In order to inform these ongoing discussions, CPI recently analyzed existing resources and gaps in financing energy-saving projects in K-12 school districts to try to get a sense of what school districts need.

In interviews with school district officials, we heard that California’s school districts are actively looking to cut energy costs amid intense budget pressures. Interest rates are currently very low, making many energy-saving projects financially viable. But many of the typical funding sources schools use for facility improvements are limited in availability, and districts are reluctant to take on debt to fill the gap. And many districts don’t have the staff resources and technical expertise to sort through sales pitches and figure out what projects to do.

Our analysis suggests that Proposition 39 funds can best drive energy savings in three ways:

• For districts that have existing resources to support facility improvements, Proposition 39 can provide “sweetener” grants to encourage them to add more energy-saving improvements to their projects.
• For districts that do not have such resources, Proposition 39 can facilitate access to low-cost capital and provide supplemental funding to make more projects attractive. For districts that cannot access capital due to their difficult financial situations, assistance would likely need to be expanded.
• And in order to make all of this happen, Proposition 39 needs to provide technical assistance to help districts navigate their options, figure out what projects will work for them, and pull together the funding pieces.

If Proposition 39 funding is allocated in a way that takes school district resources and needs into account, it can help schools start saving energy to close budget holes right now. And it can help them do longer-lived projects, so that they can continue saving energy into the future.

The Amazon is the world’s largest rainforest, but protecting it from illegal deforestation is a challenge nearly as immense as the forest itself. In a previous study, CPI has discussed explanations for a slowdown in the rate of forest clearings observed in the 2000s. In a new study, DETERring Deforestation in the Brazilian Amazon, we take a step further and answer the question: Which specific policy efforts contributed most to the reduction in Amazon deforestation?

Our analysis reveals that the implementation of the Real Time System for Detection of Deforestation (DETER), a satellite-based system that enables frequent and quick identification of deforestation hot spots, greatly enhanced monitoring and targeting capacity, making it easier for law enforcers to act upon areas with illegal deforestation activity. This improvement in monitoring and law enforcement was the main driver of the 2000s deforestation slowdown.

Prior to the activation of DETER, Amazon monitoring depended on voluntary reports of threatened areas, making it difficult for law enforcement personnel to locate and access deforestation hot spots in a timely manner. With the adoption of the new remote sensing system, however, Brazilian law enforcement personnel were able to better identify, more closely monitor, and more quickly act upon areas with illegal deforestation activity.

Through empirical analysis, we estimate that DETER-based environmental monitoring and law enforcement policies prevented the clearing of over 59,500 km² of Amazon forest area from 2007 through 2011. Deforestation observed during this period totaled 41,500 km² – 59% less than in the absence of the policy change.

We also estimate that, in a hypothetical scenario in which monitoring and law enforcement was entirely absent from the Amazon, an additional 122,700 km² of Amazon forest would have been cleared from 2007 through 2011. To put that figure in context, that’s an area larger than the total land mass of the country of Nicaragua.

These results show that the total amount of avoided deforestation attributed to monitoring and law-enforcement policies in a five-year period is almost as large as the impact of a whole set of conservation policies introduced in the second half of the 2000s (see Assunção et al. [2012]). Although in this study we estimate avoided deforestation in a slightly different five-year window from the one used in the previous CPI/PUC-Rio study, the sheer magnitude of the forest area that was preserved indicates that the relative impact of DETER-based monitoring and law enforcement was far greater than that of other conservation policies implemented under the PPCDAm framework.

We also find that the policy change had no impact on agricultural production, an important finding considering the ongoing debate about how conservation policies and economic growth interact. In fact, in a simple calculation of the costs and benefits of these policies, we see that any price of carbon set above 0.76 USD/tCO₂ would more than compensate the cost of environmental monitoring and law enforcement in the Amazon. Compared to the price of 5.00 USD/tCO₂ commonly used in current applications, these figures suggest that the presence of an active monitoring and law enforcement authority in the Amazon has the potential to yield significant net monetary gains.

Our results have two key policy implications. First, these findings highlight the quantitative relevance of these policies’ deterrent effect. This does not in any way imply that other policies should not be used to combat deforestation. Rather, it suggests that such policies are complementary to monitoring and law enforcement efforts, effectively deterring forest clearings at the margin, while monitoring and law enforcement contain the bulk of deforestation.

 Second, our results suggest that better monitoring technology could further increase the effectiveness of Amazon law enforcement activities. Overcoming DETER’s incapacity to see through clouds and obtaining land cover imagery in higher resolutions are two examples of technological advances that could enhance law enforcement targeting capability and add significant value to Brazil’s conservation efforts.

Given the immense importance of forests for their biodiversity, carbon stock, and economic value, and the immense challenge of protecting them, we hope to see more efforts like these not just in Brazil, but around the world.

However, people trying to understand what energy path the country is heading toward are often puzzled by the complexity of the picture: On the one hand, the country is the biggest emitter and the largest net importer of coal. On the other, China also leads renewable energy manufacture and installation, and has helped push down the cost of renewable generation globally.

At a World Affairs Council event titled “Energy Access: China’s Impact on Global Energy Markets” this February, two panelists, Mikkal Herberg from the National Bureau of Asian research and Seth Kleinman from CitiGroup Global Markets, joined CPI’s Senior Director David Nelson in discussing China at its crossroads, and the implications for energy trends and changes. The panel discussed a range of issues – from how the country invests in overseas assets, to how its increasing dependence on imports affects global prices. Some of this discussion was particularly illuminating for those seeking to understand China’s complex climate and energy signals.

One point generated in this discussion that is particularly interesting is that all concerns filter through China’s main lens: to maintain growth and political stability. Put through this lens, there are a series of daunting domestic challenges which threaten these goals. The smog covering Beijing and a dozen other provinces in China this past winter is a reminder of the gravity and urgency of China’s environmental issues. Before letting local pollution threaten social stability, the Chinese government also needs to deal with its aging population and subsequent less abundant cheap labor, to rebalance the ever-increasing power of state-owned enterprises, to ensure food safety and public health, and most importantly, to transfer wealth and welfare to the growing middle class.

Many of these domestic challenges are also key concerns in the energy and climate sphere. Take the power of state-owned enterprises as an example. As the panelists pointed out, despite being state-owned enterprises, China’s national oil companies increasingly operate like real oil companies, seeking economic profits rather than state energy security interests by reselling overseas-produced oil to regional markets rather than importing it to China. Similarly, state-owned grid companies often ignore renewable targets and prefer to connect cheaper coal-fired energy than wind to the grid. The Chinese government is becoming more and more concerned about the expense of providing loans and support to keep state-owned enterprises’ monopoly position, and is experimenting with ways to incentivise the private sector’s participation in many industries.

To solve global problems like climate change, one must take into consideration China’s development priorities such as restraining state-owned enterprises’ power, growing rich before growing old, etc., and align global sustainability goals with these domestic interests. The more they help China solve inequality, pollution, and achieve growth, the more climate change goals are likely to succeed.

In fact, China has already been taking action to achieve domestic goals that bring about energy and climate co-benefits. Propelled by local pollution problems and energy security concerns, the country has been diversifying its energy mix to reduce its reliance on fossil fuels and increase its use of renewable and nuclear energy.

Clean technology and global competitiveness provide another juxtaposition where this alignment of interests is happening. Part of the 12^th Five-Year Plan released last year listed renewable energy as a strategic emerging industry, as the government foresees the deployment and technological breakthrough in this area will play a central role in enhancing China’s global competitiveness and leadership in the long-term. Instead of serving as the manufacturing plant it did in the electronic and internet revolution, China has a real opportunity to move up the value chain or even become the innovation hub in the new wave of technology revolution that includes renewable energy. We have already seen how China developed a leading wind industry in merely a decade’s time, and with the economy transforming from an investment-driven growth toward a demand-driven one, we may be able to see China develop its own new technology for the consumption of its growing middle class.

These are examples of how, in pursuing its self-interest, China can bring itself closer to a low-carbon development path, and how the same intention may eventually serve to combat global challenges like climate change. We need to seek further opportunities that can bring about the alignment of global need and domestic interest, and promote policies that help in this process.

The question is, could they do more? By raising and distributing international and national public climate finance in their respective local credit markets, NDBs have unique potential; their knowledge of and long-standing relationships with the local private sector put them in a privileged position to access local financial markets and understand local barriers to investment.

To answer this question with more certainty, Climate Policy Initiative recently contributed to a study promoted by the Inter-American Development Bank. The research aimed to understand the role NDBs could play in channeling and leveraging climate finance, and the conditions needed for them to be most effective.

Drawing from experiences of NDBs within the Latin American and Caribbean region, the study finds that while many NDBs are already piloting an array of financial and non-financial instruments to promote private ‘green’ investments, these institutions are at diverse stages of ‘readiness’ to fully promote climate-related programs. Many still need to build capacity, and to acquire experience in the preparation, risk assessment, evaluation, and monitoring of climate projects.

So, to come back to the earlier question – yes NDBs could do more, but decision makers should look for ways to support existing efforts, and consider the particular experience, characteristics, and potential of NDBs when developing policies and mechanisms for delivering climate finance on the ground.

For more information, check out the Inter-American Development Bank study.

The deforestation rate in the Brazilian Amazon decreased sharply in the second half of the 2000s, falling from a peak of 27,000 km2 in 2004 to 5,000 km2 in 2011. In a previous CPI/NAPC study [Assunção et al. (2012)], we estimated that conservation policies introduced in the mid to late 2000s prevented the loss of approximately 62,000 km2 of forest in the 2005 through 2009 period. We’ve recently taken a closer look at one of these policies — National Monetary Council Resolution 3,545.

Introduced in mid-2008, Resolution 3,545 placed a condition on rural credit, an important source of financing for rural producers, in the Brazilian Amazon Biome. To get credit, borrowers had to present proof of compliance with environmental regulations, the legitimacy of their land claims, and the regularity of their rural establishments. To prove credit eligibility, Resolution 3,545 required borrowers to present a series of documents. Such documentation, however, varied according to borrower profiles, with small-scale producers subject to less stringent requirements. Resolution 3,545 represented a restriction on official rural credit — and thereby on the fraction of rural credit that is largely subsidized via lower interest rates — while other sources of financing for agricultural activity suffered no such restriction.

After quantitatively evaluating Resolution 3,545′s effect on credit concession and deforestation in the Amazon Biome, we estimate that approximately BRL 2.9 billion (USD 1.4 billion) in rural credit was not contracted in the 2008 through 2011 period due to restrictions imposed by Resolution 3,545. This reduction in credit prevented over 2,700 km2 of forest area from being cleared. This means that deforestation was 15% lower than it would have been in the absence of the resolution. The resolution’s impact on deforestation was only significant in municipalities where cattle ranching is the main economic activity, as opposed to crop farming.

These results help us better understand the economic environment of the Brazilian Amazon. They suggest that there are binding credit constraints for potential deforesters. In particular, cattle ranchers appear to be more heavily dependent on subsidized rural credit for production and for sustaining deforestation activities. In contrast, crop farmers appear to be less dependent on these same subsidies, or, at least, to make use of the subsidies to intensify productivity instead of expanding their production frontier.

Our work has two key policy implications. First, the evidence shows that conditional rural credit can be an effective policy instrument to combat deforestation. In light of the heterogeneous effects captured across sectors and regions, however, conditional rural credit could complement, rather than substitute, other conservation efforts. Our findings also highlight the fact that pre-existent socio-economic circumstances and implementation details matter.

Second, our analysis suggests that the financial environment in the Amazon is characterized by significant credit constraints. Especially in municipalities where cattle ranching is the predominant activity, fewer resources correspond with less deforestation. This is a key finding with relevant implications for policy design. It suggests that policies that increase the availability of financial resources (e.g. payments for environmental services) may lead to higher deforestation rates, depending on the economic environment and existing resources in the area. Our results do not suggest that these policies will necessarily increase deforestation, nor do they advocate against the implementation of payments for environmental services. They do, however, stress the importance of taking into account the nature of financial constraints prevailing in the Amazon into policy design. Effective monitoring and conditionality of such policies could avoid potentially adverse rebound effects.

Global leaders have spoken strongly on the urgent need for climate action, putting it back on top of the 2013 agenda. During his inaugural address and State of the Union speech, President Obama gave clear signals about his intentions to address this issue in his second term. At the World Economic Forum in Davos, president of the World Bank Group Jim Yong Kim reminded economic leaders about the potentially devastating impacts that could occur in a world 4°C warmer by the end of the century.

Unlocking finance is an essential part of avoiding that future. But, before leaders can determine how much more money is needed, they need to establish how much is already flowing, what the main sources are, and where it’s going.

These are the key questions my team and I at Climate Policy Initiative aimed to answer with the release of the “The Landscape of Climate Finance 2012”. Our analysis estimated global climate finance flows at an average $364 billion in 2011. To put this in context, according to the International Energy Agency, the world needs $1 trillion a year over 2012 to 2050 to finance a low-emissions transition, so current finance flows still fall far short of what is needed.

Private finance dominates but public finance plays a key role
A couple of weeks ago in a freezing Washington I had the opportunity to share the findings of the report, and the Climate Finance Flows Diagram (or “spaghetti” diagram, so-called for its tangle of finance flows) to an expert audience of practitioners at the Word Bank’s premises.

Confirming last year’s findings, we found that private finance – predominantly of domestic nature – represented the lion’s share of this total, almost 74%. Public funds, estimated at $16 to $23 billion, played a pivotal role in catalyzing private investments, as well as providing bilateral aid to developing countries.

Public and private finance institutions played an important role in raising and channeling $110-120 billion of global climate finance flows. Public intermediaries such as the World Bank channeled about two thirds. National, Sub-regional and Bilateral Finance Institutions delivered another $54 billion. These actors proved critical in enabling otherwise unviable projects through the use of concessional loans and grants, accounting for 60% and 7% of their financing respectively.

The San Giorgio Group initiative allowed us to further explore and highlight the key role of finance institutions. The Ouarzazate I Concentrated Solar Power case study provides a good example.

Other key players in climate finance included private commercial banks and infrastructure funds, which distributed around $38 billion, including project-level debt and direct investments. Last but not least, project developers provided equity capital and know-how.

Where is the $364 billion going?
The large majority of climate finance captured in the Landscape 2012 was invested in mitigation measures. Emerging economies like China, India, and Brazil were key recipients. Renewable energy generation projects and energy efficiency attracted the bulk of finance, 85% and 4% of the total respectively. We are still unclear on how much is going to adaptation measures.

Risk coverage gaps: a barrier to investment
The San Giorgio Group also allowed us to examine the critical issue of risk coverage in our recent Risk Gaps papers. Getting the risk-return equation right, in fact, is essential to attract investors such as pension funds and insurance companies, whose contribution was about $620 million for the year 2011. This relatively small figure sharply contrasts with the $71 trillion in assets that institutional investors manage. A variety of risk management instruments have been designed to overcome risk barriers and encourage investment in low-carbon technologies to scale up.

In the absence of comprehensive regulation and in the face of fiscal weakness in the developed world, weakness in capital markets, and bias towards short-term growth, green financing faces an uphill battle. Significant challenges remain including how to scale up actions to meet global needs, how to design risk-return arrangements to attract public and private capital, and how to disburse climate funds effectively.

Our work demonstrates that current climate finance flows still falls far short of what is needed to finance a low-emissions transition. This is one of the most pressing collective challenges of our time, a fact that should concern all of us. With global finance needs growing daily, 2013 should be the year real progress is made on the climate finance front.

CPI is committed to advancing knowledge around climate finance. This understanding is critical for governments and policy makers who are working to use resources most effectively.

To help reach these ambitious targets in a cost-effective manner, India launched a market-based mechanism called Renewable Energy Certificates (RECs) in 2010.

However, in the one year of trading so far, participation in the REC markets has been low: RECs have failed to attract investment. Though the design of the REC mechanism appears adequate, the performance of the market has been far from satisfactory. This, along with other issues, such as the cost of debt, translates to real concerns over whether India is on track to meet its ambitious targets.

So why is this happening?

In theory, the REC market is simple. Distribution companies and other obligated entities must meet RPO targets. This creates the demand side of the market. REC certificates are issued to renewable energy generators. This provides the supply side of the market. However, in practice, we begin to see a different story.
Based on our analysis, we identified eight points to why the Indian REC market is not likely to achieve government objectives.

1. The REC mechanism is unlikely to encourage cost reduction in renewable energy projects by promoting market forces and competition, given that participation in the REC markets has been too low to drive any cost reduction.
2. The REC mechanism is unlikely to provide incentives to drive capital investment in renewable energy projects, given that the time frame of RECs is much shorter than the investment horizon; investors discount RECs due to perceived uncertainty and risk over project life.
3. It is not clear yet whether the REC mechanism provides a mechanism to limit boom and bust cycles, given that renewable energy market has not yet overheated. However, current participation and incentive levels suggest REC mechanism insufficient to dampen cycles.
4. The REC mechanism is unlikely to weave together various state-level incentive and policy regimes within a national structure, given that it does not incentivize states to work toward reaching national goals.
5. It is not clear yet whether the REC mechanism provides incentives incremental to other relevant policies, given that, though REC cash flows are expected to be supplementary to other policies and can work in conjunction with state policies, these have not occurred to date.
6. It is not clear yet whether the REC mechanism allows for technologically differentiated incentives to support new and diverse sources of energy, given that, though the design allows for differentiation, support for new renewable sources has been weak to date.
7. It is not clear yet whether the REC mechanism will reach its goals at a reasonable additional transaction cost, given that, though direct transaction cost is low to date, it is unclear how costs will evolve as market matures.
8. The REC mechanism is unlikely to accomplish its goals with a reasonable additional cost due to higher perceived or real risks to developer. High risk perception of using RECs or any project usually deters investments.

It may be too early to make firm recommendations for the REC system, particularly since the largest contributor to the relative ineffectiveness of the REC market is the uneven participation and regulatory policy of the Indian states, a factor which lies partially outside the scope of REC market design. However, certain design flaws are likely to contribute to a continued weak REC market.

First, there is overdependence on state level policy and compliance. The system is dependent on stronger and more credible RPO goals from Indian states than have been observed to date. Stricter compliance laws and enforcement of RPO goals will increase confidence in the nation’s commitment to these goals, and can help develop and support long-term stable REC markets. Incentives for the enforcement agencies and states could encourage state agencies to support RPO goals. For example, one such pathway could be making RPO compliance a necessary condition for the financial structuring package currently being implemented to improve the financial condition of state electricity boards.

Second, the market lacks of reliable long-term price signals. The lack of long-term price signals, contracts, and other commitments greatly increases the risk to potential investors for their energy sales beyond year one. Creating secondary markets can reduce some of the long-term price risks that investors perceive in RECs by providing some future price certainty. States’ commitment to long-term targets along with yearly targets would encourage developers to invest in RECs and, in the long run, would also limit boom and bust cycles.

Third, there isinsufficient market transparency. A lack of certainty about pricing and the market may be decreasing the impact of market signals and increasing investor uncertainty. Single window counters for accreditation, registration, and issuance of RECs could decrease the time taken to procure RECs and encourage participation in REC markets.

The REC mechanism is an ambitious and perhaps laudable effort to make India meet its renewable energy targets. However, this effort faces many barriers and some of them, such as the non-compliance of RPO, are formidable. The success of the REC mechanism will depend on removing these barriers, but with little or no efforts in this direction so far, it’s unlikely that this will happen on a timeline that corresponds with India’s ambitious renewable energy targets.

Our report, ‘Falling Short – An Evaluation of the Indian REC Market‘, goes into more detail in evaluating the effectiveness of Indian REC markets against eight government objectives and offers suggestions for improving their design.

This piece is cross-posted on Climate-Eval.

Related:

• Publication: Does Credit Affect Deforestation? Evidence from a Rural Credit Policy in the Brazilian Amazon
• Publication: Deforestation Slowdown in the Legal Amazon: Prices or Policies?

Elinor Benami, Chiara Trabacchi, Hermann Amecke, and Karen Laughlin contributed headlines to this edition of Policy Watch.

Study: Black carbon ranks as second-biggest human cause of global warming
Soot ranks as the second-largest human contributor to climate change, exerting twice as much of an impact as previously thought, according to an analysis released Tuesday.

The four-year, 232-page study of black carbon, published in the Journal of Geophysical Research: Atmospheres, shows that short-lived pollution known as soot, such as emissions from diesel engines and wood-fired stoves, has about two-thirds the climate impact of carbon dioxide. The analysis has pushed methane, which comes from landfills and other forces, into third place as a human contributor to global warming.  Full article.

Beijing tries to clean up its act
China’s smog-ridden capital issued an unprecedented set of new anti-pollution measures this past weekend, as the authorities scramble to respond to rising public pressure over the city’s deteriorating air quality.

The far-reaching measures target everything from outdoor barbecues and dusty construction sites, to paint fumes and idling car engines, representing the city’s broadest effort yet to fight the persistent pollution haze over Beijing. Full article.

California carbon trading takes off
California’s official carbon market kicked off January 1 with an uptick in trading, as businesses began accounting for their greenhouse gas emissions in earnest.

No lawsuit against the program accompanied the official start date, as many had anticipated. Instead, appetite for California’s carbon allowances grew, reflecting confidence in the burgeoning, first-in-the-nation economywide greenhouse gas market, traders said. Full article.

German solar boom continues despite support cuts
Germany’s subsidy-backed solar power installations from January through to November 2012 indicate that full-year figures are set to come close to last year’s record, highlighting spiraling costs for consumers.

Figures issued by the country’s energy regulator, the Bundesnetzagentur, at the turn of the year showed January to November 2012 installations rose to nearly 7,300 MW and that November installations alone totaled 435.3 MW compared with 659.3 MW in November 2011. Full article.

Study: Averting climate change may cost $700 billion a year
About $700 billion a year of new spending on renewable power, low-carbon transport and energy efficiency is needed to meet the United Nations goal to cap temperature rises, a report for the World Economic Forum showed. Full article.

While Germany is a great example of success in distributed generation, the advent of solar leasing in the U.S. promises to make investing in solar even easier.  SolarCity, whose stock price surged nearly 50% after their initial public offering, has been a pioneer in solar leasing, which allows homeowners to install solar with no money down.  Sungevity has begun to test this model abroad in Australia and Holland.  This morning, Solar Mosaic took this model a step further by allowing individuals to take the place of banks and large corporations in bankrolling profitable solar investments, even if they don’t have a roof to put it on. Further, the Brookings Institution and Stanford’s Steyer-Taylor center have been promoting policy to create even more avenues for crowd-funding of clean energy.

Solar leasing and crowd-funding are moving forward to make investing in clean energy an option for more people, and policy can help. Effective policy can bring down costs, leading us closer to clean energy investments that are profitable. For example, experts are studying how policy can streamline permitting, interconnection, and customer acquisition, all of which are often expensive, time-consuming, paperwork laden processes.

CPI is studying how solar leasing has had an impact on access to solar, costs, and deployment, as well as what it means for policy. Our results will be released in March.