Managing the Impact of Mitigation Policies

Transcription

1 Managing the Impact of Mitigation Policies White Paper prepared for Climate for Sustainable Growth Project February 2016 Andrei Marcu Wijnand Stoefs Tomasz Chruszczow Katja Tuokko

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3 This White Paper is part of the CEPS project Climate for Sustainable Growth, whose main objective is to analyse the impacts of climate change mitigation measures on the three pillars of sustainable development: the economic, environmental and social dimensions. It does so by looking at the positive as well as adverse - both intended and unintended - impacts of climate change mitigation policies and projects. This paper fully recognizes that mitigation policies have both positive and adverse impacts, the focus of is on any (potential) adverse impacts. This White Paper builds on five case studies developed by CEPS in an earlier stage of the Climate for Sustainable Growth project, which review the impact of climate change policies at three different levels: policy (food labeling), sectoral (soda ash in the EU) and country (Ghana, Poland and the Maldives). These case studies can be found on the following website: It is important to note that lack of information and analysis of impacts and tools to mitigate adverse impacts can act as a brake on ambitious climate action. This paper and the overall project s focus should be seen in this light. This project was made possible by the support of ENI, Hydro, Lafarge, Solvay and the Government of Saudi Arabia. Centre for European Policy Studies (CEPS) Brussels Copyright 2016, Centre for European Policy Studies All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of the Centre for European Policy Studies. Place du Congrès 1, B-1000 Brussels Tel: 32 (0) info@ceps.eu website: Electronic version can be accessed via: i

4 Contents Chapter 1. Introduction... 1 Chapter 2. Impacts of climate change mitigation policies... 2 Impacts of domestic policies... 4 Impacts of policies implemented in other jurisdictions... 8 Impacts of international policies Chapter 3. Addressing the impacts of climate change mitigation policies Identification of impacts Mitigation of impacts Evaluation of mitigation tools Chapter 4. Conclusions and lessons learned Identifying impacts Quantifying impacts Addressing impacts ii

5 Managing the Impact of Mitigation Policies White Paper Prepared for the CEPS Project on Climate for Sustainable Growth Andrei Marcu, Project Leader Wijnand Stoefs Tomasz Chruszczow Katja Tuokko Chapter 1. Introduction Climate change, as a challenge facing humanity, is being addressed through the implementation of various policies and measures aimed at reducing greenhouse gas (GHG) emissions. When these policies and measures are implemented, in the period of transition and beyond, they have both co-benefits, as well as adverse impacts, which can deeply affect our everyday lives and society. For this reason, it is extremely important to pay close attention to the way in which the transition to a low-ghg economy is managed. What is also important, as reflected in the discussions in several different forums, including meetings within the UNFCCC, is the recognition that GHG mitigation policies and projects may have significant impacts other than the intended reduction in GHG emissions within the defined jurisdiction. This paper highlights the need to ensure that any unforeseen and unintended adverse impacts of climate change mitigation policies are addressed in a timely fashion. It emphasises that the transition to a low-ghg society should take place by moving harmoniously across three axes of sustainability: i) integrity of environmental protection; ii) economic growth that leads to higher standards of living; and iii) social solidarity, inclusion and cohesion. At the same time, awareness of all the impacts will make for a more efficient and informed policy-making. Furthermore, a full understanding of both the domestic and international impacts is crucial for the speed with which mitigation measures can be implemented and the buy-in they receive from stakeholders. Policy-makers, especially in the developed Andrei Marcu is Head of the Carbon Market Forum at CEPS. Tomasz Chruszczow (Polish Foundation for Climate Change), Wijnand Stoefs is Researcher and Katja Tuokko is Research Assistant in the Carbon Market Forum at CEPS. 1

6 world, are trying to identify, manage and address the adverse impacts of GHG mitigation policies within their own jurisdictions, and are putting safety nets in place when necessary. But the question arises whether they give the same level of attention to the impacts of their GHG mitigation policies outside their own jurisdiction? This White Paper examines whether there are potentially unintended impacts of existing, or emerging, policies outside the jurisdictions where they were put in place. This question is equally relevant when it comes to impacts of international climate change mitigation policies. This latter category includes policies such as those that the International Civil Aviation Organization (ICAO) and the International Maritime Organization (IMO) intend to put in place. While these impacts may not be immediately visible, they will become increasingly evident as GHG mitigation policies become stricter and start to bite. Chapter 2 provides clear evidence of the different types of impacts that are an effect of mitigation policies. Chapter 3 turns to the question of how to effectively address the impact of climate change mitigation policies by presenting domestic and international tools that have been tried in various parts of the world. In addition, it also examines potential ramifications related to the timeline of implementation of policies and their impacts. Chapter 4 draws conclusions and sums up the lessons learnt. This White Paper builds on five case studies developed by CEPS in an earlier stage of the Climate for Sustainable Growth project, which review the impact of climate change policies at three different levels: policy (food labelling), sectoral (soda ash in the EU) and country (Ghana, Poland and the Maldives). It is important to emphasise that this paper does not attempt to review or judge the merit, effectiveness and efficiency of climate change mitigation policies and measures, but rather focuses on their social, economic and environmental impacts, especially during the period of transition to a low GHG economy. Chapter 2. Impacts of climate change mitigation policies Many jurisdictions that are implementing GHG mitigation policies monitor their impacts, with a strong focus on economic impacts. Monitoring is done for a variety of reasons, including legal obligations related to the implementation of any new legislation or regulation. Developed countries, which have taken the lead in implementing mitigation policies, are particularly concerned about the impact these policies will have on their own territory, beyond mitigating climate change. It is often the case, however, that the impact of domestic policies beyond the jurisdiction implementing them and the impact of policies implemented in other jurisdictions are not sufficiently considered. For example, the European Commission s impact assessments for the EU ETS take a wide variety of economic, environmental and social impacts in the EU into account, but the in depth investigation frequently stops at the EU s borders. The only international impacts taken into consideration are 2

7 related to domestic competitiveness concerns and, occasionally, their effects on trade with Least Developing Countries (LDCs). By and large, outside the highly politicised UNFCCC negotiations, little attention has been paid to understanding whether there is any impact from GHG mitigation policies in other jurisdictions. But in today s highly globalised and interdependent world, such a question should not be viewed as inappropriate. To conclude, in order to present the findings of the case studies in a systematic manner, this chapter will consider the impacts from three different angles: 1. What are the impacts of GHG mitigation policies in the jurisdiction where they are implemented? 2. What impact, if any, do policies implemented in one jurisdiction, have on other countries? For illustration purposes, we can consider the case of Ghana examining both a) which policies, implemented in other jurisdictions, have on it and b) which impacts Ghanaian policies have beyond their borders. 3. What are the impacts of international GHG mitigation policies (implemented by international organizations), on the different jurisdictions covered by those policies? This White Paper clearly identifies examples of both positive impacts (labelled as cobenefits ) and adverse impacts. Both positive and adverse impacts can also be regarded as either intended, or unintended. While intended co-benefits may need to be managed in some cases, they are for the most part welcome. But adverse, but unintended, impacts do need to be managed. While fully recognising both sets of effects, at this time we focus on unintended adverse impacts of climate change mitigation policies. An example of a climate change mitigation policy with both positive and adverse impacts can be found in the EU Emissions Trading System (EU ETS) which was introduced with the objective of putting a price on a tonne of GHG emitted, and obliging the emitter to internalise that cost. This allowed economically rational decision-making processes to guide decisions on asset allocation: GHG-intensive products and production processes would become more expensive and low-ghg alternatives would become more attractive. Among the intended impacts of the EU ETS is the encouragement for low-ghg innovation and energy or fuel savings, the dissemination of green technology and the creation of price incentives to choose low-ghg alternatives. At the same time it was not intended to encourage production activity to move to jurisdictions with no, or less stringent, climate change policies, which may result in higher total GHG emissions. This phenomenon is known as carbon leakage. In addition, we should also be concerned to learn whether and how these policies can impact sustainable development and if so, how to quantify such an impact. In looking 3

8 at the impacts through the lens of sustainable development, this study categorises them in the following ways: - Economic impacts, such as changes in trade, production or investment trends, growth or reduction in size and importance of different sectors, changes in international competitiveness, carbon leakage, cost structures, changes in disposable income. - Social impacts, such as job losses and gains in different sectors, need for retraining, household disposable incomes and human capacity building and inclusion of stakeholders in decision-making processes. - Environmental impacts, such as changes in non-ghg emissions, air quality, water use and water pollution, deforestation, land use. Assessing impacts of climate change mitigation policies Adverse Positive jgfmfg Intended gfj Economic Unintended Social Environmental In looking at the impacts of GHG mitigation from the three different angles described above, this chapter first examines domestic impacts, then impacts of policies implemented in other jurisdictions, and finally impacts of international policies. Impacts of domestic policies The domestic impacts of climate change mitigation policies are currently far better studied, understood and managed than impacts from policies implemented in other jurisdictions, or at the international level. The former are examined in the following sections with respect to their impact on the economic, social and environmental dimensions of sustainable development. Economic impacts In our five case studies we examined in particular economic impact on production capacity, investment, costs, disposable income, production levels and trade. Impacts were not observed in all these areas in all five studies. A few examples showing the 4

9 impacts on production costs, competitiveness and investment will help to illustrate the kinds of impacts that were observed. In general, it is not always clear and easy to demonstrate the cause-effect relationship between what was observed in the areas listed above and climate change policies. Climate change policies are just one of the many factors that impact the economic performance of enterprises, people and society overall. Most impacts were observed in the cost and price areas, and could be in some cases more directly related to climate change policies. One of the strongest impacts of climate change mitigation policies observed in the case studies concerned production costs. The EU ETS aims to increase the production cost of more emissions-intensive goods with respect to less emissions-intensive alternatives by putting a price on GHG emissions. It does this by means of two types of costs: direct and indirect costs. Direct costs are the costs of purchasing emissions allowances (EUAs) to cover GHGs emitted during production. Indirect costs are the direct costs that are passed through to downstream producers in the same value chain; the GHG costs are embedded in inputs such as energy or intermediate products. Installations covered by the EU ETS also incur administrative costs resulting from the monitoring, reporting and verification (MRV) obligations under the scheme. In this context, we now consider the experiences of the Polish iron and steel sector and the European soda ash industry, both of which have faced direct and indirect costs from the EU ETS. Direct costs have been mitigated by free allocation, based on a complex formula that is discussed in-depth in the next chapter. Over the period (Phase 2 of the EU ETS), the Polish iron and steel sector was allocated more free allowances than necessary to cover their emissions, allowing the companies to earn windfall profits. In Phase 3 of the EU ETS ( ), however, the sector has faced small, but non-trivial, direct costs estimated at 0.56 per tonne of steel in 2013, and 0.91 per tonne of steel in The indirect costs of the EU ETS for the iron and steel sector were, in some cases, more significant, especially in the 2nd phase of EU ETS. The estimates for indirect costs ranged from 0.05 per tonne of steel in 2014 for installations that use less electricityintensive technology, to more than 15 per tonne of steel in 2008, for electricityintensive electric-arc producers. The combined direct, indirect and administrative cost for European soda ash plants also depends on the production technology and fuel used. In this case, due to the formula used to distribute free permits in the EU ETS, the least emissions-intensive plants (0.8 tonnes of CO2e emitted per tonne of soda ash) make a small profit from the EU ETS: between 0.24 and 1.19 per tonne of soda ash (for respective EUA prices of 8 and 30). The high emissions-intensive plants (1.4 tonnes of C02e emitted per tonne of soda ash) face significant EU ETS costs, between 4.56 and per tonne of soda ash (for 5

10 respective EUA prices of 8 and 30). This amounts to between 3% and 11% of total production costs. The impact of the EU ETS on the competitiveness of the Polish iron and steel sector and the EU soda ash sector should, however, be treated with caution. Studies have shown that at least part of the costs might have been passed on to downstream sectors and consumers. While these costs are an intended consequence of the EU ETS, there are also unintended impacts. By increasing production costs for industry in the EU, the competitive position of EU industry vis-à-vis foreign competitors may worsen. This could cause carbon leakage, which is the displacement of emitting activities and jobs to countries with no, or less stringent, climate change policies, resulting in a net increase in GHG emissions. The EU ETS price signal should have an impact on production levels and on investment decisions in the Polish iron and steel and EU soda ash sectors, but the case studies have not found evidence of carbon leakage at this stage. Other variables have been more significant so far in determining the competitive positions of these industries. The drastic restructuring of the Polish iron and steel sector since the early 1990s was due to its transition from a centrally planned economy to a market economy, and not due to climate change policies. More recently, the economic crisis and the high price of energy in the EU have had a far greater impact on the Polish iron and steel sector and the EU s soda ash industry than the EU ETS. As such, it is currently not possible to determine a clear impact of climate change mitigation policies in the EU on investment decisions in these two sectors. Investments are part of a long-term decision-making process, and it is possible that climate change policies are still too young to allow for a visible cause-effect relationship. On the other hand, large-scale energy efficiency and renewable energy projects can raise concerns that investments in climate change mitigation cause short-term economic impacts by inducing a scaling back in spending in other critical areas. Countries, such as the Maldives, may lack the financial capacity to invest in climate change mitigation without scaling back spending in areas such as education, environmental protection or health care, with significant socio-economic and environmental impacts. In the Maldives, the cost of the two renewable energy projects that are being undertaken, and a third one that is still in a planning phase, amounts to nearly $380 million, or approximately 18% of its GDP. In the long-term, however, these policies and projects have substantial and desirable benefits: energy consumption and energy bills decrease, the local energy mix is diversified and energy security is enhanced. Other less-obvious benefits include improvements in local air quality by lowering both GHG and non-ghg emissions, which benefits the health of the local population. 6

11 Social impacts The case studies find that the domestic impacts of climate change mitigation policies also have a social dimension. This section highlights some of the findings including impacts on household disposable income, income distribution and employment. Firstly, the disposable income of households and businesses can be impacted both positively and adversely by climate change policies. Energy efficiency and renewable energy programmes in the Maldives and Ghana reduce energy bills by lowering energy consumption and replacing fossil-fuelled generators with alternatives that are cheaper in the medium to long term. Household disposable incomes can also be reduced, either for all or for specific income groups. Even though governments reform direct and indirect fossil fuel subsidies in order to decrease spending on these schemes, encourage energy savings and promote low-ghg alternatives, these reforms can still have unintended impacts. In Ghana, for example, fuel prices increased between 15% and 50% after fossil fuel subsidies were phased out in 2013, thereby raising transportation prices. This had detrimental effects on income distribution. Because transportation and energy account for a larger percentage of spending for lower-income households, these price increases disproportionately affect lower-income households, by decreasing their disposable income by an estimated 7%. It must be noted that climate change mitigation policies could also exacerbate the energy poverty that afflicts large numbers of people in developing countries who lack access to modern energy. For example, investments in renewable energy could increase electricity prices and reduced fossil fuel subsidies could affect access to energy and transportation. Other climate change policies, however, could help mitigate energy poverty. Off-grid renewable energy installations, e.g., help electrification of rural areas in Ghana. One can also point to positive impacts from climate change policies in the form of potential job creation and the development of new and green sectors of the economy. The production, installation and maintenance of energy-efficient systems and renewable-energy installations in Ghana and the Maldives have created local jobs for factory workers, electricians and technicians. In Ghana, at least 100 direct jobs were created in recycling, retailing and production centres with an energy-efficiency programme aimed at replacing old and inefficient refrigerators. Also in Ghana, a programme that replaced light bulbs with more efficient compact fluorescent lamps (CFLs) increased employment, as not only were local electricians trained, but also two factories were established in Ghana to produce CFLs. There are currently no clear indications that climate change policies have resulted in significant job losses in any of the five case studies. There is some evidence that jobs in the fossil-fuelled energy sectors in the Maldives and Ghana are being replaced by jobs in building and maintaining cleaner energy alternatives, but the net impact on 7

12 employment is not yet clear. This creative destruction of jobs, however, is also an intended impact. In the electricity generation and iron and steel sectors in Poland and the soda ash sector in the EU, there have been no observed job losses due to climate change policies. Other macroeconomic developments, such as the economic crisis, energy prices and the transition to a market economy have had a far greater impact on employment. This could change over time, however, as EUA prices increase and free allocation to installations at risk of carbon leakage, which are the main measures to smooth the transition, decreases. Environmental impacts On the environmental side, most policies and projects observed have limited unintended impacts. The impacts are mostly confined to the siting and construction of projects and the disposal of waste during decommissioning. The construction of renewable energy installations such as wind turbines and solar PV systems could have significant environmental impacts if they are sited in locations that are environmentally sensitive (such as coral reefs) or if the construction is not well managed from an environmental point of view. Different aspects of the local environment, such as the quality of soil and ground water, can be affected if the decommissioning of energy-efficiency and renewable energy installations and the disposal of components are not managed well. In Ghana, the CFL replacement programme has the potential to create mercury pollution if CFL bulbs are not disposed of and recycled properly. In the Maldives, there is currently no facility to handle large amounts of waste from solar panels safely. The decommissioning of those panels therefore currently entails transporting the panels overseas, and handling the waste there, which is not without risk if not properly done. Impacts of policies implemented in other jurisdictions GHG mitigation policies may have impacts in jurisdictions other than those where they were implemented. These types of impacts have in general not been closely examined and are not the object of a regulatory requirement. The impacts identified are mostly socio-economic in nature. There are two ways to analyse such impacts, which may have implications for the way in which they are handled. One approach is to recognise and measure the impacts in a given jurisdiction of GHG mitigation policies that are implemented in another jurisdiction (i.e. impacts in Ghana of policies in other jurisdictions). In the context of the case studies on which this White Paper is based, these are the potential impacts that would need to be recognised in Ghana or the Maldives, as a result of GHG mitigation policies in the EU. 8

13 Regarded from this angle, Ghana and the Maldives would have to recognise that such impacts exist and be aware that they are the effect of EU policies. Whether the impact or the awareness of the existence of policies in other jurisdictions comes first, is something that would require further discussion. The second approach is to examine the impacts that policies in one jurisdiction have on other jurisdictions. When the EU adopts a GHG mitigation policy it should examine if it has unintended impacts not only in the EU, but also in other jurisdictions, such as the Maldives and Ghana. When a policy or measure is intended to apply only to the issuing jurisdiction, there is at present no, or less detailed, obligation on that jurisdiction to consider whether it has any impact beyond its own borders or the nature and magnitude of this impact. Given the two viewpoints, it is not surprising that there is, compared to domestic impacts of policies, a relatively small body of knowledge and literature when it comes to impacts in other jurisdictions. In addition the framework to identify such impacts and the methodologies to quantify them are very sparse. The impacts that were observed in the case studies were nearly all unintended, as there is currently little attention paid to this type of impact when policies are designed and implemented. The Product Environmental Footprinting (PEF) scheme can be used to illustrate crossborder impacts. The PEF is a voluntary EU-led labelling scheme that is currently in its pilot phase. It aims to simplify environmental labelling in the EU, by providing a common methodology, verification methods and rules for communication for producers within specific product groups. The second wave of pilot projects, started in June 2014, focuses on 11 food-related products. The initiative can potentially have substantial and beneficial impacts in and beyond the EU. It could lead to the harmonisation of environmental labels and create transparency for EU consumers who wish to buy green products but are confused by a plethora of different green claims and labels for consumer goods. At the same time, it could be also very helpful by harmonising standards for producers across the globe, which may wish to conform to green criteria and sell green products in the EU. The Product Environmental Footprinting scheme would have a broad reach, with the potential to cover all consumer goods (food, clothing, household appliances, etc.). This would increase the ability of producers of green goods, regardless of their location, to market and sell their products to EU consumers. However, not all of its impacts can be considered desirable. The scheme impacts small producers, many of them in developing countries, as standards are inherently more difficult to meet for smaller producers; they may lack access to information, and the capacity (human and financial) to comply with this regulation. Goods that rely on many small producers at the base of the value chain (like cocoa, palm oil, shrimp, rice and other major developing country agri-food exports) will tend to suffer disproportionately. 9

14 Another example of impacts of climate change policies, also from the Food Labelling case study, the EU Forest Law Enforcement, Governance and Trade (EU FLEGT) programme, addresses illegal logging and deforestation by preventing the import of illegal timber into the EU, strengthening sustainable and legal forest management, improving governance and promoting trade in legally produced timber. One approach within the EU FLEGT framework takes the form of voluntary partnership agreements between the EU and timber-exporting countries. The EU commits to help cosignatories with capacity-building and forest management in order to reduce illegal logging. In addition to creating a sustainable forest product industry and helping to avoid deforestation, EU FLEGT also affects those communities that depend on informal logging, thereby affecting livelihoods. On the positive side it helps to build capacity and secure market access for those producers that source their lumber in a sustainable fashion, which provides long-term economic prospects for the community. The EU ETS provides the clearest signal among existing GHG mitigation policies worldwide, as it results in a carbon price whose impact can be accurately traced. It has the potential to trigger increases in the cost of services and of intermediate and finished goods globally. Providers of services and producers of goods that are faced with increased production costs due to the EU ETS will pass, whenever possible, a share of these costs on to their customers. This is true whether the customers are in their jurisdiction or abroad. The case study of the soda ash sector concludes that the direct and indirect costs resulting from the EU ETS carbon price are likely to increase global prices for soda ash. This could be attributed to increases in the price of EU producers, possibly in combination with a fall in supply, as some EU producers may become uncompetitive in what is a globally traded quasi-commodity. The exact impact on global prices is difficult to assess for several reasons: the EU ETS prices have been low, the soda ash sector has only been covered by the EU ETS since 2013 and this is a relatively new policy whose costs will have to work their way through the supply chain. The higher prices are passed through to downstream sectors that use soda ash as an input, such as glass and detergents, leading to higher production costs for these products, for example, in the construction and car industries. Downstream sectors and ultimately consumers both in developing and developed countries face increased prices due to this international pass-through of EU ETS costs. It can be argued that the EU ETS price provides an incentive to use soda ash from processes or facilities that are less GHG-intensive. This is a real impact, but a desired one. However, the impact of moving production to more GHG-intensive production facilities that are not covered by GHG constraints was not anticipated nor considered desirable as an outcome. Also, raising the cost of materials used in consumer products or the construction industry in developing countries is not a desired outcome of pricing GHGs through the EU ETS. 10

15 Another example is aviation and maritime transportation within the EU ETS. While the EU ETS provision on international aviation has been put on hold pending the outcome of the ICAO process in 2016, its potential impact on developing countries could become significant, as a function of the price of permits in the EU ETS, and other factors related to local circumstances. If airlines are required to surrender emissions allowances in the EU ETS to cover their international flights, this could result in higher ticket prices and potentially impact access to air transportation. The International Centre for Trade and Sustainable Development (ICTSD) estimates that an EU ETS allowance price of 30 could lead to a 4% increase in ticket prices, and a 2.4% decrease in EU-wide demand for flights. 1 For countries that are highly dependent on international tourism, such as the Maldives, a decrease in tourist activity could result in significant losses in terms of income and jobs. Tourism is the most important sector for the Maldives economy and represents a significant percentage of GDP (28% in 2012). However, the decrease in demand for aviation will not be uniform. The Maldivian tourism sector Maldives is not expected to witness a 2.4% decrease in EU passengers because of the inclusion of international aviation in the EU ETS.. The Maldives is a luxury destination, and the cost of transportation is only one aspect in the price of luxury tourist packages. Additionally, there are few alternatives modes of transportation to reach the Maldives, which would also indicate a relatively small impact of a carbon cost of the airline industry on tourism in that country. Another GHG mitigation policy that the EU is currently examining, namely the inclusion of maritime transportation in the EU ETS, could also have a significant impact on the three countries examined in the case studies (Ghana, the Maldives and Poland). Modelling done by the ICTSD shows that an EU GHG pricing mechanism for maritime transportation would potentially lower the GDP of Small Island Developing States (SIDS), such as the Maldives, by between 0.2% and 1.8% (at respective carbon prices of 15 and 30 USD), solely through reduced trade between the EU and the SIDS. 2 Although it is not yet decided whether maritime transportation will be covered in the EU ETS, the EU is implementing MRV (measuring, reporting and verification) requirements within the system starting in 2018, in order to facilitate discussions in the International Maritime Organization (IMO) and test the viability of a ship-based ETS. Impacts of international policies A third aspect of the impact of GHG mitigation policies is the impact of international GHG mitigation policies in jurisdictions where they are applicable. There are currently 1 International Centre for Trade and Sustainable Development (2011), The Inclusion of Aviation in the EU Emissions Trading System An Economic and Environmental Assessment, Geneve. 2 International Centre for Trade and Sustainable Development (2010), International Transport, Climate Change and Trade: What are the Options for Regulating Emissions from Aviation and Shipping and what will be their Impact on Trade?, Background Paper, Geneve. 11

16 not many international climate change mitigation policies and approaches that are operational. As identified in our case studies, the Clean Development Mechanism (CDM) and food labelling are among the most significant. Discussions are underway at the global level, however, on two other high-profile mitigation policies that are likely to become operational. These would entail the introduction of a market-based mechanism (MBM) to reduce GHG emissions from international aviation and international maritime transportation (regulated by the ICAO and IMO, respectively). Such an initiative has the potential to impact developing and developed countries significantly. Climate Strategies, an international network of independent researchers specialising in climate change, assessed and modelled the combined economic impact of an MBM on both international maritime and aviation. It found that the economic impact of an MBM for international shipping and aviation on developing countries would be small overall: reductions in GDP of less than 0.01% on average, with GDP reductions of around 0.2% for some countries studied. 3 Countries whose economies depend on tourism and trade are likely to experience impacts that are closer to the higher estimate. The Maldives is one of the countries singled out for analysis in that paper. The global MBM encompassing both international aviation and shipping would have a slightly positive effect on the trade deficit in the Maldives 10 years after implementation (0.25% change in the trade balance for a global ETS with 100% auctioning). However, this would not be sufficient to mask the adverse impacts of the marketbased measure on the tourism sector. Decreased numbers of tourists could reduce GDP by up to 0.22%. Summing up the positive (maritime) and adverse (aviation) effects leads to a GDP reduction of 0.182% ten years after implementation of the MBM. Several food labelling schemes were analysed in our case studies, all of which have climate change mitigation conditions. Labels can have various distributional effects. Labelling schemes can have significant benefits for businesses and households that are certified by UTZ, Fairtrade, RSPO or Rainforest Alliance. Both access to credit and the price they are able to charge for their crops are increased. Additionally, the labelling schemes also help build up the human and technical capacity of their producers by spreading good agricultural practices with regard to production, harvesting, handling and management. This helps increase the productivity of their members and the quality of their products, and reduces the use 3 Climate Strategies (2013), "Research to assess impacts on developing countries of measures to address emissions in the international aviation and shipping sectors", Final report and annex 6, case study on the Maldives, 6 February. 12

17 of toxic chemicals. Some labels also aim to empower women by emphasising training and capacity building of this vulnerable group. But labelling schemes (most notably those for cacao producers) favour large producers at the expense of small producers, as it is more difficult for the latter to meet the standards set by the labelling authorities. This distributional effect increases income inequality and prevents lower-income farms from reaping the full benefits offered by labelling schemes. CDM projects have brought substantial benefits, but also unintended impacts in Ghana. They raise international funding for local projects by making it possible to receive GHG revenues from the sale of Certified Emissions Reductions (CER). In some projects a share of these revenues are earmarked for the development of local communities. In addition, planned market-based mechanisms in ICAO and IMO are likely to use offsets from mechanisms such as the CDM. This may boost CER prices and therefore the benefits of CDM projects. There is also a potential for significant government savings. The Natural Gas Recovery and Utilization from Jubilee Oil Field CDM project is estimated to save $2 billion for the Ghanaian government over a 10-year period. However, if the price of CERs is lower than the estimates used when the projects were set up, they can incur significant costs for local businesses and governments involved, as uneconomical projects might be costly to either continue or shut down prematurely. Another benefit resulting from climate change policies is job creation. One CDM project that produced and supplied improved stoves created local jobs by helping local businesses develop the production of these new stoves; another such project involving the development of a landfill educated and trained local residents to become engineers, technicians, etc. One waste project in Accra is estimated to have created 700 permanent jobs and 300 during construction. However the number of jobs lost in the informal waste sector could be substantially more than those created by the project. ( The CDM projects on cook stoves mentioned above also generate significant benefits for the buyers of the cook stoves. They are more fuel efficient, thereby reducing expenditure on fuel, especially for low-income households. They also emit less smoke, which improves in-house air quality and results in significant health benefits for the entire family. There are also benefits to local agriculture: three waste-sector CDM projects identified in Ghana produce fertilizers, which decreases the need for chemical fertilizers and improves local water quality. A final and significant benefit from CDM projects in Ghana is the impulse they give to technology transfer and capacity-building by enabling and motivating companies to develop local projects in developing countries. 13

18 Chapter 3. Addressing the impacts of climate change mitigation policies Identification of impacts In order to address and manage the unintended (adverse) impacts of climate change mitigation policies and projects, it is necessary to first identify and quantify those impacts. Countries use various tools and procedures to identify impacts, which can be done either ex ante, i.e. before the policy has been implemented, or ex post, after the policy has been implemented. Identifying impacts ex ante has the clear benefit of allowing for the management of impacts before they occur, and the incorporation of tools to manage the risk at an early stage. The two most common ex-ante impact identification tools observed in the case studies are impact assessments and stakeholder consultations. Impact assessments are used to determine if there are any social, environmental or economic impacts that can be expected if the proposed measure is implemented. In certain jurisdictions, such as the EU, they are mandatory for any legislative proposal. The Ghana case study identified a limited number of impact assessments undertaken by the government, but there is no clear regulatory imperative to undertake impact assessments. Most international and multilateral donors and organisations play an important role in the identification of impacts. For example, the UNFCCC has extensive capacitybuilding programmes to aid countries in involving stakeholders during the implementation of climate change policies and starting impact identification procedures. International organisations, such as the World Bank and the CDM Executive Board, require impact assessments for programmes or projects they support, fund or approve in order to ensure their sustainability. The World Bank mandates the development of impact assessments and environment and social management frameworks for any project it funds. Community consultation also plays a large role in identifying and mitigating impacts in the procedures set out by the World Bank. In the case of the Maldives, the World Bank required impact assessments for its Scaling-up Renewable Energy Program (SREP) in low-income countries, but these assessments only analysed a limited set of potential impacts, with a focus on employment and disposable incomes. The UNEP Riso Centre (now the UNEP DTU Partnership) analysed one economic impact in its 2014 Low Carbon Development Strategy: the abatement costs of 23 projects and policies, but also did not take other economic, social or environmental impacts into account. It must be noted that impact assessments are frequently complex and technical exercises. They require both human capacities (for modelling and forward-looking analysis) and financial capacities (to support long and complex research and involvement with local stakeholders). Both of these capacities may be lacking in developing countries, or deemed to be too costly to invest in for every policy or 14

19 project. This constraint must also be seen in view of the fact that impact assessments produce far-from-perfect projections into the future, as they attempt to predict not only the manner in which projects unfold, but also the behavioural changes that these projects might or might not set in motion. A second major tool for assessing impacts that is potentially less costly and has a shorter timeline is stakeholder consultations. The aim of this tool is to gather the views of a wide range of stakeholders on a proposed policy or project, in order to identify and understand their concerns, as well as to define ways in which they can be taken into account and addressed. It is important to note that many impact assessments may include stakeholder consultations. Stakeholder consultations in the EU are often used to gather input from academics, research institutes, industry, private citizens and local governments when a piece of legislation is being reviewed or updated. In the Maldives the ministry responsible for a new legislative proposal solicits input from other government agencies and public stakeholders through workshops. This has the advantage of collecting the views, knowledge and experience of relevant ministries, businesses and individuals with respect to their concerns on potential impacts. This information is then, to the degree it is deemed relevant, incorporated into the legislative process. Both impact assessments and stakeholder consultations have one weakness in common, however. The identification of impacts (and when possible their quantification) does not necessarily translate into action. The issues, and what sometimes seems to be the indication for the best solution highlighted through these processes, are often not taken into account. This has been the case both for the Maldives and the EU. Furthermore, there is often no clear mechanism to prioritise the social, environmental and economic impacts that are identified. Ex-post identification of impacts has the advantage of hindsight: real impacts can be observed, lessons can be drawn and solutions presented. However, there is also the clear disadvantage that we cannot mitigate risk, which is the case if these processes are undertaken ex-ante. Also, end-of-pipe solutions are in many cases more expensive for addressing impacts. For the moment many climate change mitigation policies may simply be too young for ex-post analysis, as impacts may not yet have materialised. Our cases studies nevertheless identified some examples from which lessons can be drawn. An interesting example is the Grievance Redress Mechanism for the Accelerating Sustainable Private Investment in Renewable Energy (ASPIRE) project in the Maldives. This mechanism is a three-tiered system that clearly designates a responsible individual to whom individuals and organisations that are adversely impacted by the ASPIRE project can communicate their grievances in a formal or informal manner, anonymously or not. This procedure may be undertaken through judicial channels, if desired. The Grievance Redress Mechanism lowers the barriers preventing 15

20 stakeholders from getting their concerns heard and solutions introduced into the project, during and after operation. Both ex-ante and ex-post identification have their advantages and disadvantages and complement each other, but until now there have been few examples in which the two methods are used together. Mitigation of impacts Once impacts have been identified, the next step is to manage them. This is important in order to ensure that any unforeseen or unintended (adverse) impacts of climate change mitigation policies do not hamper sustainable development. While impacts can be identified ex ante and ex post, similarly, they can also be mitigated ex ante (before the policy is implemented and the impacts materialise) or ex post (after the policy is implemented and the impacts have materialised). Tools and measures that minimise mitigation ex-ante can be considered a form of risk management. They are meant to ensure that the expected, but unintended, impacts of a policy or action do not materialise. This can be accomplished by the deployment of risk mitigation measures before any impacts are observed, including changes in the policy or project before implementation. Ex-ante mitigation measures are therefore frequently part of the climate change policy itself. This is illustrated by the discussions in ICAO and IMO on the development of market-based mechanisms (MBMs) for these two sectors. Before the MBMs were defined, countries and stakeholders were already discussing the inclusion of measures to mitigate the impacts of the MBMs, which included offset mechanisms, recycling of revenues, de minimis thresholds for inclusion in the scheme and slower compliance timetables for developing or vulnerable countries. An offset mechanism in the ICAO MBM would, for example, allow airliners to purchase emissions reduction credits (for example, CERs) to comply with the MBM. This enables companies to look for low-cost abatement potential outside the aviation industry and could benefit the countries that host the projects that generate the credits. Recycling the revenues from the MBM could help countries mitigate impacts on those impacted by the MBM while continuing to encourage low-ghg innovation in the sector. De minimis thresholds could exclude countries or routes that do not contribute significantly to international aviation or maritime activities and/or emissions. This provision would help simplify the MBM by excluding small operators and could shield developing countries from the adverse impacts of the measure. Slower compliance timetables for vulnerable countries, on the other hand, would give those countries more time to prepare for the policy before it enters into force. A far-reaching example of an ex-ante mitigation policy, which is not part of the climate change policy, is the Economic Diversification Strategy that is currently underway in the Maldives. Diversifying the economy would limit its vulnerability to all external shocks, including climate change policies, for example, by decreasing the importance 16

21 of the tourism sector in the economy. This would limit the potential impacts of climate change policies in the international aviation sector. Ex-post mitigation measures focus on addressing impacts after they have materialised. This has the advantage that measures to mitigate the impacts can be more precise in selecting their targets (by focusing on those stakeholders that have experienced impacts) and more in-depth (by addressing only the observed impacts). This decreases the risk of not fully addressing the impacts, or overdoing it. Ex-post measures can also have a broader scope than ex-ante measures. Social security and safety nets in EU member states will be activated if climate change policies lead to losses in employment or closures of plants. These safety nets can include retraining programmes, early retirement, unemployment benefits and support programmes to help those affected to switch to other jobs. The labelling scheme established by the Roundtable for Sustainable Palm Oil (RSPO) in 2004 presents another example of an ex-post tool. Smaller producers of palm oil were facing challenges joining up and complying with RSPO standards. Since 2013 they can apply for assistance from the Smallholder Support Fund. Support can go to training on agricultural practices, conservation activities, social development, market access and organisational growth, and/or can cover auditing costs. Mitigation measures can also include both ex-ante and ex-post characteristics. The California cap-and-trade programme requires installations to surrender permits to cover their emissions. However, in order to minimise the risk of carbon leakage and related socio-economic impacts, installations receive free allocation, depending on their carbon leakage risk level (low, medium or high). Free allocation is done ex-ante, based on historical production. This ex-ante measure is complemented ex-post. One year later, when data on actual production levels become available, an ex-post true up takes place to adapt the initial allocation to actual production levels. The impacts discussed in the previous chapter materialised at both the national and international level. Likewise, the tools to manage and mitigate the impacts that were observed in the case studies are found at the national as well as the international governance levels. There is, however, no causal relationship between the governance level from which the impacts originate and the governance level at which the measures are undertaken to mitigate impacts. The Maldives Economic Diversification Strategy discussed above is an example of a national tool to mitigate potential international impacts. Conversely, the UNFCCC Capacity-Building Framework is an international tool that helps mitigate domestic national impacts by addressing the needs, conditions and priorities of developing countries. The Framework also focuses on the specific needs of least-developed countries and Small Island Developing States (SIDS) and aims to support stakeholder 17