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If given the chance, Indonesia’s COVID-19 stimulus can build a green, resilient economy

June 4, 2020 |

 

The global health pandemic is leading the world towards recession, and Indonesia is no exception. To restore prosperity and growth, the government needs to ensure that recently passed stimulus packages take into consideration long-term sustainable development goals.

The world is heading towards recession as a result of the COVID-19 crisis, and Indonesia is no exception. The country’s stock exchange has lost about 35% of its value this year, and 3 million people have lost their jobs, with that number possibly rising to 9 million by mid-year if Indonesia’s GDP growth slows further, or heads into negative territory, as some economists predict.

The Indonesian government has responded by unveiling a number of stimulus packages to support the country’s tourism, aviation, real estate and energy sectors, as well as for general business economic recovery, including relaxing import levies and tax incentives for small and medium-sized enterprises (SMEs). While these measures are needed, they are designed to last no further than September 2020.

Indonesia has a unique opportunity to learn from past mistakes and build a recovery that improves the country’s chances for economic stability and growth. To restore long-term prosperity, however, incentives must promote a green, resilient and inclusive economy. This can be achieved by making adjustments to the stimulus packages in the following three ways:

1. Taxpayer-funded fiscal policies should accelerate the growth of green industries.

An economy that relies on fossil fuel is vulnerable to market shocks and worsens the climate crisis. About 50% of Indonesia’s electricity is powered by coal, and almost all the country’s transportation is fueled by oil. Though there are attempts to diversify the energy mix, renewable energy still accounts for less than 10%.

A new mining law – which guarantees an extension of current coal concessions for up to 20 years – reinforces the dominance of coal, where it is not needed. Although the stimulus packages mention renewable energy, it provides financial support to the oil and gas and mining industries, but makes no mention of other green industries.

Renewables are struggling to gain a major footing in Indonesia because of entrenched fossil fuel interest: coal is subsidized, tariffs are mostly driven by the price of coal and subsidized diesel is dominating energy supply in remote islands. Without more aggressive government gap funding, private sector financiers in Indonesia still consider renewables to be a risky investment. The stimulus packages are a perfect opportunity to address these imbalances, reducing fossil fuel subsidies while increasing incentives for renewable energy, battery manufacturers and other energy storage solutions, as well as recycling, energy efficiency and other industries that have demonstrated strong job growth and at the same time contributed to a low-emission, low-resource economy.

There is sufficient precedent to take cues from. The European Union has announced it will integrate its coronavirus response into its Green Deal agenda, which brings every single law, regulation and business in line with a 50% emissions cut by 2030. During the 2008 global recession, the United States made fiscal bailouts to General Motors and Chrysler conditional upon energy efficiency measures and cleaner fleets, which fostered a new era of competitiveness for those companies.

2. Natural resources for essential needs must be diversified and decentralized.

Global trade is here to stay, but when it comes to essential needs the pandemic teaches us that the more options we have closer to home, the better. Indonesia, like many other countries, scrambled to import essential medical supplies before shifting what we could to domestic production. Increasing capacity for local production of essential services will enable us to be resilient in the face of future shocks to the economy or disruptions to supply chains.

Energy generation and transmission provides a key opportunity. Electricity is an essential need, yet we have had little success in diversifying and decentralizing our energy sources. Stimulus investments could accelerate these efforts. For example, off-grid systems powered by renewable energy are needed to electrify rural and isolated areas where transmission lines have not reached, while also building resilience in areas that are already electrified. Having building, businesses and individual households partly connected to the grid, but partly powered by off-grid energy, will reduce the risk of shocks to the system. Stimulus incentives could accelerate these energy grid investments.

Food and water are also essential needs, yet entire localities are becoming increasingly reliant on imports. For example, the Berau district of East Kalimantan prioritized palm oil development after a coal price shock in 2015 decimated the district’s traditional mining economy. Other essential food crops, such as rice and maize that were traditionally grown in Berau, all declined in land area as palm oil dominated 90% of agricultural land. Berau is now at risk of falling into the same single-commodity trap with palm oil as it was when coal dominated the local economy.

In other parts of Indonesia, there are 88 districts – with a population of 7 million people – that are already food insecure. Stimulus incentives for farming and agriculture should be applied towards improving sustainable agriculture practices, needed to ensure the resilience of our food supply in light of climate change, as well as promoting crop diversification, especially in areas where we see single-crop domination.

3. Indonesia must use current momentum to decouple growth from resource use.

Prior to the COVID-19 pandemic, renewables were outpacing fossil fuels for power generation growth at the global level. But with demand and prices for oil dropping, supplies are piling up. While some analysts predict that this spells a blow to renewables as cheap oil floods the supply chain, others predict that investors will flee oil as the cost and risk of oil exploration far outweighs that of renewable project development.

Knowing that renewable energy growth is on the rise and that the cost and supply of fossil fuels will become increasingly unpredictable, now is the time to aggressively invest in a massive shift to renewable energy. This will reduce our dependence on the few companies that extract limited natural resources from the earth, while investing in a more diverse energy supply chain that is demonstrating economic growth.

Indonesia can instead harvest the replenishable resources we have in abundance – sun, wind and water – as well as its manufacturing and infrastructure that take advantage of those resources, like stimulus incentives that help Indonesia switch more rapidly to electric vehicles. We can build diverse energy systems that do not rely on limited sources, while decentralizing distribution from the main transmission grids to help build resilience. We will power our transportation systems from that energy, and see much less pollution in our cities. Our health would improve, as would the health of the planet.

This is the world, and the Indonesian economy, we should aim to build after the pandemic.

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A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Uncovering the Private Climate Finance Landscape in Indonesia

May 15, 2020 | and

 

Climate finance in Indonesia is falling far short of the need.

Indonesia needs an estimated USD 247 billion by 2030 to meet its NDC target of reducing greenhouse gas emissions by 29%. However, research from Climate Policy Initiative (CPI) tracked only about USD 13.2 billion of private climate finance between 2015-2018, highlighting Indonesia’s need to significantly scale up climate finance in the next ten years to achieve its NDCs. This analysis comes at a time when financial institutions, listed companies, and public companies will start reporting the sustainable aspects on their portfolios by 2021, as mandated by the POJK 51/2017 regulation issued by the Financial Services Authority (OJK).

These estimates are a follow-up to a previous CPI report on Indonesia’s public climate finance, where we found that at least USD 951 million of climate finance from public sources was disbursed in Indonesia in 2011. The analysis was instrumental in supporting the Ministry of Finance’s efforts to develop a climate finance budget tagging system.

CPI’s upcoming study, Uncovering the Landscape of Private Climate Finance in Indonesia, is aimed at developing a first-of-its-kind approach for tracking private climate finance in Indonesia. For the study, we collected data from different investor categories including, but not limited to, financial institutions, project developers, corporations, domestic philanthropies, and impact investors, supplementing it with publicly available data.

Through our research, we’ve identified 5 preliminary trends in climate finance in Indonesia:

  • Total climate finance from the private sector reached USD 13.2 billion between 2015-2018, with commercial financial institutions (FIs) accounting for a majority (67%) of this. However, this only accounts for 2.3% of commercial FIs’ total credit issuance (USD 378 billion), highlighting the big chasm between their total financing compared to their climate financing.
  • Debt financing continues to be preferred mode of lending, accounting for 71% of total financing, or USD 9.4 billion. However, the amount of debt financing on climate investment has stagnated over the last two years (USD 2.7-2.8 billion per year), probably due to policy amendments on renewable energy (RE) use. The latest regulation from the Ministry of Energy and Mineral Resource (no.50/2017) is putting all RE projects in development under the BOOT scheme, and in direct pricing competition with coal-fueled power plants. As a result, many RE developers found it difficult reach financial closing, despite having secured the power purchase agreement with PLN (Indonesia’s national utility company).
  • The distribution of private finance is skewed towards renewable energy projects, reflecting the appetite for increased private sector involvement in the renewable energy market, especially in small hydro and geothermal power plants, which are perceived to be less risky.
  • Private finance flows to adaptation remains limited (USD 1.7 billion) despite tremendous potential economic value, as these sectors are traditionally considered as “government responsibility.” For instance, improvement in coral reef state by 2030 could unlock an additional value of USD 37 billion (or USD 2.6 billion per annum) in Indonesia (Coral Reef Economy, UNEP, November 2018) but investments in agriculture, forestry, land use and natural resource management were reported at less than a billion between 2015-2018.
  • The current private philanthropy fund in Indonesia, which is disbursed almost exclusively in the form of grants, has been playing a large role in climate activities currently uncovered by private finance. This includes technical assistance and grassroots community engagement in forestry, land-use, natural resource management, coastal protection, and disaster management. The private, philanthropic climate fund has stagnated for the last three years, most likely due to its increasing focus on education and health.

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India’s lightbulb moment: Not using this crisis for meaningful energy sector reform would be a waste

May 12, 2020 |

 

Co-authored by Vibhav Nuwal, Himraj Dang, and Mahua Acharya

The trend of low power demand, now furthered in the post-COVID economy, and increased RE generation, will continue to put a ceiling on the PLF of the thermal fleet.

The 9-minute lights-off on the 5th of April was an interesting event in many ways – the power of the call given by Prime Minister Modi, the extent of participation by the public, and the expert management of the national electricity grid. It was also perhaps the first time in nearly a decade that the national grid, or its potential collapse, entered into mainstream conversations and public consciousness.

The event gave rise to many discussions, mostly technical, amongst power sector experts – and was nothing short of a tremendous engineering and coordination accomplishment. Switching off a massive 32,000 MW of power, or the size of Denmark’s electricity supply, and then bringing the power back in a few minutes, is no easy feat: most power plants take longer than 9 minutes to reduce or increase electricity generation.

This accomplishment, though, shouldn’t hide the fact that even pre-COVID-19 India’s power sector has been facing may problems, chief amongst them financial sustainability and payment reliability. It would be easy to push these problems down the road in light of the current crisis. However, the 9-minute event could also be seen as a lightbulb moment, with a real opportunity to take a step back and evaluate a course of action going forward now, when energy demand is low and likely to remain that way for at least a few months, if not much longer.

What types of lessons might we learn?

First, as India continues to integrate renewable energy in keeping with its energy security and climate change goals, a market based automatic mechanism for integration of infirm renewable power into the grid is needed. All countries struggle with this, as so does India presently. The 9 minute lights-off event demonstrated the technical capacity for managing grid flexibility, at least in one direction. But one must also remember that this was a planned event – grids had time to slowly back down supply in preparation and reduce damage from a sudden shock. With renewable power, this luxury isn’t available – weather patterns change and forecasting will never be 100% accurate. The management of the 9-minute event has reassured us that the Indian grid is robust; which means it is also robust enough to integrate more renewable energy – and this is timely given growth forecasts for renewables.

If we can design a market that competitively discovers costs and penalties to dispatching renewable power across a nationwide grid, the “must-run” status of renewable energy will be earned without a regulatory push. Further capacity to manage power spikes associated with 175GW of renewable energy can be built with a push for lithium-ion battery storage availability in each grid, c. 25MW storage for each 1,000MW of generation capacity. The Central Electricity Authority has researched this issue extensively and concluded that with minimal backdowns, the surge of renewable power expected in the future can be fully dispatched.

Second, what to do with idle, old, and inefficient coal plants. With a reduction in power demand across the country, the adjustment has been made by reducing output from coal and lignite plants. This is a good time to recognize that the last ten years have seen a steady decline in energy generation from fossil fuels – plant load factors for the 2019-20 period are at 56%, down from 78% a decade ago. Coincidently, many of these same plants were to install flue gas desulphurization (FGD) systems as part of the country’s commitment to COP21, but the commitment to retrofit 440 units amounting to 166.5GW by December 2022 is way behind schedule. As an example, only 2 out of 33 plants in the polluted NCR have met their FGD targets, and this tardiness can no longer be permitted given our renewed concerns for public health.

With an increase in the generation of renewable energy, assuming India continues to prioritize this sector given climate pressures, the operation of coal-based power plants will remain reduced, and now corrected downwards additionally with the new, post-COVID economic situation. Utilities will continue to lose money through locked-in fixed payment contracts unless a replacement program is devised. Rather than have low performing, old, and polluting thermal plants across the board, some of these old units could be incentivized to shut down, based on generation costs, remaining plant life, and the economics of installing pollution control equipment. This will increase the PLFs of larger, newer, more efficient plants, including those of NTPC, and also help mitigate the country’s now permanent problems with air pollution.

Third, we have one more chance for ‘Make in India,’ an opportunity to bring in fresh COVID-influenced industrial investment from Korea and Japan which is diversifying away from China. Industrial power in Vietnam is, for example, 40% cheaper than in India. Thailand incentivizes manufacturing industry to work through the night by offering vastly discounted power.

We know fuel oil prices have been totally decontrolled in India, and the refineries have even been upgraded to pay for low sulphur fuel, so tariff change for fossil fuels is eminently possible, even politically. India’s cross-subsidy scheme has uneven impacts on the competitiveness of sectors; to specifically target manufacturing, industrial power tariffs need to be competitively-priced. For this to happen, agricultural tariffs have to be dealt with squarely. The political consensus seems to be veering towards a DBT subsidy provided under PM-KISAN, and freeing up all tariffs thereafter, with no scope for unfunded subsidies.

And finally, all this requires that the perennial and oldest issue of the financial health of the DISCOMs gets solved, not just given a lifeline. DISCOMs now owe over INR 8.8 billion to generators. The current lockdown period has hit finances even harder – as industrial and commercial buyers will likely not recover to pre-COVID levels in a hurry. DISCOMS are left catering to low paying categories (households), and loss-making categories such as agriculture.

The proposed Electricity Amendment Bill, 2020, is an ambitious step in the right direction – with bold moves to institute cost-reflective tariffs, remove subsidies, and strengthen the sanctity of contracts through greater enforcement and provision of payment security to generators. Each state can be asked to endorse the legislation with its variant, which could become a condition to accept the centre’s band-aid assistance in this time of crisis.

However, the proposed Bill could have gone further to introduce the radical reforms that are needed. In the current draft, many of the reforms proposed earlier – carriage and content separation, more effective Renewable Purchase Obligations, and default open access to renewable energy – have either been dropped or watered down. Nevertheless, a bold reform move would be the complete abolition of cross-subsidy at a defined future date. The DISCOMs should be required to implement “Direct Benefit Transfer” for paying any subsidy on electricity (rather than it being borne by the Discom, as is the case presently). Removing the cross-subsidy will create the urgency to solve the subsidy problem, and at the same time make power tariffs more competitive – something we critically need if we wish to attract factories relocating from China.

It is said that India reforms only when there is a crisis. We have a monster of a crisis now, and to not use this crisis for meaningful reform would be a waste of talent, leadership, and this rare lightbulb moment at every level.

This blog originally appeared in Financial Express 

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How the Coronavirus Recovery Effort can Support a European Green Deal

May 7, 2020 | and

 

In the space of a few months, COVID-19 has changed the debate around large scale government intervention.

The need for a significant stimulus to prevent a protracted economic downturn arrives at a time when voices calling for increased investment to tackle climate change are also on the rise. Rather than being at odds, the two challenges can be addressed simultaneously, with coordinated planning around a Green New Deal that tackles short-term economic needs with long-term sustainability goals.

Discussions of a Green New Deal—extensive government spending and public works to decarbonise the economy while addressing key social and economic concerns around the transition—were already gaining momentum prior to the COVID-19 pandemic.

At the end of 2019, the European Commission proposed a ‘Green Deal – a framework of regulation and legislation to achieve the EU’s targets of net-zero carbon emissions by 2050, and a 50%-55% cut in emissions from 1990 levels by 2030. According to the Commission’s European Green Deal Investment Plan, the deal is worth at least €1 trillion  over the next decade, or €100 billion per year. The largest share, €500 billion, would come from the EU budget, €114 billion of co-financing would come from national governments, and about €300 billion would come mostly from the private sector. €100 billion would be allocated to a ‘just transition’ mechanism to help retrain workers who lose jobs in shuttered coal mines or steel factories.

Today, in the pandemic context, some members of the European Parliament argue that legislative bandwidth consumed by the climate platform should instead be devoted to tackling the coronavirus crisis. Yet, the pandemic has shown us that large scale, coordinated and urgent action is instead needed.

On April 9th, European finance ministers agreed to provide a €540 billion rescue package using existing instruments, including the European Stability Mechanism (ESM) —the bloc’s bailout fund, with no strings attached for healthcare expenses. A few days later, EU heads of state endorsed a longer-term budgetary effort, including plans for a separate recovery fund.

As details of recovery programmes are discussed, there is a chance to expand the Green Deal further. The ‘moon-shot’ effort to strengthen the regional economy, decarbonise, and increase long-term resilience stands the best chance of success if it follows two key principles.

First, recovery should come with conditions targeting an inclusive and sustainable economy. Governments should consider how to harness short-term crisis response to transform industries most in need of decarbonisation and resilience against climate risk. Targeted support for distressed industries, such as airlines, should come with climate-positive strings attached. But over the longer-term, the scope for Green Deal intervention is much wider.

Europe has just under a quarter of global renewable generating capacity and saw the second highest increase (after Asia) in 2019. A collapse in energy demand, and consequently of energy prices, could favour renewables – now consistently producing electricity at a lower cost than fossil-fuel alternatives. However, the crisis will hit supply chains, and uncertainty could see firms stall capital investments. As well as providing patient, long-term loans, public support should focus on restoring confidence by integrating renewable sources into the grid. In Europe, that means cross-border integration; like everywhere else, it also means supporting electricity storage.

Converting and retrofitting old buildings for higher energy efficiency is an obvious target for major public investment. Further, public investment should galvanise a transition in heavy industry, through public procurement with green conditions on the one hand, and re-training to build the skills required for circular economy business models on the other.

That connects to the second principle: synchronise the various national strategies and plans that already exist across the region.

Mutual support and coordination across the bloc is essential. Early in the crisis, a group of countries badly hit by the virus and currently facing high levels of debt pushed for mutualised assets – come to be known as ‘coronabonds’ – to raise finance and share fiscal costs at the Eurozone level. However, such proposals encountered staunch resistance among primarily northern European countries, who favour using the ESM. That association has already produced discontent towards the agreement in southern Europe, arguably where support is most needed. Disagreements over the role of grants in the proposed recovery budget have also hindered progress. These tensions show that the recovery and Green Deal must offer a positive vision to all European countries, or all efforts will be lobbied out of existence.

Bringing national strategies more directly under a regional umbrella would complement regional-level mechanisms for raising investment. The EU budget currently represents only 1.02% of countries’ national income for the 2014-2020 period, inadequate for crisis spending. It could, however, establish a solidarity fund to support countries negatively affected by shocks, including climate-related shocks, and be combined with credit for longer-term investments. Reforming the EU’s fiscal framework could also defuse disagreements over sharing fiscal costs while incentivising green investment. Suggestions by the Italian government and plans mooted at the Commission are a step in the right direction.

There are significant risks to the success of the current Green Deal, let alone an expanded programme, but the coronavirus emergency has once again revealed government’s irreplaceable role as the final guarantors of the public good. Sharing the burden of combating the coronavirus could set an inspiring precedent for a just transition to combat climate breakdown—which will have fare more dire economic and health impacts than the current pandemic. If the current systemic shock of the coronavirus crisis jolts countries into action, maybe then they can create a truly European Green Deal.

This blog originally appeared in Climate Home News.

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Indonesia Environment Fund: Bridging the Financing Gap in Environmental Programs

April 30, 2020 | and

 

Tasked with managing funds related to environmental protection and conservation, Indonesia’s Environmental Fund Management Agency provides a unique financing mechanism to help meet the country’s climate goals.

Indonesia’s economy is growing at 5-6 percent annually, almost twice the global average. And as the world’s fourth most populous country, it is also one of the world’s largest emitters of greenhouse gas (GHG) emissions. This makes Indonesia a key player when it comes to tackling climate change. But it can’t do it alone.

By committing to reduce its GHG emissions to 29% unconditionally and 41% with international assistance, Indonesia has progressively set itself on a low-carbon development pathway. Responding to this commitment, the international community – through multilateral donors – has pledged financial support to help Indonesia meet these climate goals. But to manage this multilateral funding – as well as its national funds – Indonesia needs an efficient institution capable of implementing GHG reduction projects from the central government down to the grassroots level. This is a job for Indonesia’s newly launched Environmental Fund Management Agency, known by its Indonesian acronym BPDLH.

The BPDLH – the Indonesian version of the Amazon Fund, the largest source of international climate finance in Brazil – is unique in that it can receive and manage both state and non-state funds for climate change management. As a public service agency (Badan Layanan Umum or BLU), it is designed to be more autonomous than government institutions, but more regulated than state-owned enterprises. As a result, the BPDLH can be more flexible and effective when it comes to managing funds from domestic and international sources.

recent Climate Policy Initiative study explains in detail the role and potential of BPDLH as the “financing hub” for environmental programmes in Indonesia. BPDLH is not the first management fund of its kind in Indonesia, but it is unique because – compared to other existing BLUs whose main source of funding comes from the state budget – it is allowed to accept international donor funds.

In addition to the primary capital raised from the state budget and interested donors, BPDLH can raise other sources of revenue from grants, investments and fees from the provision of their services in accordance to existing laws. These revenues, categorized as non-tax state revenue, can be disbursed without first depositing into the state treasury. Because of this flexibility, BPDLH should be able to sustain itself financially.

Similar to the country’s well-known Education Fund, BPDLH is also allowed by regulation to include investment as its service, develop its investment portfolio and broaden its funding coverage. But whereas the Education Fund uses revenues to cover scholarship and research, BPDLH will use revenues to fund forest conservation, pollution reduction and other environmental programmes.

With such a flexible and strategic design approach, BPDLH has the potential to mobilize billions of dollars for climate change mitigation and adaptation programmes. To illustrate the flexibility, imagine BPDLH as a big “house” in which donors have their own “rooms”. Potential recipients can navigate the “house” to find the room they find most suitable. Eligible recipients in this case may vary from government ministries and local government to civil society organizations, including indigenous people. In the BPDLH scheme, the “house” will not only be the intermediary for channeling the donor’s funds, but also implementing rules of transparency and upholding fiduciary duties.

Another benefit of this flexibility is the ability of BPDLH—albeit being a national public service agency—to better cater to donors’ specific requirements, including those of international donors. Learning from the Amazon Fund, the flexibility of a Fund is imperative since each donor normally has specific requirements, while there are constraints for potential recipients to meet them. The newly established BPDLH should be able to manage this obstacle through its flexibility: making both ends meet by being flexible enough to bridge the donor-recipients gap.

As an emerging market country with a vast supply of natural resources, Indonesia continues to be a main destination for global climate investment, and strengthening the role of BPDLH will be key to connecting global support with local actions on the ground. This should be doable through ensuring the flexibility of BPDLH as a public service agency. Ultimately, the presence of BPDLH should shape the landscape of environmental funding in Indonesia, and help the country meet its climate and overall environmental goals.

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A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Climate in the Time of COVID

April 28, 2020 |

 

How do we take on lessons from the threat today for the threat of tomorrow?

The world has experienced disasters and huge economic impact in the past – whether from hurricanes, floods, droughts, earthquakes, or the myriad different ways nature asserts itself. But it normally happens in one place or another. There has been no other known time in our living history when everyone in the world has experienced the same thing at the same time. While the World Wars may have come close, they still had the world divided. Unlike COVID-19.

And while of course each of us individually will experience the fall-out from this pandemic in different ways, it is undeniable that each of us will be touched by it in some form or the other at the same time.

So it isn’t a stretch here to draw parallels to the other global threat looming large upon us: climate change.

Like the coronavirus, climate change will affect everyone globally, albeit on a scale of decades and centuries rather than months and years. It too will not distinguish between caste, color, creed, religion, or national boundaries, and like the coronavirus, climate change will have its greatest impact on the poor and most vulnerable.

Everyone acknowledges that the priority at the moment must be to address the pandemic and its social and economic aftermath. However, without taking anything away from the urgency of acting that the pandemic imposes on us all, it behooves us to look closely at how the lessons and challenges of dealing with the COVID-19 crisis are relevant and useful for addressing the climate challenge.

For one thing, in the wake of this pandemic, there is bound to be this huge surge of global empathy that will be ripe to be harnessed for improving the conditions at the human-planetary boundary.

Let that not simply be left behind in marveling at anecdotes and pictures of wild goats wandering the deserted streets of a Welsh village or dolphins reappearing off Mumbai’s coast. Let’s remember that air pollution reversed itself in the world’s most polluted cities like Delhi – where the AQI has been in the recently unheard of double digits. And while the human and economic toll that has been extracted is not acceptable to achieve that, it is a demonstration of the fact that the earth will regenerate, and we can deploy technologies and economic incentives to achieve that in a more orderly transition.

The most important thing governments can do is to address the gaping shortcomings in the social safety nets. Whether this is to address the lack of sufficient health care in most parts of the world and the ability of people to afford it (for that matter, even have access to running water for the most basic rule in this pandemic of washing hands frequently) or the ability to provide for those who are suffering the most – the daily wage earners whether they be waiters in America or the construction labor in India.

The people of the world must remember this and demand of their governments that they make all this right. The bonus: a world much more economically and socially resilient and so much better equipped to deal with the impacts of climate change.

Considerations should also be integrated into the economic stimulus programs so that the macroeconomic impetus leads to building resilience against future systemic shocks to society and the financial markets. With oil prices at another historic low, governments should eliminate fossil fuel subsidies. The consumption subsidies themselves are worth $400 billion per year. Over ten years that is $4 trillion – or real money that can make a difference. Governments could issue bonds for that amount today – to be paid by savings from avoided fossil fuel subsidies that are instead earmarked in their budgets for repayment – and deploy the proceeds to build the woefully inadequate social safety nets and enhance social and economic resilience. And yes, it will enhance countries’ abilities to address impacts of climate change in the future.

And what of lessons for the semi-public and private sectors?

Development finance institutions, particularly the multilateral development banks, play a critical role in bridging public and private finance to maximize benefits to recipient countries. Many usually play a counter-cyclical role at times like this, that is interestingly different from the usual risk-averseness they exhibit. With outflows from emerging markets happening at the fastest pace ever and a potential debt crisis looming, development finance institutions need to ensure that their enhanced capital flows adhere to stated goals of supporting low-carbon development pathways and making these economies more resilient. Whether it is providing financing for sustainable infrastructure or funding domestic financial institutions to help integrate small and medium enterprises into more agile supply chains to minimize disruption. And this time perhaps the demonstrated ability of development finance institutions to take higher risk to achieve desireable outcomes will stick because climate change will certainly test us on this repeatedly.

And while many might see the private sector’s main role as a recipient of government stimulus, in fact business and finance have a role to play too. In particular, the financial sector must ensure that investment capital doesn’t flow into creating or sustaining assets that are likely to be stranded in the near-mid term. In addition to accelerating the shift to a low carbon, resilient economy already being supported by capital markets, asset owners and managers should ensure that investment flows into sectors that will create the most jobs today like in clean energy, construction, and transportation – all while making society more resilient to climate change.

Every one of these actions will help us recover from the current crisis we are in and prepare us for the next one. It will also garner the goodwill of the people of the world. We can all agree that they deserve it.

This blog originally appeared on Innovate4Climate.

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Expanding the Horizon of Climate Adaptation Finance

April 9, 2020 |

 

With each passing year, extreme weather events and chronic climate-related changes occur more frequently and intensify globally. These changes put enormous pressure on communities worldwide to invest in adapting to climate change. Since 2012, Climate Policy Initiative (CPI) has sought to comprehensively track domestic and international investment in activities that address and respond to climate change through the Global Landscape of Climate Finance (the Landscape). High quality adaptation finance tracking can identify gaps and barriers in financing adaptation and resilience solutions globally, drive leaders and stakeholders to invest in or otherwise support increased finance flows, hold public and private actors accountable, and support government agencies in developing policy guidance.

Despite the critical importance of adaptation finance tracking, significant data and reporting challenges limit our ability to capture the full picture of global adaptation finance flows in the Landscape. Adaptation investment is difficult to track due to a variety of challenges, including the context dependency of adaptation projects, uncertain causality associated with potential adaptation investments, a lack of impact metrics, and confidentiality and reporting requirements.

From an international policy perspective, the need for tracking adaptation finance flows originates from a commitment made by developed countries in 2009 to jointly mobilize USD 100 billion per year in climate finance by 2020 for action in developing countries (UNFCCC, 2009). To support this aim to jointly mobilize climate finance in the hundreds of millions, CPI submitted research, A Snapshot of Global Adaptation Investment and Tracking Methods, to the Global Commission on Adaptation to inform its September 2019 flagship report: Adapt Now: A Global Call for Leadership on Resilience. The submitted research contains a new level of detail on adaptation finance tracked in the Landscape, including breakdowns of adaptation flows by sector and type of finance, a mapping of flows by region in key sectors, and country-level case studies to assess how vulnerability correlates with adaptation finance flows.

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India needs a bailout – Can we make it green?

April 3, 2020 | and

 

This post originally appeared in Economic Times. 

Three weeks of lockdown due to the Coronavirus pandemic and India’s economy will take a beating that could be worse than the lukewarm condition it was already at over the last few years. Estimates show that the lockdown could bring the country’s growth down to 2.5% from 4.5% projected earlier. While health spending must come first, all kinds of industries will need bailouts from the government – airlines, hospitality and energy among them.

This comes at a time when many industries were already challenged. In the months leading up to this crisis, air pollution over Indian cities had hit record levels. Financial markets were struggling with a liquidity crisis. The power sector was also in trouble.

Yet, in the midst of this economic darkness, Delhi’s air has never been cleaner and skies haven’t been more blue. Even urban balconies are seeing sunbirds. Traffic has come to a halt, sidewalks are clean and the new green of springtime is everywhere. Greenhouse gas emissions have no doubt fallen.

But this is not the sort of environmental clean-up people are looking for. Climate action and reducing pollution must come from economic growth, not the loss of it. Reviving the sectors hardest hit by the economic downturn will need direction – rather than straight out cash injections. Perhaps this is our one opportunity to give it that direction – to orient these industries and their markets – towards a green, efficient and inclusive future?

As we tackle this crisis and focus on reflating economies, short term stimulus packages should be directed at the poor – the government of India is already on track with its 1.7 trillion rupee relief package and the Prime Minister’s fund is still in developmental stages. But to recover from recession and also get back on track to high growth, a much bigger recovery package is needed. A long-term stimulus should have incentives for the kind of economy we want – green, clean, inclusive, and efficient. In this way, taxpayer funded economic stimulus policies can function both to re-energize the economy, creating new opportunities and employment, and at the same time look to the next set of challenges.

This is not a new idea but was proven implementable during the US bailout of GM and Chrysler in 2008. The bailout required these firms to produce more energy-efficient fleets. While the auto industry at first balked at these new standards, it was what was needed to make changes in a struggling sector. U.S. auto manufacturing ultimately came out more competitive for it, especially in the field of electric cars. India can apply the same idea to industries at the cusp of a green transition.

There are similar opportunities in many sectors for catalysing such a change, including transportation.

The automotive industry is expecting a big bailout from the government. The auto industry crisis of decreased sales can be used as an offset to increase demand and boost electric vehicles penetration across India. As a starting point, we could create conditional bailout packages requiring delivery companies to shift to electric vehicles, followed closely by simply mandating that public sector agencies and taxi/bus fleets use only electric vehicles. The associated support infrastructure is already emerging – supported massively through government subsidies.

The power sector is another industry deeply affected by the current crisis. Since renewable energy is already cheaper than fossil fuels, any direct assistance here is not needed. Instead, the need is for India to make investments in addressing the structural issues that are holding back the further penetration of renewable energy. One measure could be that relief monies include deep incentives for battery storage, accelerated optimization of battery usage between the vehicles industry and grids, enabling and incentivizing demand response solutions, and earmarking funds to accelerate a further liberalization of energy markets. A structured bailout package could buy down the closure of aging coal plants – but only on condition that they are replaced with renewable-plus-battery combinations.

These ideas are not just good for the environment, but they are good business for India long-term. But how to finance them when there is so much competition for India’s limited funds?

There is also good news here: Even in the middle of the Corona crisis and a very volatile market, State Bank of India raised $100 million in green bonds, its third iteration of such bonds. This transaction reinforces the fact that investors still bet on sovereign backed issuances. Perhaps now is a good time to commit to raising green bonds wherever possible – to fuel sectors that need liquidity, but by indirectly requiring them to move towards greener assets. We could use stimulus funds for both, creating demand and also reducing the cost of issuing green bonds.

And finally, any bailout package must be inclusive. 62% of India’s employment is casual, 85% of that is concentrated in two sectors and on an average earn less Rs 300/day. It is nobody’s guess that daily wage labourers will be worst hit by the Corona crisis. Even regular employment will experience major job and income losses with the prolonged reduction in new hiring. The question is how to bring employment back. If the bottom 80% are disproportionately hit, and they do not benefit, through job reinstatements, any kind of greening package will begin to look removed from reality. Incentives for green and efficient must therefore focus on green job creation and inclusion, serving as a reminder that national funds are being directed towards the economy we want.

Historically we have observed that an economic recession pushes climate change discussions to the margins. However, that was the past – when renewable power was not cheaper than coal, when our air was not grey, and when climate change was not a global crisis.

We are standing at the crossroads of history where our actions will have long-term consequences. It is thus an opportune moment in economic history to reset our growth pathways and truly direct financial capital to funding the kinds of things that will give us the blue skies, clean air, and green power and jobs that we deserve.

 

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Bailouts for a Better World

April 1, 2020 | , and

 

A deep economic crisis is expected in the wake of the COVID-19 pandemic health crisis. We applaud the quick action of governments in supporting health workers and institutions, the business sector, and different communities. However, if taxpayer-funded bailouts are not implemented properly we can worsen another crisis: global climate change.

We cannot afford to miss a rare opportunity to enact stimulus policies that can restore economic activity and reduce the risks of climate change. Without enacting climate-friendly incentives or considering the jobs of the future, we risk accumulating financial and environmental debts that will burden our children, who will wonder why we did nothing to change these prospects when we had the chance.

It is not a radical idea.

The bailout of GM and Chrysler during the 2008 financial crisis attached rules requiring the production of more energy-efficient fleets. Turns out, it was the impetus needed to make significant changes in a sector that was already struggling to keep up with foreign competitors. US auto manufacturing emerged more innovative and more competitive, including in the field of electric cars.

Similar opportunities are lurking in many sectors now, including air transportation.

Aviation alone is responsible for 2% of global carbon emissions. There are some industry-led measures in place to reduce these emissions, including the support of biofuels and carbon credits, but they are far from enough to address the industry’s impact on global climate change.

The airline sector is being hit hard, and the shock is likely to persist.  In addition to the short-term impact of travel bans and thousands of cancelled trips, conferences and events, there will be long-term changes as people adjust to virtual meetings, work from home, and other newly-found travel-reduction behavior afforded by digital technologies.

Helping the airlines and other important industries is absolutely necessary to prevent a much worse loss of jobs if nothing is done. However, financial assistance must include climate-impact measures, which will also support the industry’s long-term health and competitiveness.

Measures that would link airline bailouts to limits on carbon emissions is currently out of the US stimulus package. However, other nations can decide to bring the two objectives together when they roll out their own stimulus plans.

One measure could be a carbon tax on jet fuel earmarked to compensate the government in case of losses from loans provided by the bailout, and to retrain airline staff for jobs in new, climate-friendly sectors with strong growth potential. With just a modest impact on air tickets, this could ensure that public money will be available for forward-looking policies that help families now and in coming years.

Oil and gas is another industry to watch. Its global capitalization has been declining and is now deeply affected by the crisis.  The recent crash in oil prices has anticipated what used to be just a possible scenario for 2030. Billions of dollars in fossil fuel assets are poised to be stranded. It would be foolish to just channel fiscal resources and stimulate investments in assets that will be further impacted by economic transformations we know are coming.

The overall picture of the stimulus package matters, but so does its form. For example, financial support could be linked to regulation in the form of conditional loans or equity, affecting public policy goals by taking ownership interests. Ultimately, the goal should be a better integration of public policy goals into decision-making.  This can be achieved by using stimulus funds to transition to clean energy sources, which are competitive, create good jobs and further the goal of energy security. Bold regulatory change is also crucial.

The US should take this moment to create a national market for electricity, under federal regulation in line with the natural gas sector, reducing a serious handicap of renewable energies vis-a-vis fossil fuels.  It would save taxpayer money and could create an economic boom.  The targets in the green deal recently proposed by the EU are a perfect vehicle to sustain the continental economy. The possibilities in Asia are boundless.

The global economy will not be the same after this shock.

The world just achieved something that people thought was impossible: deep cuts in greenhouse gas emissions. China, the world’s largest carbon emitter, reduced emissions by an estimated 25% last month.  Trying to revert to previous patterns when global demand comes back would be an unimaginable lost opportunity.

Joaquim Vieira Ferreira Levy, former CFO and President of the World Bank and the Brazilian Development Bank—BNDES, respectively

Tom Heller, Director, Sustainable Finance Initiative, Stanford University, and Chairman of the Board, Climate Policy Initiative

Barbara Buchner, Global Managing Director, Climate Policy Initiative

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With Coronavirus: investors and policymakers must shift to increase resilience

April 1, 2020 |

 

This post originally appeared on Climate Home News. 

The $16 trillion dollar wipeout in global stock markets over the past month highlights the serious vulnerabilities of our economic system to shocks. Around the world, millions became unemployed practically overnight and millions lost a huge portion of their savings. These events will have catastrophic consequences for people’s well-being and will shape economic and political trends for years if not decades. This doesn’t even account for the impacts of the COVID-19 pandemic on human health and the tragic situation currently unfolding in hospitals around the world.

Much will be written about this historical event as society takes stock of what just occurred, but one thing is clear. Resilience must be a driving force in the policy response. As investors of last resort, governments have the key role to play. The central bank playbook in 2008 and 2020 is similar, as liquidity evaporated and financial contagion spread, central banks had to step in as buyers of last resort with increasingly larger rescue packages. At the same time, governments are working desperately on the fiscal front to provide economic stimulus to the real economy and prevent an economic depression. Estimates of bailout packages are in the order of $10 trillion globally and growing.

So where does this leave us?

Governments and taxpayers bear the ultimate risk and thus have the mandate and responsibility to reduce these risks. There will be a cost but as we clearly see with the COVID-19 pandemic, the cost of prevention pales in comparison. The same could be said about climate change.  A working paper from the US National Bureau of Economic Research found that by 2100, the costs of climate change would reduce global GDP by 7.22 percent while the costs of prevention – by meeting the goals of the Paris Agreement are substantially less, around 1.07 percent of GDP. For the US, costs are even higher at 10.5% of GDP. To put things into perspective, this is roughly in line with the costs of a COVID-19 pandemic every year.

As we move forward past this crisis, policymakers should have resilience in the front of their minds. Below are some practical steps that can be taken in our policy response not only to enable us to boost green growth and reduce greenhouse gas emissions but also to create a more resilient financial system.

Rebalance incentives for publicly traded companies to reward long-term sustainability over short-term profits. Companies are too focused on the next quarter at the expense of their long-term financial viability. Fiscal and monetary policies need to reward long-term investment and risk reduction. Executives should not be compensated based on stock performance but broader metrics. Company Boards should emphasize long-term stability and survivability. Inherent in this is the need to address climate risk. Stock buybacks financed with debt should be forbidden.

Better safety nets – our world is moving towards greater disruptions from climate change, but also other types of crises driven by greater interconnectedness which generates systemic risk. As we see with COVID-19, a crisis in one place, can quickly spread to the rest of the world and this is not limited to communicable diseases. Financial crises in one corner of the globe can impact our supply chains, and our financial markets as trading in various financial products is linked in incredibly complex arrangements, generating systemic risk. A world with more risks needs better safety nets and more resilient systems. There is a need to improve safety nets for all citizens whether these are economic, health and climate-related shocks.

Eliminate fossil fuel subsidies – An estimated US$5.2 trillion is spent annually on fossil fuel subsidies. This is wasteful and damaging to the environment, leading to inefficient use and unnecessary GHG emissions, creates rent-seeking in the economy and presents a huge opportunity cost for taxpayers. Trillions should instead be invested in industries of the future which have the potential to provide for our energy needs while eliminating the risk of climate change. With the barrel of oil at around $25 per barrel, consumer subsidies could be eliminated now with very little consequence.

Embrace the telework trends that have emerged from the COVID emergency. As companies and consumers race to adapt to the massive disruptions from COVID-induced shutdowns, we have seen how millions of workers have adapted to working from home and used new technologies to collaborate in ways that were unimaginable a decade ago. A distributed workforce can increase the resilience of business operations, can massively reduce transport related GHG emissions from commuting and work-related travel and can even increase the affordability of cities and generate distributional effects as there is less need to concentrate workers in one place.

Embrace the public sector not as an investor of last resort but as the leader shaping future investment trends in a way that is aligned with societal goals. Public investment shapes markets and creates benefits to society that the private sector cannot provide. Through publicly-funded R&D programs, scientists developed the core technologies behind the Internet and of modern medicine. Similarly, the revolutions taking place in renewable energy production, electric storage and electrified transportation would not have been possible without the early-stage investments made by the public sector. Investments for public benefit in areas like new energy technologies, public health, urban infrastructure are critical to reducing long-term risks and ultimately can lower public outlays when disasters strike.

While there is still hope for this public health threat to be minimized and hopefully, eventually eliminated, our economic response will have repercussions for decades. It’s the right time to focus on a vision for a resilient, inclusive, and sustainable economy.

 

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