CLIMATE CHANGE PUBLIC EXPENDITURE AND INSTITUTIONAL REVIEW SOURCEBOOK © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. Cover photos from the World Bank Flickr Site. Cover design by World Bank staff Ivy Ka-Yee Lau. PREFACE The 2013 Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC AR5) advised that “warming of the climate system is unequivocal” and said that since the 1950s “many of the observed changes are unprecedented over decades to millennia.” Climate change is one of the greatest challenges of our time–it affects every country and yet progress in mainstreaming climate change into the policy-making process is patchy. Some countries’ political leaderships have put in place high-profile climate change mitigation and adaptation plans, with broad participation across government agencies and nongovernmental stakeholders, and with their central finance and planning agencies assuming a key role. In many other countries, however, climate change issues remain the preserve of specialist environmental agencies and there is no framework or mechanism by which climate change issues are systematically taken into account in national planning. This Climate Change Public Expenditure and Institutional Review Sourcebook (CCPEIR) seeks to provide practitioners with the tools and information needed to respond to the public expenditure policy and management challenges arising from climate change. It is a series of notes and supporting materials written to consolidate current research and international experience, to identify emerging practice, and to provide practical and applicable guidance for staff of central finance agencies, development agencies, environmental agencies, and international organizations working on climate change issues. While the key issues addressed in most public expenditure reviews–aggregate expenditure discipline, policy alignment, efficiency, and effectiveness–are all relevant to climate change expenditure analysis, these issues are adequately addressed elsewhere. In addition to emphasizing the importance of strengthening national systems, this Sourcebook focuses on the specific public expenditure policy and management challenges posed by climate change, such as decision making in the face of uncertain future climate conditions, expenditure planning for extreme weather and climate events, and the lack of agreed-upon budget classifications for climate-related activities. Differences in the level of knowledge and experience across the range of public expenditure policy and management issues are reflected in the chapters; this Sourcebook is intended, however, to be only the first step toward providing a comprehensive source of information that is detailed enough to provide clear and operational guidance, to help raise awareness, and to support policy dialogue in countries that are developing climate change plans. It is hoped that this Sourcebook will be continually expanded and updated to become more useful and relevant for policy makers in developed and developing countries alike. The costs of inaction on climate change are high and will be disproportionately borne by developing countries. While the costs of mitigation and adaptation may be short-term, the benefits are likely to accrue well beyond the time horizon of politicians and planners. It is imperative for both human welfare and continued economic development that growth and poverty reduction agendas go hand-in- hand with the green agenda. Climate change is an emerging and evolving issue, and it must be mainstreamed starting today. The CCPEIR Team June 2014 ACKNOWLEDGEMENTS The Climate Change Public Expenditure and Institutional Review (CCPEIR) Sourcebook was prepared by a World Bank team led by Adrian Fozzard and, in the final phase, by Erika Jorgensen. The Sourcebook team included Adrian Fozzard, Elisa Portale, Sylke Von Thadden, Leo Dobes, Murray Petrie and Arvind Nair during preparation; and Erika Jorgensen, Ivy Ka-Yee Lau, and Maria Shkaratan for final revisions and completion. Helpful comments, suggestions, and contributions were received from many reviewers, including Nataliya Biletska, Milan Brahmbhatt, Jim Brumby, Francis Ghesquiere, Stephane Hallegatte, Ari Juhani Huhtala, Auguste Kouame, Eduardo Ley Andrea Liverani, Jenni Panjunen, Apurva Sanghi, Rob Taliercio and Lorena Vinuela, and GEF staff, all of the World Bank; and Paul Steele and also Tom Beloe of UNDP. World Bank staff Philippe Ambrosi, Marc Forni and Olivier Mahul contributed to the development of the chapter on disaster risk management. Christophe Crepin and Andrea Liverani (World Bank), and Paul Steele (UNDP) contributed to the chapter on budget classification. Jane Ebinger and Wei-Jen Leow of the Bank’s CCGPT team redrafted the chapter on international public climate finance. Andrew Velthaus, Yasemin Biro, Rawleston Moore and Knut Sundstrom of GEF provided key inputs for the chapters on planning and international public climate finance. Topics and methods for the Sourcebook were discussed at a UNDP-led workshop in Bangkok in 2012, with the participation of the World Bank, the European Union, GIZ, the Republic of Korea, SIDA, OECD, DfID, USAID, UNCDF and UNEP, together with government officials from over 22 countries in Asia Pacific, Africa, Latin America and Europe. Erika Jorgensen led the team that brought the Sourcebook to completion, especially Ivy Ka-Yee Lau and Maria Shkaratan, and also Simon Davies, Eduardo Ferreira, Rachel Li Jiang and Wei-Jen Leow. Jane Ebinger provided essential guidance during the final phase as well as contributions from her team. Special thanks go to the financial support provided by the Governance Partnership Facility, which included contributions from Norway, Netherlands, Australia and United Kingdom, and the APEC Climate Change Policies Trust Fund. Vice President, PREM: Ana Revenga Sector Director, and Sector Manager, PRMPS: William Dorotinsky Task Team Leader, ECSP2: Erika Jorgensen TABLE OF CONTENTS INTRODUCTION ........................................................................................................................ 1 A. Climate Change Context ...................................................................................................................... 2 B. Purpose, Analytic Framework and Process ........................................................................................15 C. Sourcebook Scope and Structure .......................................................................................................22 CHAPTER 1. POLICY ................................................................................................................. 28 1.1. Chapter Summary ...........................................................................................................................28 1.2. Main Issues .....................................................................................................................................30 1.3. Better Informed Policy Choices .......................................................................................................39 1.4. Mitigation Policy Challenges: Energy Pricing ..................................................................................42 1.5. Mitigation Policy Challenges: Carbon Pricing .................................................................................50 1.6. Mitigation Policy Challenges: Adoption of Low-Carbon Technologies ...........................................56 1.7. Adaptation Policy Challenges: Public Investment and Private Sector Action .................................63 1.8. The Role of Regional and Local Government ..................................................................................64 1.9. The Role of the Private Sector ........................................................................................................70 CHAPTER 2. PLANNING ........................................................................................................... 72 2.1. Chapter Summary ...........................................................................................................................72 2.2. International Framework ................................................................................................................74 2.3. National Planning ............................................................................................................................80