions trends; collecting qualitative or quantitative information on what GHG mitigation actions different regions or countries are taking, e.g., in order to provide international recognition for these actions; quantifying the GHG impact of such actions (i.e. calculating the difference between performance and baseline); and identifying promising areas for future GHG mitigation action in the regional scope. While these options are not mutually exclusive, they do differ from each other, sometimes substantially. The design of any regional MRV systems will therefore depend on which of the above aims they are trying to fulfill. Agreement on which the MRV provisions will focus on will need to be made during the negotiation process. The process of carrying out MRV of mitigation actions can also vary. Countries will need to agree on such specific issues as:

• Measurement: What guidelines, rules, and best practices should be followed when estimating the impacts of measures that mitigate GHG emissions? Agreement will be needed on whether measurement or monitoring requirements should vary, for example according to the type of action. Alternatively, country- and action-specific estimation methodologies and processes could be used. • Reporting: Common reporting formats and guidelines outlining how actions are reported (which language, what units, what timing, where are reports to be collected, what should be reported and when reporting should take place) need to be established. • Verification:What types of verification body or bodies (national or international) are needed, what verification process should Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 369

be followed, how should results be reported, and should adjustments in reports on GHG mitigation be made? Agreement will also be needed on the consequences of problems raised at the verification stage.

Countries may also need to agree on some more general issues, such as whether measurement, reporting, and verification issues should be considered separately. The types of actions or commitments considered by the regional MRV can also differ (UNFCCC 2009). They can vary from “soft” actions (non-binding) to “hard” actions (binding national targets), with each presenting different MRV-related challenges. These actions can be grouped into five major categories:

• national emission targets (binding or non-binding); • other forms of national commitments or actions (e.g., GHG- intensity or energy-intensity targets); • sectoral emissions targets (binding or non-binding); • CDM and/or other crediting mechanisms; and • domestic policies and measures or other non-crediting approaches.

In order to assess the progress of different types of actions or commitments, different requirements for MRV are needed both between and potentially also within categories.

11.4.2 Challenges with Regional MRV Systems

One of the biggest issues with regional MRV systems is the transparency of data and its reliability. Another constraint is institutional capacity at the national level. Estimating a country’s emissions will require some country-specific activity data, e.g., on energy use. Obtaining such data and information on country-specific emission factors, requires both time and resources. The cost of establishing a country’s emissions inventory can vary widely, depending on the country and its economy. It will require a lot of effort and time to create a regional MRV institution and even more time to make it efficient. A broad regional consensus on the need for creating such an external institution will be needed. Most countries in Asia do not have experience of data collecting, processing, and sharing. A platform for introducing a regional MRV system in Asia could be provided by ASEAN, which has already established regional structures and is making on-going efforts to harmonize legislation. 370 Managing the Transition to a Low-Carbon Economy

There is also an opportunity for greater involvement of ADB in establishing a regional MRV scheme among its members. ADB could encourage and support its members to develop national MRVs and to try to use regional platforms to promote data collection in a transparent, consistent, and integrated way.

11.5 National Policy Actions

11.5.1 Operational Principles for Regional Institutions

Asia has in recent years taken actions to adapt to climate change impacts and to mitigate GHG emissions. Many Asian countries have developed national plans or strategies for climate change, established a ministry or agency as the central point to deal with climate change and its impact, and implemented programs to support adaptation and mitigation activities. But there are still many gaps that need to be addressed by national legislation. There is an urgent need to raise the awareness of climate change impacts and risks, incorporating climate change in development planning and policy making and creating an effective institutional framework for better policy coordination. There is an increasing need to invest more resources in climate adaptation and mitigation and to eliminate market distortions which hinder the implementation of such actions. Asian states need to strengthen international and regional cooperation in knowledge, technology, and financial transfers and to undertake more research to fill knowledge gaps on climate-change-related challenges and solutions at local levels, on their way toward sustainable development and mitigation of climate- change-related threats.

11.5.2 National Policy Measures on Adaptation to Climate Change

At the national level, the most important step for Asian economies is to establish institutions that support structural reform and to continue efforts to strengthen climate change resilience by improving adaptive capacity and taking technical and non-technical adaptation measures in climate-sensitive sectors. A country’s resilience to climate change depends principally on its adaptive capacity (ADB 2009a), which is subject to the state’s economic, social, and human development activities, and closely related to: Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 371

• income, inequality, poverty, literacy, and regional disparity; • capacity and governance of public institutions and public finance; • availability or adequacy of public services including education, health, and social protection; and

capacity for economic diversification, especially at local levels. Strengthening adaptive capacity also requires incorporating climate change adaptation in development planning. Adaptation should be considered an integral part of sustainable development and poverty reduction strategies. Many sectors have adaptation needs but water, agriculture, forestry, and health require particular attention. However, adaptation measures have suffered from ambiguous information associated with large-scale, long-term investments such as climate proofing of buildings and defensive infrastructure, and the need to coordinate large number of stakeholders. As a result, the private sector is not taking a leading role; the main measures need to be driven by public policy and government interventions. There is an urgent need for Asian governments to develop and adopt more proactive, systematic, and integrated legislation on adaptation in key sectors. Their policies need to lead toward cost-effective, durable, and long-term solutions, as well as focusing on the specific country’s circumstances in the following sectors (Brömmelhörster 2010):

• Water resources: scale up existing good practices of water conservation and management and apply integrated water management more widely, including flood control prevention, early warning flood systems, and irrigation improvements. • Agriculture: strengthen local adaptive capacity by improving public services for climate change forecasts, research and development on heat-resistant crops, early warning systems, efficient irrigation systems, and risk-sharing instruments such as insurance schemes. • Forestry: improve early warning systems and awareness- raising programs to strengthen local communities’ capacity to cope with increasing risk of forest fires due to shifting climatic patterns, implement aggressive public–private partnerships for reforestation and afforestation. • Coastal and marine resources: implement integrated coastal zone management plans, including mangrove conservation and planting. 372 Managing the Transition to a Low-Carbon Economy

• Health: focus on expanding or establishing early warning systems for disease outbreaks, health surveillance, awareness raising campaigns, and communicable disease control programs. • Infrastructure: introduce policy regulations, introducing climate proofing of transport- related investments and infrastructure.

11.5.3 National Policy Measures to Mitigate Climate Change

The Asian region plays a crucial role in global attempts to stabilize GHG concentrations in the atmosphere. While the response of the largest GHG-emitting developed economies under the UNFCCC is key to a successful global solution, Asian governments will also need to play an important role in the global solution, given that the region’s rapid economic and population growth will likely cause its GHG emissions to grow further, and because a low-carbon growth path can bring significant economic benefits. Mitigation should target land use change and forestry, energy, and agriculture. The forestry sector is one of the largest contributors of GHG’s emission in Asia, so special attention needs to be given to maintaining or increasing forest areas by implementing REDD standards and improving forest management. Reducing or preventing deforestation has the largest potential for mitigation in the short run. Asian governments should step up efforts to reduce deforestation, support reforestation and afforestation, and enhance national and provincial governance systems for sustainable forest management. These require policy reforms including:

• monitoring and controlling illegal logging, • increasing governmental rent received for the forest concessions, • lengthening the concession cycle and lease security, and • stimulating greater competition in accessing concessions.

Since forests are also home to many indigenous communities, policies must be designed to fully recognize and respect their rights and priorities, and to ensure their participation in the design and implementation of REDD policies (Yurdi et al. 2010). Mitigation in the energy sector can be achieved at a relatively low cost or even a negative net cost. Asian countries have significant Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 373

mitigation potential in both the energy supply and demand sectors (ADB 2009).

• On the supply side, the major mitigation options are policies to promote efficiency improvement in power generation, fuel switching from coal to natural gas, and use of renewable energy, including biomass, solar, wind, hydro, and geothermal resources. • On the demand side, policies are needed to reduce GHG emissions by regulating improvement of energy efficiency in the most energy-intensive sectors, such as the residential and commercial building, industry, and transport sectors.

There are many win–win mitigation options in Asia, with cost savings from mitigation exceeding expenses. Energy efficiency improvement measures fall in this category. However, there are also numerous constraints on adopting these options. These can be overcome by national legislation aimed at:

• addressing information, knowledge, and technology gaps; • reducing market and price distortions; • easing policy, regulatory, and behavioral barriers; and • resolving deficiencies in the necessary finance for investments in the energy sector

Moreover, policies to increase climate change mitigation in the energy sector have to address a prominent market distortion in the energy sector, which is present in many Asian countries; subsidies for fossil fuels and electricity generated from such fuels. Governments must gradually reduce general fuel subsidies and provide targeted subventions only to the poor and vulnerable. Given its rapid economic and population growth, Asia’s energy demand is likely to continue to expand, and new sources of energy supply will have to be addressed in the longer term. With the support of existing financial transfer and technology cooperation mechanisms, Asian governments should step up their efforts to develop and use clean, renewable, and low-carbon energy sources, as well as clean and sustainable transport systems. Governments should support the greening of energy and transportation industries by putting in place or further strengthening appropriate policy frameworks, creating appropriate financial and tax incentives, and supporting research and development. Public sector energy investment should incorporate the negative externalities of GHG emissions in cost–benefit analysis (Renewable Energy and Energy Efficiency Partnership 2008). 374 Managing the Transition to a Low-Carbon Economy

Asia has significant potential for carbon sequestration in agriculture if legislation in the following areas is adopted (IPCC 2007):

• improved crop and grazing land management; • restoration of organic soils (including peatland) that are drained for crop production, and restoration of degraded lands; • livestock management; and • manure and bio-solid management, and bioenergy use.

These measures can lead to a reduction in fertilizer and methane- related emissions, a reversal of emissions from land use change, and greater sequestration of carbon in the agro-ecosystem. However, the development and implementation of such measures in Asia has been very slow so far. Measures for reducing GHG emissions from agriculture can be explored through a combination of market-based programs, regulatory measures, voluntary agreements, and international programs. Examples of market-based programs include taxes on the use of nitrogen fertilizers, and reform of agricultural support policies. Regulatory measures could include limits on the use of nitrogen fertilizers and thus ensure the compliance of agricultural activities with environmental objectives. Voluntary agreements on better farm management practices could be promoted, alongside labelling of organic products. International programs could support technology transfer in agriculture. Corruption strongly undermines trust in the democracies of the region (Chang and Chu 2006). Bureaucratic and political elites often carry out reforms with the purpose of safeguarding their own interests and the ultimate outcome is often different from the initial plan (Cheung 2005). Another element that hinders a straightforward approach to reforms and adaptation policies is insufficient training of assigned staff. In the developing countries of Asia, reforms are usually developed by international agencies, leaving citizens outside the decision-making process and unable to understand or adopt an appropriate course of action. Sometimes reform packages are based on assumptions that are valid only for developed countries and therefore irrelevant to the developing country they are addressed to (Bowornwathana and Wescott 2008). Asian countries are diverse and approaches need to take into consideration the specifics of every country, otherwise results will be unsatisfactory. This has to take place not only at local, national, and regional levels; countries need to better understand the needs and constraints of their neighbors and be ready to make balanced compromises. Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 375

Finally, a problem regularly met in Asia is the superficial nature of reforms that are mostly conducted at a fast pace, often leading to failures because the structural improvements that are required must take place at a much slower rate.

11.6 Conclusion

Despite evidence of greater economic integration and expanding regional cooperation, Asia’s diverse geography, culture, and political norms have complicated progress toward a single regional arrangement comparable to the EU or the North American Free Trade Agreement. Countries are further divided by different religious, ethnographic, and cultural identities. Politically, they range from democracies to autocracies. Moreover, a long history of cultural rivalry continues to cast a shadow over the region. Unlike Europe, which integrated in common defense against an external threat and in the shared conviction that state rivalry must be replaced by regional cooperation, Asia does not have a natural set of organizing principles that could drive the continent toward political integration. Indeed, with Asian peace and security largely guaranteed by the US presence in Asia and the Pacific even after the end of the Cold War, neither concerns over internal friction nor over external challenges act as a sufficient catalyst for integration. A focus on the EU as a potential model for Asian integration is probably inappropriate: the conditions that would favor such a structure are not present at this time in Asia. Given the diverse threat perceptions, political norms, and levels of economic development, the process of integration in Asia is likely to remain fluid and unbalanced for some time to come. European integration was largely initiated by a top–down design by a handful of visionaries from German and French elites who shared a common vision for the future, but Asian integration is much more likely to result from a networking of multilateral cooperation from the bottom up—often in spite of rivalry and competition among the region’s leaders. Climate change is a huge challenge in Asia, not only because of the number of emitters and the contradictory national motivations for mitigation and adaptation strategies, but also because Asia is likely to be significantly affected by the consequences of climate change. Areas with high population densities, relatively low economic development, and geographical sensitivities will make it particularly difficult for Asia to deal with the impacts of climate change. The melting of the Himalayan glaciers due to global warming could cause floods followed by water 376 Managing the Transition to a Low-Carbon Economy shortages and land degradation that would affect 1 billion people. In Central and South Asia, crop yields could decrease by 30%, creating food insecurity in predominantly agricultural economies. Today, in Asia, 1.4 billion people live in low-lying regions. With rising sea levels, these populations face the threat of permanently losing the coastal land on which they reside and make their livelihoods. Combating the adverse effects of climate change is an urgent issue and the way Asia addresses the interconnected problems of energy, climate change, disaster relief, and growth will have profound implications for the region and the world. Although regional organizations have begun to serve as consensus builders on the desirability of addressing climate change, they have yet to develop much of a profile in creating common policies or response mechanisms. Because Asia does not have a single dominant institutional architecture, this consensus building role is diffused over a variety of organizations and discussion channels with different degrees of authority and varied memberships. Regional organizations have been less effective as mobilizers, and their role on climate change noticeably less concrete and operational than, for example, their role in disaster relief. If the vigor and effectiveness of regional organizations derive from their track record on bringing together officials and leaders with a common purpose, the climate change issue may help to advance that dynamic. Based on the experience of the past decade, Asian institutions are likely to intensify their consensus building role and expand their work in developing practical approaches to specific problems or sectors; however, regulatory harmonization or collective standard setting are likely to prove more difficult. Discussions of international cooperation on climate change operate at two very different levels. The one most often in the headlines is the effort to establish global norms and targets to mitigate climate change, controlling emissions, adapting to the change that is already inevitable, and paying for both mitigation and adaptation. Those efforts are the focus of the UNFCCC and of the major conferences of its member states, including the Bali conference in December 2008 and the Copenhagen conference in December 2009. Thus far, regional organizations in Asia have played a relatively small role in these negotiations, in spite of an effort by ASEAN and APEC to organize its members’ preparations for Copenhagen. The most developed regional cooperation in Asia is by ASEAN, which is on the way to achieving a degree of economic and social integration and cooperation and which also pays close attention to environmental issues that affect the wellbeing of its citizens. ASEAN could serve as a model for regional integration for the rest of the continent, which can Narrowing the Gaps through Regional Cooperation: Institutions and Governance Systems 377

learn from its successes and mistakes. SAARC, Central Asia Regional Economic Cooperation (CAREC), and the Regional Environmental Centre for Central Asia also have great potential for integrating Asian countries in regional groupings that will serve as a platform for pursuing green development and strengthen the Asian voice in the international arena. The process of integration in Asia is progressing slowly and will take its time before it can be considered successful.

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Executive Summary of the Companion Book

Asia is at a crossroads. Robust economic growth is lifting millions of people out of poverty, but is also driving resource and energy consumption to unsustainable levels. Climate change exacerbates the challenges of growth and development. The developing economies of Asia are highly vulnerable to changing climate. A global warming of the atmosphere of up to 2°C would lead to losses in high-income countries and a global loss of about 1% to 2% of gross domestic product (GDP), but Asia’s middle- and low-income countries could lose as much as 6% of GDP. Climate change is harming many economies in the region, diverting resources from development programs, and making it more difficult for people to escape poverty. Asia accounts for about 40% of global greenhouse gas (GHG) emissions and this share will rise to almost 50% by 2030 in a business- as-usual scenario. Yet some 650 million people in Asia lack access to clean fuels for cooking and heating, and millions more lack electricity. However, developing countries cannot simply follow the carbon- intensive development path taken by industrialized countries. It is estimated that, by 2050, 67% of the people in Asia will live in cities. This increasing urbanization will require a massive expansion in transportation infrastructure, urban development, energy production, and agricultural output. This is a forceful reminder that finding low- carbon solutions for Asia is neither a luxury problem nor a climate problem. It is foremost a reality that will require a new development paradigm. Low-carbon green growth is an avenue toward development that decouples economic growth from carbon emissions, pollution,

381 382 Managing the Transition to a Low-Carbon Economy and resource use, and promotes growth through the creation of new environment-friendly products, industries, and business models that also improve the quality of life. Thus, low-carbon green growth entails: (i) using less energy, improving the efficiency with which resources are used, and moving to low-carbon energy sources; (ii) protecting and promoting the sustainable use of natural resources such as forests and peat lands; (iii) designing and disseminating low-carbon technologies and business models to reinvigorate local economies; and (iv) implementing policies and incentives that discourage carbon intensive practices. How close are the emerging economies of Asia to turning their aspirations for a new development paradigm into a reality? What policies, institutions, and financial factors accelerate or inhibit a shift to resource-efficient green growth? What is the potential for the private sector, technology, financing, and regional cooperation to become drivers for future economic growth? This book aims to answer these questions by reviewing the low-carbon policy initiatives taken by Asian countries at the national, sectoral, and local levels, while assessing the achievements, identifying the gaps, and examining new opportunities for low-carbon green growth. The goal of this study is to share the experiences and lessons of several Asian countries with other developing nations and to make recommendations for actions by the countries in the region, while deepening the actions of leading economies. This book is based on the recognition that benefits from low-carbon green growth are an imperative, not a luxury, for developing Asia. Asia must also find an answer to the mounting international competition for resources— energy, raw materials, water, and fertile agricultural land—that will dominate the coming decades.

Changing Perspectives, Converging Policies, and Transformation Strategies

On the move toward low-carbon green growth, a great deal is happening in Asia. Compared to the economies of other regions, Asia has the highest rate of policy innovations and commitments to low-carbon economic development. Many countries of the region have incorporated low-carbon growth components in their national development plans to attain a better balance between the environment, the economy, and social welfare. Heavily dependent on imported resources and energy, the emerging economies of Asia have been pursuing a new, low-carbon development paradigm that is improving industrial competitiveness and Low-Carbon Green Growth in Asia: Policies and Practices 383 serving burgeoning green technology markets. The People’s Republic of China, India, and Indonesia, for example, are becoming market leaders in a variety of low-carbon technologies such as wind turbines, solar cells, electric vehicles, and biofuels, among others. Given the great potential of renewable energy sources and energy efficiency in most Asian countries, feed-in-tariffs and renewable energy portfolio standards could serve to attract investment and promote a national energy transition. Other policy innovations in industry, transportation, and urban sectors are also making low-carbon technologies affordable for many middle- and low-income countries. Asia’s policy experiences and aspirations in tackling climate change through multi-sectoral, multi-level approaches show that there are co-benefits from these approaches in the short term, as well as in the medium to long term. The following summarizes actions some countries are taking that could be rolled out across the region:

National Sector-Specific Policy Actions for Accelerating Low-Carbon Green Growth

Energy Seek cost-effective, market-based solutions for the uptake of existing technologies • Invest in reducing the cost of existing low-carbon technologies such as solar, wind, and bio-energy • Continue to focus on lowering energy intensity and improving carbon productivity by changing the energy mix away from an over-reliance on fossil fuels • Gradually remove fossil fuel subsidies, introduce true energy pricing, and promote mechanisms such as feed-in tariffs and renewable portfolio standards • Progressively amend laws in order to scale up renewable energy in a competitive market dominated by fossil fuels

Energy Efficiency Improve energy efficiency through a combination of regulations and market- based instruments • Launch top-runner programs for industrial technologies and electrical appliances • Expand energy-saving labeling programs and begin to test carbon labeling programs • Develop a focused and well-packaged regulatory system for small and medium-sized enterprises (SMEs) that integrates efficiency

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standards and targets by assisting with compliance mechanisms, including providing funds and matching grants with goals • Develop sectoral guidelines and training to achieve energy efficiency standards

Transport Develop new regulations, policies, and financing mechanisms to alter current fleet growth patterns • Introduce new performance-based targets and incentive systems, such as tax exemption for low-carbon vehicles for the transport sector • Progressively improve the fuel efficiency and pollution standards for passenger cars and light-duty vehicles • Introduce retail sales of biofuels such as ethanol in urban and rural markets • Develop a consistent framework for integrating externalities such as local air pollution and use to promote efficient and seamless multi- modal transport systems

Agriculture and Forestry Identify and implement the immediate actions needed to restore carbon sinks • Introduce new market-based incentives for restoring degraded forests and providing rural employment • Increase inspection capacity and tighten penalties for illegal logging • Scale up pilot schemes for enhancing carbon stock such as land sequestration and reduction of water and fertilizer use • Extend awareness of market-based instruments to isolated communities and poor farmers

Urban Sector Scale up coordinated policies for land use planning, urban infrastructure, and finance • Change regulations and standards in buildings that lead to the inefficient use of energy and materials • Pilot market-based mechanisms such as carbon pricing and cap-and- trade to encourage the efficient use of public resources • Encourage and provide advice on low-carbon life style choices and mentoring programs for neighborhoods • Remove barriers to mass transit networks, improving intermodality of transport and urban freight solutions

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Industry and Trade Create competitive markets focused on high value added, low-carbon products and services • Integrate low-carbon targets and objectives into central and local level industrial policy • Link industrial promotion incentives and private sector innovations to carbon performance • Reduce the tariff rate for low-carbon environmental goods and services and strengthen intellectual property regimes • Provide information and training on existing and emerging technologies, management practices, and related green business opportunities available internationally

Fiscal Identify and implement immediate actions needed to introduce market- based instruments • Pilot budgetary reforms and gradually increase energy taxes or carbon pricing • Introduce performance-based tax incentive systems for achieving sectoral emission targets • Explore innovative financing instruments and accelerate R&D support for future industries • Improve efficiency, transparency, and accountability in the financial sector by including rating programs and/or carbon credit schemes with measuring, reporting, and verification requirements

Asia’s experience across different sectors shows that technological innovation for increased resource efficiency is a catalyst for change. To encourage this change, governments should reduce the cost of technologies, support research and development (R&D), and improve education to generate low-carbon green growth. To conquer the cost barrier of new technologies, several Asian governments and industries have cooperated successfully in generating a mutually reinforcing cycle of market expansion and cost reduction. This has not only resulted in large-scale deployment of low-carbon technologies but has also provided the means for other countries to overcome cost barriers. A strong partnership between the public and private sector ensures an effective flow of financial resources to firms and households that reinforce the long-term implementation of programs organized around market-based incentives. Most of the finance required will be for investment in new or improved infrastructure. This means these public finance mechanisms 386 Managing the Transition to a Low-Carbon Economy must facilitate investment in productive capital with a long life span where costs can be amortized over the life of the assets. The key will be to link public finance mechanisms to sources of private finance suitable for low-carbon infrastructure investment. The private sector is also partnering with governments to ensure appropriate monitoring and reporting activities. Low-carbon development thus involves not just environmental policy, but also finance, trade, science, technology, governance, and other policy areas. The analysis also shows that developing Asia needs to worry not only about the effects of climate change, but also whether countries are locking themselves into a high-carbon future. Emerging Asia is growing faster than other regions of the world. The infrastructure resulting from the high growth era risks locking in carbon footprints for many years. Power plants and factories have lifetimes of between 15 and 40 years, while road, rail, and power distribution networks can last 40 to 75 years, or more. Decisions on land use and urban planning have effects that can last more than a century. Opportunities to shift from high- to low- carbon infrastructure must be seized sooner rather than later. Delaying action by a decade could increase the cost of mitigation two to five times.

Going Green as an Inclusive Growth Strategy

The outlook for developing Asia’s carbon emission growth is substantial in absolute terms. Many inefficiencies drive today’s high-carbon intensity. High-carbon energy consumption could be cut by 45% by changing lifestyle choices and improving energy efficiency in factories, buildings, transportation, agriculture, and electricity generation. Such climate-smart development initiatives would trigger investments in new technologies and create green jobs. These green jobs could employ as much as 1% to 2% of Asia’s workforce. This figure could be even higher in poorer countries because of the greater need to improve the environment and adopt more sustainable infrastructure, as well as the greater scope for increasing employment in forestry and agriculture. If countries are to achieve major benefits from green jobs, active labor market policies will be required, not least to cushion the potential impact of green growth policies on employment in high-polluting and resource-intensive sectors. Macroeconomic policies must stimulate demand while ensuring that debt-financed spending supports economic activities with high social returns. Inclusive growth remains the foremost goal for emerging Asia. Many of the great benefits of low-carbon green growth are rarely Low-Carbon Green Growth in Asia: Policies and Practices 387 quantified. Providing access to clean energy will vastly improve people’s education, employment, and quality of life—in particular, cleaner, more affordable energy for cooking will reduce the toil of women and the devastating health effects of indoor air pollution among the 600 million people in developing Asia. Lower emissions from transport will improve air quality and lead to health benefits in urban areas. Large populations in developing countries depend on climate-sensitive sectors such as agriculture, forestry, and animal husbandry: the natural resources that underpin these, such as soil, water, grazing land, biodiversity, and forests, are subject to degradation as a result of the changing climate and their exploitation for short-term benefits. There are several measures, such as low-till agriculture, afforestation, and community forest management that simultaneously reduce degradation, sustain the livelihoods of the rural poor, cut emissions, and increase forest carbon stocks.

Regional Cooperation for Seizing the Opportunities

Scientists argue that delaying climate change mitigation by 10 years would likely make it impossible to keep global warming from exceeding 2°C. Carbon dioxide emitted today will remain in the atmosphere for a century and temperatures will continue to rise for a few centuries after GHG emissions in the atmosphere have stabilized. Therefore, today’s decisions will determine tomorrow’s options. Action to limit global warming to 2°C by the end of this century will be feasible only if all countries play their part in mitigation. The international climate financing architecture currently delivers an estimated $171 billion annually to projects in developing countries, from sources including development finance institutions ($70 billion), project developers ($65 billion), corporate actors ($13 billion), and commercial financial banks ($12 billion). The private sector share of climate finance in developing countries is around 57%. However, investment of more than $6 trillion will be needed in the region by 2030 in the energy sector alone. Filling the financing gap will require all the tools at our disposal, spanning efficiency gains, reform and integration of carbon markets, and the creation of innovative financing instruments. The Clean Development Mechanism (CDM), among other carbon market mechanisms, can be termed a success, but it is still very uncertain whether it can deliver the required financial resources to developing countries because of oversupply and the low demand caused by international and national policies and financial and economic crisis. 388 Managing the Transition to a Low-Carbon Economy

As agreed at the Copenhagen Climate Change Conference in 2009, long- term funding to support climate action in developing countries should reach $100 billion annually by 2020 through various sources. Therefore, climate finance must be scaled up significantly through all possible ways and means. Financing from developed countries will be key as it is also in the global community’s interest for developing Asia to cut emissions. From the perspective of equity and historical responsibility, developed countries should show leadership and share responsibility in filling the significant financing gap. This must be done in addition to official development assistance, if growth and development are not to suffer. Effectively engaging the private sector is crucial to filling the financing gap for mitigation. The pricing of carbon through taxes or implementation of emissions trading schemes can provide strong incentives to improve efficiency as market participants seek the lowest cost abatement options wherever they occur. Setting a price on carbon will also influence the consumption and investment decisions of billions of households and firms that are consuming subsidized high-carbon fuels. As many low-carbon projects have a long payback time, governments can play a catalytic role by setting up guarantee mechanisms, risk sharing schemes, and low-carbon funds, and changing tax policies and subsidies to mitigate private investment risks. But carbon pricing alone will not generate the needed flows of technology across borders. Developing Asia and other advanced economies need to work together to embrace the challenge of diffusing low-carbon products, services, and innovations. Liberalization of trade and reduced tariff rates for low-carbon green products and services would accelerate technology transfer, and developing Asia would benefit too from the knowledge created by emissions reduction activities in advanced economies such as Japan, the Republic of Korea, and Singapore. Cooperative action in this region would be in the political interest of all governments for the following reasons. First, a more direct, region-wide push for energy efficiency, technology, investment, and deforestation is essential to add credibility to the voluntary pledges and national targets without losing economic competiveness. Second, given the scale of investment required and the deterioration of public finances in many countries, cooperation, consultation, and coordination among governments in this region can leverage private sector capital. Third, because it will take time to agree on the details to implement a global climate deal, it is important to advance with concrete actions to provide the international community with experience and lessons for increased financial and technical assistance to developing Asia. Low-Carbon Green Growth in Asia: Policies and Practices 389

Developing Asia is expected to be at the center of the global agenda on low-carbon green growth. Asia has much at stake in the fight against climate change as the region is the world’s most populous and has had high economic growth with a rising share of global GHG emissions, and parts of Asia are among the most vulnerable to looming climate risks. Nowhere are production, resource consumption, and emissions growing faster than in developing Asia. Action on the following ten key issues is crucial to achieving low- carbon green growth in Asia.

Regional Actions for Accelerating Low-Carbon Green Growth in Asia

Regional Carbon Market • Promote the links between national carbon trade schemes, which will require the creation of a regional public–private policy dialogue and framework to prepare the ground. Links will include transparent agreements and rules (for instance, measuring, reporting, and verification systems) and institutional arrangements. • Encourage investment in cross-border low-carbon energy infrastructure and transport projects.

Regional Energy Partnership • Promote a regional partnership on renewable energy, setting national renewable energy targets, and favorable feed-in tariffs and renewable energy portfolio standards. • Promote setting of national efficiency standards for a limited but critical range of energy-intensive industrial and consumer goods, and buildings. Develop energy efficiency labeling for electrical appliances, consumer products, and industrial manufacturing processes, building on work currently under way according to a mutually agreed timetable.

Private Sector Participation • Implement effective capacity development programs regionally or subregionally to help create an enabling policy and legal environment to attract private sector participation. International development institutions, national governments, and financial institutions should use risk-mitigating products (e.g., political risk guarantees and credit risk guarantees) to encourage private sector investment in low- carbon infrastructure development. • Promote a regional public–private portfolio of several large-scale integrated smart city and smart grid demonstration projects across different regulatory regimes.

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Technology Transfer • Establish a network of regional low-carbon innovation centers modeled on the Consultative Group on International Agricultural Research, to help developing countries accelerate the uptake of low- carbon technology. Regional development institutions such as ADB may play a leading role in promoting climate technology transfer and diffusion, helping countries learn from each other. • Forge a free-trade agreement within Asia for high-impact green and low-carbon technologies and services.

Finance • Encourage the phasing out of fossil fuel subsidies, using a regionally coordinated approach. This should be done as a prelude to introducing fiscal reforms that encompass a range of pricing and taxation instruments, including taxes on fossil fuels and other resources • Set up a regional platform to encourage reducing emissions from deforestation and degradation (REDD+) projects. This should be hosted by key forest nations of the region and involve the international community, regional financial institutions, civil society, and the private sector.

The full volume of the book, Low-Carbon Green Growth in Asia: Policies and Practices, can be downloaded from http://www.adb.org/publications/low-carbon-green-growth-asia- policies-and-practices-0 Managing the Transition to a Low-Carbon Economy Managing the Transition to a Low-Carbon Economy Managing the Transition to a Low-Carbon Economy Perspectives, Policies, and Practices from Asia Perspectives, Policies, and Practices from Asia Asia must be at the center of the global About the Asian Development Bank fight against climate change. It is the ADB’s vision is an Asia and Pacific region free world’s most populous region, with high of poverty. Its mission is to help its developing economic growth, a rising share of global member countries reduce poverty and improve the quality of life of their people. Despite the greenhouse gas emissions, and the most region’s many successes, it remains home vulnerability to climate risks. Its current to the majority of the world’s poor. ADB resource- and emission-intensive growth is committed to reducing poverty through pattern is not sustainable. This study inclusive economic growth, environmentally recognizes low-carbon green growth sustainable growth, and regional integration. as an imperative—not an option—for Based in Manila, ADB is owned by 67 members, developing Asia. including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, Asia has already started to move toward equity investments, guarantees, grants, and low-carbon green growth. Many emerging technical assistance. economies have started to use sustainable development to bring competitiveness to About the Asian Development Bank Institute their industries and to serve growing green ADBI, located in Tokyo, is the think tank technology markets. of ADB. Its mission is to identify effective development strategies and improve The aim of this study is to share the development management in ADB’s developing member countries. ADBI has an experiences of developed Asian economies extensive network of partners in the Asia and and the lessons they have learned. The book Pacific region and globally. ADBI’s activities assesses the low-carbon and green policies are aligned with ADB’s strategic focus, which and practices taken by developed Asian includes poverty reduction and inclusive countries, identifies gaps, and examines economic growth, the environment, regional cooperation and integration, infrastructure new opportunities for low-carbon development, middle-income countries, and green growth. private sector development and operations.