74884 EUROPE AND CENTRAL ASIA REPORTS OVERVIEW GROWING GREEN The Economic Benefits of Climate Action Uwe Deichmann and Fan Zhang IBRD 34198R1 | DECEMBER 2012 This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. RUSSIAN FED. ESTONIA LATVIA CZECH LITHUANIA POLAND REP. SLOVENIA BELARUS SLOVAK REP. CROATIA HUNGARY BOSNIA AND RUSSIAN FEDERATION HERZEGOVINA UKRAINE MONTENEGRO SERBIA ROMANIA MOLDOVA KOSOVO ALBANIA BULGARIA FYR MACEDONIA TURKEY GEORGIA KAZAKHSTAN ARMENIA AZERBAIJAN UZBEKISTAN TURKMENISTAN KYRGYZ REP. TAJIKISTAN EUROPE AND CENTRAL ASIA This report is part of a series undertaken by the Europe and Central Asia Region of the World Bank. Earlier reports have investigated poverty, jobs, trade, migration, demography, and productivity growth. The series covers the following countries: Albania Latvia Armenia Lithuania Azerbaijan Moldova Belarus Montenegro Bosnia and Herzegovina Poland Bulgaria Romania Croatia Russian Federation Czech Republic Serbia Estonia Slovak Republic FYR Macedonia Slovenia Georgia Tajikistan Hungary Turkey Kazakhstan Turkmenistan Kosovo Ukraine Kyrgyz Republic Uzbekistan GROWING GREEN OVERVIEW GROWING GREEN The Economic Benefits of Climate Action Uwe Deichmann and Fan Zhang Contents Foreword ix Acknowledgments xiii Acronyms and Abbreviations xv Overview 1 ECA—a bystander in climate action 1 The benefits of climate action 5 Climate action as a co-benefit: Cost reductions and productivity increases 6 Climate action as an investment: Opportunities in clean and green industries 8 Climate action as insurance: Reduced risks of damage from climate change 11 The costs of climate action 13 Reform labor markets to facilitate structural transformations 14 Use social protection systems to soften impacts from energy price increases 16 A strategy for climate action 18 Priorities for climate action 22 Energy efficiency is a priority for all countries 22 Cleaner and renewable energy can reduce energy investment risks 24 Better management of natural resources increases productivity and helps mitigation 27 Implementing climate action 29 Power: Investments required to modernize the electricity sector can make it cleaner and more efficient 29 v vi Growing Green Production: Large energy savings and emission reduction potential 35 Mobility: Co-benefits alone justify greater mitigation efforts 36 Cities: Leaders on climate action 40 Farms and forests: Increasing carbon storage in soils and vegetation 42 Spotlight One: The climate challenge 47 Spotlight Two: Emission trends in the ECA Region 53 Spotlight Three: Why climate action is a harder sell in ECA 63 References 67 Figures 1 Climate action interacts with all major development objectives 3 2 Significant health damages from fossil fuel power generation, 2009 8 3 ECA is falling behind East Asia in green innovation, green patents granted, 1996-2010 10 4 Most ECA countries produce few green innovations, green patents granted, 1990-2010 10 5 Employment (bars) in the renewable energy sector in the EU-27 is significant, although employment shares (dots) are still small, 2010 11 6 Energy consumption and emissions do not fall even as energy intensity continues to drop 12 7 Not all ECA countries are well prepared to adapt to employment impacts of climate action 15 8 Residential electricity prices are below cost recovery in many countries and some cross-subsidize between residential and non-residential consumers, 2011 16 9 Ambitious price reform plus climate action would burden low income households in several countries 18 10 The fiscal gains from bringing electricity prices to cost recovery levels exceed the costs 19 11 Elements of a climate action strategy 20 12 Energy intensities remain high in many ECA countries, kg of oil equivalent per $ GDP, 2009 22 13 Forecasts have generally underestimated actual wind generation capacity in the EU-27 26 14 Cereal yields in much of ECA remain low, tons per hectare 28 Contents vii 15 Emissions from transporting natural gas exceed those caused by its extraction 31 16 Costs for wind and solar power have dropped rapidly with increased deployment 33 17 Energy use in cement production remains persistently high in the CIS countries (MJ per ton of clinker) 35 18 Dense urban areas tend to have lower greenhouse gas emissions 42 19 Low labor productivity in the forest sector in many countries, US$ per employee, 2010 45 S1.1 Global land air temperatures continue to rise, anomalies relative to 1961-1990 48 S1.2 Weather varies from year to year but the trend points towards a warmer and more variable climate 50 S2.1 ECA accounts for the second largest CO2 emissions among World Bank regions 54 S2.2 ECA per capita CO2 emissions is the highest among World Bank regions 54 S2.3 CO2 emissions from fuel combustion, 2009 55 S2.4 Three scenarios for per capita CO2 emissions from fuel combustion in the Eastern Europe/Eurasia region 56 S2.5 ECA CO2 emission intensities are the highest among all regions 57 S2.6 ECA CO2 emission per unit of energy use is slightly higher than world average 58 S2.7 CO2 emission intensities in ECA sub-regions, 1991-2009 58 S2.8 Per capita emissions of non-CO2 greenhouse gases, 2008 59 S2.9 Annual greenhouse gas emissions by source, 2008 60 S2.10 ECA’s annual greenhouse gas emissions by sector, 2008 61 S2.11 Emissions in all sectors are increasing except from agriculture and forestry 61 S3.1 Relative to the rest of the world, ECA is more vulnerable to higher carbon prices and less vulnerable to the effects of global warming 64 S3.2 Greater concern about climate change in more vulnerable countries 65 Maps 1 Power 29 2 Production 34 3 Mobility 37 4 Cities 40 5 Farms and forests 43 viii Growing Green Tables 1 A climate friendly energy transition can reduce uncertainty in energy sector investments 25 2 The indirect costs of road transport from climate change are small compared to others 38 3 Policy instruments for sustainable transport 39 S2.1 The five largest emitters in 2009 accounted for more than three quarters of ECA’s CO2 emissions from fuel burning 57 Foreword The world is heading for a rise in average temperatures of 4° Celsius by the end of the century and possibly more in higher latitudes. We could face a climate that has not been experienced in the millennia in which human civilizations have developed. Given the speed of climate change, adaptation can be costly and is unlikely to eliminate all risks, especially for the poorest and most vulnerable. As World Bank Group President Jim Yong Kim warned recently: “Lack of action on climate change threatens to make the world that our children will inherit a completely different world than we are living in today. Climate change is one of the biggest challenges facing develop- ment, and we need to take action on behalf of future generations.� Most countries in the Europe and Central Asia (ECA) Region have been slow to respond to this challenge. In light of the prospect of more frequent and severe droughts, floods, heat waves and wildfires, many ECA countries have teamed up with the World Bank and other develop- ment partners to explore adaptation options for coping with a warmer and more variable climate. Our 2010 regional report Adapting to Climate Change in Eastern Europe and Central Asia was written to inform these efforts. Adaptation will remain important as current heat-trapping emis- sions commit the world to further warming. But to prevent climate change that exceeds our adaptation capacity, climate action to signifi- cantly reduce emissions must become a greater priority for all countries. This report, along with two companion reports that distill the lessons from successful countries in increasing energy efficiency and in mitigat- ing the welfare consequences of reductions in energy subsidies, shows how this can be made to happen. There are legitimate concerns about the economic costs and social impacts of climate policies. But this report shows that well-designed cli- mate action can bring numerous benefits, while its costs can be con- ix x Growing Green tained. It will be important for policy makers to be mindful of the following key considerations: First, reducing emissions from energy consumption will require large investments but, given the high energy intensity of the ECA region, these investments offer attractive rates of return. This is particularly true for industrial energy use which could be cut by half without loss of output. This is also true for reducing losses in power and heat generation, and for raising the efficiency of energy use by households and in public service delivery. By 2017, World Bank financed investments in energy efficiency in ECA will annually avoid the equivalent of today’s CO2 emissions of countries such as Bulgaria or Switzerland. There are many more cases where climate benefits are a small part of overall benefits. Improving sustainable transportation reduces congestion, local air pollution and accidents. These local and immediate benefits dwarf those from lower greenhouse gas emissions. Air pollution from power generation alone causes almost $20 billion in health damages in ECA each year. In the rural sector, better land and forest management brings urgently needed productivity gains while also increasing the amount of atmospheric car- bon captured in soils and trees. Restoring land abandoned in Western Russia since 2001 could yield 11 million tons of grain at a time of rising global demand for food. For some mitigation options costs still exceed immediate benefits—as is the case with some renewable energy tech- nologies. Such options may not become a priority in many ECA countries for some time. But the costs of action have been falling as new technolo- gies and experiences become widely shared, while the costs of inaction leading to dangerous climate change will continue to rise if mitigation is delayed. The time to act is now. Second, climate action will require some difficult adjustments across the economy, but it will also bring new economic opportunities. Many firms have benefited from fiscally unsustainable and environmentally harmful energy subsidies. Protection from the true cost of energy has contributed to a lack of competitiveness in ECA compared to neighbors in Western Europe and East Asia. A modern industry should be able to cope with real input costs by using those inputs far more efficiently. The large shifts in energy and economic systems over the next few decades will also create entire new industries and businesses. The global market for renewable energy, for example, was $250 billion in 2011 and is grow- ing fast. Opportunities exist in all countries and across the technology spectrum. Governments can encourage green growth by pursuing ambi- tious climate policies and by improving their business climate. Countries that have learned the lessons of experience in the ECA Region’s recent assessment of the European growth model (“Golden Growth�) will be in a good position to benefit from the transition to a low-carbon economy. Overview xi Third, by raising the cost of energy, climate action can affect employ- ment and household welfare. Greater energy efficiency and effective social protection systems can soften those impacts. Labor market reforms and active labor market policies can facilitate job transitions and social safety nets can help those unable to find adequate new work. Similarly, rising energy bills would hit the budgets of the poorest households the most. Assistance for better home insulation and more efficient appliances can reduce those bills. And many ECA countries have already improved social assistance programs to provide additional support with energy costs of poor households. Climate action is one of the ECA Region’s three strategic pillars. As this report shows, it is closely linked to the other two—competitiveness and social inclusion. Climate policies should prioritize actions that will strengthen competitiveness and promote economic growth. There are many opportunities to do so in the ECA region. And they can be comple- mented by affordable policies that moderate the costs of climate action for the poor and vulnerable. By becoming leaders on climate action, ECA countries can “grow green�. Philippe Le Houérou Indermit Gill Vice President Chief Economist Europe and Central Asia Europe and Central Asia Acknowledgments This report was prepared by Uwe Deichmann and Fan Zhang based on contributions from a large number of World Bank staff and external experts. This work was carried out under the direction of Indermit Gill, Chief Economist for the Europe and Central Asia (ECA) Region, who generously provided his guidance, insights and encouragement. The report was sponsored by the ECA Regional Leadership Team under Philippe Le Houérou, Regional Vice President. The report received substantial support from the ECA management team. The team would particularly like to thank the Sector Director for Sustainable Development, Laszlo Lovei, as well as Kulsum Ahmed, John Kellenberg, Henry Kerali, Ranjit Lamech, Dina Umali-Deininger and Wael Zakout; Yvonne Tsikata, Sector Director, and Benu Bidani in the Poverty Reduction and Economic Management Unit; and Jesko Hentschel in the Human Development Sector Unit. Martin Raiser, Country Director for Turkey, was an early champion of this study and gave helpful sugges- tions throughout its preparation. Kseniya Lvovsky and Markus Repnik, country managers in Albania and Bulgaria respectively, also provided useful inputs. The study builds on more than twenty background papers and policy notes authored or co-authored by Brian G. Bedard, Brian Blankspoor, Hannes Böttcher, Hei Sing (Ron) Chan, Jacqueline Cottrell, Mame Fatou Diagne, Ariel Dinar, Mark A. Dutz, Eleanor Charlotte Ereira, Carolyn Fischer, Alexander Golub, Mykola Gusti, Marcel Ionescu Heroiu, Gary Howorth, Erika Jorgensen, Matthew E. Kahn, Leszek Kasek, Olga Kiuila, Natalia Kulichenko, Florian Kraxner, Donald F. Larson, Sylvain Leduc, Michael Levitsky, Shanjun Li, Anil Markandya, Craig Meisner, Andrew Mitchell, Carolina Monsalve, Michael Obersteiner, Jung Eun Oh, Isil Oral, Caroline Plante, Louis Preonas, Irina Ramniceanu, Nina Rinner- berger, Lourdes Rodriguez-Chamussy, Indhira Santos, Dmitry xiii xiv Growing Green Schepaschenko, Siddharth Sharma, Maria Shkaratan, Anatoly Shvidenko, Jas Singh, Ahmed Slaibi, Govinda Timilsina, Sebastian Vollmer, Krzysztof Wojtowicz and Tomasz Zylicz. The report benefited greatly from coordinating closely with two related studies: “Energy efficiency: Lessons learned from success stories� by Gary Stuggins, Yadviga Semikolenova and Alexander Sharabaroff; and “Balancing act: Cutting energy subsidies while protecting affordability� by Caterina Ruggeri Laderchi, Anne Olivier and Chris Trimble. The rele- vant sections of this report draw on their work. These studies have been supported by the ECA Region’s Regional Studies Program coordinated by Willem van Eeghen. Marianne Fay, Vijay Jagannathan and Michael Toman were peer reviewers for this report and also provided valuable inputs and sugges- tions in the study’s early stages. Elena Kantarovich and Rhodora Mendoza Paynor provided adminis- trative assistance and helped in the production of the report. Sofia Chia- rucci and Naotaka Sugawara carried out data analysis for various parts of the report and Irina Bushueva, Xu Chen, Tarik Chfadi, Ryan Decker, Po Yin Wong, Kuangyuan Zhang provided research assistance. Gazmend Daci, Dmytro Glazkov, Marat Iskakov, Elena Klochan and Artur Koch- nakyan kindly provided data for energy subsidy estimation. In addition to the contributors of the background papers and parallel regional studies, many people at the World Bank and in the region pro- vided helpful comments, suggestions and other inputs along the way. The team thanks Gabriela Elizondo Azuela, Benoit Blarel, Anna Maria Bog- danova, Pascal Boijmans, Ken Chomitz, Jane Ebinger, Daryl Fields, Anto- nina Firsova, Franz Gerner, Alexander Gershunov, Kathrin Hofer, Ron Hoffer, Peter Johansen, Stephen Karam, Sunil Kumar Khosla, Agi Kiss, Andreas Kopp, Holger A. Kray, Ryszard Malarski, Yuriy Myroshnychenko, Shinya Nishimura, Kari Nyman, Victor Olkov, Harun Onder, Salvador Rivera, Alexander Rowland, Jitenedra P. Srivastava, Claudia Ines Vasquez Suarez, William Sutton, Jari Vayrynen, Kryzysztof Blusz and Michael Yulkin. We wish to apologize to anyone inadvertently overlooked in these acknowledgments. Matthias Beilstein, Viktor Novikov and Otto Simonett of Zoinet pre- pared most of the maps in this report and also provided valuable com- ments on its content. Michael Jones was the principal editor and Romain Falloux designed the Overview of the report. Dina Towbin, Paola Scalabrin and Susan Gra- ham led the production of the full report. Preparation of several background papers was supported by the World Bank’s Green Growth Knowledge Platform, the Research Support Bud- get, and the DEC Knowledge for Change Program. Acronyms and Abbreviations CO2(e) carbon dioxide (equivalent) EBRD European Bank for Reconstruction and Development FAO Food and Agriculture Organization of the United Nations GDP gross domestic product GHG greenhouse gas GW(h) gigawatt (hour) IEA International Energy Agency IPCC Intergovernmental Panel on Climate Change kg kilogram kW(h) kilowatt (hour) LNG liquefied natural gas MJ megajoule Mtoe million tons of oil equivalent MW(h) megawatt (hour) OECD Organisation for Economic Co-operation and Development PPP purchasing power parity PV photovoltaic R&D research and development TJ terajoule TPES total primary energy supply TOE tons of oil equivalent xv xvi Growing Green Geographic groupings CIS Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Uzbekistan and Ukraine ECA Europe and Central Asia: Central Asian countries, Eastern Partnership countries, EU-10, the Russian Federation, Turkey and Western Balkan countries EU European Union, or EU-27: EU-10, EU-15, Cyprus and Malta EU-10 Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia EU-15 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and United Kingdom OHIC other high income countries: high income countries outside of Europe Central Asia Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan Eastern Partnership Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine South Caucasus Armenia, Azerbaijan and Georgia Western Balkan Albania, Bosnia and Herzegovina, Croatia, Kosovo, FYR of Macedonia, Montenegro and Serbia Overview In the two decades since they started their transition from command to market economy, countries in Europe and Central Asia (ECA) have gone through difficult changes. During the 1990s, the first post-transition decade, many countries in the region reformed their economic systems. The reward was a recovery of output and incomes. In the second decade, the 2000s, policy makers focused on making this growth more inclusive. Poverty rates fell further, and public services and social security got bet- ter. The recent economic turmoil has caused setbacks, increasing both fiscal gaps and social hardship. But during this third decade, countries in ECA should not get distracted from giving attention to the third develop- ment objective—that of putting their economies on an environmentally sustainable growth path which improves the ecology and provides citi- zens with the quality of life that they expect. The time has come to ele- vate environmental sustainability, including a stable and predictable climate, to a development objective alongside economic growth and social inclusion. If this is done right, over the next two decades ECA’s growth will be quicker, kinder, and cleaner. ECA—a bystander in climate action During the last two centuries, energy derived from fossil fuels has made possible enormous improvements in living standards. It has also resulted in a rapidly increasing concentration of heat-trapping gases in the atmo- sphere that, if continued unchecked, will lead to radical changes in the world’s climate (Spotlight 1: The Climate Challenge). The basic physics of global warming are now well understood. Computer models yield predic- tions of climatic change that match actual patterns. And increasing empirical evidence—from temperature records, changes in plant and ani- 1 2 Growing Green mal distributions, melting glaciers and shrinking sea ice—provides enough cause to take the threat of global warming seriously, and at a minimum insure the world against calamitous climate change. The only form of insurance available to the world is self-insurance. Without greater action to protect the climate, by reducing emissions of CO2 and other greenhouse gases, the rise in average global temperatures will far exceed the stated goal of 2 degrees Celsius adopted by the international commu- nity. In ECA, missing this goal will increase the probability of severe drought, heat waves, and floods, as well as changes in precious ecosys- tems such as the vast boreal forests in northern Eurasia. Yet climate action has been inadequate, not just in ECA countries but in most of the world. Policy makers are reluctant to introduce climate change mitigation targets because they fear that such policies will reduce economic growth and jeopardize social inclusion. Such concerns are understandable. But this report shows that they are often overstated. Like all policies, even well-designed climate action will involve tradeoffs. For example, prices for some goods and services will have to rise, but the region will also avoid significant expenditures—including almost $20 bil- lion in annual healthcare costs caused by air pollution. This report shows that even during the process of development—indeed especially during such periods when infrastructure and institutions are still being built— these trade-offs can be anticipated and managed. Without overstating the opportunities and underestimating the costs, there is reason to believe that smart climate policies can also yield immediate economic benefits. ECA is not “ground zero� in the fight against climate change. Some other region’s emissions are larger and faster growing. The region’s share in global emissions is about 12 percent (Spotlight 2: Emission trends). But ECA’s share of world output is about half that which points to large inef- ficiencies that also help explain low growth. By not making environmen- tal sustainability a development objective alongside economic growth and social inclusion, the region risks missing the opportunity to accelerate the transformations that will both modernize its economies and make them more efficient. Within ECA, five countries—Russia, Poland, Ukraine, Turkey and Kazakhstan—account for almost 80 percent of regional CO2 emissions. Contributions from all countries will be required to stop climate change, but success will depend most on developments in these countries, the rapidly growing emerging economies in Asia, and in many advanced OECD countries with persistently high emissions. Countries in Western Europe and East Asia have begun ambitious transitions focused on energy efficiency and clean energy. The motiva- tion is to both reduce climate-related risks but also to take advantage of economic opportunities along a greener growth path. Public support for such efforts is becoming stronger in these countries. So far, it has been Overview 3 weak in ECA (Spotlight 3: Why climate action is a harder sell in ECA). By remaining on the sidelines, ECA countries risk becoming latecomers to an energy-industrial transformation that could well be the most important economic development of the first half of this century. This report identi- fies the tradeoffs involving climate action, argues why they have to be better understood by countries in ECA, and shows how they can be better managed. Nothing good is completely free. But the costs of climate action should be seen alongside its benefits (Figure 1). And there are considerable eco- nomic, social and environmental benefits. Growth benefits and costs Raising energy efficiency and improving land management are priorities with productivity effects that also have significant climate benefits. ECA’s industrial sector could reduce energy use by half and sustainable farming on abandoned land could produce an additional 11 million tons of grain in Russia alone, while also reducing emissions from land use. Climate investments can also bring new sources of growth and employment if FIGURE 1 Climate action interacts with all major development objectives 4 Growing Green ECA taps into the $2.3 trillion market for renewable energy investments in this decade. Taking advantage of green growth opportunities will require an improved business and investment environment. Countries such as Russia, Poland, Turkey and Ukraine can aid both economic growth and climate action by improving the climate for doing business. Climate action can raise production costs and the energy transition will require public investment. A higher share of economic activity in ECA countries comes from energy intensive industries—more than 35 percent of employment in the Czech Republic and Slovakia, and more than 40 percent of value added in Azerbaijan and Belarus, for instance. What will help? Putting a price on emissions and encouraging the switch to cleaner energy will require investments in energy efficiency to buffer the impact of price increases. Smart policies such as Ecotax reforms will reduce the adjustment costs. So will phasing in the most affordable actions first in a transition that will take a generation. Social benefits and costs Climate action will have immediate as well as long term social benefits. ECA faces an estimated $19 billion in health costs from fossil fuel power generation each year, disproportionally affecting lower income house- holds. Renewable energy sources can often provide power to isolated populations in remote areas more cheaply than diesel generators. The poorer population living in drought or flood prone areas in Central Asia and Southeast Europe will also benefit most from avoiding future climate change, which could reduce yields for some crops by as much as 40 to 50 percent without costly adaptation measures (World Bank, 2012b). But climate action will raise heating, lighting, and cooking expenses for households and can lead to job losses at inefficient and energy inten- sive firms. Average residential electricity rates in ECA have already increased by 40 percent in the 2000s and petrol prices have more than doubled as countries reduced subsidies, although both are still low com- pared with Western Europe. Further adjustments will be required to recover costs and promote emission reductions. What is needed? Labor market reforms that facilitate job transitions, sectoral policies that help poorer households reduce their energy bills, and—especially—social pro- tection policies that use existing programs to make climate action kinder. Environmental benefits and costs Actions that help reduce heat trapping emissions from fossil fuel burning or changes in land use also help ensure the continued availability of eco- Overview 5 logical services such as clean air, productive land and the survival of important plant and animal species. For example, reducing coal-fired power generation reduces air and water pollution including from mer- cury which accumulates through the entire food chain. Climate smart agriculture and forestry operations also protect biodiversity. Yet, even for the environment, climate action is not always a “win- win� set of actions. Some clean energy options such as hydro power and wind turbines can harm natural systems, affecting aquatic and bird life for example. And intensive bio-energy production can harm the environ- ment just like other unsustainable farming practices. It can compete with food production or cause the removal of carbon rich natural vegetation to make room for energy crops. Support for bioenergy needs to be con- tingent on a full accounting of economic and environmental effects. These problems need to be anticipated and managed. But policymak- ers should be reassured that there are a growing number of climate action success stories to learn from, not just in the wealthiest countries but also in those that are still developing (World Bank, 2012a). Even cash-strapped ECA countries do not have to be bystanders any more. The benefits of climate action The main benefit of climate action is avoiding future damages. Predicting the magnitude of these damages is difficult, but the cost of inaction is expected to be large. Moderate warming below 1 degree Celsius is likely to have small—for ECA, perhaps even slightly positive—net impacts. But studies suggest dangerous nonlinearities—expected damages rapidly increase with a warming beyond 2 degrees (e.g., Stern, 2006; Tol, 2012).1 The annual cost of adaptation to even relatively moderate climate change in ECA until 2050 could be between $6 billion and $10 billion (World Bank, 2010b).2 These costs would rise with continued warming in the second half of this century. Lingering uncertainty, time lags between emissions and impacts, and the global nature of the problem help explain the weak public support for climate policies. Decision makers are usually focused on more immediate and local concerns. It is therefore helpful to think of climate action not just as a solution to a long-term global problem, but as the driver of a 1. Some researchers have been particularly concerned with catastrophic climate change given the possibility of extreme warming within this century (e.g., Weitzman 2009). 2. Other recent research on the link between climate change and natural haz- ards suggests that more frequent and severe impacts could be felt much earlier (Coumou and Rahmstorf 2012). 6 Growing Green technical and economic transformation that can yield immediate benefits and brings new opportunities. A simple typology of climate actions can help policy makers decide on the sequencing of climate policies—climate action as an immediate co-benefit, as a medium-term investment, and as long-term beneficial insurance. Climate action as a co-benefit: Cost reductions and productivity increases The clearest cases where immediate economic benefits exceed climate benefits are where resources—especially energy and land—are used inef- ficiently and where current energy, production or transport systems impose indirect economic or health costs that are much higher than their long-term climate damages. Persistent fossil fuel subsidies encourage wasteful energy use that causes excessive and avoidable heat-trapping emissions. Many ECA countries have made progress, especially in reform- ing power sector subsidies. But energy subsidies are still high in Eurasia. In 2010 consumption subsidies alone were approximately $39 billion in Russia, $12 billion in Uzbekistan, $8 billion in Ukraine, $5 billion in Turk- menistan, $4 billion in Kazakhstan and $1 billion in Azerbaijan.3 Even in ECA countries with low or no energy subsidies, the efficiency of energy use could be improved a lot. If ECA had the energy intensity levels of the OECD—if it used a comparable amount of energy to produce a unit of GDP—it could produce its current output using 42 percent less energy. Energy efficiency investments that reduce the use of electricity, heat and transport fuels have short payback periods. Basic investments such as building-level metering and temperature controls in some Cen- tral European countries paid off within two years through reduced energy use (Stuggins et al., 2012). Energy efficiency opportunities exist in many sectors, such as power generation and transmission, in industrial produc- tion where the savings potential is close to 50 percent, and in the provi- sion of water, street lighting and other public services. Failure to scale up such investments despite favorable economics is more likely due to short- comings in financial markets or information provision. These are prob- lems that public policies can help overcome. Inefficient resource use in agriculture and forestry also has high eco- nomic costs while harming the climate. ECA’s massive land mass stores vast amounts of carbon in soils and plants. But land and forest resources remain poorly managed in much of the region. Restoring degraded and abandoned agricultural land would raise productivity and output at a time when the global demand for food, feed and fuel is increasing. Better 3. www.worldenergyoutlook.org/subsidies.asp. Overview 7 soil management increases carbon storage directly and land restoration projects typically have high rates of return. The climate benefits of bringing abandoned land back into production are less direct. In Western Russia alone, re-cultivation of 8 million hect- ares that were abandoned since 2001 could produce more than 11 million tons of grain (Schierhorn et al., 2012). This would increase Russia’s pres- ence in global food markets. It would also bring global climate benefits even if it causes some local increase in greenhouse gas emissions, because it would prevent larger emissions caused by agricultural expansion else- where. Forest areas in ECA are expanding, but many ECA countries do not get as much out of their forests as they could. Labor productivity in Rus- sia’s forest sector is only half of that in Estonia or Poland for instance, and an even smaller fraction of that in Canada or Sweden. With better forest management, ECA’s vast forests could contribute more to both rural eco- nomic development and climate goals. Improving sustainable forest man- agement and expanding the processing of forest products to global best practice could create as many as 3 million additional jobs. Policies that reduce non-climate indirect (“external�) costs of energy use represent another case of climate change mitigation as a co-benefit. A good example is the cost of motor vehicle use. Cars are perhaps the most desired consumption item. As incomes have risen in countries in ECA, vehicle fleets have grown by more than 50 percent in some coun- tries just in the last decade. This has also generated indirect costs that could be as high as 46 US cents per km (Proost and van Dender, 2011). A surprising finding is this: only about five percent of this cost is from expected climate change damages from vehicle emissions; the far greater share is from congestion, local air pollution, traffic accidents and noise. So policies that reduce car use while providing efficient and affordable public transport alternatives yield big payoffs. Another example for climate friendly measures that provide immedi- ate local benefits is reducing air pollution. Burning fossil fuels in power plants, factories or vehicles causes not just CO2 emissions, but also harm- ful emissions of particulates and sulfur dioxide. New estimates suggest that air pollution from fossil fuel burning in ECA cause health impacts and increased mortality valued at about $6 billion annually in Russia and $3 billion in Poland, for example, even when using quite conservative assumptions (Figure 2). Lowering these damages by reducing energy consumption overall and replacing coal-fired power plants with cleaner energy options also reduces CO2 emissions significantly. Studies in West- ern Europe suggest that local health benefits could offset about half of the total costs of comprehensive climate policies (Van Vureen et al., 2006). 8 Growing Green FIGURE 2 Significant health damages from fossil fuel power generation, 2009 Note: * indicates countries for which damages were imputed because earlier direct damage estimates were unavailable. Source: Markandya and Golub (2012). These economic benefits come with real gains in quality of life by reduc- ing the incidence of respiratory disease, smog and grime. Not all climate policies are win-wins and a clear economic case does not imply that changing current patterns of power generation, produc- tion, transport, city living, farming and forestry will be easy. The upfront costs can be large, even where justified by long term benefits, and there can be significant implementation or transaction costs. But by focusing on actions that are justified by immediate economic and welfare benefits alone, policy makers can go a long way towards reaching stated climate goals. This should be a priority for all countries in ECA. Climate action as an investment: Opportunities in clean and green industries Experience from Western Europe, an increasing number of US states, and from emerging East Asian economies suggests that the transition from wasteful to efficient energy use, from fossil fuels to clean energy, and from unsustainable to climate smart land use is well underway. This transformation is changing existing businesses and creating new ones as markets for green goods and services grow. Examples are clean energy generation technologies, energy efficient consumer and investment goods, but also energy services companies and firms that retrofit buildings Overview 9 and machinery to reduce fuel use or emissions. Some of these sectors have been growing rapidly. In 2011, 250 billion dollars were invested in renewable energy globally—six times the amount invested in 2004. Enterprises in ECA can take advantage of opportunities in these sectors by integrating into the green production networks in advanced econo- mies and by facilitating the emergence of domestic industries and services in these sectors. Being close to the green growth leaders in Western Europe such as Denmark or Germany, ECA countries can seek closer integration by encouraging green FDI and trade in green goods and components. Trade between Western and Eastern Europe has grown increasingly sophisti- cated and—just as in traditional sectors like automobiles—enterprises in advanced economies will continue to seek cost advantages by outsourc- ing production (Gill and Raiser, 2012). Low labor and land costs may not be enough. Attracting such investments requires a good business envi- ronment. Green investments will also be more likely to flow to places that are serious about the environment. Reform of fossil fuel subsidies, mak- ing prices reflect damages from burning fossil fuels, and targets for emis- sion reductions that encourage deployment of climate friendly technologies show a long-term commitment to a more sustainable econ- omy. Such policies signal support for investors and a domestic market for their products. Strong climate policies not only encourage foreign investments, they also promote the creation of domestic green industries. The low-carbon transformation will increase demand for relatively low-skilled jobs for installation and operations and maintenance of renewable energy instal- lations or for energy efficient building renovations. To break into higher value added activities requires better innovation systems. Just three countries—Japan, Germany and the United States—currently account for 60 percent of patents related to greenhouse gas mitigation (Dutz and Sharma, 2012). Developing and emerging countries account for a rela- tively small share. While the number of patents related to greening growth from East Asian and Latin American countries is increasing, the trend in ECA is flat (Figure 3) with only four countries accounting for more than two green patents (Figure 4). This is in part a reflection of generally weak innovation systems, but also of unambitious domestic climate goals. “Demand pull� policies, such as support for renewable energy, tend to be most effective in encouraging innovation, especially the type that builds on already existing technologies. R&D (supply side) policies will still be necessary to create brand-new solutions. Public support for green FDI, trade and innovation systems represent policies that, rather than picking winners through old-style industrial policies, provide an environment in which greener and cleaner technolo- 10 Growing Green FIGURE 3 ECA is falling behind East Asia in green innovation, green patents granted, 1996-2010 Note: Total United States Patent and Trademark Office grants in OECD Green Technology Areas. Source: Dutz and Sharma 2011. USPTO patents granted in PATSTAT. FIGURE 4 Most ECA countries produce few green innovations, green patents granted, 1990-2010 Note: Total United States Patent and Trademark Office grants in OECD Green Technology Areas. Source: Dutz and Sharma 2011. USPTO patents granted in PATSTAT. Overview 11 gies can develop. This encourages job creation, although the overall employment impact of green policies is ambiguous. Countries with gen- erous renewable energy incentives saw large job increases in clean energy sectors (Figure 5). Many of these were in installation and maintenance rather than manufacturing—85 percent of Germany’s 130,000 solar energy jobs, for instance. So employment effects are not restricted to technology leaders. Furthermore, just like information technology, a clean energy transition will change the nature of existing jobs in addition to creating new ones. A plumber might now install a solar rather than conventional hot water heater. Despite these employment generation opportunities, job creation should not become a primary focus of climate action. The focus should be on climate action’s contribution to raising efficiency and productivity overall which creates employment through growth. Climate action as insurance: Reduced risks of damage from climate change Climate actions whose net benefits or co-benefits are high are the priority for ECA countries, but these will not be sufficient to keep global warming within safe levels. The impressive reductions in energy intensity (energy FIGURE 5 Employment (bars) in the renewable energy sector in the EU-27 is significant, although employment shares (dots) are still small, 2010 Source: Eurostat and 11th EurObserv’ER Report. 12 Growing Green used per unit of output) in ECA’s economies have been largely due to higher energy efficiency. This has not led to corresponding reductions in absolute energy use or carbon emissions, because economic growth wiped out these energy savings. If current rates of growth and energy intensity reduction continue, this will not change over the coming decades (Figure 6). Avoiding dangerous climate change will require large absolute emis- sion reductions. It is therefore necessary to also reduce the amount of emissions per unit of energy consumed. This will require investments that so far generally do not pass conventional cost-benefit benchmarks. This continues to be the case for many types of clean energy generation— such as solar photovoltaic or concentrated solar energy, wind energy (except in areas of high potential) and some types of bioenergy. Currently the support for many of these technologies is often far higher per avoided ton of CO2 emission than most estimates of an optimal carbon price required to achieve the 2 degree climate goal. Yet, this support is still justified to scale up deployment that brings down the cost of clean energy. In a way, this is the price of insurance (or, more precisely, self-protection) against the very real risk of severe climate change impacts. FIGURE 6 Energy consumption and emissions in ECA do not fall even as energy intensity continues to drop Note: This scenario assumes 4 percent growth, and energy intensity convergence to EU levels implies a continued decrease of 1.8 percent per year in EU 15 countries and 3.5 percent in ECA countries. Source: World Bank staff using IEA data. Overview 13 The question is who should pay the insurance premium. Low- and middle-income countries have understandably been less willing to subsi- dize mitigation options that are expensive today. This has not stopped China, for instance, from investing in the business of producing clean energy capital goods. China is now the largest producer of solar PV pan- els, but until recently well over 90 percent of production has been exported. As prices fell dramatically, a larger share of production has been used at home. Besides nurturing an emerging industry there may be additional reasons for countries to support currently uneconomical tech- nologies, such as EU obligations or a desire to reduce fossil fuel import dependence. In most cases, however, lower income countries can leave development of currently uncompetitive new technologies and the reduction of their costs to industrialized nations. They can still capture some of the benefits of clean energy by focusing on those technologies that are closest to market competitiveness in their country and by seeking international support for early deployment, for instance through the Clean Development Mechanism, Joint Implementation mechanism or the Clean Technology Fund. The Clean Technology Fund already sup- ports investments in Kazakhstan, Turkey and Ukraine. The costs of climate action At the Copenhagen Climate Conference in 2009, governments agreed to the goal of keeping warming to less than 2 degrees Celsius. Cost estimates of climate policies come from economic models and estimates range widely: from slightly negative, suggesting that climate action has net ben- efits, to as high as 4 percent of GDP. Most estimates, including a recent analysis for Poland, put them at around 1 percent of GDP for some time before diminishing and turning into net benefits (World Bank, 2011; Stern, 2006). These estimates are at best approximate since they do not include all direct and indirect costs and benefits, and make guesses about important future developments such as the scope and speed of techno- logical change. These costs of climate action need to be compared to the cost of inaction—the future damages from unchecked climate change. These are equally difficult to predict but very likely exceed those of cli- mate policies by a significant margin. The costs of climate action predominantly come from a rise in energy prices. Removing fossil fuel subsidies and accounting for the cost of dam- ages from fossil fuel burning will make energy derived from coal, oil and gas more expensive. And subsidies to cleaner technology, for example through feed-in tariffs, often raise electricity costs. Policy makers’ greatest concern is usually the short-term impacts of such price increases, in par- 14 Growing Green ticular on labor markets and on social welfare. These impacts will not all come at once because the energy transition will unfold over several decades, leaving time for adjustment. But locally they can be large where there is a high concentration of energy intensive industries or in places where fossil fuel subsidies are removed rapidly. The point to remember, though, is that ECA has been through far more challenging and disrup- tive adjustments, and the transition to more sustainable energy systems will be nothing like the transition from planned to market economy. Countries in the region today have labor markets and social protection systems that will cushion the impact of energy price changes, if current reform processes are sustained. Reform labor markets to facilitate structural transformations Employment impacts of climate policies can go both ways. New energy technologies generate jobs as do energy efficiency investments and better management of natural resources. But higher energy prices can also cause job losses in traditional energy generation—including mining—and make energy intensive firms that fail to modernize uncompetitive. Short- term job creation and losses occur in those sectors directly affected by climate policies, while medium and longer-term labor market effects also affect supply chains and lead to changes in capital stock, innovation and deployment of new technologies. It is difficult to predict the net effects, just as it has been in other major transformations. With the introduction of office automation and IT, many predicted large job losses as a result of greater efficiency. Instead, while some jobs disappeared, entirely new jobs were created and greater productivity increased the demand for IT services. So rather than trying to predict net labor market outcomes, it is best to focus on whether countries are prepared to facilitate job transi- tions. Figure 7 sorts ECA countries for which sufficient data are available on two dimensions: their vulnerability to job losses from energy price increases—countries with large employment in energy and energy inten- sive sectors are more vulnerable—and their adaptability—countries with flexible labor markets, high skill levels, good social protection systems and greater spending on active labor market programs that will facilitate the transition. Countries such as the Slovak Republic, Bulgaria, Hungary, Latvia, Lithuania, Croatia and Poland will likely be less affected by cli- mate policies. Their energy prices are already quite high and their econo- mies are more diversified in non energy intensive industries. Countries such as FYR Macedonia, Serbia and Russia, in contrast, show both high vulnerability and low adaptability. Overview 15 FIGURE 7 Not all ECA countries are well prepared to adapt to employment impacts of climate action Source: World Bank Staff calculation. See Oral et al. (2012) for details. Note: Countries with high vulnerability (higher values) are those with higher shares of employment and value added from energy-intensive industries, as well as those that would experience a higher energy price increase. Countries with high adaptability (higher values) are the ones with higher labor market flexibility, higher skills, higher social protection readiness, and higher spending on active labor market policies. The value 0 represents the average position in terms of vulnerability and adaptability across all countries in our sample. This analysis takes into account the overall manufacturing sector. A more detailed breakdown of the manufacturing sector resulting in a similar analysis, but covering fewer countries, is in Oral et al. (2012), Annex 1. One way to reduce vulnerability to energy price shocks while also increasing competitiveness is to improve energy efficiency in energy intensive sectors, an area where much remains to be done in ECA. A shift out of energy intensive sectors is already occurring for reasons not pri- marily related to energy price changes and this will also reduce vulnera- bility. Additionally, countries can improve adaptability by reforming labor markets and social systems. These reforms are necessary in many ECA countries in any case and are therefore not specific to the problem of climate policy. Relaxing overly restrictive employment protection leg- islation, improving education and skills development, and, in some cases, more active labor market policies that generate employment will create economies that are far better prepared to deal with the gradual shifts in sectoral employment that may be triggered by climate policies. 16 Growing Green Use social protection systems to soften impacts from energy price increases Energy prices have already increased significantly in most ECA countries. Turkey now has some of the highest prices for gasoline and diesel fuel in the world. Between 2000 and 2010, residential electricity prices increased by more than 50 percent in the EU-10, and by about 20 percent in the EU candidate countries. Prices remained relatively low—often below cost recovery—in the CIS countries, where high industrial electricity prices cross-subsidize low residential prices (Figure 8). Environmental concerns will often not be the primary reason for fur- ther energy price changes. Fiscal reasons will be more pressing in coun- tries with large energy subsidies, such as Russia which spent about $22 billion in electricity subsidies in 2010. Another reason for energy price hikes is the growing backlog of investment, particularly in electricity gen- eration and transmission. A recent World Bank study estimated invest- FIGURE 8 Residential electricity prices are below cost recovery in many countries and some cross- subsidize between residential and non-residential consumers, 2011 Note: The green columns show average residential electricity prices in 2011 (cents/kWh, left axis). The blue squares show the ratio between non-residential and residential electricity prices. The purple line indicates that the average price ratio between non-residential and residential consumers is 0.73 in EU-27. The orange line is an estimate of the cost-recovery price of electricity supply at 12.5 cents/kWh in ECA. Many countries had a block tariff structure; prices in the chart show weighted averages of electricity prices. Source: World Bank staff calculation based on ERRA and EUROSTAT tariff databases. Overview 17 ment needs of over $3 trillion in the ECA region over the next 20 years, about half of which are for power infrastructure. Climate policies will be the third driver of energy costs, most immediately in EU and candidate countries that will need to achieve the Union’s “20-20-20� goals: an EU- wide average 20 percent reduction of greenhouse gas emissions, 20 per- cent increase in energy efficiency and 20 percent share of renewable energy. The upfront investments required will often translate into at least temporarily higher energy costs. A key concern is the impact on low income households. Poorer house- holds will be more affected as electricity prices represent a higher share of their total expenditures. If ECA countries were to charge at least cost recovery levels plus a carbon charge of $15 per ton of CO2—a price adjust- ment scenario that would unlikely occur all at once—poorer households, and sometimes all households, in a number of countries would face expenditure shares for electricity that are considered above a commonly accepted affordability threshold of 10 percent of total expenditures.4 Tajikistan, Kyrgyz Republic, Serbia and Montenegro would be most affected among countries for which sufficient data are available (Figure 9). Without energy efficiency measures, reducing electricity consumption is generally not an option for poor households, who already use the bare minimum. They could switch to other, cheaper fuels as happened in Tur- key after natural gas prices were raised, but this is often coal or fuel wood which cause harm to health and the environment. Addressing the social impacts of energy price reform will instead require a mix of two types of instruments. One is social safety nets like lifeline tariffs or cash transfers. Lifeline tariffs, which subsidize a certain amount of consumption to meet basic needs, are difficult to target so a large share of benefits may leak to the non-poor. Cash transfers generally have lower coverage, so there is a greater risk of missing low-income households. The success of such transfers to buffer energy price rises will depend on the quality of the social assistance system. Ongoing reforms in some countries like Moldova or FYR Macedonia are creating simpler and better targeted systems. Any efforts to address energy related distribu- tional issues should be embedded in the overall social assistance program. Social assistance in the form of subsidies for energy costs should not be the only instrument. Rather than spending on recurrent subsidies, governments and civil society organizations can assist poorer households in reducing energy consumption by supporting renovation of substan- dard and poorly insulated housing or through the purchase of more energy efficient household appliances. Such programs have long been used in Brazil where utilities must invest 0.5 percent of their revenue in 4. Ruggeri-Laderchi et al. (2012), present a detailed analysis of a similar sce- nario. 18 Growing Green FIGURE 9 Ambitious price reform plus climate action would burden low income households in several countries Estimated share of electricity expenses in total household expenditure after price increase, (%) Source: World Bank staff calculation based on ECAPOV database. FIGURE 10 The fiscal gains from bringing electricity prices to cost recovery levels exceed the costs Source: Ruggeri Laderchi et al. (2012). Overview 19 demand-side energy efficiency with half earmarked for the poorest households. In ECA, considering only the fiscal gains from subsidy reform (green bars in Figure 10), most countries will see large cost savings (yel- low bars) even after subtracting the cost of social protection (the blue bars) and energy efficiency programs for low-income households (orange bars). A strategy for climate action The general principles of a climate action strategy that emerge from this discussion do not have to be complex. Any strategy must start with a clear objective. For climate change mitigation the goal is to significantly reduce heat trapping emissions, but in a way that is complementary to the pur- suit of other development objectives. The overall global climate action goal is a stabilization of atmospheric greenhouse gases that will keep the average temperature rise to 2 degrees. Globally this implies that annual emissions need to be cut by around 90 percent by 2050—a very challeng- ing task. Countries differ in terms of opportunities for emission reduc- tions and immediate development needs. Not all countries will therefore be expected to follow the same emission reduction paths, giving low income countries the “emission space� required for faster economic growth. This principle also guides the UN Framework Convention on Climate Change’s Nationally Appropriate Mitigation Actions (NAMAs), which encourages each country to determine its specific emission reduc- tions goals. Pursuing climate objectives requires a focus on areas where the great- est gains can be achieved. These climate action priorities are clear. Emis- sions from the burning of fossil fuel for electricity generation, industrial production, transport or heating cause atmospheric concentrations of CO2 and other greenhouse gases to rise, trapping heat and leading to gradually warming temperatures. Stabilizing these concentrations requires, first, using energy far more efficiently and, second, shifting from fossil fuels to cleaner and renewable energy sources. A third priority is to maintain and enhance the ability of natural systems to capture and store carbon in soils and vegetation. Changes in land use in ECA is not a major contributor to climate change. The region’s forests are, in fact, expanding. But there remains significant scope to increase the amount of atmo- spheric carbon that is captured and stored in trees and soils while also raising income from farms and forests. Textbook climate change economics suggests that only a single policy instrument is required to achieve climate objectives. A price on carbon emissions that reflects our best estimate of the future costs from climate 20 Growing Green FIGURE 11 Elements of a climate action strategy Source: World Bank staff. change damages should encourage firms and households to reduce energy consumption, to switch to cleaner energy sources and to make greater efforts to preserve carbon storing natural resources. Representa- tive carbon cost estimates range from $33 to $88 per ton of CO2 and this price would rise over time to achieve agreed greenhouse gas stabilization targets. Where carbon taxes are unpopular or more certainty about the quantity of reductions is desired, a system can be put in place where a limited (“capped�) number of emission allowances are distributed or auc- tioned off to energy consuming firms that can subsequently be traded. Firms that can more easily cut emissions can sell their allowances to those that can’t, ensuring that emissions occur where they are cheapest. The European Emission Trading Scheme is the largest cap-and-trade system in operation. Carbon taxes and emission trading systems will play a role in carbon mitigation, but that role has so far been relatively minor. Instead, a more engineering oriented view of climate action has dominated most studies and policy discussions. It focuses more on concrete emission reduction steps across sectors. This approach is represented by the marginal abate- ment curves that show mitigation options ranked by their net cost per avoided ton of CO2 emissions and by the so-called stabilization wedges Overview 21 that break down the total amount of required emissions into smaller, manageable components such as changing the power sector fuel mix or raising building efficiency standards. Adopting this view, the policy chal- lenge becomes more concrete and manageable but also more complex. Rather than a simple carbon charge that lets markets determine the cheapest way to cut emissions, it requires numerous individual interven- tions using all available policy instruments: through prices such as energy taxes or subsidies for technology development, regulations such as effi- ciency standards or renewable energy quotas, and through investments, for instance in R&D, information programs or smart grid infrastructure. Among these instruments, policy makers can use prices and regulations to influence capital spending and consumption decisions in the private sector, and investments are what the public sector can do and finance directly, often by using revenue from energy related taxes. A major barrier for climate action is the concern that it may have negative impacts on other public objectives. Policy makers worry that climate action will be disruptive and impose high costs on households, firms and the public sector, and that the longer-term economic benefits will be small. The concern is that climate action will jeopardize the main development objectives of achieving economic growth that raises living standards and that is socially inclusive and environmentally sustainable. Climate policy design needs to anticipate negative side effects of climate action and to promote the opportunities that come with a major eco- nomic and technological transformation. As in any area of policy making, there will be trade-offs and the goal must be to achieve sufficient climate change mitigation to avoid large damages and adaptation costs in the future without unduly compromising economic aspirations and social fairness in the present. Climate policies therefore need to be closely aligned with sectoral growth policies, social protection systems and envi- ronmental safeguards. Besides a clear objective, priorities and instruments, a strategy should also include a time frame. For climate action, the time frame is measured in decades, with most policy discussions focusing on 2050 as a major target date. This poses a challenge to policy makers more attuned to much shorter election or planning cycles. But it also allows a climate strategy to be phased in gradually, so the most cost-effective actions (e.g., energy efficiency) or those with the highest co-benefits (e.g., reducing pollution from coal burning) can be implemented first, while currently expensive options (e.g., some renewable energy) can wait until costs have come down with investments from the world’s leading economies. This does not mean that climate action can be delayed or should not be ambitious. The more emission reductions are delayed, the more difficult and costly it becomes to achieve climate goals. 22 Growing Green FIGURE 12 Energy intensities remain high in many ECA countries, kg of oil equivalent per $ GDP, 2009 Source: IEA (2011). Priorities for climate action Energy efficiency is a priority for all countries ECA countries have made significant progress in lowering their energy intensity. Between 1995 and 2009 energy intensity dropped by about 4 percent per year, on a path towards convergence with the EU-15. There is still a large spread of energy intensities across the region. Albania, Tur- key and Croatia, for instance, are below the EU-15 average, while inten- sities in Uzbekistan, Kazakhstan, Serbia and Russia are more than two times higher (Figure 12). There remains large potential for further reduc- tions.5 If the ECA region as a whole used energy as efficiently as the OECD average, it could save the equivalent of South America’s entire energy consumption in 2009. There is some debate about the role that energy efficiency plays in promoting economic growth. Richer countries tend to have lower energy intensities and economic growth is correlated with falling energy inten- sity in ECA and elsewhere. Energy importing countries that raise effi- ciency improve their current account balance and are less vulnerable to external price shocks. Unless energy is subsidized, firms that produce with lower energy inputs have a cost advantage over less efficient pro- ducers elsewhere. And households making energy efficiency investments will realize savings that can be spent elsewhere. This does not mean that 5. Stuggins et al. (2012) provide a comprehensive discussion of energy ef- ficiency issues in ECA. Overview 23 higher energy efficiency by itself causes growth or that all wealthy coun- tries are efficient; North America has similar or higher incomes compared to Western Europe despite considerably higher energy intensities. But overall one would expect energy efficiency investments to support growth objectives. The link between energy efficiency and growth also points to the lim- itations of a sole focus on energy efficiency in a climate action policy. More economic activity and higher household wealth will also lead to additional energy consumption. This will offset some of the savings achieved by efficiency investments. This “energy rebound effect� can operate both in a narrow sense—more fuel efficient cars encourage peo- ple to drive more—and, in a broader sense—as the economy grows more people can afford a car. If energy production remains dominated by fossil fuels, energy efficiency alone will not lead to sufficient emission reduc- tions. A switch to cleaner and renewable energy must accompany it. Many energy efficiency investments have very attractive financial returns. But despite payback times of only a few years, persistent under- investment remains a problem. In part, this is due to various failures in the markets for energy, capital and information. When prices don’t reflect the cost of fossil fuel derived energy on the environment and human health, it encourages excessive energy consumption. This underpricing also encourages inefficient investment decisions that focus on initial costs and overlook long-term energy savings, for instance by buying incandes- cent light bulbs rather than energy efficient lighting. Capital markets that are unfamiliar with the economics of energy efficiency will not provide the financing mechanisms needed for efficient investment goods that may initially cost more but generate a long-term flow of benefits in the form of lower energy bills. In addition, many studies have shown a per- sistent lack of awareness among firms as well as households of the money that can be saved through energy efficiency investments. Overcoming these market failures will require some government intervention using a mix of policy instruments. Energy pricing will be the most effective tool. This involves several aspects. The priority is to get energy prices to reflect the true cost of production and delivery. Subsidy reform has taken place in many ECA countries, but price distortions remain high in others, as described above. Beyond market pricing, to move from medium to high energy efficiency requires that prices reflect the indirect costs of energy—damages from local and greenhouse gas pol- lution. Revenue from carbon or energy taxes that reflect these indirect costs can lower tax distortions elsewhere such as employment reducing payroll taxes. The Czech Republic, for instance, introduced a fiscally neu- tral environmental tax reform that raised energy prices and lowered 24 Growing Green social security contributions for employees and workers. The social and economic impacts of such taxes can also be reduced by raising them grad- ually in line with realized energy savings. Finally, getting prices right in ECA often also means simply moving from flat fees to consumption based billing, for instance in home heating. Building-level metering and con- sumption-based billing could lower home heating demand by 15-20 per- cent in Ukrainian cities (Semikolenova et al., 2012). Energy price reform is necessary but unlikely to be enough. In coun- tries that have been very successful in reducing energy use, a dedicated energy agency makes information and advice more broadly available and helps in coordinating energy efficiency policies across ministries and sec- tors. This is the task of the Russian Energy Agency established in 2009 to promote the goal of a 40 percent reduction in energy intensity. Energy agencies can also work with the financial sector to develop appropriate financial instruments, for example for energy efficiency investments in buildings. In addition to such non-intrusive approaches, there will still be a need for more direct regulation to overcome protracted market and behavioral failures. Almost every country has introduced vehicle fuel efficiency standards—even though higher fuel taxes would be preferable in principle—and building codes increasingly prescribe requirements to insulate homes. In both cases, manufacturers or builders will otherwise neglect efficiency considerations because they do not pay subsequent fuel bills, while consumers may focus too much on purchasing costs com- pared to long-term energy bills. As a third type of instrument, well- designed incentives can help overcome financial and capital market barriers. These may go directly to firms or households in the form of subsidized loans, for instance, or through financial intermediaries together with technical advice to assist banks that are not familiar with the eco- nomics of energy efficiency investments. There remains tremendous scope in ECA for policy innovation and learning from peers inside and outside the region. Cleaner and renewable energy can reduce energy investment risks A recent World Bank study has estimated that the ECA region needs to ramp up investments in additions or rehabilitation of the power system from about 17GW per year today to 47GW per year in the 2026-2030 period to maintain adequate supply (World Bank, 2010a). Even if more ambitious and effective energy efficiency efforts can reduce the required level of investments to some extent, ensuring reliable electricity supply will be a major challenge. Mobilizing investment capital is one major task. Overview 25 Especially from a climate change perspective, there is the added problem that power infrastructure is very long lived — up to 40 or 50 years in the case of large base-load nuclear or coal plants. These long time horizons imply at least three types of uncertainties that power sector investments need to consider—about changing regulations, changing technology and changing climatic conditions (Table 1). TABLE 1 A climate friendly energy transition can reduce uncertainty in energy sector investments Type of Investment uncertainty Main concern principle Climate action benefit Regulatory How will future climate regulations Predictability Clear regulatory framework— uncertainty affect the economics of installed including climate related power infrastructure? regulations—provides certainty for power sector investments Technology How will technical progress change Flexibility Emphasis on efficiency and smaller uncertainty the economics of different long-lived scale generation units preserve power supply infrastructure options? options to adjust future investments Climate How will changes in temperature Reliability Diversified supply portfolios with uncertainty and water availability impact thermal a high share of climate proof power production? renewables increase climate resilience Source: World Bank staff. Regulatory uncertainty persists in ECA countries that have no formal greenhouse gas emission restrictions. Even in the EU, the emissions trad- ing system is still evolving and future prices for carbon emissions will in large part depend on political decisions. Such schemes may spread to other parts of the region as the implications of climate change become more apparent and popular support for climate action rises. Many inter- national firms and banks already incorporate an assumed carbon price into their financial investment feasibility calculations. Expectations of future carbon pricing have already altered investment decisions favoring natural gas over coal-fired power plants in the U.S. (although more recently the drop in gas prices has been a larger factor). Conversely, reg- ulatory uncertainty also hinders investments in low-carbon generation. IEA estimates that climate change policy uncertainty might add a risk premium of up to 40 percent to such investments, driving up consumer prices by 10 percent. Technology uncertainty is also high. Long a fairly predictable industry in terms of technology development, innovation in the power sector has accelerated with major progress in the efficiency of gas plants and in many types of renewable generation. This makes predictions of technol- 26 Growing Green ogy performance and price trends difficult. As recently as ten years ago, the International Energy Agency (IEA) forecast 2030 wind energy deploy- ment levels for Europe that were already reached by 2010 (Figure 13). In 2000 IEA also projected global solar energy deployment to reach about 8 GW by 2020; by 2011 almost 70 GW had been installed. Future fossil fuel generation costs are also difficult to predict as coal, oil and gas prices fluc- tuate greatly as they go through boom and bust cycles. Uncertainty about future climatic conditions, finally, also affects tech- nology choices (van Vliet et al, 2012). Brazil in 2001, France in 2003, Kyrgyzstan and Tajikistan in 2007 and the United States in 2011 and 2012 saw shutdowns or capacity reductions in hydro, nuclear or coal- fired power plants caused by drought-induced water shortages or ele- vated temperatures in cooling water reservoirs. Projections of local climate impacts are still very uncertain, but will probably bring changes in weather patterns that will affect thermal and hydro power generation, and possibly also wind and solar although to a much smaller extent. FIGURE 13 Forecasts have generally underestimated actual wind generation capacity in the EU-27 Source: Pieprzyk and Rojas Hilje, 2009; actual capacity for 2009-2011 updated with data from the European Wind Energy Association; EWEA = European Wind Energy Association; IEA=International Energy Association. Overview 27 Good policy making can help reduce these three types of uncertain- ties. Predictable policies, including initially modest carbon constraints designed to increase over time, provide greater certainty for investors and reduce the risk of stranded assets. Retaining flexibility helps reduce tech- nology uncertainty. The longer investments can be delayed without incurring broader economic or welfare costs, the better. Ambitious energy efficiency efforts, both on the supply and demand side, help postpone investments in new capacity. And a larger share of investments in small and decentralized generation, including a larger share of combined heat and power and renewable energy plants, allows a more gradual expan- sion path that tends to be easier to finance and can take advantage of newly available technology. A more diversified power generation portfo- lio can also increase reliability in the face of climate change, especially if it includes a high share of renewable energy with low water require- ments and no fuel costs. Reducing vulnerability to fossil fuel price swings through energy portfolio diversification has large macroeconomic bene- fits that could amount to $68 billion per year in the ECA region (Meisner, 2012). These benefits could offset some of the additional costs incurred by renewable energy. Better management of natural resources increases productivity and helps mitigation ECA’s land resources produce about 12 percent of its greenhouse gas emissions, through forest clearing, soil degradation and unsustainable agricultural practices; although the ECA region’s forests are a net carbon sink since forest cover has been increasing. Forest carbon stocks rose by 10 percent between 1990 and 2010. But increasing wildfires that are often caused by human actions and poor soil and livestock management is threatening to turn ECA’s natural areas from a carbon sink into a car- bon source where more heat trapping gases move from soils and plants to the atmosphere than vice versa. Preventing this from happening brings major benefits, because better management of agriculture and forestry raises food and timber production while also increasing the amount of carbon that gets locked away in soils and plants. There are many technical, sector-specific approaches to reducing emissions. But the main insight is that an increase in agricultural and for- est sector productivity can support both economic and mitigation objec- tives. For example, agricultural intensification globally has avoided almost 600 billion tons of CO2 equivalent between 1961 and 2005, largely by making it unnecessary to expand agricultural areas into natural areas 28 Growing Green to feed growing populations. Productivity increases can thus have sig- nificant climate benefits. Many ECA countries, in particular the largest, have far lower agricultural productivity than their peers (Figure 14). One study estimates that Kazakhstan and Ukraine could double productivity and Russia could increase it by two thirds. Additionally, ECA also has vast areas of abandoned and degraded land that could be brought back into production. In Russia alone, an area larger than Romania has become fallow since 1991. Smart reintroduction of this land—focusing on those areas not yet reclaimed by abundant nat- ural vegetation—could make the region a larger exporter of agricultural products. This would reduce pressure on agricultural expansion in other regions where the climate impacts from land clearing would be far more severe. Similarly, better management of forests could increase productivity and value added from the forest sector. Labor productivity in the sector is between $5,000 and $25,000 in ECA countries, compared to an EU-15 average of $70,000. Developing the forest processing sector could create many new jobs. Eastern Europe has two jobs in forest processing for every job in forestry itself. In North America, the ratio is 7:1, in Western Europe it is 4.4:1. Reaching Western European levels could generate up to 3 million additional forestry related jobs. FIGURE 14 Cereal yields in much of ECA remain low, tons per hectare Source: FAO. Overview 29 Implementing climate action Power: Investments required to modernize the electricity sector can make it cleaner and more efficient 30 Growing Green The power sector in the ECA region is the source of just over 20 percent of total greenhouse gas emissions. Fossil fuel provides 85 percent of the energy supply including the vast majority of fuel for electricity genera- tion. This is also a legacy of ECA’s large fossil fuel reserves—more than 30 percent of global gas and coal reserves are found in the region. As a result, reductions in the carbon intensity of power production will not be easy. As ECA countries will have to replace and add perhaps as much as 500 to 600 GW of generating capacity, there are four potential options to reduce the sector’s climate change impacts: a near term switch from coal to nat- ural gas, which emits about half as much CO2 per unit of electricity pro- duced; deployment of carbon capture and sequestration, first for coal and later also for gas-fired power plants; a greater role for nuclear power; and a long-term shift to a larger share of renewable energy. None of these provide an easy or quick solution. Gas will be more important for a transition period, but avoidable life-cycle emissions should be reduced. ECA is home to two of the world’s major cen- ters of natural gas production—Russia’s Siberian fields and Central Asia (Turkmenistan, Kazakhstan and Uzbekistan). Already important in many ECA countries, gas-fired power generation could be expanded into Southeastern Europe, for instance, thereby replacing higher emission coal-fired generation. Gas-fired power stations tend to be cheaper, quicker to build and can be operated more flexibly. In fact, in a transition to clean energy gas is expected to play an important role in complementing inter- mittent renewable energy. While burning natural gas causes only about half the heat trapping emissions as coal under ideal conditions, gas pro- duction and transmission often cause an additional and avoidable release of greenhouse gases. Flaring and venting of methane in natural gas pro- duction is a well documented concern, especially since methane has a 25 times greater warming potential (though a shorter lifetime in the atmo- sphere) than CO2. The World Bank’s Global Gas Flaring Reduction Part- nership works with industry and governments to reduce such emissions. A problem that has received less attention is that transporting natural gas through pipelines from remote production sites also causes emissions from leaking pipes and from compressors (Levitsky et al., 2012). Gaz- prom’s Russian pipeline system has 47 GW of installed compressor capac- ity, approximately equivalent to Ukraine’s entire generation capacity in 2010. Simulation of life cycle emissions—the total of emissions from extraction to delivery—based on best available information about the age and performance of pipeline systems suggests that compression is indeed a major emission source. Where pipeline infrastructure dates from Soviet times, the emissions caused by transportation are equal to burning 20 percent of the field production volume (Figure 15). Large emissions— from liquefaction, shipping and regasification—are also associated with Overview 31 FIGURE 15 Emissions from transporting natural gas exceed those caused by its extraction Emission volumes as a percentage of emissions embedded in field production volumes Source: Levitsky, Howorth and Zhang (2012). Life cycle greenhouse gas emissions of the natural gas sector in ECA. Note: Assuming 1 billion cubic meters (BCM) in final use produces X tons of CO2 equivalent of emissions and getting 1 BCM from field to use causes Y tons of CO2 equivalent, then the percentage terms measured in the vertical axis equals Y/X. liquefied natural gas (LNG), imported from the Gulf states or Algeria, for instance. Among ECA countries, only Turkey currently imports LNG, but others are also considering diversification of gas imports. New sources of unconventional shale gas in countries like Poland or Ukraine could reduce the need for imports. While shale gas production causes additional emissions, as well as other local environmental impacts, total life cycle emissions would be approximately equivalent to imported gas because of the shorter transport distances. Natural gas will have an important role in a local carbon transforma- tion in the short and medium term. But even with reduced pipeline emis- sions and less flaring and venting, an expanded global role for natural gas will still lead to global warming beyond safe limits. Natural gas expansion must therefore be embedded in a broader strategy accompanied by ambi- tious energy efficiency efforts and a gradual shift towards zero emission energy production. Uncertain prospects for carbon capture and sequestration. Switching to nat- ural gas can reduce the carbon footprint of ECA’s power sector which 32 Growing Green remains heavily reliant on coal. Another option is to capture CO2 from fuel combustion and store it underground in saline aquifers or depleted oil and gas fields. The technology for carbon capture and sequestration (CCS) exists and has been deployed in pilot plants and to increase pro- duction from aging oil fields. But most assessments think that large scale deployment would still take another 10-20 years and the additional investment and energy costs will make CCS feasible only if there is a robust emission allowance market or a carbon tax. A recent World Bank study estimates that a carbon price of $12 - $18 per ton of CO2 might make CCS feasible in the Balkan countries. More countries in ECA should systematically explore the feasibility of CCS and develop the information base, regulatory framework and institutional capacity for deployment. However, the uncertain prospect of CCS should not justify extensive expansion of fossil fuel power infrastructure and should not distract from the long-term need to move the power sector away from carbon. Nuclear power’s economics are increasingly unfavorable. The third option to lower emissions from the power sector is nuclear energy. The ECA region gets about 10 percent of its power from 67 nuclear reactors in 8 ECA countries; 38 more are in planning stages. Nuclear plants can provide large amounts of carbon-free power around the clock, require little land and use a relatively abundant fuel source. But concern about nuclear accidents, unresolved issues of nuclear waste storage and concern about nuclear weapons proliferation have motivated opposition to the technol- ogy. Furthermore, recent experience suggests that new nuclear power would not be economically competitive even when ignoring indirect costs such as the implicit public insurance against large scale disasters. In part because of increased safety regulations and the high cost of capital, investment costs per kW of nuclear power have steadily increased over the last three decades in both France and the United States. It may require technological breakthroughs that lower costs and strengthen safety to significantly increase nuclear power’s share of electricity production. Much higher shares of renewable energy will be needed. Renewable energy sources such as solar, wind, geothermal and bioenergy, currently contrib- ute a small share of ECA’s energy. The most important is hydro with an installed capacity of more than 100 GW. Globally, investments in renew- able power are increasing, reaching $263 billion in 2011, including $1.2 billion in Turkey, for instance. Costs have fallen sharply, especially in the case of wind and solar power (Figure 16), although in the absence of a price on emissions they still tend to be higher than conventional energy— especially where fossil fuels receive explicit or implicit subsidies. For some time to come, most renewables will require some form of support. In principle, low and middle income ECA countries could leave such sup- Overview 33 FIGURE 16 Costs for wind and solar power have dropped rapidly with increased deployment Source: IPCC (2011). port to rich countries and wait until technology costs have been driven down enough to make local deployment attractive. On the other hand, there are good reasons for many ECA countries to expand the use of renewables. Ukraine and Turkey, for instance, do so to reduce depen- dence on fossil fuel imports. 34 Growing Green Practically all ECA countries have some form of renewable energy support policy and most have a feed-in tariff that guarantees clean energy producers a minimum price for a defined time period. Global experience shows that the size of the feed-in tariff is not the only determinant of actual deployment. In fact, too high a tariff provides an unwarranted windfall to investors, and once a constituency for such support mecha- nisms emerges, it is difficult to reduce tariffs even if investment costs have dropped. Other design features determining feed-in tariff effectiveness include the length of support, guaranteed grid access, whether energy markets are competitive, and low administrative and regulatory barriers. If renewable energy technologies continue to become cheaper, support programs can be scaled back while deployment continues to increase. Once intermittent renewable energy reaches about twenty percent, larger investments in grid infrastructure and management will be necessary. For countries that consider these issues early on in energy planning, the transition will be much easier. Overview 35 Production: Large energy savings and emission reduction potential 36 Growing Green Many of the world’s leading companies have long realized that they can become more competitive by aggressively pursuing energy efficiency. Dupont, one of the largest chemical companies, reduced energy use by 18 percent between 1990 and 2010 while growing production by 40 per- cent. With ECA’s industry sector using 28 percent of total energy and accounting for 34 percent of its CO2 emissions, there are large opportuni- ties for reducing energy use while also making firms more competitive. Energy consumption in the cement industry, for example, has remained persistently high in the CIS countries (Figure 17). Reaching global best practice, the iron and steel, cement and paper and pulp industries could lower energy use by 50 percent or more. FIGURE 17 Energy use in cement production remains persistently high in the CIS countries (MJ per ton of clinker) Source: GNR Database (CSI, 2011). Encouraging energy efficiency in industrial production requires a mix of instruments. One barrier is that output product prices in the steel or cement industry, for instance, have been increasing faster than energy Overview 37 prices, reducing the pressure to become more efficient. Continuing energy subsidies also blunt price signals. Programs that encourage indus- trial energy efficiency will help overcome these and other barriers. Direct support such as reduced taxes on energy efficient equipment or acceler- ated depreciation or tax credits lower investment costs. “White certifi- cates� represent a market-based approach. Energy users must hit realistic targets and receive tradable certificates if they comply. Firms that over- comply can sell their certificates to firms that cannot meet requirements. Poland has been the first ECA country to introduce such a scheme. Vol- untary agreements, in contrast, have had a mixed record, although “peer pressure� can be effective if an industry consists of only a few large play- ers. Three cement companies in Lithuania for instance agreed on energy savings goals with the government and reduced electricity use by more than 10 GWh between 2007 and 2009. Finally, smaller and medium- sized firms are most affected by financing constraints. It takes some time and effort to create an energy savvy banking sector and to develop an energy services sector that assists companies. 38 Growing Green Mobility: Co-benefits alone justify greater mitigation efforts Overview 39 Moving goods cheaply and efficiently is essential for economic develop- ment and individual mobility is an aspiration for emerging middle classes in all countries. Energy use and emissions from transport have therefore been growing in most countries including in ECA where passenger vehi- cles per thousand people increased from less than 250 to more than 350 in the 2000s. Transport accounts for about ten percent of all of ECA’s emissions, 70 percent of those are from road traffic. Reducing these emis- sions will not be easy. Considering only the sector’s climate impacts, reducing transport emissions would be more expensive than emission cuts in other sectors. A uniform carbon tax, for instance, would likely lead to much lower reductions in transport emissions than those in the power or industrial sectors. On the other hand, there is a large technical potential to reduce the climate impact from cars, trucks and other trans- port modes, and most countries have policies to make the sector more efficient. There are several reasons for this. First, climate impacts are only one relatively small unwanted side- effect of transport. An estimated 95 percent of the indirect costs of road TABLE 2 The indirect costs of road transport from climate change are small compared to others Policies Estimated Public abatement affecting demand costs (US and supply-type and vehicle Externality Source Nature of costs cents/km) policies characteristics Climate Greenhouse gas Wide-ranging and 0.2–2.3 Fuel efficiency change emissions from uncertain adverse standards, CO2 or fossil fuel use impacts from fuel taxes, cap and climate change trade Congestion Volume of use Mainly time and 2.6–22.2 Network capacity Congestion charges, approaches or schedule delay costs fuel taxes, access exceeds design restrictions, land- capacity per unit of use regulation, time quantity controls Air pollution Fuel combustion and Mainly health, 0.7–9.2 Standards (vehicle exhaust loss of life, and equipment, fuel environmental quality), access degradation charges Traffic High traffic density Mainly health and 0.7-6.5 Adaptation of road Traffic rules and safety and heterogeneity loss of life; material infrastructure, procedures, risk in vehicle weight damage emergency services, dependent insurance and speed, increase mandatory insurance premiums average accident risk Noise Engines and Health, discomfort 0.1–5.9 Sound barriers, Standards, curfews, movement silent road surfacing, tradable permits curfews Source: Proost and van Dender (2011). 40 Growing Green transport instead come from time lost in congested traffic, local health effects from pollution and noise, and damages from traffic accidents (Table 2). Second, lowering transport emissions by reducing fuel use and congestion can promote economic growth. More efficient transport facil- itates inter and intra-industry trade, expands labor markets, and pro- motes innovation and technology spillovers (World Bank, 2009). Induced growth will further increase transport, however, which makes it even more important to be ambitious about reducing its carbon footprint. Third, a climate smart transport sector will reduce dependence on imported oil. In the long term, a large share of transport could shift to electric or hydrogen cars fueled with renewable energy, but the internal combustion engine, and dependence on a volatile market for oil, will persist for some time to come. Alternative fuels will likely contribute relatively little to reduced greenhouse gas emissions from transport. Biodiesel is easy to produce and its cost is often comparable to petrol. But growing plants for energy use competes with food production and when the entire life cycle emissions are compared, biofuel’s emission reductions tend to be smaller than is often assumed. Third generation biofuels grown on non-arable land (for example derived from algae) are still in early development stages. With large-scale electrification or fuel switching a relatively distant prospect, climate action in the transport sector relies on price policies, regulations and public investments (Table 3). The goal is to make trans- port more energy efficient by avoiding the need for some trips, shifting trips from individual to public transport and improving the efficiency of transport vehicles. Many ECA countries have already increased fuel prices considerably, in some cases exceeding what would represent a rea- sonable carbon premium. Turkey’s high petrol prices reflect revenue col- TABLE 3 Policy instruments for sustainable transport Energy efficiency Cleaner energy Avoid Shift Improve Fuel switch Supply side Expand IT access for Improve public Information Facilitate R&D, tech (investments) telework. transport infrastructure campaigns; facilitate adoption; support and capital stock; use improved vehicle alternative fuel of IT/smart ticketing. technology adoption. infrastructure. Demand side Land use regulations Fuel taxes, congestion Fuel efficiency Subsidies or (prices & for transport oriented pricing, parking standards; registration requirements for regulations) densification. fees; reduce parking fees based on alternative fuels. availability; traffic emissions. management; public transit subsidies. Source: World Bank staff. Overview 41 lection objectives more than environmental goals. Others, especially in the former Soviet Union, continue to maintain low fuel prices. Increasing fuel taxes could raise significant revenue that could be reallocated to reduce more distorting tax burdens elsewhere. Raising Turkmenistan’s fuel price of 22 cents per liter to the still very low US price in 2008 of 56 cents could free up $375 million per year. Regulations such as fuel economy standards are less effective than price policies such as fuel taxes. But they are politically feasible even where taxes are not, and in the absence of other policies they do reduce fuel consumption. Making registration fees dependent on the vehicle’s CO2 emissions provides an incentive for more efficient cars, but like fuel economy standards, they increase the cost of larger cars, but do not dis- courage additional driving. The specific policy package for the transport sector will depend on country specifics. One important lesson is that any policy that discourages vehicle use must be complemented by policies that provide alternatives. Efficient and affordable public transit must be in place before increases in fuel taxes or parking restrictions discourage private vehicle use. Rail or ship transport options must be convenient and competitive if policies make truck transport of goods more expensive. Planners should keep in mind that the primary goal of transport planning is to efficiently move people and goods, not cars and trucks. 42 Growing Green Cities: Leaders on climate action Overview 43 Climate action at the city level, where between 70 and 80 percent of CO2 emissions originate, has arguably been more dynamic in recent years than at the national or global level. This is driven in part by self-interest because many cities will face large adaptation challenges if global warm- ing accelerates. But another important reason is that a low-carbon foot- print and high environmental quality are becoming an increasingly important urban attribute that attracts skilled workers and innovative firms. For instance, Russian cities with better environmental quality receive a larger share of migrants (Berger et al., 2008). While climate action in urban areas requires addressing many issues, three stand out. Residential and commercial buildings account for up to 40 percent of energy consumption. Many buildings in ECA, including large apartment blocks constructed during Soviet times, have already been renovated. Many more still need upgrades. “Shallow� energy effi- ciency upgrades such as caulking, attic insulation and new windows help, but yield far smaller energy savings than “deep� thermal retrofits (30-40 versus 70-90 percent). Yet, scaling up such renovations is surprisingly hard. Building codes, energy labeling and other standards help, but do not deliver quick results since the housing stock turns over slowly. Pro- grams that lower financial barriers to retrofits through banks or directly have a mixed record. A long-term strategy built on dedicated funding and a strong coordinating agency can help overcome these problems. A second priority is to reduce energy consumption and emissions in public services. Large savings are possible in public buildings, water sup- ply, street lighting, solid waste and particularly in district heating, which is widespread in many ECA countries. Implementation in the public sec- tor requires less coordination than in the private building markets, and a number of innovative World Bank projects have cost effectively reduced public sector energy use. The Tool for Rapid Assessment of City Energy (TRACE), which has been piloted in a number of Turkish cities, helps cit- ies identify and prioritize improvements across sectors. The third major factor affecting urban energy use is the shape of a city. Compact cities generally are more energy efficient, since each housing unit requires less space, and public services, including transit, can be pro- vided more efficiently. Indeed dense European and Asian cities have far lower per capita energy use and emissions than sprawling North Ameri- can or Australian cities (Figure 18). ECA cities have generally maintained compact European settlement patterns. But with rising wealth, there will be greater pressure to suburbanize. Good city management can counter those trends through effective zoning and land use management, priority 44 Growing Green FIGURE 18 Dense urban areas tend to have lower greenhouse gas emissions Source: World Bank and Citymayors.com. use of inner-city brownfields or other areas within the city for increasing population density, provision of efficient public transit lines that also guide new development, and avoiding incentives to over-consume hous- ing through tax preferences or development fees that do not reflect the negative side effects of sprawl. Overview 45 Farms and forests: Increasing carbon storage in soils and trees 46 Growing Green Topsoils in ECA hold carbon equivalent to five to ten times annual global emissions and its forests hold another three times annual emissions. Maintaining and, where possible, adding to these huge carbon stores will make a major contribution to the shared goal of a stable climate. At the same time, productivity in ECA’s agriculture continues to lag far behind its potential. These two objectives—increasing economic output from farms and forests and promoting climate action—are not contradictory. There are two ways in which agriculture, for instance, supports both. One, as outlined earlier, is that ECA has vast areas of abandoned and degraded agricultural lands that could be brought back into production. This would make a major contribution to meeting rising global demand for food and help avoid land being converted from forest to farms in more fragile parts of the world. The second way in which the rural sector can reduce emissions is by making its operations generally more efficient. Agricultural emissions come mainly from poor soil management including excessive use of fer- tilizer, methane from livestock production, and CO2 emissions from farm buildings and equipment. Soil degradation, in particular, is widespread. Improvements in current farming practices and restoration of already degraded farmland have high payoffs. An additional ton of carbon fixed in degraded cropland soils can increase wheat yields by 20 to 40 kg per hectare or by 10 to 20 kg/ha for maize (Larson et al., 2012). Degraded pasture lands can similarly become more productive for raising livestock. Rates of return on land restoration projects in Turkey and Uzbekistan have been around 20 percent even when climate benefits are not included. Carbon finance has supported some projects but they are typically diffi- cult to implement under the current architecture. Livestock and dairy production, the second major source of greenhouse gases, is growing rap- idly in ECA. Again, increasing productivity can significantly lower emis- sions per unit of output. Greenhouse gas emissions from dairy production will fall by a factor of ten when production increases from ECA’s typical 500 liters annually per cow to OECD levels of about 7500 liters. Higher intensity operations will require better management of inputs and manure. Bioenergy is considered a renewable energy resource and many coun- tries as well as the EU have introduced bioenergy standards such as a minimum share of biofuel for vehicles. These standards are currently being rethought, because among the many different types of bioenergy, some turn out to have an overall negative climate or environmental impact. Bioenergy can be derived from many different sources: energy crops grown for that purpose, crop residues left behind after the harvest, organic byproducts from industrial processes or organic waste. They gen- erate solid, liquid or gaseous fuels that can be used for heating or power. Overview 47 Biogas can fuel conventional power generation equipment. And until electric vehicle technology matures biofuels are a means to lower emis- sions from cars, trucks and planes. The problem with bioenergy from energy crops is that they compete with food crops at a time when food prices are rising. In many places land is too valuable to be devoted to energy crops rather than food production because photosynthesis is a very inefficient way to convert the sun’s energy into usable energy. For illustration, a combination of solar cells, electric batteries and electric vehicle engines would use available land 600 times more efficiently than growing biomass, converting it to biofuels and using it in internal combustion engines (Michel, 2012). Furthermore, because growing energy crops requires a large energy input and replen- ishment of fertilizers which causes nitrous oxide emissions (also a potent greenhouse gas), the net energy return and emission reductions are often quite low. The technical potential for bioenergy in ECA is quite high and with its abundant land mass, an expansion of sustainable bioenergy pro- duction should be evaluated. Ukraine could possibly produce 12 percent and Croatia 16 percent of its primary energy supply through bioenergy according to a study by the European Commission. But any bioenergy project needs to consider the net carbon benefits, the alternative uses of the land, and the impacts on air pollution and competing water demand. The priority should therefore be bioenergy options with few downsides such as the use of agricultural waste products or manure for biogas. In contrast to many tropical forest areas, ECA’s forests have increased in size in recent years. Globally, 135 million hectares of forests have been lost in the last twenty years, while ECA has added about 16 million hect- ares (Shvidenko et al., 2011). But increasing human pressure is causing localized deforestation and an increase in forest fire activity—especially in Russia. Forests are also threatened by climate change itself as ecological conditions change and pests, such as bark beetles, survive warmer win- ters. Better forest management will ensure that ECA’s forests remain a carbon sink rather than becoming a source of emissions. At the same time, ECA can get far more economic benefits out of its forest resources. Total value added from all of ECA’s forests was $26 billion in 2010, com- pared to $113 billion in the EU-15. Forest sector labor productivity is very low (Figure 19). ECA countries could also greatly increase employment in the sector, if forest processing is expanded to levels found in forest rich Scandinavia or Canada. Some ECA countries have made major reforms. Latvia and Estonia now obtain 4-5 percent of GDP from the forest sector. Improving sustainable forest management will maintain carbon stocks while creating new economic opportunities, often in lagging regions with few other options. 48 Growing Green FIGURE 19 Low labor productivity in the forest sector in many countries, US$ per employee, 2010 Source: FAO, State of the World’s Forests 2011. Spotlight One: The climate challenge Mikhail Ivanovich Budyko, who spent most of his career at academic institutions in Leningrad, today’s St. Petersburg, was one of the fathers of climatology as a quantitative science. Following his path-breaking work on global heat balances in the 1950s, he began to study the “earth snow- ball effect�: a significant drop in atmospheric CO2 could trigger a self- reinforcing process that might cause the earth to be completely covered in ice. Budyko did not believe this had ever happened in geological his- tory, but by studying global cooling, he also clarified the role of CO2 in warming the planet. He was one of the first to scientifically estimate the global warming effects of rising CO2 levels and he became convinced of human’s role in this process: “The conclusion is made that present-day climate appears to have changed as a result of man’s inadvertent impact and this change may be considerably increased in the nearest decade� (Budyko, 1977). It took almost half a century after his pioneering early research for this insight to become the scientific consensus with the Third Assessment of the Inter- governmental Panel on Climate Change. For the last two hundred years, since the start of the industrial revolu- tion, energy derived from coal, oil and gas has fueled unprecedented economic growth and welfare gains. These carbon rich resources had been safely stored in the ground for more than 300 million years in the case of coal. Burning them within the space of a few generations—each year we burn the products of one million years of photosynthesis6—has added far more carbon to the atmosphere than land and oceans can absorb. For the last 400,000 years, atmospheric carbon dioxide (CO2) concentrations varied between 180 and 300 parts per million (ppm); in the last 10,000 years—the time in which modern civilizations devel- 6. According to James Barber at Imperial College London. 49 50 Growing Green oped—between 260 and 280 ppm. Since the industrial revolution they have increased to 394 ppm as of 2012, a level the earth had last seen about 3 million years ago in the early Pliocene Epoch. Adding the effect of other greenhouse gases like methane brings current concentrations to about 450 ppm of CO2-equivalent or CO2e. Atmospheric CO2 and other gases trap incoming radiation from the sun, causing a gradual warming— the so-called greenhouse effect. Over the last one hundred years this caused temperatures to increase by about 0.8 °C (Figure S1.1). FIGURE S1.1 Global temperatures continue to rise, anomalies relative to 1951-1980 Sources: NASA, NOAA, CRU/UEA7. The fundamental physics of this process have been known since Joseph Fourier’s work in the 1820s, and in 1896 Svante Arrhenius estab- lished the link between human induced emissions of greenhouse gases and global warming. Today, basic science, climate models and an increas- ing body of empirical evidence all confirm the existence of global warm- ing. In response, the global community has adopted the scientific consensus that the increase in global temperature should remain below 2°C to prevent dangerous changes in the climate system. This is the goal that governments agreed to at the global climate summit in Copenhagen in 2009.8 Without effective climate action, under current policies, tem- 7. www.cru.uea.ac.uk; http://data.giss.nasa.gov; www.ncdc.noaa.gov 8. There is some doubt among some scientists whether this is an achievable goal. New research also suggests that damages from such warming could be larger than previously estimated. See Anderson and Bows (2011). Overview 51 peratures will go up further—possibly by 5 or 6°C above pre-industrial levels by the end of the century. These are levels last seen about 30 mil- lion years ago, when snow and ice had largely disappeared and sea levels were 30 to 70 meters higher. CO2e concentrations are currently growing at about 2 to 2.5 ppm per year. But what drives warming is not the rate but cumulative emissions which determine greenhouse gas concentrations and thus temperatures for at least a thousand years after emissions stop.9 To have a good chance of keeping warming to 2°C the world must limit cumulative emissions from 2000 to 2050 to 1.4 trillion tons of CO2e. To achieve the Copenha- gen goal, today’s annual emissions of about 48 billion tons of CO2e need to peak within the next ten years and then drop quickly to about 20 bil- lion tons by 2050 (Roeglj et al, 2011; NRC, 2011). In per capita terms, emissions need to drop from today’s 7 tons CO2e to about 4 tons by 2030 and 2 tons by 2050, when world population will be between 9 and 10 billion. If economic output increases three-fold, as more countries achieve middle and high income status, then emissions per unit of output will have to fall by 80 to 90 percent over the next four decades. This is a daunting task that must involve all countries in the world and one that will become harder the longer climate action is delayed. Countries with historically high emissions will need to cut more, and some developing countries may need to temporarily overshoot these targets. While the drivers of climate change are well understood, there is far more uncertainty about its future impacts. The earth’s climate is already experiencing higher variability against a warming trend (Figure S1.2). Global temperatures are generally higher than in the middle of the last century. Temperatures vary from year to year and from place to place, but there is now a greater probability that any given place will experience higher than historically expected temperatures—sometimes much warmer, as in the heat waves in Western Europe in 2003 and Western Russia in 2010 that led to many deaths.10 While it is impossible to defini- tively attribute specific events to climate change, such heat waves are consistent with climate model forecasts. In fact, changes such as shrink- 9. Solomon et al. (2009). The following scenario is adapted from Stern (2009). 10. The 2010 Russian heat wave coincided with 50,000 more deaths in the af- fected region than would have been expected under normal summer conditions according to MunichRe Reinsurance’s NatCatSERVICE, “Natural catastrophes in 2010� (www.munichre.com). The 2003 Western European heatwave had a similar impact. There is a lively academic debate about whether the Russian heat wave can be attributed to climate change (Rahmstorf and Coumou 2011) or natural long term variability (Dole et al. 2011). By the time there is statistical certainty about attribution of specific events to human induced climate change, the world will likely have committed to warming beyond presumably safe limits. 52 Growing Green FIGURE S1.2 Weather varies from year to year but the trend points towards a warmer and more variable climate June-July-August surface temperature deviations relative to 1951-1980 mean, °C Note: The number at the top right of each map shows the global mean temperature deviation for that year. Source: Hansen et al. 2011. ing glaciers and diminishing sea ice have occurred faster than models predicted. For the ECA region these models predict changes in agricul- ture, hydrology, and temperature extremes that could bring more fre- quent flooding, thawing of northern permafrost, unreliable harvests, and severe fires in forests and drained peatlands. A previous World Bank ECA Regional Study summarized climate change impacts and adaptation in the region and five more detailed adaptation pilots analyzed probable impacts and response options in Southeastern Europe and Central Asia (Fay et al., 2010; Hoffer and Horvathova, 2012; World Bank, 2012b). Spotlight Two: Emission trends in the ECA Region The reasons for ECA’s large contribution to global greenhouse gas emis- sions—relative to the size of its population and economy—have been well documented (e.g., Fay et al., 2010; World Bank, 2010a). Several countries in the region have abundant coal, gas and oil resources which, when combined with low energy prices, encourage wasteful energy con- sumption. There has been progress, but there is still a persistent legacy of inefficient energy use in private buildings, industry and transport, and a backlog of modernization of the public capital stock (public buildings, street lighting, water treatment plants, etc.) leading to high energy use in power production, water supply and public transportation. The following paragraphs illustrate the scale of the region’s emissions. This summary mostly focuses on CO2 emissions that come largely from fossil fuel com- bustion, but also discuss other greenhouse gases emitted from non-com- bustion activities. ECA’s share of global emissions is larger than its share of GDP or pop- ulation. ECA accounts for 7.0 percent of world population, 7.3 percent of global GDP (PPP based), 11.4 percent of all greenhouse gas emissions (5.3 billion of 47 billion tons CO2e), and 13.1 percent of CO2 emissions from fuel combustion (3.8 billion of 29.0 billion tons). Among World Bank regions it ranks second in total emissions behind East Asia & Pacific, although combined emissions from high income economies are still far larger (Figure S2.1). Per capita CO2 emissions from fossil fuel burning in ECA are about 6.9 tons of CO2, the highest among the World Bank regions, but are still sig- 53 54 Growing Green FIGURE S2.1 ECA accounts for the second largest CO2 emissions among World Bank regions Source: IEA, 2011. Data for 2009. Note: EAP=East Asia & Pacific, SAR=South Asia Region, LAC=Latin America & Caribbean, HIE=High Income Economies, MNA=Middle East & North Africa, AFR=Africa. FIGURE S2.2 ECA per capita CO2 emissions are the highest among World Bank regions Source: World Bank Staff calculation based on IEA, 2011. Overview 55 nificantly lower than those in high income economies (which is pulled up by very high emissions in North America), and slightly below those of the EU-15 (Figure S2.2 and Figure S2.3). There are notable exceptions at the country level. The national average emissions vary from less than half a ton in Tajikistan to more than 12 in Kazakhstan. Per capita emissions are likely to rise considerably without effective climate action. Figure S2.4 shows future per capita CO2 emissions based on three scenarios developed by the IEA (2011). The first assumes that current energy and climate change policies prevail in the region over the next 25 years. The second assumes that already announced new policies are effectively implemented. The third assumes policies will be adopted in the region that are consistent with the goal of stabilizing CO2 equiva- lent concentrations in the atmosphere at a level of 450ppm—the level at which global warming is projected to be limited to 2° Celsius. The choice of these policies determines future emissions. For the IEA Eastern Europe & Eurasia region as a whole, it will determine whether emissions in 2035 will be 23 percent below 2008 levels or 24 percent above. For the IEA FIGURE S2.3 CO2 emissions from fuel combustion, 2009 Source: World Bank staff calculations, based on data from IEA, 2011. Note: Width of bars is proportional to population. 56 Growing Green FIGURE S2.4 Three scenarios for per capita CO2 emissions from fuel combustion in the Eastern Europe/ Eurasia region Source: IEA scenarios, UN Population Division. Note: IEA’s Eastern Europe/Eurasia region includes all ECA countries except Czech Republic, Hungary, Poland, Slovak Republic and Turkey. Caspian sub-region11, emissions might grow by 58 percent, or by only about 9 percent. Emissions are highly concentrated among ECA countries. Just five countries account for 77 percent of emissions (Table S2.1 and Figure S2.3). The 15 countries with the smallest emissions account for less than 6 percent of ECA’s total. The Russian Federation alone emits almost half of all ECA emissions. Its per capita emissions are higher than the OECD average and it is by far the largest country in the region by population. ECA still uses far more energy per unit of output than other regions. It remains the region with the highest energy intensities in the world – 285 tons of oil equivalent (TOE) per million dollars of GDP (2000 PPP) compared to a global average of 189 and to 133 in the EU-15. The region’s share of global total primary energy supply (TPES) is 11 percent. Emission intensities—emissions per unit of GDP—are consequently also higher than in other regions. Uzbekistan emits 1.7 kg of CO2 per dol- lar of GDP (2000 PPP), compared to a world average of 0.5 kg/$. Russian Federation, Serbia, Kazakhstan and Uzbekistan also have emission inten- sities above 1 kg/$. This is not so much due to ECA’s carbon intensity of power generation (the amount of CO2 per unit of energy produced), 11. Includes Armenia, Azerbaijan, Georgia and the five Central Asian republics. Overview 57 TABLE S2.1 The five largest emitters in 2009 accounted for more than three quarters of ECA’s CO2 emissions from fuel burning Per capita emissions Population Total emissions Country (tons of CO2 p.c.) (million) (million tons of CO2) Russian Federation 10.8 141.9 1532.6 Poland 7.5 38.2 286.8 Ukraine 5.6 46.0 256.4 Turkey 3.6 71.9 256.3 Kazakhstan 12.0 15.9 190.0 Source: IEA, 2011. which has steadily decreased due to the increased share of natural gas in the fuel mix. It is now approximately the same as the world average and only 17 percent higher than in the EU-15 (Figure S2.6). However, ECA uses considerably more energy to produce a given output. Emission intensities have fallen steadily over the last four decades, with the notable exception of the immediate transition period when GDP fell far more than fuel combustion (Figure S2.5 and Figure S2.6). So the trend is in the right direction and the challenge is to maintain and accelerate it. Emis- sion intensities also vary greatly between ECA subregions, with Central Asia having the highest values (Figure S2.7). FIGURE S2.5 ECA CO2 emission intensities are the highest among all regions Source: IEA, 2011a. GDP using purchasing power parities in 2000 US dollars. 58 Growing Green FIGURE S2.6 ECA CO2 emission per unit of energy use are slightly higher than world average, 1971-2009 Notes: TPES=total primary energy supply, toe=tons of oil equivalent. Source: World Bank staff calculation based on IEA, 2011. FIGURE S2.7 CO2 emission intensities in ECA sub-regions, 1991-2009 Source: IEA, 2011. GDP using purchasing power parities in 2000 US dollars. Overview 59 In addition to burning fossil fuels, non-combustion activities also release significant amounts of CO2, methane and other greenhouse gases (GHGs). Venting and flaring is the major source of methane and non- combustion CO2. Russia is the world’s leading gas flaring country respon- sible for 26 percent of flaring in 2010 and Kazakhstan is ranked 7th and responsible for 3 percent. Agricultural and forestry practices emit the largest amount of nitrous oxide, in addition to CO2 and methane. Manu- facturing of aluminum and cement and other industrial products releases CO2 and industrial gases, such as HFCs and PFCs. In 2008, fuel combus- tion constituted 64 percent of total greenhouse gas emissions, among which natural gas contributed 26 percent, followed by coal at 24 percent and oil 14 percent. Non-combustion related greenhouse gases totaled 1.9 billion tons of CO2 equivalent, or 36 percent of ECA’s overall emissions, including 15 percent from venting and flaring, 6 percent each from agri- culture, forestry and industrial processes, and 3 percent from landfills and waste treatment (Figure S2.9). ECA’s per capita emissions of non-CO2 greenhouse gases are the high- est in the world, mostly from methane released by gas flaring and venting (Figure S2.8). Non-CO2 pollutants usually have life spans shorter than CO2, but are much more potent warmers. For example, emitting one ton of methane or nitrous oxide would have the same immediate effect on warming as emitting 25 or 289 tons of CO2 within a 100-year horizon. Efforts to limit these pollutants would therefore have a strong and quick effect in mitigating climate change. FIGURE S2.8 Per capita emissions of non-CO2 greenhouse gases, 2009 Source: World Bank Staff calculation based on PBL (2010) and EDGAR 4.1 datasets. 60 Growing Green FIGURE S2.9 Annual greenhouse gas emissions in ECA by source, 2009 Source: World Bank Staff calculation based on IEA (2011), PBL (2010), and EDGAR 4.1 datasets. Note: Industrial processes refer to the non-combustion emissions from manufacturing of cement, lime, aluminum etc. Agriculture production comprises emissions from animals, animal waste, rice production, fertilizer use etc. Forest and others refers to direct emissions from forest fires plus emissions from decay of biomass etc. Electricity and heat production accounts for the largest share of GHG emissions in ECA. The sector accounts for 31 percent of emissions, includ- ing 21 percent from power generation. When allocating electricity and heat to consuming sectors, industrial production contributes the largest share at about 28 percent, followed by the built environment (cities) sec- tor at 21 percent, farms and forests 13 percent and mobility 10 percent (Figure S2.10). These patterns vary somewhat by country. Electricity, heat and other energy industries account for the largest share of emis- sions in most ECA countries. However, transport is the highest emitter in Albania, Armenia, Georgia and Kyrgyzstan. Emissions from farming are significant in ECA, but less so than in tropical regions. ECA emissions from agriculture were 331 million tons of CO2e in 2008, approximately 6 percent of global emissions in this sector. The Russian Federation, Turkey and Ukraine are the largest emitters. Overview 61 FIGURE S2.10 ECA’s annual greenhouse gas emissions by sector, 2009 Source: World Bank staff calculation based on IEA, 2011. Note: Power constitutes emissions from electricity production and other energy own use. Production refers to GHG emission from manufacturing, construction and other industrial activities. Mobility refers to emissions from transportation. Cities comprises emissions from residential, commerce, public sector, and waste treatment. Emissions from forests include those from forest or peat fires or deforestation, but not offsetting forest growth elsewhere. FIGURE S2.11 Emissions in all sectors are increasing except from farms and forests Source: World Bank staff calculation based on IEA, 2011. 62 Growing Green Emissions from all sectors have increased in the past decade except those from farms and forests. The transportation sector has seen the larg- est increase in emissions, by 36 percent since 2000. In power generation and industrial production, emissions have increased by 15 and 9 percent, respectively. Emissions from cities have increased by 11 percent from 1990, but have almost stabilized in the past decade. On the other hand, emissions from farms and forests have steadily declined by 29 percent over the past decade (Figure S2.11). Spotlight Three: Why climate action is a harder sell in ECA Despite significant progress in some countries, climate action in the ECA region has lagged developments in many other regions.12 Figure S3.1 gives some indication why decision makers and the public in ECA might be less supportive of climate action. It groups countries on two dimen- sions. Source vulnerability is determined by fossil fuel resources, employ- ment in the coal, oil and gas sectors, renewable energy potential and scope for carbon sequestration in soils and forests. The economies of countries highlighted at the bottom of the map matrix would be less affected by the imposition of a global price on carbon—the economies of countries in the top row would be most affected. Impact vulnerability indi- cates countries’ likely exposure to the effects of climate change on agri- culture, extreme natural hazard events and sea level rise. Countries on the left set of maps are more threatened, countries on the right, less. Almost all ECA countries are clustered in the top right map. They are highly dependent on fossil fuels and, on average, have lower renewable energy potential than many other countries. Although predicted impacts are severe in some parts of the region, ECA countries are also generally less threatened by climate change impacts compared to countries such as Bangladesh or Mexico. The ECA region’s reluctance to embrace ambi- tious climate action—as reflected in recent survey data reviewed below— is therefore not entirely irrational. 12. As reflected, e.g., in the national communications to UNFCCC and Copen- hagen commitments. 63 64 Growing Green FIGURE S3.1 Relative to the rest of the world, ECA is more vulnerable to higher carbon prices and less vulnerable to the effects of global warming Source: Buys et al. 2009. Perceptions and attitudes towards climate change in ECA: from concern to action? The climate change module of the 2010 Life in Transition Survey explores the perceptions and attitudes of Eastern Europe and Central Asia’s people with respect to climate change. For comparison, it also contains informa- tion on five Western European countries (France, Germany, Great Brit- ain, Italy and Sweden). Climate change is a source of concern for a majority of people in most countries, although there is variability, with high concern countries (such as Moldova, Sweden, Azerbaijan, Slovenia or Germany) and lower concern countries such as Great Britain, Poland or Russia. While over 80 percent of Moldovans and 77 percent of Swedes agree that climate change is a serious problem currently facing the world, this opinion is shared by 37 percent in Great Britain and 40 percent in Poland. When asked to rank the most important problems in the world today, respondents in Europe and Central Asia rank climate change in fifth position on average, after poverty, terrorism, infectious disease and Overview 65 economic downturns, and before armed conflicts, nuclear weapons or the increasing world population. This is in contrast with Germany or Sweden, where climate change comes second only to poverty as the most important problem facing the world. People in Eastern Europe and Central Asia consider themselves to be less informed about the causes and consequences of climate change than their neighbors in Western Europe. But concern about climate change is not unfounded: it is related to genuine risks and can translate into policy under certain conditions. There is a positive relationship between the average degree of concern in ECA countries, and their vulnerability to climate change, as measured by the vulnerability index created for ECA countries that captures each country’s exposure, sensitivity and adaptive capacity to climate change (Figure S3.2). Concern about climate change is greater in countries with higher exposure and sensitivity to climate change. Although people in ECA are no less concerned about climate change than their western European neighbors, they are much less likely to have taken personal action: only 23 percent of respondents in the ECA region say they have “personally taken actions aimed at helping to fight climate FIGURE S3.2 Greater concern about climate change in more vulnerable countries Source: Diagne and Rodriguez-Chamussy (2012) using the vulnerability index from Fay and Patel (2008). 66 Growing Green change�, versus 60 percent in western European countries. In fact, there is a positive correlation between a country’s per capita income and the extent of reported climate change mitigating actions taken by the general population: EU-10 countries and Croatia show levels of action that are comparable to western European countries, whereas much lower levels of action are reported in Central Asia and the Caucasus. In Georgia, Armenia and Azerbaijan only 3 percent of the population report taking personal action. The correlation is nevertheless imperfect, with Russia notably standing among the countries with the lowest proportion of peo- ple reporting taking action personally. At the individual level, taking per- sonal actions to help fight climate change also correlates with measures of economic welfare such as assets or consumption per capita, and has no significant relationship with education, age or gender. The most com- monly taken specific actions in ECA are also cost-saving (11 percent reduced water consumption and 10 percent reduced energy consumption at home). The greater number of specific actions taken by western Euro- peans indicate greater public coordination (for example, 45 percent started separating waste for recycling, versus only 8 percent in ECA), greater choice by richer consumers (for example, 13 percent in western Europe purchased a more environmentally-friendly car versus 1.9 per- cent in ECA) or better public services (with much larger numbers choos- ing public transportation or reducing the use of a car). Another way in which people can take action against climate change is by demanding climate change mitigation through the political process. The proportion of people that support the environment as a first priority for government spending is relatively low in most ECA countries and a majority is not willing to pay extra taxes to fight climate change. There is however a positive relationship between individual information, citizen engagement, concern about climate change and willingness to pay: con- trolling for economic characteristics and education, the probability that individuals may be willing to pay higher taxes or give part of their income to fight climate change is higher when they live in a country more vul- nerable to climate change, feel well informed on the causes and conse- quences of climate change, and have high levels of concern. The evidence thus suggests that translating concern about climate change or climate change vulnerability into mitigation action (through individual behaviors or collective action) hinges on agency and public coordination, the expansion of economic opportunities and the availabil- ity of information at the individual level. Contributed by Mame Fatou Diagne and Lourdes Rodriguez-Chamussy. 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Adapting agriculture to climate change in four Europe and Central Asia countries, Report No. AAA71 - 7E, Europe and Central Asia Region, Washington, D.C. This report is a part of a series of 3 regional reports. The series includes Growing Green: The Economic Benefits of Climate Action, Balancing Act: Cutting Energy Subsidies While Protecting Affordability and Energy Efficiency: Lessons Learned from Success Stories. Balancing Act: Cutting Energy Subsidies While Protecting Affordability In Eastern Europe and Central Asia there are significant pressures for residential energy tariffs to rise, as government budgets are increasingly stretched and cannot afford to pay large energy subsidies. Further pres- sures for tariffs to rise come from environmental concerns, as the tariff levels that households now face do not cover the social costs of energy production. Because reforms that would increase energy tariffs are likely to affect significantly the poor and the middle class, their political feasibil- ity may be questioned unless appropriate ways of cushioning the impacts can be devised. Balancing these competing claims—fiscal and environ- mental concerns on the one hand, affordability and political economy concerns on the other—is a task that policy makers in the region are increasingly unable to put off. While challenging, the reforms needed for this balancing act can build on much that has been learned in the last decade in terms of improving the effectiveness of social assistance systems and increasing energy efficiency. The report suggests that a policy agenda that focuses on cutting subsidies to the energy sector, while investing in energy efficiency and supporting households at the bottom of the distri- bution, amounts to a new wave of policy reforms for the energy sector in transition countries. The feasibility of such an integrated policy agenda and the ability of these policies to balance the competing claims of fiscal responsibility and social concerns are explored through different policy scenarios, which, in their simplicity, help clarify the parameters of the policy choices many countries ECA are facing. Energy Efficiency: Lessons Learned from Success Stories The report is designed to identify energy efficiency policies that have been implemented in countries that have successfully decreased their energy intensity. The study analyzes the energy efficiency policies in seven successful EU countries: Denmark, Germany, Ireland, Sweden, Lithuania, Poland and Romania. These countries were achieved low energy intensities or reduced their energy intensity considerably over the past twenty years. The report analyzes the evolution of the energy inten- sity of these countries from 1990 to 2007, identifying points of inflection in the progress towards improvements. Changes to the policy agenda immediately upstream are explored in an effort to identify cause and affect relationships in energy use. The country case studies indicate that policy implementation evolves, reflecting such issues as institutional capacity and affordability. For example, energy price increases were adjusted quickly to reflect full economic costs for all sectors except house- holds in EU-12 countries. EU-15 countries have added environmental taxes to energy costs, providing deeper incentives to constrain energy use. Implementing environmental taxes was difficult and generally took place when it appeared to be politically viable to do so. Similarly for gov- ernance issues, EU-12 countries have undertaken some of the first steps towards improving the governance of the energy efficiency agenda by establishing an entity responsible for energy efficiency policy and prepar- ing National Energy Efficiency Action Plans. Monitoring and Evaluation of these programs is functioning to a limited extent in EU-12 countries while EU-15 countries take these responsibilities more seriously as they are better able to afford the costs associated with such programs.