International Support for Domestic Climate Policies in Developing Countries (Climate Policy Series)

international support for domestic climate policies in developing countries

GUEST EDITOR:

Karsten Neuhoff

VOLUME 9 ISSUE 5 2 0 0 9

International support for domestic climate policies in developing countries 435–449 Climate Policy 9(5), September 2009. Published by Earthscan: Dunstan House, 14a St Cross Street, London EC1N 8XA, UK.

KARSTEN NEUHOFF

© 2009 Earthscan All rights reserved. No part of this publication may be reproduced, stored in retrieval systems or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission from the publisher.

450–463

Climate Policy is editorially independent. The editorial administration of the journal is supported by Climate Strategies (a not-for-profit research network), the French region Ile de France and Le Centre National de la Recherche Scientifique (CNRS) in France. Orders can be placed online at www.climatepolicy.com or sent to the journal’s distributors, Portland Customer Services, using the contact details below. Institutional subscriptions for volume 9 are £449/$899/€585 (air mail extra); personal subscriptions are £125/$249/€165 (air mail extra). Post: Fax: Tel: Email:

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Policy targets: lessons for effective implementation of climate actions SARAH LESTER, KARSTEN NEUHOFF

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A history of conditionality: lessons for international cooperation on climate policy MAIKE SIPPEL, KARSTEN NEUHOFF

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COUNTRY STUDY Brazilian low-carbon transportation policies: opportunities for international support HAROLDO MACHADO-FILHO

508–516

Policy and regulatory framework for renewable energy and energy efficiency development in Ghana WILLIAM GBONEY

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Domestic climate policy for the Indian steel sector UMASHANKAR SREENIVASAMURTHY

529–543

Climate Policy is indexed in Thomson ISI Social Sciences Citation Index.

Climate co-benefit policies for the Indian power sector: domestic drivers and North-South cooperation ANOOP SINGH

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544–552

Printed in the UK by MPG Books Ltd on FSC-certified paper.

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Concentrated solar power in South Africa KATE GRANT

The Publishers acknowledge the generous support of Climate Strategies for the publication of this journal. Climate Policy is published 6 times a year (bi-monthly). Periodicals Postage Paid at Rahway, NJ. US agent: Mercury International, 365 Blair Road, Avenel, NJ 07001. POSTMASTER: Address changes to CLIMATE POLICY, 365 Blair Road, Avenel, NJ 07001.

SYNTHESIS Using intermediate indicators: lessons for climate policy JAMES CUST

ISSN: 1469-3062 (print), 1752-7457 (online) ISBN: 978-1-84407-872-1 Responsibility for statements made in the articles printed herein rests solely with the contributors. The views expressed by individual authors are not necessarily those of the editors, the funders or the publisher.

EDITORIAL Understanding the roles and interactions of international cooperation on domestic climate policies

China’s wind industry: policy lessons for domestic government interventions and international support XILIANG ZHANG, SHIYAN CHANG, RUOSHUI WANG, MOLIN HUO

565–570

OUTLOOK Twinning: lessons for a South-North climate policy context ZSUZSANNA PATÓ






 

 

 


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Editorial 435

■ editorial

Understanding the roles and interactions of international cooperation on domestic climate policies KARSTEN NEUHOFF* Department of Applied Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK

Introduction The United Nations Framework Convention on Climate Change defines the principle of common but differentiated responsibility (Art. 4.1 of UNFCCC). It is the common responsibility of all countries to pursue mitigation actions so as to achieve climate stabilization. The differentiated nature of historic responsibility, capabilities and economic situation creates a responsibility for developed countries to support mitigation actions in developing countries, for example by paying for the agreed incremental costs of climate policies in developing countries (Art. 4.3). Over the last year an inspiring and fruitful dialogue has developed, with international negotiators and policy researchers exploring options and mechanisms to facilitate this cooperation. Rather than proposing or favouring any specific mechanism, this Special Issue of Climate Policy provides bottom-up evidence from six case studies in developing countries. They explore how domestic actions in the transport, power, industry and agricultural sectors can shift those sectors to a lowcarbon growth path, and analyse the drivers and barriers for such actions. The studies then explore what type of international support is suitable to enhance the scale, scope and speed of implementation. Domestic stakeholders initiate and support these actions, not only because of their climate impact, but mainly because of non-climate benefits such as energy saving and security, and reduced local pollution levels. This is reflected in the idea of nationally appropriate mitigation actions (NAMAs), which have assumed a prominent position in the present negotiations (UNFCCC, 2009). However, other pressing needs and resource constraints limit the scale or ambition of climate policy, and might delay the implementation of NAMAs. International support can help to overcome these constraints by providing additional resources for incremental costs, technical assistance and capacity building support, and for facilitating technology cooperation. The technology, capacity building and financial mechanisms that are currently being discussed (e.g. the G77 and China proposal for an enhanced financial mechanism with the UNFCCC, in Accra in 2008) expand the scope and scale of cooperation beyond the current largest mechanism – the Clean Development Mechanism (CDM). This is crucial because, as explained below, increasing the scale of an offsetting mechanism would have major drawbacks, including rents flowing into carbon-intensive sectors rather than driving a shift towards low-carbon activities. Focusing the CDM in order to create space and not distort other cooperation mechanisms does not, however, imply that the private sector will play a smaller role in future climate cooperation. ■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 435–449 doi:10.3763/cpol.2009.0630 © 2008 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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On the contrary, the objective of international cooperation is to support domestic stakeholders in the implementation of actions and policies that they define as part of their NAMAs. This will contribute robust domestic regulatory and policy frameworks to attract private-sector investment at the scale that is necessary to tackle climate change. The private sector also plays a central role in innovation and/or the adoption of technologies within national circumstances and often assists large-scale diffusion. Growing domestic markets allows for the development of local capacities and attracts national and international technology investment and production. Domestic policies create a suitable environment for such activities. International mechanisms for technology cooperation can support governments in creating a conducive environment for these activities, including capacity building, technical assistance and financial support. This can be complemented by specific mechanisms relating to R&D cooperation or IP issues; for example, the recent proposal formulated by India on Low Carbon Innovation Networks.1 International cooperation on domestic climate policies provides institutional capacity and private-sector expertise that enables developing countries to move to a low-carbon growth path. As this path becomes more defined, and emissions trajectories become more predictable and can be regulated, it will be possible to discuss whether developing countries benefit from absolute emissions targets in the period post-2020. It is frequently argued that international cooperation that is not market-based will not be able to provide the scale of transfers that are necessary to shift developing countries to low-carbon growth trajectories. It is also debatable whether cooperation between governments can really have an impact on emissions. Both questions are clearly linked. The more effective public funds are in delivering emissions reductions in developing countries, the greater public support for the provision of public funds in developed countries will be; e.g. revenues from auctions in emissions trading schemes. Frameworks for the effective implementation of policies and actions have become increasingly robust. Three articles in this Special Issue (Cust; Lester and Neuhoff; Sippel and Neuhoff) explore the role of policy indicators, targets and incentive schemes. Indicators facilitate the monitoring of intermediate policy outcomes, international comparison of best practice, and internal management of effective implementation. Intermediate indicators for policy outcomes have become a standard tool for the definition of policy targets in OECD countries and in international development cooperation. This motivates our interest in exploring whether they can also be used to support the implementation of domestic climate policies. Using indicators for intermediate policy outcomes rather than final emissions targets avoids the uncertainty of predicting emissions reductions from transformational policies. The intermediate outcomes of policies can be observed sooner than final emissions reductions, thus accelerating the learning from initial experiences and allowing for national and international incentive schemes that provide early rewards.

Transformational domestic policies with climate (co-)benefits In this Special Issue, six case studies from developing countries explore the role of transformational policies with climate co-benefits that have significant impacts on carbon emissions. The studies were inspired by the analytic framework of sustainable development policies and measures – SD-PAMs (see Winkler et al., 2002; Bradley et al., 2005; Ellis et al., 2007) and further ideas for integrating development and climate policies (Chandler et al., 2002; Kok et al., 2008) that have informed the current proposals by the Republic of Korea in the UNFCCC discussions on NAMAs (Republic of Korea, 2009).

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To illustrate the approach, Figure 1 depicts the historic and projected global energy demand in the major sectors and the energy savings projected by the IEA in different alternative policy scenarios. The various trigger points are depicted where domestic policies can facilitate a shift to an energy-efficient development trajectory. Urban planning and infrastructure determine transport patterns and energy demand for transport. Machado-Filho (this issue) discusses how national transport policy within Brazil, city planning and targeted transport investment can create options for public transport development. It is desirable to complement ‘pull’ schemes in order to increase the attractiveness of public transport systems with simultaneous ‘push’ elements; for example, reducing the fuel subsidy and/or increasing prices for private car use. This makes the overall policy package environmentally more effective and reduces financing costs. The technology used and operational procedures shape industrial energy demand. Gboney (this issue) describes the success of a semi-governmental body in auditing industrial energy consumption in Ghana; identifying energy-saving opportunities, and supporting policy realization with capital grants. Sreenivasamurthy (this issue) illustrates the role of domestic policies for the industrial sector GHG emissions from steel production in India. Domestic policies can have significant impacts by incentivizing or administering energy efficiency; shifting production away from the inefficient coal-based direct reduced iron (DRI) process to blast furnace/basic oxygen furnace (BF–BOF) production, creating an incentive to use steel economically, and exploring the use of substitutes. Unmetered electricity access has prevented investment in, and effective use of, efficient water pumps in rural India. Singh (this issue) illustrates how public support in order to replace inefficient pumps is beneficial both for individual farmers and for the overall system, when implemented alongside electricity metering and a cost-reflective tariff structure. Effective insulation of buildings reduces energy demand for heating and cooling. Li (2008) describes how large-scale demonstration programmes are necessary in order to enable commercial

18,000 16,000 Public Transport

14,000

Transport

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Production efficiency

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Industry Savings

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8,000 6,000

Industry Household Savings

4,000

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Household and Others Efficient use

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20

20

20

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00 20

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FIGURE 1 Trigger points for policies to enhance energy efficiency (based on data from IEA, 2008)

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providers to develop the supply chain and to train staff. At this stage, regulation or other incentive schemes are required to ensure the effective insulation of all new-build or large-scale retrofit programmes. Much new-build takes place in emerging economies, and will shape their future energy demand. Any improvements in insulation practices will therefore shift the future energy demand for buildings downwards. Figure 2 summarizes the historic and projected mix of primary energy sources to meet the expected global energy demand, thus also determining the CO2 emissions from fossil fuel use. Overall carbon emissions can be further reduced using carbon capture and sequestration (CCS) for fossil fuel combustion, with substantial reductions occurring if the technology is applied to large installations in the power sector. Strategic deployment policies for renewable energy technologies are required to enable the large-scale contribution of renewables to energy supply from 2020 onward. Grant (this issue) illustrates how the procurement of an increasing share of energy from concentrated solar power plants can encourage domestic and international firms to adopt the technology and stimulate its production in South Africa. Large wind resources require the appropriate technology and network design to capture the resources and integrate them with the existing energy system. Zhang et al. (this issue) analyse the Chinese wind-power industry and point out the importance of technical cooperation and domestic policy design for the development of the industry. Singh (this issue) shows how shifting coal power stations to supercritical designs in India reduces transformation losses, and how the upgrading of transmission and distribution networks can significantly reduce transmission losses. The discussion of methods to support domestic activities in developing countries also builds on previous country case studies for sustainable development policies and measures in Brazil, China, India and South Africa (Bradley et al., 2005); China, Brazil and Mexico (CCAP, 2007); South Africa (Winkler et al., 2007); and Brazil, India, China, South Africa and Mexico (Murphy et al., 2008). Crosscountry comparisons show that, in most countries and sectors, various policies with climate cobenefits already exist (see, e.g., the WRI database on SD-PAMs, www.wri.org/project/sd-pams). The challenge is to pursue these policies faster, on a larger scale, or with a more comprehensive scope. 18,000

Extra other Concentrated solar power

16,000

Other Extra biomass

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FIGURE 2 Policies to shift to low-carbon energy provision (based on data from IEA, 2008)

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Opportunities for international support for domestic policies The country case studies illustrate that policies with climate co-benefits exist and are implemented in developing countries. Local stakeholders support these policies, due in part to the immediate development benefits unrelated to emissions reductions. In some countries, high import bills for fossil fuels and power generation shortages have been a major motivation for government energyefficiency policies, while in others, negative impacts on human health have inspired clean production laws and some transport policies. This suggests that it is easier to gain political support for domestic policies that are not primarily climate-centric, but which contribute to overall socio-economic growth and long-term improvements. These policies therefore also have additional domestic beneficiaries and supporters. Well-developed climate change policies need to be inclusive of the needs of developing countries. The country case studies analyse how international support could enhance the scale, scope and time-frames of implementation. Immediate domestic priorities such as inequality and poverty, unemployment and economic growth often precede an interest in pursuing efficiency improvements, structural reforms and, in particular, the use of low-carbon technologies and fuels. Many policies unintentionally create ‘winners’ and ‘losers’ and can only be successfully implemented where hardships for individual consumers are avoided. The example of electricity metering in rural environments illustrates how combining policies can ensure that consumers who lose from an individual policy, for example their unmetered electricity access, can benefit from a policy that allows a combination approach and can provide more efficient water pumps. For policies that drive investment and technology innovation, domestic and international firms need to have confidence in the stability of the policy (Miller, 2008). International support can serve to increase the confidence in a policy. For example, financial support for climate policy creates an incentive to maintain a domestic policy framework for low-carbon technologies and energy efficiency. Thus international cooperation contributes to regulatory stability and enables investment, for example in production facilities for concentrated solar power in South Africa. The impacts of new policies and technologies, however, are uncertain. Countries with scarce resources tend to be risk-averse and often prefer to replicate economic growth concepts that have been previously tried and tested, rather than exploring alternative options to develop low-carbon economic activities and infrastructure. International support for the costs associated with policy implementation reduces the risks for domestic policy makers, which may otherwise prevent the implementation of a policy. Successful examples of low-carbon policies in other countries, alongside the sharing of experiences and best practice of policy implementation, can also reduce uncertainties. In many instances, international cooperation will encompass a package of activities. For example, in the absence of viable economic opportunities to apply new skills, and within an unsupportive institutional setting, capacity building is not very effective. Likewise, it is unlikely that financial transfers will deliver any policies with climate co-benefits and private-sector responses if they cannot build on local expertise. Combining international cooperation with local capacity, however, can contribute to successful policy implementation.

Experience with effective policy implementation Various obstacles can interfere with the implementation of actions and policies; there are often problems even in environments where implementation structures seem to be theoretically

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Policy target applied to Input Outcome

convincing and mutually agreed. Recent experience with processes of policy implementation, as well as the opportunities emerging from international cooperation, suggest that implementation can be made more effective (1) by the use of policy indicators and targets, (2) through international incentive schemes, and (3) by ensuring inclusive policy processes. Recently, policy indicators have received increasing levels of attention. Cust (this issue) summarizes how the information provided with such indicators facilitates benchmarking to identify best practice and pursue international learning, while providing information for improved management and implementation of actions. The use of indicators has enabled policy targets to become an integral part of policy design. Amongst other examples, Lester and Neuhoff (this issue) summarize how policy targets have been used in the UK domestic context in the negotiation of UK Public Service Agreements (PSAs) between the local and central governments. Examples are also drawn from the Government Performance Results Act (GPRA) in the USA, which set targets for central administration. Policy targets are also increasingly used in international processes; including in the Poverty Reduction Strategy Papers (PRSPs) of the IMF, in the accession process of new Member States to the European Union, and as part of the Millennium Development Goals (MDGs). The vertical axis in Figure 3 shows that in most cases successful policy targets do not apply to the final outcome measure; successful examples usually also include intermediate indicators. This is beneficial, as it allows for shorter time-frames for target definition and implementation, which means that the time-lag from policy implementation to final outcome can be managed. Moving away from final outcomes, however, has the drawback of reducing the flexibility of policy choices; the closer that policy targets are linked to inputs, the more prescriptive they become for policy and low-carbon activity. The definition of policy indicators and metrics has to balance the benefits of short time-lags, which allow for effective implementation, and the flexibility provided by outcome-based metrics. A clear definition of policy targets and monitoring of the associated metrics is not only of interest for internal governance processes, but can also be used as a component of international

MDG

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FIGURE 3 Time-frames and outcomes used for policy targets Key: GPRA = Government Performance Results Act, MDG = Millennium Development Goals, PRSP = Poverty Reduction Strategy Papers, PSA = Public Service Agreements.

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cooperation. In particular, one could envisage that policy outcomes are subject to incentive schemes. For example, in the UK, local authorities are often rewarded for delivering against the policy targets negotiated with central government. Experience from international incentive schemes and the governance issues around the relevant institutions offer both positive and negative learning experiences; examples include the conditionality provisions of the World Bank and IMF, bilateral development assistance, and the EU accession process of new Member States. Sippel and Neuhoff (this issue) argue that effective schemes require a clear definition of objectives and meaningful indicators for their measurement. Effective schemes also require stringent reactions in the case of non-compliance. However, mutual interests in programme continuity and concern for the poor often limit the stringency of response. In bilateral development assistance, the strategic interests of developed countries and the range of options available for developing country partners further limit the stringency of responses. Financial incentives are now increasingly used ex-ante during the qualification process for project and programme support. Similarly, during the accession process, new Member States had to satisfy legal, institutional and economic requirements before joining the European Union. Cooperation between different public and private institutions of the respective countries contributes to improved informationsharing and technical assistance. This is illustrated in the article by Pató (this issue), which discusses the Hungarian experience of twinning cooperation with an existing EU Member State. Twinning programmes formed the basis for administrative cooperation and exchange of staff at various levels of government to enhance mutual understanding, provide technical assistance, and create a network of contacts that allowed for informal resolution of problems. The cooperation process is likely to be the most important determinant for the success or failure of policy cooperation. Only local constituencies can ensure an effective implementation of a policy, and they will only do so when there are shared objectives and a sense of ownership for the policy design. This understanding is now reflected in the design of IMF and World Bank programmes. For example the Poverty Reduction Strategy Papers build on experience in developing countries, reflecting jointly developed objectives and criteria for the success of the cooperation.

Mechanisms to provide international support Multilateral frameworks are an important pillar supporting successful climate policy implementation; inclusive approaches need to be established to ensure that all countries will receive support in implementing effective mitigation and adaptation policies. Figure 4 summarizes the different frameworks to provide international support for domestic climate mitigation activities and policies. Reasons to move beyond policy CDM, why absolute emissions targets are not yet required, and options for cooperation on specific policies during the low-carbon transition period are discussed below. The different options for a cooperation and funding framework to support domestic climate policies are not exclusive. The CDM already works in parallel with the multilateral funds of the World Bank and the Global Environment Facility (GEF), as well as initiatives by various national governments and cities that cooperate on climate topics. Several criteria can be used to select the most suitable approach towards international support for domestic policy. For example, the incremental funding required for new technologies can be defined more easily, and might thus be provided from a multilateral body. In contrast, the implementation of policies to shift transport investment and modal choice towards mass transit

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Project support (programmatic) CDM

Policy support

Emission targets

Domestic policy criterion*

Multilateral project/policy support • World bank funds funds/GEF / GEF • Using tax on aviation/shipping* Bilateral policy support • CO 2 auction revenue • National budgets* Policy CDM* • Combined with policy support** • Linked to activities (GIS+)

Targets •Absolute/intensity Absolute/intensity •Firm/no Firm/no-lose -loose •Sectoral Sectoral/country /country

FIGURE 4 Cooperation and funding framework *Not in existence. + Green Investment Schemes.

are country-specific and might benefit from close cooperation at the city level. Therefore, they are more likely to be pursued through bilateral arrangements within a wider UNFCCC framework.

Focusing on the role of the CDM mechanism The CDM subsidizes individual projects with credits that are internationally accredited, monitored and verified. This creates some local activities and some local stakeholders but contributes little towards domestic institutions to manage and implement wider climate policies. The CDM has effectively supported low-carbon investments in developing countries and has attracted the engagement of private parties to pursue new project ideas and overcome initial barriers (Michaelowa, 2008). As CDM credits are used to offset emissions of installations in Annex I countries, the mechanism does not create net emissions reductions unless targets in Annex I are defined more stringently in expectation of the use of CDM credits (Müller and Ghosh, 2008). Therefore, much of the debate on the CDM mechanism has focused on the question of whether individual projects provide additional emissions reductions relative to business-as-usual (BAU) scenarios in developing countries. This question is critical because otherwise the CDM projects could result in a net emissions increase. For the purpose of this project, more fundamental aspects of the mechanism are of concern and are described below. First, CDM credits subsidize low-carbon projects to compete in the subsidized fossil fuel energy markets of host countries. Thus energy and energy-intensive commodities remain cheap, and consumers have no incentive to use them more efficiently or shift to low-carbon alternatives. Second, all CDM projects receive the same carbon price. Figure 5 illustrates how the costs differ across mitigation options. Often large rents accrue from the difference between the carbon price and the costs of a specific mitigation project. These rents cannot be used to support other mitigation measures – an issue that is increasingly discussed in the context of proposed international emissions trading schemes. Furthermore, rents are common in markets. However, they typically accrue within a country and are at least partially compensated by taxation and redistribution policies. Such

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Energy supply Transport Buildings (elect.) Buildings (other) Industry (elect.) Industry (other) Agriculture Forestry Waste

$/t CO2 <100

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GT CO2 eq. Emission reduction potential (2030) non-OECD/EIT*

FIGURE 5 Mitigation options in non-OECD countries Source: based on IPCC (2007). *Economies in Transition.

mechanisms do not exist in international markets, and therefore rents created by public policy could undermine public support for international climate cooperation. This single carbon price also implies that CDM projects are less likely to succeed in least developed countries, where smaller project size and higher policy uncertainty increase transaction costs and reduce the attractiveness of the CDM mechanism. Third, stakeholders benefiting from the CDM mechanism have an interest in the continuation of the approach. An expansion of the CDM project-based approach must be weighed against the risk of a growing number of CDM stakeholders supporting the continuation of the CDM and delaying a shift to more integrated and effective policy frameworks. The CDM Executive Board has demonstrated how a harmonized international framework allows for the development and application of a methodology to evaluate the additionality of CDM projects. So far, however, it has been difficult to develop, under the same framework, a methodology to reward developing countries with CDM project credits for the implementation of sustainable development policies and measures (SD-PAMs). Instead of expanding the CDM methodology to create explicit linkages with policy implementation, national governments could engage in discussions on policy implementation of the project host country when buying CDM credits. Host countries are most inclined to discuss policies that allow for large-scale diffusion of cost-effective technologies, and therefore cooperation would focus on project types in sectors with low incremental costs. Private actors could, however, also buy the credits and might thus undermine the efforts of the international policy cooperation.

Internationally enhanced NAMAs Domestic climate policies have three dimensions in which they can encourage energy efficiency and low-carbon activities. First, they can change regulation and institutional structures to remove barriers for energy-efficient and low-carbon technologies and activities. Second, they can create

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markets and other stimuli to support new technologies and grow local capacity for their production and use. Growing experience and scale will reduce costs and allow for wider diffusion. Third, they can remove subsidies for energy and start to internalize carbon costs. While economically efficient, such price adjustments have to be carefully managed to avoid negative impacts on poor households. This could involve policies to reduce energy needs (insulation, energy-efficient devices) or to provide direct compensation for increased costs. International support can help domestic climate policy in these dimensions via financial transfers, technical assistance, technology cooperation, and by providing a broader framework for innovation. A successful design of international cooperation can also create incentives for the continuity of domestic policies, and thus enhance regulatory stability. Therefore, international support for domestic policies gives the confidence for increased investment by domestic and international firms. Moving towards frameworks for profitable investment, financial support for domestic climate policies covers the incremental costs of pursuing a policy. Monetary support could be linked to indicators monitoring the successful implementation of a policy. Thus policy makers are only exposed to the risk they can manage – the policy implementation – but not the more uncertain transformational impact. Whether or not a desired long-term transformation (e.g. to a public transport system) succeeds will affect the reputation of the policy maker but will have no impact for the international incentive scheme. Thus policy makers can pursue ambitious transformational policies that are necessary to shift economies to low-carbon growth trajectories. Multilateral institutions, such as the GEF, funded by a tax on CDM credits and several World Bank funds, currently pursue a mixed portfolio of actions supporting individual projects as well as wider policy frameworks and climate actions. Levelling a tax on international aviation and shipping could allow for a significant scaling up of these activities. Funds could be allocated to support investment and policy reforms in response to proposals by coalitions of public and private actors (Heller and Shukla, 2003). Multilateral cooperation offers transparency as it is based on a harmonized process for all interactions. This, however, might also restrict the flexibility of cooperation in responding to national specificities. In addition, due to the inherent complexity of international negotiations, any international framework must be uncomplicated in order to be a manageable part of the negotiation process. This creates a governance challenge for the international institutions tasked with allocating funds to cover incremental costs. Such institutions are in a position to exercise significant discretion, and as a result could be exposed to strong political pressure attempting to influence the decision-making process. For bilateral policy support, auction revenues from national emissions trading schemes or budgets in developed countries could support domestic climate policies in developing countries. The bilateral structure would allow for more flexibility in tailoring the design of such cooperation. For example, policy makers can prioritize policies in response to domestic preferences, resources, capabilities, and the size of the energy and transport systems. Bilateral cooperation also facilitates technical assistance and information-sharing across different levels of administration and privatesector actors of the respective countries. However, the experience from bilateral development assistance shows that multiple donor countries supporting a partner country often duplicates administrative burdens and results in a reduced sense of responsibility. The Paris Declaration on Aid Effectiveness (OECD, 2005) aimed to address this problem by making donors’ actions more harmonized, transparent and effective. This approach could be extended to climate cooperation; a lead partner might be selected to cooperate with a developing country, either across all policy areas or for activities in a specific

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sector. The choice might reflect geographical vicinity or other comparative advantages of the respective relationships.

Tailoring targets to the needs of countries Targets, no-lose targets and policy CDM reward developing countries for emissions reductions relative to a baseline; reductions are marked by credits that can be sold in international markets (see also Baumert et al., 2002; Samaniego and Figueres, 2002; Baron and Ellis, 2006; Schmidt et al., 2006, Ward et al., 2008). This approach can define emissions targets for the overall economy (targets and no-lose targets) or selected sectors and activities (targets, no-lose targets and policy CDM). While targets provide a clear metric for the success of domestic policies, it is unclear how effective they are in guiding policy implementation. This uncertainty is due to the time-lags between policy implementation and impact on emissions; difficulties in determining the baselines add uncertainties in emissions reductions achieved from policies (Bosi and Ellis, 2005). Absolute emissions targets create a framework for individual policy components that contribute towards delivering the necessary overall emissions reductions. Figure 6 illustrates, for two OECD regions, emissions projections from studies by the IEA. At the aggregate level, but less so at a sectoral level (Winebrake and Sakva, 2006), such studies give relatively robust projections of future baseline emissions. The biggest change occurred recently for Europe; an increasing number of climate policies have been implemented, causing projected emissions to decline. Using a robust projection, it is possible to calculate emissions reduction opportunities and set credible emissions targets. Anchored in robust institutional frameworks, targets can create strong incentives for public and private actors to manage emissions in a prudent manner. They also create clarity in 10,000

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FIGURE 6 OECD European and North American CO2 emissions and IEA business-as-usual (BAU) projections

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longer-term trends beyond the time-frame of individual policies, and allow forward-looking companies to identify emerging opportunities for low-carbon innovation. However, it is too early for most developing countries to move towards absolute emissions targets. It is institutionally demanding to translate long-term emissions targets into incentives for policy implementation. More importantly, emissions projections for developing countries are more uncertain, as Figure 7 illustrates using the example of China. The 2020 projections almost doubled between the IEA World Energy Outlook 2002 and World Energy Outlook 2007. The change can be attributed to data accuracy, expected GDP growth, assumptions on energy intensity, and improvements in modelling techniques. Large underlying uncertainties mean that it is difficult to define emissions targets. To be credible for industry and acceptable in developing countries like China, the emissions targets must be set relative to the upper level of BAU projections. The same would have to apply to no-lose targets to limit the risk of a country exceeding the no-lose target and forgoing any incentives to pursue emissions reductions. If the targets are set at such high levels, and emissions turn out to be far lower, then developing countries have access to large amounts of ‘hot air’ to sell in the international carbon market. Potentially, even a supply of more than 1 Gt/year carbon allowances from China alone would replace any emissions reduction requirements in OECD countries and thus crash the allowance price. As a large share of the uncertainty in the emissions projections of developing countries relates to uncertainties in their potentially large growth rates, some authors argue for the definition of targets relative to GDP. However, this creates many questions about GDP measurement including the valuation of products and services in countries with a strong financial incentive to inflate GDP measurements. While emissions targets are currently difficult to define for developing countries, they have several benefits for the design and implementation of national climate policies: they create the

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opportunity to converge towards a global carbon price and can create a framework for a fair allocation of environmental resources. Developing countries are unlikely to use national emissions targets before 2020. With the implementation of domestic climate policies, they can nevertheless acquire the necessary institutional capacity and experience that will enable them to graduate to a regime with absolute emissions targets in the future. Green Investment Schemes provide preliminary ideas on how financial transfers from emissions trading under absolute Kyoto caps can support, for example, insulation of the housing stock in recipient countries (Ürge-Vorsatz et al., 2007a, 2007b, 2008).

Conclusions Domestic policies are required for the long-term transformation to a low-carbon economy. The examples described in this Special Issue of Climate Policy illustrate the diversity of suitable approaches across sectors and countries. The experience from policy implementation across other policy fields suggests how policy indicators, policy targets and international incentive schemes can improve policy implementation – if they are carefully managed. International frameworks can offer this opportunity, by moving from project-based support schemes towards policy cooperation. To ensure that the necessary portfolio of policies with climate co-benefits will be pursued, all countries should outline a low-carbon development strategy and identify the actions and policies necessary to achieve development and climate objectives. Developing countries can use low-carbon development strategies to discuss financial support, and any other assistance they may require for the implementation of specific domestic climate policies, with developed countries. Anchoring discussion in the UNFCCC framework ensures transparency for monitoring and reporting by all parties. Under the current reporting framework of national communications and inventories, reporting is infrequent and focused on aggregate GHG emission measures and qualitative policy details. This only allows an estimation of policy success based on changes to aggregate emissions. As a result, the current framework is characterized by large time-lags and uncertainties. For effective cooperation on domestic climate policies, new indicators are required in order to report on the scale and scope of policy implementation and on intermediate policy outcomes, such as a modal split in transportation policies, or a change in investment volumes in low-carbon technologies. It needs to be explored how best to anchor this in the UNFCCC framework. Transparent indicators provide evidence for policy effects and are necessary in order to retain and increase political support for financial transfers from developed countries. Evidence of success also fosters support for domestic contributions to the policy scheme. Experience and success with the implementation of mitigation policies can feed back to improve decisions on the future scale and scope of cooperation. Clear indicators create ‘objective’ evidence on policy performance, which can strengthen both internal and external accountability in addition to the learning benefits from international benchmarking and exchange of best practice. The relative merits of bilateral or multilateral schemes might have to be evaluated on an individual case-by-case basis. However, it is clear that an overall international structure is important even in the case of bilateral support for domestic policies. For example, the UNFCCC could facilitate transparent monitoring and reporting of policy cooperation, in order to ensure that all parties make their pledged contributions, to protect weaker players in the bilateral setting, and – perhaps most importantly – to create a robust framework for the potentially large funding requirements for adaptation policy. The different options for cooperation can easily distract from any focused effort to coordinate emissions reductions. Therefore it will be important to clarify difficult aspects at an early stage so

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as to avoid obstacles. Such early cooperation could possibly even extend to a certain level of implementation activity. Early activity could include decisions on the volume of resources pledged by developed countries, the detail of reporting on low-carbon development strategies, and a set of shared policy indicators or policy categories to facilitate international cooperation. As developing countries might face the highest adaptation costs, an inclusive framework that also addresses their concerns about adaptation is particularly important. Developed countries could pledge resources for transfers on mitigation and adaptation; for example, a share of the auction revenue from domestic emissions trading schemes (current EU proposals), or other public funds (e.g. Norway). In addition, a levy on international aviation and shipping could create both climate benefits and additional funds (see Müller, 2008). Additional sources of finance could support multilateral funds, such as the GEF or the World Bank-led BioCarbon Fund and Forest Carbon Partnership Facility in supporting domestic climate policies in developing countries.

Acknowledgements In remembrance of Bernhard Schlamadinger, whose energy and commitment was an inspiration to all of us who had the privilege of learning from him. The authors wish to thank, without implicating, Michel Colombier, Thomas Heller, Michel Grubb, David Newbery, Harald Winkler, Subash Dhar, Jon Stern, Bernice Lee and Aaron Cosbey for many useful comments and discussions. Thanks are also due to Richard Lorch, Katherine Robinson and the many referees for their valuable input. My special thanks go to Sarah Lester, Tim Laing, Kate Grant and Jim Cust for the enthusiasm and attention to detail that made this project possible, and to Simone Cooper for careful reading of many of the papers. Financial support from the UK Natural Environment Research Council (grant TSEC2: ESRC: RES-152-25-1002) is gratefully acknowledged.

Note 1. CleanNet, a network of climate innovation centres, was referred to by Shyam Saran at UNFCCC Climate Change Talks, Bonn, Germany, 7 April 2009.

References Baron, R., Ellis, J., 2006, Sectoral Crediting Mechanisms for Greenhouse Gas Mitigation: Institutional and Operational Issues, Report COM/ENV/EPOC/IEA/SLT(2006)4, Organisation for Economic Co-operation and Development (OECD) and International Energy Agency (IEA), Paris. Baumert, K.A., Blanchard, O., Llosa, S., Perkaus, J.F., 2002, Building on the Kyoto Protocol: Options for Protecting the Climate, World Resources Institute, Washington, DC. Bosi, M., Ellis, J., 2005, Exploring Options for Sectoral Crediting Mechanisms, Report COM/ENV/EPOC/IEA/SLT(2005)1, OECD Environment Directorate and International Energy Agency (IEA), Paris. Bradley, R., Pershing, J., Schipper, L., Baumert, K.A., Dubash, N.K., Moreira, J.R., Mwakasonda, S., Ng, W.-S., Nogueira, L.A.H., Parente, V., Winkler, H., 2005, Growing in the Greenhouse: Protecting the Climate by Putting Development First, World Resources Institute: Washington, DC. CCAP (Center for Clean Air Policy), 2007, Greenhouse Gas Mitigation in China, Brazil and Mexico: Recent Efforts and Implications, International Developing Country Analysis and Dialogue, CCAP, Washington, DC. Chandler, W., Schaeffer, R., Dadi, Z., Shukla, P.R., Tudela, F., Davidson, O., Alpan-Atamer, S., 2002, Climate Change Mitigation in Developing Countries: Brazil, China, India, Mexico, South Africa, and Turkey, Pew Center on Global Climate Change, Arlington, VA.

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Ellis, J., Baron, R., Buchner, B., 2007, SD-PAMs: What, Where, When and How? Report COM/ENV/EPOC/IEA/SLT(2007)5, Organisation for Economic Co-operation and Development (OECD) and International Energy Agency (IEA), Paris. Heller, T.C., Shukla, P.R., 2003, ‘Development and climate: engaging developing countries’, in: J.E. Aldy, J. Ashton, R. Baron, D. Bodansky, S. Charnovitz, E. Diringer, T.C. Heller, J. Pershing, P.R. Shukla, L. Tubiana, F. Tudela, X. Wang (eds), Beyond Kyoto: Advancing the International Effort against Climate Change, Pew Center on Global Climate Change, Arlington, VA, 111–140. IEA (International Energy Agency), 2008, World Energy Outlook, IEA, Paris. IPCC, 2007, Fourth Assessment Report of the Intergovernmental Panel on Climate Change: Mitigation of Climate Change. Contribution of Working Group III, Cambridge, New York. Kok, M., Metz, B., Verhagen, J., Van Rooijen, S., 2008, ‘Integrating development and climate policies: national and international benefits’, Climate Policy 8(2) Special Issue: Development Policy as a Way to Manage Climate Change Risks, 103–118. Li, J., 2008, Bilateral Collaboration on Energy Efficiency in Buildings, Chatham House Working Paper, IDDRI, Paris. Michaelowa, A., 2008, Empirical Analysis of Performance of CDM Projects, Climate Strategies, Cambridge, UK [available at www.climatestrategies.org/component/reports/category/16/71.html]. Miller, A.S., 2008, ‘Financing the integration of climate change mitigation into development’, Climate Policy 8(2) Special Issue: Development Policy as a way to Manage Climate Change Risks, 152–169. Müller, B., 2008, International Adaptation Finance: The Need for an Innovative and Strategic Approach, EV 42, Oxford Institute for Energy Studies, Oxford, UK. Müller, B., Ghosh, P., 2008, Implementing the Bali Action Plan: What Role for the CDM? Oxford Institute for Energy Studies, Oxford, UK. Murphy, D., Drexhage, J., Cosbey, A., Tirpak, D., Egenhofer, C., 2008, Furthering EU Objectives on Climate Change and Clean Energy: Building Partnerships with Major Developing Economies, International Institute for Sustainable Development (IISD), Winnipeg, Canada. Republic of Korea, 2009, Crediting Mechanism for Nationally Appropriate Mitigation Actions by the Parties Not Included in Annex I of the United Nations Framework Convention on Climate Change: Proposal of Draft Text by the Republic of Korea, Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol [available at http:// unfccc.int/files/kyoto_protocol/application/pdf/koreacrediting240409.pdf]. Samaniego, J., Figueres, C., 2002, ‘Evolving to a sector-based clean development mechanism’, in: K.A. Baumert, O. Blanchard, S. Llosa, J.F. Perkaus (eds), Building on the Kyoto Protocol: Options for Protecting the Climate, World Resources Institute, Washington, DC, 89–108. Schmidt, J., Silsbe, E., Lee, J., Winkelman, S., Helme, N., Garibaldi, J., 2006, Program of Activities as CDM Projects: Implications of the Montreal Decision, International Clean Development Mechanism Dialogue, Center for Clean Air Policy (CCAP), Washington, DC. UNFCCC, 2009, Negotiating Text, Ad Hoc Working Group on Long-Term Cooperative Action under the Convention, Sixth session, Bonn, 1–12 June 2009, FCCC/AWGLCA/2009/8 [available at http://unfccc.int/resource/docs/2009/ awglca6/eng/08.pdf]. Ürge-Vorsatz, D., Harvey, L.D.D., Mirasgedis, S., Levine, M.D., 2007a, ‘Mitigating CO2 emissions from energy use in the world’s buildings’, Building Research & Information 35(4), 379–398. Ürge-Vorsatz, D., Koeppel, S., Mirasgedis, S., 2007b, ‘Appraisal of policy instruments for reducing buildings’ CO2 emissions’, Building Research & Information 35(4), 458–477. Ürge-Vorsatz, D., Tuerk, A., Sharmina, M., Feiler, J., Qiao, L., 2008, Green Investment Schemes: Maximizing their Benefits to the Climate and Society, Climate Strategies, Cambridge, UK. Ward, M., Streck, C., Winkler, H., Jung, M., Hagemann, M., Höhne, N., O’Sullivan, R., 2008, The Role of Sector No-Lose Targets in Scaling Up Finance for Climate Change Mitigation Activities in Developing Countries, Report prepared for the International Climate Division, Department for Environment, Food and Rural Affairs (DEFRA), UK. Winebrake, J.J., Sakva, D., 2006, ‘An evaluation of errors in US energy forecasts: 1982–2003’, Energy Policy 34(18), 3475–3483. Winkler, H., Spalding-Fecher, R., Mwakasonda, S., Davidson, O., 2002, ‘Sustainable development policies and measures: starting from development to tackle climate change’, in: K.A. Baumert, O. Blanchard, S. Llosa, J.F. Perkaus (eds), Building on the Kyoto Protocol: Options for Protecting the Climate, World Resources Institute, Washington, DC, 61–87. Winkler, H., Howells, M., Baumert, K.A., 2007, ‘Sustainable development policies and measures: institutional issues and electrical efficiency in South Africa’, Climate Policy 7, 212–229.

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■ synthesis article

Using intermediate indicators: lessons for climate policy JAMES CUST* Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK

What roles can metrics, particularly intermediate indicators, play in informing the design and implementation of policies and actions with climate co-benefits? While the precise definition of indicators differs across sectors and strands of the literature, performance metrics typically measure not only the final outcomes, but also inputs, processes, and output measurements of actions. Indicators frameworks have become a widespread feature of policy and project monitoring across both affluent and lower-income economies for reporting, learning and, in some cases, target- or incentive-based management. Indicators play an important and positive role in project management and policy making, even where they are not tied to explicit targets or incentive mechanisms. In particular, the use of intermediate indicators can provide early and timely reporting of progress and setbacks, allowing for policy learning and discussion of best practice across projects or programmes. Policy relevance: A successful transition to low-carbon growth trajectories depends on the ability of governments to implement actions and policies to initiate and guide low-carbon development. The experience from public and private actors in other sectors shows that suitable indicators are necessary to provide the information to manage policy implementation. In contrast, the UNFCCC framework only requires reporting on CO2 emissions (final outcomes). This raises the question of whether additional indicators are required to support policy design, implementation of domestic action and best-practice learning. It further raises questions concerning the extent to which such reporting can be generic or should be associated with specific actions, and which reporting can be harmonized internationally or needs to be country-specific. Keywords: climate policy; development; feedback; indicators; intermediate indicators; metrics; sustainable development Quels rôles peuvent jouer les métriques, en particulier les indicateurs intermédiaires, pour informer la conception et la mise en œuvre des politiques et actions à co-bénéfices climatiques? Tandis que la définition précise d’indicateurs diffère selon les secteurs et domaines de littérature, les métriques liées à la performance contrôlent typiquement non seulement le bilan final mais révèlent souvent les données d’entrée, le procédé et les conséquences quantifiées des actions. Les structures à indicateurs sont devenues une caractéristique répandue en politique et en suivi de projet à travers les économies aussi bien riches que moins riches, dans l’évaluation, l’apprentissage, et dans certains cas la gestion par objectifs ou incitations. Les indicateurs jouent aussi un rôle important et positif dans la gestion de projet et la prise de décisions, même lorsque ceux-ci ne sont pas liés à des objectifs explicites ou mécanismes incitatifs. En particulier, l’emploi d’indicateurs intermédiaires peut favoriser un suivi rapide des progrès et échecs initiaux, facilitant l’apprentissage politique et les discussions sur les meilleures pratiques à travers projets ou programmes. Pertinence politique: Réussir la transition vers des trajectoires à faible croissance carbone dépend de l’aptitude des gouvernements à mettre en œuvre des actions et politiques à fin d’initier et guider les développements sobres en carbone. L’expérience des acteurs publics et privés dans d’autres secteurs montre que des indicateurs appropriés sont indispensables pour fournir l’information nécessaire à la gestion et la mise en œuvre des politiques. A l’inverse, seules communications ou émissions de CO2 (chiffres finaux) ne sont requises dans le cadre de la CCNUCC. Ceci entraîne la question de savoir si des indicateurs additionnels sont nécessaires pour soutenir la conception des

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 450–463 doi:10.3763/cpol.2009.0632 CLIMATE POLICY © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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politiques, la mise en œuvre de l’action intérieure et l’apprentissage de meilleures pratiques. De plus ceci mène à des questions sur la mesure selon laquelle la communication devrait être générique ou liée à des actions spécifiques, quelles communications peuvent être harmonisées mondialement et lesquelles doivent être spécifiques aux pays. Mots clés: développement; développement durable; indicateurs; indicateurs intermédiaires; interactions dynamiques; métriques; politique climatique

1. Introduction The challenge of shifting towards low-carbon sustainable growth trajectories requires the effective implementation of policies and actions across developing countries. A number of actions that pursue economic growth and developmental objectives contain direct or indirect climate co-benefits. Many such policies and actions, particularly in developing-country contexts, may generate lower emissions, but only relative to some baseline, alternative policy or long-term shift in investment patterns. Although climate benefits may not be direct or immediate, successful policy implementation and learning is in the interests of all stakeholders, and can contribute to the acceleration of low-carbon development. Such co-benefits may be secondary outcomes and are unlikely to be best defined or valued by a narrow measure of greenhouse gas emissions reductions only. This article explores how the use of quantitative indicators, and in particular intermediate or short-term output indicators, can support such processes. Often seemingly well-designed policies and programmes have failed to deliver the anticipated results for a multitude of reasons, such as failure to follow up on the intentions to implement, insufficient scale or scope of incentives or funding, or unexpected barriers that prevent response by industry/consumers. Past experiences have led public- and private-sector actors to put increasing emphasis on the use of quantitative indicators to measure and manage the success of policy implementations, and to allow for subsequent learning and identification of international best practices. Indeed, the benefits of operating such indicators are manifold: they can facilitate international learning and build trust between Parties about progress towards the common goal of addressing climate change, and allow governments to monitor progress and intervene quickly to improve policy implementation, and they can enhance programme management by making implementation agencies more effective, or allowing them to be more quickly informed of problems, barriers and delays. There is renewed focus on the contribution of indicators to fulfil measurement, reporting and verification commitments of Parties under the United Nations Framework Convention on Climate Change (UNFCCC) as defined in the Bali Action Plan. The decision sets in motion the development of measurable, reportable and verifiable nationally appropriate mitigation commitments or actions, including quantified emission limitation and reduction objectives, while ensuring the comparability of efforts among them, taking into account differences in their national circumstances (UNFCCC, 2007).

A clear metric of success is in the interests of all Parties and stakeholders; creating opportunities for learning, sharing of best practice, cooperation, and policy management.

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This article reviews experiences with indicators to explore the role that they can play in informing and supporting policy actions, enhancing project and programme improvement, and generating dialogue and best-practice sharing across domains. Drawing on experiences from other indicator frameworks across a variety of countries, regions and sectors, the article discusses the lessons emerging from applications of indicator for performance benchmarks, international comparisons and domestic policy design. The article surveys indicator experiences using various forms of indicator frameworks and a variety of indicator sets, including the ‘logical framework’, ‘pressure– state–response’ and ‘key performance’ indicators. We explicitly exclude discussion of indicators linked to – or conditioned on – policy targets or incentive contracts; for a discussion of such examples see Lester and Neuhoff (2009). This article focuses instead on four areas of non-climaterelated indicator experience, where the indicators serve as intermediate benchmarks or informative metrics for policy debate, design and assessment. Indicators, as an intermediate output metric from an action or process, can be used as a tool to support policy implementation or facilitate the setting of performance benchmarks. This article draws on experiences with performance metrics and intermediate indicators across countries at the sectoral, national and international levels. This provides insights into the process by which such metrics may be selected, measured and reported. This article explores the theoretical and practical issues relating to the development, implementation and effectiveness of intermediate indicators across a variety of non-climate-change applications and sectors. Intermediate indicators can be useful as part of internal or domestic information gathering and presentation for strategy and policy learning. The use of such indicators can enable the adoption of best practice and provide a framework for learning and policy dialogue. Indicators need not be conditional on targets to generate learning and improved policy success, although they are likely to be strengthened where their design and implementation are tied to project or policy objectives. Informative and policy-relevant indicators, once successfully designed and implemented, can facilitate better policy design, ongoing assessment and updating – generic indicators are of significantly less value. The learning and performance-management benefits of quantitative indicator sets are further enhanced where data are available to stakeholders, or where indicator data are actively shared across domains.

2. Review of indicator methodology and practice Indicators are widely used across both the private and public sectors, with varying applications, terminology and conceptual frameworks. Indicators are defined by the OECD as a parameter (a property that is measured or observed), or a value derived from parameters (index) which points to, provides information about, describes the state of a phenomenon, with significance extending beyond that directly associated with a parameter value (OECD, 1998).

Indicator models and terminology vary widely by use but typically focus on some broadly defined set of inputs, outputs and outcome measures or, alternatively, pressure–state–response and impact metrics. This article focuses on usage and experience with intermediate indicators, typically short-term or intermediate output metrics, which capture some degree of insight into a process or action. Such indicators are typically observable before (or defined in different terms from) the final

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outcome or impact of an action or process (see Figure 1). Intermediate indicators are of particular interest where one wishes to learn about or improve an action or process before the final completion of said action or process. Alternatively the final impact or outcome may not manifest itself directly or immediately following some action, and thus intermediate indicators can provide project- or policy-relevant feedback, or metrics that can be tied to the incentives of specific actors within a process. Indicator methodology, at the conceptual level, typically falls under two broadly defined approaches; indicator systems and performance-based indicators. The systems view focuses on inputs, outputs and outcome/impact measures such as those captured by the ‘pressure–state– response’, ‘logic model’ or ‘logical framework’ approaches. The systems view comprises an indicator framework or hierarchy, whereby indicators are chosen to capture different aspects of a process or set of processes (see e.g. Boland and Fowler, 2000; Brignall and Modell, 2000). Performance-based indicators typically focus only on specific intermediate outcome-based indicators as a shorterterm metric within an action-relevant time-frame. Performance-based indicator applications include their use in benchmarking, performance-related pay, and for results-based management (Wholey, 1999; Heinrich, 2002; Black and White, 2004). Intermediate indicators refer to measures of activity or service provision that contribute to an overarching final outcome, whereas final outputs are the ultimate consequences and achievements of an action or service (Boyne and Law, 2005). Typically they refer to the human action, policy or response that can be measured and assessed as an intermediate step towards meeting some larger or less responsive metric. Intermediate indicators are used throughout the economy at an individual firm, sector and national policy level to measure, benchmark and incentivize performance. Intermediate indicators can take the form of both lead or lag indicators, depending on the nature of the final outcome and the intermediate outputs. Increasingly, intermediate indicators are used for outcome-based policy making, target setting or performance assessment. The design and implementation of these policy targets often suffers from a ‘missing middle’ problem, whereby the link between policy objectives and final outcome indicators is not fully established; the use of intermediate outcome indicators is required to assess progress at regular intervals.

Outputs

Inputs Input measures

Action metrics

Intermediate indicators

Outcome or impact indicators

Inputs, policies, or resources

Actions, programmes or projects

Shorter-term effects of action or output from some process

Final or long-term effects. Ultimate goals of policy or process

e.g. Public education expenditure for infrastructure

e.g. School construction programme

e.g. New school construction projects completed

e.g. Secondary school enrolment rates

FIGURE 1 A simplified illustration of the structure of indicator systems (see also Schacter, 2002; HM Treasury et al., 2003; European Commission, 2004, 2007; Boyle, 2005)

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Intermediate outcome-based indicators can reflect action or success across a shorter or more policy-relevant time-frame, allowing for continued political or financial support for programmes that may require longer investment cycles to deliver carbon reductions. This would also allow for policy adjustment or learning across time, particularly where the full benefits of interventions may be unclear. Where success is measured on a shorter time horizon, recognition and rewards for success can be better distributed across actors, whilst maintaining consistency with longer-term objectives of sustainable development. While shorter time-frames also allow for flexibility in the design of policy regimes, and thus for rapid learning from past experience, they do not allow for the final policy impact to be quantifiable. In addition, targets defined over a longer time-frame provide less structure for actual implementation. At present, only limited reporting requirements exist for quantitative climate-related indicators under the UNFCCC, while reporting requirements differ across Annex I and Non-Annex I Parties. Under National Inventory Reporting (NIR), Annex I countries are required to submit emission inventories to the UNFCCC secretariat, including all greenhouse gases. In contrast, Non-Annex I Parties provide GHG emission information through their National Communications (NC), which are submitted periodically. Flexibility in reporting has meant that coverage across different countries is variable and the reporting standards are not always consistent, limiting the scope for comparison across Non-Annex I Parties. National activity data vary even more widely, with many Non-Annex I countries reporting the lack of activity data as the critical constraint on developing complete national GHG inventories (Monni et al., 2006). Recent work on proposed policy CDMs has explored the use of quantitative measurement and targeting of policy impacts as intermediate indicators – rather than market mechanisms for overall emission reductions (Cosbey et al., 2007; Lewis and Diringer, 2007; Schmidt et al., 2008). Several options related to policy CDMs have been suggested, including the indicator requirements for socalled ‘action targets’. The discussion of indicators for target setting is beyond the scope of this article; however, the use of intermediate indicators for any such policy- and measures-based approach may be an important feature in order to capture indirect climate co-benefits from such actions. This article contributes to the discussion of quantitative indicators for use in climate policy, and in particular where intermediate indicators have been shown to play an important and positive role in policy learning, dialogue and the adoption of best practice.

3. Experiences with intermediate indicators We examine four different applications of intermediate indicators, drawing on those experiences from implementation and lessons that might be usefully applied to indicators for climate change mitigation (Table 1). In the subsequent section we evaluate these approaches and any lessons that can be drawn from them for climate policy. In public management, the use of performance indicators has been widely debated (see Boyne and Chen, 2006; Moynihan, 2006). A popular approach, developed in the environmental field, is to situate intermediate indicators within an indicator system capturing a range of inputs, outputs and outcomes and their interactions. Our first two indicator experiences fall broadly under this approach: sustainable development indicators and agri-environmental indicators. The third and fourth examples explore the use of more functional or streamlined designs based on the use of intermediate indicators for policy or process design. Here, the key performance indicators and lead indicators for use in Overseas Development Assistance (ODA) develop a framework focused on the identification and measurement of key output indicators tied explicitly to actions and measures taken by Parties.

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TABLE 1 Overview of indicator case studies Scale of

Voluntary/

Comparable

Capture co-

Purpose/

comparison/

conditional/

between

benefit (e.g.

objectives

reporting

procedural

projects,

economic

firms or

growth and

programmes

environmental factors

Sustainable

National

P

+

++

Promote co-benefits of

Development

sustainable development

Indicators

policies and highlight

(e.g. SDIs

non-economic indicators

in the UK)

affected by policies and measures

Agri-Environmental

International

P

+

++

Identify environmental

Indicators

pressures and encourage

(e.g. AEIs for

stronger environmental

CAP across the EU)

dimensions of countryside management

Key

Firm

V

++

Project-level assessment of

Performance

performance for

Indicators

benchmarking and cross-

(e.g. construction

firm learning

benchmarks in the UK) ODA and

Bilateral,

Development

Multilateral

C

++

+

To support evidence-based domestic policy design,

Indicators

encourage international

(e.g. EU

dialogue and facilitate

Special

better transparency and

Programme for

accountability in

Africa)

expenditures

3.1. Sustainable Development Indicators: experiences from the UK Sustainable Development Indicators (SDIs) have been developed in response to the rise of sustainability awareness after the Rio Summit in 1992 with the call of Agenda 1 for all nations to produce information to monitor sustainable development (UNCED, 1992). SDIs are used across the OECD and EU, and throughout all levels of the economy: local to international, intra-firm to sector-wide. In 1994, the UK became one of the first countries to adopt SDIs as part of a pilot phase in response to the 1992 Rio Summit. In 1996 a preliminary set of 130 indicators was published for discussion and consultation. The UK approach, for example, contains headline indicators, covering areas such as economic growth and air quality, with underlying core indicators covering diverse

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aspects of sustainable development concerns. The UK government makes commitments regarding improving the headline indicators and reviewing policy direction as necessary. The annual reporting and five-yearly review process draws these indicators together as part of a ‘quality of life barometer’. This gives information on how much each indicator has improved and where each one stands relative to historical comparisons (Hall, 2005).

3.2. Environmental indicators: national agri-environmental indicators in the EU In the environmental field, a wide variety of indicators and metrics have been developed in recent years, prompted by concerns about sustainability and the effects of human economic activity on the environment. These indicator efforts include the OECD environmental indicators (OECD, 1998), the UN Commission on Sustainable Development (1996), the EU agri-environmental indicators (Eurostat, 1999) and the Environmental Sustainability Index (Esty et al., 2005). We focus here on the implementation experience under the EU agri-environmental indicators. The need to consider the environmental implications of agricultural activity first entered EU policy under the ‘Single European Act’ of 1986. Since then EU Member States have implemented a range of agri-environmental programmes (AEPs) in response to EU regulations and with the shared objectives of encouraging less-intensive production, reducing market surpluses, and alleviating environmental pressures. Agri-environmental indicators (AEIs) were developed in response to concerns regarding the challenges of measuring policy success and the limitations of existing monitoring. The hope was to increase the proportion of Common Agricultural Policy (CAP) spending that was channelled through AEPs, but to justify doing so required more data on the implementation and effectiveness of such programmes. Under Agenda 2000 propositions, EU Member States have developed indicator sets broadly conforming to comparable international approaches to agricultural–environmental measurements (e.g. OECD environmental indicators).

3.3. Key performance indicators: construction industry benchmarks Key performance indicators are now widely used performance metrics for benchmarking, learning and adoption of best practice. They are used to internalize incentives, for example within firms or public-sector bodies, and also for external comparison and information exchange. As in many other countries, the UK’s construction industry has seen the introduction of key performance indicators (KPIs) as an industry standard for benchmarking performance. In the UK, the development of the key performance indicators has formed part of the ‘Constructing Excellence’ productivity programme, with the first set of indicators produced in 2000. These include client satisfaction, defects, profitability, safety and productivity.

3.4. Lead indicators in development assistance: the European Commission’s Special Programme for Africa The European Commission’s Special Programme for Africa (SPA) and the development of ‘processconditional’ poverty reduction strategy papers (PRSPs) reflects the recent trend away from ex-ante aid conditionality in favour of enhanced ‘ownership’ by aid-recipient countries and performancebased assessment of policy interventions. This has renewed interest in the role of intermediate or lead indicators, as a metric of success and as a policy tool (Adam et al., 2004). Since 1999, under the SPA of the European Commission, several new indicator programmes have been developed across aid-recipient countries in sub-Saharan Africa. While these and the PRSPs have been implemented as part of a wider move towards performance- or process-based conditionality, the focus in this article is on the experience of developing the intermediate indicators for measuring

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and monitoring development activity. See Sippel and Neuhoff (2009) and Lester and Neuhoff (2009) for more details on target-based approaches and a broader discussion of aid conditionality. In this article we limit the discussion to the lessons that can be drawn from SPA indicators for the measurement of climate policy actions.

4. Evaluation: experiences with indicator selection, design and implementation Indicators can be evaluated with regard to indicator selection, design and implementation. Nonclimate indicator experiences offer insights into the analysis of measurement in indicator systems, appropriate indicator choice and design, and implementation experience, including policy application and relative policy relevance of indicator sets. The section below identifies the key evaluative lessons to be drawn from the four case study examples; first through discussion of indicator choice and design, moving on to issues of measurement and implementation, before assessing the policy relevance and a summary of experience of indicators and metrics.

4.1. Experience with indicator choice and measurement and participation The use of indicator frameworks has become widespread across a range of fields and applications; from firm-level performance benchmarking and balanced scorecard approaches, through to local government public service agreements, up to international comparative indicators of science and technology, environmental pressures and development goals (e.g. the Millennium Development Goals). In particular, there has been a rapid growth in the use of performance metrics and linking policy to quantitative indicators (Sanderson, 2000). A lesson that emerges from indicator experiences is that the implementation of indicator systems to measure and monitor performance generates efficiency gains, improvement in performance and a focusing of efforts (even in the absence of explicit incentive- or target-based approaches). For example KPIs, such as in the UK construction industry, create opportunities for learning and internal discussion, arising from the simple measurement of key indicators, even without the explicit targeting of improvements in certain outcomes. It should be noted, however, that indicator selection plays a decisive role in determining the direction of efforts, and a poor indicator choice can generate perverse outcomes. One specific example of this is where indicator design is not closely linked to policy objectives. Experience from the EU’s use of agri-environmental indicators, for example, suggests that measuring and reporting alone can be a passive process when not tied to explicit targets or policy actions. Wilson and Buller (2001) argue that the emphasis of the EU-led AEP goals, as well as the nature of measurement indicators, has created the incentive to maintain those practices viewed as environmentally friendly, rather than to seek explicit changes. By measuring existing pressures, the application of environmental indicators in this context helped to avoid additional pressures, but thus encouraged farmers to maintain their current behaviour rather than improve techniques. The longer-term risk in this example is that agricultural de-intensification (the overarching objective) opportunities will be missed. Widespread use of indicators, for example within firms, government and international bodies, demonstrates extensive existing capacity and expertise that might be drawn upon for climate indicator selection, design and measurement. However, where this applies to developing countries, capacity and resource constraints have often implied donor-led or donor-backed measurement and data collection. For example, a major consideration in the development of poverty reduction strategy (PRS) monitoring has been how to best gather and aggregate data to produce the relative indicators. Some authors have emphasized the importance of PRS monitoring to remain

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a ‘second-tier’ process, drawing on existing data collection and sectoral reporting (GTZ, 2004). Indicators and monitoring have been used in the design of PRSPs as stated objectives and targets agreed between donor and recipient. We focus here on experience with the monitoring itself – discussion of the use of indicators as targets can be found in Lester and Neuhoff (2009). A cautionary note from the experience of indicators linked to overseas development aid, such as the SPA indicators, would imply that many developing counties may require the support of Annex I Parties to fill resource and capacity shortfalls, in particular to meet any broadening of reporting requirements of non-emission indicators. In addition to the importance of resource and capacity constraints in indicator design and measurement, experience from the UK highlights how the responsibility for collection and reporting, as well as the intrinsic incentives of the various actors, must be carefully aligned to maximize indicator accuracy and usefulness. For example, experience with KPIs in the construction industry suggests that it is important to establish capacity and clear responsibilities for selection, measurement and reporting of indicators, whether in projects, across firms or at the sectoral level. Typically KPIs are first measured and reported as an exercise in internal benchmarking. Costa et al. (2006) indicate that this can create problems for data collection, processing and analysis. The largely project-based nature of the construction industry is reflected in the design of performance indicators. As a consequence, organizational learning takes place on a project-to-project basis, through management practice, rather than through overall adjustments in company-wide production methods or objectives. Broadly, the choice and design of indicators should be carefully linked to the overarching objectives, even where they are not, or will not be, tied to performance-related incentives or targets. Indicators in the development of the performance-based conditionality approach by the European Commission were chosen based on the criteria of policy relevance, importance to economic development, and consistency with existing approaches, while meeting the requirements of ‘ownership’ by recipient countries. As a consequence, the indicators are standardized, transparent and widely measured metrics of performance across economic sectors; with those tied to performance-based conditionality situated proximate to policy actions, but without imposing specific policy design (i.e. impact indicators only). The intermediate indicators were chosen narrowly to cover health and education, and to be linked directly to the evolution of poverty (Adam et al., 2004). Intermediate indicators allow actionable and updatable measures of progress, success or performance. The measurement and reporting of indicators is typically a useful first step towards improved project or policy management. The development and implementation of indicator systems can generate dialogue and learning about the measured actions. In turn, the measurement of actions and processes can inform debate and even shift discussions; such as around the role of environmental management under the Common Agricultural Policy. Indicator evaluation is important for policy relevance, and intermediate indicators act as useful proxies for policy, programme or project success by offering timely feedback and allowing adjustment or redesign of implementation as well as learning and adoption of best practice in future policy iterations.

4.2. Experience with indicator implementation, policy impact and learning benefits Indicators, as intermediate measures of project and policy outputs or deliverables, can have strong positive impacts on performance and success. Furthermore, the use of intermediate indicators offers distinct advantages over alternative qualitative approaches to accounting for performance and policy outcomes. The application of intermediate indicators can deliver learning and management benefits even where they are not tied to targets or incentive schemes – the act of measuring alone can move forward dialogue and action. This section explores the evidence from

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our four examples and the supporting literature, looking at the value of intermediate indicators, first as a learning tool, then in policy dialogue, and finally even in the absence of explicit targets, as a measure of policy success or programme completion. Implementation of shorter-term outcome-based metrics or intermediate indicators can often be a positive step towards stronger evidence-based management, policy design and improvement, and performance-based incentives. The experience with intermediate indicators has allowed greater learning through feedback processes, and adoption of best practice through measurement of comparable efforts. Indicator sets often help clarify the links between economic and other noneconomic dimensions, accelerating quantification of such aspects or integration into cost–benefit analysis. Linkage of policy discussion and indicator design can help subsequent indicators support or influence policy direction and success. The experience in the UK with SDIs demonstrated that indicator choice was an integral part of the process; the choice and design of indicators were integrated with, or proceeded by means of, strategy discussions. This allowed indicators to inform and reshape policy, rather than merely measure what was done (Hak et al., 2007). However, the true value of the chosen indicators is dependent on their relevance and immediacy. The experience with SDIs has been characterized by a rising popularity in their use across public and private sectors, yet an ‘implementation gap’ between the indicators and policy actions persists. This implementation gap further restricts the capacity for such indicators to influence economic activity in adopting sustainable practices. However, there remains a large potential for SDIs to influence policy making (IISD, 2005) in the same way as it has already influenced policy discourse. Nevertheless, the policy-guiding value of SDIs depends very much upon their continuous improvement and, where necessary, the rejection of unworthy indicators (Lawn, 2004). Intermediate indicators offer proximity to policy choices while also aligning with decisionmaking time-frames, in a way that longer time-frame outcome measures, or qualitative interim assessments may be incapable of doing. Indeed, intermediate indicator choice has been shown to allow alternative policy strategies to be pursued while remaining consistent with indicator informativeness of intermediate outcomes. For example, AEIs in the EU have played an important role in the recent development of AEPs, particularly under the CAP. Their introduction was motivated by a need for better measurement and assessment of AEPs, with the accompanying motive of thus facilitating increasing emphasis on AEPs as a share of agricultural support under the CAP. The very act of measuring has been shown across the indicators case studies to be a useful one; but with the AEIs they helped inform, and ultimately shift, the debate from intensive agriculture to an increasing emphasis on environmental stewardship and countryside management. The enhanced reporting of outcome indicators for agri-environment programmes has allowed for a measurement of overall policy objectives. It should be noted, however, that where not accompanied by more granular or focused intermediate output metrics, such outcome indicators can be misleading and of limited policy relevance. Examples include the widespread decline in potential nitrogen loading in the soil, as measured by the nitrogen soil surface balance indicator (OECD, 1999). For certain countries, such as Hungary, this reduction in nitrogen surplus is particularly large due to the collapse in agricultural support levels and market transition, rather than as an outcome of AEPs themselves. Again this highlights the challenge presented by headline ‘outcome’ indicators that are distant from actual behaviour or policy design. While there is little doubt about the importance of reducing such indicator levels, the policy insights generated from a trend in this indicator alone are severely restricted. Even where indicators are not tied to explicit performance incentives or targets, they can provide a valuable and powerful tool for evidence-based management and benchmarking. This can generate

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learning and dynamic improvements at the project or programme level. A strong example of the power of non-incentive-based metrics is drawn from the use of key performance indicators, in this case from the construction industry in the UK. Firms in the UK were generally receptive to cross-firm comparison for learning and best practice generated by participation in KPI frameworks. Indeed, the formation of ‘clubs’ for benchmark comparisons proved one of the most effective aspects across construction KPIs in the UK, and also across Chile and Brazil (Costa et al., 2006). The key drawback identified by the authors was a firm’s tendency to copy successful managerial practices rather than understanding the principles and concepts involved in those practices. Furthermore, they emphasized the need for firms to use the benchmarks more for internal analysis across time, rather than for comparison across competitor firms. It should be noted, however, that the policy or performance impact of intermediate indicators, particularly where they are not directly linked to outcomes or targets, does not always generate the improvements envisaged. The experience of countries implementing poverty reduction strategy (PRS) monitoring has been mixed. Indicator choice and proximity to policy goals have often been poor. The 2005 review of PRS (IMF and World Bank, 2005) noted that specifying clear targets, for which data are available, and identifying intermediate indicators remains particularly challenging for some countries and that many PRSs would benefit from a more explicit link between indicators, targets and the policies needed to achieve them. The sequencing and coordination of monitoring has faced challenges, along with the practical difficulties of data collection, further compounding the lack of evaluation and analytical capacity available to many PRS countries. Governments in most countries are monitoring results as a requirement, and results are not being used to adjust strategies or to enhance accountability for performance (World Bank, 2004, p. 17).

5. Conclusions for climate policy indicators Experience from the use of intermediate indicators in non-climate-related areas has strong implications for climate policy; such indicators can play a valuable role in the implementation of projects or policies with climate co-benefits, facilitating learning, performance management and policy dialogue. The use of intermediate indicators allows for the measurement of non-emissionspecific outputs that may be of greater policy relevance, reflect the multiple objectives of a policy action, or which can serve as a proxy for longer-term or indirect emission outcomes. For policies and measures with climate co-benefits, the measurement and reporting of actions can increase policy success while improving policy or programme performance and accountability. Furthermore, such indicators may better facilitate international dialogue, learning and cooperation, where actions and measures with development objectives, and only indirect or partial emission-mitigation objectives, can be measured, reported and supported. Indeed the focus of Non-Annex I mitigation efforts are likely to be centred on growth-enhancing policy action with climate co-benefits. Where, globally, 1.6 billion people remain without basic electricity infrastructure, and industrial processes require modernization and efficiency improvements, there exist opportunities for significant efforts to promote development while avoiding both excessive additional GHG emissions and technological ‘lock-in’ through SD-PAMs. Intermediate indicators can be useful as part of internal or domestic information gathering and presentation for strategy and policy learning. They provide shorter-lag feedback on policy interventions, processes or actions, allowing for updating in design, benchmarking and learning.

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Furthermore, the complexity of effective structural changes requires policy synergies over a longer time horizon. Agricultural indicators in Europe provide an example of where the evolving design of indicators has provided a timely and quantitative evidence base to support the transition from production subsidies towards more sustainable policies and practices. Evidence from indicator systems applied elsewhere suggests that informative indicators can help policy dialogue, process design and performance improvements. Experience with key performance indicators supports the view that the use of such indicators can enable the adoption of best practice and provide a framework for learning and policy improvement. Indicators need not be conditioned on targets to generate learning and improved policy success, although they are likely to be strengthened where their design and implementation is based on project or policy objectives. Informative and policy-relevant indicators, once successfully designed and implemented, can facilitate better policy design, ongoing assessment and updating – generic indicators are of significantly less value. The learning and performance-management benefits of quantitative indicator sets are further enhanced where data are available to stakeholders, or where indicator data are actively shared across domains. It should be noted, however, that a wider use of intermediate indicators for policies and programmes with climate co-benefits could impose additional burdens on resources and monitoring capacity in developing countries. It may be appropriate for Annex I countries to support the resource and capacity requirements faced by developing countries. Significant experience and capacity exists in indicator design and implementation, especially across all sectors of industrialized economies. While resource and capacity challenges persist in many developing countries, political and institutional experience and acceptance is widespread. Performance indicators are an everyday part of project management for firms, agencies and public-sector bodies, not least in developing countries, where donor actions are invariably tied to performance metrics of some kind. The cost of measurement and defining the roles and responsibilities in measurement and reporting can be critical to the overall success and uptake of an indicator framework. However, where real learning or performance benefits can be pursued, evidence suggests that widespread voluntary uptake by firms, sectors or governments can be possible. Experience shows us that metrics should be appropriate, relevant, selective, simplified and outcome-oriented, and are able to capture cross-cutting outcomes. While this article does not put forward any specific recommendations regarding the framework for use or design of intermediate indicators to measure climate-related policies and programmes, the experiences reported here strongly support the development of appropriate indicators to support policies in the relevant national contexts. Furthermore, it may be important to encourage international cooperation and capacity building to help developing countries meet the burden of extensive data collection.

Acknowledgements Financial support from the UK Natural Environment Research Council (grant TSEC2: ESRC: RES-152-25-1002) is gratefully acknowledged.

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Boland, T., Fowler, A., 2000, ‘A systems perspective of performance management in public sector organisations’, International Journal of Public Sector Management 13(5), 417–445. Boyle, R., 2005, Civil Service Performance Indicators, Discussion Paper, Institute of Public Administration, Ireland. Boyne, G.A., Chen, A.A., 2007, ‘Performance targets and public service improvement’, Journal of Public Administration Research and Theory 17(3), 455–477. Boyne, G.A., Law, J., 2005, ‘Setting public service outcome targets: lessons from local public service agreements’, Public Money and Management 25(4), 253–260. Brignall, S., Modell, S., 2000, ‘An institutional perspective on performance measurement and management in the ”new public sector”’, Management Accounting Research 11, 281–306. Cosbey, A., Murphy, D., Drexhage, J., 2007, Market Mechanisms for Sustainable Development: How Do They Fit in the Various Post-2012 Climate Efforts? IISD, Winnipeg, Canada [available at www.iisd.org/pdf/2007/ market_mechanisms.pdf]. Costa, D.B., Formoso, C.T., Kagioglou, M., Alarcón, L.F., Caldas, C.H., 2006, ‘Benchmarking initiatives in the construction industry: lessons learned and improvement opportunities’, Journal of Management in Engineering 22(4), 158–167. Esty, D.C., Levy, M., Srebotnjak, T., de Sherbinin, A., 2005, Environmental Sustainability Index: Benchmarking National Environmental Stewardship, Yale Center for Environmental Law and Policy, New Haven, CT. European Commission, 2004, Evaluation of Socio-economic Development: The Guide Publication, European Commission, Brussels. European Commission, 2007, Indicators for Monitoring and Evaluation: An Indicative Methodology, Methodological Working Paper 3, European Commission, Brussels. Eurostat, 1999, Towards Environmental Pressure Indicators for the EU, Environment and Energy Paper Theme 8, Luxembourg. GTZ, 2004, National Monitoring of Strategies for Sustainable Poverty Reduction/PRSPs, Main Report, Vol. 1, German Agency for Technical Cooperation, Eschborn, Germany. Hak, T., Moldan, B., Dahl, A.L., 2007, Sustainability Indicators: A Scientific Assessment, International Council for Science, Scientific Committee on Problems of the Environment, Island Press, Washington, DC. Hall, S., 2005, Sustainable Development Indicators: Making Them Work, Department for Environment, Food and Rural Affairs, London [available at www.sustainabilityindicators.org/about/Meetings/TorontoMeeting/ Stephen%20Hall%20-%20Canada%20ISIN.pdf]. Heinrich, C., 2002, ‘Outcomes-based performance management in the public sector: implications for government accountability and effectiveness’, Public Administration Review 62(6), 712–725. HM Treasury, Cabinet Office and National Audit Office, 2003, Setting Key Targets for Executive Agencies: A Guide, HM Treasury, London. IISD, 2005, Sustainable Development Indicators: Proposals for a Way Forward, prepared for the United Nations Division for Sustainable Development (UN-DSD), International Institute for Sustainable Development, Winnipeg, Canada. IMF and World Bank, 2005, 2005 Review of the Poverty Reduction Approach: Balancing Accountabilities and Scaling Up Results, Report, September 9, International Monetary Fund and World Bank, Washington, DC. Lawn, P., 2004, ‘The sustainable development concept and indicators: an introductory essay’, International Journal of Environment and Sustainable Development 3(3/4), 199–234. Lester, S., Neuhoff, K., 2009, ‘Policy targets: lessons for effective implementation of climate actions’, Climate Policy 9(5), 464–480. Lewis, J., Diringer, E., 2007, Policy-Based Commitments in a Post-2012 Climate Framework, Working Paper, Pew Center on Global Climate Change, Arlington, VA [available at www.pewclimate.org/docUploads/PolicyBased%20Commitments%20in%20a%20Post-2012%20Climate%20Framework.pdf]. Monni, S., Lapveteläinen, T., Pipatti, R., Gönfors, K., 2006, Post-2012 and Reporting, Background Paper to COP-12, Nairobi. Moynihan, D., 2006, ‘Managing for results in state government: evaluating a decade of reform’, Public Administration Review 66, 77–89. OECD, 1998, Towards Sustainable Development Indicators, OECD, Paris. OECD, 1999, OECD Agri-Environmental Indicators, Information Paper, OECD, Paris. Sanderson, I., 2000, ‘Evaluation in complex policy systems’, Evaluation 6(4), 433–454. Schacter, M., 2002, Not a ‘Tool Kit’: Practitioner’s Guide to Measuring the Performance of Public Programs, Institute on Governance, Ottawa, Canada.

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Schmidt, J., Helme, N., Lee, J., Houdashelt, M., 2008, ‘Sector-based approach to the post-2012 climate change policy architecture’, Climate Policy 8, 494–515. Sippel, M., Neuhoff, K., 2009, ‘A history of conditionality: lessons for international cooperation on climate policy’, Climate Policy 9(5), 481–494. UN Commission on Sustainable Development, 1996, Indicators of Sustainable Development: Framework and Methodologies, United Nations Commission on Sustainable Development, New York. UNCED, 1992, Rio Declaration on Environment and Development, United Nations Conference on Environment and Development, Rio De Janeiro. UNFCCC, 2007, Bali Action Plan, Decision -/CP.13: 1. Wholey, J.S., 1999, ‘Performance-based management: responding to the challenges’, Public Productivity and Management Review 22(3), 288–307. Wilson, G.A., Buller, H., 2001, ‘The use of socio-economic and environmental indicators in assessing the effectiveness of EU agri-environmental policy’, European Environment 11(6), 297–313. World Bank, 2004, The Poverty Reduction Strategy Initiative: An Independent Evaluation of the World Bank’s Support Through 2003, World Bank Operations Evaluation Department, Washington, DC [available at http:// lnweb18.worldbank.org/oed/oeddoclib.nsf/24cc3bb1f94ae11c85256808006a0046/6b5669f816a60aaf85256 ec1006346ac/$FILE/PRSP_Evaluation.pdf].

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■ synthesis article

Policy targets: lessons for effective implementation of climate actions SARAH LESTER*, KARSTEN NEUHOFF Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK

Policy targets are used to improve the implementation of domestic and international actions, in a national context and in international frameworks. But how can domestic and international experience be useful for climate policy? Case studies point to the value of defining policy targets more broadly than final outcomes, which in the case of climate policy are CO2 emission reductions. There is a need for robust policy instruments to reduce uncertainties and accelerate feedback loops within appropriate time-frames. A recurring theme is the importance of engagement across all stakeholders to create ownership and confidence in the ability to deliver against policy targets. Policy relevance: Policy targets have a potential role in domestic implementation and international cooperation for three reasons. First, it is difficult to define absolute emission targets for developing countries. Experiences from other sectors’ use of indicators reveal the positive impact of measures beyond final outcomes as the basis for the definition of targets. Second, the main impact of many of the actions and policies that enable transition to a low-carbon growth trajectory is typically witnessed in the long term. If only long-term targets are used, then it is difficult to recognize and support early contributions. This could result in less effort being dedicated to the initial actions that are necessary to achieve long-term change. Defining policy targets more broadly can improve recognition and delivery of initial actions. Third, for effective international cooperation, Parties need to be able to define the level of their contribution towards achieving the joint objective. Experience from other sectors is useful to inform the selection of the most suitable indicators and ensure effective delivery. Keywords: climate policy; indicators; international support; outcome-based indicators; performance measurement; policy frameworks; policy implementation; policy targets Les objectifs de politique sont utilisés pour améliorer la mise en œuvre d’actions intérieures et internationales, dans des contextes nationaux et cadres internationaux. Mais de quelle manière l’expérience intérieure et internationale peut-elle être utile à la politique climatique? Des études de cas montrent la vertu de définir des objectifs de politique de manière plus générale que l’unité finale, qui, dans le cas de la politique climatique, est la réduction des émissions de CO2. Des instruments politiques robustes sont indispensables à la réduction des incertitudes et à l’accélération des interactions dynamiques selon des délais appropriés. L’importance de l’engagement est un thème récurrent à travers toutes les parties prenantes dans l’instauration d’autorité et de confiance dans l’aptitude à réaliser les objectifs politiques. Pertinence politique: Les objectifs de politiques ont un rôle potentiel dans la mise en œuvre intérieure et la coopération internationale pour trois raisons. D’abord, il est difficile de définir des objectifs d’émissions absolus pour les pays en développement. L’expérience avec l’utilisation d’indicateurs dans d’autres secteurs révèle l’effet positif qu’a l’emploi de valeurs supérieures au bilan final, en tant qu’assise pour la définition d’objectifs. Ensuite, la plupart des actions et politiques ont comme effet principal de faciliter la transition vers une trajectoire à faible croissance carbone en particulier à long terme. Si seuls des objectifs à long terme sont utilisés, les contributions initiales sont difficiles à identifier et à stimuler. Ceci pourrait avoir comme effet la réduction des efforts consacrés aux actions initiales, celles-ci étant indispensables à la réalisation des transformations à long terme. Une définition plus générale des objectifs de

■ *Corresponding author: E-mail: [email protected] CLIMATE POLICY 9 (2009) 464–480 doi:10.3763/cpol.2009.0633 CLIMATE POLICY © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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politique peut améliorer l’observation et l’exécution d’actions initiales. Enfin, dans un but de coopération internationale effective, les différentes parties doivent être en mesure de définir leur niveau de contribution à la réalisation de l’objectif commun. L’expérience issue d’autres secteurs sert à influencer la sélection d’indicateurs les plus appropriés et garantir une exécution effective. Mots clés: cadres de politiques; indicateurs; indicateurs fondés sur les résultats; mesures de performance; mise en œuvre de politiques; objectifs de politiques; politique climatique; support international

1. Introduction Many technologies and public- and private-sector actions are being discussed that could facilitate the shift towards low-carbon growth for countries. But even if they receive political support within the country, and possibly internationally, it is by no means certain whether they will eventually be implemented and or if they will be effective. This article reviews recent experience with the use of policy targets in domestic and international frameworks to enhance the reliability and effectiveness of implementation of technologies and actions. The basis for the definition of any target is a suitable metric. In climate discussions regarding final outcome measures (typically CO2 equivalent emission reductions), the metric is used to evaluate the success of an action. However, the literature on policy targets illustrates that many other indicators can be, and have been, used to improve the implementation of actions. The different types of indicators have been characterized in the parallel article by Cust (2009), while this article focuses on the experience with such indicators for the definition of policy targets. We were initially interested in exploring what criteria to use to select the most suitable indicators. But the literature points to many other dimensions that are often more important for the design of policy targets that contribute to the effective implementation of actions. As a result, this article summarizes these issues in relation to climate policy. We explore this experience using both international and national case studies: the Millennium Development Goals (MDGs) of the UN and the Poverty Reduction Strategy Papers (PRSPs) of the IMF offer the most prominent international experience. The Government Performance Results Act targets implemented by the USA, and the UK Public Service Agreements (PSAs) and Best Value Performance Indicators (BVPIs) provide insights into the role of targets for domestic policy. This article acknowledges the importance of the debate regarding the performance delivery of targets, moving beyond it to discuss the lessons provided by case study experiences. Although the success of the case studies debated here is questioned within the literature, the examples provide useful frameworks for the implementation of domestic and international action. The findings suggest that experience with effective domestic implementation can help to inform climate policy. The lessons from national and international country policy regimes analysed in this article suggest the importance of partnership and accountability in the production of valuable policy. Domestic policies offer the flexibility in design and implementation needed to create new governance frameworks, connecting local development needs with emissions reductions to create co-benefits for government. The literature suggests that although outcome-based targets are used by the majority of case studies, there is a need for these to be complemented by strong policy frameworks and other relevant input, process and output targets. An integrated approach is required for effective domestic policy implementation: governments need to implement robust and comprehensive policy frameworks to internalize carbon externalities and provide regulatory and market structures for

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the transition towards a low-carbon economy. Appropriate time-frames, and links to technological, financial and capacity-building measures will be necessary for successful climate policy.

2. Literature review The use of targets for policy and performance management has been analysed in many academic disciplines. Discussions cover various aspects of performance management: the process of setting and negotiating targets, defining metrics and measurement indicators, and institutional implementation. In order to structure the discussion on how to approach the many areas that have used policy targets, we discuss the type of indicator used to set the targets. Indicators are defined as the variables used to measure progress towards goals (HM Treasury et al., 2001; Boyle, 2005). The different terminologies that are used for indicators are reflected in Figure 1. For example, performance indicator structures are usually characterized with input, output and outcome measures (Boyle, 2005). Alternatively resource, result and impact indicators can be defined (European Commission, 2004, 2007).

2.1. Indicators and broader experience with policy targets Input and resource indicators are often used within financial budgeting. These targets provide information on the financial and material means to implement programmes (Boyle, 2005). An example of an input indicator for financial systems would be the percentage of over- or underpayments for a particular service. Input indicators often suffer from problems of perverse incentives, as individuals involved in monitoring and evaluation of the schemes have incentives to game the system by spending additional resources that might not contribute to the final outcome. Output indicators have often been used by local domestic governments to structure the flow of resources to deliver policy; for example the first phases of the UK Local Public Service Agreements (Local PSAs) and US Government Performance Results Act targets used this structure. Later phases of the UK Public Service Agreements tended to use outcome-based indicators, which focus on delivered outcomes and effects. Outcome-based indicators can be divided into two measures: intermediate and final. Intermediate outcomes refer to measures of service provision that contribute to an overarching final outcome, whereas final outcomes are the ultimate consequences and achievements of public organizations (Boyne and Law, 2005).1 Outcome targets have also been used within financial planning and performance budgeting to link expected results to budgets, normally focusing on outcome measurement used in connection with the analysis of performance data against predefined standards (Rose, 2003). Results are produced through the use of incentives, both by creating incentives for individuals within organizations and by motivating them to maximize organizational performance (Andrews, 2005). International poverty reduction programmes and development policies have also moved towards outcome-based targets measuring access to health care and education. Monitoring also often focuses on income poverty measures, with poverty-gap, inequality and intensity indicators dominating (Booth and Lucas, 2004). The drawback of using indicators that are based on outcomes for the design and implementation of policy targets is the ‘missing middle’ problem, where the link between policy objectives and final outcome indicators is not fully established. Hence the use of intermediate output indicators is required to assess progress at regular intervals (Holvoet and Renard, 2007). Also, final impact/ outcome data are difficult to obtain and often fail to provide the regular feedback on performance

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Inputs: resources, raw materials for production process

Outputs: finished products and services

Activities: actions completed to create final product

Boyle (2005)

European Commission definition

Input

Activity

Output

Output

Resource

Outputs: finished Resources: financial and products and services organizational information used to provide services Inputs: resources used to aid delivery

UK government Delivery chain definition

Resources

Inputs

Outcomes: direct or indirect impacts as a result of an output

Final outcomes: : long-term effects and ultimate goals

Intermediate outcomes: : direct to short-term to medium-term effects

Intermediate outcome (short-term)

Result

Results: immediate benefits of targets Outputs: Final products of the organization

Outputs

Intermediate outcome (medium-term)

Final outcome

Impact

Impacts: further benefits beyond direct and immediate consequences Outcomes: Final impacts and consequences of government activity

Outcomes

FIGURE 1 The structure of performance indicators (adapted from Schacter, 2002; HM Treasury et al., 2003; European Commission, 2004, 2007; Boyle, 2005)

required to learn from successful implementation (Booth and Lucas, 2004). As a result, the majority of schemes use some combination of input, process, output and outcome indicators. More broadly, there has been evaluation of the use of targets within different sectors. For example, there is substantial work within the public administration literature on domestic government reform in developed countries; Results-Based Management (RBM) is particularly common within the UK public service (HM Treasury et al., 2001, 2003; Rose, 2003). The variety of schemes using indicators and targets within UK government is vast; however, the majority of evaluation discourse focuses on the use of outcome-based targets tied to strong implementation frameworks. Another key area that has employed indicators and policy targets is international development and aid, which increasingly incorporates a results-management paradigm that structures the development programmes of international financial institutions. There is substantial use of policy targets by the IMF, the World Bank, OECD and other multilateral and bilateral agents, through the use of RBM and monitoring and evaluation systems (Holvoet and Renard, 2007). Multilateral

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and bilateral performance monitoring have been covered more thoroughly in the literature than space within this article allows.2

2.2. Climate change targets and mechanisms This article aims to use experience in other sectors to inform climate policy questions. The definition of emission targets has become an intrinsic part of many policy processes (e.g. Committee on Climate Change, 2008) and policy instruments such as the European Union Emissions Trading Scheme (EU-ETS). But most of the discussion focuses on the relative merits of absolute emission targets (Baumert et al., 2002), sector no-lose targets (Ward et al., 2008) or intensity and dynamic targets (Peterson, 2008).3 While targets provide a clear metric for the success of domestic policies, it is unclear how effective they are in guiding policy implementation. Uncertainty due to the timelags between policy implementation and impact on emissions creates difficulties in determining baselines, and uncertainties in emissions reductions achieved from policies (Bosi and Ellis, 2005). In addition, large uncertainties in underlying emission drivers such as economic growth and sector development, data uncertainty, and questions about governance structures have led to the rejection of absolute emission targets for developing countries – at least for the present. This article therefore explores the experience from other sectors, discussing whether, in addition to emissions, targets could be linked to other indicators so as to facilitate the effective implementation of action. This has obvious attractions in the context of developing countries that will most probably not have absolute emission targets in the near future, but is also an attractive policy option for developed countries. For example, the European Union has committed to a target of 20% renewables in the final energy mix by 2020, including a trajectory and the requirement of additional reporting by Member States at frequent intervals (European Commission, 2008).

3. Framework of international and national and policy targets: case studies Six case studies are outlined below: Table 1 provides broader contextual information about the examples chosen. The Millennium Development Goals (MDGs) provide international, quantitative index targets, using multiple measurement indicators (White and Black, 2004). The MDGs are a synthesis of the International Development Goals outlined by the OECD Development Assistance Committee in 1996 and the declaration adopted at the Millennium Summit in New York in 2000. The time period of the programme is 15 years, from conception in 2000 to completion in 2015. Policy is structured by overarching qualitative goals; for example reducing child mortality. To structure these goals, a quantitative target is supplied; e.g. reducing by two-thirds, between 1990 and 2015, the under-5 mortality rate. These quantitative targets are measured using a set of indicators; such as under-5 mortality rate (UNDP, 2003). The MDGs provide absolute targets on a global scale. Implementation of the MDGs is the responsibility of individual nation states. Under such frameworks, countries are often able to set and monitor their own targets; therefore individual country regimes, in connection with multilateral and bilateral partners such as the PRSPs and DFID PSAs, will be the focus of this article. Poverty Reduction Strategy Papers (PRSPs) are participatory-process international development instruments, which focus on the global reduction of poverty through the implementation of national plans (Booth and Lucas, 2004). PSRP monitoring is largely outcome-based, with some consideration given to intermediate outputs and the completion of important input targets (World Bank, 2002). The PRSPs represent a form of ‘process conditionality’ advocated by the World Bank and IMF; the development of the negotiated agreements aims to reconcile government-led

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TABLE 1 Outline of target policies Target policies

Target area

Commitment period

Focus of target

Millennium Development

Poverty, education, health,

2000–2015

International development

Goals (MDGs)

environmental sustainability,

Poverty Reduction Strategy

Poverty targets

global partnership targets Papers (PRSPs)

Usually 3-year time-frame

International development.

(medium–long term),

Poverty reduction/

reviewed annually

social welfare

Public Service Agreements

International aid and

Usually 3-year time-frame

International development.

(PSAs)

poverty targets. National

(medium–long term),

Bilateral aid/poverty

Department for

targets towards the MDGs

reviewed after 3 years

reduction

Local Public Service

Education, employment,

3 years

Agreements (Local PSAs)

health and social services,

International Development Framework: (DFID PSAs) National development/ social welfare

crime and drug reduction, recycling, transport targets Government Performance

Government performance

5-year strategic plan.

Government performance

Results Act (GPRA)

targets

Annual performance plans

management

Best Value Performance

Internal government

Pilot phase until 2000.

Government performance

Indicators (BVPIs)

performance targets

Since then 3-yearly

management

performance satisfaction surveys

consultative planning with traditional compliance mechanisms (Booth et al., 2001). Indicators are usually quantitative, monetary measures based on income or consumption, with occasional non-monetary measures (for example, education poverty can be analysed using data on the level of literacy) being included, dependent on their suitability. The types of targets set and indicators used are reliant on the country strategy paper; the ODI Report (ODI, 2001) analyses experiences from Kenya, Mali and Tanzania, among others. The UK Public Service Agreements (PSAs) were introduced in 1998 by the Comprehensive Spending Review. The review set PSAs for 18 government departments and 5 cross-cutting priorities, which linked outcome-based targets to departmental aims and objectives (HM Treasury et al., 2001). Recent changes to the PSA structure mean that 30 PSAs now reflect collective government priorities. The UK DFID Public Service Agreements (Department for International Development PSAs) provide one example within the PSA structure. The DFID PSA outlines an overall aim – to eliminate poverty by achieving the MDGs – alongside eight development objectives for reducing poverty (e.g. increasing effective response), and five targets: for example, increasing primaryschool enrolment. DFID measures are international targets reflecting the UK government’s commitment to the MDGs through cooperative work with multilateral, bilateral and business and international organizations. The UK Local Public Service Agreements (Local PSAs) are quantitative targets usually placed in a three-year time period. The majority of Local PSA targets are absolute targets, based on individual

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indicators; for example by 2004, 75% of 14-year-olds will achieve level 5 in English (DTLR, 2001). While many local governments use national targets as a guide for these percentages, Local PSAs are designed using negotiated agreements between local and national government. The US Government Performance Results Act (1993) provides national government targets for the various agencies and cabinet departments (GAO, 1999). Each department is required to produce a five-year strategic plan and annual performance and accountability reports, which combine to set and document target progress. The majority of targets set annual goals (either progressive or absolute) for individual metrics, while the indicators are single statistical measurements (for example the number of initial disability claims processed). The targets provide short-term aims for action, while the indicators measure the progress towards achievement. The policy environment is structured by top-down enforcement through regulation by central government, while the performance plans are produced by individual agencies, allowing some bottom-up inputs. The UK government also sets internal policy targets intended to improve the quality and costeffectiveness of public services. The Best Value Performance Indicators (BVPIs) require all English local authorities to collect data on public satisfaction with government services; for example, satisfaction with complaints handling and open space provision (Department for Communities and Local Government, 2007). The ‘Best Value’ surveys and targets are internal local government performance measures, similar to the GPRA targets described above, but which monitor public satisfaction with service provision by local authorities rather than national agency performance. BVPIs have now been incorporated into the UK national monitoring frameworks. Policy targets differ in their objectives and implementation. Table 2 summarizes these dimensions for the various policy regimes considered. ‘Placement of target’ describes the governance level that the target has been set at. Policy targets can be produced through top-down, bottom-up, or participatory-process governance regimes.

4. Implementation frameworks Implementation experience varies vastly across the case studies; schemes employ different frameworks and time-scales to measure targets. To structure implementation, the aspirational long-term targets of the MDGs are implemented by national governments, often through the use of annual performance plans. This creates realistic implementation time-frames and captures donor contributions to the MDGs. Monitoring the progression of the MDGs is the joint responsibility of the donor countries and their implementation partners in developing countries. A specific example of the implementation of the MDGs through donor agency performance measurement is supplied by the UK Department for International Development (DFID). The DFID PSAs have undergone three phases of implementation. Under the new 2008–2011 framework, each PSA has a lead department, while other departments participate in delivery of the agreement. Delivery agreements outline the vision, measurement, and delivery strategy required for implementation. DFID’s contribution to international development is structured at the strategic level by the MDGs and at the national level by legislation. PRSPs are designed to allow donor organizations to align their assistance with national programmes; the recipient countries are required to develop strategy documents which are then reviewed by the Bretton Woods Institutions (Roberts, 2005). The PRSP process appears to be most successful when implemented alongside budget management reforms and Medium-Term Expenditure Frameworks (MTEFs). In monitoring the implementation of PRSPs, both quantitative

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National

satisfaction surveys

three-yearly performance

Indicators (BVPIs)

Pilot phase until

annual reports

2000. Since then

Local

and agencies

departments

Government

agencies

bottom-up approach of strategic plans and

and government

framework and

Performance

Best Value

Act (GPRA)

outcomes

Results and

resource targets

process and

Outputs and some

Outcome-based.

Cabinet departments

Performance Results

approach of broad

National

(Federal legislation)

Government

Mix of top-down

and output.

Mostly outcome.

(Local PSAs)

Local

Some throughput

Participatory process

National

Local Public

Service Agreements

in implementation)

example: DFID PSAs

measures

Mostly outcome

(participatory process

Top-down

Agreements (PSAs)

Public service

framework (some

Outcome-orientated input monitoring)

UK-led/National

National

measures

Mostly outcome

Input/output indicator

(PRSPs)

process

Participatory

Country-led/National

Poverty Reduction

Strategy Papers

in implementation)

Goals (MDG)

National

level

Top-down

Implementation

Participatory process

Placement of target Top-down/Bottom-up/

(participatory process

Global

Governance level

Development

Millennium

Case study policy

TABLE 2 Summary of the nature and placement of policy targets in institutional framework

surveys

Direct satisfaction

Direct

Dependent on LPSA

departmental objectives

strategic plan,

delivery partner

Dependent on

national PRSP

Dependent on

Direct

Direct/indirect indicator

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national PRSP

Dependent on delivery

partner strategic plan

Dependent on LPSA

Public Service Agreements

(PSAs) example: DFID PSAs

Local Public Service

Dependent on agency/

department target

Dependent on department

target

Government Performance

Results Act (GPRA)

Best Value Performance

Indicators (BVPIs)

Agreements (Local PSAs)

Dependent on

Poverty Reduction

Absolute

Combination

Absolute/Relative/

Strategy Papers (PRSPs)

Goals (MDG)

Millennium Development

Case study policy

and accountability

Non-binding, public satisfaction

Binding legislation

Dependent on LPSA

partner strategic plan

Dependent on delivery

national PRSP

Dependent on

Binding

Binding/non-binding

Nature of target

low satisfaction indicated by public

subject to local review/voluntary monitoring if

Public accountability and satisfaction surveys,

level in the budget

performance dictates programme funding

Legal requirement to produce strategic plans,

administrative requirements

pump-priming grants, relaxation in

level in the budget, reward schemes,

Performance dictates programme funding

User engagement reliant on DFID leadership

DFID responsibility for delivery.

bilateral commitment and budget management

conditionality for recipient countries,

Non-legal instruments, form of process

of the Millennium Declaration

International commitments – adoption

Enforcement method

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Policy targets 473

and qualitative data are used; participatory poverty assessments, geographical information systems and household surveys are common methods. The UK Local PSAs are negotiated agreements between local government authorities and the national government. Local authorities are incentivized through the provision of reward schemes, pump-priming grants, and relaxation of administrative requirements for achievement of outcomes (DTLR, 2001). A Local PSA commitment creates a quasi-contract, which can result in financial rewards (Boyne and Chen, 2007). Local PSAs are implemented as a form of payment by results. This approach is based on the UK’s ‘Best Value’ regime, which requires local authorities to produce annual plans linking their current performance to financial support. The convergence of these two approaches is due to the evaluation of best practice and reform of the broader PSA and performance management structures within the UK. The US GPRA targets are designed to develop the performance management of national government through strategic plans and annual performance reports. Federal departments are required to prepare strategic plans that span six years, and annual performance plans outlining performance goals and targets. These annual plans serve to monitor performance over the previous fiscal year, as well as setting future targets. The responsibility for evaluating past performance and setting new goals rests with federal managers and officials.

5. Evaluation of case studies: critical issues A review of the theoretical literature and evaluative work surrounding the case studies suggests that various features are critical for the implementation of policy targets. Targets can also be evaluated by their delivery success rates and trajectories; however, this article focuses on the institutional aspects of target regimes. 4 The overview in Table 3 summarizes the literature on the case studies. 5 We use ‘x’ to denote significant and ‘xx’ to denote very significant themes.

5.1. Suitable indicators as the basis for targets One constituent feature of successful target design that stands out in the literature is the use of outcome-based targets.6 The use of outcome-based indicators is becoming increasingly common; for example, while only 11% of PSA targets used outcome measures in 1998, this figure rose to 67% over the following years, with the remainder of the indicators consisting of throughput, output quantity and output quality measures (Rose, 2003). International target policies focus on strategic development outcomes; for example reducing poverty and increasing education standards globally. Outcome-based targets often suffer from the ‘missing middle’ problem, whereby the link between policy objectives and final outcome indicators is not fully established; therefore the use of intermediate outcome indicators is required to assess progress at regular intervals (Holvoet and Renard, 2007). For the PRSPs, the gap between public service activities and overarching policy objectives is a particular problem. The GRPA targets also fail to link activities with outcomes, as these targets focus on performance outcomes while excluding processes and outputs (Radin, 2000). National-level and internal efficiency government targets, GPRA indicators, Local PSAs and BVPIs all make use of outcome-based targets. The literature surveyed in Table 3 supports these ideas, suggesting that although outcomebased targets are of importance in creating successful target policies, linking inputs, processes and outputs comprehensively to final outcomes creates a robust target regime.

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x

x

xx

xx

xx

xx

x

xx

x

x

xx

x

x

xx

xx

GPRAs and BVPIs

targets

Local PSAs

xx

Internal government

National government targets

government implementation

National: local-level or internal

Criteria for success and failure. Key: x = significant within the literature, xx = substantially significant; dark grey = important at all levels, medium grey = importance varies across implementation levels, light grey = important only at national or local level.

imposed targets

Paternalism of state government,

Linked to existing local management systems

Ability of local institutions to define targets.

partner strategies

and harmonization of donor and

Establish inspiring vision vision. Alignment

x

xx

Targets believed to be achievable achievable.

Credibility of targets

xx

Accountability in implementing targets

budget processes x

x

commitment/incentives. Link to national

xx

x xx

xx

Use of reward schemes. Financial

xx

xx

PRSPs and PSAs

MDGs

xx

Donor–partner targets

International targets

International: country-level implementation

Sense of ownership of targets

partnership approach and local involvement

Participatory assessments, importance of

cross-cutting outcomes

input/process measures, capture

Need for outcome-based targets targets: some

Summary evaluation of targets and indicators

understanding of commitment and targets

Design, implementation, institutional aspects,

TABLE 3 Evaluation matrix (adapted from Lester and Neuhoff, 2008)

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Ownership The evaluation literature in Table 3 suggests that a sense of ownership and understanding of rationale of targets by all stakeholders that are involved is important for the overarching topdown commitment required for international development aid. In theory, the PRSPs are based on the principles of ownership and partnership. Driscoll and Evans (2004) suggest that local engagement is characteristically higher in the ministries and institutions where coordination is based; however, it is difficult to develop a deeper sense of ownership at the subnational, regional and district tiers of organization. Country studies reinforce this finding, suggesting that although the PRSP processes are based on external initiatives, commitment and institutionalization are key factors in the successful development of PRSPs. In combination with difficulties created by the incentive structure of development aid, this undermines local action and compliance procedures of donors.

Partnership The importance of participatory processes was frequently reported at the international MDG and PRSP level as well as for local government targets. The nature of partnership agreements varies between the case studies. A minimalist concept of participation was adopted by many countries during the production of the first PRSPs; however, participation has increased rapidly through the use of consultation-type activities, as seen from the second generation of papers (Guthrie, 2008). For Local PSAs, partnership refers both to cooperation between local government and public/private organizations, and cooperation between central and local government. Local strategic partnerships can also help to identify local development priorities, which are then incorporated into second- and third-round PSAs. It has been suggested that participation is more about process than content; participation is a ‘mechanism’ that can be employed to produce good governance, efficiency and equity (Guthrie, 2008). Fostering the correct institutional environment for practising participation requires political leadership and government–civil society engagement. For example, BVPIs require partnership between local authorities and both public- and private-sector organizations; the flexibility produced under this cooperation has enabled innovation in service delivery. The difficulties of partnership cooperation are numerous, but ‘paternalism’ by national government appears to particularly affect the success of agency-level targets, such as the Local PSAs, and internal government efficiency targets such as the GPRA targets and BVPIs.

Accountability Accountability has several dimensions: striving for results, demonstrating performance, using resources efficiently, and compliance with policies and laws (Laverge, 2002). A new understanding of accountability as encouraging ‘a greater degree of pro-activity, greater flexibility in assessing and managing risks, greater appeal to partnership, and greater focus on results’ (Laverge, 2002, p. 5) is aligned with the discourse on international development aid targets, while a more traditional understanding of accountability as responsibility for results is akin to the management structure of local government reform. A systems perspective is suggested by the first understanding, implying that accountability loses its relevance for intermediate-level national government targets due to the fact that outcomes are not usually attributed to the actions of a single party, but are considered to demonstrate the effectiveness of the results framework. This may help to explain why the literature suggests that accountability is crucial for international country-level targets and the internal government

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efficiency targets, but not for national government targets such as the Local PSAs – who feel no direct responsibility for policy delivery. As one moves towards a final outcome, it is more difficult to attribute accountability within the policy process. It is possible to hold national governments accountable for policy, but to create responsibility throughout the policy delivery chain it is important to tie outcomes to processes: the use of intermediate outcome and process indicators can help to achieve this.

6. Discussion and relevance to climate policy Experience from national and international policies that utilize targets can inform climate policy. The findings of the review of the evaluation literature suggest that a sense of ownership and understanding of the rationale of targets is important both at the international and state level. Commitment at the local level is fundamentally important for the achievability of targets. Local engagement is characteristically higher in institutions where coordination is based: it is more difficult to develop a deeper sense of ownership at the subnational, regional and district tiers of organization. The case studies provide evidence to support this finding, suggesting that although the PRSP processes are based on external initiatives, local commitment and institutionalization are key factors in the successful development of targets. Institutions and capacity building are particularly important in fostering national and local ownership. The broader lessons for climate policy will now be discussed.

6.1. Final outcome-based targets and the ‘missing middle’ problem The challenge for the transfer of this experience to climate policy is likely to revolve around the definition and use of appropriate indicators (Cust, 2009). Up to this point, much of the focus in climate discussions has centred on the role of measured emissions reduction outcomes, either in absolute values or relative to a baseline. There is, however, considerable scope for broadening the discussion to explore intermediate indicators for policy actions with emission mitigation co-benefits. Indicators for the successful implementation of policies offer a range of advantages, particularly for developing countries, such as shorter time horizons for both implementation and feedback for policy design. Targets can be defined at different stages of delivery, dependent on the policy objective: it is possible to have input, output, intermediate and final outcome indicators for targets. Outcomebased targets are employed by almost all policies examined in this article; however, they are typically combined with input and process targets for successful implementation. Otherwise the implementation of policy targets suffers from the ‘missing middle’ problem, whereby the link between policy objectives and final outcome indicators is not fully established. Intermediate output indicators allow for an assessment of progress at regular intervals (Booth and Lucas, 2002; Holvoet and Renard, 2007). In many sectors, final impact/outcome data are difficult to obtain and often fail to provide the regular feedback on performance required in order to learn from successful implementation (Booth and Lucas, 2004). This might also apply to sector-specific emissions data. Further work could investigate the creation of intermediate process- and outcome-based targets for climate policy; for example, within energy efficiency projects, renewable technology innovation chains and the energy sector. The use of such measures could help to address the ‘missing middle’ problem with regard to policy objectives, capturing cross-cutting issues, and enabling progress to be assessed at regular intervals. Linking intermediate and final outcome targets also avoids ineffective use of resources and allows the capture of long-term policy goals.

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6.2. Time-frames In addition to learning from the ‘missing middle’, problem, which restricts the effectiveness of policies due to a mismatch of policy objectives and outcomes, climate policy may also be informed by the implementation of targets over particular time-frames. Time-frames for target setting vary with each case study. The MDGs are defined for a 15-year horizon, the PRSPs and Local PSAs are usually implemented for 3 years, while GPRA targets are measured on an annual basis. Targets defined over a longer time-frame provide less structure for actual implementation; for example, it is difficult to break down large overarching climate emissions reductions targets into smaller implementation steps due to the complexity of the carbon abatement problem. Lessons can be drawn here from the GPRA targets, which function under a dual measurement framework using a six-year overall time-frame complemented by annual milestones and monitoring. This framework provides policy stability for national government action, while incentivizing action to produce annual monitoring of specific change. However, while shorter time-frames allow for flexibility in the design of target regimes and thus facilitate rapid learning from past experience, often they do not allow for the full policy impact to develop. This suggests that for climate policy it may be important to measure intermediate outcomes, and occasionally inputs, rather than final outcomes. The definition of appropriate intermediate and process indicators and their use as a basis for policy targets requires additional research to inform the design of appropriate mechanisms.

6.3. Ownership The lessons from domestic country regimes analysed in this article suggest the importance of partnership and accountability in the definition of a policy target framework. The current discussions on climate actions in developing countries refer to Nationally Appropriate Mitigation Actions (NAMAs) as a mechanism for delivering domestic emissions reductions in developing countries (Republic of Korea, 2009). Sustainable Development Policies and Measures (SD-PAMs) could also be developed as a mechanism for national developing country climate mitigation (Winkler et al., 2007). The accompanying articles in this Climate Policy Special Issue discuss sets of policies and actions to enhance energy efficiency in irrigation, large-scale use of wind power or concentrated solar power, energy efficiency in industrial applications, and a shift to energy-efficient transport modes. Their implementation could be supported by the use of indicators and appropriate policy targets. Experience from other sectors points to the importance of engaging stakeholders in the definition of such targets, including industry, local government and civil society. Where NAMAs or SD-PAMs are pursued alongside international financing, technology cooperation or capacity building, the international counter-party should also be consulted in the target definition process to ensure a sense of responsibility for the overall objective and commitment to the required contribution.

6.4. Financial incentives A clear definition of policy targets and monitoring of the associated metrics is not only of interest for internal governance processes, but can also be linked to incentive schemes. The Clean Development Mechanism (CDM) and other offsetting schemes provide examples of such incentives – the emissions reductions achieved at a project level (outcome measure) are translated into credits that can be sold in carbon markets.

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The analysis of policy targets points to the value of expanding the set of metrics that are used beyond final outcomes. This raises the question of whether international incentive schemes could be linked to policy targets that are defined using indicators other than final emission outcomes. For example, in the UK, local authorities are often rewarded for delivering against the policy targets negotiated with central government, e.g. PRSPs use Public Expenditure Management (PEM) systems and MTEFs to link performance and budgeting. The literature suggests that this type of system has had reasonable success in implementing actions. The UK PSA targets and US GPRA legislation also use efficiency goals for public administration which are tied to the allocation of financial resources. In the international context this raises a further set of questions, as such incentive schemes could create a double conditionality. Countries might only pursue an action if international support is provided, and international support is only provided if the action is effectively implemented. The article by Sippel and Neuhoff (2009) discusses lessons for the design that emerge from experience in other sectors and programmes.

7. Conclusions The experience from policy targets has been considered for the design of climate policies and actions; for example, as part of NAMAs or SD-PAMs. Case study experience points to the need to define policy targets more broadly than final outcomes, which in the case of climate policy are CO2 equivalent emission reductions. There is a need to use intermediate outcome or process indicators that translate long-term emissions reduction objectives into intermediary outcomes. Such indicators reflect the success of government policy within, for example, three-year political time-frames. Experience in other fields suggests that where suitable and appropriate metrics were used to define policy targets, successful implementation often followed. Thus a suitable set of policy targets can enhance the private sector’s confidence in government policy, and unlock investment in energy-efficient and low-carbon investment. The literature emphasizes that other factors, such as the engagement of stakeholders and a shared sense of ownership, are equally important for the success of policy targets. This points to the importance of national and international climate policy frameworks that offer the space and opportunities for domestic policy communities to initiate actions. International support and reporting should be structured in order to be accessible to policy makers and domestic populations, and flexible enough to address the specific circumstances. The challenge for future work is to assess the role of targets and indicators in connection with technological, financial and capacitybuilding measures for climate policy.

Acknowledgements For Andy Ward. Thanks are due to Anne Neumann and Charlie Withers for many useful comments, and to Kate Grant and James Cust for being two vital parts of a wonderful team. Particular thanks go to Tim Laing and Roland Ismer for the many hours of support and input. The authors also wish to thank, without implicating, the editor, Richard Lorch, and two anonymous reviewers for many useful comments and assistance. Financial support from the UK Natural Environment Research Council (Supergen Flexnet Grant number EPSRC:EP/E04011x/1) is gratefully acknowledged.

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Notes 1. 2. 3. 4. 5. 6.

For further definitions and terms see Cust (2009) and Lester and Neuhoff (2008). See White and Black (2004). Further discussion of target terminology and design for climate policy can be found in Philibert and Pershing (2001). Brief summaries of such evaluation can be found in White and Black (2004) and Lester and Neuhoff (2008). For a full summary of the literature, see Lester and Neuhoff (2008). For further definitions and terms, see Cust (2009) and Lester and Neuhoff (2008).

References Andrews, M., 2005, ‘Performance-based budget reform: progress, problems, pointers’, in: A. Shah (ed), Fiscal Management, Public Sector Governance and Accountability Series, World Bank, Washington, DC, 31–70. Baumert, K.A., Blanchard, O., Llosa, S., Perkaus, J.F., 2002, Building on the Kyoto Protocol: Options for Protecting the Climate, World Resources Institute, Washington, DC Booth, D., Lucas, H., 2002, Good Practice in the Development of PRSP Indicators and Monitoring Systems, Working Paper 172, Overseas Development Institute (ODI), London. Booth, D., Lucas, H., 2004, ‘Monitoring progress towards the Millennium Development Goals at country level’, in: R. Black, H. White (eds), Targeting Development: Critical Perspectives on the Millennium Development Goals, Routledge, London. Booth, D., et al., 2001, ‘Overview of PRSP processes and monitoring’, in: ODI Report, 2001, PRSP Institutionalisation Study, Final Report, ODI, London. Bosi, M., Ellis, J., 2005, Exploring Options for Sectoral Crediting Mechanisms, Report COM/ENV/EPOC/IEA/SLT(2005)1, OECD Environment Directorate and International Energy Agency (IEA), Paris. Boyle, R., 2005, Civil Service Performance Indicators, Discussion Paper, Institute of Public Administration, Ireland. Boyne, G.A., Chen, A.A., 2007, ‘Performance targets and public service improvement’, Journal of Public Administration Research and Theory 17(3), 455–477. Boyne, G.A., Law, J., 2005, ‘Setting public service outcome targets: lessons from local public service agreements’, Public Money and Management 25(4), 253–260. Committee on Climate Change, 2008, Building a Low-carbon Economy: The UK’s Contribution to Tackling Climate Change, December 2008, Committee on Climate Change, London. Cust, J., 2009, ‘Using intermediate indicators: lessons for climate policy’, Climate Policy 9(5), 450–463. Department for Communities and Local Government (2007) Best Value User Satisfaction Surveys 2006-2007: general survey national report. Department for Communities and Local Government: London. Driscoll, R., Evans, A., 2004, The PRSP Process and DFID Engagement: Survey of Progress 2003, ODI, London. DTLR (Department for Transport, Local Government and the Regions), 2001, Local Public Service Agreements: New Challenges, DTLR Publications, London. European Commission, 2004, Evaluation of Socio-economic Development: The Guide Publication, European Commission, Brussels. European Commission, 2007, Indicators for Monitoring and Evaluation: An Indicative Methodology, Methodological Working Paper 3, European Commission, Brussels. European Commission, 2008, The Climate Action and Renewable Energy Package: Europe’s Climate Change Opportunity [available at http://ec.europa.eu/environment/climat/climate_action.htm]. GAO (General Accounting Office), 1999, Managing for Results: Opportunities for Continued Improvements in Agencies’ Performance Plans, US GAO, Washington, DC. Guthrie, D., 2008, ‘Strengthening the principle of participation in practice for the achievement of the Millennium Development Goals’, in: UNDESA United Nations Department for Economic and Social Affairs (ed), Participatory Governance and the Millennium Development Goals, United Nations, New York. HM Treasury, Cabinet Office, National Audit Office, Audit Commission and Office for National Statistics, 2001, Choosing the Right Fabric: A Framework for Performance Information, HM Treasury, London.

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HM Treasury, Cabinet Office and National Audit Office, 2003, Setting Key Targets for Executive Agencies: A Guide, HM Treasury, London. Holvoet, N., Renard, R., 2007, ‘Monitoring and evaluation under the PRSP: solid rock or quicksand?’ Evaluation and Program Planning 30, 66–81. Laverge, R., 2002, Results-based Management and Accountability for Enhanced Aid Effectiveness: A Reference Paper for CIDE Officers Engaged in Capacity Development and Program-based Approaches such as SWAps, Canadian International Development Agency, Quebec. Lester, S., Neuhoff, K., 2008, The Role of and Experience from Policy Targets in National and International Government, Climate Strategies, Cambridge, UK [available at www.climatestrategies.org/our-research/category/40.html]. ODI (Overseas Development Institute), 2001, PRSP Institutionalisation Study: Final Report, ODI, London. Peterson, S., 2008, ‘Intensity targets: implications for the economic uncertainties of emissions trading’, in: B. Hansjürgens, R. Antes (eds), Economics and Management of Climate Change: Risks, Mitigation and Adaptation, Springer, New York, 97–110. Philibert, C., Pershing, J., 2001, ‘Considering the options: climate targets for all countries’, Climate Policy 1(2), 211–227. Radin, B., 2000, ‘The Government Performance Results Act and the tradition of federal management reform: square pegs in round holes?’ Journal of Public Administration and Research Theory 10(1), 111–135. Republic of Korea, 2009, Crediting Mechanism for Nationally Appropriate Mitigation Actions by the Parties Not Included in Annex I of the United Nations Framework Convention on Climate Change: Proposal of Draft Text by the Republic of Korea, Ad Hoc Working Group on Further Commitments for Annex I Parties under the Kyoto Protocol [available at http:// unfccc.int/files/kyoto_protocol/application/pdf/koreacrediting240409.pdf]. Roberts, J., 2005, ‘Millennium Development Goals: are international targets now more credible?’ Journal of International Development 17, 113–129. Rose, A., 2003, Results-orientated Budget Practice in OECD Countries, ODI Working Paper 209, ODI, London. Schacter, M., 2002, Not a ‘Tool Kit’: Practitioner’s Guide to Measuring the Performance of Public Programs, Institute on Governance, Ottawa, Canada. Sippel, M., Neuhoff, K., 2009, ‘A history of conditionality: lessons for international cooperation on climate policy’, Climate Policy 9(5), 481–494. UNDP (United Nations Development Programme), 2003, Indicators for Monitoring the Millennium Development Goals: Definitions, Rationale, Concepts and Sources, United Nations, New York. US Government Performance Results Act, 1993, Senate and House of Representatives of the United States: Washington, DC. Ward, M., Streck, C., Winkler, H., Jung, M., Hagemann, M., Höhne, N., O’Sullivan, R., 2008, The Role of Sector No-Lose Targets in Scaling Up Finance for Climate Change Mitigation Activities in Developing Countries, Report prepared for the International Climate Division, Department for Environment, Food and Rural Affairs (DEFRA), UK. White, H., Black, R., 2004, ‘Millennium Development Goals: a drop in the ocean?’ In: R. Black, H. White (eds), Targeting Development: Critical Perspectives on the Millennium Development Goals, Routledge, London. Winkler, H., Howells, M., Baumert, K.A., 2007, ‘Sustainable development policies and measures: institutional issues and electrical efficiency in South Africa’, Climate Policy 7, 212–229. World Bank, 2002, A Sourcebook for Poverty Reduction Strategies, World Bank, Washington, DC, Chapters 1–3.

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■ synthesis article

A history of conditionality: lessons for international cooperation on climate policy MAIKE SIPPEL1*, KARSTEN NEUHOFF2 1

Institute of Energy Economics and the Rational Use of Energy, University of Stuttgart, Hessbrühlstrasse 49a, 70565 Stuttgart, Germany 2 Department of Applied Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK

This article surveys the experience of conditionality provisions applied by the World Bank, the IMF, bilateral donors, and the European Union’s accession process. Ownership is essential for effective cooperation and requires domestic climate policies to be country-driven and decision-making to be equitable. Bilateral cooperation allows for a direct exchange of expertise and long-term relationships. A multilateral umbrella or multilateral institutions can avoid complexity and detrimental competition between multiple supporters of one developing country, limit the ability of individual countries to abuse the mechanism to exercise geo-strategic interests, and allow for more stringent reactions to non-compliance. In all cases, independent monitoring and review create transparency and objectivity, enhance effectiveness, and protect the interests of all parties. Policy relevance: Past conditionality provisions offer many negative experiences, particularly where international organizations have imposed the prevailing economic paradigm on countries that were in desperate need of finance. The situation for international cooperation on climate change mitigation is fundamentally different. Developing countries can choose whether they want to access international support to enhance the scale, scope or speed of their mitigation actions. Developed countries or international bodies also retain some discretion to choose among possible mitigation actions based on the carbon impact. This creates a double conditionality and the opportunity to jointly design appropriate incentive schemes. Several lessons from the use of conditionality provisions are identified in order to inform the process, institutional setting and design of such incentive schemes. Keywords: bilateral aid; climate policy; conditionality; domestic policies; EU; IMF; international support; North–South; World Bank Cet article examine l’expérience des clauses de conditionnalité appliquées par la Banque Mondiale, le FMI, les donneurs bilatéraux, et l’Union Européenne dans le processus d’adhésion. L’autonomie est indispensable à une coopération effective et exige que les politiques climatiques intérieures soient guidées au niveau national et que la prise de décisions soit équitable. Les coopérations bilatérales facilitent l’échange direct d’expertise et des relations à long terme. Un cadre multilatéral _ ou institutions internationales _ ont comme avantages d’écarter la complexité et une concurrence nuisible entre multiples alliés d’une nation en développement; limiter l’aptitude de certains pays à abuser des mécanismes dans le but d’exercer leurs intérêts géostratégiques; et faciliter une réaction plus rigoureuse face à la non-conformité. Dans tous les cas, le contrôle et la revue indépendants facilitent la transparence et l’objectivité, accroissent l’effectivité et protège les intérêts de toutes les parties. Pertinence politique: Les clauses de conditionnalité passées présentent beaucoup d’expériences négatives, en particulier là où les organisations internationales imposent le paradigme économique qui prévaut à des pays désespérés d’obtenir des fonds. Les circonstances pour la coopération internationale dans la lutte contre le changement climatique sont fondamentalement différentes. Les pays en développement ont le choix d’accéder ou non au soutien international pour augmenter l’étendue, l’échelle ou la rapidité de leurs actions de mitigation. Les pays développés et organismes internationaux conservent aussi un certain pouvoir quant au choix des actions de mitigation ■ *Corresponding author: E-mail: [email protected] CLIMATE POLICY 9 (2009) 481–494 doi:10.3763/cpol.2009.0634 © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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possibles en fonction de l’empreinte carbone. Ceci entraîne une double conditionnalité et la possibilité de concevoir en commun des systèmes incitatifs appropriés. Plusieurs leçons sont tirées de l’emploi des causes de conditionnalité pouvant influencer le procédé, le cadre institutionnel et la conception de tels systèmes incitatifs. Mots clés: aide bilatérale; Banque Mondiale; conditionnalité; FMI; Nord-Sud; politique climatique; politiques intérieures; soutien international; UE

1. Introduction Developing countries play an important role in stabilizing CO2 concentrations in the atmosphere. This will require domestic climate actions. However, with limited responsibility for historic emissions and priority being given to other development objectives, domestic action with climate benefits (or ambitious actions with climate co-benefits) in developing countries are contingent on support by developed countries. This is the basis of a mutual conditionality of climate cooperation between developed and developing countries – developing countries can only pursue ambitious mitigation action with appropriate international support, and developed countries can only provide such support if it is expected to contribute to climate action. This raises questions about how such cooperative climate policy can be realized, and what we can learn from other policy fields and the broader literature. This special issue of Climate Policy tackles this question in three steps. The first question is: What type of policy indicators are suitable for the measurement of domestic action (see Cust, 2009)? This is followed by the second question, on how to define policy targets using such indicators (Lester and Neuhoff, 2009), and leads to the final question on how to reflect the mutual conditionality in the mechanisms of international climate cooperation. This article provides a structured overview of the performance of previous cooperation between countries that links international public finance to the implementation of domestic policies. This linkage is often referred to as ‘conditionality’. The article provides an overview on factors that scientists have found to be associated with the performance of conditionality in different settings. The article does not judge or evaluate the pursued policy objectives or instruments. In order to inspire a discussion of the possible role of such conditionality provisions, it provides some preliminary ideas about the possible characteristics of cooperative climate policy. Conditionality has been used in multilateral settings such as the IMF or the World Bank, in bilateral development aid, and in EU enlargement. While the effectiveness and scope of World Bank and IMF conditionality may be highly controversial (Burnside and Dollar, 2000), conditionality in the EU enlargement process is frequently acknowledged as an effective policy instrument (Schimmelfennig and Sedelmeier, 2004). Table 1 presents an overview of the effectiveness of conditionality applied by the IMF, the World Bank, bilateral donors and the European Union. The analysis includes (1) the level of compliance with conditionality, i.e. whether policy reforms required by the conditions were implemented; (2) the reaction in the case of non-compliance; and (3) a brief assessment of whether policy objectives were achieved, i.e. whether policy reforms under the conditionality mechanism have achieved the envisioned results. Conditionality can be designed by using different approaches. Ex-ante conditionality means that financial transfers or accession negotiations start only after certain conditions have been met. Ex-post conditionality requires that conditions have to be fulfilled during the programme in order to trigger continuation. A mixture of these forms is common. Programmes are often accompanied by less binding policy provisions.

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TABLE 1 Qualitative comparison of conditionality provisions in different programmes IMF

World Bank

Bilateral aid

EU enlargement

Compliance with conditionality

X

X

XXX

Stringency of reaction to non-compliance

XX

X

XXX

Competition (donor-side)

XX

Competition (recipient countries)

XX

XX

The greater the number of Xs, the higher the score. Source: authors’ findings

The theoretical literature on conditionality provisions is broad. Killick (1997) describes the concept of conditionality as a ‘principal–agent framework’: the essential problem is how principals […] can design contracts which embody rewards that make it in the interests of agents […] to further the principals’ objectives (Killick, 1997, p. 487).

In contrast, Checkel (2001) highlights the role of dialogue, persuasion and negotiation. Principal– agent framework better explains cooperative climate policy where mutual responsibilities need to be aligned. Here the principal would at the same time be an agent – and vice versa. Sections 2–5 of this article review conditionality provisions applied by the IMF, the World Bank, bilateral aid and EU enlargement. Section 6 presents explanations that are offered in the literature for the performance of the reviewed conditionality mechanisms. Based on these factors for success and failure, we conclude with some design aspects for cooperative climate policy in Section 7.

2. IMF conditionality The IMF offers loans to countries that need capital, and countries accept the conditionality clauses that the IMF attaches to these loans. When founded in 1944, the IMF provided credit to its member countries in order to stabilize the post-war financial system. Conditionality prescribed monetary and fiscal targets, and should ensure the repayment of loans. From the 1960s onwards, the level of detail and the number of conditions increased (Figure 1). Now addressing developing countries exclusively, structural adjustment loans in the 1980s started to include conditions on supply-side and institutional issues such as deregulation (Killick, 1997). In the 1990s the concepts of poverty reduction and good governance (e.g. protection of property rights, efficient administration, the fight against corruption) emerged. From about, 2000 the IMF (and the World Bank) promoted the preparation of Poverty Reduction Strategy Papers (PRSPs) by member countries in a participatory process. These later developments show that the IMF (and the World Bank) now attaches much more importance to the role of domestic stakeholders.

2.1. Compliance with conditionality Dreher (2004) provided an overview of research on compliance with IMF conditionality, and found that compliance has generally been rather weak. He showed that compliance rates were around 50% or below for credit ceilings or overall fiscal deficit for the years 1969–1984. Compliance

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25 20 15 10 5 0

19

52 955 958 961 964 967 970 973 976 979 982 985 988 991 994 997 000 003 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Dreher and Vaubel, 2004 (*1) IMF IEO 2007 (GRA) IMF IEO 2007 (PRGF)

(*1) 1952–1994: number of binding conditions per programme started in that year; 1995–2002: average number of performance criteria per programme.

FIGURE 1 Number of conditions with IMF programmes

in the following years ranged between 30% and 50%. Compliance with ‘prior actions’ (ex-ante conditionality) was significantly higher, at 80%, in the same period.

2.2. Reaction in the case of non-compliance In the case of non-compliance, IMF programmes are interrupted or ended. Mussa and Savastano (1999) found that more than a one-third of IMF arrangements ended with disbursements of less than half of the initially agreed support, and that in only 43–49% of analysed cases was 75% or more of the negotiated sum distributed. However, new programmes are frequently concluded even though non-compliance with the conditionality of previous programmes is evident (Bird, 2002; Dreher, 2002).

2.3. Achievement of policy objectives Research usually measures the impact of IMF loans on growth, and not on poverty reduction (Mosley et al., 2004). Table 2 shows Dreher’s (2006) findings that existing studies do not

TABLE 2 Studies researching the effect of IMF loans on growth: number of studies found in the literature Type of study

Increase growth

Decrease growth

No effect on growth

Before/after studies

3

0

6

With/without studies

1

1

6

Regression-based studies

3

7

5

Source: Dreher (2006, p. 773)

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provide clear evidence on whether IMF loans increase growth, decrease growth, or have no effect on growth.

3. World Bank conditionality The World Bank offers loans to developing countries for infrastructure or sectoral projects and requires acceptance of the conditionality clauses attached to these loans. Founded alongside the IMF in 1944, the World Bank’s objective is to promote long-term economic growth by investment in infrastructure projects such as roads or dams, and conditionality attached to these loans should ensure repayment. In the 1980s the World Bank first started policy-based lending or ‘structural adjustment lending’, which now makes up about one-third of World Bank lending. Conditionality in policy-based lending in the early years included conditions on policy reforms that were believed by the World Bank to be essential for a country’s social and economic development. In recent years, the World Bank has increasingly relied on policy reform projects driven by borrower countries themselves under their poverty reduction strategies. At the same time, a shift to ex-ante conditionality could be observed, with loans as rewards for the implementation of policy reforms: the focus of policy-based lending shifted from traditional multi-year and multi-tranche operations to single-tranche operations, with 90% of World Bank policy operations being single-tranche in 2007. Single-tranche loans are conditional on ‘prior actions’ which are to be met before approval of the loan (Koeberle, 2005; World Bank, 2007). The number of conditions in policy-based lending has increased from an average of about 12 in 1980, to above 40 in the early 1990s, followed by a decline to below 20 in 2003, and 10–12 in 2005 and 2007 (Koeberle and Malesa, 2005; World Bank, 2007).

3.1. Compliance with conditionality The World Bank itself provides evidence on the outcome of programmes. According to these evaluations, the share of ‘satisfactory’ policy-based lending projects has fluctuated but increased since the 1980s. From 2000 onwards, it has constantly been between 80% and 90%. Single-tranche credits in general, and poverty reduction credits in particular, are evaluated as even better – with the latter showing 100% successful outcomes in 2006 (Koeberle and Malesa, 2005; World Bank IEG, 2008).

3.2. Reaction in the case of non-compliance In cases where conditionality requirements are not met, the main response of the World Bank appears to be delayed assistance. Killick (1997) found that ‘on average, adjustment programmes take twice as long to complete as intended, largely because of non-implementation of policy conditions’ (p. 486). In cases of continued non-compliance, disbursement rates are still nearly 100%. Svensson (2003) concludes that there is no link between a country’s fulfilment of conditionality and the disbursement of loans.

3.3. Achievement of policy objectives The World Bank’s own evaluation of programme success has been mentioned above. On a programme or ‘micro’-level, conditionality programmes are mostly considered to have reached their policy objectives. To evaluate conditionality performance on the ‘macro’-level, the effect of World Bank loans in terms of economic growth and poverty reduction may be analysed, as these are the primary policy objectives of the Bank. While there is little meta-information available on the links between World Bank loans and poverty reduction, the effect of World Bank loans on

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growth has been analysed in a number of cross-country studies. There is dispute about the effectiveness of World Bank aid on growth. While Hansen and Tarp (2000) found that aid had a positive effect on growth, Burnside and Dollar (2000) concluded that the impact of aid on growth depends on a country’s good governance policies. Many critiques have suggested that such clear evidence of the impact of World Bank aid on economic growth does not exist (Killick, 1997; Easterly, 2003; Rajan and Subramanian, 2007). Notably, conditionality attached to structural adjustment programmes has been accompanied by adverse effects on the poorer sections of countries’ populations (Dreher, 2002).

4. Conditionality applied to bilateral aid Donor countries offer loans for infrastructure or sectoral projects, or as budget support. Recipient countries accept the conditionality clauses that the donors attach to these loans. Since the 1980s, bilateral development aid usually ties programmes to the IMF and World Bank conditionality provisions (‘cross-conditionality’). While the statutes of the World Bank and the IMF prohibit political conditions, bilateral programmes frequently contain political conditionality on human rights and democracy (Killick, 1997). Alesina and Dollar (2000) argue that the economic and strategic interests of donor countries determine bilateral aid flows with few exemptions. Conditionality for bilateral aid differs in each donor–recipient relationship. Two examples illustrate the diversity of approaches. The majority of official development aid from the UK used to require recipients to spend aid on products or services from the UK. This has changed, and the UK does not tie aid any more since 2001 (OECD, 2001). Since 2005, the UK’s development partnerships have been based on a common commitment towards the Millennium Development Goals (MDGs), respecting international obligations, and strengthening financial management. Another example of bilateral aid conditionality is the recent US aid programme, Millennium Challenge Account (MCA). Started in 2004, it establishes quantifiable political, social and economic performance criteria to determine a country’s eligibility for aid beforehand, and makes both the data and the selection methodology publicly available. The concept is influenced by Burnside and Dollar (2000), who suggested that aid is more effective in well-governed countries.

4.1. Compliance with conditionality For UK aid, there is no transparent monitoring for compliance with conditionality currently in place (Mokoro, 2005). For the MCA, in early 2009, 26 countries had complied with the programme’s requirements and were thus eligible for funding (CGD, 2009).

4.2. Reaction in the case of non-compliance Cross-country studies for bilateral aid demonstrate that the difference between committed and disbursed funds is uncorrelated with reform outcome as measured by the World Bank’s Operations Evaluation Department (OED) (Figure 2). Neumayer (2003) found that respect for human rights does not exert a consistent influence on the allocation of aid by the majority of donors. Alesina and Dollar (2000) concluded that the reactions to recipient countries’ policy implementation depend on the geo-strategic interests of the donor countries. To explain the ‘Samaritan dilemma’, the example of the UK may be illustrative. Secretary of State for International Development Benn prefers ‘not to let the poor suffer by reducing our development assistance as a consequence of their government’s political choices or shortcomings’ (Benn, 2007). The UK may alter the channels of aid, e.g. to humanitarian assistance or support for election processes.

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35% 30% 25% 20% 15% 10% 5% 0% 0%

0% – 1%

1% – 10%

share of committed aid cancelled

10% – 25%

25% – 50%

> 50%

successful programmes unsuccessful programmes

FIGURE 2 Share of committed bilateral aid cancelled in successful and unsuccessful programmes (source: Svensson 2003, p. 39; successful reformers as defined by the World Bank OED)

In the case of the MCA, the reaction in the case of non-compliance is refusal to participate in the programme. Although the selection process is transparent and objective, exemptions appear. For example, Georgia was found eligible for MCA funding although it clearly failed to reach several benchmarks. This was probably to support Georgia’s political transition (Lucas and Radelet, 2004).

4.3. Achievement of policy objectives Evidence for the effectiveness of bilateral aid is mixed. Some have come to the conclusion that bilateral aid performs worse than multilateral aid, due to donors’ geo-strategic interests taking precedence over growth or poverty reduction policies in the recipient country (Alesina and Dollar, 2000). On the other hand, Ram (2003) found an impact of bilateral aid on growth that was not present with multilateral aid. Rajan and Subramanian (2007) suggested that neither bilateral nor multilateral aid impact on growth. Preliminary research by Johnson and Zajonc (2006) found no links between MCA funding and economic growth. However, they suggest that candidate countries that had not yet met the selection criteria, but who were striving to do so, performed 25% better on improving policy indicators than a control group of countries.

5. EU enlargement conditionality In contrast to development aid, the EU not only offers candidate countries financial benefits but, more importantly, EU membership. EU membership is perceived to be accompanied by economic development, national recognition and political stability (Steunenberg and Dimitrova, 2007). Candidate countries have to satisfy several stages of legal and economic reforms as preconditions. Capacity building and financial resources support this process. During previous enlargements, conditionality was limited to the adoption of the Acquis Communautaire. In the last enlargement round, to include Central and Eastern European countries, conditionality was expanded to include the Copenhagen criteria and the requirement that a country has the ability to take on the ‘obligations of membership’ (Grabbe, 2001). There are,

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however, no clear benchmarks, which leaves it open to existing Member States to judge whether candidate countries have met the conditionality requirements (Dimitrova, 2002).

5.1. Compliance with conditionality While implementation of the Acquis Communautaire is very widespread, compliance with democratic conditionality (e.g. human rights, liberal democracy) is significantly lower. Countries with ∨ authoritarian governments, such as Slovakia under the Mec iar government or Serbia under Miloševic´, feared the high political costs of adopting democratic conditionality (Schimmelfennig and Sedelmeier, 2004). In general, rule adoption has increased towards the final stages of accession negotiations, when the prospect of membership becomes increasingly realizable (Grabbe, 2001). It decreases sharply once the accession date is set (Steunenberg and Dimitrova, 2007). A sharp decline in the number of conditions set by the EU in this final phase suggests that the Union is aware of this trend.

5.2. Reaction in the case of non-compliance The most powerful conditionality tool is the ability of the EU to decide which countries can proceed to the next stage towards accession. Thus the enlargement process has become structured around milestones, at any one of which accession can be stopped. For example, Croatia’s lack of cooperation with the International Criminal Court in The Hague was followed by a delay in its 2003 bid for membership. Turkey did not start negotiations until 2005 due to a lack of compliance with the policy reforms required (Steunenberg and Dimitrova, 2007).

5.3. Achievement of policy objectives The policy objective of EU enlargement conditionality is EU rule transfer to future Member States, and it is widely judged to be effective (Grabbe, 2001; Schimmelfennig and Sedelmeier, 2004). There is some debate on whether the way that rule adoption is fast-tracked by national governments, without much democratic discussion, has a negative effect on policy persistency (e.g. Dimitrova, 2002). Furthermore, Schimmelfennig and Sedelmeier (2004) suggest that rule adoption generally means formal transposition into national laws, but implementation and enforcement in everyday policy-making are not enforced, and compliance with conditionality may therefore be ‘lip service’ only. They conclude that the short-term effectiveness of EU conditionality may be partnered by long-term inefficiency. Their argument is supported by the current debate about corruption and lack of rule of law in new EU Member States Bulgaria and Romania (Noutcheva, 2006; Alegre et al., 2009).

6. Explaining the performance of conditionality The academic literature on the conditionality mechanisms reviewed above provides explanations for the performance of these mechanisms. Table 3 provides an overview of factors for success frequently cited in the conditionality literature, along with references to some of the scholars who mentioned them, and the context in which they were observed (IMF, World Bank, bilateral aid or EU enlargement). Note that there is not necessarily a consensus among scholars on all of these success factors and their relevance. A lack of shared ownership of projects and policies reduces their effectiveness and persistence, as experienced with IMF and World Bank conditionality (Bird and Willett, 2004). Conditions which are based on the implementing country’s priorities encourage ownership. A lack of ownership

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TABLE 3 Factors for success as presented in the conditionality literature by scholars to explain the success and failure of conditionality provisions (see also Sippel and Neuhoff, 2008) Factors for success

Experience from

Literature

Ownership

IMF, World Bank

Killick, 1997; Leandro et al., 1999; Checkel, 2001; IMF, 2001; Khan and Sharma, 2003; Bird and Willett, 2004; World Bank, 2007

Country-specific conditionality,

IMF, World Bank

customization

Killick, 1997; Leandro et al., 1999; Checkel, 2001; IMF, 2001; Dreher, 2002; Khan and Sharma, 2003; Bird and Willett, 2004; World Bank, 2007

Stringency in reaction to

IMF, World Bank, Bilateral aid,

Collier et al., 1997; Killick, 1997;

non-compliance

EU enlargement

Bird, 2002; Svensson, 2003; Schimmelfennig and Sedelmeier, 2004; Noutcheva, 2006

Overcome geo-political donor

IMF, World Bank,

Killick, 1997; Burnside and Dollar, 2000;

interests

bilateral aid (negative example)

Bird and Willett, 2004; Lucas and Radelet, 2004; Alegre et al., 2009

Continuity and predictability of programmes

World Bank, EU enlargement

Leandro et al., 1999; Steunenberg and Dimitrova, 2007; World Bank, 2007

Donor coordination and

World Bank,

Killick, 1997; Leandro et al., 1999; World

harmonization

other conditionality mechanisms

Bank, 2007

Recipient competition

EU enlargement,

Grabbe, 2001; Johnson and Zajonc, 2006

bilateral aid (MCA) Good governance in

IMF, World Bank, bilateral aid,

Burnside and Dollar, 2000; Hansen and

‘recipient’ country

EU structural funds

Tarp, 2000; Ivanova et al., 2003; Mosley et al., 2004; Johnson and Zajonc, 2006

Transparent and objective

IMF, World Bank,

monitoring and evaluation

bilateral aid (negative examples)

Killick, 1997; Selbervik, 1999; Dreher, 2002; Svensson, 2003; Marchesi and Sabani, 2007; World Bank, 2007

can result from perceived donor dominance, among other factors. In the EU context, ownership seems to be less important, probably as a result of powerful sanctioning: the incentive of EU membership is very attractive, and non-compliance with EU conditionality credibly leads to the EU refusing accession. However, a lack of ownership may also lead to ineffectiveness of conditionality in the long term (Noutcheva, 2006). A lack of stringent reaction in the case of non-compliance with conditionality is associated with overall failure of the conditionality mechanism in all the programmes analysed – regardless of the attractiveness of the incentives (Killick, 1997; Selbervik, 1999; Svensson, 2003; Schimmelfennig and Sedelmeier, 2004). In bilateral relationships, geo-strategic donor interests and the ‘Samaritan dilemma’ may have prevented such stringent responses (Alesina and Dollar,

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2000). The international financial institutions’ lack of stringent response is partly explained by the pro-lending bias of donor staff, whose income, prestige and power depends on the amount of money transferred (Dreher, 2002; Bird and Willett, 2004). While stringency of reaction in the case of non-compliance is important, the continuity and predictability of programmes offer longterm perspectives, which are also associated with programme success (Leandro et al., 1999; Steunenberg and Dimitrova, 2007). Donor competition is considered to impact negatively on the performance of conditionality. This arises where donors approach countries with a variety of agreements. This may lead to countries abandoning programmes prematurely in order to engage with other partners, or to conflicting policy objectives by different donors. Furthermore, donor competition causes additional transaction costs for recipient countries. By contrast, competition arising between countries in their attempt to comply with conditionality by one donor has been associated with success in cases of EU enlargement and the MCA (Grabbe, 2001; Johnson and Zajonc, 2006). Good governance is believed by many to have a positive influence on the effectiveness of conditionality programmes (e.g. Burnside and Dollar, 2000; Hansen and Tarp, 2000). Careful selection of cooperation partners, like that performed by the MCA, is expected to lead to more efficient outcomes. However, it may exclude many partners from programme participation. Programmes focusing on capacity building can help countries improve their governance in the first place. Evaluation of programme success by the organization’s own staff can result in an overestimation of programme achievements. This is because staff members have the incentive to hide previous failures when judging programmes, as discussed in the context of the World Bank by Dreher (2004). Both the difficulty of monitoring and concern about monitoring failures reduced the response of the IMF and World Bank to failed programmes (Killick, 1997; Marchesi and Sabani, 2007).

7. Lessons for international cooperation on climate policy The principle of common but differentiated responsibility for climate change action creates many opportunities for international cooperation. This article focused on the implications for joint efforts on the mitigation side. The frequently stated objective to retain at least a 50% chance of global temperatures not exceeding 2°C can only be achieved if both developed and developing countries pursue strong mitigation actions. Capabilities (resources, technology capacities etc), priorities and historic responsibility differ between developed and developing countries. This leads to the differentiated responsibility of developed countries towards supporting developing countries in their mitigation actions. This support will be tailored towards contributing to emissions reductions. The Clean Development Mechanism (CDM) offered the first example of such cooperation, where financial flows are specifically linked to reductions in CO2 emissions at the project level. This type of support can be expanded from projects to policies. It can also target transformational activities towards low-carbon infrastructure, decarbonization of the energy system, or shifting of industrial activities towards low-carbon growth. With such transformational policies it is difficult to measure the direct CO2 impact, and other indicators might be used to determine success. What is likely to be the basis of any such mechanism is some type of mutual conditionality – e.g. some actions are only pursued if developing countries can get international support for incremental costs, and developed countries will only provide such support if the mechanism provides some level of reassurance that the action will be pursued.

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This article asks: What are the historic lessons from the use of conditionality that might inform the design of such cooperation? In the previous section, success factors of conditionality were presented. From these success factors, the following paragraphs draw some conclusions concerning the design of cooperative climate policy.

7.1. Importance of domestic ownership The basis of conditionality on domestic climate policies in developing countries needs to be true ownership. Imposed policy reforms have widely been reported to be failures in the context of World Bank and IMF loans. The only exception is the case of EU enlargement – after their initial decision to join the Union, accession countries had to transcribe and implement a large set of rules (even beyond the Acquis Communautaire). Despite the sometimes rather limited domestic ownership of this process, it succeeded because of the strong incentive (next step in the graduation towards EU Member State). Due to the absence of such attractive incentives, domestic ownership building on domestic initiatives will be crucial for international cooperation on climate action. This equally applies to the ownership and level of engagement on the side of the developed countries. Developed countries have a large self-interest in climate protection, hopefully resulting in more widely anchored engagement than for poverty reduction. Developing countries may find it acceptable to implement climate policies, as there is a common understanding of the importance of trying to prevent dangerous climate change. However, one could imagine that ownership on the part of developing countries would depend on mitigation achievements in industrialized countries.

7.2. Importance of tailoring to country-specificities Country-specificity of conditionality on domestic climate policies is essential in order to achieve ownership. Therefore, country-driven approaches to define domestic climate policy agendas seem promising. In this context, experiences from the country-driven formulation of PRSPs under World Bank and IMF loans may be considered. This is now reflected in proposals from many developing countries, starting from technology needs assessments, and leading towards the formulation of National Adaptation Programmes of Action (NAPAs). One might assume that bilateral relationships allow for a better customization of programmes to national circumstances than multilateral settings, because they follow the principle of subsidiarity and are more flexible. This would argue for some component of bilateral cooperation between developed and developing countries under the umbrella of the UN framework.

7.3. The tough trade-off: credible response to non-compliance versus programme continuity While bilateral relationships may prove more effective in responding to specific national circumstances, multilateral settings seem to perform better regarding the stringency of reaction to non-compliance with conditionality. A multilateral setting may help to overcome geo-strategic interests or the ‘Samaritan dilemma’, which are common in bilateral relationships and seem to prevent stringent reactions to non-compliance. Therefore, one could imagine a multilateral framework for the design of cooperative climate policy, in which bilateral relationships can function. An equitable decision-making structure of the multilateral body and transparent reporting could further help to prevent the prevalence of geo-strategic interests of individual countries or groups of like-minded countries. However, there is also the opinion that continuity and predictability are supportive for programmes, and bilateral relationships might better allow for the development of long-term

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partnerships. Cooperative climate policy would probably face a trade-off between stringency in reaction to non-compliance and continuity of programmes. Further research may explore the two concepts further and inform a balanced position on this issue.

7.4. Implications for bilateral approaches: donor harmonization and recipient competition Donor competition is a factor associated with the failure of conditionality provisions. In cooperative climate policy, a multilateral framework could provide some guidance and monitoring for bilateral cooperation. To reduce the distortions from donor competition, bilateral cooperation on a specific action could be registered in the UNFCCC framework. This also contributes to transparency, which creates accountability of both parties towards the objective of a joint mitigation action. Further research could explore the question of what type of activities an independent source of funding (e.g. from taxes on international air or sea transport, or from a finance mechanism such as the CDM’s adaptation levy) would be most valuable in preventing distortions from donor competition. Unlike donor competition, recipient competition has been reported to promote the success of conditionality. Recipient competition could be achieved by selectivity of cooperative climate policy. Selectivity could mean that countries that fulfil certain conditions beforehand are rewarded for their reform efforts with international support.

7.5. Independent monitoring Both the experience from conditionality in this study and the UNFCCC framework highlight the importance of measurable, reportable and verifiable results. The issue of monitoring and evaluation of domestic climate policy implementation therefore deserves special attention. Based on a country’s internal accountability mechanisms, an independent body within the multilateral framework could provide for a transparent and objective evaluation of performance. It would help to prevent overly positive evaluation of performance by staff members who were involved in project management. As cooperative climate policy should probably not finance domestic climate policies that are business-as-usual, experience from additionality in the context CDM and GEF projects should be considered. Additionality of emissions reductions is difficult to measure and verify, and even more so at the policy rather than at the project level (Michaelowa, 2005). This article has focused on lessons from conditionality for the design of international cooperation on climate policy. Obviously these have to be balanced against several other objectives, and constraints, of international climate cooperation. We hope that this review encourages further research, practical work and political dialogue on the conditionality issue and its integration with other issues that influence cooperative climate policy.

Acknowledgements Financial support from the UK Economic and Social Science Research Council (grant TSEC) is gratefully acknowledged. We are grateful for comments by Jon Stern, Chris Beauman, Ben Jones and Axel Michaelowa on earlier versions of this article, to participants of the Climate Strategies workshop on cooperative climate policy in May 2008 in Cambridge for input and discussion, and to Richard Lorch and three anonymous Climate Policy referees for constructive comments that helped to improve the article. Any remaining error or opacity is solely our own responsibility.

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References Alegre, S., Ivanova, I., Denis-Smith, D., 2009, Safeguarding the Rule of Law in an Enlarged EU: The Cases of Bulgaria and Romania, CEPS Special Report, April 2009, Archive of European Integration (AEI) [available at http://aei.pitt.edu/ 10818/]. Alesina, A., Dollar, D., 2000, ‘Who gives foreign aid to whom and why?’, Journal of Economic Growth 5(1), 33–63. Benn, H., 2007, International Development. Aid: Conditionality, Written Answers to Questions, UK Parliament, 10/01/2007. Bird, G., 2002, ‘The completion rate of IMF programmes: what we know, don’t know and need to know’, World Economy 25(6), 833–847. Bird, G., Willett, T.D., 2004, ‘IMF conditionality, implementation and the new political economy of ownership’, Comparative Economic Studies 46, 423–450. Burnside, C., Dollar, D., 2000, ‘Aid, policies, and growth’, American Economic Review 90(4), 847–868. CGD, 2009, MCA Monitor: Tracking the Millennium Challenge Account, Center for Global Development, Washington, DC [available at www.cgdev.org/section/initiatives/_active/mcamonitor]. Checkel, J.T., 2001, ‘Why comply? Social learning and European identity change’, International Organization 55(3), 553–588. Collier, P., Guillaumont, P., Guillaumont, S., Gunning, J.W., 1997, ‘Redesigning conditionality’, World Development 25(9), 1399–1407. Cust, J., 2009, ‘Using intermediate indicators: lessons for climate policy’, Climate Policy 9(5), 450–463. Dimitrova, A., 2002, ‘Enlargement, institution-building and the EU’s administrative capacity requirement’, West European Politics 25(4), 171–190. Dreher, A., 2002, The Development and Implementation of IMF and World Bank Conditionality, HWWA Discussion Paper 165, Hamburg. Dreher, A., 2004, ‘A public choice perspective of IMF and World Bank lending and conditionality’, Public Choice 119, 445–464. Dreher, A., 2006, ‘IMF and economic growth: the effects of programs, loans, and compliance with conditionality,’ World Development 34(5), 769–788. Dreher, A., Vaubel, R., 2004, ‘The causes and consequences of IMF conditionality’, Emerging Markets Finance and Trade 40(3), 26–54. Easterly, W., 2003, ‘Can foreign aid buy growth?’, Journal of Economic Perspectives 17(3), 23–48. Grabbe, H., 2001, ‘How does Europeanisation affect CEE governance? Conditionality, diffusion and diversity’, Journal of European Public Policy 8(4), 1013–1031. Hansen, H., Tarp, F., 2000, Aid and Growth Regressions, CREDIT Research Paper No. 00/7. Ivanova, A., Mayer, W., Mourmouras, A., Anayiotos, G., 2003, What Determines the Implementation of IMF-Supported Programs?, IMF Working Paper 03/8, IMF, Washington, DC. IMF, 2001, Structural Conditionality in Fund-Supported Programs, IMF Policy Development and Review Department, IMF, Washington, DC. International Monetary Fund, Independent Evaluation Office, 2007, ‘An IEO Evaluation of Structural Conditionality in IMF–Supported Programs’, Washington D.C. Johnson, D., Zajonc, T., 2006, Can Foreign Aid Create an Incentive for Good Governance? Evidence from the Millennium Challenge Corporation, Harvard University CID Working Paper 11, Cambridge, MA. Khan, M., Sharma, S., 2003, ‘IMF conditionality and country ownership of adjustment programs’, World Bank Research Observer 18(2), 227–248. Killick, T., 1997, ‘Principals, agents and the failings of conditionality’, Journal of International Development 9(4), 483–495. Koeberle, S., 2005, ‘Conditionality: under what conditions?’, in: World Bank (ed), Conditionality Revisited, World Bank, Washington, DC, 57–83. Koeberle, S., Malesa, T., 2005, ‘Experience with world bank conditionality’, in: World Bank (ed), Conditionality Revisited, World Bank, Washington, DC, 45–56. Leandro, J., Schafer, H., Frontini, G., 1999, ‘Towards a more effective conditionality: an operational framework’, World Development 27(2), 285–299. Lester, S., Neuhoff, K., 2009, ‘Policy targets: lessons for effective implementation of climate actions’, Climate Policy 9(5), 464–480.

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Lucas, S., Radelet, S., 2004, An MCA Scorecard: Who Qualified, Who Did Not, and the MCC Board’s Use of Discretion, Center for Global Development. Marchesi, S., Sabani, L., 2007, ‘IMF concern for reputation and conditional lending failure: theory and empirics’, Journal of Development Economics 84, 640–666. Michaelowa, A., 2005, ‘Determination of baselines and additionality for the CDM: a crucial element of credibility of the climate regime’, in: F. Yamin (ed), Climate Change and Carbon Markets, Earthscan, London, 289–304. Mokoro Ltd, 2005, DFID Conditionality in Development Assistance to Partner Governments: A Report for DFID, London. Mosley, P., Hudson, J., Verschoor, A., 2004, ‘Aid, poverty reduction and the new conditionality’, Economic Journal 114, F217–F243. Mussa, M., Savastano, M., 1999, The IMF Approach to Economic Stabilization, IMF Working Paper 99/104, IMF, Washington, DC. Neumayer, E., 2003, ‘Is respect for human rights rewarded? An analysis of total bilateral and multilateral aid flows’, Human Rights Quarterly 25(2), 510–527. Noutcheva, G., 2006, Bulgaria and Romania’s Accession to the EU: Postponement, Safeguards and the Rule of Law, CEPS Policy Brief 102. OECD, 2001, United Kingdom, 2001, Development Co-operation Review: Main Findings and Recommendations, OECD, Paris. Rajan, R.G., Subramanian, A., 2007, Aid and Growth: What Does the Cross-Country Evidence Really Show?, IMF Working Paper WP/05/127, IMF, Washington, DC. Ram, R., 2003, ‘Roles of bilateral and multilateral aid in economic growth of developing countries’, Kyklos 56(1), 95–110. Schimmelfennig, F., Sedelmeier, U., 2004, ‘Governance by conditionality: EU rule transfer to the candidate countries of Central and Eastern Europe’, Journal of European Public Policy 11(4), 669–687. Selbervik, H., 1999, Aid and Conditionality – The Role of the Bilateral Donor: A Case Study of Norwegian–Tanzanian Aid Relationship, Royal Norwegian Ministry of Foreign Affairs, Oslo. Sippel, M., Neuhoff, K., 2008, Lessons from Conditionality Provisions for South–North Cooperation on Climate Policy, EPRG Working Paper 08/25, Climate Strategies, Cambridge, UK. Steunenberg, B., Dimitrova, A., 2007, ‘Compliance in the EU enlargement process: the limits of conditionality’, European Integration Online Papers 11(5) [available at http://eiop.or.at/eiop/index.php/eiop/article/view/2007_005a]. Svensson, J., 2003, ‘Why conditional aid does not work and what can be done about it’, Journal of Development Economics 70(2), 381–402. World Bank, 2007, Conditionality in Development Policy Lending, World Bank, Washington, DC. World Bank IEG (Independent Evaluation Group), 2008, Annual Review of Development Effectiveness 2008: Shared Global Challenges, World Bank, Washington, DC.

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■ country study

Brazilian low-carbon transportation policies: opportunities for international support HAROLDO MACHADO-FILHO* Ministry of Science and Technology of Brazil, Esplanada dos Ministérios, bloco E, sala 242, Brasília, D.F. 70.067-900, Brazil

Two transport policies with climate co-benefits for the intra-city and inter-city transport in Brazil are analysed. Both policies aim to shift transport from the road (cars in cities, trucks between cities) towards less energy-intensive transport modes (bus, underground, rail and shipping). The main motivations for these policies are domestic benefits, including reduced energy costs, fewer accidents, and reduced local congestion and pollution. Despite these apparent benefits, barriers and financing constraints limit the scale and scope of the policy formulation and are likely to further impact their implementation. While it is relatively easy to mobilize investment in transport logistics infrastructure at the national level, given the benefits for economic competitiveness for the country as a whole, it is more challenging to leverage funds to provide more efficient and integrated public transport systems at the city level. International cooperation can play a significant role in supporting domestic policies, and thus contribute to direct emissions reductions and lower-carbon growth trajectories through a modal shift. Policy relevance: A modal shift of freight and passenger transport would enhance the energy efficiency of transport services. In Brazil, like most developing countries, infrastructure constraints prevent such a modal shift. Barriers to implementing national policies can differ within a country as well as internationally; for example, financial constraints are far more severe for cities pursuing public transport projects than for federal projects on inter-city freight transport. This creates opportunities for international support to tackle specific barriers and thus help governments to deliver domestic policy objectives. In order to avoid merely subsidizing the transport sector and increasing transport volumes, international support has to focus on measures to facilitate a modal shift that underpins a broader national transport strategy. Keywords: Brazil; developing countries; CO2 reduction; domestic policy; infrastructure; international investment; modal shift; transportation sector Deux politiques de transport à co-bénéfices climatiques pour le transport intra- et interurbain au Brésil sont analysées. Les deux politiques visent à remplacer le transport routier (voitures en ville, camions entre villes) par des modes de transport moins intensifs en énergie (autobus, métro, rail et bateau). La motivation principale de ces politiques provient des bénéfices intérieurs, y compris un moindre coût en énergie, moins d’accidents et la réduction de la congestion et pollution locales. Malgré ces avantages évidents, l’échelle et l’envergure de la formulation des politiques sont limitées à cause de barrières et contraintes de financement étant à même d’affecter encore plus leur mise en œuvre. Bien qu’il soit relativement facile de mobiliser les investissements en infrastructure de logistique de transport au niveau national étant donnés les avantages en compétitivité économique pour le pays entier, il est plus difficile de mobiliser des fonds pour un système de transport public efficace et intégré au niveau urbain. Une coopération internationale peut jouer un rôle important dans le soutien des politiques intérieures, et de ce fait favoriser les réductions directes d’émissions ainsi que les trajectoires de croissance sobres en carbone, à travers le transfert modal. Pertinence politique: Le transfert modal du transport de marchandise et des passagers permet d’améliorer l’efficacité énergétique des services de transport. Au Brésil, comme dans la plupart des pays en développement, les contraintes liées à l’infrastructure empêche un tel transfert modal. Les barrières à la mise en œuvre de politiques intérieures peuvent différer au sein d’un pays ainsi qu’avec l’étranger; par exemple, les contraintes financières sont bien plus importantes

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 495–507 doi:10.3763/cpol.2009.0638 © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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pour les projets de transport public des villes que pour les projets fédéraux de transport de marchandises interurbain. Ceci crée des possibilités pour un soutien international qui aiderait à surmonter certaines barrières et de ce fait aiderait les gouvernements à réaliser des objectifs de politique intérieure. Dans le but d’éviter de simples subventions au secteur du transport et d’augmenter les capacités de transport, un soutien international doit se concentrer sur des mesures facilitant un transfert modal dans le cadre d’une stratégie nationale de transport plus générale. Mots clés: Brésil; infrastructure; investissement international; pays en développement; politique intérieure; réductions de CO2; secteur du transport; transfert modal

1. Introduction This article aims to link potential international financial support to increased scale, scope and time-frames for the implementation of domestic policies with climate co-benefits in developing countries. This article discusses the transportation sector in Brazil, with reference to specific examples from two recently adopted policies: a policy that can promote a change in the modal split in the country; and a programme that aims to fund public transportation in urban areas. The growing mobility of goods and people is one of the main features of globalization. Transportation is a basic enabler of economic activity and personal interaction, and an effective transportation infrastructure is recognized as being closely linked to economic growth. However, one of the negative aspects of this growing mobility is that motorized forms of transport are strongly associated with the increase of greenhouse gases (GHG) in the atmosphere. The 2007 Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) highlighted that one of the largest increases in GHG emissions from 1970 to 2004 was in the transportation sector, with an increase of 120% over that time period (IPCC, 2007). This sector accounts for 23% of world energy-related CO2 emissions, with 74% coming from road vehicles (IPCC Working Group III, 2007). GHG emissions from the transportation sector are expected to continue to increase sharply in the near future. This is mainly due to the increased use of cars and trucks by the vast majority of the world’s population, with increasing access to personal vehicles. To avoid such shifts of new consumers to private cars in developing countries, viable alternatives have to be developed and deployed. This article explores what drivers and barriers exist for the development of such viable alternatives for inter-city freight transport and urban car transport. GHG emissions reductions are, however, only one of several key issues related to the transportation sector during the coming decades. Mitigation it is unlikely to be a priority for policy makers in the developing countries, who see investment in their transportation systems as a key enabling factor for economic development. Therefore, emission reduction opportunities by themselves are unlikely to drive the development of the desired alternatives. The implementation of mitigation options has several co-benefits of economic, environmental and social order. Highlighting the co-benefits of effective domestic transportation policies (decreased dependency of oil exports; reduced air pollutants and noise; reduced costs with regard to health systems, including traffic fatalities; reduced traffic jams and related losses of billions of dollars each year) (NCHRP, 2003) is extremely important in order to gain the political support of domestic stakeholders. It can also show that development objectives are compatible with the long-term objective of large-scale emissions reductions. Despite the existence of the co-benefits for several decades and the overall development benefit that a modal shift could offer to Brazil, only limited efforts have been pursued towards their

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delivery. This raises the question of whether international support can shift the balance towards their implementation. Section 2 discusses the different options that are available.

2. Description of policies Brazil’s transportation system faces two different challenges, both at different scales. The first challenge is to improve the infrastructure of the transportation system throughout the country. This could ease the integration, expansion and improvement of the production system in order to facilitate a cooperative development effort among regions. In this regard, all transportation systems must be significantly improved in light of this need. Road transportation is the main transport system in Brazil. In the twentieth century, Brazilian transportation policy overemphasized the importance of roads. In 2005, 58% of freight transportation was being pursued on roads (measured in t/km). The predominance of this mode of transport is the result of a development model implemented in the country since the 1950s. Prioritization of roadways was implemented at the expense of railway investments, and studies have indicated that vast expanses of waterways in most of the hinterlands have not been fully exploited for water-borne transport. The second main challenge related to the transportation sector is ensuring an effective transportation system in urban areas, especially in the larger cities (ten cities in Brazil have more than 2 million inhabitants). These cities suffer from air pollution, congestion, noise and accidents caused by intense traffic. Governments have difficulty in providing the necessary road network infrastructure for the incredibly rapid increase in the number of both light and heavy vehicles and in promoting effective public transportation systems. These two main challenges faced by Brazil’s transportation sector are shared with many other developing countries. This article discusses one aspect towards their solution – the development of policies and infrastructure to shift transport to rail, ship, buses and underground so as to limit energy consumption, reduce local pollution, accidents and congestion, and to contribute towards low-carbon growth. Two policies that have been adopted for the Brazilian transportation sector are evaluated: the National Plan on Logistics and Transport, and Pro-Transport. The first policy addresses the challenge of how to promote a multimodal transport system and identify the scale of investment necessary, the second addresses the issue of how to ensure alternative investments to improve the urban public transportation system.

2.1. National plan on logistics and transport The PNLT (Programa Nacional de Logistica e Transporte) is a framework policy that aims to provide a strategic planning system for the transportation sector, for the mid- and long term. It involves all government structures, as well as the various public and private organizations and institutions related to the transportation sector. It is a multimodal plan, involving the whole logistic chain associated with transportation, including all costs and not just direct sector costs – which indicates the need for actions and investments in the light of the country’s social and economic development needs (Federal Government of Brazil, 2007a). Although some environmental externalities have been considered in its elaboration, climate change concerns have not been yet integrated into it. One of the objectives of the PNLT1 is to achieve an effective change in the existing freight transportation mix of the country, given that the optimization and rationalization of freight is associated with the more intensive and adequate use of railways and waterways. This objective takes into account energy efficiency and productivity of flows, in order to consider volume and

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70 60

58 Highway

50

Railway

40 30

33 32 25

20

Waterway

29

Pipeline Airway

13

10

3.6

0

5

0.4

2005

1

2025

FIGURE 1 Current and future freight transportation mix (in terms of t/km) (Source: PNLT)

transportation distances. It is worth highlighting this objective in the scope of this article, given that the PNLT can induce a change in the modal shares of trucking, rail and inland waterways transport, which may curb the GHG emissions curve in the country. If the projects and actions identified in the plan are implemented, railway and waterway modes will significantly increase, as can be seen in Figure 1. In order to implement its objectives, the PNLT indicates the amount of investment recommended until 2023. These figures have been aggregated by modes and by periods of implementation, as can be seen in Figure 2. However, the recommended investments that have been presented, corresponding to around 7% of the country’s annual GDP (in 2007), certainly do not cover the totality of investments required by the transportation sector in Brazil.

R$ million 80,000 After 2015

70,000 18,789

2012–2015

60,000

2008–2011 50,000

13,109

40,000 30,539 30,000 20,000

42,296

10,000

16,969

0 Highway

12,411

3,048

Railway

6,173 3,962 2,672

5,450 7,301

3,229 3,004 3,462

Waterway

Ports

Airports

FIGURE 2 Recommended investments in transportation infrastructure by 2023 (by modes)

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2.2. Pro-Transport Public transportation, not just in Brazil but also in several other developing countries, is undergoing a serious crisis resulting in high tariffs, institutional difficulties, loss of quality, loss of commercial speed due to traffic jams, and a reduction in urban mobility. This has caused a real reduction in the number of trips made by urban populations using public transport. In order to reverse this scenario, it is necessary to create exclusive corridors for public passenger transportation, terminals, stops and shelters, and to ensure accessibility. Given the amount of investment needed, and the difficulties that local governments face allocating an adequate amount of financial resources to these measures, Pro-Transport has been created with the aim of offering an alternative channel to raise such funds.2 Pro-Transport is a programme established to finance infrastructure geared towards the public transportation of passengers, with priority given to low-income groups, using resources from the Government Severance Indemnity Fund for Employees (FGTS). This Fund was created in 1967 to protect workers dismissed without just cause, by opening an account linked to the work contract. Every month, companies deposit 8% of each employee’s salary in accounts opened in their names, and the money can be used by them in specific situations. The FGTS comprises the total sum of these monthly deposits, and finances popular housing, basic sanitation, and urban infrastructure programmes. Several actions can be financed under Pro-Transport, including segregated streets, exclusive streets and lanes for public urban passenger transportation traffic (aiming at replicating the successful experience of some cities, such as Curitiba; see Box 1), and public urban passenger transportation line connection points for the same or a different modality.

Box 1. Public transportation system in Curitiba Curitiba is a city in the south of Brazil, with a population of around 1.8 million people. Since the 1970s its public transportation system has been quoted as an example of best practice in cities with rapid urbanization and urban sprawl, especially the dedicated lanes for a bus rapid transport system. The ‘surface metro’ system, with bi-articulated buses serving 75% of all weekday commuters, was achieved at the relatively low cost of US$3 million/km, compared with a typical tram system, which costs US$8–12 million/km, or a subway at US$50–100 million/km. The system has been estimated to reduce fuel consumption by 25–30% (Roseland, 1998) when compared with eight comparable Brazilian cities. Rabinovitch (1993) estimated a saving of 27 million litres of fuel a year, equating to approximately 62,505 tonnes of CO2. In addition, there are regulations ensuring that the bus fleet is less than 10 years old. There has been an additional move to convert the bus fleet to biodiesel starting in 2000. Despite the perceived success of the Curitiba plan, it has not been widely adopted in other Brazilian cities, although there are similar schemes in Belo Horizonte, Brazil, and in Bogotá, Colombia. Since the inception of the plan in the 1970s, there has been a move to develop a rail system in Curitiba alongside, and even to replace, elements of its bus network, but capital constraints have held back this intention (Demery, 2004). The view that rail is a superior option, along with the highly integrated land-use and transit planning required for a Curitiba-style approach, may explain the lack of implementation in other cities. This highlights the barriers, both political and economic, that need to be overcome in establishing successful urban public transport systems, with their associated emissions reductions.

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Given that Pro-Transport is a programme to facilitate fund raising to be used in public passenger transportation, it does not have a specific cost, although related projected resources have limitations. Pro-Transport’s target audience are city halls, state governments, managing bodies and public urban transportation service concessionaires. Although the scale of the programme has not been clearly identified, there are some requirements that the target audience must satisfy before they can apply for funding.

3. Benefits Efforts to develop transportation policies in Brazil have largely been motivated by reasons other than climate change, as is the case for the two policies presented above. The PNLT’s Executive Report, which has more than 400 pages, does not even mention GHGs, addressing – at most – local pollutants. The need to reduce atmospheric pollutants and GHGs has only recently been mentioned in the justification of a Resolution on Pro-Transport, recommended by the Council of Cities of the Ministry of Cities. 3 In fact, the integration of climate change concerns into transportation sector policies is still at a very preliminary stage in Brazil. Railway and waterway modes are usually more cost-effective than roadway modes in terms of energy consumption per tonne of freight, especially regarding mining, raw materials and basic agricultural products, due to far greater load capacity. In a study on the energy use and carbon emissions from freight in ten industrialized countries, the data suggested that the modal mix has a large impact on freight energy use, as the energy intensity of road freight (in MJ/t-km) is as much as ten times greater than that for shipping or rail (Schipper et al., 1997). Furthermore, measures to promote public passenger transportation usually reduce GHG emissions. From a climate change perspective, the IPCC recognizes that personal motor vehicles consume much more energy, and result in far more GHG emissions per passenger-km, than other surface passenger modes (IPCC Working Group III, 2007), although the experience of some countries also suggests that isolated measures to ensure an efficient transportation system do not necessarily reduce the number of private vehicles on the streets. Moreover, if new train and underground systems powered by electricity are implemented, this might have a positive impact on GHG emissions, taking into account the fact that the Brazilian electrical mix is very clean, due to the high share of hydroelectric power (88.7% in 2007), and there is great potential for additional renewable electricity. However, it is worth considering that the increasing use of fossil fuels for electricity generation in Brazil has the potential of downsizing the potential positive impacts of new trains and underground systems for public transport. The policies will also have additional non-climate co-benefits. In the case of the PNLT, if successfully implemented, the plan might increase productivity and distribution of goods with significant economic gains, avoiding losses from the bottlenecks found in the current transportation system. This point also applies to the urban environment and the Pro-Transport programme, which can have additional direct co-benefits in terms of health, noise and congestion, as indicated in the previous sections. The government official responsible for the PNLT has recently indicated that a shift in the modal mix would have the following potential benefits in the period from 2005 to 2025: a 15% increase in energy efficiency, a 22.5% reduction in fuel consumption, a 20% reduction in NOx emissions and a 15% reduction in CO2 emissions.4 However, the assumptions for the calculation of these figures have not been specified and a careful analysis needs to be conducted. It remains challenging to quantify the short-term and long-term climate change benefits of these policies. Given the complexity of Brazil’s fuel supply market (the availability of ‘gasohol’,5

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hydrated ethanol,6 vehicular natural gas (VNG), diesel and biodiesel), it would also be extremely complex to quantitatively estimate the mitigation potential of a modal shift. However, if it is assumed that there is a global market for fuels, and the marginal savings of fuel will result in a reduction of fossil fuel exploration, then the benefit of shifting away from liquid fuels is more significant. In addition, regarding Pro-Transport, there is no publicly available information on the amount of funds raised through the programme, and therefore it is difficult to estimate its contribution to investments in public passenger transportation systems. A comprehensive study entitled Greenhouse Gas Mitigation in Brazil, China and India: Scenarios and Opportunities Through 2025 (CCAP, 2006) provides some indication of the GHG reductions through several different policies. Three different scenarios were developed, partly based on the A2 and B2 IPCC scenarios: ■ A pre-2000 policy scenario, which considered only policies and programmes adopted prior to 2000, was used as the ‘business-as-usual’ (BAU) scenario. ■ A recent policy scenario (also called ‘unilateral actions’), which considered the impact of the implementation of all policies announced before 2006, was also developed. ■ Where appropriate, each country analysis conducted up to four variations of advanced option scenarios. For the transportation sector in Brazil, according to the BAU scenario, GHG emissions would grow at such a fast pace that by 2020 (245 MtCO2) they would have increased more than 130% compared with 2000 levels (106 MtCO2). In the ‘recent policy’ scenario, emissions are almost onefifth (18%) lower in 2020 (202 MtCO2, which is 44 MtCO2 less than the BAU scenario). The savings are equivalent to almost 1.5 times the total emissions from light-duty vehicles in 2000 (CCAP, 2006).7 Figure 3 illustrates the scale of the emissions savings relative to the ‘pre-2000 policy’ scenario.8 The ‘recent policy’ scenario encompasses only the deployment of flex-fuel technology and the Conpet programme, as these were adopted between 2000 and 2005. The flex-fuel vehicles allow their owners to select the fuel used each time they fill the tank; they can decide to use any addition of hydrated ethanol to petrol in the blend, from 0 to 100%, with no need to change the vehicle’s operation. This has been quite successful in Brazil.9 Conpet is the name of the National Programme for the Rational Use of Natural Gas and Oil Products; an energy efficiency programme aiming to achieve a 25% improvement in energy efficiency in the use of oil and natural gas. Given that the PNLT and Pro-Transport were not considered in either the ‘recent policy’ or ‘advanced option’ scenarios, it can be deduced that their implementation may imply a GHG mitigation beyond –18% of the BAU scenario.10 Although there are perceived potential benefits from of these two policies in terms of GHG emissions reductions, there is a need to develop further analysis, where data are available, to give a more exact assessment of the impacts of these policies in terms of the likely carbon emissions reductions. When resources are available, it could be ‘relatively easy’ to subsidize new public infrastructure, but this usually results only in increased transport, rather than a modal shift. This phenomenon has been widely observed with urban public transport systems, but might equally apply to freight. Thus, the ideal situation is that policies that create viable low-carbon options could be combined with policies that reduce the attractiveness of existing transport modes. Such policies typically start with cost-reflective taxes on fuel that recover investment costs, cover maintenance costs, cover the cost of accidents, and cover local environmental impacts (noise and pollution). Eventually they might expand to also include carbon costs. Increasingly,

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700

Other Saving

600

Other (inc. Residential) 2020 ‘Recent Policy’ Transport Emissions 202 MtCO2

500

MtCO2

400 2000 Transport Emissions 106 MtCO2

300

Transport Saving B2

Transport Saving A2 Transport Saving Transport

Manufacturing Saving 200

Manufacturing & Construction

100

Electricity Saving Electricity 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025

0

FIGURE 3 Sectoral emissions reductions (Source: historical data IEA, projected data CCAP)

congestion charging schemes also levy additional tariffs on passenger cars in urban environments (e.g. London), and additional road-use charges for trucks aim to reflect the increased road maintenance costs and other externalities.

4. Domestic drivers and barriers Many stakeholders are involved in transport policy and projects – this creates a multitude of drivers and barriers for their implementation. One example of this is access to finance; a key aspect for infrastructure projects. In this section we explore in more detail why access to finance differs between inter-city freight transport projects and public transport projects within cities. In 2003, the Ministry of Transportation recaptured the process of mid- and long-term transportation planning on a national scale, which was consolidated in 2006, setting up the basis for elaborating the PNLT, involving state governments, the manufacturing and service sectors, transport operators, contractors and users. The PNLT served as an input for formulating the Federal Government Pluriennial Plan of Actions (PPA) 2008–2011, and for the first indication of investments for the PPA 2012–2015. It will also serve as an input for organizing of subsequent PPAs until 2023, which is the horizon of the socioeconomic studies on which the PNLT has been based. The PNLT has been integrated into the Growth Acceleration Programme, known as PAC, which aims to offer better credit conditions for infrastructure. Investments in logistics (modals) to the order of more than R$58 billion have been estimated under the PAC for the period 2007–2010, including around R$33 billion from the federal budget and around R$17 billion from public financing, mainly through the Brazilian Social and Economic Development Bank (BNDES).11

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The BNDES, as a component of the PAC, approved in 2007 an interest rate reduction for segments related to infrastructure, including roadways, railways, ports, airports and urban transportation. Therefore, the interest rates will be, on average, 60% lower than in 2005, with the objective of stimulating investment in the Brazilian economy. The interest rate for BNDES loans comprises the long-term interest rate plus a basic fee, as presented in Table 1, plus a credit risk rate, of up to 3.57% p.a., pursuant to the beneficiary’s risk. This interest rate is considerably lower than commercially available Brazilian interest rates, which are among the highest in the world (13.75% in October 2008). Financial resources under the PAC can be an important element for achieving PNLT objectives, especially regarding the change in modal split. Given that the time horizon for the PNLT is 2023, if the PAC could provide one-third of the funds necessary, as expected by 2010, access to financial resources will be unlikely to create a constraint. This is because the availability of financial resources for investments in logistics is considered strategically important, as it is seen to affect the country’s competitiveness. This situation is rather different for the Pro-Transport programme. As the benefits are on a smaller scale, and accrued only by the local population, visitors and tourists, and not considered to be central for the international competitiveness of Brazil, access to finance is offered on less favourable terms. Pro-Transport is led by the Ministry of Cities in collaboration with the Curator Council for the Government Severance Indemnity Fund for Employees. Policy makers for Pro-Transport are governance officials from city halls, state governments, managing bodies or public urban transportation service concessionaires, who will decide whether it is worth participating in the programme and executing the projects, given that they will also assume the risk of the investments. Monthly interest will be charged for interventions within the scope of Pro-Transport, on the date established in the contract, in the grace and amortization phases, at the nominal rate of 6% per year for the public sector and 20% for the private sector. There will be a four-year grace period, starting from the date the financing contract is signed. The amortization period lasts up to 20 years, starting from the month following the end of the grace period. Moreover, there is the minimum percentage counterpart contribution that the borrower is responsible for that has been fixed over investment value. Thus, Pro-Transport involves a considerable number of conditionalities and investment risks. The rate of return for many urban transportation projects can only be verified on a long-term basis and, therefore, many projects are not attractive for private investors. The counterpart contribution can also represent a significant barrier for both public and private entities.

TABLE 1 Brazilian Social and Economic Development Bank (BNDES) basic interest rates applied for public infrastructure investment Logistic

2005

2006

2007

% Change (07/05)

Northeast regions and bottleneck reduction

2.5%

0.0%

0.0%

–100%

Other investments

2.5%

1.5%

1.0%

–60%

2. Roadway, airway, port and terminal modals

2.5%

1.5%

1.0%

–60%

3. Roadway concessions

3.0%

3.0%

2.0%

–33%

1. Railway Modal

Source: BNDES (2007).

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Another significant barrier is the fact that the projected resources for Pro-Transport are quite limited (R$1 billion for the fiscal year 2008), especially considering sector needs and the number of municipalities in Brazil. With these financial resources, the programme would not be able to finance more expensive interventions, such as underground systems or tram lines, which could represent a greater reduction in GHG emissions. The analysis of these two policies suggests that financial barriers related to urban transportation projects are higher than those for logistic projects (modals). This takes into account that the latter usually involve issues related to economic competitiveness and, therefore, logistic projects are more attractive both from the political and economic points of view. Moreover, at the federal or state level, it is easier to find technical expertise or political capability to raise international funds than at the city level; a situation that is also related to the capacity of the counterpart contribution and credibility of the borrower. Uncertainties in the continuity of actions and the related political support represent additional barriers to the implementation of transportation policies.

5. International cooperation Given the challenges facing transportation sectors in developing countries, technical and financial support, at many levels, is necessary, if not to guarantee the feasibility of the implementation of domestic efforts, then at least to accelerate them. International cooperation can play a significant role in this process. A financial flows report issued by the UNFCCC Secretariat (UNFCCC, 2007) confirms that it is important to focus on the role of private-sector investments when considering means of enhancing investment and financial flows to address climate change, as they constitute the largest share of the investment and financial flows (around 86%). However, the majority of transportation infrastructure-related investment, with the long-term nature of its rate of return, does not seem very attractive to private investors. If investments in the transportation sector are to be compatible with the long-term objective of large-scale emissions reductions, they must be designed and structured in a complementary way. Therefore, the climate change regime has a fundamental role to play in organizing efforts in a coordinated manner, as well as in providing adequate means to measure them. Thus, options within the multilateral climate change regime must be explored. This regime has already offered innovative ways to fund GHG mitigation measures; the Kyoto Protocol created market mechanisms to finance mitigation measures. Among them the Clean Development Mechanism (CDM), the only one focused on the participation of developing countries, has resulted in significant GHG emissions reductions in non-Annex I countries. CDM projects have provided a fruitful environment for the enhancement of technological cooperation among different stakeholders (the private sector, NGOs and government at various levels) and have promoted environmentally friendly investments in developing countries’ economies. However, so far, the carbon market has had little impact on GHG emissions from the transportation sector, although related projects are eligible under the CDM (Lancaster, 2008). Only two project activities to date (one in India and the other in Colombia) under this sectoral scope have been approved by the CDM Executive Board. The main barrier for a large number of CDM project activities in the transportation sector, particularly those involving a modal shift, is proving ‘additionality’ – whether or not the project would be feasible without the opportunity of the CDM project activity. It is not yet certain whether the number of CDM projects will increase. There is potential to do so through the opportunities

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offered by programmatic CDM, which have not been fully explored due to many existing complexities involved, and new opportunities that might be created in the post-2012 arrangement. Therefore, other options must be sought beyond the Kyoto Protocol’s CDM, and an effective implementation of the UNFCCC may provide some solutions. At the 13th Conference of the Parties to the UNFCCC (COP-13), in 2007, an Action Plan was adopted (Decision 1/CP. 13) to launch a comprehensive process to enable full, effective and sustained implementation of the Convention through long-term cooperative action, now, up to, and beyond 2012, in order to reach an agreed outcome. The possible adoption of an arrangement under the auspices of the UNFCCC – providing positive incentives (through technology, financing and capacity building) to support nationally appropriate mitigation actions by developing countries, in a measurable, reportable and verifiable manner – would be a significant contribution to the ultimate objective of the Convention, as well as to the promotion of sustainable development and equity. Given that GHG emissions from the transportation sector are expected to continue to increase sharply in the near future, particularly in developing countries such as Brazil, all the options to address such emissions, including funding to support their mitigation, must be taken into consideration at the domestic and international levels. However, it is worth emphasizing that without adequately quantifying the possible benefits of transportation policies in terms of GHG emissions reductions in developing countries, it will be difficult to attract international support and investments in this area. The lack of data and quantitative indicators on the possible mitigation impacts of these policies – which is a deficiency identified in the two Brazilian policies previously analysed – can be a significant barrier for mobilizing funds that could support them. On the other hand, indication of potential international support that clearly shows the long-term objective of large-scale emissions reductions can help in integrating climate change concerns into domestic policies in such countries, which will lead to the development of quantitative indicators on GHG emissions reductions.

6. Conclusions Two policies related to the transportation sector – the National Plan on Logistics and Transport (to promote significant change in the modal split in the country) and Pro-Transport (to fund public transportation in urban areas) – have recently been adopted in Brazil. Although these policies are acknowledged to have been adopted for reasons other than climate change, they may nonetheless help to lower the projected GHG emissions trajectory in Brazil. Moreover, taking into account that the transportation sector has many interlinkages with other actors and economic activities, additional environmental, social and economic co-benefits have been identified, suggesting that improvements for the wider economy are compatible with the long-term objective of large-scale emissions reductions. The analysis of these policies has led to the conclusion that, while it is relatively easy to mobilize investment in transport logistics infrastructure at the national level, given the impacts on economic competitiveness for the country as a whole, it is more challenging to leverage funds to provide more efficient and integrated public transport systems and their related infrastructure at the local level. Although it is already in the self-interest of Brazil, for reasons other than climate change, to shift to rail and waterways for transportation of freight, many actions that are (supposedly) positive for a country are not pursued, whether because of constraints of finance, political opposition to change, or failure to coordinate the different actors and activities.

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Taking into consideration these challenges within the Brazilian transportation sector, international cooperation can play a significant role in supporting domestic policies, especially to complement and accelerate domestic efforts. If such efforts are perceived as instruments that can also contribute to the long-term objective of large-scale emissions reductions, the integration of climate change concerns into domestic policies can be enhanced, and more adequate indicators of their mitigation potential can be developed. This article recognizes that the linkages between global warming and the transportation sector must be addressed in the context of the broader goal of sustainable development. Thus, both public and private investment opportunities must be explored. In any case, international cooperation must be compatible with the efforts undertaken by developing countries to reduce emissions within their territories, even if this is not the primary objective of the policy adopted. This is the fairest way to ensure that developing countries can experience growth to meet their social and economic needs, while at the same time contributing to the full, effective and sustained implementation of the Convention. The international community has been discussing, under the multilateral climate change regime, the ways and means to support nationally appropriate mitigation actions by developing countries. The provision of positive incentives (through technology, financing and capacity building) is fundamental to encourage, accelerate and enlarge the scope of such actions. However, as far as international cooperation to support domestic policies in developing countries is concerned, it is still uncertain the extent to which the recent global financial economic crisis and its spillover effects will reduce the availability of funds to be invested in such countries.

Acknowledgement The ideas contained in this article do not necessarily reflect the official position of Brazil on these issues.

Notes 1. A more detailed description of objectives of the PNLT is given in the Executive Report of the plan (www.centran.eb.br/ docs/proj_estru/logistica/relatorio_executivo_junho2007.pdf). 2. This section is based on the information available at the Ministry of Cities website (www.cidades.gov.br/secretariasnacionais/transporte-e-mobilidade/programas-e-acoes/pro-transporte/). 3. Council of Cities, Ministry of Cities, recommended Resolution of 9 July 2008. 4. Presentation by Eng. Marcelo Perrupato at the International Seminar on Waterways, Brazil–Netherlands, held in Brasilia, 4 March 2009. 5. In Brazil, ethanol is blended with petrol, with a current content of 25% of anhydrous alcohol, forming a ‘gasohol’ mixture. 6. In Brazil, the automobile industry has developed engines capable of running on a 100% ethanol blend. During the 1980s around 70% of the entire fleet of light vehicles in Brazil ran on hydrated ethanol. This Brazilian situation has changed significantly since then and, in recent years, the availability of ‘flex-fuel’ vehicles has stimulated the consumption of hydrated ethanol. 7. Estimated emissions from light-duty vehicles in Brazil corresponded to a total of 31.9 MtCO2 in 2000. 8. The most important pre-2000 transportation policy in Brazil is the National Ethanol Programme. Although the creation of this programme did not have the direct objective of reducing GHG emissions, it is currently recognized as having been extremely successful in promoting such reductions. The average annual avoided CO2 emissions contributed by ethanol consumption in Brazil since 1990 has been estimated at around 13 MtCO2. Avoided CO2 emissions from ethanol consumption were estimated by applying a factor of 0.7 to simulate the difference between ethanol and petrol engine performance and the CO2 emission factor for petrol (Federal Government of Brazil, 2007b).

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9.

The production and sale of flex-fuel vehicles (petrol–ethanol) has been very successful since their launch in March 2003. The production of flex-fuel vehicles has grown from 49,200 units in 2003 to 332,500 in 2004, 857,900 in 2005, and 1.4 million in 2006, with a total of 3.86 million flex-fuel vehicles in 2007, accounting for 16% of Brazil’s fleet (ANFAVEA, 2008). 10. A linear extrapolation based on the BAU scenario is not possible, mainly due to the complexity of Brazil’s fuel supply market, as mentioned previously. For a more precise quantitative estimate, a computational model should be run, which goes beyond the scope of this study. 11. PAC, Press Release, p. 17 (available in Portuguese at www.brasil.gov.br/pac/conheca/infra_estrutura/logistica/pac_no1).

References ANFAVEA (Brazilian National Association of Vehicle Manufacturers), 2008, Annual Report, ANFAVEA, São Paulo. BNDES (Brazilian Development Bank), 2007, Growth Acceleration Program: Better Credit Conditions to Infrastructure, Rio de Janeiro [available in English at http://inter.bndes.gov.br/english/pac.asp]. CCAP (Center for Clean Air Policy), 2006, Greenhouse Gas Mitigation in Brazil, China and India: Scenarios and Opportunities through 2025, CCAP Synthesis Report, Washington, DC. Demery, L., 2004, Bus Rapid Transit in Curitiba, Brazil: An Information Summary, publictransit.us Special Report No. 1. Federal Government of Brazil, 2007a, Transportation Policy in Brazil: National Plan for Logistics and Transportation: Executive Summary, Ministry of Transportation, Brasília. Federal Government of Brazil, 2007b, Brazil’s Contribution to Prevent Climate Change: White Paper, MRE/MCT/MMA/ MME/MDIC, Brasília [available in English at www.mct.gov.br/upd_blob/0018/18294.pdf]. IPCC (Intergovernmental Panel on Climate Change), 2007, Climate Change 2007: Synthesis Report, WMO/UNEP, Geneva. IPCC Working Group III, 2007, Climate Change 2007: Mitigation of Climate Change, Working Group III of the Intergovernmental Panel on Climate Change, WMO/UNEP, Geneva. Lancaster, R., 2008, ‘Caught in the headlines: can something be done to improve the role of carbon finance in tackling road transport’s rising greenhouse gas emissions?’, Point Carbon 2(6), 23–26. NCHRP (National Cooperative Highway Research Program), 2003, Economic Implications of Congestion, NCHRP Report 463, Washington, DC. Rabinovitch, J., 1993, ‘Urban public transport management in Curitiba, Brazil’, UNEP Industry and Environment 16(1–2), 17–20. Roseland, M., 1998, Toward Sustainable Communities: Resources for Citizens and their Governments, New Society Publishers, Gabriola Island, BC, Canada. Schipper, L., Scholl, L., Price, L., 1997, ‘Energy use and carbon emissions from freight in ten industrialized countries: an analysis of trends from 1973 to 1992’, Transport and Environment, Transportation Research Part D 2(1), 57–76. UNFCCC, 2007, Report on the Analysis of Existing and Potential Investment and Financial Flows Relevant to the Development of an Effective and Appropriate International Response to Climate Change: Dialogue on Long-term Cooperative Action to Address Climate Change by Enhancing Implementation of the Convention, Fourth workshop, Vienna, 27–31 August 2007, Dialogue Working Paper 8.

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■ country study

Policy and regulatory framework for renewable energy and energy efficiency development in Ghana WILLIAM GBONEY* International Institute of Infrastructural Economics and Management (I3EM), PO Box KD 530, Kanda, Accra, Ghana

What external support is needed to assist Ghana’s domestic policies to overcome domestic barriers and increase the scope, scale and speed of adoption of renewable energy and energy efficiency technologies? Although Ghana has a well-established regulatory environment and institutional set-up, international cooperation and support are required to leverage domestic policy and create an enabling environment to accelerate the transition to affordable and reliable renewable energy. International support can also be used to enhance the activities of the Energy Foundation and energy service companies (ESCOs) as well as to increase the adoption of energy efficiency technologies through residential and industrial demand-side management (DSM) activities. Policy relevance: Despite domestic and international financial incentives, barriers from the regulatory framework and from conventional practice prevent the utilization of renewable resources in both grid-connected and off-grid applications. Tackling these barriers requires both government commitment towards a comprehensive strategy and support from different stakeholders to explore viable solutions. Such action can be supported, but not replaced, with international support for capacity building, technical assistance and finance. Experience from Ghana points to some success for such a strategy for energy efficiency measures but also highlights the importance of domestic and international structures that ensure continuity of an institution with sufficient resources for programme and project execution. Keywords: capacity building; climate policy; domestic policies; energy efficiency; energy sector; international support; regulatory framework; renewable energy Quel est le soutien exterieur requis pour appuyer les politiques intérieures du Ghana pour écarter les barrières intérieures et augmenter l’ampleur, l’échelle, et la rapidité d’adoption des technologies en énergies renouvelables et en efficacité énergétique? Bien que l’environnement réglementaire et les institutions ghanéennes soient bien établis, une coopération et un soutien extérieurs sont nécessaires pour faire levier aux politiques intérieures et créer un environnement propice à l’accélération de la transition vers un système d’énergies renouvelables abordable et fiable. Un soutien extérieur peut aussi être dédié à l’augmentation des activités de la Fondation de l’énergie et des entreprises de service énergétique « Energy Service Companies » (ESCO) ainsi qu’à l’adoption accélérée de technologies d’efficacité énergétique grâce à des activités de gestion de la demande « demand-side management » (DSM) résidentielle et industrielle. Pertinence politique: Malgré les incitations financières intérieures et extérieures, les obstacles propres au cadre réglementaire et à la pratique courante bloquent l’emploi des ressources renouvelables dans les applications à la fois connectées au réseau et hors reseau. L’engagement du gouvernement vers une stratégie globale est nécessaire pour surmonter ces obstacles, ainsi que le soutien de diverses parties prenantes dans l’analyse de solutions viables. De telles mesures peuvent être soutenues, mais non remplacées, par un soutien international au renforcement des capacités, une aide technique et des fonds. L’expérience ghanéenne révèle le succès de cette stratégie en ce qui

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 508–516 doi:10.3763/cpol.2009.0636 CLIMATE POLICY © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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concerne les mesures d’efficacité énergétique, tout en illustrant l’importance des structures nationales et internationales garantissant la pérennité d’une institution à l’aide de ressources suffisantes à l’exécution de programmes et projets. Mots clés: cadre réglementaire; efficacité énergétique; énergies renouvelables; politique climatique; politiques intérieures; renforcement des capacités; secteur de l’énergie; soutien international

1. Introduction Despite the increasing deployment of low-carbon technologies, greenhouse gas (GHG) emissions from fossil fuels have continued to increase (IPCC, 2007). As noted by Sims et al. (2007), the absence of effective government policies can cause GHG emissions from fossil fuel combustion to rise from a global figure of 26.1 GtCO2-equivalent in 2004, to between 37 and 40 GtCO2-equivalent by 2030. The challenge for both developed and developing countries is a massive shift of the energy sector to low-carbon technologies within the next 10–20 years (Avato and Coony, 2008). Ghana is a developing country which is endowed with abundant renewable energy resources (e.g. biomass, solar, hydro and wind) (Akuffo, 2003). This article provides insight into renewable energy (RE) and energy efficiency (EE) policies in Ghana, and identifies the barriers (including regulatory, human and institutional capacities, and financial constraints) that prevent the widespread deployment of RE and EE. It does not suffice to address these barriers individually, as has been shown by the failure of the Clean Development Mechanism (CDM) fund, which tends to focus on addressing only financial issues. A comprehensive action plan, which combines efforts in all these areas, is therefore required. The article also identifies the domestic policies that are ‘slow-moving’, and which would require international support and cooperation in order to increase the scale, scope and speed of RE and EE adoption in Ghana.

2. Policy description on renewable energy and energy efficiency The overall Ghana government policy on renewable energy is aimed at removing the barriers which have hampered the exploitation of the country’s renewable resources, by attracting investment, as well as by building local capacity for accelerating the transition to a sustainable market (DANIDA, 2002). This policy has led to the development of Ghana’s strategic national energy plan, which set a national target of 10% RE in the country’s energy mix by 2020 (Energy Commission, 2006). The government’s energy policy has also sought to enhance energy efficiency (EE) through demand-side management (DSM) activities. To ensure the effective integration of RE and EE into the country’s energy sector reforms, the government established two regulatory agencies in 1997: the Energy Commission (EC) and the Public Utilities Regulatory Commission (PURC). The EC was set up to recommend the development and utilization of Ghana’s energy resources. The EC is also responsible for developing the overall renewable energy regulatory and legislative framework, in order to ensure the wide adoption of RE. The second regulatory body, PURC, is responsible for developing suitable feed-in tariffs and regulating quality of service delivery. A third institution, the Energy Foundation (EF), was created in 1997 as a public–private partnership. The Energy Foundation’s focus is on the promotion of energy efficiency development, and providing energy solutions for residential and industrial consumers. Despite the strong institutional set-up and abundant RE sources available, these resources have not been harnessed, due to the barriers discussed in the next section.

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3. Domestic barriers and drivers The inability to harness the abundant RE resources is attributable to the following factors, which were identified at a recent workshop held in Accra, Ghana (Gboney, 2009), to discuss how to create the enabling domestic environment for international support and cooperation, towards enhancing RE and EE technology transfer.

Absence of legal RE policy and regulatory framework Despite the government’s commitment to the development of RE, the absence of a comprehensive legal and regulatory framework has been a major barrier for independent power producers (IPPs) to invest in RE technologies (RETs). For instance, the absence of network access rules and a transparent network pricing framework is hindering the development of RE. The government’s policy also seeks to encourage the development of mini-hydro and other mini-grid-connected RETs, but the absence of well-documented tariff principles, as well as the non-existence of appropriate regulatory capacity on mini-grid systems, have continued to act as barriers. Furthermore, there is no incentive for the development of stand-alone systems, because of a lack of a suitable pricing framework which would enable such systems to sell back power to the electric distribution company.

Lack of access to credit and long-term finance Another barrier identified is the general reluctance on the part of the domestic banks and other financial institutions to finance RETs (United Nations, 2008). Ghana possesses a well-developed financial sector comprising 25 banks, made up of commercial, merchant and development banks, with a total of 310 branches country-wide. In spite of this, financial support and access to longterm credit have not been available to RE and EE for the following reasons: ■ The perceived riskiness of RE projects ■ Inadequate funds available to the banks ■ Lack of experience and in-depth understanding by bank staff on how to carry out credit risk analyses of RE and EE projects ■ The inability of the private entrepreneurs and the energy service companies (ESCOs) to present bankable proposals.

Weak domestic capacity of local stakeholders The stakeholders’ workshop also brought to the fore the general lack of capacity in both the banking and non-bank financial institutions, with regard to RE and EE, infrastructure project finance, project risk allocation, and the review of Power Purchase Agreements (PPAs). It was also noted that the RE developers and the ESCOs do not possess the capacity to prepare feasibility studies and business plans, or to carry out environmental impact assessment of RE and EE projects.

Absence of an all-inclusive rural electrification policy Although there is an energy policy covering the RE sector, the policy fails to clearly define rural electrification policy vis-à-vis grid extension plans and off-grid programmes. This policy gap has affected the deployment, diffusion and commercialization of RE technologies in rural communities and peri-urban areas.

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Lack of appropriate technical capacity for the maintenance of RE systems Another barrier that has been identified is the weak technical capacity of private entrepreneurs in the installation and maintenance of RE technologies, especially solar PV systems and EE appliances. This issue needs to be addressed through international support and cooperation, in order to generate the necessary technological change and to enhance the country’s capacity to embrace new RE and EE technologies.

Lack of appropriate technical standards The absence of well-documented technical standards for both RE and EE technologies was also identified as a barrier affecting the deployment and diffusion of RETs in Ghana. The country has already put in place a mandatory appliance standards and labelling regime, which requires retailers of room air-conditioners and compact fluorescent lamps (CFLs) to import and sell only products that conform to the minimum efficiency and performance standards of the Standards Board (Energy Commission, 2007). However, the standards for refrigerators and other industrial equipment which have the potential to reduce consumer demand through the use of more efficient appliances are yet to be put in place.

Lack of information and stakeholder awareness Most stakeholders who were interviewed during this study seem to have limited knowledge of the costs, benefits, performance and opportunities for RETs and EE equipment in Ghana. It was also noted that architects and builders fail to take account of energy efficiency in their building designs.

Limited scope of operation of the Energy Foundation Although the Energy Foundation appears to have made some modest gains in promoting energy efficiency, the study has revealed that its activities are limited to the capital city, Accra, and a few of the regional capitals. Figure 1 shows the regional distribution of activities, while Figure 2 depicts the relationship between the Foundation’s activities and regional share of population.

60 50 40 % 30 20 10 0

Accra

Ashanti

Central

Eastern Western

Volta

BrongAhafo

Northern

Upper East

Upper West

Regions FIGURE 1 Regional distribution of Energy Foundation activities

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60 50 40 % 30 20 10 0 Accra

Ashanti

Central

Eastern

Western

Volta

Northern

Brong Ahafo

Upper East

Upper West

Regions % of Activity

% of Population

FIGURE 2 Relationship between population distribution and Energy Foundation activities in the regions

As shown in Figure 2, most of the Foundation’s activities are based in Accra, Ashanti, Central and Eastern regions of Ghana. This may be due to the high population and hence greater industrial activity in these regions. It is, however, important that the Foundation’s activities are extended to the other regions, especially the Northern, Brong Ahafo, Upper East and Upper West regions, whose main economic activity is agriculture. This is very important if Ghana is to make a significant contribution towards reducing global GHG emissions. Figure 3 depicts the key activities of the Energy Foundation. Energy efficiency in buildings, energy management and audits are the main activities of the Foundation. The Foundation

60 50 40 % OF ACTIVITY 30 20 10 0 Energy Efficiency

Energy Management

Technical Assistance

Energy Audit

ACTIVITY TYPE FIGURE 3 Key activities of the Energy Foundation

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has also intensified its public education programme to raise the awareness of residential consumers and industrial users of electricity about DSM activities, and how they can reduce energy consumption. Figures 1, 2 and 3 clearly indicate that more effort and international support is required in order to enable the Energy Foundation to intensify its activities, and enhance the scale and scope of its operations country-wide. In light of the above barriers, the workshop also identified the following as the key drivers which can unlock domestic policy and provide a conducive environment for technology transfer, to enhance the scale, scope and speed of RE and EE deployment in Ghana: ■ Creation of the appropriate regulatory and legal frameworks to incentivize the private sector to invest in RE and EE projects. ■ Development of standards for technology performance. The workshop recommended that the Ghana Standards Board should liaise with the Energy Commission and Energy Foundation to develop codes, standards and certification to provide end-users with performance awareness. ■ The need to develop innovative financing mechanisms, which would permit the bundling of small projects to enhance their financial viability. ■ Public awareness and the establishment of information centres, to provide potential users with information and data on equipment costs and performance. ■ The level of interest from academics, private entrepreneurs, regulators and policy makers is a clear manifestation of the willingness of stakeholders to contribute towards developing a comprehensive domestic strategy, which would support the adoption and absorption of RE and EE technologies. ■ Capacity building, especially training in technology, regulatory economics, financing and management. ■ The use of South–South cooperation to enhance technology transfer.

4. International support mechanisms and actions to overcome barriers This section examines in detail the mechanisms and actions which can be used to build on the domestic policy and drivers identified at the Accra workshop, in order to overcome the barriers to facilitating the rapid diffusion of RE and EE technologies. The following actions and mechanisms are also expected to catalyse Ghana’s efforts to deliver a successful RE and EE technology transfer.

Technical assistance Even though the country currently possesses good policy and regulatory regimes, these appear to be limited to conventional energy sources. International support is required to develop appropriate mandated market policies, which would encourage both private- and public-sector investment. Assistance is also required to develop model PPAs for small RETs (<10 MW), in order to promote mini-grid system development. It is also imperative that the overall policy is redefined to clearly show the roles of RE off-grid system and grid-extension plans. International support, which builds on domestic policy and recognizes off-grid systems, would enhance the deployment, diffusion and commercialization of RETs in rural communities and peri-urban areas in Ghana.

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Capacity building: human and institutional The general lack of knowledge on RE and EE systems on the part of banks and non-bank financial institutions can be surmounted by using international and public-sector financial support to build the capacities of the financial institutions. To be able to ‘unlock’ domestic policy, promote privatesector investment and build an overall enabling environment, support would be required to assist RE developers and the ESCOs in the preparation of feasibility studies and business plans. Training and capacity building are also required for the regulatory agencies and staff from the country’s Ministry of Energy, in policy formulation and regulation of both grid and off-grid systems.

Overcoming the financing barrier Currently, Ghana’s government provides almost 100% capital subsidy for grid-connected systems, while off-grid systems receive no support. One mechanism which could be used to support the private sector is an IDA (International Development Association) partial risk guarantee scheme. This approach has the potential to lower the perceived risk assumed by international lenders, who are reluctant to support private-sector initiatives in both the RE and EE sectors. The guarantee can cover areas such as regulatory, political, currency convertibility and transferability. The country can also overcome the financing barrier by taking advantage of the World Bank’s Clean Technology Fund (CTF), to increase investment in projects and programmes that contribute to the demonstration, deployment and transfer of RETs and other low-carbon technologies (World Bank, 2008). The advantage that the CTF possesses is that it can be used to provide grants and concessional financing to developing countries, and it can also combine with public and private resources to scale up the deployment of RETs and other low-carbon technologies (World Bank, 2008). Ghana can also benefit from financing under the Clean Development Mechanism (CDM). Since most of the rural areas in Ghana still use woodfuel (which leads to deforestation) and kerosene, the carbon reduction potential resulting from the use of alternative sources is likely to be significant enough to enable mini-grid RETs to qualify as a CDM project. In 2002, realizing the benefit of mini-grid systems for reducing GHG emissions, the World Bank and the Global Environment Facility (GEF) created the Community Development Carbon Fund (CDCF). This fund is aimed at extending carbon financing to small projects, including mini-grid renewable systems. It is designed to reduce the CDM transaction cost of mini-grid renewable energy systems by allowing small-scale projects to be bundled together into a portfolio so that they can be developed as one larger CDM project. The country can also take advantage of the government’s micro-finance scheme, which is operated by the country’s rural community banks, to support the development of off-grid systems. The support can be in the form of a partial credit guarantee and the provision of credit facilities by the World Bank and other multilateral and bilateral agencies, so that these rural banks can offer long-term credit of at least 10 years to micro-, small and medium enterprises (MSME) to develop mini-grid RE systems. With regard to energy efficiency, it has been observed that the ESCOs’ potential to undertake EE activities on a large scale or expand their activities is limited because of their weak balance sheets. International financial support can be utilized to leverage the government’s scheme on micro-financing in order to provide co-financing support to the ESCOs.

Actions on technical standards Although the mandatory appliance standards and labelling regime on room air-conditioners and CFLs is in existence, discussions with stakeholders at the Accra workshop suggest that codes,

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standards and certification for RE and EE equipment still need to be implemented, in order to reduce the high risk and negative perceptions of RETs and EE equipment. In that regard, international support and government financial support can be used to support the Standards Board and the Energy Commission, to set up test and certification centres in various parts of the country, and to provide purchasers of RE and EE equipment with performance assurance.

Promoting stakeholder awareness The limited information on RE and EE technologies as a barrier can be overcome if a ‘centre of excellence’ is established at one of the local universities. The centre can serve as a platform which would bring experts from academic, business, government and finance sectors together to discuss and address issues relating to RE and EE, as well as climate change, in a more focused manner. Such centres could be used to improve access to information for stakeholders and facilitate international cooperation (Staley et al., 2008). The centre would thus enhance information flow with international energy and climate agencies such as the UNFCCC, while assisting in the development and strengthening of local enterprises.

5. Conclusions The study has highlighted the key domestic policies and institutional set-up in Ghana’s renewable energy and energy efficiency sectors. Despite the huge potential RE resources in Ghana, these have not been harnessed due to a multitude of barriers. The article therefore examined how these barriers can be surmounted by leveraging domestic policies, through international cooperation and support, to increase the scope, scale and speed of RE and EE adoption in Ghana. Building an enabling environment is very crucial to increasing the scale of technology transfer, and enhancing the use of RE and EE technologies. Even though the regulatory framework and the institutional set-up appear to be well established, it was noted that international support and cooperation could be utilized to enhance the capacity of the regulatory agencies, the Energy Foundation, policy makers and other stakeholders. The regulatory bodies need to have an in-depth understanding of some of the well-established methods for regulating mini-grid systems. Many RE and EE projects have become unsustainable in developing countries due to inadequate attention to the availability of local skills for design, installation, operation, repair, spare parts management and technology transfer. This barrier can be addressed with international financial support and a twinning arrangement, in the form of North–South and South–South cooperation, as well as support from the World Bank and other multilateral donors. The study also identified the lack of access to long-term financing as a barrier which needs to be addressed. Donor support can be utilized for demonstration or pilot projects for most rural RETs. The government’s micro-financing scheme can be leveraged to provide support to rural consumers to purchase stand-alone systems. Most of the rural banks are unable to offer loans with repayment periods exceeding 20 months. International financial support can therefore be given to these banks to co-finance credit for off-grid RE systems. This would enhance the consumer’s ability to repay the loans, through the extension of the 20-month loan repayment period to at least 5 years. These actions, if well implemented, have the potential to increase the scale of deployment and diffusion of off-grid systems in Ghana, especially in the rural areas, to accelerate the attainment of 10% of RE in the country’s energy mix by 2020. The study also noted that one way of overcoming the financing barrier is to build the human capacity of the bank and non-bank financing institutions in RE

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and EE credit analysis, project risk allocation and infrastructure project analysis, using the appropriate technical and financial assumptions. The study also highlighted the country’s ability to take advantage of international finance mechanisms such as the World Bank’s Clean Technology Fund (CTF) to promote the deployment and transfer of low-carbon technologies, as well as the Community Development Carbon Fund (CDCF) to finance small projects, especially mini-grid RE systems. The CDCF has the advantage of allowing small-scale projects to be bundled together into a portfolio, to be developed as one larger Carbon Development Mechanism (CDM) project.

References Akuffo, F., 2003, Indigenous Energy Resource Catalogue for Ghana, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. Avato, P., Coony, J., 2008, Accelerating Clean Energy Technology Research, Development, and Deployment, World Bank Working Paper 138, Washington DC. DANIDA, 2002, Support for the Development and Management of Renewable Sector Programme Support, Project Completion Report, DANIDA Energy Sector Programme Support for Ghana. Energy Commission, 2006, Strategic National Energy Plan, 2006–2020: Woodfuels and Renewables, Accra, Ghana. Energy Commission, 2007, Ghana Appliance Energy Efficiency Standards and Labelling Programme, Energy Commission, Accra, Ghana Gboney, W., 2009, Workshop Report: International Support to Promote Technology Transfer and Deployment, for Renewable Energy and Energy Efficiency in Ghana, Summary of discussions during the workshop in Accra, Ghana on 8 April 2009 [available at www.eprg. group.cam.ac.uk/wp-content/uploads/2009/05/ghana-workshop-report_final1.pdf]. IPCC, 2007, Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK and New York. Sims, R.E.H., Schock, R.N., Adegbululgbe, A., Fenhann J., Konstantinaviciute I., Moomaw, W., Nimir, H.B., Schlamadinger, B., J., Torres-Martínez, J., Turner, C., Uchiyama, Y., Vuori, S.J.V., Wamukonya, N., Zhang, X., 2007, ‘Energy supply’, in: B. Metz, O.R. Davidson, P.R. Bosch, R. Dave, L.A. Meyer (eds), Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, UK and New York, 252–322. Staley, B., Goodward, J., McMahon, H., 2008, From Positions to Agreement: Technology and Finance at the UNFCCC, Discussion Paper, World Resources Institute, Washington, DC. United Nations, 2008, Identifying, Analysing and Assessing Existing and Potential New Financing Resources and Relevant Vehicles to Support the Development, Deployment, Diffusion and Transfer of Environmentally Sound Technologies, Interim Report by the Chair of the Expert Group on Technology Transfer, FCCC/SB/2008/INF.7, UNFCCC, Poznan, Poland. World Bank, 2008, Climate Investment Funds (CIF), The World Bank Group, Washington, DC [available at http:// web.worldbank.org].

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■ country study

Domestic climate policy for the Indian steel sector UMASHANKAR SREENIVASAMURTHY* Electricity Policy Research Group, Faculty of Economics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, UK

The problem of creating an appropriate domestic sectoral climate policy by emerging economy governments is examined through the case study of India’s iron and steel sector. Unique circumstances and patterns exist in different sectors of emerging economies so a single international policy may be unable to reconcile subtle yet important countryspecific drivers. Shortcomings in the form of distortions could arise if policies are designed with a short time horizon. A fully integrated, long-term and well-planned domestic policy is required. The emergence of a strong domestic carbon price to guide sector expansion is identified as a key feature for such a framework. Additional support through international cooperation would help to gain the necessary political support while stabilizing the policy environment and facilitating substantial sectoral abatement. Policy relevance: Fuel savings and emissions reductions in India’s steel sector can be delivered firstly by improving energy efficiency in existing and new plants, secondly by shifting to efficient production processes, and thirdly by using steel more efficiently as a component or by substituting low-carbon alternatives. The CDM only supports energy savings and emissions reductions from efficiency improvements in the production process, but cannot target the other two opportunities. Domestic policies, including improved product standards and carbon pricing, can create broader benefits for the Indian economy and global climate. However, to achieve domestic support for these measures, international cooperation and coordination are necessary. A key question is how support can be structured without providing subsidies for the production of a carbon-intensive commodity. Keywords: CO2 reductions; domestic policy options; India; iron and steel; sectoral approach La notion que les gouvernements de pays émergents créent une politique climatique intérieure sectorielle appropriée est examinée à travers l’étude de cas du secteur de l’acier et du fer de l’Inde. Les circonstances et tendances des pays émergents sont uniques et de ce fait une politique internationale unique pourrait difficilement réconcilier des forces intérieures subtiles mais proéminentes. Une conception des politiques à court terme pourrait donner lieu à des carences en matière de distorsions. Une politique intérieure entièrement intégrée, à long terme et bien planifiée est requise. L’émergence d’un prix intérieur du carbone fort est identifié en tant que caractéristique clé pour guider la croissance du secteur, dans le cadre d’une telle structure. Un soutien supplémentaire issu de la coopération internationale apporterait un appui politique indispensable, tout en stabilisant le contexte d’élaboration des politiques et facilitant une réduction considérable des émissions du secteur. Pertinence politique: Des réductions de carburant et des reductions d’emissions dans le secteur de l’acier en Inde peuvent être réalisées, en améliorant l’efficacité énergétique dans les centrales existantes et neuves, en substituant des procédés de production efficaces, et en utilisant l’acier de manière plus efficace dans les assemblages ou bien en le remplaçant par des matériaux à moindre teneur en carbone. Le MDP soutient les procédés d’économies d’énergie et de réduction d’émissions obtenus par des gains d’efficacité, uniquement dans les procédés de production, et n’est pas applicable aux deux autres opportunités citées. Les bienfaits des politiques intérieures, y compris les normes pour produits améliorées et l’établissement du prix du carbone, peuvent s’appliquer plus généralement à l’économie indienne et au climat planétaire. Cependant, pour soutenir ces mesures au niveau national, une coopération et

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 517–528 doi:10.3763/cpol.2009.0640 © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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coordination internationales sont nécessaires. Une question essentielle est de régler la structurer du soutien de manière à éviter les subventions à la production d’un produit à forte teneur en carbone. Mots clés: approche sectorielle; fer et acier; Inde; options de politique intérieure; réductions de CO2

1. Introduction Indian steel production is expected to triple by 2020, with significant implications for coal consumption and carbon emissions. The opportunities are being explored to enhance energy efficiency and reduce carbon emissions by: (1) increasing the efficiency of existing and new plants, (2) the shifting of investment from the inefficient coal-based direct reduced iron (DRI) process to the blast furnace basic oxygen furnace (BF-BOF) process, and (3) creating incentives for efficient steel use. Different policy instruments are available to realize these opportunities, including Clean Development Mechanism (CDM) credits, carbon taxes, incremental carbon emission taxes, and administered standards. This article analyses the implications of these policies on the sector’s efficiency improvement and carbon emission reduction. The ultimate challenge is to gather political support for the implementation – linking domestic benefits such as reduced coal consumption and upgrading of technology with potential support from international cooperation. The Indian iron and steel sector grew at over 7% per annum in 2005–2007 (MoS, 2008) and accounts for nearly 10% of country’s carbon dioxide (CO2) emissions (Garg et al., 2006). Growth has been driven primarily due to a surge in demand for steel from the rapidly expanding infrastructure, housing and manufacturing segments. The country exported 10% of its steel output, but was essentially a net importer during this period. The nominal import tariff for crude steel has been fixed at 5% (MoS, 2009).1 The analysis of primary steel production in India shows that energy efficiency and CO2 emission intensity levels are still 50–75% behind the OECD average (IEA, 2007). The major reasons are small plant size, the emergence of small-scale coal-based DRI units, and a large contribution from old public-sector units (see Figure 1). A unique feature of the Indian scenario is that the

EAF/EIF using scrap Private 14% Coal DRI+EF Private 26%

Coal BF-BOF Public sector 32% `

Coal BF-BOF (+1 Corex) Private Gas DRI sector Private 17% 11%

FIGURE 1 Steel industry structure, India: output 53.9 million tonnes of crude steel (tcs) for the year 2007/08 (MoS, 2008); BF-BOF = blast furnace/basic oxygen furnace, DRI = direct reduced iron, EF = EAF/EIF = electric arc/induction furnace

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35

3.5

30

3

25

2.5

20

2

15

1.5

10

1

5

Carbon intensity tCO2/tcs

Specific energy GJ/tcs

coal-based DRI process requires a significantly lower capital investment and exploits the local advantage of cheaper low-grade raw materials while employing unskilled labour. It accounted for 26% of country’s crude steel production in 2007, with over 350 small units, and the output was growing at 15% per annum (MoS, 2008). The other uncommon route, natural-gas-based DRI, is not expected to increase its share in India due to fuel availability and price constraints (MoS, 2008). Despite significant performance differences between different primary crude steel-making routes (see Figure 2), firms in India continue to invest in the inefficient coal-based DRI process and are averse to taking up many of the potential energy efficiency measures. An industry survey (Sreenivasamurthy, 2008b) suggests that this is due to the high rate of return required by investors, which energy efficiency and modernization measures may not always deliver. While existing CDM schemes encourage some project-based efficiency improvements that result in reduced CO 2 emissions, they do not guide the sector towards low-carbon production processes. It was also found that limited data are available on the performance of the sector, which hinders the mainstreaming of climate mitigation into periodic planning guidelines for sector expansion. The Bali Roadmap (UNFCCC, 2008) makes reference to ‘consideration of cooperative sectoral approaches and sector-specific actions’ and ‘various approaches, including opportunities for using markets to enhance the cost effectiveness to promote nationally appropriate mitigation actions (NAMAs)’ in order to enhance implementation of the Convention’s objectives. In line with these recommendations, this article evaluates various domestic policy options for intervention to lower the rising GHG emissions trajectory of the Indian steel sector.

0.5

0

0 BF-BOF, OECD

BF- BOF, India

Coal DRI-EF with waste heat power, India

Specific Energy

Coal DRI-EF without waste heat power, India

Carbon Intensity

FIGURE 2 Primary steel-making performance comparison with OECD countries (Source: Planning Commission, 2006; IEA, 2007)

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2. Existing policy ideas In the post-2012 international climate cooperation talks, a number of schemes have been suggested to support specific actions in developing countries. While some researchers are investigating transnational technical cooperation (Baron, 2006; APP, 2008a), others propose a no-lose sectoral crediting mechanism (Schmidt et al., 2008) and best practice adoption (Japan, 2008). However, given the particular dynamics of a fast-growing sector in a free market with numerous players, these approaches may not be able to address the most fundamental concern: lack of factoring CO2 externality costs into decisions at the levels of every firm (including small units) and of government. If initiatives by firms and governments continue to be voluntary, without specific objectives and time-lines for abatement, climate benefits will remain an afterthought in investment decisions. A submission to the UNFCCC by South Africa (2008) points to the importance of sustainable development policies and measures (SD-PAMs) (see also Winkler et al., 2007). Their application to the Indian steel sector from the policy context is explored in this article. The analysis points to the importance of such bottom-up policies, which are able to influence every relevant decision made and are ambitious and long term.

3. What should the sectoral policy objective be? The manufacture and use of steel is a resource-intensive and socio-economically complex activity, creating a deeply entrenched supply chain system in India. This implies that a holistic consideration of both production and consumption is required when proposing any climate policy for the sector. The broader policy objective should clearly be to help integrate climate mitigation into the decision-making stage and enable energy efficiency improvement of all production units. Figure 3 illustrates three mechanisms that can contribute to reduced energy demand and carbon emissions relative to the business-as-usual (BAU) scenario for 2020. First, policies focusing on efficient technologies alone, such as waste energy recovery under CDM, typically help promote specific abatement projects while leaving the key drivers of emissions growth unchecked. Second, an additional effort of ‘process shift’ could help divert new investments from the intrinsically less efficient coal-based DRI process to the large BF-BOF process. This is because climate protection effort eventually calls for progressively greater abatement from the steel sector, and policies should evolve to enable step-changes towards the most efficient metallurgical processes. The projectbased mechanism fails to limit proliferation of inefficient processes and does not promote modernization of entire industrial units, both of which could deliver maximum climate benefits. Third, the end-user requirement could also be partly met by more efficient material use (Worrell, 2007) and by substituting steel with other less carbon-intensive materials. Acknowledging that steel is inherently a carbon-intensive material, policies in the long term should promote material efficiency and substitution. In summary, an energy efficiency improvement policy could deliver noteworthy emissions reductions by 2020. However, the inefficient coal-based DRI process would continue to contribute a disproportionately higher share of sectoral emissions (39%) than output (30%; tonnes of crude steel). Looking forward to 2030 and beyond, achieving additional sectoral abatement could well lead to tougher bargaining positions due to lock-in effects from the coal-based DRI process. On the other hand, shifting the structure to the most efficient large BF-BOF units would allow the industry to meet the same market demand and yet achieve further emissions reductions by 2020.

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limited emissions and a conservative production forecast from MoS, 2008) (for detailed assumptions, see the original source, Sreenivasamurthy, 2008a)

FIGURE 3 Different outcomes possible (represented progressively) from climate policies in the Indian steel sector (assuming that steel substitutes have

India country study 521

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Finally, any additional efforts through material efficiency and substitution could help achieve substantive emissions reductions. The costs involved for such a transition could be high. Capital expenditure for establishing a coal-based DRI induction furnace unit is around $200 per tonne crude steel (tcs) per annum, which is one-quarter of the expenditure for a large BF-BOF unit (Sreenivasamurthy, 2008b). However, the higher investment costs for the BF-BOF units result in subsequent savings in operating costs, and are thus profitable in the long term. Furthermore, large BF-BOF units require imported high-grade coking coal, making those units less competitive during periods of high global demand for the fuel (Sreenivasamurthy, 2008a) but, conversely, improve the competitive situation in times of declining commodity prices, as witnessed in early 2009. For detailed information on the latest steel technologies and their abatement costs see the APP handbook (APP, 2008b), IEA (2007) and Oda et al. (2007). Nonetheless, certain co-benefits from such long-term integrated planning can be expected. These include reduced demand for coal (a primary energy source in India); lower local pollution levels, especially from coal DRI units; increased firm competitiveness; and the stimulus for local research and development activities in the steel supply chain.

4. How can this objective be met? The broader policy objective should clearly be to help integrate climate mitigation into the decisionmaking stage for all production units. An important feature of the Indian business system is that private companies, and an increasing number of public firms, are largely dynamic and entrepreneurial in nature. If policies are enforced with clear guidelines, then firms tend to innovate and maximize individual benefits; as the example of the success of CDM in India illustrates (CII, 2008). This article now discusses how tailored domestic policies could help address domestic climate actions by creating appropriate economic incentives.

Existing Clean Development Mechanism Although CDM incentivizes project-based initiatives, due to the inherent complexities of determining a baseline, satisfying additionality criteria, extensive monitoring and verification requirements and high transaction costs, most industrial firms are not motivated enough to apply for this scheme, especially when considering new builds or modernization (Hayashi and Michaelowa, 2007; Parthan and Bachhiesl, 2007). Thus, while CDM promotes easy-to-monitor project activities, it does not encourage abatement through complex modernization activities, choice of plant size, or the type of process adopted. Developing new sector-wide baseline methodologies under CDM would require redefining the existing guidelines and procedures. Conversely, providing project-based incentives makes climate policies politically acceptable while generating minimum opposition from governments and industrial lobbies. This play-it-safe position is further reinforced by the urge to meet end-user demand through a metallurgical process which requires a short lead time and low capital costs. A lack of comprehensive technology cost curves to guide policy design for sectoral mitigation also adds to this complexity. Despite its political convenience, policies that achieve marginal abatement through energy efficiency improvement alone will have to be re-evaluated in order to avoid incentivizing suboptimal processes or plant sizes.

Proposed Policy 1: Harmonized carbon tax Under this scheme, the government levies a charge to the firm for every unit of carbon emission (tonne of CO2). In response to the tax imposed, firms then seek opportunities to minimize their

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overall current and future tax liabilities by investing in cleaner technologies or extensive modernization plans. For new builds, firms would evaluate their carbon tax liability during the design stage itself on process type, plant size and choice of technology.

Proposed Policy 2: Incremental emissions carbon tax or intensity-based rewards Firms prefer to avoid the imposition of taxes in the political process and subsequent implementation (Smith and Vos, 1997; Wallart, 1999). To reduce this opposition, another policy option is to charge for the incremental emissions alone, i.e. the tax is only levied on emissions over and above a specific emissions limit (see Figure 4). A corollary would be intensity-based rewards, as discussed by Schmidt et al. (2008), advocating a no-lose crediting policy. The proposed scheme under India’s national action plan (NAP) for climate change also has a similar intensitybased design whereby energy efficiency levels are to be benchmarked and subsequent trading of certificates permitted (NAP, 2008). The benchmarks can be determined based on ambitious targets agreed by stakeholders. The benchmarks could also be seen as providing a new technical guideline for technology providers, new entrants and plant designers. However, such a scheme has some drawbacks. Defining benchmarks is quite complex, given different process types, plant vintage and size, type of raw materials, scrap volume used, and choice of system boundaries (Eichhammer et al., 2002; Tanaka et al., 2006). Setting of standards also has an arbitrary nature and can be influenced by stakeholders. As a result, there may be a risk of two or more process-wise or vintage-wise standards emerging from the political process, thus undermining a shift towards the most efficient production process.

Specific Emission levels CARBON TAX

‘X’ t CO2/tcs

NO CARBON TAX

Production FIGURE 4 Incremental carbon tax: in this scheme, tax is levied only above the specified emissions level (‘X’ tCO2/tcs). This policy is similar in design to other intensitybased approaches, where producers below the specific emission level are rewarded

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Proposed Policy 3: Administered standards Regardless of imposing any of the above market-based policies, highly inefficient processes such as coal-based DRI and old and/or small BF units may still continue to operate, given the domestic demand for iron and steel products. These units have inherent advantages such as being flexible, requiring low capital investment, and using low-quality raw materials. Providing market-based incentives for such units to improve energy efficiency may only help to achieve minor abatement results and may not be adequate to guide the sector to an overall lower carbon production path in the medium to long term. Hence, it may be necessary to incorporate and enforce certain standards for plant sizes and limits on capacity addition in inefficient processes. Norms can be stipulated and revised over time, making firms aware of the minimum plant performance levels required for sectoral expansion. The Asia–Pacific Partnership Steel Task Force (APP, 2008a) and the World Steel Association (WSA, 2008) discuss such an approach, where inefficient plants are identified through benchmarking and are eventually phased out.

5. Criteria for policy selection The major criteria for suitable policy choice would be effectiveness and governance. Effectiveness can be understood as the ability of a policy to limit the growth of sectoral GHG emissions below a BAU scenario, not only in the short term, but also in the long term. Governance relates to simplicity and transparency in administration and interpretation by various stakeholders. Governance requires periodic monitoring, reporting and verification (MRV) systems to be put in place, which are lacking at present. In particular, since there is a significant presence of public-sector units in the Indian steel industry, private firms may be concerned about distortions created by climate policy. Hence, the policy should be designed to create a level playing field for both private- and public-sector players. Existing CDM policy is least likely to encourage process shift, as it continues to provide projectbased incentives to inefficient processes such as waste energy recovery projects. Furthermore, creating process-wise intensity-based incentives may allow the continuation of inefficient processes. A harmonized tax, on the other hand, targets the total emissions of all units, including those which are below standard emission intensity levels, and hence can help in enhanced efficiency. On governance, it is expected that an intensity-based policy is likely to involve more complexity than other options. A summary of policy evaluation criteria is presented in Table 1. The analysis in this table shows that, although schemes such as CDM and Policy 2 (incremental emissions tax, or the proposed NAP scheme) can deliver marginal emissions reductions in the short term, they do not tend to strongly promote the move to more efficient plant configurations in the longer term. Policy 3 (administered standards) would, on the other hand, allow the gradual incorporation of the goal into national planning mechanisms. Policy 1 (harmonized tax) appears to be a good option to tackle sectoral emissions with varying advantages at all stages and also goes well with the free market nature of the Indian business environment. Enhanced abatement could further be achieved by combining Policies 1 (harmonized tax) and 3 (administered standards), which could provide the dual effect of price-based incentives and minimum performance standards for existing and planned capacities. Although the above policy analysis is not complete in itself, it highlights the kind of distortions that different policies could deliver by considering a short time horizon (such as 2020). Climate change concerns require urgent action; however, it is crucial that these policies evolve in the right direction and avoid the locking-in of carbon-intensive processes and technologies. Therefore, it is

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TABLE 1 Policy evaluation criteria Criteria for policy evaluation

Existing

Proposed Policy 1:

Proposed Policy 2:

Proposed Policy

CDM

Harmonized tax

Incremental

3: Administered

emissions tax or

standards

intensity-based rewardsa 1. Short term: Improve

+

++

+

++

–––

+

––

++

––

+

–

NA

4. Overall effectiveness

––

++

–

++

5. Ease of implementation

+

++

––

+

6. Ease of monitoring and

++

+

––

+

efficiency and CO 2 intensity of coal DRI and BF-BOF units against business-asusual (BAU) 2. Medium term: Encourage shift from coal DRI and small BF to large efficient BF units 3. Long term: Encourage substitution of steel with low-carbon-intensive materials

verification Notes: a The intensity-based rewards proposed in India’s NAP (2008) have a similar policy design. +++ = very good; ––– = worst; NA = not applicable.

vital to have a fully integrated, long-term and well-planned domestic policy approach which can take into account the aforementioned implications.

6. Barriers for policy implementation The major difficulty for implementation of the policy framework in India is the fundamental issue of accepting mitigation responsibility by both government and industry. It can be argued that in line with this national position, the policies discussed above do not require any national or sectoral emission caps (or reductions in steel output), but would nevertheless show the country’s commitment to act earnestly on climate mitigation. Some concerns may arise that the implementation of such policies would affect the operational viability of many steel units and reduce supply during periods of higher demand for steel. The government could also be concerned about inflationary pressures from carbon prices. However, a detailed analysis of the sector’s operating costs (Sreenivasamurthy, 2008a) shows that carbon emission liability costs are insignificant compared with production costs. Furthermore, it can be argued that as long as steel prices are determined by free market principles, an increase in production cost due to carbon pricing would not completely feed through to product prices.

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Finally, because the medium- and small-scale firms in the steel sector employ a large semi-skilled and unskilled workforce in India, any threat to their survival could have serious political repercussions, thus directly forcing the government to reconsider any ambitious policies. One solution could be the provision of capacity building in order to enhance the skills of unskilled and semi-skilled workers to enable their employment at larger, more efficient plants. However, given the entrenched socio-economic implications, further detailed research is required in this area.

7. How can this be anchored through international cooperation? Even though the policy would essentially be nationally driven, close international cooperation from Annex I Parties will be required to support policy implementation and deliver enhanced emissions reductions. One such area is technology transfer and cooperation, where domestic policies need to be complemented by increased access to technology. Examples of the latest technologies include larger-volume blast furnace units, enhanced coal injection, thin slab casting, and improved coal washeries. The APP (2008b) handbook provides detailed information on the technology solutions required. Financing these efforts can be linked to input-based metrics (such as carbon price, choice of process in new build) and outcomes (such as sector-wide emissions). Furthermore, capacity-building programmes for low-skilled workers can help to increase their employability in larger and more efficient steel-making units. Nevertheless, further research is required on how international financing and technology support could balance the social concerns while implementing ambitious domestic climate policies. If future international mitigation commitments require India to enhance its contribution, then the domestic sectoral policy can progressively be ramped up to raise the domestic carbon price, tighten new-build design norms, and further encourage low-carbon alternative materials.

8. Conclusions This article analysed the feasibility of a domestic climate policy framework for the Indian steel sector. It shows that distinct circumstances prevail in emerging economy sectors and a single international policy may not be able to address subtle yet important country-specific drivers. The article therefore discussed the need to set up a domestic regulatory framework with a suitable climate policy to target the specific drivers. Based on the analysis of different policy outcome scenarios for the steel sector, it is concluded that an effective policy should be consistent in limiting emissions at all stages of its implementation. The recent economic downturn of late 2008 showed that, at times of lower steel demand, the coal DRI process is largely uneconomic. In the longer term, promoting such inefficient steel making could therefore prove costly for the economy as well as for the climate, thereby reinforcing the argument for a shift towards more efficient routes. Implementing such policies is also likely to deliver significant co-benefits such as lower pollution levels to the surrounding communities, a reduced demand for coal, and stimulation of local research and development in low-carbon technologies. As emerging economies continue to expand, a key criterion to measure policy effectiveness would be the emergence of a domestic carbon price to guide future sector investments. Ultimately, policies should seek to achieve the twin objectives of enhanced abatement and sustainable production. Further research is required on policy implications and the international cooperation mechanisms required to support an appropriate domestic policy. To conclude, it is possible to

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carefully design an ambitious domestic sectoral policy that lowers emissions and costs, delivers benefits to the economy and the community, while addressing the larger global objective of climate mitigation.

Note 1. Although a slowdown in the Indian steel sector was seen from October 2008 onwards due to the global financial crisis and the associated fall in international steel demand, this article looks at long-term demand and capacity addition scenarios in India, where the policy analysis could be an important consideration.

References APP (Asia–Pacific Partnership), 2008a, Our Challenge for Clean Development and Climate: APP Steel Task Force, Asia– Pacific Partnership on Clean Development and Climate [available at http://2050.nies.go.jp/3rdLCSWS/presentation/ ppt_TeruoOkazaki.pdf]. APP (Asia–Pacific Partnership), 2008b, The State-of-the-Art Clean Technologies (SOACT) for Steelmaking Handbook, Asia– Pacific Partnership on Clean Development and Climate [available at www.asiapacificpartnership.org/pdf/Projects/ Steel/SOACT-1-7-08.pdf]. Baron, R., 2006, Sectoral Approaches for Greenhouse Gas Reductions: Climate Policy and Competitiveness in the Iron and Steel Sector, Energy Efficiency and Environment Division, IEA [available at www.oecd.org/dataoecd/29/17/37897024.pdf]. CII, 2008, Building a Low Carbon Indian Economy, Discussion Paper, Confederation of Indian Industry [available at www.climateprojectindia.org/resource/finding/3_building_lowcarbon08.pdf]. Eichhammer, W., Köwener, D., Gruber, E., 2002, ‘Energy efficiency benchmarking’, from the Workshop on Policy Modeling for Industrial Energy Use, Seoul, Republic of Korea, 7–8 November 2002 [available at http://eetd.lbl.gov/ea/IES/ iespubs/52698.pdf#page=77]. Garg, A., Shukla, P.R., Kapshe, M., 2006, ‘The sectoral trends of multigas emissions inventory of India’, Atmospheric Environment 40, 4608–4620. Hayashi, D., Michaelowa, A., 2007, Lessons from Submission and Approval Process of Large-scale Energy Efficiency CDM Methodologies, UNIDO Paper [available at www.unido.org/fileadmin/import/63287_Paper _Daisuke _Hayashi.pdf]. IEA, 2007, Tracking Industrial Energy Efficiency and CO2 Emissions, OECD Publications, Paris. Japan, 2008, Submission to UNFCCC on Sectoral Approach [available at http://unfccc.int/files/kyoto_protocol/application/ pdf/japan_sectoralapproach_rev.pdf]. MoS (Ministry of Steel), 2008, Forging New Frontiers: 2008 Compendium, Ministry of Steel, Government of India [available at http://steel.nic.in/Steel%20Ministry%20 Compendium.pdf]. MoS (Ministry of Steel), 2009, Duty Structure at a Glance 2009–10, Ministry of Steel, Government of India [available at http://steel.nic.in/duty_structure.htm]. NAP (National Action Plan), 2008, National Action Plan on Climate Change, India [available at www.india environmentportal.org.in/content/national-action-plan-climate-change]. Oda, J., Akimoto, K., Sano, F., Tomoda, T., 2007, ‘Diffusion of energy efficient technologies and CO2 emission reductions in iron and steel sector’, Energy Economics 29, 868–888. Parthan, B., Bachhiesl, U., 2007, Barriers to Energy Efficiency under the Clean Development Mechanism, GFSE-7 Workshop: Energy Efficiency in Developing Countries – Strong Policies and New Technologies, 21–23 November [available at www.gfse.at/fileadmin/dam/gfse/gfse7/REEEP-IEE-GFSE07.pdf]. Planning Commission, 2006, Report of the Working Group on Steel Industry for the Eleventh Five-Year Plan (2007–2012) [available at http://planningcommission.nic.in/aboutus/committee/wrkgrp11/wg11_steel.pdf]. Schmidt, J., Helme, N., Lee, J., Houdashelt, M., 2008, ‘Sector-based approach to the post-2012 climate change policy architecture’, Climate Policy 8, 494–515. Smith, S., Vos, H.B., 1997, Evaluating Economic Instruments for Environmental Policy, OECD, Paris. South Africa, 2008, Submission to UNFCCC: Ideas and Proposals on the Elements Contained in Paragraph 1 of the Bali Action Plan [available at http://unfccc.int/resource/docs/2008/awglca4/eng/ misc05.pdf].

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Sreenivasamurthy, U., 2008a, Domestic Climate Policy for the Steel Sector, India, published under the theme International Support for Domestic Climate Policies (ISDCP), Climate Strategies, Cambridge, UK [available at http:// www.climatestrategies.org/our-reports/category/40/94.html]. Sreenivasamurthy, U., 2008b, ‘GHG emission regulation for the Indian steel sector’, Master’s degree thesis, Engineering for Sustainable Development, University of Cambridge, UK. Tanaka, K., Matsuhashi, R., Nishio, M., Kudo, H., 2006, ‘CO2 reduction potential by energy efficient technology in energy intensive industry’, Institute of Energy Economics 1, March [available at http://eneken.ieej.or.jp/en/data/pdf/ 324.pdf]. UNFCCC, 2008, Bali Action Plan 1/CP.13 Section 1(b) (iv) and (v) FCCC/CP/2007/6 [available at http://unfccc. int/ resource/docs/2007/cop13/eng/06a01.pdf# page=3]. Wallart, N., 1999, The Political Economy of Carbon Taxes, New Horizons in Environmental Economics Series, Edward Elgar Publishing, UK. Winkler, H., Howells, M. and, Baumert, K., 2007, ‘Sustainable development policies and measures: institutional issues and electrical efficiency in South Africa’, Climate Policy 7, 212–229. Worrell, E., 2007, ‘Materials, energy and climate change’, presentation at the Engineering for a Low-carbon Future seminar, University of Cambridge, November 2007 [available at www.ifm.eng.cam.ac.uk/elcf/documents/ 071121_worrell.pdf]. WSA, 2008, A Global Sector Approach to CO2 Emissions Reduction for the Steel Industry [available at www.steel-grips.com/ newsdesk/business_news/A_global_sector_ approach_to_CO2_emissions_reduction_for_the_steel_ industry.html].

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■ country study

Climate co-benefit policies for the Indian power sector: domestic drivers and North–South cooperation ANOOP SINGH* Department of Industrial and Management Engineering, Indian Institute of Technology Kanpur, Kanpur – 208 016, India

The Indian electricity sector offers the possibility for efficiency improvements across power generation, transmission and end-use of electricity. Three specific climate co-benefit policy options are identified which have significant potential to mitigate CO2 emissions in the Indian power sector: (1) the adoption of clean and efficient coal-based generation technology, (2) upgrading the low-tension (LT) distribution network to a high-voltage distribution system (HVDS), and (3) the adoption of efficient agricultural pump sets. Policy simulations suggest that an agricultural pump set replacement programme could reduce emissions by 5–30% per annum. In addition to improving technical efficiency, this could also help to improve economic efficiency if implemented jointly with electricity metering. The implementation requires the engagement of various stakeholders. The need for up-front capital requirements is a significant barrier for implementation but creates opportunities for international cooperation. Policy relevance: The study identifies three features of an effective approach to realize energy efficiency and lowcarbon opportunities. First, a comprehensive analysis can identify energy savings opportunities along the entire value chain. Second, technical linkages between the quality of the distribution network and the requirements of efficient pumps create benefits from the combined implementation of individual measures. Third, the sharing of energy savings between stakeholders can create political support for actions and can contribute to long-term objectives; for example the delivery of new pumps with electricity meters. This illustrates the benefit of an overall low-carbon development strategy capturing analytical, technological and political links. It allows for the identification of specific transitions and can be implemented with a set of policies and actions that are supported by domestic stakeholders, and can be enhanced if also supported by international support mechanisms. Keywords: climate co-benefit policies; electricity sector; GHG emissions reduction; India; international cooperation Le secteur de l’électricité indien offre la possibilité d’améliorations d’efficacité aux niveaux de la production d’énergie, de la transmission, et de l’utilisation finale d’électricité. Trois options de politiques spécifiques à co-bénéfices climatiques sont identifiées ayant un potentiel important de réduction des émissions de CO2 dans le secteur de l’énergie indien : (1) adoption d’une technologie de production au charbon propre et efficace, (2) modernisation des réseaux de distribution à basse tension « low-tension » (LT) en réseaux de distribution a haute tension « high-voltage distribution systems » (HVDS) et (3) adoption d’ensembles de pompes agricoles efficaces. Des simulations de politiques suggèrent qu’un programme de remplacement des ensembles de pompes agricoles pourrait réduire les émissions de 5 à 30% par an. En plus d’améliorer l’efficacité technique, ceci pourrait aussi améliorer l’efficacité économique, dans le cas d’une mise en œuvre associée à des compteurs électriques. Cette mise en œuvre nécessité l’engagement de parties prenantes variées. L’exigence des conditions de paiement d’avance est un obstacle important à cette mise en œuvre mais crée des possibilités de coopération internationale. Pertinence politique: Cette étude identifie trois caractéristiques d’une approche propice à réaliser des objectifs en efficacité énergétique et sobriété carbone. D’abord, une analyse complète peut identifier des opportunités d’économie d’énergie tout au long de la chaîne de production. Ensuite, des avantages peuvent provenir des liens techniques entre

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 529–543 doi:10.3763/cpol.2009.0639 © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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la qualité des réseaux de distribution et les besoins des pompes efficaces, en vertu de la mise en œuvre commune de mesures individuelles. Enfin, le partage des économies d’énergie entre parties prenantes peut créer un soutien politique aux actions et peut contribuer aux objectifs à long terme ; par exemple la distribution de nouvelles pompes avec compteurs électriques. Ceci illustre l’avantage d’une stratégie globale de développement sobre en carbone comprenant les liens analytiques, technologiques et politiques. Celle-ci permettrait d’identifier des transitions spécifiques, peut être mise en œuvre grâce à une série de politiques et d’actions soutenues par des parties prenantes nationales, et peut être d’autant plus augmentée par un appui venant de mécanismes de soutien international. Mots clés: coopération internationale; Inde; politiques à co-bénéfices climatiques; réduction des émissions de GES; secteur de l’électricité

1. Introduction The Indian economy is at a crossroads with regard to development. The path towards sustainability should embrace greener energy resources and more efficient technology for the extraction and conversion of energy. Furthermore, efficiency in electricity transmission and distribution, and its consumption by end-users, also needs attention. Economic, policy, regulatory and institutional inputs would play a defining role in the decision-making process of various stakeholders to achieve GHG emissions reductions. India’s contribution to the historical GHG inventory is low. In per capita terms, GHG emissions were recorded to be 1.3 tonnes of CO2 equivalent in 1994 (UNFCCCC, 2005). However, CO2 emissions from energy use are expected to grow substantially and reach 5.5 billion tonnes by 2031/32 under a high-coal-use scenario (GOI, 2006a). The increasing demand for fossil fuels in both the electricity and transport sectors would be a significant contributor to this. Under its obligation to the UNFCCC, direct policy interventions to address climate change have been initiated recently, with the adoption of the India’s national action plan (NAP) on climate change. This outlines eight national missions as adaptive/mitigation policy options. Apart from energy efficiency and solar energy, the action plan does not seem to focus on policy options to address large-scale inefficiencies in the sector. Due to competing development objectives and resource constraints, costly policy options with significant environmental dividends are not realized to their full potential. This often leads to the selection of least-cost options, especially for energy generation, transmission and distribution, and utilization. This article identifies three policy options across the supply chain of electricity which have a large potential for mitigating CO2 emissions from the Indian power sector. These are (1) the adoption of efficient and clean coal technologies, (2) upgrading the low-tension (LT) distribution network to a high-voltage distribution system (HVDS), and (3) the adoption of efficient agricultural pump sets. These policies are evaluated for their potential to mitigate CO2 emissions. The roles of domestic policy drivers, stakeholders, and international cooperation are highlighted in order to devise an implementation strategy.

2. Climate co-benefit policy options for the Indian power sector The Indian power sector faces a number of challenges, including capacity shortages, inefficiencies along the supply chain, and inefficient pricing (Singh, 2006). Being the largest consumer of coal and the largest contributor to CO2 emissions in the country, the power sector remains the focus for designing and implementing policies that can also help curb GHG emissions. Due to historical inefficiencies, the Indian power sector offers many avenues to adopt policies that can introduce significant climate co-benefits. Among others, these policy options include

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TABLE 1 Potential for climate co-benefit policies in the Indian power sector Climate co-benefit policy

Implementation horizon

Existing policy push Status of adoption

Adoption of efficient and clean coal technologies

Long term

Low

Very Low

Large-scale deployment of renewable energy

Medium term

High

Medium

Rehabilitation and refurbishments of old plants

Medium term

High

Medium

Adoption of efficient agricultural pump sets

Short to Medium term

Low

Very Low

Modernization of the LT distribution network to HVDS

Medium term

Low

Very Low

the adoption of efficient coal technology, the promotion of renewable energy resources, the modernization of the power distribution network, and improvements in end-use energy efficiency (Ghosh et al., 2002; Mathur et al., 2003; Kroeze et al., 2004; Watson et al., 2007). These options differ in terms of their contribution to mitigating GHG emissions, their implementation horizon, and their need for international cooperation. While some of the policy options are easily adaptable and are currently under various phases of implementation, others are slow-moving due to a lack of resources, policy gaps, competing priorities, and implementation hurdles. Table 1 provides a subjective evaluation of the five policy choices across five sets of criteria, and provides a comparative evaluation of these policies. Due to the large-scale emissions reduction potential and the inadequacy of the existing policy push, we identify the following specific policy options relevant to the Indian power sector: ■ Adoption of efficient and clean coal technologies (Generation) ■ Modernization of the LT distribution network to HVDS (Network) ■ Adoption of efficient agricultural pump sets (Utilization). These policy options target the three important segments of the Indian power sector; namely generation, transmission and distribution (T&D), and utilization of electricity. The merits of the identified policy measures and implementation challenges are further evaluated in Table 2. These differ in terms of the ease of implementation as well as political acceptability. While the replacement of agricultural pumps seems to have implementation challenges, the policy could help to address the growing energy subsidy in the sector and also bring additional long-term benefits. The three identified policy options exhibit great potential for reducing the carbon emissions of the Indian power sector by addressing the sector’s present inefficiencies. The reduction in emissions can be easily and directly identified in the case of large coal-based power plants. Although the benefits of improving system efficiency and end-use pump set efficiency are indirect, they are substantial nonetheless. The following sections provide a discussion on each of the identified policies. The emissions mitigation potential for the pump set replacement programme is presented in Section 4. The implementation strategy and some of the implementation issues are highlighted in Section 6.

3. Adoption of efficient and clean coal technologies Policy description: The use of more efficient coal-fired power stations in the case of capacity addition in the Indian power sector. This includes a greater share of supercritical and ultra-supercritical

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TABLE 2 Evaluation of selected policy for North–South cooperation Criteria

Efficient and clean

Efficient agricultural

Distribution

coal technologies

pump sets

network upgrade

Presence of large-scale inefficiencies

Y

Y

Y

Ease of policy formulation

Y

Y

Y

Ease of programme design

Y

N

N

Large identifiable sources of emissions

Y

N

Y (indirectly)

Ease of verification of emissions reduction

Y

Y?

Y

Ease of channelling support from North

Y

Y?

Y

Political acceptability

Y

Y?

Y

Ease of implementation

Y

?

Y

Transparency in implementation and monitoring

Y

?

Y

Will it help reduce energy subsidy in future?

N

Y (large)

Y

Low

Low and limited

Low and limited

Ya

N

N

Level of government priority for domestic financing Domestic fiscal policy support available Note: a For supercritical technology.

technology in new capacity additions. This may also include the development of a carbon capture and storage (CCS)-ready integrated gasification combined cycle (IGCC) plant of commercial size. The thermal efficiency of coal-fired electricity plants in the country is substantially below international best practice. In 2003, the energy efficiency of coal-fired electricity plants in India was 30% as compared to 42% in Japan (Graus et al., 2007). It is estimated that, by the year 2020, the replacement of old and smaller electricity generation plants, and the adoption of efficient technologies for new capacities (scenario EFF) could lead to a 9% reduction in GHG emissions compared with the base case (Kroeze et al., 2004). The government has specified supercritical technology for nine projects identified under the ‘ultra mega power projects’ (UMPP) programme, with an aggregated capacity of around 36,000 MW. Furthermore, a fiscal push provides full exemption from central excise duty for equipment procured for setting up UMPPs using supercritical technology.1 Apart from the UMPPs and a few independent power producers (IPPs), electricity generation capacity addition may continue to use the inefficient pulverized coal (PC) technology. While the poor efficiency of existing vintage plants can be best addressed through the renovation and modernization (R&M) programmes, a significant environmental burden can be avoided by the adoption of efficient and clean coal technologies for new electricity generation in the country. These include supercritical pulverized coal (SC-PC), ultra-supercritical pulverized coal (USC-PC), atmospheric fluidized bed combustion (AFBC), pressurized fluidized bed combustion (PFBC), and the integrated gasification combined cycle (IGCC). The efficiency gain for the SC-PC plants is of the order of 2 percentage points, which comes at a higher capital cost (Table 3). Ultra-supercritical pulverized coal (USC-PC) technology can achieve an efficiency of about 44% (Davison, 2007).

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IGGC technology can achieve a similar level of efficiency at a higher capital cost and provides an option for carbon capture, although with a loss of overall efficiency (Table 3). According to government projections, coal is expected to remain the dominant fuel for electricity generation and is expected to fuel about 78% of the electricity generation in the country (GOI, 2006a). We project emissions from the power sector to grow from 525 million tCO2 in 2007/08 to 3.45 billion tCO2 in 2031/32. A decline in emissions can be expected through a greater share of supercritical and ultra-supercritical technology in new capacity additions, albeit at a higher capital cost.2 Investors consider the trade-off between higher capital costs and efficiency gains in making a choice of technology. Lower capital costs can make it profitable for private investors to invest in supercritical power stations, as savings due to lower fuel consumption and related handling costs would outweigh the difference in capital costs. The evidence presented in Table 3 gives a mixed picture. The reported difference in efficiency as compared with a subcritical plant is of the order of 2–4 percentage points for the two efficient technologies, depending on local conditions. This translates to coal savings of 5–11%. In terms of capital costs also, the differences need to be examined in the specific context. NETL (2007) reports only a small difference in capital costs across the two efficient technologies in the US market in 2006, which may not be directly applicable in the Indian context due to technical characteristics as well as prevailing market conditions. Recent experience with power projects suggests that per MW cost for a main plant for a supercritical unit (660 MW) is about 30% higher than a comparable subcritical unit (600 MW). The difference in total capital cost, including civil works and balance of plant (BOP), but excluding financing costs, comes down to about 19%.3 Investment costs and fuel costs contribute in about equal shares to the generation costs of base-load coal power stations. Thus, according to the international costs, it is profitable for private investors to pursue supercritical power stations in other countries; whereas, according to

TABLE 3 Capital cost and CO2 emission factor comparison for coal-based technologies Technology

Subcritical pulverized coal (PC)

Capital cost

Thermal

CO2 emission

(’000 USD per MW)

efficiency (%)

factor (tCO2/GWh)b

21–23 a

36–38

1,073.75

38.6 Supercritical pulverized coal (SC-PC)

28–30 a

c

40.94 39.56–40.24

Ultra-supercritical pulverized coal (USC-PC)

941 d

44

743

42.8–44 Integrated gasification combined cycle (IGCC)

1,733–1,977

Shell – 43.1

640–663

Shell – 1,613

GE – 38

Shell – 763

GE – 1,439

GE – 833

Notes: a In million Rs per MW. Personal communication with CEA and BHEL (a domestic manufacturer). These are current quoted prices for the main plant i.e. boiler and turbine units only, for Indian specifications. b The CO2 emission factors reported in column 4 for PC and SC-PC are for Indian conditions. The rest are for US conditions. c For 500 MW – 170 kg/cm2, 535/ 535°C. d For 660 MW – 247 kg/cm2, 538/565°C and 800 MW – 247 kg/cm2, 565/ 593°C. Sources: CEA (2008a, 2008b), Davison (2007), NETL (2007), Cao et al. (2007), personal communications with CEA and BHEL, a domestic manufacturer.

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the data from Indian investors, it is not profitable to independently choose supercritical power stations in India. The wedge between the capital costs of the two technologies can be reduced through competition in the domestic market over the next few years, especially from manufacturers based in China. The high cost of supercritical plants in the context of an Indian manufacturer is also due to higher import contents. The costs are expected to come down once domestic manufacturing replaces the costlier import of critical components. This further highlights the need for easing international cooperation for the transfer of greener technology to developing countries. The adoption of clean and efficient coal technology for the Indian power sector can be achieved through a combination of policy directives coupled with financial incentives, as in the case of SC-PC technology for the UMPPs. It is proposed that the scope of existing policy be further widened to include other projects by central, state and private-sector entities, and that it should also facilitate early adoption of the USC-PC technology. A policy formulation by the Ministry of Power, in consultation with the state governments and other stakeholders, could mandate the adoption of supercritical technology for all new power generation projects of, say, 600 MW and above.4 The PFBC and IGCC technologies continue to remain largely at pilot or demonstration stages. Furthermore, technology standardization and the need to scale-up the technological capability remain key areas of concern for potential investors. Technology cooperation for setting up commercial-sized plants using these technologies would provide an opportunity to address specific local requirements and would also help in strengthen domestic technical capability.

4. Adoption of efficient agricultural pump sets Policy description: The policy recommendation is to implement a joint programme for the replacement of inefficient agricultural pump sets (including motor/engine and pump assemblies) along with mandatory electronic metering of their electrical connections. Such a programme should be supplemented with feeder metering and system modernization of the low-tension (LT) distribution network with a high-voltage distribution system (HVDS). The distribution companies (discoms) should also undertake separation of rural feeders with partial support from the restructured accelerated power development and reforms programme (R-APDRP). The agriculture sector accounts for about 25% of the electricity consumption in India.5 Up to 31 March 2008, around 15.47 million pump sets were in use in the country (CEA, 2008a, 2008b). Heavily subsidized and unmetered tariffs, or free electricity to agricultural consumers, have led to a widespread accumulation of millions of inefficient pump sets across the country. Metering of agricultural consumers also remains a key challenge. The World Bank (2001) reported that the average efficiency of electrical pump sets in four field-study locations in Haryana was 21–24%. The study found that only 2% of the pumps surveyed had efficiency levels above 40%. Significant energy efficiency savings could materialize if inefficient pump sets were replaced by low-rating but efficient pump sets. The rectification required for the pump sets could improve energy efficiency by 20–45%. A large-scale programme to replace inefficient pumps along with metering of electricity supplies could bring significant double dividends. This would not only help bring down electricity consumption over the lifetime of efficient motors but would also help in addressing the persistent challenge of metering agricultural supplies. The rehabilitation of the agricultural feeders will improve the power quality supplied to the pump sets and enable them to operate more efficiently, reduce burnouts, and thus extend their operational life. While this addresses domestic issues, it

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CO2 Emission Scenarios: Efficient Pump Sets and HVDS 160 147.6 140.5 Annual Carbon Emissions (mt CO2)

140 128.7

124.6

117.5

113.6

120

103.6 100

80

60

40

20

0 2007–08

2011–12

2011–12

2011–12

(Base)

(Efficient Scenario I)

(Efficient Scenario II)

2011–12 (Efficient Scenario III)

2011–12 (Efficient Scenario IV)

2011–12 (Efficient Scenario V)

FIGURE 1 CO2 emissions scenarios with adoption of efficient pump sets and HVDS

would also provide significant long-term benefits in terms of reducing CO2 emissions. The reduction in electricity consumption by agricultural pumps would improve the acceptability of metered tariffs. Furthermore, upgrading the LT distribution network to HVDS would significantly reduce network losses and improve power quality to the benefit of the consumers. We construct alternate policy scenarios for varying degrees of penetration of efficient pump sets and roll-out of HVDS in rural areas, and enumerate their impact on mitigation of CO2 emissions (Figure 1).6 It is assumed that the number of agricultural pump sets would grow to 20 million by 2011/12. In efficient scenarios, all new pump sets are expected to be efficient, hence requiring less hours of operation and having a 10% lower rating.7 The case for all pump set replacements is similar. The T&D loss level is expected to fall from 32.25% in 2007/08 to 25% by 2011/12. Estimated savings of 85.6–528 MtCO2 emissions are expected to result under various scenarios, with the greatest saving resulting from efficient pump sets applied to all new and existing agricultural connections, along with HVDS roll-out. Pilot level programmes have been implemented/initiated by BEE, USAID/ DRUM and some of the state utilities, including Gujarat. The experience from such initiatives would help in the design and implementation of large-scale policy-driven programmes in future.

5. Modernization of the LT distribution network to HVDS Policy description: The existing low-tension (LT) distribution system in India is largely supported through 100 kVA or 63 kVA distribution transformers, and feeds various consumers through long LT lines at 400V. Under HVDS, a greater part of the LT network could be upgraded to 11 kV lines,

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with numerous small-capacity transformers to feeds consumers. Any residual LT lines would be replaced with aerial bunched conductors (ABC). Additionally, distribution transformer (DT) metering with IT connectivity would add further impetus to efficiency improvements and transparency in the system. The distribution network for electricity in the country is epitomized by significant loss of electricity, due to both technical and non-technical reasons. The average transmission and distribution losses (T&D) are estimated to be 31.25% for 2004/05 (CEA, 2006).8 High T&D losses, which continue to bleed the sector financially, are very high compared with those in industrialized countries. Theft of electricity has often been attributed to this high level of non-technical or commercial losses. Having a high proportion of low-voltage lines in the network and the poor quality of the distribution network are also causes of the high level of technical losses. Low-voltage overhead distribution lines are susceptible to wire tapping for the theft of electricity. A Working Group on Power for the 11th five-year plan suggested a greater emphasis on a high-voltage distribution system (HVDS) in order to bring the HT/LT ratio of the network from its current value of 1:2.5 to 1:1 (GOI, 2006b). In order to curb pilfering of electricity, a number of distribution utilities have undertaken the replacement of overhead lines with aerial bunched conductors (ABC). The benefits of ABC and HVDS are significant due to the reduction in network losses. In spite of attractive payback periods, high investment requirements and lack of finances remain the key impediments to this effort. A high-voltage distribution system (HVDS) has been implemented on a limited basis in the states of Andhra Pradesh, Delhi, Gujarat, Maharashtra, Uttar Pradesh, West Bengal and Karnataka (GOI, 2006b). HVDS investment in Andhra Pradesh was partly supported through lending from the development bank of Germany, KfW. Table 4 highlights the achievement of rural HVDS projects in the state of Andhra Pradesh. Due to a variety of competing requirements for R-APDRP funding, the available domestic funding for HVDS is very limited compared with the required level of investment. Some of the other states, including Madhya Pradesh and Haryana, have initiated such programmes with the assistance of the Asian Development Bank, KfW and the World Bank.

TABLE 4 Impact of a high-voltage distribution system (HVDS) on network losses Details

Kottur Substation I

Bangarupalem Substation

39

38

133.85

96.94

3.6

3.3

Length of LT line after HVDS (km)

1

0.8

Length of HT line after HVDS (km)

2.6

2.5

Line loss (%)

18.63

16.30

Line loss after HVDS (%)

5.47

3.77

Net incremental investment (’000 Rs)

275

215

Payback period (years)

3.41

3.85

No. of pump sets Connected load (kW) Original length of LT line (km)

Source: APSPDCL (undated).

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India country study 537

6. Implementation strategy for climate co-benefit policies The implementation strategy for the identified policy options can be set out in the six stages depicted in Figure 2. Issuing a policy directive is the domain of the central or respective state governments. The consultation process in defining the policy boundaries as well as programme design would involve the greater participation of other stakeholders. Hence part of the policy description would be background work towards policy formulation as well. Independent agencies who have relevant experience in the power sector can provide the necessary oversight for policy implementation and monitoring throughout various stages. Apart from continuous monitoring by the implementing agencies and an overall monitoring by the government, the Central Electricity Authority (CEA) and regulatory commissions would play a greater role in monitoring policy implementation. Continuous monitoring also needs to be ensured by implementing as well as financing agencies. The adoption of clean and efficient coal technology for the Indian electricity sector can be achieved through a combination of policy directives and financial incentives. Consensus at the state level would be necessary for effective implementation of such a directive when dealing with projects that supply electricity to one state only. Table 5 outlines the responsibilities for various stakeholders towards implementation of the suggested policies. Distribution of electricity is within the purview of the state entities. Hence, policy initiative and programme design for the replacement of agricultural pump sets and HVDS deployment require greater participation from the state-level entities. The central government’s support, through the Bureau of Energy Efficiency (BEE) and the Bureau of Indian Standards (BIS), would be crucial for setting standards. Apart from technical inputs for the project implementation, energy service companies (ESCOs) can provide financial solutions beyond the initial investment and also share part of the savings. Supplementary funding for metering and transmission network upgrades could be ensured through the R-APDRP. The role of electricity regulatory commissions (CERC and SERCs) along with the Central Electricity Authority (CEA) and Rural Electrification Corporation (REC) would be very useful in monitoring programme implementation. The tax incentives for efficient technologies represent implicit financial support by the government. The financial gap in implementing the proposed policies and programmes could be bridged by support through international cooperation of a bilateral or a multilateral nature. To create efficient programme design and ensure effective implementation of the programmes under support through international cooperation, the participation of the respective bilateral or multilateral agencies at the level of programme design and monitoring planning would be justifiable. This is further discussed in the next section.

Policy formulation

Policy description

Programme design

Financing

Implementation

Monitoring

FIGURE 2 Strategy for policy implementation

CLIMATE POLICY

CLIMATE POLICY

CEA

Ministry of Finance

Ministry of Power

√

√

√

√

√

√

√

√

√

√

√

Note: a Including NGOs, consumers, energy service companies (ESCOs) etc.

Financing

Monitoring

√

√ √

√

√

√

Policy Description

Implementation

√

√

√

√

Modernization of LT distribution network to HVDS

√

√

Adoption of efficient agricultural pump sets

Programme Design

Policy Formulation

Financing

Monitoring

Implementation

Programme design

Policy description

Policy formulation

Financing

Monitoring

√

√

√

Programme design

√

√

√

√

Policy description √

√

√

Implementation

CERC

Adoption of efficient and clean coal technologies

State governments

Policy formulation

Responsibility

R-APDRP

TABLE 5 Stakeholders’ responsibility for policy implementation

SERCs √

√

√

√

√

√

√

Gencos √

√

√

√

√

√

√

√

√

√

√ √

√

√

BEE/BIS

√ √

√ √

√

Discoms

√

√

Equipment mfg.

√

√

Rural Elec. Corp. √

√

√

√

√

√

√

Others a √

√

√

√

Lenders √

√

√

√

√

√

√

Intl. cooperation √

√

√

√

√

√

√

√

√

CDM financing √

√

√

√

√

√

538 Singh

India country study 539

The benefits of GHG emissions reductions could outweigh the costs associated with the suggested policy measures. Challenges with respect to design, implementation and monitoring of programmes at the distribution level could be addressed partly through greater participation of stakeholders and appropriate funding for capacity building. Historical mistrust and lack of accountability on the part of the distribution utilities does nothing to reassure policy makers. Realizing this, a number of new initiatives targeted within the domain of the distribution utilities are being implemented through central sector utilities such as PGCIL, NTPC etc. Capacity building and a meaningful role of consumers can help with more effective implementation of programmes involving a direct interface with consumers. A phased implementation of such programmes would provide learning experiences and an opportunity to fine-tune the programme for future phases of implementation.

7. Need for international cooperation and financing Due to perverse incentives, policy gaps and lack of financial resources, the identified policy options have not been currently taken up on a scale that can deliver significant climate cobenefits. Traditional CDM financing could be rather limited, especially for pump set replacement and HVDS programmes. These also entail significant monitoring costs to meet CDM guidelines. Until recently, clean and efficient coal technologies have not received due attention in the CDM process. CDM support for advanced clean coal technologies, such as IGCC or CCS, seems to be unlikely in the near future due to the availability of low-hanging fruit such as efficiency improvements and renewable energy (Watson et al., 2007). A methodology for new grid-connected fossil fuel-fired power plants using less GHG-intensive technologies (#ACM0013) has recently been approved by the CDM Executive Board. A project proposal for a 1,320 MW supercritical coal-fired power plant at Tirora, in Gondia district, Maharashtra and a 4,000 MW project at Sasan in Madhya Pradesh have been submitted for approval. The experience with these proposals can provide useful insights into the economics and implementation of such projects, and the admissibility of CDM. A case for the replacement of agricultural pump sets and upgrading the electrical distribution network can be made under the programmatic CDM. However, such financing may remain inadequate. Bilateral and multilateral support for finance, as well as technical cooperation, could help in the implementation of the two policies (Table 6). A variety of national and international routes for additional finance have been developed in the context of climate change. Apart from multilateral institutions, these include a mix of public and private initiatives (TERI, 2006). The Clean Energy Financing Vehicle (CEFV) was proposed to facilitate the transfer of high-efficiency technology to mitigate climate change. This was intended to blend carbon financing with grants to reduce the costs of new technologies and energy infrastructure, as well as mitigating technology risks (World Bank, 2006a, 2006b). The study points to the particular need for support towards up-front capital costs and, in the case of distribution networks and pumps, a close coordination of any such process with many stakeholders at national, state and local levels. There is a great potential to learn from the implementation of similar initiatives in other countries through North–South and South–South cooperation. A twinning approach across similar institutions, departments and other stakeholders also encourages easy access to the expertise of other countries.

CLIMATE POLICY

CLIMATE POLICY

N

Efficient and clean

pumps for new

N

Awareness and

capacity building

N

DT metering and IT

with HVDS

Y

N

N

Y

Y

Y

Partial

generation companies)

Y (through

N

–

–

Y – Partial

Y – (R-APDRP)

Y – Partial (BEE)

N

Y

(R-APDRP)

Y – Partial

(R-APDRP)

Y – Partial

distribution network

N

Y

–

Central government

Modernization of LT

N

Y

–

N

governments

State

(R-APDRP)

–

Strengthening of

N

N

N

utility

N – (non UMPPs)

Distribution

Generation companies

rural distribution network

–

Consumer metering & IT

connections

Cost of inefficient

Efficient agricultural

pump sets

coal technologies

Consumers

Policy

TABLE 6 Available financing for climate co-benefit policies: need for international cooperation

N

N

Y – Partial

Y – Partial

N

CDM

Programmatic

Y?

financing

CDM

Y

Y – Partial

Y – Partial

Y – Partial

N

Y

Y

financing

International

540 Singh

India country study 541

8. Conclusions The Indian power sector offers significant potential for efficiency improvements and mitigation of emissions by adopting the three suggested policy measures along the electricity supply chain. However, the proposed steps are difficult to implement on the desired scale due to the poor financial state of the sector and a lack of domestic financing. The choice of technology is often guided by cost minimization and capital constraints and does not explicitly price carbon. Domestic drivers alone cannot address this. International cooperation, both financial and technical, can be helpful in addressing such local development issues as well as the global climate challenge. The suggested policies are expected to generate large emissions reductions and would ultimately provide a conducive environment for efficient pricing policies to replace the inefficient practices that have plagued the sector for decades. Policy simulations suggest that an agriculture pump set replacement programme would produce a 5–30% emissions reduction. A significant reduction in losses along the electrical supply system and improvements in end-use efficiency would help nullify any adverse impacts of a reduction in price subsidies. Improved metering and governance would help reduce pilferage of electricity, redressing previous consumption patterns, as more users would be consuming electricity through metered connections. Given the prevailing financing constraints in the sector, international financial support would be more than justified to bring about significant reductions in carbon emissions from the sector. The challenge of implementation of the suggested policy measures could be significant in the case of programme design and monitoring. The international cooperation needs to address both the technical needs and the financial requirements of implementing the suggested policy measures. The availability, accessibility and financing of existing and future efficient technologies should find support under such a cooperative framework.

Notes 1. Ministry of Finance (Department of Revenue) Notification No. 46/2008 Central Excise dated 14 August 2008. 2. Further results for the scenarios are reported in Singh (2008). 3. Considering a ‘back of the envelope’ estimate of Rs 8 million per MW each for civil works, and balance of plant (BOP) to be almost the same across the two technologies. 4. Supercritical plants above this limit are commercially available in the domestic as well as the international market. 5. Due to the lack of metering of a significant number of agricultural consumers, this may be an overestimation by the utilities to hide high system losses, often due to theft. 6. Detailed results and assumptions for these scenarios are shown in Table A1 in the Appendix. 7. In the base case, pumps are assumed to operate for 4.3 hours, at the level recorded in 2007/08. It is assumed that efficient pump sets require only 3.8 hours of operation. 8. This may be an underestimation to the extent that part of such losses may have been camouflaged as a higher share of unmetered supplies to agricultural consumers.

References APSPDCL, undated, A Presentation on High Voltage Distribution Systems in APSPDCL, Southern Power Distribution Company of Andhra Pradesh Limited, Tirupati, India. Cao, Y., Wei, X., Wu, J., Wang, B., Li, Y., 2007, Development of Ultra-supercritical Power Plant in China: International Conference on Power Engineering–2007, 23–27 October 2007, Hangzhou, China. CEA, 2006, All India Electricity Statistics: General Review 2006, Central Electricity Authority, Ministry of Power, Government of India, New Delhi [available at http://cea.nic.in/power_sec_reports/general_review/0405/ch10.pdf].

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CEA, 2008a, Presentation on Clean Coal Technology in India, India–EU Working Group on Coal, 21 January 2008, New Delhi, Central Electricity Authority, Ministry of Power, Government of India, New Delhi. CEA, 2008b, Baseline Carbon Dioxide Emissions from Power Sector, Central Electricity Authority, Ministry of Power, Government of India, New Delhi [available at www.cea.nic.in/planning/c%20and%20e/database_ publishing_ver3.zip]. Davison, J., 2007, ‘Performance and costs of power plants with capture and storage of CO2’, Energy 32, 1163–1176. Ghosh, D., Shukla, P.R., Garg, A., Ramana, P.V., 2002, ‘Renewable energy technologies for the Indian power sector: mitigation potential and operational strategies’, Renewable and Sustainable Energy Reviews 6, 481–512. GOI, 2006a, Integrated Energy Policy: Report of the Expert Committee, Government of India, Planning Commission, New Delhi. GOI, 2006b, Report of the Working Group on Power for 11th Plan: Sub-group on Distribution Including Village and Household Electrification, Planning Commission, Government of India, New Delhi. Graus, W.H.J., Worrell, M., Voogt, E., 2007, ‘International comparison of energy efficiency of fossil power generation’, Energy Policy 35, 3936–3951. Kroeze, C., Vlasblom, J., Gupta, J., Boudri, C., Blok, K., 2004, ‘The power sector in China and India: greenhouse gas emissions reduction potential and scenarios for 1990–2020’, Energy Policy 32, 55–76. Mathur, J., Bansal, N.K., Wagner, H.J., 2003, ‘Investigation of greenhouse gas reduction potential and change in technological selection in Indian power sector’, Energy Policy 31, 1235–1244. NETL, 2007, Cost and Performance Baseline for Fossil Energy Plants: Volume 1: Bituminous Coal and Natural Gas to Electricity Final Report, National Energy Technology Laboratory, Department of Energy, USA. Singh, A., 2006, ‘Power sector reform in India: current issues and prospects’, Energy Policy 34(16), 2480–2490. Singh, A., 2008, Climate Co-benefit Policies in India: Domestic Drivers and North–South Cooperation, Climate Strategies and Electricity Policy Research Group, University of Cambridge, Cambridge, UK [available at www.climatestrategies.org/our-research/category/29/95.html]. TERI, 2006, Climate Change and Technology Transfer: Status Review Paper Report to British High Commission, TERI, New Delhi. UNFCCC, 2005, Sixth Compilation and Synthesis of Initial National Communications from Parties not included in Annex I to the Convention, United Nations Framework Convention on Climate Change, Bonn [available at http://unfccc.int/ resource/docs/2005/sbi/eng/18a02.pdf]. Watson, J., MacKerron, G., Ockwell, D., Wang, T., 2007, Technology and Carbon Mitigation in Developing Countries: Are Cleaner Coal Technologies a Viable Option? Background Paper for Human Development Report 2007, UNDP [available at http://hdr.undp.org/en/reports/global/hdr2007-2008/papers/watson_ mackerron_ockwell_wang.pdf]. World Bank, 2001, India: Power Supply to Agriculture: Volume 1: Summary Report, Energy Sector Unit South Asia Regional Office, The World Bank, New Delhi. World Bank, 2006a, Clean Energy and Development: Towards an Investment Framework, GEF Council, 6–9 June 2006, Global Environment Facility, The World Bank, Washington, DC. World Bank, 2006b, An Investment Framework for Clean Energy and Development: A Progress Report, DC2006-0012, 5 September 2006, The World Bank, Washington, DC.

CLIMATE POLICY

Annual energy consumption (GWh)

T&D losses (%)

Energy generation at bus bar (GWh)

5

6

7

Gross gas- and diesel-based thermal generation (GWh)

Gross hydro-based generation (GWh)

Gross nuclear-based generation (GWh)

Gross renewable-based generation (GWh)

Total gross generation (GWh)

9

10

11

12

13

Notes: Efficient Scenario I – All new connections with efficient pump sets. Efficient Scenario II – All new connections with efficient pump sets and 50% replacement of old pump sets. Efficient Scenario III – all new connections with efficient pump sets and 50% replacement of old pump sets, HVDS. Efficient Scenario IV – All new connections with efficient pump sets and 100% replacement of old pump sets. Efficient Scenario V – All new connections with efficient pump sets and 100% replacement of old pump sets, HVDS. Assumptions: Efficient motors would bring down average pump set rating by 10%. a The life of a pump set is assumed to be 12 years.

85.6

Carbon savings over plant life (MtCO2)a

22

7.1 4.8

140.5

Annual savings potential for carbon emissions (MtCO2)

147.6

0

0

Annual savings potential for carbon emissions (%)

1,124.6

0

0

0

9

132

167,499

1,557

5,258

23,517

17,561

119,606

155,737

25

116,803

4.19

76.43

3.82

20

2011/12

Efficient Scenario I

21

Annual carbon emissions

19

0

0

0

9

138

176,006

1,636

5,525

24,711

18,453

125,681

163,647

25

122,735

4.3

78.20

3.91

20

2011/12

Base case

20

Nuclear-based generation (GWh)

Renewable-based generation (GWh)

17

Hydro-based generation (GWh)

16

18

8

Gas- and diesel-based thermal generation (MtCO2) 0

117

Coal-based thermal generation (MtCO2)

15

148,517

1,381

4,662

20,852

15,571

106,052

138,088

31.25

94,935

4.3

60.49

3.91

15.47

14

Emissions

Gross coal-based thermal generation (GWh)

8

Generation

Total connected load of agricultural pump sets (GW)

Average hours of daily use (hours)

4

Average pump capacity (kW)

3

Number of agricultural pump sets (million)

2

2007/08

Year

1

Base case estimate

S. No. Description

TABLE A1 Savings in CO2 emissions: adoption of efficient agricultural pump sets along with HVDS

Appendix

227.0

12.8

18.9

128.7

0

0

0

8

121

153,457

1,427

4,817

21,545

16,089

109,579

142,681

25

107,011

3.99

73.42

3.67

20

2011/12

Efficient Scenario II

408.7

23.1

34.1

113.6

0

0

0

7

106

135,403

1,259

4,251

19,010

14,196

96,687

125,895

15

107,011

3.99

73.42

3.67

20

2011/12

Efficient Scenario III

362.2

20.4

30.2

117.5

0

0

0

7

110

140,026

1,302

4,396

19,659

14,681

99,988

130,193

25

97,645

3.8

70.40

3.52

20

2011/12

528.0

29.8

44.0

103.6

0

0

0

7

97

123,552

1,149

3,879

17,347

12,954

88,225

114,876

15

97,645

3.8

70.40

3.52

20

2011/12

Efficient Efficient Scenario IV Scenario V

India country study 543

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544 Grant

■ country study

Concentrated solar power in South Africa KATE GRANT* Electricity Policy Research Group, Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, UK

The case is examined for accelerated deployment of concentrated solar power (CSP) technology in the South African electricity sector. Policy mechanisms and enabling activities that need to be defined and developed to encourage investment in CSP are reviewed. The use of a tender process, complemented by support from other policy instruments such as feed-in tariffs, is proposed as an efficient way of meeting an effective CSP target. The advantages of international support and commitment to large-scale CSP deployment include the sharing of knowledge and the incremental improvements inherent in the process of ‘learning-by-doing’. Policy relevance: South Africa requires a viable alternative to coal power generation if it is to endorse decarbonization of the power sector. CSP could offer an appropriate technology but, after some years of discussions, no pilot project has yet been realized. Amongst other enabling activities, this illustrates two requirements for such a shift to a new lowcarbon technology: finance to meet the incremental costs of the initial pilot projects, and a strategy to create domestic production or attract international manufacturers to South Africa. These requirements are necessary to reduce costs and replace lost jobs from reduced coal power generation. International cooperation might unlock these opportunities by providing financial support for the incremental costs, thus enhancing the credibility of longer-term deployment strategies so as to attract investment in the supply chain; for creating technical assistance and capacity-building measures towards a suitable regulatory framework; and for manufacturing, installation and operation of plants. Keywords: accelerated deployment; capacity building; climate policy; concentrated solar power; energy sector; international support; policy instruments; renewable energy; South Africa Le cas d’un déploiement accéléré de la technologie de conversion de l’énergie solaire concentrée « Concentrated Solar Power » (CSP) est analysé dans le secteur de l’électricité en Afrique du Sud. Les instruments de politique et activités de soutien à définir et développer en vue de stimuler l’investissement dans le CSP sont analysés. L’emploi d’un processus d’appel d’offre, supplémenté par d’autres instruments de politique tels que tarifs de rachat, est proposé en tant que méthode efficace pour réaliser un objectif CSP. Parmi les avantages d’un soutien international et d’un engagement au déploiement du CSP à grande échelle sont le partage des connaissances et l’amélioration progressive implicite aux processus d’apprentissage par la pratique. Pertinence politique: L’Afrique du Sud a besoin d’une alternative viable à la production d’énergie à charbon à dessein de s’engager dans la décarbonisation du secteur de l’énergie. Le CSP se présente en principe comme une technologie appropriée, mais après des années de discussions, aucun projet pilote n’a encore été exécuté. Parmi d’autres activités favorables, ceci illustre deux conditions pour une transition vers une nouvelle technologie sobre en carbone: les fonds pour satisfaire le coût progressif des projets pilotes initiaux, et une stratégie de production intérieure favorable à l’attrait des producteurs internationaux en Afrique du Sud. Ces conditions sont nécessaires pour la réduction des coûts et pour la création d’emplois pour remplacer les emplois perdus à cause de la baisse de production d’énergie à charbon. Une coopération internationale pourrait entamer ces possibilités en apportant un soutien financier aux coûts progressifs; augmentant la crédibilité des stratégies de déploiement à long terme de manière à attirer l’investissement

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 544–552 doi:10.3763/cpol.2009.0637 CLIMATE POLICY © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

South Africa Country Study 545

dans la chaîne de production; et en apportant une assistance technique et des mesures de renforcement des capacités dans la création d’un cadre réglementaire approprié, et dans la fabrication, l’installation et l’opération des centrales. Mots clés: Afrique du Sud; déploiement accéléré; energie solaire concentrée; énergies renouvelables; instruments de politique; politique climatique; renforcement des capacités; secteur de l’énergie; soutien international

1. Introduction South Africa has traditionally been a highly carbon-intensive economy. More than 90% of South Africa’s electricity generation is dependent on coal; therefore it is a sector with significant carbon emissions mitigation potential (SBT, 2007; Winkler and Marquard, 2007). South Africa is a country rich in renewable energy resources. Some resource assessments indicate that renewable energy technology (RET) could provide for 15% of the electrical demand by 2020 and 50% by 2050 (Winkler, 2003; Banks and Schäffler, 2006). There are vast solar resources, yet the penetration of technologies such as concentrated solar power (CSP) is negligible. Investment in CSP will assist with carbon abatement and prevent South Africa from being locked into a carbon-intensive development trajectory. Furthermore, it will diversify the power mix; thereby increasing the security of South Africa’s power supply and decreasing its vulnerability to fluctuating primary fuel costs. There are also development co-benefits such as job creation and the stimulation of an indigenous industry in solar technology. Policy instruments are proposed in this article to support the entry of the private sector into the CSP generating industry. Global markets stand to benefit from the cost reductions and accumulated learning inherent in the process of decreasing the concentration of an industry and increasing the installed capacity of a technology. With this in mind the potential for international collaboration to facilitate the adoption of CSP technology in South Africa is explored.

2. South Africa’s environmental ambition South Africa is endeavouring to implement effective renewable energy policies that would not only have the benefits of carbon abatement, but would also be aligned with the country’s development goals of securing supply through diversity, stimulating the economy, encouraging job creation, and managing energy-related environmental and health impacts (DME, 1998). In 2003 a White Paper on Renewable Energy (WPRE) was published. In terms of a supply-side strategy, the WPRE outlined the government’s objective of achieving 10,000 GWh of renewable energy contribution to final energy consumption by 2013. Based on the National Energy Regulator of South Africa’s (NERSA) medium-demand forecast (NERSA, 2007), this target would amount to approximately 3% of final electricity demand in 2013. The government also released an Energy Efficiency Strategy in 2005 (DME, 2005) that sets a target of 12% average reduction in final energy demand by 2015. Since the introduction of the WPRE in 2003, deployment of RET has been limited. It is believed that the slow implementation of the WPRE is due to the high capital costs of technology in contrast with low electricity tariffs, and the lack of certainty in policy and institutional frameworks (World Bank, 2007). NERSA recently approved new renewable energy feed-in tariff (REFIT) guidelines (NERSA, 2009) with the aim to ‘induce developers to invest’. NERSA has proposed that Eskom Distribution is appointed as the renewable energy power purchase agency and, as such, would be obliged to buy electricity at a prescribed rate, for a 20-year term, from any generators

CLIMATE POLICY

546 Grant

that are awarded licences under the REFIT programme. Carbon revenue from the Clean Development Mechanism (CDM) will be excluded from the REFIT programme. The Long Term Mitigation Scenarios (LTMS) technical report (Winkler, 2007) models the impacts of existing South African renewable energy and energy efficiency policies on future emissions. It is a confluence of research and results from an interactive process, which involved a scenariobuilding team (SBT) of key stakeholders in the industry. It concludes that the projected emissions level in 2050 resulting from current policy requirements is not far enough below the business-asusual scenario of unrestrained growth. This indicates that South African climate policy needs to define more ambitious targets in order to effectively reduce emissions to a level more closely aligned with that required by science for GHG stabilization (SBT, 2007).1 South Africa has vast solar resources, with studies suggesting that 194,000 km2 of land receives sufficient solar radiation to make a CSP plant viable (DME, 2003). If a mere 5% of this land (9,700 km2) was used, 242 GW of CSP could be deployed.2 With a 25% capacity factor (EU, 2008), this translates to about 530 TWh of annual electricity supply. To put this into perspective, this is more than twice the electricity demand of the South African population in 2007. Capacity scenarios indicate that nominal CSP capacities between 2 GW (Banks and Schäffler, 2006) and approximately 3 GW (SBT, 2007) could be realized by 2020.

3. Description of policy It has been proposed that a more ambitious target than the 10,000 GWh outlined in the WPRE is set for the deployment of RET in order to accelerate South Africa’s transition to a low-carbon economy. A scenario of a 15% contribution from renewables to final electricity consumption by 2020 has been suggested by various studies (EDRC, 2003; Banks and Schäffler, 2006; Winkler 2007, Marquard et al., 2008). Defining an independent target for CSP within the total RET target will encourage investment in this area and stimulate cost improvements and ‘learning-by-doing’. It will also trigger job creation, as it has been estimated that approximately 5.9 jobs/MW will result directly from CSP installation and operation (compared with 3 jobs/MW for new coal) (AGAMA, 2003).

3.1. Suitable policy instruments International experience There are various policy instruments that have been employed to support and encourage investment in CSP technologies, particularly in the USA and Spain. In the USA, the 1974 Solar Energy Research Act was passed to support R&D in solar-specific technologies (IEA, 2004). The first set of commercial-scale CSP plants were commissioned in stages between 1984 and 1990. Energy tax credits and favourable purchasing regulations as a result of renewable portfolio standards were seen as incentives for CSP deployment in the USA at this time (IEA, 2004).3 In Spain, a suite of government policies provided the market ‘pull’ for the deployment of CSP. Various regulations promoted the proactive inclusion of RE in the primary energy mix. Longterm, stable feed-in tariffs, priority network connections and five-year committed off-take agreements guaranteed future revenues. The technology ‘push’ was developed through RD&D programmes and capital grants in the form of non-refundable loans or subsidies – in particular the aid programme for solar PV and solar thermal introduced in 2001 (IEA, 2004). In 2001, 10% tax deductions were offered for investments in renewable technologies.

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Local context In South Africa, the electricity sector is dominated by the vertically integrated, state-owned utility, Eskom, which generates 94% of the country’s electricity. The Electricity Regulation Act 4 of 2006 gives provisions for the Minister (of the DME) in consultation with NERSA to define the types of energy sources from which electricity must be generated and the percentage distribution of those sources (46.1.b). This provides a vehicle in which a renewable portfolio standard or quota system similar to those employed in the USA (Nevada and California) could be set up in South Africa. However, the current electricity crisis presents a difficult atmosphere for investment in RET. In February 2008, Eskom was placed on credit watch and it has been limited to borrowing R150 billion (approximately €13 billion) from the market over the next five-year period (Eskom, 2008b) Therefore Eskom is concentrating on projects of critical national significance in order to ensure security of supply. Thus conventional coal-fired power stations are favoured over expensive low-carbon technologies with intermittent generating profiles. Future fiscal support and capital grants (similar to those used in Spain) are unlikely, as R60 billion has already been pledged to Eskom by the National Treasury (Manuel, 2008) and, as stated in the 2003 WPRE: ‘South Africa’s fiscal resources are limited and there are competing high priority social and economic programs’. In 2007 Eskom was mandated to source 5,000 MW of new generation investment from the private sector (Eskom, 2008a). In this context, it seems feasible that a tender process would be an effective way of encouraging the private sector to contribute towards meeting the CSP target. International experience (e.g. Denmark, Ireland and the UK) has indicated that a competitive tendering process results in lower costs for deploying renewable technology projects (see Neuhoff et al., 2008, for a review of international experiences in renewable support schemes). Tendering is a process whereby bidders compete to supply a defined amount of energy for a contracted period, at a pre-agreed rate (Bode and Groscurth, 2008). The South African Electricity Regulation Act of 2006 could provide legislative support for a tender process. Provisions exist for the Minister of the DME to make regulations regarding the participation of the private sector in new generation activities. The advantage of a tender process is that the cost of deployment is determined through bidding, and thus the government does not face the challenge involved in setting a feed-in tariff for a new technology for which limited information on detailed costs is available. Successful bidders also have a guaranteed source of revenue, which facilitates the process of securing project finance. A disadvantage is that preparing project documents for the bidding process can be expensive and risky for market participants. Bidders may also drive their costs down in order to be awarded the bid and thus may not plan adequate contingency for cost increases. Experience with tendering in the UK and Ireland highlighted the fact that, due to delivery obligations not being specified, there is the possibility that not all of the capacity contracted will be built (Neuhoff et al., 2008). This suggests the need for some collateral to ensure that winning bidders implement the project within a specified time-frame. Unfortunately such a measure increases the risk, and therefore the costs, for investors; an aspect that should be acknowledged when defining the project conditions. Although a tender process is proposed as an effective tool for stimulating investment in the solar industry, it is acknowledged that a suite of policy instruments could give a more tailored solution for the South African context. For example France and Denmark supported tender processes for large-scale projects with feed-in tariffs (Neuhoff et al., 2008). Eskom is averse to paying higher rates for electricity if the cost is not commercially feasible for its business (Eskom, 2008a). There is still uncertainty as to whether tariff structures that facilitate adequate cross-subsidization between electricity consumers will be developed by NERSA. Consequently it may be necessary to offer additional support for nascent CSP projects in order to build up capacity in the local industry.

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3.2. Executing the policy and mobilizing investment Policy stakeholders The Department of Environmental Affairs and Tourism (DEAT) is instrumental in climate policy development within South Africa. However, it is recognized that, in terms of sector-specific policies, it will be necessary for government departments to collaborate in order to reach an effective climate policy strategy (DEAT, 2004). Table 1 is a stakeholder collaboration matrix that summarizes some of the government cooperation that will be required. Table 1 is not an exhaustive list of the stakeholders involved in the electricity industry. Key players such as private enterprises, finance institutions, research centres and NGOs are crucial for the successful deployment of CSP. It is essential to understand who is likely to be making the

TABLE 1 Government collaboration matrix DEAT

DME

Eskom

NERSA

NT

DTI/DST

SANERI/

Department

Department

DPE

National

National

Department of

SANEDI

of Environment

of Minerals

Department

Energy

Treasury

Trade and

South African

and Tourism

and Energy

National

of Public

Regulator

Industry/

Enterprises

of

Department

Energy

South Africa

of Science

Development

and Technology

Institute

Policy drivers – ‘X’ indicates an area where collaboration could occur Progressive

X

climate policy RET policy to

X

X

X

regulate electricity sector Defined structure

X

X

for public participation Robust tender

X

X

X

X

X

X

X

X

X

process Enabling activities Restructured electricity tariff system Information: grid

X

access, grid codes and EIAs etc Robust PPAs Funding channels

X

X

Industry collaboration

X

X

International partnerships Development of human capital

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X

X X

X

X

X X

X

X

X

X

X

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investment decisions for entering the CSP market and what barriers they are experiencing. This will indicate what type of support could be offered to encourage these emerging stakeholders. Institutional barriers such as slow registration, licensing and grid connection processes, as well as arduous environmental impact assessments (EIAs) need to be addressed. Robust power purchase agreements (PPAs) that support investment in CSP over the lifetime of the project also need to be developed. Market structure is a concern, with Eskom operating as the main producer and single buyer. Eskom exerts considerable authority, and private participants may feel that there is significant risk in being dependent on Eskom’s purchasing power and expansion strategies. Robust legal frameworks protecting third party investments are required. Capacity barriers can be seen in the lack of resources in government departments and technical sectors. It is evident that there are sufficient solar resources and the need for added generating capacity in South Africa. Yet it is unclear as to whether there are enough financing, construction and material resources available to embark on an accelerated build programme.

4. International cooperation It is important for CSP to be deployed not only as an individual project, but with a clear strategy for large-scale application in order for the benefits of economies of scale and incremental learning to be reaped. International cooperation could reinforce domestic development strategies through strategic deployment or the removal of barriers (Grubb, 2004).

4.1. Capacity building Institutional capacity across the relevant government departments may not be sufficient to dedicate resources to climate-specific policies (DEAT, 2004). A research structure needs to be developed to identify knowledge gaps and provide intellectual input into policy making (Winkler, 2006). Government departments may benefit from international bilateral partnerships that encourage knowledge sharing at the national and municipal level. This will assist in developing a robust policy framework in which the transition to a low-carbon economy can be supported. Sector capacity and technical skill are necessary to absorb and adapt technologies to the local context. Studies indicate that the deployment of renewables will result in a higher level of job creation than the deployment of the same capacity of new coal generation. However, it will require training and skills development, which needs to be supported by the relevant education and training authorities (AGAMA, 2003). Grubb (2004) suggests that international collaboration can take the form of domestic ‘market engagement’. This includes support systems such as cofinancing, innovation centres, information networks and collaboration on demonstration projects to enable the sharing of risk.

4.2. Incremental funding The cost of CSP technology in South Africa is currently prohibitive. Therefore, in order to promote the deployment of CSP, a support scheme will be necessary to encourage investors or the government to pursue a tender process that may result in an incremental outlay above that required to invest in new coal power generation. This funding could come from the newly introduced REFIT programme. Tradable certificate schemes are unlikely to provide the support

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levels that are required for the initial deployment of projects. Similarly the CDM has not yet provided sufficient incentives to invest in CSP. Thus financial support from the Global Environment Facility or new mechanisms of financial or technical cooperation may be central to the pursuit of large-scale deployment of CSP in South Africa. Such incremental funding will only be required for the medium term because, as the cost of using coal as a fuel source increases (as externalities are internalized) and the levelized electricity cost (LEC) for CSP decreases,4 projects will begin to become competitive with conventional technologies. The cost of capital for CSP may be at a premium, as it could be perceived to have a high-risk profile. Added to this, international financial institutions may feel that South Africa presents a risky investment climate. Direct risk sharing through joint ventures could reduce the cost of capital. International support could boost South Africa’s risk rating and therefore indirectly facilitate the securing of affordable project finance.

4.3. Building confidence in a future market Robust government commitment is an incentive for the private sector to enter the CSP market. De-politicizing this commitment through cross-party consensus would enhance confidence in the long-term stability of such policies. This could be augmented by international collaboration, as the private sector would be encouraged by the potential of a larger market. In addition, largescale, strategic deployment would induce cost reductions through incremental improvements and by allowing access to optimal components (Neuhoff, 2005).

5. Conclusions Despite South Africa’s intentions to reduce its GHG emissions, studies show that, under current development targets, the reduction of emissions is likely to be limited (Winkler, 2007). Thus it is evident that an accelerated programme for the adoption of low-carbon technology is required. This article discussed the benefits of developing a more ambitious target for renewable energy contribution than the one currently outlined by the White Paper for Renewable Energy (DME, 2003). In particular it focused on the large-scale deployment of CSP technology. In the current market context of Eskom being mandated as the sole buyer of electricity, it was suggested that a robust and transparent tender process would be an effective way of encouraging the private sector to enter the solar generation market. This support mechanism would need to be complemented by other policy instruments, such as the REFIT programme proposed by NERSA, in order to make CSP projects financially feasible under current tariff circumstances. It is acknowledged that the development and refinement of such policies will require collaboration between, and significant capacity building within, various government departments and stakeholders. International support may fortify this process. There are obstacles that need to be overcome in order to ensure that South Africa can realistically meet an ambitious solar target. Various channels of international collaboration are discussed. This support can manifest itself through knowledge sharing and information networks, incremental funding for projects, or the facilitation of access to optimal technology. The global benefits of large-scale CSP deployment will be seen in cost reductions resulting from ‘learning-bydoing’ and incremental improvements in efficiency. International commitment will augment and support South Africa’s intentions to meet RET contribution targets. This will assist in mitigating risk and boosting confidence in the potential of an attractive, self-sustaining solar market in the long term.

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Notes 1. The ‘required by science’ scenario assumes that South Africa has all the technical and financial resources at its disposal to reduce emissions by between 30% and 40% below 2003 values by 2050. This amounts to mitigation of about 1,300 Mt of GHG per year (SBT, 2007). 2. Using the assumption that a 100 MW plant can be built on 4 km2 (Eskom, 2006). 3. In 1978 the Public Utilities Regulatory Policies Act required utilities to purchase power from qualified, small-scale private producers at the avoided-cost rate. This encouraged deployment of renewable energy technologies (IEA, 2004). 4. The rate at which the LEC for CSP decreases depends on the global cumulative capacity. The LEC is also dependent on the local capacity to supply components and expertise (World Bank, 2006).

References AGAMA, 2003, Employment Potential of Renewable Energy in South Africa: A Study Commissioned by Sustainable Energy and Climate Change Partnership, a project of Earthlife Africa Johannesburg, in partnership with WWF, Denmark, SECCP, Johannesburg. Banks, D., Schäffler, J., 2006, The Potential Contribution of Renewable Energy in South Africa, commissioned by Sustainable Energy and Climate Change Partnership, February 2006. Bode, S., Groscurth, H.-M., 2008, Incentives to Invest in Electricity Production from Renewable Energy under Different Support Schemes, Arrhenius Institute for Energy and Climate Policy, March 2008. DEAT, 2004, A National Climate Change Response Strategy for South Africa, Department of Environmental Affairs and Tourism, September 2004. DME, 1998, The White Paper on Energy Policy, Department of Minerals and Energy, Republic of South Africa [available at www.dme.gov.za/energy/documents. stm#1]. DME, 2003, White Paper on Renewable Energy, Department of Minerals and Energy, Republic of South Africa [available at www.dme.gov.za/energy/documents. stm#1]. DME, 2005, Energy Efficiency Strategy of South Africa, Department of Minerals and Energy, Republic of South Africa [available at www.dme.gov.za/energy/efficiency.stm]. EDRC, 2003, Policies and Measures for Renewable Energy and Energy Efficiency in South Africa, commissioned by Sustainable Energy and Climate Change Partnership, Energy and Development and Research Centre, Cape Town. Eskom, 2006, Environmental Impact Assessment Process: Proposed Concentrating Solar Power Plant and Associated Infrastructure in the Northern Cape Area, briefing paper [available at www.eskom.co.za/content/ BID_Final_English230306.pdf]. Eskom, 2008a, Bidders Guide to Power Purchase Programmes, Eskom, Johannesburg [available at www.eskom.co.za/live/ content.php?Item_ID=6865& Revision=en/1]. Eskom, 2008b, Together, Rising to the Challenge: Annual Report 2008 [available at www.eskom.co.za/ annreport08/]. EU, 2008, Concentrated Solar Power, European Commission Research Topics [available at www.ec.europa.eu]. Grubb, M.J., 2004, ‘Technology innovation and climate change policy: an overview of issues and options’, Keio Economic Studies 41, 103–132. IEA, 2004, Renewable Energy: Market and Policy Trends in IEA Countries, OECD/IEA, Paris. Manuel, T.A., 2008, Budget Speech, Ministry of Finance, 20 February 2008. Marquard, A., Merven, B., Tyler, E., 2008, Costing a 2020 Target of 15% Renewable Electricity for South Africa – Final Draft, Energy Research Centre, University of Cape Town [available at www.erc.uct.ac.za/Research/publications/08Marquardetal-costing_a_2020_ target.pdf]. NERSA, 2007, Updated NIRP3 National Demand Forecast January 2007, National Energy Regulator of South Africa, Pretoria. NERSA, 2009, NERSA Decision on Renewable Energy Feed-in Tariff, Media Statement, 31 March 2009 [available at www.nersa.org.za/News.aspx]. Neuhoff, K., 2005, ‘Large-scale deployment of renewables for electricity generation’, Oxford Review of Economic Policy 21(1), 88–110.

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Neuhoff, K., Skillings, S., Rix, O., Sinclair, D., Screen, N., Tipping, J., 2008, Implementation of EU 2020 Renewable Target in the UK Electricity Sector: Renewable Support Schemes, Redpoint Energy Ltd. SBT, 2007, Long Term Mitigation Scenarios: Scenario Document, Scenario Building Team, Department of Environment Affairs and Tourism, Pretoria [available at www.erc.uct.ac.za/Research/LTMS/LTMS-intro.htm]. Winkler, H., 2003, ‘Renewable energy policy in South Africa: policy options for renewable electricity’, Energy Policy 33, 27–38. Winkler, H. (ed), 2006, Energy Policies for Sustainable Development in South Africa: Options for the Future, Energy Research Centre, Cape Town [available at www.erc.uct.ac.za/Research/publications/06Winkler-Energy%20policies%20for %20SD.pdf]. Winkler, H. (ed), 2007, Long Term Mitigation Scenarios: Technical Report, prepared by the Energy Research Centre for Department of Environment Affairs and Tourism, Pretoria [available at www.erc.uct.ac.za/Research/LTMS/LTMSintro.htm]. Winkler, H., Marquard, A., 2007, Energy Development and Climate Change: Decarbonising Growth in South Africa, UNDP 2007/40, Human Development Report 2007/2008. World Bank, 2006, Assessment of the World Bank/GEF Strategy for the Market Development of Concentrating Solar Thermal Power [available at www.isi.fhg.de/e/eng/projekte/179-e.htm]. World Bank, 2007, Project Appraisal Document on a Proposed Grant to the Republic of South Africa for a Renewable Energy Transformation Project, Report No 39789-ZA.

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■ country study

China’s wind industry: policy lessons for domestic government interventions and international support XILIANG ZHANG*, SHIYAN CHANG, MOLIN HUO, RUOSHUI WANG Institute of Energy, Environment, and Economy, Tsinghua University, Beijing 100084, China

The dynamics of the development of China’s wind power industry were investigated from a dual perspective of domestic government interventions and international support. The progress of China’s wind power industry is largely attributed both to the effective implementation of a bundle of domestic public policies (such as the wind power concession programme, mandatory renewable power market share, power surcharge for renewables, and tax relief) and international support (in the forms of technology transfer, CDM and public finance support). Wind power has great potential for mitigating China’s future CO2 emissions. However, resource uncertainty, technology risk, and market uncertainty will need to be addressed in order to translate the potential into market reality. Enhancing domestic technology R&D support, increasing the level of the power surcharge for renewables, international support (e.g. CDM), and improving technology transfer will assist in minimizing these uncertainties and risks. Policy relevance: International technological cooperation is illustrated in terms of how domestic policy and international support interact through constructive domestic policies, private-sector joint ventures, and international capacity building and financial support. The definition of a new objective for future policy (large-scale penetration of wind in the Chinese power system) allows for the identification of future priorities for technology cooperation. Large amounts of intermittent generation require new technologies and practices for grid operation and management, and better adaptation of turbine design to domestic materials and local conditions. Win–win options exist, but need to be supported by capacity building and frameworks that balance incentives for international technology companies against Chinese concerns over dependence on imported technology and high licensing fees. Keywords: China; domestic policy; international support; wind power La dynamique de développement de l’industrie éolienne chinoise est examinée de la perspective des interventions gouvernementales intérieures et du soutien international. Les progrès de l’industrie éolienne chinoise sont largement attribués à la mise en œuvre effective d’un paquet de politiques publiques intérieures (telles que le programme de tarif réduit à l’éolien, la part de marché obligatoire des énergies renouvelables, surcharge pour les renouvelables, et dégrèvement fiscal) et le soutien international (transfert des technologies, MDP et soutien financier public). Le potentiel de l’énergie éolienne à réduire les émissions de CO2 futures de la Chine est important. Cependant, l’incertitude face aux ressources, le risque technologique, et les incertitudes de marché devront être pris en compte de manière à traduire ce potentiel en réalité de marche. L’augmentation du soutien à la recherche et au développement technologiques intérieurs, l’augmentation du niveau de surcharge pour les énergies renouvelables, le soutien international (ex : MDP), et l’amélioration du transfert des technologies, contribueront à la minimisation de ces incertitudes et ces risques. Pertinence politique: La coopération technologique internationale est illustrée par l’interaction de la politique intérieure et du soutien international dans les politiques intérieures constructives, le partenariat commercial privé, et le soutien extérieur au renforcement des capacités et à l’apport financier. La définition d’un nouvel objectif pour la politique future (forte pénétration de l’éolien dans le système énergétique chinois) permet d’identifier les priorités pour une coopération technologique future. De nouvelles technologies et pratiques sont nécessaires dans l’opération et la

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 553–564 doi:10.3763/cpol.2009.0641 © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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gestion de réseau, pour une production énergétique à forte intermittence, ainsi qu’une meilleure conception de turbines adaptées à des matériaux et conditions climatiques intérieurs. Des options « gagnant-gagnant » existent, mais nécessitent des structures et capacités renforcées, aptes à pallier les incitations aux entreprises de technologie étrangères, face aux préoccupations de la Chine quant à la dépendance en technologie importée et le coût élevé des licences. Mots clés: Chine; énergie éolienne; politique intérieure; soutien international

1. Introduction China’s energy consumption and GHG emission issues have recently become a focus of most of the global energy, environment and security talks. The features of China’s energy system evolution in the future will have important implications for global energy investment, energy market restructuring, and environmental protection. Increasing the share of renewable energy resources could be an important element of China’s energy system transition. China’s wind energy resource is abundant. The technical development potential of onshore wind resources is as much as 297 GW at a height of 10 m (CMA, 2006), with annual electricity generation being more than 594 TWh, which is more than 18% of the total electricity production of China in 2007. Since 2004, China’s wind power industry has been growing at an unprecedentedly high rate (Figure 1). The cumulative installed capacity of wind turbines went from 550 MW in 2003 to 12 GW in 2008, with new installations of 6.2 GW in 2007 alone. Chinese wind turbine manufacturers and joint ventures accounted for 75.4% of the increased wind turbine installations in 2008 and 61.6% of the cumulative wind turbine installations by 2008. At present, China has become a leading country in the world both in terms of wind power technology deployment and manufacturing capacity. How could such dramatic progress be made? Why has the domestic renewable/wind policy been so effective? What is the role of international support? China’s wind energy development has long been a

6,500

14,000

5,500

12,000

Cumulative capacity Incremental capacity

10,000

4,500

8,000

3,500

6,000

2,500

4,000

1,500

2,000

500 –500

0 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

FIGURE 1 Installed capacity and incremental capacity in China during 1995–2008 (MW) Source: Li and Gao (2008); Li et al. (2009)

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2006

2007

2008

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topic of research (Zhang et al., 2001; Liu et al., 2002; Lewis, 2005; Lema and Ruby, 2007). However, these questions have not yet been answered satisfactorily. In particular, there is a lack of literature that has approached China’s wind industry development issues from a combined perspective of domestic policy and international support. The article is structured as follows: Section 2 presents an assessment of the impacts of China’s public policies for wind industry development. Section 3 analyses the role that international support plays in promoting China’s wind power industry development. Section 4 provides an outlook to 2050 for China’s wind industry in terms of the development potential, risks and uncertainties associated with the development process, along with some policy recommendations which would largely help translate the wind development potential into market reality. Section 5 gives some conclusions.

2. Domestic policy impact assessment 2.1. Domestic policy interventions Renewable Energy Law China’s Renewable Energy Law was passed by the Congress on 28 February 2005 and took effect on 1 January 2006. The law recognizes the strategic role of renewable energy in optimizing China’s energy supply mix, mitigating environmental pollution, improving energy supply security, and promoting rural social development. It also relates renewable energy development and utilization directly to China’s energy system transition. This law has largely shaped an integrated renewable energy policy framework by providing a set of directives encouraging and enabling renewable energy. Wind power development has been listed as a priority technology and highlighted by this law. More importantly, this law has laid a legal foundation for wind energy investments and government interventions in China.

Wind power concession programme In China the development of any wind power projects of over 50 MW needs to go through a concession tendering procedure that is coordinated by the National Development and Reform Commission (NDRC). To achieve better cost-effectiveness through competition, potential developers are invited to join a public bidding process. Those who offer the ‘best price’ under certain terms will win the concession and thus have the right to build wind farms on the concession sites. The wind developers selected by the concession programme will also have the right to sell the electricity at the agreed tariff to the grid, which is guaranteed by the government in the form of a power purchase agreement. From 2003 to 2008, five rounds of concession bidding have been implemented, and 49 wind farms have been approved, with a total capacity of 8,800 MW. Most of them are located in Guangdong, Jiangsu, Neimenggu, Jilin, Gansu and Hebei provinces. The programme has been modified in the process of implementation. In order to strengthen the capacity of local wind turbine manufacturers, 70% domestic content of wind turbines has been required since the second round of bidding. To avoid the excessively low prices that sometimes occurred during the first two rounds of bidding and subsequently prevented an effective implementation, a comprehensive evaluation method has been introduced since the third round of bidding. With the new method, the selection of the concession developers is based not only on the energy price bid by the developer (long-term power purchasing agreement) but also the technological proposals.

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Mandatory renewable market share The Chinese government issued and released the Middle and Long-term Renewable Energy Development Plan in September 1997. A mandatory target has been introduced to increase the share of renewable energy in the national energy supply. Power from renewable energy sources will account for 10% of the total energy consumption by 2010 and 15% by 2020. The share of renewable power, excluding hydro, in the main electricity grids should reach 1% by 2010 and 3% by 2020. Electricity investors owning an installed capacity of more than 5 GW are requested to have a share of renewable power, excluding hydro, in their electricity generation capacity of more than 3% by 2010 and 8% by 2020. Wind power has been identified as a priority renewable energy technology. According to the Plan, the installed capacity of wind power should reach 5 GW by 2010. Since the cumulative installed capacity of wind power surpassed 6 GW in 2007, the NDRC increased the wind power target for 2010 from 5 GW to 10 GW. Based on the current development momentum, the total installation of wind farms could reach 30 GW by 2010.

Power surcharge for renewables and premium The Chinese government has implemented a 0.002 CNY/kWh electricity surcharge to subsidize renewable power including wind power. In January 2006, a policy document Interim Measure of Renewable Energy Tariff and Cost Sharing Management was released by the NDRC. For biomass power generation projects a subsidy of 0.25 CNY/kWh is available. For wind power, a public bidding process is required for projects with a capacity over 50 MW. The difference between the long-term contract price for wind power and that of local coal-fired power is covered by the fund.

Relief of VAT and customs duty The value added tax (VAT) rate for investment projects is 17% in China, although no VAT is levied on fuel costs. This creates a disadvantage for wind turbines with high investment costs and no fuel costs, relative to coal-fired power stations for instance (Liu et al., 2002). To avoid this distortion and increase the competitiveness of wind power, the Chinese government allows a 50% VAT rebate for wind farm developers. To enhance domestic innovation and manufacturing capacity, the Ministry of Finance issued a new regulation on import tax and duty for wind turbines and key components of wind turbines on 14 April 2008. Before the new import tax and duty regulations, there had been no specific tax and duty regulations applying to the import of wind turbines. With the implementation of the new policy, however, there will be no import tax and duty exemption if the imported wind turbine is smaller than 2.5 MW per wind turbine. At the same time, the key parts of imported equipment will enjoy an import tax and duty exemption. Together with the new import tax and duty regulation, the Ministry of Finance published an inventory of the components that are eligible for the import tax and duty exemption.

Technology research and development The Chinese government has made substantial efforts to support wind technology R&D. The national basic research programme (973 Programme), the national high-tech R&D programme (863 Programme) and the national key technology R&D programme are the three key programmes (TKPs) of China. Wind energy technology research and development has been an important focus of these programmes. Other programmes and projects have also largely supported the demonstration and industrialization of wind energy technologies, such as ‘Bi-Emphasis’ projects,

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National Debt Investments for Wind Power, and international cooperation projects. Some experience has been gained in terms of wind resource surveys and evaluation, wind farm operation and management, and wind power turbine design and manufacture. At the same time, a number of experts and technicians have been sponsored for technology R&D and project management.

2.2. Impact of domestic policy interventions The effects of Chinese domestic policies on wind power development are evaluated in terms of effectiveness as well as in terms of efficiency. The specific policy indicators used include capacity installed, localization of wind turbine manufacture, reductions in wind turbine costs and wind power feed-in tariffs, local economic and social development, and technology R&D capability. A summary of the domestic policy evaluation is presented in Table 1.

Capacity installed The change in total installed capacity of wind farms is an important measurement of the effectiveness of the domestic policies implemented. The cumulative installed capacity of wind turbines went from less than 38 MW in 1995 to 12,153 MW in 2008 (Figure 1). Note that most of the increased installed capacity has occurred since 2005 when the Renewable Energy Law was passed by Congress. This is also closely related to the implementation of such wind policies as the wind power concession programme, the mandatory renewable market share, and the power surcharge for renewables.

Localization of wind turbine manufacture The localization of wind turbine manufacture has been viewed as an important method to reduce the cost of wind turbines and thus the feed-in tariff of wind power in China. It can also make a contribution towards increasing the competitiveness of the Chinese wind power industry. The share of domestic and joint-venture wind turbine manufacture in the new turbine installations climbed from 25% in 2004 to 75.6% in 2008 (Figure 2). The two biggest domestic wind turbine manufacturers, Sinovel and Goldwind, shared 40.6% of the increased installed capacity in 2008, while their foreign counterparts, Vestas and Gamesa, had 17.7%. In terms of the cumulative installed capacity, domestic and joint-venture manufacture accounted for 61.8%, while foreign

TABLE 1 Matrix of domestic policy impact assessment

Capacity installed

CP

LR

CP-LR

MMS

CP-LR-MMS

+

+

+

+

+

+

+

+

+

+

Localization of wind turbine manufacture

+

+

FFI

RD&D

Local economic and social development

+

+

+

Cost/feed-in tariff reduction

+

+

+

+

+

+

+

+

+

+

Technology R&D capability

+

PS

+

Notes: + = direct positive contribution; CP = concession programme; LR = localization requirements; CP-LR = concession programme plus localization requirements; MMS = mandatory market share; CP-LR-MMS = concession programme plus localization requirements plus MMS; PS = power surcharge and premium; FFI = other fiscal and financial instruments (excluding CS); RD&D = research, development and demonstration.

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558 Zhang et al.

80%

75%

70%

75.60%

70%

60%

55.10%

58%

50% 40%

45% 42%

30%

30% 24.40%

20% 25% 10% 0% 2004

2005

2006

2007

2008

Foreign-owned manufacturers Domestic and Chinese–foreign joint-venture manufacturers

FIGURE 2 Changes in market shares of the increased installed capacity since 2004

companies totalled 38.2%. The success in localizing wind turbine manufacturing is largely attributed to the requirement of the wind power concession programme that 70% of the components of the wind turbine (measured by cost) should be manufactured domestically.

Local economic and social development The majority of wind farms are built in the underdeveloped areas of China, such as Inner Mongolia, Xinjiang, Zhang Jiakou district of Hebei Province, and Gansu Province. The wind farm development serves as a new engine of local economic growth and a new fiscal revenue source for the local governments. It also brings in new job opportunities for local residents. The electricity generated from wind farms was approximately 12 TWh in 2008,1 leading to a revenue of more than 7 billion CNY from the sale of electricity.

Reduction in wind turbine costs and feed-in tariff There has been a decline in wind turbine cost and the feed-in tariff of wind electricity since 2004. The cost of wind turbines imported from foreign companies is often 20% higher than that of domestically manufactured turbines. The feed-in tariff for wind power under the wind power concession programme in Inner Mongolia was decreased from approximately 0.6 CNY/kWh on average in 2004 to 0.5 CNY/kWh on average in 2007. The reduction in costs/feed-in tariff resulted largely from the implementation of such renewable energy policies as the wind power concession programme, relief on VAT and import tax and duty, and technology R&D.

Increased technology R&D capability China’s key wind technology R&D priority has been given to large-sized wind turbines, variable speed technologies, variable pitch distance, offshore turbines, and wind farm design. Before 2000, Chinese companies were not able to manufacture wind turbines of more than 600 kW. Currently, the major Chinese wind turbine manufacturers (such as Goldwind and Sinovel) already have the capacity to manufacture wind turbines of 1.5 MW. In addition, domestically made wind turbines

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of 2 MW are being tested on site. The public R&D support has made a great contribution to the increase in the technology R&D capabilities of Chinese wind companies.

3. The role of international support 3.1. Technology transfer All the major wind turbine technologies deployed in China originated from foreign countries, so the role of technology transfer can never be overestimated in China’s wind technology development and deployment. In this context, the current article does not highlight the role of technology transfer itself; instead, emphasis is given to interpreting how it could happen.

Technology transfer mechanisms Sinovel, Goldwind and Dongfang Electric are the three biggest domestic manufacturers in China. Sinovel accounted for 22.45% of the total increased wind turbine market in China in 2008, while Goldwind and Dongfang Electric had shares of 18.12% and 16.86%, respectively. All of them started to build their manufacturing capabilities through technology transfer. The main technology transfer mechanisms are licensing, joint development, and purchase of the foreign company (Table 2).

Stakeholder analysis Our approach to the issue is through stakeholder analysis. The analysis has structured some of the elements of the successful story (Table 3) based on a wind technology transfer survey. An important lesson learned is that the substantive involvement of the governments of both developed and developing countries in the technology transfer process can play a catalytic role in the international transfer of environmentally sound technologies, particularly at the early stages of technology transfer. As an example, Goldwind gained R&D funds not only from the research programmes of MOST, but also through financial support from the German government. TABLE 2 Technology transfer mechanisms of the three largest Chinese wind turbine manufacturers Manufacturer Technology list

Sinovel

Goldwind

Technology transfer Year

Collaborator

Mechanism

1.5 MW

2003

German Fuhrlander

Joint development

3 MW

2007

Austrian Windtec

Joint development

5 MW

2007

Austrian Windtec

Joint development

660 kW

1997

German Jacobs

Licensing

750 kW

2001

German REpower

Licensing

1.5 MW

2005

German Vensys

Joint development

2.5 MW, 3 MW,

2008

German Vensys

5 MW Dongfang Electric

Purchasing the foreign company

1.5 MW

2004

German REpower

Licensing

2.5 MW

2005

German Aerodyn

Joint development

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TABLE 3 A stakeholder analysis of the technology transfer process in China Stakeholders

Motivations/Objectives

Actions

Domestic companies

■ Technology leapfrogging

■ Licensing

■ Increased intellectual property

■ Joint development

■ More market share

■ Joint venture

■ Brand recognition Foreign companies

■ More profit from licensing sales ■ Increased market share in China ■ Lower labour cost in China ■ Higher financial return ■ Understand Chinese wind conditions

Chinese government

■ Lower cost of wind turbine manufacturing

■ Value added tax reduction

■ Address energy crisis and climate change

■ Guaranteed grid connection

■ Economy development of wind industry

■ Premium

■ Technology leapfrogging

■ R&D

■ More job opportunities

■ Custom duty relief ■ Favourable loan

Foreign governments

■ Improved reputations in fulfilling their UNFCCC financial and technology obligations ■ Assisting the wind companies in occupying more of the Chinese wind

■ Financial support for purchase of foreign wind turbines ■ Protecting intellectual property ■ Joint research and development ■ Help capacity building

power market

3.2. Clean Development Mechanism (CDM) China signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 and ratified the Kyoto Protocol on 30 August 2002. In the first quarter of 2007, China became the biggest supplier of Certified Emission Reductions (CERs) not only in terms of volume of CERs but also in terms of CDM project numbers. In the CDM project measures, the priority areas for CDM projects in China are also identified as energy efficiency improvement, development and utilization of new and renewable energy, and methane recovery and utilization. From the second quarter of 2005 to the first quarter of 2007, the share of the approved renewable energy CDM projects varied between 69% and 86%, thus reflecting the successful implementation of the measure (Teng and Zhang, 2009). By the end of April 2009, the Chinese government approved 1,766 CDM projects in total, and 337 of these were wind power projects. Further, approximately 95% of the wind power projects which do not belong to the wind power concession programme are CDM projects. The CO2 reduction from all the CDM projects approved in China would reach approximately 1.57 billion tons by 2012, and the CO2 reduction from the wind power CDM projects would be 177 million tons, or more than 10% of the total. The wind farm investors

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could get an economic incentive of approximately 0.1 CNY/kWh on average from CDM projects. So we can see that CDM has played a very important role in the development of China’s wind power industry.

4. The future of China’s wind power industry 4.1. China’s wind power outlook To identify the contribution of wind power in China’s sustainable energy system transformation, we developed an electricity scenario with CO2 emission control. The basis of this is to achieve the target of zero CO 2 emissions growth after 2025 through the aggressive development of alternative low-carbon energy, along with the assumed improvements in market efficiency through policies and measures, and a clearing of any relevant market barriers. The energy system model of Tsinghua-ALTRANS depicts the power generation technology portfolio under the scenario (Figure 3). According to the outputs of the modelling work, under the CO2 emission constraint scenario, China’s wind power installation will reach 100 GW in 2020, 285 GW in 2030, and 395 GW in 2050, showing that China will have great wind power market opportunities for investors in future.

4.2. Risks and uncertainties The lowest feed-in tariff accepted by potential investors is an important measurement of the competitiveness of the different power-generating technologies. The lower the feed-in tariff of the technology, the higher the competitiveness of the technology. On average, CDM project credits lead to 0.1 CNY/kWh tariff reduction. The competitiveness of wind power varies significantly with the wind turbine costs, wind turbine performance, and the wind resource endowment. Although China’s wind industry has made marked progress since 2004, there are still a number of risks and uncertainties needing to be addressed in order to translate China’s great wind development potential into market reality.

3000

Solar

Biomass 2500

Wind Nuclear

GW

2000

Hydro Fuel Oil

1500

NG

Polygeneration+CCS

1000

Polygeneration

IGCC

500

SC/USC PCC

0 2010

2015

2020

2025

2030

2035

2040

2045

2050

FIGURE 3 A power supply scenario under CO2 emission control

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562 Zhang et al.

Resource uncertainty The assessment of the economics of wind farms and the selection of sites for wind farms are very much based on wind resource assessment. There has been a lack of sufficient and accurate wind resource assessments in China. As a consequence, a number of wind farms built in China cannot generate as much electricity as anticipated before their construction, resulting in economic loss. Currently, there is not only a shortage of the funds for sufficient and accurate wind resource surveys but also a shortage of the wind survey technologies in China. As Chinese manufacturers do not currently have the technology and capacity for manufacturing low-wind-speed turbines and high-axis wind turbines, there is a possibility that a large amount of China’s wind resources would not be able to be utilized.

Technology risk All of the wind turbine design systems used by Chinese manufacturers have been transferred from foreign companies. Foreign companies often transferred the design system to their Chinese partners but not the databases and know-how associated with the design systems. So the design system transferred is largely a ‘black box’ as far as the Chinese manufacturers are concerned. These transferred design systems were developed according to the climate and wind conditions in foreign countries. The climate and wind conditions in China, however, are often quite different from those in the countries where the wind turbine design systems were developed. As a consequence, the wind turbines designed with the foreign design systems do not operate as well as expected in some locations.

Market uncertainty The installed capacity of wind turbines in China seems to run ahead of the grid capacity. With more wind farms being built, there are increasing concerns about the capacity of the grids to accept wind electricity in China. Wind farms are often located in the underdeveloped areas of China, where there is insufficient demand for electricity. As a result, the wind electricity has to be transmitted to the developed areas of China. Wind electricity transmission, dispatch and management have already become a major barrier to the expansion of the wind electricity market, because the Chinese grid companies do not currently have sufficient command of the appropriate technologies. A substantial amount of funding will be needed in order to develop the grid technologies for wind electricity transmission, dispatch and management.

4.3. Policy recommendations on domestic government interventions and international support Enhancing domestic technology R&D support Both the central government and provincial governments need to make further efforts to support the research, development and transfer of such key wind turbine technologies as wind resource survey technologies, wind turbine design technologies, low-speed wind turbines, and wind electricity transmission, dispatch and management technologies.

Increasing the power surcharge for renewables The fund created by the power surcharge for renewables has been, and will be, the major public financial source for encouraging investment in the wind power sector, including grid technology R&D to enable the grids to accommodate more wind electricity. The current level of the power surcharge seems to be too low, not only in terms of the need for public finance for renewable energy development and utilization but also in terms of internalization of the externalities of renewables.

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Improving technology transfer All the wind turbine technologies that China needs are currently in the hands of companies in the developed countries. The successful transfer of such key technologies as wind resource survey technology, wind turbine design know-how, low-speed wind turbines, wind electricity transmission, and dispatch and management technologies into China would largely help China to minimize the risks and uncertainties of wind power industry development. While the Chinese government is making substantial efforts to facilitate this technology transfer, the governments of the developed countries can also do many things to assist with technology transfer. For example, this could take the form of supporting joint ventures, providing export loans for the technology transfer companies, supporting the capacity building within Chinese companies, providing financial support for lowering the licensing fees, and working together with the Chinese government to create sustainable win–win technology transfer mechanisms.

5. Conclusions China’s wind power industry has made considerable progress since 2004. This is largely attributed to the strong bundle of domestic public policies to spur industrial development and implementation (such as the wind power concession programme, power surcharge for renewables, and tax relief) and to international support in the form of technology transfer, CDM, and providing public finance. Wind power has a great potential for mitigating China’s CO2 emissions in future. However, a number of risks and uncertainties such as resource uncertainty, technology risk, and market uncertainty have to be robustly addressed in order to translate the potential into market reality. Enhancing domestic technology R&D support, increasing the level of the power surcharge for renewables, enhancing the capacity of the grids to accept and manage more wind electricity, international support such as CDM, and improving technology transfer will greatly help to minimize these uncertainties and risks.

Acknowledgements This study was supported by the National Natural Science Foundation of China (Project No. 90410016) and Climate Strategies. The article benefited from comments by Karsten Neuhoff, Richard Lorch and the Climate Policy anonymous referees. Their comments are greatly appreciated. The views presented here are solely those of the authors.

Note 1. This estimate is based on the cumulative installation of wind turbines by 2007, with 2,000 full load hours on average.

References CMA (China Meteorological Administration), 2006. China Wind Resource Assessment Report, China Meteorological Press, Beijing. Lema, A., Ruby, K., 2007, ‘Between fragmented authoritarianism and policy coordination: creating a Chinese market for wind energy’, Energy Policy 35, 3879–3890. Lewis, J.I., 2005, ‘From technology transfer to local manufacturing: China’s emergence in the global wind power industry’, PhD dissertation in Energy and Resources, University of California Berkeley, CA.

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Li, J.F., Gao, H., 2008, China Wind Power Report 2007, China Environmental Science Press, Beijing. Li, J.F., Gao, H., Wang, Z.Y., Ma, L.J., Dong, L.Y., 2009, China Wind Power Report 2008, China Environmental Science Press, Beijing. Liu, W.Q., Gan, L., Zhang, X.L., 2002, ‘Cost-competitive incentives for wind energy development in China: institutional dynamics and policy changes’, Energy Policy 30, 753–765. Teng, F., Zhang, X.L., 2009, ‘Clean development mechanism practice in China: current status and possibilities for future regime’, Energy 34, doi:10.1016/j.energy.2009.04.033. Zhang, X.L., Gu, S.H., Liu, W.Q., Gan, L., 2001, ‘Wind energy technology development and diffusion: a case study of Inner Mongolia, China’, Natural Resources Forum 25, 33–42.

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■ outlook: insight

Twinning: lessons for a South–North climate policy context ZSUZSANNA PATÓ* Regional Centre for Energy Policy Research (REKK), Corvinus University of Budapest, Budapest, Fövám tér 8, H-1093, Hungary

Twinning is an innovative tool utilized in the EU enlargement process. It is designed to strengthen the institutional capacities of the candidate countries to implement the acquis communautaire. Twinning involves the long-term secondment of a Member State public servant to the domestic counterpart institution and thereby provides hands-on public sector experience. Arguably, the twinning concept is also applicable in South–North climate policy cooperation, and its potential is explored. Twinning serves as a valuable supplement to ongoing capacity-building efforts by assisting the actual implementation of policies. Its basic design addresses some of the frequently cited problems of developmental assistance. Policy relevance: Capacity building and technical assistance are often quoted as components of international technology cooperation, but frameworks to further enhance their contribution to international cooperation on climate policy are rarely discussed. The twinning experience offers an example of formal frameworks to enhance South–North and South–South cooperation on programme design and implementation via the exchange of experts within administrations. Twinning also offers broader insights. Cooperation for technical assistance and capacity building needs to be demand-driven and integrated within existing institutional structures in order to ensure effectiveness. The main challenge is to encourage experts to spend one to two years in recipient countries to ensure an effective understanding of local circumstances. This also reduces the need to send experts in the other direction and thus reduces the risk of a brain-drain, where experts do not return. Keywords: capacity building; climate policy cooperation; developing countries; domestic climate policies; public sector; twinning Le jumelage est une méthode novatrice pratiquée dans le processus d’élargissement de l’UE. Il est conçu pour renforcer les capacités institutionnelles des pays candidats dans la mise en œuvre de l’acquis communautaire. Le jumelage s’opère par l’affectation d’un fonctionnaire d’un Etat Membre dans l’institution nationale équivalente et de ce fait apporte une expérience de première main du secteur public. On peut raisonnablement affirmer que le concept de jumelage est aussi bien applicable à la coopération en politique climatique Sud-Nord, et ce potentiel est examiné. Le jumelage est un complément important aux efforts de renforcement des capacités continus en vertu de l’appui réel qu’il donne à la mise en œuvre des politiques. Sa conception de base prend en compte certains des problèmes récurrents de l’aide au développement. Pertinence politique: Le renforcement des capacités et l’assistance technique sont souvent cités en tant qu’éléments de coopération internationale technologique, mais les structures pour renforcer leur contribution dans le cadre de la coopération internationale en politique climatique sont rarement examinées. L’expérience du jumelage apporte un exemple de structures officielles permettant de renforcer la coopération sud-nord et nord-sud dans la conception et l’exécution de programmes à travers l’échange d’experts au sein des administrations. Le jumelage apporte aussi des expériences plus générales. La coopération en appui technique et renforcement des capacités doit être stimulée par la demande et intégrée au sein des structures institutionnelles existantes afin de garantir son succès. Le défi principal

■ *E-mail: [email protected] CLIMATE POLICY 9 (2009) 565–570 doi:10.3763/cpol.2009.0631 © 2009 Earthscan ISSN: 1469-3062 (print), 1752-7457 (online) www.climatepolicy.com

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consiste à encourager les experts de passer un ou deux ans dans le pays d’accueil pour garantir une bonne compréhension des circonstances locales. Ceci réduit aussi la nécessité d’envoyer des experts dans l’autre sens et réduit de ce fait le risque de fuite des cerveaux lorsque les experts ne rentrent pas. Mots clés: coopération en politique climatique; jumelage; pays en développement; politiques climatiques intérieures; renforcement des capacités; secteur public

1. Introduction Political cooperation among nations creates numerous instances where policies that have not emerged from the domestic sphere are adopted and eventually implemented. The successive enlargements of the European Union (EU) are examples of unique and grand exercises of policy transfer, which cover virtually all policy fields. The EU recognized that it needed a tool in its external cooperation activities to strengthen the institutional capacity of candidate countries to be able to implement the acquis communautaire. Twinning, which was launched in 1998 and used widely by the European Commission in the enlargement process, aims to assist those countries in the development of the modern and efficient state administration required to implement the acquis. This article explains the innovative features of twinning as compared with classical technical assistance, and argues that twinning can be applied in a South–North context and will help to alleviate commonly mentioned problems of development assistance. The research underpinning this article involved semi-structured interviews with representatives of beneficiary institutions, with a former adviser serving in various twinning projects, and with the central coordinating unit responsible for EU assistance projects in Hungary (Pató, 2008). A literature survey of previous twinning evaluations prepared for various European institutions also informs this work (Birker et al., 2000; Cooper and Johansen, 2003; EC, 2004).

2. The concept of twinning The backbone of a twinning project is the one- to two-year secondment period of a public servant from an EU Member State. This provides hands-on experience on the implementation of the acquis communautaire to his/her candidate country counterparts responsible for the same policy field. The long-term mission period enables the adviser to learn about the nuances of the foreign environment and concentrate on the actual transferability of his/her domestic experience. Twinning projects are run jointly by a parallel institutional set-up in the beneficiary country and the Member State under the legal, financial and procedural framework

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set by the European Commission that monitors the consistent application of the predefined twinning rules (EC, 2004). The network of National Contact Points (one in each Member State) provides a link between the partner administrations and the European Commission. In particular, beneficiary country contact points collect the twinning project ideas domestically and collate them into the annual financial request to the EU (country-driven assistance). Project leaders (one from each administration) are responsible for the overall direction of project implementation, and devote a portion of their time to the project. Resident twinning advisers are the key actors of any twinning project. They are made available by their home administrations to their counterparts in the host country through EU funding; providing technical advice and assistance to the administration according to a predetermined work plan.1 In addition, twinning projects employ short-term experts for specific defined tasks during programme implementation. There are substantial differences between technical assistance and twinning (Table 1). Most importantly, twinning supplies the host institution with peer-to-peer long-term cooperation from a parallel administration implementing similar policies, based on legal requirements that apply to both institutions. The most prominent features are partnership, benchmarking and best practice dissemination, as opposed to unilateral knowledge transfer as embodied in conventional technical assistance practice.2 Partnership means that, in the twinning instrument, the beneficiary institution holds the main responsibility for successful implementation (Birker et al., 2000). It involves selecting preferred candidates from among the various potential project partner institutions and advisers, reporting on progress and – once the project is approved – clearing all kinds of payments. The so-called ‘guaranteed results’ are set by the project partners (rather than by the European Commission or the Member State) in the project contract, and implementation is evaluated solely against these benchmarks. The twinning partner is selected by the beneficiary institution alone and this often entails a choice between various modalities of acquis implementation prevalent in the Member States (Papadimitriou and Phinnemore, 2003; Tulmets, 2005b).

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TABLE 1 Contrasting technical assistance with twinning (based on Palombi, 2007) Twinning

Technical assistance

Public expertise

Private expertise

‘Peer to peer’ cooperation

Consultant–beneficiary cooperation

EU Member State proposal selection based only on quality of proposal

Proposal selection based on quality of proposal and price

Jointly defined benchmarks

Hierarchical target setting

Some specific advantages Transfer of know-how and best practices from EU Member States

Very useful when there is a relevant technical gap in the level of development of the beneficiary institution

Joint commitment to achieve mandatory results High level of sustainability Long-term engagement with residence, enabling application

3. Twinning in a South–North context Institutional twinning has been successfully tested both within and outside the EU (Lopes and Theisohn, 2003). The number of projects in the EU-10+2 peaked between 2002 and 2004 at around 200 projects per year and then decreased sharply with the accession of 10 new Member States. The most active policy areas were agriculture, internal market and justice issues, reflecting the priorities of the EU (Table 2).

Gradually extended eligibility – not only for candidate and potential candidate countries but also to newly independent Member States and the Mediterranean region – for hosting a twinning project signals that it has become the principal capacity-building tool in Europe. The twinning experiences of these countries, which are more loosely connected to the EU than those aspiring to membership, can provide important lessons for South–North cooperation. It is likely to offer more similar experiences than the new

TABLE 2 Twinning projects per sector in the new Member States and candidate countries 1998–2005 Sector

Total

Agriculture and fisheries

176

Environment

120

Structural funds Consensus and social policy

76 101

Public finance and internal market

210

Justice and home affairs

243

Transport, energy and telecom

59

Standardization

28

Others

97

Total

1,110

(Source: EC, 2006)

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Member States, as the differences in general politicaleconomic setting between developed and developing countries is much greater than between the EU-15 (sending the experts) and the EU-10 (hosting the experts). The unanimous political consensus and high social support for EU membership for candidate countries has been translated into a strong mandate for the government to manage policy transfer in virtually all policy fields in an efficient and timely manner (Schimmelfennig and Sedelmeier, 2004). Climate policy, on the other hand, is still lower down on the domestic agenda than other social and economic issues and is not tagged with the rewards of membership. Ongoing capacity-building projects on climate policies are predominantly governed by the United Nations Framework Convention on Climate Change (UNFCCC) and operated by the Global Environment Facility (GEF). Several donor countries provide bilateral support via their development agencies (e.g. GTZ in Germany, Danida in Denmark). GEF activities are driven by the UNFCCC agenda and focus on systemic help such as policy preparation (national communications; national adaptation programmes of action; technology needs assessments; GHG inventory) and institutional development (national capacity selfassessment, designated national authority for CDM, or country support programme for focal points) (UNFCCC, 2007). Twinning programmes could effectively complement these multi-stakeholder targeted capacity-building activities by adding a special public-sector element that focuses on the actual implementation of national policies. Its design is compatible with the generally acknowledged guidelines of developmental assistance developed in the last decade as a response to strong criticism of their effectiveness (FukudaParr et al., 2002; Lopes and Theisohn, 2003). The following lessons can be drawn from the EU twinning experience.

4. Demand-driven assistance Assistance resources are largely wasted when driven by supply. Their efficient use requires the immanent willingness of the receiver to act and to align the available donor facilities to its needs. The political leadership of the beneficiary administration must actively endorse the goals of the climate programme. The embedding of climate policy measures to wider developmental goals not only at the programming but also at the implementation level is therefore likely to be essential for success, as this allows building on domestic policy drivers that are most likely to be linked to non-climaterelated dimensions. Twinning is a suitable tool to facilitate cooperation between various institutions involved in the policy reform with the parallel operation of resident advisers and the designated high-profile

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project leader in the twinning host institution. The demand for well-defined assistance is channelled to the donor community via the twinning tendering process, where the initiative is vested in the host institution.

5. Goal setting The lack of project ownership from the beneficiary side often translates into goals that reflect donor priorities both in terms of direction and reach. In contrast, twinning projects allow partners to set benchmarks jointly, creating flexibility to agree on appropriate and realistic goals.

6. Institutional choice Creating new institutions in development assistance runs the risk of their closure after the assistance is over. This experience was also confirmed by some twinning experiences: newly created institutions are very likely to fail, as past activities and vested interests can easily overwrite the proposed institutional reforms (Court of Auditors, 2003; EC, 2004; Tulmets, 2005a). This offers two lessons: 1. Climate policy assistance should avoid creating new organizations, or even special units within ministries, and instead enhance the capacity of existing organizations and units. 2. The operational structure of climate change twinning itself should, and can, be built on existing national institutions. The existing national focal points for the UNFCCC could well serve as national contact points for the twinning administration. In addition, the circulation of tenders could be managed by a virtual information hub akin to the CDM bazaar.

7. Brain-drain Climate policy assistance is often blamed for draining indigenous human resources from developing countries. Capacity building enables motivated individuals to join international organizations such as the UNFCCC or the IPCC, thus undermining the original good intentions. This process has been manifest in Europe as well, with more young professionals moving from national administrations to EU institutions in hope of higher status and better salaries. In twinning, however, the resident advisers remain employed by their home administration during the mission to another country and their host counterpart receives domesticoriented capacity building.

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However, beneficiary organizations often underestimate the time and human resources needed for twinning projects, in comparison with conventional consultancy work, where only the consultant is accountable for achievements, typically meaning less work for the host institution (Cooper and Johansen, 2003). Having different government employers in twinning can also cause friction between the co-workers. There is the possibility of a strong motivational backlash from the domestic counterpart if their ability to work is restricted and there is a large difference in financial remuneration between them and the foreign resident adviser (O’Connor and Kowalski, 2005; Tulmets, 2005b). Paying for the extra work can undoubtedly create new tensions within the domestic administration, but seems to be necessary for efficient twinning.

8. Knowledge transfer Policy knowledge accumulated in the donor country is useful only insofar as it is applied to local conditions. The long-term (one to two years) presence of a fellow civil servant who has the time and resources to adapt successful mitigation policies from his/her own country differs from the operation of ‘flying in’ foreign experts. This learning is based on the constant interaction that characterizes efficient business organizations. Similarly, the national implementation model choice experienced in European twinning is likely to be replicated in South–North climate cooperation, where historic bilateral ties most often coincide with similar administrative cultures. An important question that follows the policy adaptation problem is whether or not South–South countries could engage in twinning. Two developing countries may have more appropriately linked climate policy experience. This question is not addressed here and will require trialling and research.

9. Conclusions This article serves as a catalyst for initiating discussion among interested parties and stakeholders on the South–North climate policy exchange. The idea of transferring not only certain polices but also policy facilitators (i.e. twinning) has its own distinct merits – as evidenced through a number of successful EU projects over the past 10 years. Twinning has the potential to be a well-focused complementary device for ongoing capacity-building activities in Southern nations, particularly when implementation- and public-sector-oriented. Its essential design allows for the avoidance of the conventional pitfalls of developmental assistance and could assist with institutional and organizational barriers.

International organizations (i.e. UNFCCC and GEF), as well as donor countries’ development agencies, need to actively consider adding this powerful tool to their programmes.

Notes 1. The beneficiary partner contributes human resources, office space, training, conference venues and interpretation services. 2. This is sometimes referred to as the ‘open method of coordination’ (Tulmets, 2005a, 2005b).

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