1 

AS AGREED WITH THE CIVIL SOCIETY MEETING, HERE IS A REPORT

JOINTLY PREPARED BY THE DEPARTMENT OF ENERGY AND THE ASIAN DEVELOPMENT BANK

A. Consultations Undertaken 

1. The Government of the Philippines and the Asian Development Bank (ADB) have 

prepared this report at the request of the CTF Trust Fund Committee on consultations 

undertaken with civil society organizations and other stakeholders on the Philippines CTF 

Investment Plan update. 

2. As part of other work on the ADB-funded e-trikes pilot project, since April 2011 ADB has 

met with a wide range of stakeholders covering broad user groups—from tricycle drivers, 

suppliers, manufacturers, government officials, to lawmakers—on the e-Trike project design. 

ADB maintains lists of participants who attended the meetings (available upon request) that 

include more than 200 individual attendees at these events. However, as we have 

acknowledged in our earlier meeting, neither ADB nor the Department of Energy consulted a 

recognized renewable energy group before submitting the revised country Investment Plan for 

the Philippines. 

1. DOE’s Consultation in Taguig City (18 October 2011) 

3. The DOE held a consultation meeting in Taguig City attended by 16 LGUs (12 in NCR, 

Albay, Boracay, Cabanatuan, Davao) to present the proposed E-Trike Program wherein a 

minimum of 20,000 units to a maximum of 100,000 units of e-trikes will be deployed under a 

“Rent-to-Own” arrangement through the ADB loan facilities to LGUs. During the consultation 

meeting, the results of the Pilot E-Trike Study held in Mandaluyong was discussed, including the 

city’s approach to maximize driver participation in the actual runs, while paying Php150.00 or 

Php300.00 boundary per day. The need for the formulation of a long-term plan on promotion 

and sustainability was emphasized. 

DOE and LGU Officials at the consultation meeting 

4. The DOE noted the concerns and recommendations of the LGUs, among them, the 

need to conduct test runs of the vehicle, do life-cycle study of the lithium battery, suit e-trike 

design to specific terrain and conditions of routes, undertake IEC for driver-beneficiaries, make 

attractive the cost and financial scheme, address potential default-payment of drivers which 

caused bankruptcy of Monte de Piedad in a previous lending program to drivers, and install 

related support infrastructures. 

2012-08-054_000000000000001
2 

2. Project related discussion with stakeholders since April 2011 

5. Since April 2011, the Project team along with Government counterpart staff has 

consulted stakeholders, including national and local government units. In addition, drivers were 

consulted in Mandaluyong City and Malay (Aklan), two of the areas where the first units will be 

deployed. Beginning in July 2011, the ADB e-Trikes Project team began hosting informal 

industry meetings to foster communication and cooperation amongst industry players and to 

ensure local buy-in throughout the project preparatory process. To date, seven informal 

meetings have offered opportunities to encourage representatives of the local tricycle 

manufacturing community to ask questions about e-Trikes specifications, design and bidding 

processes, and to maintain open communication with the ADB team. Summaries of the 

stakeholder activities undertaken to date and lists of attendees are available upon request. 

3. Consultation since February 2012 

6. Since requests have been made for further consultations about the proposed switch 

from renewable energy to sustainable transport, the Department of Energy and ADB have 

reached out in a range of ways to a variety of stakeholders. Here is a summary of their outreach 

to key stakeholders since early February 2012: 

(i) Single stakeholder meetings, Manila: In early February 2012, ADB met the 

Networking and Project Development Federation of Free Workers (FFW) and the 

Asian Labor Network on IFIs (ALNI) Philippine Chapter. ADB also had a bilateral 

meeting with WWF on the investment plan. 

(ii) Washington, DC meeting: On February 9, 2012, the DOE and ADB led a 

telephone conference with international NGO representatives, mostly all 

Washington, DC, based, which was organized in consultation with the World 

Resources Institute (WRI), which represents developed country CSOs as an 

observer to the CTF Trust Fund Committee. Key NGOs monitoring energy and 

transport issues participated, including Overseas Development Institute (ODI), 

WRI, and Oxfam America. In advance of that meeting, NGOs concerned about 

the CTF investment plan update met and articulated their main concerns in a 

Briefing Note on the Philippines Clean Technology Fund Investment Plan 

Update. The document guided the discussions, and the meeting led to a shared 

understanding on many issues. Minutes of the meeting and a list of participants 

are available upon request. 

(iii) Planning of multi-stakeholder consultations, Manila: On February 10, 2012, 

ADB facilitated discussions among key civil society stakeholders about a series 

of further consultations on both the shift away from renewable energy and 

moving forward with sustainable transport. The NGO Forum on ADB, Aksyon 

Klima, WWF, and the Freedom from Debt Coalition worked with ADB to design 

the consultations. At a follow-up February 24th meeting, in addition to the groups 

above, Clean Air Initiative–Asia and Partnership for Clean Air joined the planning. 

The groups shared their consolidated recommendations for the consultations 

with the DOE on March 2nd, and the group is planning to meet with the DOE on 

March 9th to finalize the consultation schedule and the proposed participants at 

each meeting. 

2012-08-054_000000000000002
3 

4. Planned future consultations 

7. In the near future, the DOE, with ADB’s support, is planning to continue the consultation 

process through the following events: 

 Continue bilateral meetings- at the request of concerned stakeholders, the 

Government of the Philippines and ADB will continue to meet any stakeholders 

who want to express their concerns about the consultation process or related 

issues. 

 Multi-stakeholder consultations, Manila- Although the actual methodology of the 

meetings has not yet been decided, the initial discussions led to the planning of a 

series of six consultations along these lines: 

(i) Consultation 1: Renewable energy in the Philippines– The first 

consultation is for power sector stakeholders and for those interested in 

financing and the renewable energy sector. The Department of Energy 

(DOE) may present its case for not using CTF funds for a renewable 

energy project and solicits further inputs from key stakeholders. The 

consultation may also address other types of renewable energy that were 

not funded with CTF financing, such as wind, geothermal, etc.

(ii) Consultation 2: Other options/why e-Trikes?– The main target group 

for this consultation will be policy makers, government officials, 

academics, and some transport stakeholders who want to participate to 

prepare for consultation #3. This consultation will look at the other 

transport options for the CTF funding such as buses and e-jeepneys, and 

the DOE will present data and a case for choosing e-Trikes. This 

consultation is putting into context and discussing with relevant 

government agencies and other stakeholders the decision on why e-trikes 

were selected and not specifically the other options for CTF funding. 

(iii) Consultation 3: Sustainable transport in the Philippines– 

Consultation #3 focuses on the full range of transport stakeholders. This 

consultation aims to discuss with public transport (jeepney and tricycles) 

operators/drivers associations on the use and potential of fleet 

electrification. Representatives from TODA/JODA groups from Taguig 

and Makati who have actual experience could join this consultation. DTI 

and DNR representatives could speak about the disposal issue. DOE 

may present its case for using CTF funding for a sustainable transport 

project and solicit further inputs from key stakeholders. Note that some of 

the topics in the agenda below will also be covered in the project level 

consultations. However, at Consultation #3, as the target group is 

transport stakeholders, the depth of conversation will differ from those of 

the project level consultations with civil society.

(iv) Consultation 4: Sustainable transport and finance– Consultation 4 is 

for those interested in financing and the sustainable transport sector. The 

DOE may present its rationale for seeking funding for the e-trike project 

and solicit inputs from key stakeholders. An example of the type of 

discussion that could take place in this consultation include asking why 

2012-08-054_000000000000003
4 

banks with DOTC-approved criteria for borrowing for sustainable 

transport, including but not limited to e-trikes, were not used for financing 

purposes. 

(v) Project level consultations– assuming that the above consultations 

conclude with an agreement to move forward with sustainable transport 

and an e-Trike project, the project level consultations will cover topics 

agreed by ADB, DOE and key stakeholders, including those listed below. 

These consultations will vary in length, depending on the topic. Note that 

some of these topics were included in the consultation with transport 

stakeholders. As these consultations are for a wider audience, including 

civil society, academe, and others, they may address each topic at a 

different level. 

(vi) Concluding consultation–At the end of the series of consultations, it 

was proposed to lead a wrap-up session that synthesizes all inputs and 

discussions. Perhaps at the end of each consultation a representative 

would be selected to join this wrap up meeting with the DOE and ADB 

and agree on steps forward. 

8. While Department of Energy (DOE) will take the lead in these consultation meetings with 

ADB’s support, the DOE plans to undertake its own consultations with additional stakeholders, 

including other government agencies. 

B. Summary of Issues 

9. Here is a summary of issues that has been raised by the consultants during various 

consultations. 

Consultation with the NGOs: Comments Matrix 

Question/Comment Response 

No government 

ownership, ADB 

“railroading” the project 

and corrupting energy 

policy formulation 

 The Secretary of the Department of Energy (DOE), in his letter to CTF, 

has clearly stated the Government’s commitment to electric transport 

and that the project is a priority in the context of energy security. 

 The Government was actively involved in the design of the e-Trike 

project and participated in stakeholder discussions with tricycle driver 

associations, local mayors and governors on the planned e-Trike 

program. ADB has played a dual role in the project: as technical expert 

and financier. 

 

 While solar power is a priority for ADB, the context in the Philippines is 

different due to high electricity tariffs, and private sector interest 

prompted by the higher tariffs and additional subsidy through feed in 

tariffs (which government investment could crowd out). It is DOE’s policy 

position to currently limit subsidizing investments in solar to 50 MW for 

next three years to lessen its impact on average electricity price and 

benefit from expected sharp price reduction of solar panels in the coming 

few years. 

 On 16 February 2012, the Cabinet-level investment committee of the 

National Economic and Development Authority (NEDA) approved the E2012-08-054_000000000000004
5 

Question/Comment Response 

Trike project together with its proposed ADB financing with CTF support, 

to be presented to NEDA Board—chaired by the President—for approval 

(expected by mid-March). 

No formal consultation 

was done for the 

proposed CTF 

reallocation and ADB 

should delay the 

decision. 

 ADB and DOE followed the same process of consultation during 

submission of the original Country Investment Plan in 2009. However no 

NEDA infrastructure committee was involved as it was simply an 

allocation from one project (solar) to another project (e-trike) of DOE. In 

preparing for the recent request for reallocation, ADB and DOE plan 

further consultations both in Manila (preliminary discussion on 10 

February followed by wider consultation on 17 February) and 

Washington (9 February), and will include civil society representatives 

from multiple locations by video conference. We appreciate the NGO 

Forum on ADB's support in the planning of these consultations, to ensure 

they meet NGO needs. 

 DOE made its commitment to hold extensive consultation in its letter to 

CTF, stating “We are working with ADB to consult local NGOs regarding 

this matter and also on the details of the energy efficiency component of 

the revised investment plan.” 

 A list of key stakeholders consulted by ADB since April 2011 is available 

upon request. 

 The Philippine Investment Plan is a document prepared by the 

Government, and the Department of Finance submitted the plan to CTF. 

Secretary, DOE’s letter reconfirmed its commitment to fast track 

processing at all levels, including CTF approval. 

 As our work progresses, the DOE is committed to continuing 

consultations in the future. It will also undertake detailed consultations in 

each of the project areas to discuss options for old tricycle disposal and 

establishment of meaningful after-sales support for this technology. 

CTF investment could 

have been used as a 

subsidy for the feed in 

tariff to reduce 

consumer impact. 

 The original Philippine Investment Plan included about 100 MW 

equivalent rooftop solar project using net metering to sell excess power 

back to the grid. This would have reduced the average panel price 

though large international competitive bidding—the proposal was not for 

subsidizing other form of solar power 

Disposal of old tricycles 

and safety aspects of 

Lithium Ion battery. 

 Some earlier models of electric tricycles in the Philippines (and 

elsewhere) used lead acid batteries. However, all mainstream electric 

cars nowadays use lithium ion batteries: Nissan Leaf and Chevy Volt are 

prime examples. Based on global trends, ADB considers that the lithium 

ion battery, with longer life, higher energy density, no disposal related 

health hazard, and ability to fast charge, is the optimum choice. This is 

also the conclusion (Figure 1, page 12) of a recent IEA study1

, which 

concluded that although there is an inverse relationship between specific 

energy and specific power (i.e., an increase in specific energy correlates with a 

decrease in specific power), lithium-ion batteries have a clear edge over other 

electrochemical approaches when optimized for both energy and power density.

 Although due to high level of recycling, the volumes of lead dumped in 

 

1

 International Energy Agency, Technology Roadmap: Electric and plug-in hybrid electric vehicles, June 2011. 

2012-08-054_000000000000005
6 

Question/Comment Response 

the environment is relatively less in the case of lead acid batteries, much 

of the recycling is done on an informal basis, in unhygienic and 

dangerous conditions, and resulting in serious lead poisoning of the 

recyclers themselves and the neighboring communities.2

 Children are 

more susceptible to lead poisoning than adults and may suffer 

permanent neurological damage; pregnant women exposed to lead can 

cause damage to the fetus and birth defects. 

 The ADB financed pilot project has introduced Lithium-Ion batteries in 20 

pilot e-Trikes and these have completed more than 200,000 km since 

May 2011. 

 Recent recalling of lithium batteries in the US were not because of 

battery fault but to improve battery casing design. The proposed e-Trikes 

will include the improved battery casing. 

 According to the US National Highway Traffic Safety Administration 

(NHSTA) report,3

 an incident involving fire occurred more than three 

weeks after a vehicle had been crash tested on May 12, 2011. That 

incident, which occurred at the test facility caused no injuries, is the only 

case of a battery-related fire in a crash or crash test of vehicles powered 

by Lithium-Ion batteries, despite a number of other rigorous crash tests 

of the Chevy Volt separately conducted by both NHTSA and General 

Motors. 

 GM and federal safety officials believe that last year's fires were caused 

by coolant leaking from damaged plastic casing around the batteries 

after side-impact collisions. The coolant caused an electrical short, which 

sparked battery fires seven days to three weeks after the crash tests. No 

owners have reported fires after crashes. GM’s design solution is to add 

steel to the plates protecting the batteries. The NHTSA also has crashtested a Volt with the added steel, and have accepted GM’s proposed 

solution. 

 Battery and old tricycle disposal will be addressed by the project. Battery 

suppliers will be responsible for collecting used batteries under the 

project. Options for old tricycle disposal and meaningful after sales 

support will be developed after consultation. The first consultation in 

Puerto Princesa will be in early March 2012 for the public in each area. 

Current design is not 

suitable for a scale-up 

plan. 

 The current 20 e-Trike design was to test battery technology and 

charging options. New designs will be used for the scale up project. 

 DOE has concluded its nationwide contest for the best e-Trike design 

and awarded ten winners from a total of 183 entries. ADB has recruited a 

professional car designer to fine-tune the top three designs from the 

competition, to be used by the project. Different designs will be 

developed for different areas. 

 The drivers of the 20 pilot units running since May 2011 are convinced of 

 

2

http://www.worstpolluted.org/projects_reports/display/65

3

http://www.nhtsa.gov/About+NHTSA/Press+Releases/2011/Statement+of+National+Highway+Traffic+Safety+Admini

stration+On+Possible+Fires+in+Lithium-Ion+Vehicles+Involved+in+a+Crash

2012-08-054_000000000000006
7 

Question/Comment Response 

the benefits of the e-Trike, especially of the lithium-ion batteries, which is 

allowing them to fast-charge the battery in 20 minutes. The passengers 

are also satisfied with the performance. 

 Procurement will be of the whole e-Trike; unbundling of operational 

clusters was used only to demonstrate how new local industries may 

develop. 

No feasibility studies 

and ADB financing may 

crowd out the private 

sector. 

 Feasibility study will be posted (www.adb.org/etrike) after discussions 

with NEDA and NEDA board approval of the project. 

 ADB financing and a large-scale project is necessary for industry 

transformation. Without such project, local and retail and wholesale 

market for lithium-Ion batteries is unlikely to develop by itself. Currently, 

some private entrepreneurs are using lead acid battery in e-Trikes as 

lithium-Ion batteries are not locally available. 

 The ADB project will not crowd out private sector financing, but rather 

would create opportunity for newer projects as it will establish technology 

credibility for e-vehicles. The project will also build a local industry that 

may export electric vehicles across Southeast Asia and create demand 

for local private sector financing. 

2012-08-054_000000000000007
8 

Question/Comment Response

Role of Government 

Agencies in Decision 

Making 

The CSOs sought 

clarity on the interagency decision making 

process noting that the 

original investment plan 

was endorsed by 

multiple agencies in the 

GOP; yet this 

apparently did not 

happen for the updated 

plan. They also noted 

that there was a 

perception that the 

project was being 

driven by the ADB and 

lacked sufficient 

ownership by the GOP. 

ADB explained that in the development of the original plan, the MDBs worked 

closely with the Department of Energy (DOE), Department of Finance (DOF), 

and the National Economic and Development Authority (NEDA), and the three 

agencies agreed that the $125 million in CTF financing to be administered by 

ADB would be earmarked for the energy sector. Since the EEEV project is 

fundamentally seen as an energy project, and falls within the mandate of the 

DOE–led Fueling Sustainable Transport Program, they were under the 

assumption that ownership rests with the DOE, with the DOF as the key 

counterpart for all MDB-financed projects. ADB and the DOE claim that this 

was communicated to the Department of Transport and Communication 

(DOTC) and the Department of Environment and Natural Resources (DENR) 

and that NEDA was aware of all developments. Further, since the President of 

the Philippines, also the chair of the Climate Change Commission (CCC), had 

apparently sanctioned the EEEV project, the DOE saw no need to revert to 

other members of the CCC. 

It should be noted that inter-governmental consultation is primarily the 

responsibility of the government. 

Alternatives 

Considered for 

Inclusion in the 

Updated Investment 

Plan 

The CSOs sought 

clarity on the 

alternatives considered, 

not only in comparison 

with the original net 

metering project, but 

also within the range of

The RE scenario is very different now to what it was three years ago when the 

original rooftop solar net metering project was proposed. In 2009, the price of 

solar power generation was very high at $9/watt (solar prices have been 

declining rapidly to a global average of about $2 per watt in 2012) and 

intervention to support the sector was justified. The government had set a solar 

generation target of 100MW, and the Electric Power Reform Act bars public 

sector investments in generation. With the sector fully privatized, the net 

metering project was a good idea for achieving transformational impacts 

especially to reduce prices for residential and commercial. 

2012-08-054_000000000000008
9 

Question/Comment Response

sustainable transport 

solutions, as well as 

across a wider range of 

options in other sectors. 

In the current scenario, the feed-in-tariff structure (FIT) is not yet finalized, and 

due to the unresolved cost issues, the government has approved only up to 

50MW of solar power to be installed in the next 3 years. DOE has already 

received private sector interest for 300MW. Therefore, DOE do not see a role 

for intervention in solar generation until 2016 due to the potential to crowd out 

private sector activity, as well as concerns over the cost implications of 

increased supply of solar power (at relatively high incremental cost) to the grid. 

Regarding other RE options, the GOP is trying to phase in wind power, and 

hydro-energy has always been prominent in the Philippines grid mix. 

Investments in RE would hence not be transformational, and a $125 million 

loan combined with expected ADB co-financing of 3-4 times this amount is too 

large for the demand-side energy efficiency market. 

On the other hand, the DOTC and DOE have recently jointly recommended 

that there be a stronger push for alternative fuels. The Philippines is a net 

importer of energy to the tune of $8 billion per year and rising. So, the 

government has stressed the need for improving energy security by tempering 

fossil fuel consumption. The ADB and GOP assessed potential feasible 

projects based on a cost curve analyses. Meanwhile, they had also earlier 

started a parallel pilot e-Trike project. While they considered CNG and LPG 

options as alternatives, they found scaling up the e-Trike project to be the best 

option available in the short term. The CNG and LPG would take a longer lead 

time to have the infrastructure in place, including confirmation of the gas 

supply. Moreover, the DOE has prepared a alternative fuels roadmap for the 

next 20 years, and EVs are a critical component in it. 

The ADB and DOE are working with ADB’s sustainable transport team to 

ensure that this project, which is part of government’s broader transport sector 

plan, supporta institutional capacity building, regulatory rationalizing, etc. 

ADB will continue to work on improving the regulatory regime of the solar 

power sector. On February 20, separate from the consultation on the 

investment plan, ADB conducted a consultation with NGOs regarding the 

issues of open access, the FIT design and other power sector issues. It will 

use this ongoing process of dialogue to address concerns and arrive at a more 

viable cost sharing framework. 

This project has multiple benefits: for the drivers, this will increase daily 

income, for the government, it will reduce volume of oil import and improve 

energy security, enable optimization of the framework of a comprehensive 

urban transport plan, and for the users, it will reduce congestion, accidents, 

pollution and reduce the carbon footprint of the transport sector. 

2012-08-054_000000000000009
10 

Question/Comment Response

Potential for 

Emissions 

Reductions 

Concerns were raised 

about coal being a 

potential fuel source for 

the additional electricity 

consumed by e-Trikes. 

The CSOs referred to a 

UNEP Risoe Center 

study that suggests a 

switch to EVs would 

offer no reductions in 

emissions over vehicles 

powered by standard 

liquid fuels charging if 

the source of electricity 

comes from burning 

coal relatively 

inefficiently. 

While very unlikely, but even if the entire additional demand for electricity is 

generated by coal, the project would lead to lower emissions than persisting 

with liquid fuel-powered tricycles due to improvements associated with 

technology and efficiency standards. 

Further, while the RE sector has a comparatively higher potential for emissions 

reductions, the ADB and GOP maintain that participation in that sector is not 

feasible for now. 

ADB contacted Andrew Simpson of Curtain University, the author of Figure 

3.43 (page 129) of UNEP publication "Technologies for Climate Change 

Mitigation. In study, the author had used the typically lower efficient brown 

coal-fired power generation common in Victorian (Australia) with emissions 

intensity of 1.21 kgCO2/kWh. The author highlighted that in the Australian State 

of New South Wales, the black coal fired stations emission intensity is about 

0.89 kgCO2/kWh, or about 26% lower than Victoria. The author however 

agreed—to earlier, ADB and GOP position—that even if the grid is 100% coal 

fired a normal EV without air-conditioner will be significantly better than ICE 

vehicles, especially in Asian cities where the average speed is about 12 

k/hour. 

ADB will further clarify the appropriateness of its assumptions for the 

Philippines in the e-trike project document. 

Cost Effectiveness 

clarification on the 

comparative cost 

effectiveness between 

the net metering project 

and the EEEV project 

under worst case 

scenarios involving 

coal-based electricity 

generation. 

ADB and DOE has explained that the proposed FIT for the solar sector, if it 

comes through, will be $0.45/KWh, almost double the domestic tariff rate and 

which rivals Japan for the highest tariff in Asia, and they expect it to be fully 

passed through to consumers. Thus, even if the net metering project is more 

cost-effective in terms of GHG reductions, an intervention on solar is not a 

viable option at present. Further, they estimate that with a small battery of 

3kWh, the bulk of the EVs will be charged at home during the night, during offpeak period and will not increase the peak demand of the system. So, the 

additional electricity supply needed may not be as high and will significantly 

improve the cost effectiveness of the EEEV project. 

Additional Costs and 

Risk Premium 

The CSOs raised the 

question of how the 

project would 

incentivize private 

sector investment and 

reduce the access to 

financing barrier, which 

many consider to be a 

main barrier to EEEV 

deployment since the 

additional investment 

costs are recovered 

through lower 

operations costs. 

ADB noted that the Government has clarified that ADB’s value add is not pure 

financing. ADB’s involvement with CTF support would bring reputable safer 

battery manufacturer in the country and establish a retail-supply 

infrastructure—a pre-requisite for a locally made EV industry. 

Concessional financing will create the enabling environment for a local EV 

industry—safer reputable batteries with local support, charging infrastructure, 

and secondary industries. Access to finance is not a barrier; rather, there are 

technological, institutional and mindset barriers. The ADB and GOP believe the 

market can be transformed if technology can be brought in and, based on the 

interest expressed by a consortium of international manufacturers, the 

Philippines could become a hub for EV exports to the rest of Asia. Overall 

analysis of barriers and the transformation impacts will be discussed in details 

in the project documents, 

2012-08-054_000000000000010
11 

Question/Comment Response

What other options 

have been considered 

as alternatives to 

electric vehicles (e.g., 

CNG, LPG)?

All options have been and continue to be considered: CNG and LPG must be 

imported; switching from gasoline to these fuels results in minimal GHG 

reductions and does not enhance energy security. Switching from diesel to 

CNG may achieve 20% GHG reduction in best case scenario, but the energy 

efficiency gain would still be lower than that achieved via EEEVs. CNG and 

LPG may be practical for cars, light trucks, and heavy-duty vehicles, but these 

fuels do not present an opportunity for conversion of motorcycles and e-Trikes, 

which are at the bottom of the public transport pyramid. 

2012-08-054_000000000000011
3Sri Lanka

Project Number: 43207 

June 2012 

Proposed Loans, Grant and Administration of Loan 

and Grant

Republic of the Philippines: Market Transformation 

through Introduction of Energy Efficient Electric 

Vehicles Project 

Date printed: 25/06/2012 time: 8:25:19 PM

2012-08-054_000000000000012
CURRENCY EQUIVALENTS

(as of 6 June 2012) 

Currency Unit – Peso (P) 

P1.00 = $0.0230 

$1.00 = P43.53 

ABBREVIATIONS

 ADB – Asian Development Bank 

 ASR – Assessment, Strategy and Roadmap 

 BOI – Board of Investments 

 CDM – Clean Development Mechanism 

 CER – certified emissions reduction 

 CO2 – carbon dioxide 

 CTF – Clean Technology Fund 

 DOE – Department of Energy 

 EIRR – economic internal rate of return 

 EV – electric vehicle 

 FIRR – financial internal rate of return 

 ICE – internal combustion engine 

 ICB – international competitive bidding 

 LGU – local government unit 

 Li-Ion – Lithium Ion 

 LIBOR – London interbank offered rate 

 Meralco – Manila Electric Company 

 NCB – national competitive bidding 

 PMU – project management unit 

 TODA – Tricycle Operators and Drivers Association 

WEIGHTS AND MEASURES

 GWh (gigawatt-hour) – 1,000 megawatt-hours 

 kg (kilogram) – 1,000 grams 

 kWh (kilowatt-hour) – 1,000 watt-hours 

 mg (milligram) – 0.001 gram 

 mm (millimeter) – 0.001 meter 

 MW (megawatt) – 1,000 kilowatts 

 MWh (megawatt-hour) – 1,000 kilowatt-hours 

NOTES

(i) The fiscal year (FY) of the Government of and its agencies ends on 31 December. 

(ii) In this report, "$" refers to US dollars. 

2012-08-054_000000000000013
Vice-President S.P. Groff, Operations 2 

Director General K. Senga, Southeast Asia Department (SERD) 

Director A. Jude, Energy Division, SERD 

Team leader S. Hasnie, Principal Energy Specialist, SERD 

Team members J. Acharya, Climate Change Specialist, Regional and Sustainable 

Development Department 

R. Butler, Safeguards Specialist (Resettlement), SERD 

A. Fernando, Project Analyst, SERD 

G. Peralta, Senior Safeguards Specialist, SERD 

J. Leather, Principal Transport Specialist, RSDD 

J. Mangahas, Country Specialist, SERD 

J. Shah, Advisor, RSDD 

M. Suga, Social Sector Specialist, SERD 

E. Thomas, Social Devt Specialist (Civil Society and Participation) 

S. Zaidansyah, Senior Counsel, Office of the General Counsel 

Peer reviewer A. Zhou, Energy Specialist, RSDD 

In preparing any country program or strategy, financing any project, or by making any 

designation of or reference to a particular territory or geographic area in this document, the 

Asian Development Bank does not intend to make any judgments as to the legal or other status 

of any territory or area. 

2012-08-054_000000000000014
2012-08-054_000000000000015
CONTENTS 

Page 

PROJECT AT A GLANCE 

I. THE PROPOSAL 1

II. The Project 1

A. Rationale 1

B. Impact and Outcome 3

C. Outputs 3

D. Investment and Financing Plans 4

E. Implementation Arrangements 5

III. Due diligence 7

A. Technical Assessment 7

B. Sustainability 7

C. Financial Analysis 8

D. Economic Analysis 8

E. Governance 8

F. Poverty, Social and Gender 8

G. Safeguards 9

H. Special Features 9

I. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10

DESIGN AND MONITORING FRAMEWORK 11

2012-08-054_000000000000016
2012-08-054_000000000000017
PROJECT AT A GLANCE 

1. Project Name: Market Transformation through Introduction of Energy Efficient Electric Vehicles 

2. Project Number: 43207-013 

3. Country: Philippines 4. Department/Division: Southeast Asia Department/Energy Division 

5. Sector Classification: 

Sectors Primary Subsectors 

Energy √ Energy efficiency and conservation 

Transport Transport management and policies 

6.Thematic Classification: 

Themes Primary Subthemes 

Economic growth √

Environmental 

sustainability 

 

Capacity development 

6a. Climate Change Impact: 

Mitigation High 

6b. Gender Mainstreaming:

Effective gender mainstreaming 

(EGM) 

Gender equity theme (GEN) 

No gender elements (NGE) 

Some gender benefits (SGB) √

7. Targeting Classification: 

General 

Intervention 

Targeted Intervention 

Geographic 

dimensions 

of inclusive 

growth 

Millennium 

development 

goals 

Income 

poverty at 

household 

level 

√ 

 

8. Location Impact:

Rural Medium 

Urban High 

National Low 

Regional 

9. Project Risk Categorization: High 

10. Safeguard Categorization: 

Environment C

Involuntary resettlement C

Indigenous peoples C

11. ADB Financing: 

Sovereign/Nonsovereign Modality Source Amount ($ million)

Sovereign Project loan Ordinary capital resources 300.0 

Total 300.0

12. Cofinancing: 

Financier Category Amount ($ 

million)

Administration Type

Clean Technology Fund Official-Grant 5.0 Full

Clean Technology Fund Official-Loan 100.0 Full 

Total 105.0

13. Counterpart Financing: 

Source Amount ($ million)

Government 99.0 

Others 

Total 99.0

14. Aid Effectiveness: Not Applicable

2012-08-054_000000000000018
2012-08-054_000000000000019
I. THE PROPOSAL 

1. This is a report and recommendation on (i) a proposed loan, (ii) proposed administration 

of a loan to be provided by the Clean Technology Fund, and (iii) proposed administration of a 

grant to be provided by the Clean Technology Fund to Republic of the Philippines for the Market 

Transformation through Introduction of Energy Efficient Electric Vehicles Project.1

II. THE PROJECT 

A. Rationale 

2. Electric vehicles or e-vehicle represent a new technology with the promise to transform 

the way energy is used by today’s internal combustion engine (ICE) vehicles. For net energy 

importing countries, such as the Philippines, electric vehicles can dramatically reduce the 

country’s oil dependency, and improve long-term energy security. They are efficient, generate 

no harmful air and noise pollution and can be powered by indigenous renewable energy. 

3. Countries around the world are introducing e-vehicles to reduce energy security 

concerns: for example, the government of Israel has created generous policy incentives to 

support its commitment to 100% electric vehicles by 2020; the United States Government 

provides rebates of up to $7,500 per vehicle and have a target of one million electric cars by 

2015. The International Energy Agency’s Technology Roadmap2

, recently announced the proactive policies of the 17 countries—including the UK, Australia, Ireland, Japan, Singapore—that 

will support sales and deployment of seven million electric vehicles by 2020. 

4. Accounting for the total energy consumed from well to wheel3

, e-vehicles can reduce 

energy consumption by up to 50% and greenhouse gas emissions by up to 60% compared to 

ICE vehicles because: (i) no electricity is used while stranded in traffic jams (except air 

conditioning), (ii) energy losses in electric motors are about 5%-15%, compared with 70%-80% 

losses in the engines of ICE vehicles, and (iii) transmission and distribution of electricity is more 

efficient and cost effective than transportation of liquid fuels to the end user. 

5. The Philippines is in the forefront of developing local e-vehicle industry—e-Trikes, eJeepneys, and e-Buses. Since 2009, e-vehicle enthusiasts have undertaken a number of small 

isolated initiatives, and the Government plans to fast track the process using electric tricycles or 

e-Trikes as a priority. In April of 2011, ADB introduced4

, as a pilot, 20 locally made electric 

tricycles (e-Trikes) powered by imported Lithium-ion batteries in the City of Mandaluyong. 

Promising technical results has prompted the Government to scale-up the pilot program5

 and 

use an early-adopter opportunity to establish a sustainable local e-vehicle industry. This 

initiative has also attracted a number of reputable global battery and car manufacturers in the 

country, who considers the local market as the launching pad for a potential export market for 

these $4,000 to $5,000 e-Trikes to neighboring countries in southeast and south Asia. 

 

1

 The design and monitoring framework is in Appendix 1. 

2

 Technology Roadmap: Electric and plug-in hybrid electric vehicles, International Energy Agency, June 2011. 

 Available at http://www.iea.org/papers/2011/EV_PHEV_Roadmap.pdf 

3

 Energy consumed and green house gases (GHGs) emitted from the time a vehicle’s energy source leaves the well 

 to the time it is consumed by the vehicle, details available at: http://web.mit.edu/evt/summary_wtw.pdf 4

 Financed by RETA 6441: Efficiency Improvement and Connectivity Strengthening in Southeast Asia. Manila. 5

 Prepared by Technical Assistance to the Republic of the Philippines for Mitigation of Climate Change through 

Increased Energy Efficiency and the Use of Clean Energy. Manila. (TA 7754-PHI), ADB. 2010. 

2012-08-054_000000000000020
2 

6. The Government plans to transform the nascent e-Trike industry to an industry with at 

least three large local e-vehicle manufacturer. Large reputable global electric car (and battery) 

manufacturers are focused on bringing in the early adopter’s family car (Nissan Leaf, Chevy Volt 

and Toyota Prius) with price tag of about $45,000 for markets in Europe, the United States, and 

Australia. The Philippine vision is to transform the “base of the pyramid”, the tricycles, through 

technology leapfrogging. The combination of Lithium-ion battery technology and professionally 

designed e-Trikes to international standards will establish higher safety, environmental and 

efficiency principles. The proposed electric vehicle policy6

 also directly supports electric vehicle 

related businesses and will provide tax-exemption on imported electric vehicles for nine years. 

7. Use of Lithium-ion battery will also reduce the risk of re-introduction of Lead into the 

transport sector. Excessive use of e-bikes and e-Trikes with Lead Acid batteries and improper 

disposal prompted authorities in the Peoples Republic of China to crackdown7

 the industry. 

Philippines faces the risk of large import volume of substandard tricycles with poor quality Lead 

acid batteries reintroducing Lead in the environment. This may add to existing concerns on 

illegal smelting8

 of Lead. Detailed discussions on are in the supplementary document 24. 

8. For this transformation, the Government has sought support from the Clean Technology 

Fund (CTF), which have resources amounting to more than $4 billion pledged by major donors 

such as Australia, France, Germany, Japan, Spain, Sweden, the United Kingdom, and the 

United States. In December 2009, the Trust Fund Committee for the CTF endorsed the 

Philippine Country Investment Plan (CIP)9

, which the Government updated and submitted for 

approval in June 2012 to use CTF funds to buy down the cost of transforming the energy use by 

the tricycles. A detailed discussion on emissions reduction is in supplementary document 23. 

9. In 2010, the Philippines spent about $10 billion10 (a 39% increase from 2009) on oil 

import or about $27 million a day, of which 80% was for the transportation sector. The average 

cost of import was about $80 per barrel and, on an average, between 30 to 40 days worth of 

inventory was in the system—key concerns on energy security. Preliminary modeling shows 

that a 7% electric vehicle penetration by 2015 and 15% by 2030, can reduce fuel imports by 

approximately 6% in 2015, 13% in 2020, and more than 40% by 2030 with more reductions in 

greenhouse gas emissions and air pollution. 

10. The National Framework Strategy on Climate Change11 2010-2022, recognizes a lowcarbon path in the transport sector as an essential element and promotes models to improve the 

transport sector’s efficiency, as part of its strategic priority. The proposed Project is consistent 

with Department of Energy’s Fueling Sustainable Transport Program (supplementary document 

15) and the Alternative Fuel Vehicles Incentives Act of 2011. The promotion of new technology 

and energy efficient transportation solutions is part of the core lending strategy of the 

Assessment Strategy and Roadmap for the Philippine energy sector, and the program is in the 

Country Operations Business Plan12,2012-2014). 

 

6

 Senate Committee Report No. 44 on Senate Bill No. 285–Electric, Hybrid and Other Alternative Fuel Vehicles 

 Incentives Act of 2011. Available in the list of supplementary documents in Appendix 2. 7

 Recently, government closed down 583 lead-acid battery manufacturing plants because of improper disposal of 

hazardous waste and poor technical standard. http://www.zhb.gov.cn/zhxx/hjyw/201108/t20110802_215645.htm 8

 Philippines Department of Environment and Natural Resources recently ordered a nationwide campaign against 

illegal smelting of lead acid batteries. http://www.gov.ph/2011/09/01/denr-orders-crackdown-on-illegal-used-leadacid-battery-recycling-plants-in-region-3/ 9

 Published in December 2009, available at: http://www.dotc.gov.ph/Philippines%20CTF%20CIP%20Nov%209.pdf. 10 Source: Department of Energy, available at: http://www.doe.gov.ph/DO/Report2010.htm 11 The National Framework Strategy on Climate Change 2010-2022 available at: http://climate.gov.ph 12 ADB, Manila, September 2011, available at http://www.adb.org/sites/default/files/cobp-phi-2012-2014.pdf 

2012-08-054_000000000000021
3 

B. Impact and Outcome 

11. The impact of the proposed Project is sustainable energy use by the transport sector, 

and the outcome is the transformation of the tricycle industry through large-scale adoption of 

locally made energy efficient e-Trikes. 

C. Outputs 

12. The proposed Project has five outputs: (i) complete e-Trike units delivered to Local 

Government Units (LGUs) accompanied by a standard 3-year warranty; (ii) Lithium-ion battery 

supply chain with associated support services established; (iii) solar charging stations pilot in 

selected areas; (iv) material recovery from ICE tricycles and used batteries; and (v) successful 

communication, social mobilization and technology transfer. 

13. Output 1: E-Trike units. The Project will deliver 100,000 complete e-Trike units to 

selected cities (para. 22) and areas to replace existing ICE tricycles. The supply contract will 

include a standard warranty on mechanical and technical performance of the e-Trikes. The risk 

of technical defects and poor performance of batteries during this guaranteed performance 

period (at least 3 years or 2,000 charges) will be borne by the battery manufacturer. All e-Trikes 

will be clearly marked with a “battery supplied by” (similar to “Intel Inside” in computers) label to 

make consumer aware of the brand and obligations of the suppliers under the project. 

14. Output 2: Battery supply chain. The Project will initiate creation of Lithium-ion battery 

supply chain in the Philippines by creating an initial substantial13 market. The transformation 

objective is to attract reputable international suppliers, who have supplied at least one large 

global vehicle brand14. 

15. Output 3: Solar charging stations. The Project will establish (i) on a pilot basis, 5 offgrid solar charging stations—200 kW each—either as a cluster or stand alone, (ii) certain 

number of grid-connected charging stations. The solar charging stations will be sufficient to 

support the electricity needs of 1,000 e-Trikes. Most of this off-grid charging stations will be in 

the two island locations—Boracay and Puerto Princessa. For other areas, certain number of 

grid-connected charging stations will be included to reduce the “range anxiety” of drivers. 

Existing electric utilities will also be encouraged to establish charging stations as commercial 

operation. 

 

16. Output 4. Material recovery from ICE tricycles and used batteries. The Project will 

collect old ICE tricycles (both the side-car and the motorcycle), following the requirements of 

United National Framework Convention on Climate Change (UNFCCC). Used batteries (Lead 

Acid from ICE tricycles and Lithium Ion from e-Trikes) will also be recovered. 

17. Output 5. Communication, social mobilization and technology transfer. All 

stakeholders will be educated about the project—its benefits, technical parameters, costs and 

market potential of e-Trikes. This includes specific training of the drivers on use and 

maintenance of e-Trikes and technical training to other stakeholders to develop local human 

resources to support local industry development. 

 

13 By April 2012, Nissan sold about 11,000 electric cars (Nissan Leaf) in the US which required about 264 MWh of 

Lithium ion batteries—the 100,000 e-trike will need at least 300 MWh of Lithium ion batteries. 14 Table 5A: Manufacturers of EVs/PHEVs and partnering battery manufacturers, Electric and plug-in hybrid electric 

vehicles, Technology Roadmap, International Energy Agency, Updated June 2011 

2012-08-054_000000000000022
4 

D. Investment and Financing Plans 

18. The Project is estimated to cost $504 million (Table 1). ADB will provide $300 million 

from its ordinary capital resources, with a 15-year term, including a grace period of 5 years, an 

interest rate determined in accordance with ADB’s London Interbank Offered Rate (LIBOR)-

based lending facility15, and a commitment charge of 0.15% per annum, and such other terms 

and conditions set forth in the draft loan and project agreements. Based on these loan terms 

and repayment method, the average loan maturity is 11 years and there is no maturity premium 

payable to ADB. The CTF will co-finance the Project with a grant of $5 million ($1 million for 

capacity building and $4 million for a solar charging pilot) and a loan of $100 million, with a 40-

year term, including a grace period of 10 years, a management fee of 0.10%, 2% principal 

payment (year 11-20), 4% principal payment (year 21-40) and an interest charge of 0.25% of 

disbursed and outstanding credit balance. ADB will administer the CTF funds. CTF funds will be 

used to blend with ADB’s investment and to fill the investment gap. ADB will finance the 

financial charges during constriction for both ADB and CTF loans. The Project will likely receive 

payments (about $20 million) for carbon credits after the Project is implemented. The 

Government will finance the remaining $99 million, including taxes and contingency amounts for 

the e-Trikes. 

Table 1: Project Investment Plana

($ million) 

Item Total 

A. Base Costb

1. E-trike components 

 a. Lithium Ion battery 118.80 

 b. Body and other parts 211.20 

 c. Motors 37.84 

2. Supporting infrastructure 

 a. Charging stations 0.48 

 b. Battery recycling 2.30 

 c. Old tricycles disposal/recycling 2.64 

 d. Communication, social mobilization and admin support 0.87 

 e. Solar charging station pilot 4.00 

3. Consulting Support - 

 a. Technology Transfer and Local Industry Support 0.87 

 b. Implementation Consultant 0.87 

Sub-Total (A) 379.86 

B. Contigenciesc

1. Physical 44.38 

2. Price 14.07 

Sub-Total (B) 58.45 

C. Taxes 51.25 

D. Financial Charges During Constructiond 14.44 

 Total 504.00 

a Includes taxes and duties, government’s contribution will be as tax exemption. b In mid-2011 prices. c Physical contingencies (11.6% for foreign and 12.6% for local base costs). Price contingencies at 

 projected using the differential between international inflation rate and inflation rate on local 

 currency costs. d Includes interest during construction and commitment charges. Interest during construction for ADB 

 loan(s) has been computed at the 5-year London interbank offered rate fixed swap rate plus a spread 

 of 0.4%. Commitment charges for an ADB loan are 0.15% per year to be charged on the undisbursed 

 loan amount. ADB loan may finance local transportation and insurance costs. This covers interests 

accrued from both ADB and CTF loans. 

 

 Source: ADB Estimates.

 

15 Government’s choice to borrow under LIBOR-based lending was its own independent decision. 

2012-08-054_000000000000023
5 

 Table 2: Financing Plan

E. Implementation Arrangements 

19. As the Executing Agency, DOE will be responsible for the overall implementation, 

technical supervision and execution of the Project. It will oversee and coordinate the 

implementation, monitoring and evaluation of the program; execute contract of sale agreements 

with the local government units to ensure effective implementation; and establish and oversee 

the Project Management Unit. DOE, as the EA, will lead in all project procurement activities 

including management of the supply and service contracts of various suppliers. 

20. Landbank will pay the Bureau of Treasury of DOF the amount disbursed by ADB under 

the loan for the supply e-Trikes. Landbank will recover this amount from the LGU, which will 

repay Landbank the amount paid to the Bureau of Treasury. LGUs will allot the e-trikes to the 

drivers and charge a single-digit interest rate over the cost of the e-trikes from the supplier. This 

project will cover the cost of operation of the independent E-Trike office, which will act as a 

Project Implementation Unit. The drivers will repay this amount through daily payments (below 

200 Pesos) over a 5-year period. The E-Trike office at a LGU may involve a private agency (or 

an NGO) for collection of the daily payment (boundary) from the drivers and use the collected 

fund to repay the Landbank loan. 

21. To avoid the establishment of a national monopoly for the supply of e-Trikes, it is 

proposed that at least three vehicle manufacturers/assemblers will selected through 

International Competitive Bidding for the supply and support of the vehicles in the Philippines in 

accordance with ADB’s Procurement Guidelines (2010, as amended from time to time). The 

project will be organized into two phases: (i) a development phase, during which certain 

geographic supply packages will be procured to allow new operators to gain a foothold, plus 

allow the project to address any initial implementation issues, and (ii) a wider scale-up phase. 

The industry development phase is planned to be 24 to 30 months long, and a mid-term review 

will conclude this phase. The mid-term review will finalize the cities to be included in Phase II. 

Initial industry development phase will procure 20,000 e-Trikes, and the remaining 80,000 units 

will be manufactured and distributed over the remaining period of 30 to 36 months. 

22. The following criteria were used for selecting cities: (i) the LGU leadership’s commitment 

and interest in e-Trikes including own previous initiatives; (ii) commitment to set up public 

electric charging infrastructure; (iii) large number of existing ICE tricycles in the area; and (iv) 

the electricity supply and demand situation. Accordingly, the following sixteen areas were 

chosen for the industry development phase: Antipolo, Boracay, Cabanatuan, Caloocan, City of 

Manila, Dagupan City, Davao, Lipa City, Los Banos, Makati City, Mandaluyong City, Paranaque 

City, Puerto Princesa City, Quezon City, Sta Cruz, and Tarlac City. 

Source 

Amount 

($ million) 

Share of 

Total (%)

Asian Development Bank 300.00 59.53% 

Clean Technology Fund (loan) 100.00 19.84% 

Clean Technology Fund (grant) 5.00 0.99% 

Government 99.00 19.64% 

Total 504.00 100.00 

Source: Asian Development Bank estimates. 

2012-08-054_000000000000024
6 

23. The project will replace existing tricycles (ICE motorcycles with a side car) in the 

following order of priority: two stroke tricycles, tricycles that a driver owns, and older tricycles. 

ADB and the DOE will approve the selection criteria for each area—areas where the number of 

single stroke tricycles are less, drivers may be selected by a public lottery among the applicants. 

DOE and ADB will select a neutral party or a participating NGO to conduct public lotteries. 

24. The overall implementation schedule is conservative, taking into account the nascent 

state of the industry. The implementation arrangements are summarized in Table 3 and are 

described in detail in the Project Administration Manual, 16 which also include details on the 

selection process and selection criteria of the drivers. 

Table 3: Implementation Arrangements 

Aspects Arrangements 

Implementation period October 2012 – September 2017 (60 months) 

Estimated completion date September 2017 

Management 

(i) Oversight body Project Steering Committee headed by Secretary of DOE(Chair). 

National Economic and Development Authority (NEDA), Department of 

Transportation and Communication (DOTC) and Department of 

Environment and Natural Resources (DENR) as Members 

(ii) Executing agency Department of Energy. DOE will establish a PMU to be responsible for: 

overall management and supervision of project implementation.

(iii) Key implementing 

agencies 

Local Government Units (LGUs) involved. First procurement package 

includes Puerto Princesa, Boracay, Mandaluyong City and Cabanatuan 

City. 

(iv) Implementation unit LGU will create an E-Trike Office (PIU) which will be responsible for the 

implementation and monitoring of the Project at the ground level. 

Procurement: Industry 

Development Phase 

International 

competitive bidding with 

domestic preference 

Procurement of assembled 

vehicles with associated 

warranty and support 

services 

$ 110.64 million 

Procurement: Scale Up 

Phase 

International 

competitive bidding with 

domestic preference 

Procurement of assembled 

vehicles with associated 

warranty and support 

services 

$ 216.25 million 

Consulting services Quality-and-CostBased Selection 

(QCBS) and QualityBased Selection(QBS) 

119 person-months 

(Project Implementation 

Consultant) 

$ 1 million 

Single- source selection 

(Individual Consultants) 

36 person-months 

(Technology transfer and 

Local industry Support, 

Communications) 

$ 1 million 

Advance Contracting Advance procurement of 5,000 e-Trikes for Boracay (500 units), 

Cabanatuan (1,500), Mandaluyong (1000), Paranaque (1,000), and 

Puerto Princessa (1,500 units) in 2012 

Disbursement Direct Payment for procurement packages. Separate Imprest Account for 

CTF and ADB for administration and other categories. The ADB loan and 

CTF loan grant proceeds will be disbursed in accordance with ADB's 

Loan Disbursement Handbook (2007, as amended from time to time). 

 

16 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 

2012-08-054_000000000000025
7 

III. DUE DILIGENCE 

A. Technical Assessment 

25. According to the Massachusetts Institute of Technology (MIT)17, more efficient battery 

technologies are providing a cleaner alternative to pollution-emitting internal combustion 

engines. In many cases, conventional motorcycles emit more pollution than even large SUVs 

because they are not equipped with equivalent emissions-control technology. An electric 

motorcycles can immediately eliminate tailpipe emissions, can dramatically reduce a city’s 

overall pollution rate. GHG emissions could be negligible, as these e-vehicles can be be 

powered with renewable energy, especially solar. 

26. The United States Department of Energy views Lithium-ion battery technology as one of 

the most promising new battery options, due to its high energy and power densities and its 

potential to last the lifetime of the vehicle18. In 2008, MIT’s Electric Vehicle Team designed 

eMoto19 and found that use of Lithium-ion batteries could reduce the weight of an electric 

vehicle battery pack by up to 76% (from 93 kg to 23 kg). The lighter vehicles with a longer 

battery life proved to be more cost efficient and were able to travel farther and accelerate faster 

than models using heavier battery technology. ADB’s pilot project compared e-Trikes with 

different options: the Lithium-ion batteries (38 kg) were 72% lighter than the Lead acid (140 kg). 

27. The 20 e-Trikes pilot project used different battery size and charging options: 10 e-Trikes 

with 3 kWh batteries for fast (20 minutes) charging in public stations, and the 10 e-Trikes with 6 

kWh batteries with on board chargers for home charging (6 hours). The pilot concluded that: (i) 

Lithium-ion batteries are the sustainable battery choice; (ii) properly designed e-Trikes are 

capable of meeting the variable range, speed, and terrain considerations in the Philippines; (iii) 

fast charging is possible and can be locally designed and built; (iv) due to sophisticated battery 

and charging technologies, the drivers and LGUs will not be able to manage the risk of a faulty 

battery; and (v) the fuel savings are significant and are sufficient to support a rent-to-buy e-Trike 

scheme for the drivers. This e-Trikes financed by this project will use Lithium ion batteries. 

B. Sustainability 

28. Local support infrastructure and technical capacity is an essential pre-requisite for the 

Project. In 2008, one Manila city bought 200 e-Trikes (with lead acid batteries), unfortunately, 

only less than 10 are still operating. Apart from the main problem of lack of cash to replace Lead 

Acid batteries within 12 to 15 months, lack of ongoing technical support contributed to this 

failure. The lesson from the Mandaluyong pilot is similar: to make e-Trike initiative sustainable 

an essential pre-requisite will be a vibrant local industry that will provide, among others, skilled 

technicians, repair and support services, insurances, charging stations, and spare parts. 

29. The project will transform the risk allocation: the owner of e-Trikes will not absorb the 

risks associated with this new technology, the battery manufacturers are best placed to manage 

the risk of poor performing batteries. By backing off the risk of unreliable batteries through the 

supply chain, via the vehicle supplier, the risk will be allocated to the battery maker. 

 

17 The Technology Review, published by MIT, 2007, available at: http://www.technologyreview.com/energy/19069/. 18 Center for Transportation Research Argonne National Laboratory, operated by The University of Chicago, for the 

 United States Department of Energy. Available at: http://www.transportation.anl.gov/pdfs/TA/149.pdf 19 An electric motorcycle that demonstrated low cost electric vehicle, available at: http://web.mit.edu/evt/emoto.html. 

2012-08-054_000000000000026
8 

C. Financial Analysis 

30. Broadly, typical tricycle driver uses approximately $520 worth (5 liters) of gasoline to drive 

100 km per day but can save about $4 per day by switching to an electric tricycle, which 

consumes 5 kWh of power costing $121. With large-scale adoption, these individual savings 

could accumulate to a significant national savings of over $4 billion per year. Replacement of 

100,000 gasoline tricycles with electric tricycles at a cost of $450 million, for example, can 

generate about $175 million each year from avoided fuel imports. Detail financial analysis was 

carried out in real terms using 2011 prices, that examined the aggregate costs and incremental 

benefits measured by the revenue from drivers or users. 

D. Economic Analysis 

31. The Project’s economic analysis is based on incremental cost and benefit streams 

associated with the Project component, whose economic performance is evaluated by 

comparing with- and without-Project scenarios. Benefits are derived mainly from the fuel 

savings or avoided costs from the importation of fuel and income from the boundary payments 

of drivers/users. The overall economic internal rate of return exceeds the economic hurdle of 

12%. This indicates that the Project, from the perspective of the Government, is economically 

viable. 

E. Governance 

32. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed 

with the Government. The specific policy requirements and supplementary measures are 

described in the Project Administration Manual. 22 To ensure transparency and good 

governance, DOE will publicly disclose on its website information on how loan proceeds are 

being used. For each procurement contract, LBP and DOE will disclose (i) the list of 

participating bidders; (ii) the name of the winning bidder; (iii) basic details on bidding procedures 

adopted; (iv) the amount of the contract awarded; (v) a list of goods and services purchased; 

and (vi) the intended and actual utilization of loan proceeds under each contract being awarded. 

ADB will organize special training for LBP, DOE and PMU staff covering all aspects of Project 

implementation and ADB procedures, including procedures for implementation, procurement, 

use of consultants, disbursement, reporting, monitoring, and prevention of fraud and corruption. 

F. Poverty, Social and Gender 

33. With an e-Trike the drivers will receive a higher daily take-home pay. In Davao, 92% 

drivers were renters, and about 80% were married with about three dependents and 70% had 

secondary degree. In Boracay, about 40% drivers are owners. The fuel cost savings of P200 

per day will greatly benefit the driver community and is the basis for the rent-to-own scheme. 

The Project will not displace or negatively impact on the livelihood of tricycle drivers or families. 

Since fabrication and assembly could be largely domestic, the Project could create a net 

employment gain of around 10,000 jobs by 2015. The Project is not expected to have a 

significant effect on the existing oil-fuelled local tricycle assembly industry in the short term. 

 

20 Tricycles in Boracay, with its hilly terrain and heavy traffic uses about 6 liters ($8.20) to drive about 30 km per day. 21 Assuming cost of power of 20 cents /kWh in the Philippines, one of the highest in the region. 22 Project Administration Manual (accessible from the list of linked documents in Appendix 2) 

2012-08-054_000000000000027
9 

34. The pilot e-Trike design has incorporated women’s needs with better seating 

arrangements. Female passengers will be consulted on the design and safety aspects of 

proposed e-Trike models, especially for metro-Manila, ADB women personnel will be used as a 

focus group. As this is a replacement program, the scope for female drivers will be limited. ADB 

will target that at least 30% of charging station jobs to be filled by women (only during day-time 

shifts). Female workers will also be trained to inspect the e-Trikes for basic safety issues (roadworthiness, for example) and collection of e-Trike data on every charge. The health and safety 

benefits of the new design will be significant for the population, especially children. 

G. Safeguards 

35. The Project is categorized as C for environment, involuntary resettlement and 

indigenous people. The e-Trikes will have no tail-pipe emissions and no engine noise. Because 

of classified as category C, no separate environmental assessment will be required, although 

environmental implications need to be reviewed. According to ADB’s publication on electric 

bikes23, lead pollution is an inherent problem with electric vehicles and electric bikes with Lead 

acid batteries will increase the overall pollution rates than the ICE motorcycles. The Lithium-ion 

batteries are not an environmental hazard24 and are classified by the U.S. federal government 

as non-hazardous waste25 and are safe for disposal in the normal municipal waste stream. 

H. Special Features 

36. The proposed Project aims to create an internationally competitive local e-vehicle 

industry using latest battery and charging options including solar charging. The Project will 

ensure ongoing competition where possible to prevent market inefficiencies, and “regulate” 

where necessary with the ultimate aim that sufficient competition exists across the entire value 

of the e-Trike industry. The Project will be cofinanced with CTF resources. 

1. Clean Development Mechanism (CDM) 

37. The Project is likely to be registered under CDM of the Kyoto Protocol. Considering large 

amount of renewable energy component of the Philippines electricity grid, and the inherent 

efficient of the electric motors, the emission from the e-Trikes would be significantly less than 

the fossil fuel consumption of the gasoline driven tricycles i.e. the baseline scenario. Potential 

for emission reduction per electric tricycle distributed and operational is likely to be approx. 3.8 

tCO2e.26 The project would apply for registration under the CDM, and if registered, the project 

would generate certified emission reductions. Income from these carbon credits will be an 

important source of revenue for the project and promotion of such programs by the DOE. DOE 

has submitted the project design documents27 to UNFCCC. 

I. Risks and Mitigating Measures 

38. Major risks and mitigating measures are summarized in Table 4 and described in detail 

in the risk assessment and risk management plan.28

 

23 ADB. 2009. Electric Bikes in the People’s Republic of China: Impact on the Environment and Prospects for 

Growth. Manila (available in the list of supplementary documents in Appendix 2). 24 http://www.ehso.com/ehshome/batteries.php 25 http://www.epa.gov/osw/hazard/wastetypes/universal/batteries.htm 26 Assumptions: 80km/day; 15km/liter on gasoline tricycle; emission factor of baseline vehicle=146.93 gCO2/km. 27 Available at: http://cdm.unfccc.int/UserManagement/FileStorage/3KY4J2IW70AZPTX9MS6VGU1QORNE8F 28 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2). 

2012-08-054_000000000000028
10 

Table 4: Summary of Risks and Mitigating Measures

Risks Mitigating Measures 

Poor quality e-Trikes 

underscoring technology 

credibility and project viability. 

Pre-qualified bidders will be asked to competitively supply professionally 

designed e-trike units. Tight quality control measures will be applied at all 

levels. Minimum warranty and support will be guaranteed by the suppliers. 

Poorer batteries selected 

through international bidding 

under the project 

Strict minimum technical standards and commercial qualification criteria will 

ensure only reputable international manufacturers products are incorporated 

into the vehicles 

Excess financing cost because 

of multiple intermediaries. 

ADB worked closely with the government to ensure the drivers pay singledigit interest rates. 

Inadequate e-Trike demand 

discouraging new investment 

Extensive communication and public awareness campaign will ensure, 

drivers, users and policy makers understand key benefits. 

Inadequate capacity of local 

industry to meet demand 

Procurement will be phased to ensure a ramp up period for early adoption 

and new investments. 

Source: Staff Analysis 

IV. ASSURANCES 

39. The Government has assured ADB that implementation of the Project shall conform to 

all applicable ADB policies including those concerning anticorruption measures, safeguards, 

gender, procurement, consulting services, and disbursement as described in detail in the 

Project Administration Manual and loan documents. 

40. The Government has agreed with ADB on certain covenants for the Project, which are 

set forth in the loan agreements and grant agreement. 

V. RECOMMENDATION 

41. This is a recommendation for 

(i) the loan of $300 million to Republic of the Philippines for the Market 

Transformation through Introduction of Energy Efficient Electric Vehicles Project 

from ADB’s ordinary capital resources, with interest to be determined in 

accordance with ADB’s London Interbank Offered Rate (LIBOR)-based lending 

facility; for a term of 15 years, including a grace period of 5 years; and such other 

terms and conditions as are substantially in accordance with those set forth in the 

draft loan agreement presented to the Board; 

(ii) the administration by ADB of a loan not exceeding the equivalent of $100 million 

to the Republic of the Philippines for the Market Transformation through 

Introduction of Energy Efficient Electric Vehicles Project to be provided by the 

Clean Technology Fund; and 

(iii) the administration by ADB of a grant not exceeding the equivalent of $5 million to 

the Republic of the Philippines for the Market Transformation through 

Introduction of Energy Efficient Electric Vehicles Project to be provided by the 

Clean Technology Fund. 

2012-08-054_000000000000029
Appendix 1 11 

DESIGN AND MONITORING FRAMEWORK 

Design Summary 

Performance Targets 

and/or Indicators 

Data Sources and/or 

Reporting Mechanisms 

Assumptions 

and Risks 

Impact 

Sustainable energy 

use by transport sector 

Fuel used by the transport 

sector is reduced by at 

least 2.8% (based on 20 

million Barrels per year 

consumption in 2010) or 

an equivalent of 89.2 

million Liters of gasoline 

per year. 

Pollution in selected cities 

reduced by at least 20% 

(from the baseline 

measurement under the 

project) 

Data published by the 

Department of Energy 

Assumption 

Sufficient renewable energy 

investment in the power 

sector across the country 

Public transport use pattern 

will not be altered significantly 

by introduction of cheap 

(electric) fuel 

Risks 

Uncontrolled growth of electric 

vehicle across the country 

Cheaper and poorer quality 

electric vehicle flooding the 

market

Outcome 

Tricycle industry 

transformation through 

large scale adoption of 

locally made energy 

efficient e-Trikes 

At least 5 companies are 

established that are 

registered by the Board of 

Investment as new 

industries 

At least two retailers 

distributing (and 

assembling) Lithium-Ion 

and others high energy 

density batteries locally

At least 50% of the 

conversions outside the 

project boundary using 

Lithium Ion batteries 

Data published by the LGUs 

collected by project 

implementation consultants 

Published reports by the 

Department of Energy and 

Board of Investment 

Market survey during the 

mid-term review 

Assumptions 

Locally made e-Trike will meet 

its expected design life 

Enough local technical 

expertise is available to 

support the local industry 

Risks 

Oil price will not drop 

significantly from its current 

high level 

Significant increase of 

electricity price and power 

shortage in specific region 

Local e-Trike business 

becomes unviable because of 

cheaper imports 

Outputs 

Complete e-Trike units 

delivered to LGUs with 

at least standard 3-

year warranty 

Battery supply chain 

including support 

infrastructure created 

At least 17,000 e-Trikes 

operating by December 

2013, and 50,000 by 2014, 

and 100,000 by 2015 

At least three 

internationally reputable 

battery companies 

established active 

presence in the 

Philippines by 2014 from 

none in 2011 

Project Reports 

TRU Reports 

Industry commission and 

Board of Investment 

Reports 

Report from Securities and 

Exchange Commissions 

Assumptions 

Project will transform local 

industry and will be able to 

attract overseas investors to 

partner with local businesses 

enabling technology transfer 

and employment generation 

Government commitment to 

electric tricycle will continue 

and government will resolve 

registration and franchise 

issue across the country 

Drivers and passengers 

2012-08-054_000000000000030
12 Appendix 1 

Design Summary 

Performance Targets 

and/or Indicators 

Data Sources and/or 

Reporting Mechanisms 

Assumptions 

and Risks 

Solar and other 

charging stations 

available in selected 

areas to meet the 

public charging needs 

Material recovery from 

ICE tricycles and used 

batteries: 

a. Lithium Battery 

Recycling 

b. Body Disposal 

Communication, Social 

Mobilization and 

Technology Transfer 

At least 2 reputable motor 

suppliers by 2012 

oive solar charging 

stations of 200 kW each 

will be established. 

At least 500 locally 

assembled charging 

stations are installed in 

selected project areas 

At least 30% operators of 

public charging stations 

will be women (only during 

daytime shift) 

Battery recycled options 

studied and pilot operating 

Old tricycles are collected 

and disposed of as per 

UNFCC’s requirements 

and local environmental 

rules 

Consumers are aware of 

benefits of electric 

vehicles (3 workshops) 

and at least six companies 

selling in Metro-Manila 

with service support by 

December 2012 

acceptance of e-Trike will 

continue 

Project will be able to attract 

reputable Lithium-ion battery 

manufacturer/supplier in the 

Philippines 

Local manufacturing will be 

able to meet the project 

demand 

Risks 

Financing cost increases 

because of involving multiple 

layers of intermediaries 

Resistance of businesses 

using current technology 

Inadequate capacity of 

industry to meet local demand 

Stakeholder acceptance of 

rent to own e-Trike 

Accident and unforeseen 

event undermining e-Trike 

technology 

Activities with Milestones 

Output 1: Complete e-Trike units delivered to LGUs with standard 3-year 

warranty 

1.1 Signing of Memorandum of Agreement between DOE, Lang Bank, and LGU 

(intermittent per LGU) (01/09/2012 – 30/09/2012) 

1.2 Finalize prequalification and bidding documents for goods package 

(01/06/2012 – 30/06/2012) 

1.3 Conduct prequalification and bidding documents for goods package 

(30/06/2012 –30/9/2012) 

1.4 Conduct procurement activity from advertisement, bid submission, bid 

evaluation to contract award (intermittent 8 packages, 01/08/2012 – 

30/03/2016) 

1.5 Delivery and distribution of e-Trikes to LGUs (for drivers) and signing of supply 

and maintenance agreement between supplier and LGU (31/03/2013 – 

31/12/2016) 

1.6 

 

Output 2: Battery supply chain including support infrastructure created

2.1 Conduct procurement activity and signing of supply and maintenance 

agreement between suppliers and LGUs (for drivers) 

( 01/08/2012 – 30/03/2016) 

2.2 Identify and establish a service center per LGU (1/3/2012-29/3/2013) 

Inputs 

ADB 

CTF (loan) 

CTF (grant) 

Government 

$ 

$ 

$ 

$ 

300 

100 

 5 

99 

2012-08-054_000000000000031
Appendix 1 13 

Design Summary 

Performance Targets 

and/or Indicators 

Data Sources and/or 

Reporting Mechanisms 

Assumptions 

and Risks 

Output 3: Solar and other charging stations available in selected areas to 

meet the public charging needs 

3.1 Identify electricity provider for each area (01/01/2012-31/05/2014) 

3.2 Signing of memorandum of agreement between electricity provider, LGU and 

DOE (01/01/2012-31/09/2012) 

3.3 Finalize technical specifications for charging stations per LGU (01/01/2012-

31/09/2012) 

3.4 Conduct procurement activity from advertisement, bid submission, bid 

evaluation to contract award, turnkey package for Solar Charging stations in 

Boracay and Puerto Princesa (01/07/2012 - 31/12/2012) 

3.5 Installation of solar charging stations (01/01/2013 – 31/05/2013) 

Output 4: Material Recovery from ICE Tricycles and used batteries 

4.1 Finalize material recovery plan for batteries and old tricycles (01/04/2012 – 

31/08/2012) 

4.2 Allocate budget for each LGU and designate area for collection and disposal 

(01/07/2012 – 31/12/2015) 

4.3 Develop database of old tricycles in each LGU (01/01/2012 – 31/12/2016) 

Output 5: Communication, Social Mobilization and Technology Transfer 

5.1 Conduct project implementation general training on project management unit, 

identified LGUs, other related agencies and establish technical working group 

to prepare material recovery plan (intermittent, 01/01/2013 – 31/05/2016) 

5.2 Prepare and implement general information, education, and communication plan 

for each LGU (01/012013 – 31/05/2015) 

5.3 Undertake training and workshop on e-Trike technical operations and 

maintenance (O&M) (01/01/2013 – 31/08/2016) 

ADB = Asian Development Bank, CTF = Clean Technology Fund, DOE = Department of Energy, LGU = Local 

Government Unit 

Source: ADB Project Team. 

2012-08-054_000000000000032
THE REPORT

9780198085386 Bricks Report_00_FM.indd i 09/03/12 4:49 PM

2012-08-054_000000000000033
9780198085386 Bricks Report_00_FM.indd ii 09/03/12 4:49 PM

2012-08-054_000000000000034
1

A Study of Brazil, Russia, India, China, and 

South Africa with special focus on synergies 

and complementarities

THE REPORT

9780198085386 Bricks Report_00_FM.indd iii 09/03/12 4:49 PM

2012-08-054_000000000000035
 It furthers the University’s objective of excellence in research, scholarship,

Oxford University Press is a department of the University of Oxford.

3

 and education by publishing worldwide. Oxford is a registered trademark of

 Oxford University Press in the UK and in certain other countries

Published in India by

Oxford University Press

YMCA Library Building, 1 Jai Singh Road, New Delhi 110 001, India

© Ministry of Finance, Government of India 2012

The moral rights of the author have been asserted

First Edition published in 2012

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, without the

prior permission in writing of Oxford University Press, or as expressly permitted

by law, by licence, or under terms agreed with the appropriate reprographics

rights organization. Enquiries concerning reproduction outside the scope of the

above should be sent to the Rights Department, Oxford University Press, at the

address above

You must not circulate this book in any other form 

and you must impose this same condition on any acquirer

ISBN-13: 978-0-19-808538-6

ISBN-10: 0-19-808538-9

Typeset in 11/14.6 Adobe Garamond Pro

by Excellent Laser Typesetters, Pitampura, Delhi 110 034

Printed in India at G.H. Prints Pvt. Ltd, New Delhi 110 020

This report is written by experts and scholars from BRICS countries with the

support of BRICS governments. It aims to promote pragmatic

economic cooperation among BRICS countries. 

The data from international institutions and individual country sources have

been used in this report for comparability reasons, which may not be fully consistent

with government statistics, and hence shall not be deemed as officially approved. 

9780198085386 Bricks Report_00_FM.indd iv 09/03/12 4:49 PM

2012-08-054_000000000000036
Contents

List of Tables vi

Preface ix

Acknowledgements xi

Executive Summary xiii

 

1. Overview of BRICS 1

2. Impact of the Financial Crisis on BRICS 79

3. Best Practices 103

4. Major Challenges 160

5. BRICS Cooperation 169

2012-08-054_000000000000037
Tables

1.1 Overview of BRICS, 2010 2

1.2 Land Use in BRICS, 2008 4

1.3 Growth Rate of Gross Domestic Product 7

1.4 Gross Domestic Investment and Savings 8

1.5 Sectoral Share in GDP 10

1.6 Rank on Global Competitiveness Index (GCI), 12

 2010–11 

1.7 Population and Demographic Profi le of BRICS 13

1.8 Social Sector Indicators, 2007 15

1.9 Fiscal Defi cit of General Government 18

1.10 Fiscal Balance of General Government 20

1.11 Gross Debt of General Government 21

1.12 Fiscal Consolidation Policy 21

1.13 Composition of Fiscal Adjustment Plans 23

1.14 Monetary Frameworks in BRICS 24

1.15 Infl ation: Average Consumer Prices 30

1.16 Global Integration of BRICS Economies 32

1.17 BRICS Share of Global Trade 33

2012-08-054_000000000000038
 tables vii

1.18 BRICS Exports of Goods and Services 33

1.19 BRICS Share in World Exports 34

1.20 BRICS Exports Profi le, 2009 35

1.21 High-technology Exports 36

1.22 BRICS Share of World Exports of Services 36

1.23 Imports of Goods and Services 37

1.24 BRICS Imports Profi le, 2009 38

1.25 BRICS Share of World Imports of Services 39

1.26 Export Linkages of BRICS 40

1.27 BRICS Share in Global Remittance Infl ows 41

1.28 Trade Balance and Current Account Balance 42

1.29 Share of Global FDI Infl ows 43

1.30 Cross-country Movement of FDI Flows 45

1.31 Cross-country Movement of Portfolio Flows 46

1.32 BRICS and Foreign Exchange Reserves 47

1.33 External Debt Stocks, Total 48

1.34 BRICS Exchange Rate Regime 50

1.35 Stock Market Performance of BRICS Countries 53

1.36 Total Listed Domestic Companies 55

1.37 Market Capitalization of Listed Companies 56

1.38 Stocks Traded, Turnover Ratio 58

1.39 Equity Valuation Measures: Dividend– 59

 Yield Ratios

1.40 Emerging Market External Financing: 60

 Total Bonds, Equities, and Loans 

1.41 Insurance Sector in BRICS Economies 61

1.42 Prudential Indicators of the Banking Sector 65

 in BRICS

1.43 Bank Profi tably Indicators in BRICS 66

1.44 Financial Services Accessibility in BRICS 74

2012-08-054_000000000000039
viii tables

1.45 Credit Depth of Information Index 75

1.46 Domestic Credit Provided by Banking Sector 76

2.1 Global Financial Crisis and BRICS: 82

 Summary Indicators 

2.2 Size of Discretionary Measures in Financial Crisis 87

2.3 Measures by Central Banks 88

2012-08-054_000000000000040
Preface

Th e acronym BRIC stands for Brazil, Russia, India, and China. 

Th e term was coined by the Chief Economist of Goldman Sachs, in 

2001, in a paper titled ‘Building Better Global Economic BRICs’, 

which looked at the growth prospects of the four largest emerging economies that are culturally and geographically disparate. 

Th e main fi nding was that the BRICs would play an increasingly 

important role in the global economy. Th e projections were revised 

in later publications, as the BRIC economies fared better than 

expected.

 Th is study expands the original terms of reference to include South 

Africa because of its growing signifi cance in the global economy. Th e 

new acronym is, therefore, BRICS and it symbolizes the collective 

economic power of Brazil, Russia, India, China, and South Africa. 

Together the BRICS account for more than 40 per cent of the global 

population, nearly 30 per cent of the land mass, and a share in world 

GDP (in PPP terms) that increased from 16 per cent in 2000 to 

nearly 25 per cent in 2010 and is expected to rise signifi cantly in the 

near future.

2012-08-054_000000000000041
x preface

 Th is study, which is supported by the ministries of fi nance and 

the central banks of the BRICS, focuses on synergies and complementarities between the economies, highlighting their role as growth 

drivers of the world economy. Th e emphasis is on best practices, areas 

of cooperation, and strengthening economic links so that the BRICS 

could collectively play a more central role in the ‘new normal’ of the 

post-crisis global economy.

 Th is is also perhaps the most opportune time for forging closer 

links, given that the world economy is in a state of fl ux and a rebalancing is taking place towards the emerging economies. Th eir pivotal 

role in the global recovery has already catapulted the BRICS into 

the leadership role, which needs further cementing through greater 

interface among economies.

 Th e study, which is in fi ve parts, is in the nature of a forwardlooking report that seeks to reinforce and strengthen the position 

of BRICS in the global economy. Chapter 1 of the study provides 

an overview of the BRICS, their fi nancial, government, and regulatory framework, and their share in the global economy. Chapter 2 

examines the impact of the global crisis, the resilience of the BRICS 

economies, their use of fi scal and monetary stimuli, the process of 

recovery, and their contribution to global growth. Chapter 3 looks 

at the best practices in the BRICS and the lessons they hold for each 

other and the world economy. Chapter 4 looks at the challenges that 

the BRICS are likely to face in moving to a higher growth path. 

Chapter 5 explores areas of cooperation among the BRICS including 

initiatives that could propel the BRICS and the world economy to a 

higher growth trajectory.

2012-08-054_000000000000042
Acknowledgements

Th e following offi cials contributed to the preparation of Th e BRICS 

Report: (Brazil) Jose Nelson Bessa Maia, Fabio Augusto Najjarian 

Batista, Eiiti Sato, Paula Gala, Marcos Antonio Macedo Cintra, 

Daniel Silva Grimaldi, and Andre de Mello e Souza; (Russia) Alexey 

Rybkin, Alexey Shestov, Alexey Chernov, Sergey Potapov, Andrey 

Bokarev, Maxim Kulikov, Pavel Chernyshev, Lubov Starikova, Ilya 

Prilepskiy, Vasily Miheev, and Irina Kim; (India) Anil Bisen, Alok 

Sheel, S.V.S. Dixit, Sunil Saran, Rajiv Ranjan, Supriyo De, Reetu 

Jain, Rajmal, Rangeet Ghosh, Rakesh Kumar, Sonna Th angzason, 

Vishal Raina, and Suraj Kumar; (China) Wu Guoqi, Wang Xin, Song 

Hong, Zhao Fuchang, Guo Wensong, Wangui Mo, and Tianwei 

Zhang; (South Africa) Xavier Carim, Marisa Fassler, Neil Gary Cole, 

Mashabela Victor, and Gert Marincowitz. Dr Kaushik Basu, Chief 

Economic Adviser, Ministry of Finance, Government of India, was 

the reviewing authority on the overall progress of the work.

2012-08-054_000000000000043
2012-08-054_000000000000044
Executive Summary

Th is study, which is supported by the ministries of fi nance and the 

central banks of the BRICS, focuses on synergies and complementarities between the economies, highlighting their role as growth drivers of the world economy. Th e emphasis is on best practices, areas of 

cooperation, and strengthening economic links so that the BRICS 

could collectively play a more central role in the ‘new normal’ of the 

post-crisis global economy. Th e study is divided into fi ve chapters.

I. Overview of BRICS

Chapter 1 of the study provides an overview of the BRICS, their 

fi nancial, government, and regulatory framework, and their share in 

the global economy. Together, the BRICS account for more than 40 

per cent of the global population, nearly 30 per cent of the land 

mass, and a share in world GDP (in PPP terms) that increased from 

16 per cent in 2000 to nearly 25 per cent in 2010, and is expected 

to rise signifi cantly in the near future. If one compares the GDP in 

2012-08-054_000000000000045
xiv executive summary

PPP terms for 2010, four economies fi gure among the G-20 top ten, 

with China, India, Russia, Brazil, and South Africa in 2nd, 4th, 6th, 

8th, and 26th place, respectively. In terms of contribution to growth 

of PPP-adjusted global GDP of the world, these fi ve economies 

accounted for 55 per cent during 2000–8, and their contribution is 

expected to rise in the coming years. However, as per the criterion 

of GDP at market prices, among the members of the G-20, China 

holds the 2nd position while Brazil, India, Russia, and South Africa 

hold the 7th, 9th, 11th, and 19th positions, respectively.

II. Impact of the Financial Crisis on BRICS

Chapter 2 examines the impact of the global crisis, the resilience 

of the BRICS economies, their use of fi scal and monetary stimuli, 

the process of recovery, and their contribution to global growth. 

Th e recent global fi nancial crisis that engulfed almost all economies 

marked a painful adjustment at the macro level coupled with microlevel distortions and incentives created by past policy actions. Th e 

crisis spread to the BRICS through four channels—trade, fi nance, 

commodity, and confi dence. Th e slump in export demand and tighter trade credit caused a deceleration in aggregate demand. Th e global 

fi nancial crisis infl icted signifi cant loss in output in all the BRICS 

economies. However, real GDP growth in India and China remained 

impressive even though they also witnessed some moderation due 

to weakening global demand. Th e crisis also exposed the structural 

weakness of the global fi nancial and real sectors. Th e reversal of 

capital fl ows led to equity market losses and currency depreciations, 

resulting in lower external credit fl ows. Th e banking sectors of the 

BRICS economies performed relatively well.

2012-08-054_000000000000046
 executive summary xv

 Th e BRICS, however, recovered swiftly with the support of 

domestic demand. Still, the recovery is yet to be made compatible 

with the fi scal consolidation process. Besides the current recovery 

process, there are specifi c lessons for the BRICS economies from the 

recent crisis. Th ese lessons include (i) recognizing the invalidation of 

the decoupling hypothesis, (ii) allowing domestic demand to serve as 

a durable source of growth, (iii) instituting fi nancial sector reforms, 

(iv) monitoring and managing speculative capital fl ows, (v) creating 

fi scal policy space on a sustainable basis as a central feature of their 

reform agenda, and (vi) focusing on infrastructure development and 

employment generation.

III. Best Practices

Chapter 3 looks at the best practices and institutions within the 

BRICS economies that have made signifi cant diff erences to these 

economies and contributed to their high growth rates. Many of these 

practices and institutions have relevance within the BRICS bloc for 

enhancing cooperation and creating synergies, so that the BRICS 

collectively could grow faster.

 Major showcase areas for Brazil include agricultural research, 

which has transformed the country into a major exporter, the 

use of bio-fuel for road transport, and the emergence of Embraer 

as a high-technology aircraft manufacturer. In the social sphere, 

conditional cash transfers that target poverty and the success of the 

anti-AIDS policy provide useful lessons. A regulatory framework 

that helped Brazil withstand the shock of the global crisis, including 

the regulation of capital fl ows, and the issuance of domestic 

currency-denominated international bonds, which transfer currency 

2012-08-054_000000000000047
xvi executive summary

risk to investors, are other successful practices that have been 

highlighted.

 Russia’s major achievements include reforms during 1999–2009 

that promoted economic growth, lowered infl ation, and led to a 

dramatic fall in the number of people living below the poverty line. 

Specifi c achievements include setting up of the Oil Stabilisation 

Fund that was successful during the crisis, budgetary reforms through 

the devolution of decision-making powers, and the introduction of 

a fl at personal income tax rate of 13 per cent that ensured improvement in compliance.

 Th e main showcase institution for India is private entrepreneurship which has been instrumental in achieving 8–9 per cent annual 

growth of the economy in recent years. Private initiative has been 

responsible for the excellence achieved in the information technology 

sector and the innovative streak that has led to improvization and 

production of low-cost goods for the Indian mass market. Besides, 

the calibrated approach to capital account convertibility and the 

External Commercial Borrowing Policy have helped insulate the 

economy against surges and reversals of debt fl ows and maintained 

the external debt at sustainable levels. Th e Right to Information Act 

is increasing the transparency and accountability of government 

operations and the Mahatma Gandhi National Rural Employment 

Guarantee Scheme is a major step towards making growth inclusive.

 Th e best practices and institutions of China are those that have 

helped ensure progress in terms of sustaining its rapid economic 

growth, enhancing its overall national strength, and improving the 

living standards of its people. It also includes the success in making 

the historic transition from a highly centralized planned economy 

to a robust socialist market economy, and from a closed and semiclosed country to one that is open to the outside world. Specifi c 

2012-08-054_000000000000048
 executive summary xvii

areas are FDI attraction and utilization, and infrastructure fi nancing, 

among others.

 Th e Chinese globalization model has also been diff erent, in that 

foreign direct investment was encouraged. Th e sub-national governments (cities/provinces) have been successful in attracting foreign 

investment by providing improved infrastructure and a favourable 

regulatory environment. China also has experience in fi nancial macro-management. Th e reform and development of China’s banking 

industry and fi nancial market is an important driver for rapid and 

sustainable growth.

 South Africa has a long record of responsible macroeconomic 

management, which has helped to promote the development 

of a deep and liquid bond market and reduced external vulnerability. South Africa has strong institutions and a highly developed, 

well-regulated banking sector that escaped the worst eff ects of the 

fi nancial crisis. With the most developed industrial and fi nancial 

capabilities on the African continent, South Africa’s role in the 

integration of policies, markets, fi nance, and infrastructure is vital 

to Africa’s economic development and realization of the continent’s 

potential as a growth pole in the global economy. Outwardly oriented South African companies are among the largest sources of 

FDI in Africa and the country’s development fi nancing institutions 

are playing an increasing role in the funding of regional infrastructure investment.

IV. Major Challenges

Chapter 4 looks at the challenges that the BRICS could face in moving to a higher growth path. Since the macroeconomic parameters 

2012-08-054_000000000000049
xviii executive summary

and features of development vary within BRICS economies, the challenges they face to make their growth process sustainable also vary. 

For instance, in Brazil macroeconomic stabilization is a key precondition for successful reforms and sustainable growth. Th e challenges 

that the Brazilian economy face are as follows: (i) its tradeable goods 

sector is small when compared to other EMEs like China; (ii) saving 

and investment rates have to increase as in other BRICS economies 

like China and India; (iii) improvements are required in public sector management; and (iv) it also needs to enhance the depth of the 

fi nancial sector as well as improve long-term fi nancing structures for 

the private sector.

 In the case of Russia, the key challenges are accelerating the 

implementation of structural reforms, particularly in ineffi cient and 

undercapitalized natural monopolies, and strengthening the investment climate.

 For India, the major challenges are (i) making the growth process 

more inclusive, (ii) improving physical infrastructure, (iii) developing the agriculture sector, and (iv) enhancing delivery of essential 

public services, such as education and health, to large parts of the 

population.

 Similarly for China, policy changes are needed to address both 

domestic and external challenges. Th e policy challenge for China is 

to sustain rapid and stable economic growth, driven by both exports 

and domestic demand in a more balanced way. To facilitate restructuring of the economy, fi nancial sector reforms are needed to improve 

the intermediation of China’s large private savings. Th e government 

also needs to raise social spending in the areas of education, healthcare, and pensions, which will serve to reduce precautionary saving 

and boost consumption over time. Th ere is also a need to improve 

2012-08-054_000000000000050
 executive summary xix

the investment structure, advance reforms in the healthcare, pension, 

and education systems, and provide more support to rural areas and 

less-developed regions.

 Th e key challenge for South Africa is to achieve higher levels of 

inclusive growth that raise employment and reduce inequality. Low 

domestic savings, currency volatility, inadequate investment in productive sectors of the economy, skill shortages, and ensuring effi cient 

government services delivery are other challenges. Policies proposed 

in the New Growth Path constitute the key means to address these 

challenges through a developmental state that places employment at 

the centre of the fi ght against inequality. Within a prudently managed 

macroeconomic framework, the government is prioritizing policy 

measures focused on the expansion of infrastructure networks, skills 

development, interventions to raise youth employment, industrial 

policy that promotes higher value added exports, the development of 

rural economies, small enterprise promotion, green economy initiatives, and regional integration.

 One common challenge that BRICS economies face is the need 

for institutional development without which sustainable growth 

cannot be ensured. In a post-global crisis world largely shaped by 

fi nancial instability and weak growth in the major economies, the 

BRICS countries have a remarkable opportunity to coordinate their 

economic policies and diplomatic strategies not only to enhance their 

position as a grouping in the international economic and fi nancial 

system, but also to be a stabilization factor for the world economy 

as a whole. BRICS should increasingly harmonize and coordinate 

their policies with a view to sustaining their growth momentum 

and capacity to weather global turbulence. Th e benefi t of cooperating among themselves is immense for the BRICS as well as for the 

2012-08-054_000000000000051
xx executive summary

global economy. A strategic agenda for forging closer links among the 

BRICS, as outlined in this joint report, may contribute to consolidating and expanding their roles in global aff airs.

V. BRICS Cooperation

Chapter 5 lists exsting areas of cooperation among the BRICS, and 

explores new areas of cooperation including initiatives that could 

increase growth and development in BRICS countries and worldwide. In the BRICS economies, there exist huge opportunities to 

extend economic growth and development to the next level. In this 

regard, there is possibility to further increase cooperation among the 

BRICS to gain competitive advantages. It is important to note that 

all the proposals laid out in this chapter might contribute to promote 

synergetic relationships among the BRICS economies. However, 

implementation of these may require further deliberations and their 

political and technical feasibility is yet to be determined in greater 

detail. Th e new areas of cooperation listed below should be seen basically as exploratory items to be included in further discussions and in 

the agenda of future meetings of the BRICS leaders, ministers, and 

other policymakers. Th e focus areas suggested are as follows:

(i) Intra-BRICS Trade and Investment Cooperation 

(ii) Cooperation in Infrastructure Financing

(iii) Industrial Development and Cooperation

(iv) Cooperation in Transportation

(v) Cooperation in Food Security

(vi) Cooperation in Technical Education 

(vii) Cooperation in Financial Market Development

2012-08-054_000000000000052
 executive summary xxi

(viii) Cooperation in Research and Development

(ix) Cooperation in the Area of Culture and Tourism

(x) Cooperation in International Issues

(xi) Cooperation in Energy Security

(xii) Cooperation to Build Eff ecitve Institutions

(xiii) International Development Bank for Fostering South–South 

Investment

 To conclude, even though the BRICS have pursued diff erent 

paths of growth with diff erent macroeconomic parameters and varied 

institutional strengths, the world seems to be optimistic about their 

emergence based on their respective durable comparative advantages. 

Th e growing role of the BRICS is confi rmed by the rapid recovery of 

these economies from the global fi nancial crisis, which demonstrates 

that optimal global economic policymaking cannot be undertaken 

without including the BRICS economies at the highest level.

2012-08-054_000000000000053
2012-08-054_000000000000054
Overview of BRICS

Basic Information on BRICS Countries

In the past few decades, some large economies such as Brazil, Russia, 

India, China, and South Africa (BRICS) have acquired a vital role in 

the world economy as producers of goods and services, receivers of 

capital, and as potential consumer markets. Th e BRICS economies 

have been identifi ed as some of the fastest growing countries and 

the engines of the global recovery process, which underscores the 

changed role of these economies. Even in the G-20 countries’ forum, 

BRICS are playing a formidable role in shaping macroeconomic 

policy after the recent fi nancial crisis. At present, these fi ve countries 

encompass over 40 per cent of the world’s population and account 

for nearly 25 per cent of total global GDP in terms of PPP. If one 

compares the GDP in PPP terms, four economies fi gure among 

the top ten, with China, India, Russia, Brazil, and South Africa 

in 2nd, 4th, 6th, 8th, and 26th places, respectively (Table 1.1). In 

terms of contribution to growth of PPP-adjusted global GDP of 

the world, these fi ve economies accounted for 55 per cent during 

1

2012-08-054_000000000000055
Table 1.1 Overview of BRICS, 2010 

GDP in PPP GDP Share in World GDP Per Capita

(in US$ billion) (US$ billion) (in per cent) GDP (US$) 

 Rank in World GDP 1990 2010 1990 2010 1990 2010 1 2 3 4 5 6 7 8 9 

Brazil 8 2,172 508 2,090 3.3 2.9 3,464 10,816Russia 6 2,223 – 1,465 – 3.0 – 10,437India 4 4,060 326 1,538 3.1 5.4 378 1,265China 2 10,086 390 5,878 3.9 13.6 341 4,382South Africa 26 524 112 357 0.9 0.7 5,456 7,158Source: IMF database.Note: – Not available.

2012-08-054_000000000000056
overview of brics 3

2000–8, and their contribution is expected to rise in the coming 

years.

 Th e BRICS comprise a huge land share of the world (Table 1.2) 

and, as a result, own vast natural resources. China, which has a land 

area of about 9.6 million sq. km, is the third-largest country in land 

size, after only Russia and Canada. Russia accounts for around 20 

per cent of the world’s oil and gas reserves, while China has about 

12 per cent of the world’s mineral resources. In terms of agricultural 

land, Russia has 121.5 million hectares of arable land. Brazil covers 

47 per cent of South America and is the fi fth-largest country in the 

world (8.5 million sq km), surpassed only by Russia, Canada, China, 

and the United States of America.

 Each of the BRICS countries has multiple and diff erent attributes 

and thus each has a huge potential to develop. Brazil is extremely rich 

in resources such as coff ee, soybeans, sugar cane, iron ore, and crude 

oil, with around 60 million hectares of arable land (just 7 per cent 

of its land area) but with an agricultural area of 31.2 per cent of the 

total land area. Russia is noted for its massive deposits of oil, natural 

gas, and minerals. India is a strong service provider with a rising 

manufacturing base, while China is seen as the manufacturing workshop of the world with a highly skilled workforce and relatively low 

wage costs. South Africa is the 26th largest economy in the world, 

with a GDP of US$ 357 billion. It is a medium-sized country with a 

total land area of slightly more than 1.2 million sq. km and around 

12 per cent arable land area. It is the world’s largest producer of platinum and chromium and holds the world’s largest known reserves 

of manganese, platinum group metals, chromium, vanadium, and 

alumino-silicates. South Africa generates 45 per cent of Africa’s 

electricity and the South African power supplier provides the 4th 

cheapest electricity in the world.

2012-08-054_000000000000057
Table 1.2 Land Use in BRICS, 2008 

Country Land Arable Area Harvested Production Irrigated Irrigated Land

Area Land for Cereals of Cereals Land (per cent of

(1,000 ha) (1,000 ha) (1,000 ha) (1,000 tonne) (1,000 ha) arable land)

1 2 3 4 5 6 7Brazil 845,942 61,000 20,220 71,288 4,500 6.6Russia 1,637,687 121,649 41,716 95,079 4,346 3.5China 932,749 108,642 88,593 483,680 64,141 52.3India 297,319 158,145 99,880 246,774 62,286 36.8South Africa 121,447 14,500 3,319 14,586 1,498 9.7

World 13,003,469 1,380,515 708,495 2,489,302 306,247 21.1Source: FAO Statistical Year Book, 2010.

2012-08-054_000000000000058
overview of brics 5

Economic Growth

It is widely perceived that over the next few decades the growth generated by the largest developing countries, particularly the BRICS, 

could become a much more signifi cant force in the world economy. 

Among the BRICS, India and Brazil are relatively more domestic 

demand-driven economies. As a group, they witnessed faster economic recovery from the 2008 fi nancial crisis than advanced and 

other emerging market economies (EMEs). Although they have 

strong external linkages, they have nonetheless undergone signifi cant 

rebalancing of their economies towards their domestic sectors in the 

post-crisis period. According to an estimate by Goldman Sachs, the 

four original BRIC countries are expected to represent 47 per cent 

of global GDP by 2050, which would dramatically change the list of 

the world’s 10 largest economies. An important change that we may 

expect over the medium to long term is that the top 10 countries in 

terms of GDP may be diff erent from the top 10 countries in terms 

of per capita GDP.

 Th e inherent strength of the BRICS emanates from strong domestic demand-based economies in the case of India and Brazil and the 

signifi cant outward linkages of China and Russia. South Africa benefi ts from its large resource base and proximity to untapped growth 

potential of the African continent.

 Among the BRICS, China, followed by India, are the fastestgrowing economies in the current decade. Between 1978 and 2009, 

the Chinese economy grew at an average annual rate of 9.9 percent, 

which is much higher than the world average for the period. Th e 

growth performance of Russia and Brazil also improved signifi cantly 

after the fi nancial crises of the 1990s.

2012-08-054_000000000000059
6 the brics report

 Th e sustained economic reforms and improved macroeconomic 

fundamentals along with a buoyant macroeconomic environment 

contributed to the improved growth performance of the BRICS in 

the current decade (Table 1.3).

 Th e strong growth performance of the BRICS is attributed to 

strong macroeconomic fundamentals, as refl ected by the high savings and investment rates, even though Brazil and South Africa still 

have room to increase these rates. South Africa’s investment ratio has 

increased strongly over the past decade as government and public 

corporations have stepped up infrastructure investment, but overall 

investment is constrained by low savings. 

 Among the BRICS, China has the highest saving and investment 

rates followed by India. High savings have also helped reduce the 

contribution of net exports to GDP in the case of China and India. 

As a result, high investment-led growth was largely fi nanced by 

domestic savings (Table 1.4).

 Th e salient features of the BRICS economies are their large geographical dimensions and size of population. It is widely perceived 

that all the BRICS markets have great potential for establishing the 

most stabilising of forces, that is, a prosperous middle class. Th is 

middle-income group in each country is growing at varying rates but 

the future direction is clear, that is, the middle class will both broaden 

and deepen, providing a solid base for the growth and development 

of the economies.

Linkages between Agriculture, Industry, and Services Sectors

Th e output structures in the BRICS economies have changed signifi cantly when compared to previous decades. Th e declining share 

2012-08-054_000000000000060
Table 1.3 Growth Rate of Gross Domestic Product

(per cent)

 1991–2002 2002 2005 2006 2007 2008 2009 2010 1 2 3 4 5 6 7 8 9BRICSBrazil 2.6 2.7 3.2 4.0 6.1 5.2 –0.6 7.5PRussia – 4.7 6.4 8.2 8.5 5.2 –7.8 4.0PIndia 5.7 4.6 9.2 9.8 9.4 7.3 5.7 10.4China 10.3 9.1 10.4 11.6 13.0 9.6 8.7 10.3South Africa 2.1 3.7 5.3 5.6 5.8 3.7 –1.7 2.8Advanced Economies 2.8 1.7 2.7 3 2.8 0.5 –3.2 3.0Euro Area 2.1 0.9 1.7 3 2.8 0.6 –4.1 1.7USA 3.5 1.8 3.1 2.7 2.1 0.4 –2.4 2.8World 3.2 2.9 4.5 5.1 5.2 3.0 –0.6 5.0Source: World Economic Outlook, IMF (2011).Note: P: Projection; – Not available.

2012-08-054_000000000000061
Table 1.4 Gross Domestic Investment and Savings

(per cent to GDP)

Country 1990 1995 2000 2006 2007 2008 2009 20101 2 3 4 5 6 7 8 9Brazil Investment 20.2 18 18.3 16.8 18.3 20.7 16.5 19.3 Saving 21.4 16.5 16.5 19.7 18.8 18.4 16.1 17.0Russia Investment – 25.4 18.7 21.4 24.1 26.2 22.7 19.8 Saving – 28.8 38.7 34.1 33.2 34.9 33 24.7India Investment 24.2 26.6 24.2 36 37.6 35.6 34.5 37.9 Saving 22.7 25.4 23.2 32.9 33.5 30.2 29.8 34.7China Investment 36.1 41.9 35.1 43.6 41.7 42.5 44.8 48.8 Saving 39.6 44.1 37.5 51.3 50.5 50.2 54.2 54.0South Africa Investment – 18.2 15.9 19.7 21.3 22.0 19.4 21.7 Saving 19.1 16.5 15.8 14.4 14.1 14.9 15.4 20.0Source: World Bank Database.Note: – Not available.

2012-08-054_000000000000062
overview of brics 9

of agriculture in their respective GDPs has been a common trend 

over the years. While there has been considerable stability in agricultural growth in Brazil and Russia during 2000–5 compared to earlier 

decades, agricultural performance in India and China has shown 

greater volatility. However, Russia has experienced a decline in share 

of agriculture from 7.6 per cent in 1995 to 4.9 per cent in 2008, 

while Brazil’s share remained relatively stable between 1995 and 2008 

(Table 1.5). Another common trend is the rising share of services in 

BRICS country GDPs since 1990. In China, industry continues to 

dominate in GDP at around 42.8 per cent in 2008 (around 35.5 

per cent in 1990), while the share of services has increased from 

38.5 per cent in 1990 to 45.7 per cent in 2008.

 Agri-business plays a central role in Brazil’s economic development, engaging 35 per cent of its workforce and contributing to 

almost 42 per cent of its export dollars. Brazilian agriculture has 

undergone dramatic changes in the past few decades. From a net 

importer of food grains until the 1970s, Brazil has emerged as the 

major net exporter of food products. A similar trend is witnessed 

in the case of India, where the Green Revolution and developments 

in biotechnology helped the country become self-reliant in food 

production. With increasing global demand for food and scarcity of 

arable land in the world, agronomic conditions will enable Brazil 

to continue its growth and become a larger supplier of agricultural 

commodities to nations around the world. In China, especially since 

1991 with the introduction of the socialist market economy system, 

many changes in urban areas were ushered in. Th e share of primary 

industry rapidly went down, while that of the secondary and tertiary 

industries increased. In Russia, there are measures to implement the 

National Project in agro-industrial complex. Among the BRICS, 

South Africa has the smallest share of agriculture in GDP, at around 

2012-08-054_000000000000063
Table 1.5 Sectoral Share in GDP 

(percentage to GDP)

Country Sectors 1990 1995 2000 2005 2008 20091 2 3 4 5 6 7 8Brazil Agriculture 10.1 5.8 5.6 5.7 5.9 6.1 Industry 29.9 22.0 27.7 29.3 27.9 25.4 Services 60.0 72.2 66.7 65.0 66.2 68.5Russia Agriculture – 7.6 6.7 5.4 4.9 4.7 Industry – 27.9 31.4 32.9 29.7 32.9 Services – 64.6 62.0 61.6 65.6 62.4India Agriculture 30.0 26.8 23.2 18.9 19.0 17.1 Industry 22.3 23.2 20.7 21.0 21.0 28.2 Services 47.7 50.0 56.1 60.0 60.0 54.6China Agriculture 26.0 19.7 15.2 12.2 11.6 11.0 Industry 35.5 40.6 40.7 42.2 42.8 48.0 Services 38.5 39.7 44.1 45.6 45.7 41.1South Africa Agriculture 4.6 3.9 3.3 2.7 3.2 3.0 Industry 40.1 34.8 31.8 31.2 32.5 31.1 Services 55.3 61.3 64.9 66.2 64.3 65.8Source: United Nations System of National Accounts.Note: – Not available.

2012-08-054_000000000000064
overview of brics 11

3 per cent and its services sector accounts for more than 60 per cent 

of the total GDP.

 In terms of the World Economic Forum ranking on global competitiveness, China ranks 27 (out of 139 countries) in 2010–11, 

while the rest of the BRICS economies are placed at 51 (India), 54 

(South Africa), 58 (Brazil), and 63 (Russia), respectively. Th e better 

rank of China can be attributed to its large market size (2), macroeconomic environment (4), and innovation (26). Th e ranks of various indicators of competitiveness suggest that the BRICS have strong 

and deep markets, which is also evident in the case of South Africa 

(Table 1.6).

Education, Inequality, Demographic Trends,

and Other Social Indicators

Th e demographic dividend that BRICS economies enjoy, in comparison with rapidly aging societies and longer life-expectancies in 

advanced countries, is likely to benefi t the group in the future. Th e 

share of the urban population is rising and the child-dependency 

ratio is falling, pointing to a rising share of the working age population. Th e increasing labour force shows the huge demand-and-supply 

potential in the BRICS economies (Table 1.7).

 Th ough these economies are better placed demographically than 

advanced countries, a decline in the working age population is expected to take place at a faster pace in some of the BRICS countries. At 

present, the population in the age group of 0 to 14 years is the highest in India (32.1 per cent), followed by Brazil (27.9 per cent), China 

(21.4 per cent), and Russia (15.3 per cent). It is expected that the 

average age of the population in India will decline, before it begins to 

2012-08-054_000000000000065
Table 1.6 Rank on Global Competitiveness Index (GCI), 2010–11 

Country Global Competitive Infrastructure Macroeconomic Higher Education Market Business Innovation Index Environment and Training Size Sophistication1 2 3 4 5 6 7 8Brazil 58 62 111 58 10 31 42 Russia 63 47 79 50 8 101 57India 51 86 73 85 4 44 39China 27 50 4 60 2 41 26South Africa 54 63 43 75 25 38 44Source: Global Competitiveness Report 2010–11, World Economic Forum.

2012-08-054_000000000000066
Table 1.7 Population and Demographic Profi le of BRICS

Total Population Urban Population Dependency Total Fertility Rate

 (million) (per cent of total) Ratio (births per woman)Country 1990 2010 1990 2010 1990 2010 1990–5 2005–10

1 2 3 4 5 6 7 8 9Brazil 149.6 195.4 73.9 86.5 65.9 47.9 2.6 1.7Russia 148.1 140.4 73.4 73.2 49.4 38.7 1.6 1.5India 862.2 1214.5 25.6 30.0 71.5 55.6 3.9 2.5China 1142.1 1354.1 26.4 47.0 51.2 39.1 2.0 1.8South Africa 36.7 50.5 52.0 61.7 72.7 53.6 3.3 2.4Source: Human Development Report, UNDP.Note: Data for 1990 in the case of Russia has been taken from HDR 2010.

2012-08-054_000000000000067
14 the brics report

rise after 25 years. According to projections by the United Nations, 

the median age in India will cross 30 only by 2025 and will remain 

at around 35 until 2040. In 2020, the average Indian will be only 29 

years old, compared with the average age of 37 years in China and 

the US, 45 years in Western Europe and 48 years in Japan.

 As projected, China’s population would peak at around 1.5 billion 

in the beginning of 2030s and decline slowly afterwards. According to 

government estimates, the population of India is expected to increase 

from 1,029 million to 1,400 million during the period 2001–26, 

which is an increase of 36 per cent in 25 years at the rate of 1.2 

per cent annually.

 According to 2010 data, India has an urbanization rate of less than 

30 per cent, and China’s a little more than 40 per cent, while Russia’s 

and Brazil’s rates are 73 and 85 per cent, respectively. In the case of 

South Africa, about 61.7 per cent of the population lives in urban 

areas. Judging from these data, it is evident that China and India 

still have much room for urbanization, which will become an engine 

for their future growth. South Africa’s fertility rate has declined over 

the past decade due to rapid urbanization and the high prevalence of 

HIV/AIDS.

 Th e BRICS economies have to work together to improve living 

conditions for their populations and the quality of social services. 

Various social sector indicators suggest that there is a large scope 

for improvement in all the BRICS economies (Table 1.8). Among 

the BRICS, the Russian Federation ranks highest (71st out of 169 

countries) in terms of the Human Development Index (HDI, 2010), 

while South Africa (129th) and India (134th) are ranked the lowest. 

South Africa has fairly high adult literacy rates (per cent of population 15 years and older) for both males (88.9 per cent) and females 

(87.2 per cent) (HDI, average for 1999–2007).

2012-08-054_000000000000068
Table 1.8 Social Sector Indicators, 2007 

Brazil Russia India China SA

1 2 3 4 5 6Human Development Index (HDI, 2007)HDI Rank 75 71 134 92 129Adult Literacy (per cent of 15 yrs and above during 1999–2007) 

Male 89.8 99.7 76.9 96.5 88.9

Female 90.2 99.4 54.5 90 87.2Child-related IndicatorsGross Enrolment Ratio (2007) 87.2 81.9 68.7 61.0 76.8Children under Age 0–5 yrs (during 2000–6) 6 3 46 7 12Population below Income

National Poverty Line 21.5 19.6 28.6 2.8 –Population not Using Improved Water Supply (2006) 9 3 11 12 7Life Expectancy (yrs)Male 68.6 59.9 62.0 71.3 53.2

Female 75.9 72.9 64.9 74.7 49.8Inequality Measures

Richest 10 per cent to Poorest 10 per cent 40.6 11 8.6 13.2 35.1Gini Index 55.0 37.5 36.8 41.5 57.8Source: UNDP, Human Development Report, 2010.Note: – Not available.

2012-08-054_000000000000069
16 the brics report

 Better quality healthcare provision has reduced infant mortality 

in Brazil (from 47 per 1,000 live births in 1990 to 22.5 in 2009), 

contributing to an improvement in the well-being of the Brazilian 

population, which is somewhat witnessed in Russia as well. 

Fiscal Sector

As a result of the 2007–9 crisis, fi scal stability in many countries 

deteriorated. Most countries encountered rising fi scal defi cits and 

public debts and, therefore, had to implement fi scal consolidation. 

Fiscal consolidation was the main point on the agenda of the G-20 

Summit in Toronto, June 2010. G-20 leaders agreed to implement 

responsible economic policies, eliminate fi scal defi cits resulting from 

stimulus programmes, and prevent the escalation of growth in public 

debt. In particular, it was decided to reduce the fi scal defi cit twofold 

in three years.

 BRICS economies have diff erent political systems. Th erefore, 

the political environments under which reforms are initiated and 

implemented are quite distinct. For instance, China has a socialist 

democratic political system. India is a federal republic that has a 

democratic set-up with a parliamentary system similar to England; 

India is also the world’s largest voting republic, with participatory 

multi-party democracy. Th e politics of Russia and Brazil take place 

within the framework of a federal presidential republic. South Africa 

has been a constitutional multi-party democracy since the end of 

Apartheid in 1994. In all the BRICS countries, governments have 

played a signifi cant role in the growth and development process.

 In early 2000, the BRICS initiated fi scal consolidation measures. In addition to putting in place the Fiscal Responsibility Law 

2012-08-054_000000000000070
overview of brics 17

(FRL), Brazilian authorities are committed to maintaining primary 

surplus targets stipulated in the draft Budget Guidelines Law every 

year. Similarly, in India, the fi scal position of the central government underwent consolidation in terms of targeted reduction in 

fi scal defi cit indicators under the Fiscal Responsibility and Budget 

Management (FRBM) Act. In the same manner, Chinese authorities showed their commitment to reform the budget process. In the 

late 1990s, South Africa took steps to improve the transparency of 

budgeting by publishing medium-term expenditure estimates over a 

three-year horizon. Th is coincided with a period of debt consolidation 

to reduce interest payments and reforms to improve the effi ciency of 

tax collection.

 Russia has taken a number of steps to achieve this goal. Already 

in the Law on Federal Budget for 2011–13, a substantial reduction 

in defi cit (resulting, in part, from the fall in public spending/GDP 

ratio) was envisaged. Th e defi cit was to decline from 5.9 per cent 

of GDP in 2009 to 3.6 per cent of GDP on 2011 and, further to 

2.9 per cent of GDP in 2013. In practice, actual market conditions 

helped signifi cantly improve fi scal balance forecasts. Th e Law on 

Federal Budget for 2012–14 envisages reduction in defi cit to 1.6 

per cent of GDP in 2013 and 0.7 per cent of GDP in 2014. Fiscal 

consolidation also featured prominently in the Budget Address of 

the President, which required elimination of federal budget defi cit 

by 2015.

 Apart from reducing the defi cit, a number of other important 

measures were taken in Russia to achieve medium- and long-term 

budget stability. In particular, it was decided to re-expand the Reserve 

Fund and to re-introduce fi scal rules (which were cancelled during 

the crisis) in 2015; the latter will be modifi ed taking into account the 

crisis experience.

2012-08-054_000000000000071
18 the brics report

 Already at the end of 2011, a substantial part of fi scal oil and 

gas revenues will be transferred to the Reserve Fund, which was signifi cantly depleted during the crisis when it was the main source of 

fi nancing the government’s stimulus programme. In fact, most of the 

extra revenues (as compared to the original Law on Budget) resulting from the favourable external conditions will be transferred there; 

only a small part has been used to increase expenditures. Expansion 

of the Reserve Fund is also planned for 2012–14.

 Currently, in Russia, there is an active discussion (in the framework 

of expert groups on the update of ‘2020 Strategy’) of new budgetary 

rules to be implemented in the near future. Th ese rules will likely 

put upper bounds on federal public expenditures depending on the 

external parameters and contribute to the medium- and long-term 

fi scal stability.

 In contrast to China, India, and Brazil, Russia being an oil-surplus 

economy has a surplus in general government accounts, driven mainly 

by a sharp rise in oil prices in recent years. India’s fi scal defi cit was 

the highest even before the emergence of the global fi nancial crisis 

(Table 1.9).

Table 1.9 Fiscal Defi cit of General Government 

(percentage of GDP)

Country 1998 2000 2006 2007 2008 2009 2010

1 2 3 4 5 6 7 8

Brazil –6.5 –3.84 –3.5 –2.36 –1.4 –3.1 –2.9

Russia –8.0 3.3 8.3 6.8 4.9 –6.3 –3.6

India –7.8 –9.3 –5.3 –4.0 –8.0 –10.0 –9.4

China –2.8 –3.3 –0.7 0.9 –0.4 –3.1 –2.6

South Africa – –1.5 0.8 1.4 –0.5 –5.2 –5.8

Source: IMF Database.

Note: – Not available.

2012-08-054_000000000000072
overview of brics 19

 In some BRICs economies, the global economic slowdown has 

impacted on fi scal consolidation targets negatively. During 2008 

and 2009, the fi scal position of all the BRICS economies worsened 

mainly due to countercyclical expansionary fi scal measures to augment domestic demand. Even Russia, which had mostly managed 

its fi scal surplus in the recent past, saw a deterioration in the fi scal 

situation during 2009. Despite large fi scal expansionary measures in 

2009, Brazil and China maintained better fi scal balance among the 

BRICS (Table 1.10).

 High and rising levels of gross debt imply signifi cant risks for the 

economy as demonstrated by the recent European debt crisis. In the 

long run, persistently high levels of public debt make economies 

more vulnerable to adverse shocks, reduce their long-run growth 

potential, and endanger the prospects for monetary stability. Among 

the BRICS, India and Brazil have the largest gross debt-to-GDP ratio 

at around 69 per cent and 66 per cent of GDP, respectively, in 2010 

(Table 1.11).

 Looking ahead, with the current level of unemployment and fragile macroeconomic environment, fi scal consolidation in the years to 

come will be a challenge for the BRICS (Table 1.12). In the case 

of India, Brazil, and South Africa, in view of the gap in terms of 

socio-economic performance and widespread deprivation, carrying 

out required government fi scal consolidation is a major challenge. 

On balance, the consolidation of economic recovery in the BRICS, 

along with global economic recovery, would be crucial for moving 

towards fi scal consolidation.

 Th e planned composition of fi scal adjustment during 2010–15 

diff ers among the BRICS economies. From the broad announcements made so far, it appears that India intends to rely on revenue 

measures, while Russia and South Africa foresee greater reliance on a 

2012-08-054_000000000000073
Table 1.10 Fiscal Balance of General Government

(percentage of GDP)

 Brazil Russia India China South Africa Year Revenue Expenditure Revenue Expenditure Revenue Expenditure Revenue Expenditure Revenue Expenditure1 2 3 4 4 5 6 7 8 9 10 1998 27.8 42.3 34.6 42.5 16.1 23.9 12.1 14.9 – – 2000 30.4 35.3 36.2 32.8 16.6 26.0 13.8 17.1 26.3 27.9 2001 31.3 37.2 36.9 33.7 16.6 26.1 15.1 17.9 27.4 27.8 2002 31.9 39.5 37.0 36.3 17.1 26.4 15.9 18.9 26.4 27.5 2003 31.4 39.2 36.4 34.9 17.5 26.1 16.2 18.6 26.6 29.0 2004 32.2 37.6 36.6 31.7 18.2 25.4 16.6 18.1 28.1 29.9 2005 33.4 39.2 41.0 32.8 18.4 24.8 17.2 18.6 30.1 29.9 2006 33.4 39.4 39.5 31.1 19.4 24.7 18.2 18.9 31.6 30.4 2007 33.9 38.3 39.9 33.1 21.0 25.0 19.8 18.9 31.8 30.5 2008 34.1 38.0 38.6 34.3 19.7 27.2 19.7 20.0 30.7 30.9 2009 33.1 39.3 34.3 40.5 18.9 28.5 20.0 23.0 27.3 32.4 2010 37.4 40.3 35.3 38.9 17.5 26.5 20.4 22.9 27.5 33.3 Source: IMF Database.Note: – Not available. 

2012-08-054_000000000000074
Table 1.11 Gross Debt of General Government 

(percentage of GDP)

 1998 2000 2006 2007 2008 2009 2010

1 2 3 4 5 6 7 8

Brazil – 66.7 66.7 65.2 64.1 68.9 66.1

Russia – 59.9 9.0 8.5 7.8 10.9 9.9

India 65.4 71.4 76 72.9 72.6 74.2 69.2

China 11.4 16.4 16.5 19.8 16.8 18.6 17.7

South Africa – 42.0 31.4 27.4 26.7 30.1 35.7

Source: IMF Database.

Note: – Not available.

Table 1.12 Fiscal Consolidation Policy

Country Medium-term Fiscal Target

Brazil Fiscal consolidation is being carried out. Th e R$ 50 billion 

budget cut announced in March 2011 by the government 

derives from a review on net revenues, as well as cuts in 

expenses. Mandatory spending will be reduced by R$ 15.8 

billion, whereas discretionary spending will be cut by R$ 

34.3 billion during 2011. In order to make the former feasible, the government has adopted a set of measures regarding 

payroll and hiring, unemployment and social benefi ts, as 

well as grants and subsidies. Public investment remains 

low by international standards but is expected to increase 

substantially under the Growth Acceleration Programme 

(PAC).

Russia Refl ecting a gradual unwinding of the anti-crisis package, 

in 2010 the general government defi cit was projected to 

improve by 3 per cent of GDP. Beyond 2010, the authorities’ 2010–12 federal government budget implies a steady 

decline in the non-oil balance by about 1–2 per cent of GDP 

a year to 9.5 per cent of GDP by 2012, mainly through 

lower spending on public administration and low-priority 

infrastructure projects, but also higher social security contributions. Over the longer term, the authorities plan to 

reduce the non-oil defi cit to their sustainable target of 4.7 

per cent of GDP by 2013. (Contd)

2012-08-054_000000000000075
22 the brics report

India Gradual fi scal consolidation is envisaged by reducing the 

central government fi scal defi cit to 3 per cent of GDP 

by 2013–14. Th e planned reduction would be mainly 

revenue-driven, from higher growth and from measures 

to simplify the tax code, raise voluntary compliance, and 

reduce exemptions.

China Th e fi scal stimulus package is temporary with an explicit 

timeline through 2010. It was decided that China would 

continue with its proactive fi scal policy in 2011.

South Africa South Africa will continue to manage public fi nances in a 

countercyclical manner to support long-run fi scal sustainability. Th e narrowing of the consolidated government 

balance will continue over the medium-term expenditure 

framework. Th is will be done through a moderation in the 

growth of expenditure and a recovery in revenue in line 

with the economic cycle. Th e public sector will continue 

to support large-scale infrastructure projects to address 

transportation, water, and energy sector bottlenecks. Social 

income grants provide a safety net for the poor, while initiatives to support job creation will be intensifi ed. Th e ratio 

of debt to GDP is expected to stabilize in 2015–16 before 

declining.

Table 1.12 (Contd)

Country Medium-term Fiscal Target

combination of revenue and expenditure management (Table 1.13). 

On the other hand, Brazil, which comes under the category of 

medium and low need of fi scal adjustment, has yet to lay out detailed 

plans. It was decided that China would continue its proactive fi scal 

policy to maintain economic growth and curb price rise in 2011.

 Once the growth process has recovered, the BRICS economies 

need to revert to a path of fi scal consolidation. As a result, demand 

should emanate from private sources, given the widespread rollback of large fi scal defi cits. Th e most urgent challenge is to put in 

place credible fi scal consolidation plans to achieve sustainable fi scal 

2012-08-054_000000000000076
overview of brics 23

Table 1.13 Composition of Fiscal Adjustment Plans

Fiscal Mostly Revenue Mostly Detailed

Adjustment Revenue and Expenditure Plans in

Need Expenditure Preparation

HIGH India

(> 6 per cent) 

MEDIUM China &

(3– 6 per cent) South Africa

LOW Russia Brazil

(< 3 per cent) 

Source: World Economic and Financial Survey, IMF, May 2010.

positions before the end of the next decade. Th ese would have to 

include reforms of the rapidly growing social spending programmes 

and entitlements and broadening of tax bases. Th e timing and 

sequencing of exit from monetary and fi scal stimulus in emerging 

economies will vary according to country circumstances.

Monetary Policy Framework

Th e BRICS economies operate under varied monetary policy frameworks (Table 1.14). Brazil and South Africa have infl ation targeting regimes, while China, India, and Russia operate under diff erent 

frameworks.

 Th e Central Bank of Brazil’s (BCB) Monetary Policy Committee 

(COPOM) was created on 20 June 1996, and assigned the responsibility of setting the stance of monetary policy and the short-term 

interest rate. Th e aim in creating COPOM was to enhance monetary 

policy transparency and confer regularity to the monetary policy 

decision-making process. Brazil implemented a formal infl ation2012-08-054_000000000000077
Table 1.14 Monetary Frameworks in BRICS

Country Monetary Policy Framework Key Monetary Policy Tools Objectives

Brazil Infl ation targeting Interest rate (Selic rate): Interest rate on Infl ation: Point target of 4.5 per cent

overnight interbank loans collateralized with tolerance range of 2 percentageon federal debt instruments points for headline CPI

Russia No single target indicator OMOs and standing facilities; To ensure stability of national - Infl ation (CPI) target for 3-year period reserve requirements currency

- Managed fl oating exchange rate regime

India Multiple Indicators Approach Key policy rate: Repo/reverse repo Maintain price stability, fi nancial

rate and reserve requirements, stability, and ensure appropriateCRR and SLR fl ow of credit to productive sectors

China Multiple Indicators Approach Reserve requirement ratio, central bank Maintain the stability of the value

base interest rate, rediscounting, of the currency and therebycentral bank relending, open market promote economic growthoperation, and other policy instrumentsspecifi ed by the State Council 

South Africa Infl ation targeting Key policy rate: Repurchase rate Infl ation target range for headline 

CPI of 3–6 per cent combined with fi nancial stability objective

2012-08-054_000000000000078
overview of brics 25

targeting framework for monetary policy in June 1999. Under this 

regime, COPOM’s monetary policy decisions have as their main 

objective the achievement of the infl ation targets set by the National 

Monetary Council (CMN). If infl ation breaches the target set by the 

CMN, the Governor of the Central Bank is required to write an open 

letter to the Minister of Finance explaining the reasons for missing 

the target, as well as measures required to bring infl ation back to 

the target, and the period over which these measures are expected to 

take eff ect.

 In Brazil the central bank’s main policy instrument is the overnight, 

inter-bank interest rate, called the Over-Selic rate. Th e target for the 

Over-Selic rate is set at regular meetings of the BCB’s Monetary Policy 

Committee (COPOM). Th e Open Market Operations Department 

(Demab) is responsible for carrying out open market operations to 

keep the Over-Selic rate as close as possible to the target established 

by COPOM. 

 Since 2006, eight regular meetings of COPOM have been held, 

with each lasting for two days. Eight days after each meeting, the 

Committee releases the meeting minutes on the Central Bank’s website and to the press through the Central Bank’s press offi cer. At the 

end of each quarter (March, June, September, December), COPOM 

publishes the Central Bank’s Infl ation Report, which provides detailed 

information on economic conditions, as well as COPOM’s infl ation 

projections from its most recent meeting.

 Monetary policy, conducted by the Bank of Russia, is designed 

to maintain fi nancial stability and create conditions conducive to 

sustainable economic growth. In the 2000s, Russia’s monetary policy 

was geared at containing infl ation and smoothing fl uctuations of the 

nominal exchange rate. In the past few years the scaling down of 

interventions in the domestic foreign exchange market, the increased 

2012-08-054_000000000000079
26 the brics report

fl exibility of the exchange rate, and the gradual winding up of anticrisis measures stimulated the role of interest rate policy in reducing 

infl ation. Th e principal objective of monetary policy over the next 

three years is to reduce infl ation to an annual rate of 5 per cent.

 At present monetary policy instruments used by the Bank of 

Russia are open market operations, standing facilities, and reserve 

requirements. Th e Bank of Russia infl uences interest rates through 

its open market operations and standing facilities: the upper limit 

of the interest rate corridor is the fi xed rate on overnight refi nancing 

operations (REPO and lombard loans) and the lower limit is the 

fi xed overnight deposit rate.

 Th e Bank of Russia has been implementing its exchange rate policy 

in the context of the managed fl oating regime, aimed at mitigating 

the eff ect of external shocks on the Russian economy. Th e operational benchmark of the exchange rate policy is the rouble value of 

the bi-currency basket, currently consisting of 0.45 euro and 0.55 

US dollar. Th e Bank of Russia uses the fl oating operational intra-day 

band of fl uctuations in the value of the bi-currency basket.

 As the monetary authority of the country, the Reserve Bank of 

India (RBI) formulates, implements, and monitors monetary policy 

with the objective of maintaining price stability and ensuring adequate 

fl ow of credit to productive sectors. Monetary policy in India evolved 

with increasing current and capital account liberalization, liberalization of the fi nancial sector, changing patterns of credit requirements 

of the real sector, and rapid changes in the world economic scenario. 

Th e operating procedure of monetary policy in terms of targets and 

instruments, therefore, saw substantial changes.

 Th e twin objectives of monetary policy, that is, maintaining price 

stability and ensuring availability of adequate credit to productive 

sectors of the economy to support growth, have remained unchanged, 

2012-08-054_000000000000080
overview of brics 27

though their relative emphasis varied depending on the circumstances. In line with this, in recent years, a preference emerged for a 

soft and fl exible interest rate environment within the framework of 

macroeconomic stability. Th e use of broad money as an intermediate 

target has been de-emphasised, but the growth in broad money (M3) 

continues to be used as an important indicator of monetary policy. A 

multiple-indicators approach was adopted in 1998–9, wherein interest rates or rates of return in diff erent markets (that is, money, capital, 

and government securities markets) along with high frequency data 

on currency, credit extended by banks and fi nancial institutions, fi scal 

position, trade, capital fl ows, infl ation rate, exchange rate, refi nancing and transactions in foreign exchange are juxtaposed with output 

data to draw policy perspectives.

 With the increasing market orientation of the fi nancial structure 

and deregulation of the operations of commercial banks, the RBI 

has restructured its armoury of instruments with direct instruments 

gradually giving way to indirect ones. Th e thrust of monetary policy 

in recent years has been to develop an array of instruments to transmit liquidity and interest rate signals in the short term in a more 

fl exible and bi-directional manner. A Liquidity Adjustment Facility 

(LAF) was introduced in June 2000 to modulate short-term liquidity 

and signal short-term interest rates. Th e LAF operates through repo 

and reverse repo auctions, thereby setting a corridor for the shortterm interest rate consistent with policy objectives. Th e RBI is able 

to modulate the large market borrowing programme by combining 

strategic devolvement/private placement of government securities 

with active open market operations.

 In China, the objective of the monetary policy is to maintain the 

stability of the value of the currency and thereby promote economic 

growth. Th e monetary policy instruments applied by the People’s 

2012-08-054_000000000000081
28 the brics report

Bank of China (PBC) include the reserve requirement ratio, central 

bank base interest rate, rediscounting, central bank lending, open 

market operations, and other policy instruments specifi ed by the 

State Council.

 Th e Monetary Policy Committee in China plays an important role 

in macroeconomic management and in the formulation and adjustment of monetary policy. Th e responsibilities, composition, and 

working procedures of the Committee are prescribed by the State 

Council. Th e rules of the Committee stipulate that it is a consultative 

body responsible for the formulation of monetary policy by the PBC; 

its responsibilities are to advise on the formulation and adjustment of 

monetary policy and policy targets for a certain period, application of 

monetary policy instruments and major monetary policy measures, 

and coordination between monetary policy and other macroeconomic policies. Th e Committee plays its advisory role based on 

comprehensive research on macroeconomic situations and the macro 

targets set by the government. Th e Committee performs its functions 

through regular quarterly meetings. An ad hoc meeting is held in case 

it is proposed by the Chairman or endorsed by more than one-third 

of the members of the Monetary Policy Committee.

 Th e mandate of the South African Reserve Bank (SARB) is 

defi ned in the Constitution of the Republic of South Africa as ‘the 

protection of the value of the currency in the interest of balanced 

and sustainable economic growth in the Republic’. Deriving from 

this constitutional mandate, the Bank regards its primary goal in the 

South African economic system as ‘the achievement and maintenance 

of price stability’. Infl ation targeting was adopted as a framework for 

monetary policy in February 2000 with the aim of achieving and 

maintaining headline CPI infl ation within a range of 3–6 per cent on 

a continuous basis.

2012-08-054_000000000000082
overview of brics 29

 Th e government sets the infl ation target in consultation with the 

Reserve Bank. Th e monetary policy committee (MPC) meets at least 

six times per year. Decisions are announced immediately after the 

meeting at a televised press conference and the MPC statement is 

published on SARB’s website. Th e minutes are not published, but 

the bi-annual Monetary Policy Review discusses factors infl uencing 

infl ation and risks to the outlook. SARB engages directly with the 

public twice a year at Monetary Policy Forums that are held in major 

centres around the country. In addition, the Governor of SARB 

appears before the Parliament’s Portfolio Committee on Finance at 

least three times a year.

 Th e SARB implements infl ation targeting in a fl exible and 

forward-looking manner taking cognisance of external shocks to the 

economy, as well as other factors such as changes in the output gap 

and domestic imbalances. Financial stability is also an important 

objective of SARB.

 SARB has also focused on maintaining and improving its 

domestic market operations. Liquidity in the domestic and international interbank markets is carefully monitored. Although 

contingency plans were put in place and communicated to the 

banking counterparties, it was not necessary to provide any additional or special liquidity to domestic banks beyond the normal 

daily operations during the global fi nancial crisis and subsequent 

recession.

 Th e MPC takes cognisance of movements in the exchange rate 

and their potential impact on infl ation in determining policy rates. 

However, the rand is a freely fl oating exchange rate and SARB does 

not try to infl uence the level of the currency. Interventions, if any, are 

aimed at smoothing out excessive currency volatility in the short term 

through open-market operations. Over the past few years, reserve 

2012-08-054_000000000000083
30 the brics report

accumulation has been necessary to reduce South Africa’s external 

vulnerability in the face of a rising current account defi cit.

Price Situation

Over the past few years, large fl uctuations in the prices of industrial and agricultural commodities combined with volatile exchange 

rates have increased the volatility of infl ation in BRICS economies, 

particularly India, China, and South Africa (Table 1.15). Among the 

BRICS, Russia, Brazil, and South Africa received the direct positive 

impact of high commodity prices, while they acted as constraints 

on growth for China and India. In the second half of 2010, central 

banks grappled with the balancing act of anchoring high infl ation 

along with managing fragile economic growth.

Table 1.15 Infl ation: Average Consumer Prices

(per cent change)

Country 2000 2005 2006 2007 2008 2009 2010

1 2 3 4 5 6 7 8

Brazil 7.1 6.9 4.2 3.6 5.7 4.9 5.0

Russia 20.8 12.7 9.7 9.0 14.1 11.7 6.9

India 4.0 4.2 6.2 6.4 8.3 10.9 13.2

China 0.4 1.8 1.5 4.8 5.9 –0.7 3.3

South Africa 5.4 3.4 4.7 7.1 11.5 7.1 4.3

Source: IMF.

External Sector

Global integration of most of the emerging market economies, in 

general, and the BRICS in particular, gained momentum in the 

2012-08-054_000000000000084
overview of brics 31

1990s, mainly on account of the structural adjustments adopted by 

these economies. Th e fi nancial sector developments in these economies enhanced trade and capital fl ows along with increased technology transfers and mobility of labour. Increased global integration 

is highly visible in terms of the openness of the BRICS economies 

through higher share in global trade and other fi nancial fl ows, which 

enhanced the growth potentials of these economies (Table 1.16). 

Integration changed the course of development of the BRICS economies through active management of their external liabilities and 

assets across segments. Th is resulted in minimizing external sector 

vulnerabilities, which helped the BRICS economies withstand the 

recent global fi nancial crisis and its aftershocks.

Merchandise Trade and Invisible Flows

Th e share of the BRICS in global trade continued to grow at a rapid 

pace. Th eir share in world exports increased substantially over the 

past decade mostly through broad-based diversifi cation, both in 

commodities and regions of trade, while imports witnessed a sharp 

rise that was driven by increased investment and consumption 

demand led by the increasing purchasing power of these economies 

(Table 1.17).

brics exports

All the BRICS economies maintained persistent trends of rising share 

of exports in GDP, refl ecting the structural transitions witnessed by 

these economies in exploring avenues for exports based on comparative advantage and supported by productivity gains (Table 1.18).

2012-08-054_000000000000085
Table 1.16 Global Integration of BRICS Economies 

Share in Trade Current Forex Reserves External Debt Debt Service

World Trade Openness Account Balance (per cent (US$ billion) Ratio

 (per cent of GDP) of GDP) 

Country 1990 2010 1990 2010 1990 2010 1990 2010 1990 2009 1990 20091 2 3 4 5 6 7 8 9 10 11 12 13Brazil 0.8 1.2 6.9 11.2 0.8 –2.3 1.5 13.7 119.7 276.9 22.5 23.4Russia – 2.3 – 30.3 – 4.9 0.0 30.4 – 381.3 4.4 17.7India 0.5 1.8 6.9 21.7 –1.2 –3.2 0.5 18.0 85.7 237.7 34.9 5.9China 1.6 9.2 17.4 29.5 1.3 5.2 7.6 48.8 55.3 428.4 11.7 2.9South Africa 0.6 0.5 24.3 27.9 1.4 –2.8 0.9 10.7 23.3 42.1 – 9.3Source: IMF, UNCTAD, and World Bank. Note: – Not available.

2012-08-054_000000000000086
overview of brics 33

 Th e composition of BRICS exports changed drastically over the 

past two decades due to structural changes across the sectors of these 

economies during the period. Th ough the BRICS are still known 

for exports of natural resources, these economies moved from being 

exporters of primary products to exporters of manufactured products. Likewise, their export destinations have undergone dramatic 

changes in response to globalization and liberalization which, in turn, 

helped the BRICS increase their share in global trade (Table 1.19).

Table 1.18 BRICS Exports of Goods and Services

(per cent of GDP)

Country 1990 1995 2000 2005 2008 2009 2010

Brazil 6.9 6.8 10.1 15.1 13.8 11.3 11.2

Russia – 29.8 44.3 35.2 31.5 28.2 30.3

India 6.9 10.2 12.3 18.8 23.7 20.1 21.7

China 17.4 23.1 23.3 37.1 34.9 26.7 29.5

South Africa 24.3 22.8 27.8 27.4 35.9 27.7 27.9

Source: UNCTAD.

Note: – Not available.

Table 1.17 BRICS Share of Global Trade

(per cent)

 1990 1995 2000 2005 2008 2009 2010

BRICS 3.6 6.0 7.0 11.2 13.6 13.7 15.0

Brazil 0.8 0.8 0.8 1.0 1.1 1.1 1.2

Russia – 1.5 1.4 2.1 2.6 2.2 2.3

India 0.5 0.6 0.7 1.2 1.5 1.6 1.8

China 1.6 2.6 3.5 6.4 7.9 8.3 9.2

South Africa 0.6 0.5 0.5 0.5 0.5 0.5 0.5

Source: UNCTAD.

Note: – Not available.

2012-08-054_000000000000087
34 the brics report

Table 1.19 BRICS Share in World Exports 

1990 1995 2000 2005 2008 2009 2010

BRICS 3.9 6.5 7.5 12.2 14.8 15.1 16.3

Brazil 0.9 0.9 0.9 1.1 1.2 1.2 1.3

Russia – 1.6 1.6 2.3 2.9 2.4 2.6

India 0.5 0.6 0.7 0.9 1.2 1.3 1.4

China 1.8 2.9 3.9 7.3 8.9 9.6 10.4

South Africa 0.7 0.6 0.5 0.5 0.5 0.5 0.6

Source: UNCTAD.

Note: – Not available.

 Despite the fact that all the BRICS economies having signifi cant 

human capital endowments, the diff erence in their resource endowments are refl ected in their export baskets. For instance, manufactures account for 93.6 per cent of total merchandise exports from 

China in contrast to 66.0 and 51.8 per cent from India and South 

Africa, respectively, while it is 38.0 per cent of Brazilian exports and 

21.1 per cent of Russian exports. Russia’s export basket is dominated 

by fuel and mining exports (nearly 70 per cent), while agriculture 

products, fuel, and mining products account for nearly 60 per cent 

of exports from Brazil. South Africa’s emergence has coincided with 

the rise of other emerging markets in Africa. Th e demand for South 

Africa’s manufactured commodities (nearly 51.8 per cent) have 

boosted the countries exports and, subsequently, economic growth 

(Table 1.20).

 Structural developments across sectors in BRICS economies 

during the past two decades are more visible in technological developments, which may also be responsible for the changes in the composition and destination of BRICS exports. Th is is revealed by the 

share of high-technology goods in the export baskets, which have 

registered an increasing trend (Table 1.21).

2012-08-054_000000000000088
Table 1.20 BRICS Exports Profi le, 2009

Country Merchandise Share in Share by Commodity 

Exports World Agri- Fuels and Manu- Share by Destination

 (US$ Total cultural Mining factures

 billion) Exports Products Products 

1 2 3 4 5 6 7 8 9 10 11Brazil 153.0 1.2 37.7 21.3 38.0 EU China US Argentina Japan  (22.3) (13.2) (10.3) (8.4) (2.8)Russia* 303.4 2.5 6.9 69.0 21.1 EU Belarus China Turkey Ukraine (52.7) (5.5) (5.5) (5.4) (4.6)India 164.9 1.3 10.2 20.6 66.0 EU UAE US China HK, China (20.5) (14.4) (10.8) (5.9) (4.0)China 1,201.6 9.6 3.4 2.9 93.6 EU US HK Japan Rep. Korea

 (19.7) (18.4) (13.8) (8.1) (4.5)South Africa 61.7 0.5 10.7 34.8 51.8 EU China US Japan Switzerland (26.5) (10.5) (9.0) (7.6) (4.2)Source: WTO.Note: * National accounts data. 

2012-08-054_000000000000089
36 the brics report

Table 1.21 High-technology Exports (per cent of Manufacturing 

 Exports)

Country 1990 1995 2000 2005 2007 2008 2009

1 2 3 4 5 6 7 8

Brazil 7.1 4.8 18.6 12.8 11.9 12.0 13.9

China – – 17.2 8.1 6.9 6.5 9.3

India 2.4 4.3 4.8 4.7 5.3 5.7 8.6

Russia – 10.5 18.6 30.6 29.7 28.7 31.0

South Africa – 5.7 7.0 6.6 5.7 5.2 5.6

Source: World Bank Database.

Note: – Not available.

 Increased technology-intensive investments and a higher supply 

of human resources propelled growth in the services sector, which, 

in turn, led to higher productivity in the BRICS economies. Among 

the exports of invisibles, the share of services exhibited signifi cant 

improvement in almost all the BRICS economies (Table 1.22).

Table 1.22 BRICS Share of World Exports of Services 

(per cent)

 1990 1995 2000 2005 2008 2009 2010

BRICS 2.1 3.8 4.7 7.0 8.8 8.7 9.8

Brazil 0.5 0.5 0.6 0.6 0.8 0.8 0.9

Russia – 0.9 0.6 1.0 1.3 1.2 1.2

India 0.6 0.6 1.1 2.0 2.7 2.6 3.1

China 0.7 1.6 2.0 2.9 3.7 3.7 4.2

South Africa 0.4 0.4 0.3 0.4 0.3 0.3 0.4

Source: UNCTAD.

Note: – Not available.

brics imports

As fast-growing economies, the import demand from these economies now plays a catalytic role in the global growth process. Th e 

2012-08-054_000000000000090
overview of brics 37

diversifi cation in the composition of exports from primary to manufactured products, mostly in the form of value additions, requires 

large imports (Table 1.23).

Table 1.23 Imports of Goods and Services 

(per cent of GDP)

Country 1990 1995 2000 2005 2008 2009 2010

1 2 3 4 5 6 7 8

Brazil 5.6 8.2 11.0 10.8 13.0 10.6 11.4

Russia – 26.7 23.7 21.7 22.3 20.9 22.1

India 8.5 11.5 13.9 22.1 30.5 25.0 26.4

China 13.7 20.2 20.3 30.6 26.5 21.7 24.9

South Africa 18.6 22.8 25.3 28.9 38.3 29.4 24.9

BRICS: Share in World Imports

BRICS 3.3 6.1 6.2 10.0 12.5 13.3 14.8

Brazil 0.6 1.0 0.9 0.7 1.1 1.1 1.3

Russia – 1.3 0.7 1.3 2.0 1.7 1.8

India 0.7 0.7 0.8 1.3 2.0 2.0 2.1

China 1.5 2.5 3.4 6.1 6.9 8.0 9.1

South Africa 0.5 0.6 0.5 0.6 0.6 0.6 0.5

Source: UNCTAD.

Note: – Not available. 

 Th e major chunk of BRICS economies’ import basket consists of 

capital goods, indicating the process of large-scale industrialization in 

these economies which is also refl ected in their changed composition 

of commodity exports (Table 1.24).

 Th e BRICS’ imports of services have also grown, refl ecting the 

increasingly broad-based nature of growth achieved by these economies over the past decades. As in the case of demand for commodity 

imports, large-scale industrialization and the increased emphasis on 

2012-08-054_000000000000091
Table 1.24 BRICS Imports Profi le, 2009

Country Merchandise Share in Share by Commodity 

Imports World Agri- Fuels and Manu- Share by Origin

 (US$ Total cultural Mining factures

 billion) Imports Products Products 

1 2 3 4 5 6 7 8 9 10 11Brazil 133.7 1.1 6.4 17.6 75.9 EU US China Argentina Japan (22.9) (15.8) (12.5) (8.8) (4.2)Russia 191.8 1.5 15.2 3.8 79.8 EU China US Ukraine Japan (45.9) (13.4) (5.4) (5.3) (4.2)India 257.2 2.0 5.6 37.6 46.6 EU China UAE US Saudi Arabia

 (14.4) (11.5) (7.4) (6.0) (5.4)China 1,005.9 7.9 7.6 24.9 67.1 Japan EU Rep. of HK, Taipei, (13.0) (12.7) Korea China Chinese  (10.2) (8.6) (8.5)South Africa 73.2 0.6 7.4 23.3 68.3 EU China US Saudi Arabia Japan (32.2) (13.1) (7.8) (5.0) (4.9)Source: WTO.

2012-08-054_000000000000092
overview of brics 39

exports encouraged a high demand for services. Besides, the improved 

living standards of the middle class of these economies have driven 

the import demand of services to a greater extent (Table 1.25).

Table 1.25 BRICS Share of World Imports of Services

1990 1995 2000 2005 2008 2009 2010

BRICS 2.5 6.0 6.1 8.4 10.5 11.0 12.5

Brazil 0.9 1.1 1.1 1.0 1.3 1.4 1.8

Russia – 1.6 1.1 1.6 2.0 1.9 2.0

India 0.7 0.8 1.2 1.9 2.4 2.5 3.1

China 0.5 2.0 2.3 3.4 4.3 4.8 5.1

South Africa 0.4 0.5 0.4 0.5 0.5 0.4 0.5

Source: UNCTAD.

Note: – Not available.

trade linkages: increasing south-to-south trade

Despite a signifi cant rise in the share of exports among intra-BRICS 

economies, there is scope for increased trade among these countries, 

which underlines the need to increase the South-to-South trade 

matrix. India and China are some of the largest consumers in the 

world, particularly of oil and other raw materials, while Russia, 

Brazil, and South Africa are some of the largest suppliers of metal, 

oil, and other natural resources. Hence, there is a need to identify 

further economic linkages among these countries through trade and 

investment promotion channels (Table 1.26).

private transfers

Remittance fl ows to developing countries reached US$ 316 billion 

in 2009, which is a decline of 6 per cent from the US$ 336 billion 

recorded in 2008, refl ecting the eff ect of the global fi nancial crisis 

2012-08-054_000000000000093
Table 1.26 Export Linkages of BRICS

(US$ billion)

Exports from Russia Brazil China India South Africa Advanced Economies Euro Area1990 – – – – – –2000 0.6 5.2 1.1 0.03 60.6 34.12009 1.4 16.1 4.8 0.2 138.1 92.3Exports from India Brazil China Russia South Africa Advanced Economies Euro Area 1990 0.0 0.0 – 0.0 11.1 3.02000 0.3 0.8 0.9 0.3 27.4 7.62009 2.2 10.2 0.9 1.9 79.0 26.3Exports from China Brazil India Russia South Africa Advanced Economies Euro Area 1990 0.1 0.2 – 0.0 52.0 5.12000 1.2 1.6 2.2 1.0 208.3 30.62009 15.9 29.7 17.5 7.4 858.5 174.4Exports from Brazil China India Russia South Africa Advanced Economies Euro Area 1990 0.4 0.2 – 0.2 22.9 8.12000 1.1 0.38 0.4 0.3 34.6 13.02009 21.0 3.4 25 1.3 65.1 28.5Exports from South Africa China India Russia Brazil Advanced Economies Euro Area1990 – – – – – –

2000 0.3 0.4 0.03 0.2 15.7 6.22009 5.6 2.0 0.2 0.4 30.9 10.7Source: Directory of Trade Statistics, IMF.Note: – Not available. 

2012-08-054_000000000000094
overview of brics 41

on remittances. Th e contribution of private transfers in the BRICS 

also varies widely among member countries. India and China remain 

as the top two recipients of global remittances in 2009, with US$ 

49 billion and US$ 48 billion, respectively. For India, with an increasing current account defi cit, remittances play a cushioning role. Russia 

tops the list of emerging market economies in terms of money transfer outfl ows; calculated on the basis of balance of payments data, the 

value of remittances from Russia in 2009 stood at US$ 19 billion, 

or 7 per cent of the world’s total remittances. Unlike other private 

capital fl ows, remittances maintained a consistent increasing trend 

at least in the cases of India and China, while it showed a declining 

trend in Russia and Brazil (Table 1.27).

Table 1.27 BRICS Share in Global Remittance Infl ows

(per cent)

 1990 1995 2000 2005 2007 2008 2009 Remittances

 to GDP Ratio 

Brazil 0.8 3.3 1.2 1.3 1.1 1.1 1.0 0.3

Russia 0.0 2.5 1.0 1.1 1.2 1.4 1.3 0.4

India 3.5 6.1 9.8 8.1 9.7 11.3 11.9 3.9

China 0.3 0.9 4.0 8.8 10.1 10.9 11.5 1.0

South Africa 0.2 0.1 0.3 0.2 0.2 0.2 0.2 0.3

Source: World Bank.

current account

Th e performance of the BRICS on the external front, as refl ected in 

the current account, varied widely over the years as well as among 

the countries. China experienced an increase in its current account 

surplus prior to the crisis that moderated thereafter, while the current 

account surplus of Russia has declined over time. India, South Africa, 

and Brazil have been running current account defi cits (Table 1.28). 

2012-08-054_000000000000095
Table 1.28 Trade Balance and Current Account Balance

(per cent of GDP)

 Trade Balance* Current Account BalanceCountry 1990 2000 2008 2009 2010 1990 2000 2008 2009 20101 2 3 4 5 6 7 8 9 10 11BRICSBrazil 1.4 –0.9 0.8 0.7 –0.2 –0.7 –3.8 –1.7 –1.5 –2.3Russia – 20.7 9.2 7.3 8.3 0.0 18.0 6.2 4.1 4.9India –1.6 –1.6 –6.7 –4.9 –4.8 –2.4 –1.0 –2.0 –2.8 –3.2China 3.7 3.1 8.3 5.0 4.6 3.1 1.7 9.6 6.0 5.2South Africa 6.3 3.4 7.0 –5.8 –7.3 1.4 –0.1 –7.1 –4.1 –2.8Advanced EconomiesJapan 0.9 1.8 1.2 1.1 2.1 1.5 2.6 3.2 2.8 3.6United States –0.9 –3.1 –3.8 –2.0 –2.6 –1.4 –4.2 –4.7 –2.7 –3.2Source: UNCTAD and IMF. Note: – Not available. * Goods and services.

2012-08-054_000000000000096
overview of brics 43

Th e impact of the crisis on the current accounts of the BRICS 

economies also varied as refl ected in terms of the reduction in current 

account surpluses (China and Russia), the surplus turning into a 

defi cit (Brazil), widening of the current account defi cit (India), and 

decline in the defi cit (South Africa). On the current account, while 

the decline in oil prices aff ected Russia, the steep fall in export demand 

across the board impinged on all the other BRICS economies.

brics and capital flows

Th ere has been a marked increase in the magnitude of net private 

capital fl ows into the BRICS economies. Global as well as emerging domestic factors contributed to an increase in capital infl ows. 

Global factors include excess liquidity and a low interest rate regime 

followed in the industrialized countries along with an improvement 

in the risk perception towards EMEs and the urge for higher yields. 

Th is encouraged the shifting of the direction of global capital fl ows in 

favour of EMEs, complicating macroeconomic management in some 

cases (Table 1.29).

Table 1.29 Share of Global FDI Infl ows

(per cent)

 1990 1995 2000 2005 2008 2009 2010

BRICS 2.2 13.8 5.8 11.7 16.0 16.7 17.8

Brazil 0.5 1.3 2.3 1.5 2.6 2.2 3.9

Russia – 0.6 0.2 1.3 4.3 3.1 3.3

India 0.1 0.6 0.3 0.8 2.4 3.0 2.0

China 1.7 11.0 2.9 7.4 6.2 8.0 8.5

South Africa 0.0 0.4 0.1 0.7 0.5 0.5 0.1

Source: UNCTAD.

2012-08-054_000000000000097
44 the brics report

 Within private capital fl ows to the BRICS, FDI witnessed a substantial increase together with the high presence of portfolio fl ows, 

especially debt fl ows, over the past decade. Portfolio debt fl ows 

moderated in general, while equity fl ows remained volatile on cues 

of global and domestic growth perceptions. Unlike portfolio fl ows, 

net FDI fl ows to the BRICS remained steady even during the recent 

crisis, refl ecting the longer-term view on the growth potentials of the 

BRICS and the soundness of their fi nancial systems (Table 1.30). 

Outfl ows of FDI from these economies also increased, taking advantage of the attractive investment opportunities abroad with a view to 

acquiring new technologies and natural resources.

 In contrast to FDI fl ows, portfolio fl ows to developing and emerging market economies were driven by global risk factors. Th e liberal 

policy approach towards equity infl ows and technological advances 

witnessed in the BRICS equity markets resulted in a heightened 

concentration of global portfolio fl ows (Table 1.31).

foreign exchange reserves

All BRICS economies witnessed signifi cant accumulation of international reserves through the past decade, barring some moderation 

during periods of the global fi nancial crisis. Th e reserve accumulation 

of the BRICS can be viewed as a measure of insurance against future 

crises. As a result the BRICS’ share in global international reserves 

increased remarkably during the current decade (Table 1.32).

external debt

Th e total external debt of the BRICS economies has increased signifi -

cantly over the years. Although the volume of BRICS’ external debt 

showed an increase, its magnitude declined in general, barring the 

recent crisis period, as in the case of India (Table 1.33).

2012-08-054_000000000000098
Table 1.30 Cross-country Movement of FDI Flows

(US$ billion)

Country FDI Infl ows FDI Outfl ows 1990 2000 2005 2007 2008 2009 2010 1990 2000 2005 2007 2008 2009 20101 2 3 4 5 6 7 8 9 10 11 12 13 14 15BRICSBrazil 1.0 32.8 15.1 34.6 45.1 25.9 48.4 0.6 2.3 2.5 7.1 20.5 –10.1 11.5Russia 0.0 2.7 12.9 55.1 75.0 36.5 41.2 – 3.2 12.8 45.9 55.6 43.7 51.7India 0.2 3.6 7.6 25.3 42.5 35.6 24.6 0.0 0.5 3.0 17.2 19.4 15.9 14.6China 3.5 40.7 72.4 83.5 108.3 95.0 105.7 0.8 0.9 12.3 22.5 52.2 56.5 68.0South Africa –0.1 0.9 6.6 5.7 9.0 5.4 1.6 0.0 0.3 0.9 3.0 –3.1 1.2 0.5Advanced EconomiesJapan 1.8 8.3 2.8 22.5 24.4 11.9 –1.3 50.8 31.6 45.8 73.5 128.0 74.7 56.3UK 30.5 118.8 176.0 196.4 91.5 71.1 45.9 17.9 233.4 80.8 272.4 161.1 44.4 11.0US 48.4 314.0 104.8 216.0 306.4 152.9 228.2 31.0 142.6 15.4 393.5 308.3 282.7 328.9Source: UNCTAD. Note: – Not available.

2012-08-054_000000000000099
Table 1.31 Cross-country Movement of Portfolio Flows 

(US$ billion)

Country Portfolio Investment Infl ows Portfolio Investment Outfl ows 

1990 2000 2005 2007 2008 2009 1990 2000 2005 2007 2008 2009

1 2 3 4 5 6 7 8 9 10 11 12 13BRICSBrazil 0.6 8.7 6.7 48.1 –0.8 46.2 0.1 1.7 1.8 –0.3 –1.9 –4.1Russia – –9.9 –0.7 15.5 –27.6 8.2 – 0.4 10.7 10.0 7.8 10.4India 0.0 2.5 12.2 35.0 –15.0 – 0.0 0.1 0.0 –0.2 0.0 –China 0.0 7.3 21.2 21.0 9.9 – 0.2 11.3 26.2 2.3 –32.7 –South Africa 0.3 1.8 5.7 21.9 13.7 –7.6 13.4 0.3 3.7 3.4 6.7 1.9Advanced EconomiesJapan 46.7 47.4 183.1 196.6 –103.0 –56.3 37.8 83.4 196.4 123.5 189.6 160.2UK 23.8 268.1 237.0 406.7 363.9 284.0 30.0 97.2 273.4 179.6 –199.6 241.1US 22.0 436.6 832.0 1154.7 527.7 376.6 28.8 127.9 257.5 396.0 –117.4 549.4Source: IMF/International Financial Statistics. Note: – Not available.

2012-08-054_000000000000100
Table 1.32 BRICS and Foreign Exchange Reserves

(US$ billion)

 1990 1995 2000 2005 2008 2009 2010BRICS 41.2 162.5 271.0 1203.6 2834.7 3374.8 3914.6Brazil 7.7 49.9 32.5 53.3 192.9 237.4 287.1Russia 0.0 14.9 24.8 176.5 412.7 417.8 445.0India 2.1 18.6 38.4 132.5 248.0 266.2 276.2China 30.2 76.0 168.9 822.5 1950.3 2417.9 2867.9South Africa 1.2 3.0 6.4 18.8 30.8 35.5 38.4

Share in Total Global Reserves

BRICS 4.2 10.6 13.3 27.1 37.7 39.0 40.1Brazil 0.8 3.3 1.6 1.2 2.6 2.7 2.9Russia 0.0 1.0 1.2 4.0 5.5 4.8 4.6India 0.2 1.2 1.9 3.0 3.3 3.1 2.8China 3.1 5.0 8.3 18.5 25.9 28.0 29.4South Africa 0.1 0.2 0.3 0.4 0.4 0.4 0.4Source: UNCTAD. 

2012-08-054_000000000000101
Table 1.33 External Debt Stocks, Total (DOD, current US$) 

Country 1990 1995 2000 2005 2007 2008 20091 2 3 4 5 6 7 8 Brazil 119.7 160.5 241.5 187.5 237.6 262.1 276.9Russia – 121.4 160.0 229.9 368.1 402.5 381.3India 85.7 95.2 100.2 120.2 202.8 224.7 237.7China 55.3 118.1 145.7 284.0 373.8 378.2 428.4South Africa 23.3 25.4 24.9 31.1 43.6 41.9 42.1

External Debt-to-GDP Ratio

Brazil 23.6 20.8 37.6 21.1 17.2 15.8 17.3Russia – 38.7 61.6 30.1 28.3 24.2 31.2India 26.3 25.9 20.9 14.8 17.6 17.8 18.7China 14.2 16.2 12.2 12.6 10.7 8.4 8.6South Africa 20.8 16.8 18.7 12.6 15.3 15.2 14.8Source: World Bank, Global Development Finance, and IMF, WEO, October 2010. Note: – Not available.

2012-08-054_000000000000102
overview of brics 49

exchange rate regime and convertibility

Th e exchange rate regime and the implementation of supporting 

policies are critical for economic development and fi nancial stability of countries. Due to wide diff erences in economic and fi nancial 

environments, the BRICS economies follow diff erent exchange rate 

systems in their current and capital accounts (Table 1.34).

 Th e macroeconomic instabilities experienced by Brazil during 

the previous decades, particularly the vulnerabilities arising from its 

external sector, fi nally induced it to adopt infl ation targeting which, 

in turn, required introducing a fl oating system of exchange rate in 

January 1999. Since then, the Brazilian real averaged R$ 2.26 against 

the USD up to 31 December 2010. Th e real eff ective exchange rate 

has also oscillated substantially, reacting to shifts in fundamentals such 

as the terms of trade, risk aversion, and underlying capital fl ows.

 Russia’s exchange rate regime has been reclassifi ed from ‘stabilized 

arrangement’ to ‘other managed arrangement’, eff ective 1 November 

2008, to refl ect the managed depreciation of the Rouble and higher 

day-to-day exchange-rate fl uctuations. Th e exchange system is free 

of restrictions on payments and transfers for current international 

transactions, and legislation is also free of foreign exchange restrictions on capital account transactions. Th e Bank of Russia implements its foreign exchange policy in the general context of monetary 

policy. Th e major objectives of the Bank of Russia’s foreign exchange 

policy are to ensure stability of the national currency and create 

conditions for the dynamic development of Russia’s foreign exchange 

market. Th e Bank of Russia pursues managed fl oating arrangement 

in the exchange rate policy. In 2007 Russia completed liberalization of the foreign exchange legislation regarding capital account 

transactions.

2012-08-054_000000000000103
Table 1.34 BRICS Exchange Rate Regime

Country Currency Exchange Current Exchange Rate System Recent Developments in

Rate Structure Capital Account

Brazil Real Unitary Floating Adoption of prudential measuresRussia Russian Unitary Other managed arrangement, Easing of controls Rouble managed fl oating exchange rate 

India Rupee Unitary Managed fl oating with no predetermined Easing of controls

path for the exchange rate to fl oating 

China Renminbi Unitary Managed fl oating exchange rate regime Increasing de facto openness of the

based on market supply and demand with capital account

reference to a basket of currencies 

South Africa Rand Unitary Floating Easing of controls

2012-08-054_000000000000104
overview of brics 51

 In the case of India, given the stated policy of the RBI to contain 

volatility in the exchange rate without reference to any specifi c target 

or band, its net intervention operations have helped in signifi cantly 

absorbing the pressure of capital fl ows on exchange rate volatility. In 

recent years, however, the exchange rate has become relatively more 

fl exible, particularly in relation to the size of net intervention operations of the RBI.

 China adopted a managed fl oating exchange rate regime on 1 

January 1994. In July 2005, China launched the reform of the RMB 

exchange rate regime and moved into a managed fl oating exchange 

rate regime based on market supply and demand with reference to a 

basket of currencies. Th e reform of the RMB exchange rate regime 

has moved ahead in a proactive, controllable, and gradual way to 

increase the role of the market in establishing the rate. Currently, 

the US$-RMB spot exchange rate can move intra-day 0.5 per cent 

from a central parity that is determined at the open of trading by 

a truncated weighted average of primary dealers’ off er rates and is 

announced by the China Foreign Exchange Trading System.

 South Africa has a fl exible exchange rate regime, but excess capital infl ows are sometimes purchased to increase the level of foreign 

exchange reserves and to reduce exchange rate volatility. Reserve purchases are sterilized via, inter alia, the issuance of debentures, repurchase transactions, and sterilization swaps. Th e National Treasury 

assists the SARB in funding sterilization operations. Th e SARB does 

not target a specifi c level for the Rand, but interventions may sometimes be contemplated to sterilize large capital infl ows that could fuel 

volatility in the foreign exchange market.

 Among the BRICS, South Africa accepted the obligations of 

Article VIII, sections 2, 3, and 4 of the International Monetary 

Fund’s Articles of Agreement on 15 September 1973. India accepted 

2012-08-054_000000000000105
52 the brics report

the obligations of Article VIII of the Articles of Agreement of the 

IMF in 1994, followed by Russia in June 1996, China in December 

1996, and Brazil in November 1999 which obliged them to remove 

restrictions on the transactions in their current accounts. Regarding 

the capital account, in accordance with the policy of infl ation targeting, Brazil adopted a fl oating exchange rate in 1999 under conditions 

of almost full capital account convertibility. Russia slowly started liberalizing its capital account in the early 1990s, but it faced a serious 

currency crisis in 1998 under its strained fi scal circumstances and 

introduced a series of emergency measures, including re-intensifi cation of capital controls and the announcement of a debt moratorium. 

However, the capital account restrictions in Russia have been reversing recently. China and India follow a gradual path to capital account 

liberalization.

Financial Market Performance

Stock Exchange

During the period 1999–2010, capital markets in the BRICS experienced fl uctuations, which also varied within the group. A signifi -

cant fall in equity indices was observed between the years 2000 and 

2008. Within the group, Brazil and China saw more equity index 

fl uctuations than Russia, India, and South Africa. Except for the two 

years mentioned, equity indices rose in all the BRICS economies 

(Table 1.35).

 During this period, the price–earnings ratio (PE) as indicator of 

capital markets in the BRICS were relatively more stable in China 

and India compared with Brazil, Russia, and South Africa. In 2010, 

the PE ratios declined for all BRICS countries except India.

2012-08-054_000000000000106
Table 1.35 Stock Market Performance of BRICS Countries

Country Index Movement (per cent change) PE Ratio 1999 2005 2009 2010 1999 2005 2009 2010 1999 2005 2009 2010 Brazil 889.5 1,569.40 3,624.50 – 61.6 50 121.3 – 18.6 12.39 17 13.8Russia 177.71 1125 1444.1 – 201.6 83.3 128.6 – – 8.3 11.1 8.3India 209.5 382.9 468.5 – 89.1 40.2 100.5 – 22.8 20.17 21.8 22.4China 33.5 29.3 64.8 – 10.2 15.6 58.8 – – 15.78 15.6 14.6South Africa 7806 16438 24996 – 74 44 28.6 – – 14.4 21.8 18.9Source: Bloomberg and Morgan Stanley Capital International. Notes: Russia: RTS Stock Exchange and shares included in RTS Index calculation base.– Not available.

2012-08-054_000000000000107
54 the brics report

 Th e number of companies domestically incorporated in stock 

exchanges in two of the BRICS economies, namely, Brazil and South 

Africa declined during the period 2000 to 2006 and has fl uctuated 

in recent years. As regards Russia, the number of listed companies, 

which was on a rising trend, fl uctuated in recent years, while China 

and India witnessed continuous growth in the number of listed 

domestic companies during most of the years of the same period 

(Table 1.36).

 Th e depth of stock markets measured in terms of market capitalization to GDP in BRICS economies progressively deepened over the 

years. Th e ratio which was as low as 3.6 per cent in 1990 for Brazil, 

reached a high of 74 per cent in 2010. Th e corresponding ratios during the same period in the case of India were 12.2 per cent and 93.4 

per cent, respectively. China and Russia, both of which started off 

with a relatively shallower base, rapidly caught up. In China, the 

market capitalization-to-GDP ratio in 1995 was 5.8 per cent, which 

jumped to 81 per cent in 2010. Th e corresponding ratios with respect 

to Russia were 4.0 per cent and 67.9 per cent, respectively. Among 

the BRICS, South Africa had the largest market capitalization relative to the size of GDP during 2010 (Table 1.37). 

 Th e turnover ratio as indicators of the depth of fi nancial markets 

(stock markets) also deepened considerably over the period in the 

BRICS. Th e ratio jumped from a high base of 115.9 per cent in 

China in 1995 to 229.6 per cent in 2009. Russia with the ratio of 

108.5 per cent in 2009 had a low base of only 36.9 per cent in 2000. 

Similarly, India which had a turnover ratio of 65.9 per cent in 1990 

attained a high in turnover ratio of 119.3 per cent in 2009. Brazil and 

South Africa also witnessed a signifi cant jump in the ratio during the 

period, that is, 23.6 per cent to 73.9 per cent during 1990 to 2009 in 

Brazil and 7.0 per cent to 57.3 per cent in South Africa during 1995 

2012-08-054_000000000000108
Table 1.36 Total Listed Domestic Companies

Country 1990 1995 2000 2005 2006 2007 2008 2009 20101 2 3 4 5 6 7 8 9 10Brazil 581 543 459 381 392 442 432 377 373Russia – 170 249 296 309 328 314 279 345India 2435 5398 5937 4763 4796 4887 4921 4955 4987China 0 323 1086 1387 1440 1530 1604 1700 2063South Africa 732 640 616 388 401 422 425 410 407Source: Standard & Poor’s, Emerging Stock Markets Factbook and supplemental S&P data.Notes: Listed domestic companies are domestically incorporated companies listed on the country’s stock exchanges at the end of the year. Th is indicator does not include investment companies, mutual funds, or other collective investment vehicles.– Not available.

2012-08-054_000000000000109
Table 1.37 Market Capitalization of Listed Companies 

(per cent of GDP)

Country 1990 1995 2000 2005 2006 2007 2008 2009 20101 2 3 4 5 6 7 8 9 10Brazil 3.6 19.2 35.1 53.8 65.3 100.3 35.7 73.2 74Russia 0 4 15 71.8 106.6 115.6 23.9 70.5 67.9India 12.2 35.7 32.2 68.3 89.5 46.4 53.2 85.4 93.4China 0 5.8 48.5 34.9 91.3 178.2 61.8 100.3 81South Africa 123 186 118 229 274 291.3 178.5 249.3 278.4Source: Standard & Poor’s, Emerging Stock Markets Factbook and supplemental S&P data, and World Bank and OECD GDP estimates.Note: Market capitalization (also known as market value) is the share price times the number of shares outstanding. Listed domestic companies are domestically incorporated companies listed on the country’s stock exchanges at the end of the year. Listed companies does not include investment companies, mutual funds, or other collective investment vehicles.

2012-08-054_000000000000110
overview of brics 57

to 2009. All BRICS countries suff ered a decline in their turnover 

ratio in 2010 (Table 1.38).

 Th e dividend–yield ratio as an indicator of capital markets in the 

BRICS declined gradually, indicating better market value in these 

countries over the period. Th e year 2008, however, witnessed the 

ratio rising compared with other years (Table 1.39).

 Combined external fi nancing of capital markets in the BRICS 

from bonds, equities and loans in absolute terms during the period 

1999–2010 increased signifi cantly. Th is also indicates the integration of the BRICS fi nancial markets with world fi nancial markets 

(Table 1.40).

 Th e depth of the fi nancial sector can also be gauged from the 

extent of insurance sector penetration into the economy. In the 

absence of population-wise distribution of insurance policies, both 

life and general, an alternative to measuring the depth of the sector is 

the volume of the sector with respect to GDP expressed in percentage 

terms. Th e ratio with respect to life insurance has been on the rise 

in most BRICS economies with the highest being 0.122 per cent in 

South Africa in 2008. However, with respect to non-life insurance, 

the depth remained 0.01–0.03 per cent in all BRICS countries during the period (Table 1.41).

Financial Sector

Th e Brazilian fi nancial market is based on a modern and solid banking system, a state-of-the-art payment system, and reliable market 

infrastructure. In 2002, the Brazilian Central Bank launched the new 

Brazilian Payment System which allows fi nal and irrevocable transfers 

on a real-time basis. Th e recent credit-market reforms in Brazil have 

2012-08-054_000000000000111
Table 1.38 Stocks Traded, Turnover Ratio 

(per cent)

Country 1990 1995 2000 2005 2006 2007 2008 2009 20101 2 3 4 5 6 7 8 9 10Brazil 23.6 47.8 43.5 38.3 42.9 56.2 74.3 73.9 66.4Russia 0 0 36.9 39 64.1 58.9 59.2 108.5 85.7India 65.9 10.5 133.6 94.2 93.1 84 85.2 119.3 75.6China 0 115.9 158.3 82.5 102 180.1 121.3 229.6 164.4South Africa – 7 34 39 48.8 55 61.6 57.3 39.6Source: Standard & Poor’s, Emerging Stock Markets Factbook and supplemental S&P data.Notes: Turnover ratio is the total value of shares traded during the period divided by the average market capitalization for the period. Average market capitalization is calculated as the average of the end-of-period values for the current and the previous period.– Not available.

2012-08-054_000000000000112
Table 1.39 Equity Valuation Measures: Dividend–Yield Ratios

Country 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20101 2 3 4 5 6 7 8 9 10 11 12 13 14Brazil 9.34 2.95 3.18 4.93 5.51 3.46 4.43 3.9 3.1 2.2 4.6 2.9 2.7Russia 0.72 0.14 0.92 1.11 1.87 2.38 3.12 1.6 1 1.2 3.5 1.4 1.5India 2 1.25 1.59 2.03 1.81 1.47 1.53 1.3 1 0.7 1.8 0.9 0.9China 3.71 3.14 0.95 1.95 2.41 2.19 2.26 2.7 1.5 1.2 3.1 1.9 2.2South Africa – – 2.8 3.5 3.8 3.2 2.6 2.5 2.4 2.7 4.5 2.7 2.3Source: Data from Morgan Stanley Capital International.Note: – Not available.

2012-08-054_000000000000113
Table 1.40 Emerging Market External Financing: Total Bonds, Equities, and Loans 

(in US$ million)

Country 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20101 2 3 4 5 6 7 8 9 10 11 12 13 14Brazil 14,214 12,952 21,454 19,266 11,119 12,909 15,834 27,486 31,219 73,218 30,843 39,601 67,703Russia 13,156 167 8,313 2,831 8,535 12,239 22,532 37,004 59,165 84,536 61,230 53,940 45,389India 1,434 2,376 3,428 2,066 1,360 3,776 13,060 21,660 29,534 60,513 37,561 58,320 115,929China 6,975 3,462 9,227 4,255 4,256 12,843 22,850 38,805 50,040 75,677 28,261 66,829 79,879South Africa – 3,423 8,699 4,647 4,058 7,837 5,413 6,266 12,701 19,904 2,816 7,980 7,460Source: Data provided by the Bond, Equity, and Loan Database of the International Monetary Fund sourced from Capital Data.Note: – Not available.

2012-08-054_000000000000114
overview of brics 61

contributed to a substantial rise in intermediation, paving the way 

for solid fi nancial inclusion. Improvements such as the reduction of 

directed lending and dissemination of information can contribute 

to enhancing the power of monetary policy and reduce debt service 

(credit cost). Th e Central Bank of Brazil has decided to implement 

the Basel II framework in the Brazilian banking sector and is directly 

involved in formatting the Basel III framework. After the global 

fi nancial crisis, all the BRICS economies are envisaged to implement 

the revised framework for better banking sector regulation.

 In Russia, banking supervision has continued to improve and 

the regulatory framework is considered to be broadly adequate. 

Russian banks are generally well-capitalized and suffi ciently provisioned. Capital adequacy ratios are at comfortable levels by 

Table 1.41 Insurance Sector in BRICS Economies

Country 1990 1995 2000 2005 2006 2007 2008

1 2 3 4 5 6 7 8

Life Insurance Premium Volume/GDP

Brazil 0.002 0.003 0.004 0.013 0.013 0.014 0.015

Russia – – – 0.001 0.001 0.001 0.001

India 0.010 0.012 0.017 0.026 0.041 0.040 0.039

China 0.002 0.003 0.010 0.018 – – –

South Africa 0.077 0.110 0.146 0.108 0.130 0.126 0.122

Non-Life Insurance Premium Volume/GDP

Brazil 0.01 0.02 0.02 0.02 0.02 0.02 0.02

Russia – – – 0.02 0.02 0.02 0.02

India 0.00 0.01 0.01 0.01 0.01 0.01 0.01

China 0.01 0.01 0.01 0.01 – – –

South Africa 0.02 0.03 0.03 0.03 0.03 0.03 0.03

Source: World Bank.

Note: – Not available.

2012-08-054_000000000000115
62 the brics report

international standards. Profi tability in the banking system is robust 

and has improved, even as foreign banks have entered the market and 

increased competition. As of the end of November 2010, there were 

225 banks with foreign investment in their authorized capital.

 In India, major policy measures during the reform of the banking sector included phased reductions in statutory pre-emption like 

cash reserve and statutory liquidity requirements and deregulation 

of interest rates on deposits and lending, except for a select segment. 

Th e diversifi cation of ownership of banking institutions is another 

feature which has enabled private shareholding in public sector banks 

through listing on the stock exchanges, arising from dilution of government ownership. Over the period, the performance of the banking sector has improved, both in terms of reducing non-performing 

assets (NPAs) and improvement on indicators of prudential measures. Further, at the policy level, greater emphasis has been placed 

on fi nancial inclusion and improving the delivery of fi nancial services 

in line with technological developments.

 Since the reform and opening up of China, China’s banking 

industry reforms have continuously deepened especially in recent 

years, with the banking sector’s comprehensive strength, risk management capabilities, and international role gaining signifi cance 

rapidly. To promote reform and improve management at the same 

time, shareholding commercial banks in China have continued to 

deepen reforms, thereby consolidating the micro-foundations of the 

fi nancial system.

 Th e South African banking sector has consistently maintained 

capital adequacy ratios well in excess of the required minimum. As a 

result, South African banks remained adequately capitalized through 

the crisis and the fi nancial system did not experience any funding or 

liquidity problems. Th is is due to the fact that South African banks 

2012-08-054_000000000000116
overview of brics 63

are well regulated, have sophisticated liquidity management systems, 

and limited reliance on funding in foreign currency. To further 

strengthen regulation to support fi nancial stability, the government 

is currently focused on four main areas of reform in the banking 

sector: strengthening fi nancial stability, broadening fi nancial services 

for the poor, increasing competitiveness and effi ciency, and promoting investor and consumer protection.

 A shift is underway to a ‘twin-peak’ approach to regulation with 

the central bank being responsible for prudential regulation and the 

fi nancial services regulator for market conduct regulation. Prudential 

regulation of the insurance sector will be strengthened through 

the introduction of ‘Solvency Assessment and Management’, an 

approach similar to Solvency II in Europe. In addition, regulation of 

the credit rating agency was introduced during 2011. A framework 

to facilitate moving OTC derivative trading to an exchange and the 

approach to oversight of shadow banking, hedge fund, and private 

equity industries will be reviewed.

 Preparations for implementing the Basel III capital and liquidity requirements are underway, including the QIS and assessments 

of the availability of high-quality liquid assets and banks’ ability to 

adhere to the required standards. A formalized framework of identifying systemically signifi cant institutions is also being developed. 

Crisis management arrangements are being strengthened between 

the National Treasury and SARB. A review of the contingency framework has been conducted in terms of a World Bank/First Initiative 

project.

banking sector performance

Capital-to-asset ratio as an indicator of the performance of BRICS 

witnessed a gradual fall over the period, indicating an expansion in 

2012-08-054_000000000000117
64 the brics report

banking activities. Years like 2005 and 2009, however, witnessed a 

rise in the ratio (an improvement in fi nancial stability, deleverage, 

increase in risk aversion), indicating contraction in banking activities 

(Table 1.42).

 Capital-to-risk weighted assets as an indicator of the soundness 

of banks has risen considerably in BRICS economies though there 

were years when it fell marginally in some of the countries. Following 

the global crisis, there has not been any signifi cant fall in the ratio, 

indicating that the banking sectors in these countries are sound and 

well capitalized. A similar pattern is refl ected in the NPAs of banks in 

the BRICS, which have been gradually declining over the period as a 

percentage of total loans.

 As regards banks’ provisions for NPAs, such provisions were kept 

much in excess of the total non-performing loans in Brazil and 

China. However, provisions as a percentage of non-performing loans 

have been increasing in all BRICS countries during the period.

 Th e profi tability of banks in terms of both return on assets 

and return on equity has also been rising gradually in most BRICS 

economies notwithstanding fl uctuations in the ratios over the years 

(Table 1.43).

 Th e Brazilian banking system consists of state-owned, foreign, and 

private domestic banks. Th ere are, however, diff erences in the asset 

structures of the various banking segments. In Brazil, most fi nancial institutions that receive demand deposits are organized under 

a multiple or universal bank structure, combining the commercial 

portfolio with at least one of the following portfolios: investment, 

leasing, real estate credit, or fi nancing. According to the Central Bank 

Financial Stability Report, published in June 2010, state-owned institutions accounted for 41 per cent of the total assets, while domestic private banks held 37 per cent, and private foreign institutions 

2012-08-054_000000000000118
Table 1.42 Prudential Indicators of the Banking Sector in BRICS

Bank Capital to Assets Regulatory Capital to Risk Weighted Assets 

Country 1999 2005 2009 2010 1999 2005 2009 20101 2 3 4 5 6 7 8 9Brazil – 10.4 11.2 10.9 – 17.9 18.9 17.6Russia 14.3 12.8 15.7 – 18.1 15 20.9 18.9India 5.9 9.8 10.3 – 11.2 12.8 13.2 –China 5.2 4.4 5.6 – 11.2 2.5 11.4 –South Africa – 7.9 6.7 – – 12.7 14.1 14.4

Sources: National authorities; IMF staff estimates.Note: – Not available.

2012-08-054_000000000000119
Table 1.43 Bank Profi tably Indicators in BRICS

(per cent)

 Return on Assets Return on Equity Non-performing Loan / Total LoanCountries 1999 2005 2009 2010 1999 2005 2009 2010 1999 2005 2009 20101 2 3 4 5 6 7 8 9 10 11 12 13Brazil – 3.2 2.4 3.2 – 30.1 22.1 29.3 – 3.5 4.2 3.1Russia –0.3 3.2 0.7 1.6 –4.0 24.2 4.9 10 13.4 2.6 9.5 9.5India 5.9 0.9 1 – – 13.3 12.3 – 14.7 5.2 2.3 –China 5.2 0.6 0.8 – – 15.1 15.1 – 28.5 8.6 1.6 –South Africa – 1.2 0.9 – – 15.2 15.9 15.4 – 1.5 5.9 5.9Source: Global Financial Stability Report, IMF.Note: – Not available.

2012-08-054_000000000000120
overview of brics 67

held 19 per cent. Th e remaining 2 per cent was distributed among 

1,388 credit co-operatives, which are important agents for agricultural business.

 Since 1994, there has been considerable concentration in the 

banking sector, with a signifi cant reduction in the number of institutions. In June 2010, there were 140 banking institutions, with the 

fi ve largest accounting for 70 per cent of the total assets.

 State-owned banks in Brazil play a signifi cant role in agricultural 

and real estate credit. Given the tough competition for market share, 

however, private and state-owned banks are gradually operating 

in the same areas, with private banks increasing their stake in real 

estate credit and public institutions targeting retail credit through 

acquisitions of smaller institutions. Finally, it is worth mentioning 

the important role played by BNDES, the Brazilian Development 

Bank, in fostering infrastructure investment via long-term credit 

operations.

 As of end-2009, China’s banking sector was composed of 3,857 

banking institutions with approximately 193,000 outlets and 

2,845,000 employees. Th e total assets and total liabilities of fi nancial institutions in the banking sector reached RMB 78.8 trillion 

and RMB 74.2 trillion, respectively; the outstanding deposits of 

banks denominated in both domestic and foreign currencies grew 

to RMB 61.2 trillion; and the outstanding loans in both domestic 

and foreign currencies reached RMB 42.56 trillion. Th e outstanding 

non-performing loans (NPLs) of commercial banks registered RMB 

497.3 billion, the NPL ratio recorded 1.58 per cent, and the coverage 

ratio for provisioning grew to 155 per cent. In 2009, the net profi ts 

of banking institutions after tax reached RMB 668.43 billion. In 

terms of market capitalization, the Industrial and Commercial Bank 

of China (ICBC), China Construction Bank (CCB), and Bank of 

2012-08-054_000000000000121
68 the brics report

China (BOC) rank as the top three global banks. Th e fi ve largest 

commercial banks, namely, ICBC, CCB, BOC, ABC, and BOCOM, 

account for 50.89 per cent in total assets and 59.86 per cent of the 

banking sector’s total after-tax net profi ts. Th eir NPL ratios registered 

1.54 per cent, 1.50 per cent, 1.52 per cent, 2.91 per cent and 1.36 

per cent, respectively.

 Russia’s fi nancial system is dominated by banks. Th e Russian banking industry comprises a number of players: (i) the Central Bank of 

Russia (CBR); (ii) state-owned banks; (iii) large private banks, (iv) 

local private banks, and (v) banks controlled by foreign capital. In 

2006 the majority share (90.1 per cent of total assets) of the banking 

system in Russia was constituted of credit institutions, with private 

banks accounting for a larger share in the total assets of the banking 

system (55.5 per cent) vis-à-vis the state-owned banks (34 per cent). 

Non-bank credit institutions account for only around 10 per cent of 

the total assets of the banking system.

 One feature of the Russian market is the large number of credit 

organizations; as on 1 December 2010 there were 1,023 credit 

organizations, of which 225 have foreign participation in chartered 

capital. Th e market is also characterized by signifi cant concentration, 

with the top 30 banks accounting for approximately 70 per cent of 

all banking assets.

 Retail and corporate banking is dominated by state-controlled 

banks, the main ones being Sberbank and VTB. State-controlled 

banks taken together held more than 48 per cent of the banking 

sector’s total assets as of December 2010. Th e largest private-owned 

banks are Alfa Bank, MDM Bank, PromSvyazBank, and UralSib. 

Major international banks with substantial retail and corporate 

banking footprint in Russia are subsidiaries of Barclays, Citibank, 

Raiff eisen, Société Générale, and Uni Credit.

2012-08-054_000000000000122
overview of brics 69

 Participation in the Russian formal fi nancial sector remains low. 

An estimated 60 million people (42 per cent of the population) still 

have no access to fi nancial services, such as bank savings accounts, 

credit, or investments in securities.

 Th e Indian fi nancial system is a complex network of institutions, 

with a variety of functions and governed by diff erent regulations, 

that are dominated by public and private commercial banks. Besides 

commercial banks, which are the predominant intermediaries of 

the fi nancial system, there are cooperative banks, development 

fi nance institutions, non-banking fi nancial companies, insurance 

companies, provident funds, and mutual funds. Th e RBI exercises 

its supervisory role over the banking system encompassing commercial and cooperative banks through the powers provided under 

the Banking Regulation Act, 1949 and the Reserve Bank of India 

Act, 1934. Th e RBI also regulates select all-India fi nancial institutions under the Reserve Bank of India Act, 1934. Consequent upon 

amendments to the RBI Act in 1997, a comprehensive regulatory 

framework for Non-Banking Financial Companies (NBFCs) was also 

introduced. In respect of state and district central cooperative banks 

and regional rural banks, while the RBI is the regulator, supervision is vested with the National Bank for Agriculture and Rural 

Development (NABARD). Insurance companies and mutual funds 

are regulated by the Insurance Regulatory and Development Authority 

(IRDA) and the Securities and Exchange Board of India (SEBI), 

respectively.

 Th e banking sector in India evolved to a signifi cant extent in 

response to fi nancial sector reforms initiated as part of structural 

reforms encompassing trade, industry, investment, and the external 

sector that were launched by the central government in the early 1990s 

against the backdrop of a serious balance of payments problem.

2012-08-054_000000000000123
70 the brics report

 Accordingly, fi nancial sector reforms were initiated as part of 

overall structural reforms to impart effi ciency and dynamism to the 

fi nancial sector. Th e country’s approach to reform in the banking 

and fi nancial sector was guided by Pancha Sutra or fi ve principles: (i) 

cautious sequencing of reform measures; (ii) introduction of norms 

that were mainly reinforcing; (iii) introduction of complementary 

reforms across sectors (monetary, fi scal, external, and fi nancial); (iv) 

development of fi nancial institutions; and (v) development and integration of fi nancial markets. Th e evolution of the banking sector in 

this phase can be divided into two phases, that is, from 1991–2 to 

1997–8 and from 1997–8 onwards.

 Th e regional rural banks (RRBs) have been playing an important role in purveying rural credit. With a view to strengthening 

them, banks were encouraged to amalgamate state-wise the RRBs 

sponsored by them. In this context, the Government of India, after 

consulting NABARD, the concerned state governments and sponsor banks, initiated the process of amalgamating RRBs in September 

2005. As a result of this initiative, 137 RRBs were amalgamated by 

31 October 2006 to form 43 new RRBs (sponsored by 18 banks 

in 15 states). Th is has brought down the total number of RRBs 

from 196 to 102. Further amalgamation proposals are being considered by the Government of India to strengthen the rural credit 

sector.

 South Africa’s banking sector is highly concentrated with the fi ve 

largest banking groups (ABSA Bank Ltd., Standard Bank of South 

Africa Ltd., FirstRand Bank Ltd., Nedbank Ltd., and Investec Bank 

Ltd.), accounting for 91.6 per cent of total bank assets at the end of 

2010. Th e fi nancial crisis did not have a direct impact on the South 

African banking system, but the economic downturn that resulted 

from the crisis reduced the profi tability of banks.

2012-08-054_000000000000124
overview of brics 71

 Growth in loans and advances declined sharply at the onset of the 

crisis as a result of a downturn in the economy and turned negative 

in September 2009, only returning to positive growth in May 2010. 

Th e rate of growth has remained relatively subdued since then, and 

registered year-on-year growth of 2.5 per cent in December 2010. 

 Credit risk remains relatively high, although stable, with asset 

quality appearing to have reached a plateau. Th rough the crisis, 

impaired advances rose sharply as households and businesses came 

under increasing fi nancial strain. Banks continued to face high levels 

of impaired advances loans during 2010. Impaired advances as a percentage of gross loans and advances averaged 5.8 per cent in 2010, 

compared to 5.9 per cent in 2009 and just 3.2 per cent in 2008. 

As a percentage of gross loans and advances, impaired loans have 

remained between 5.7 per cent and 6 per cent since August 2009. 

Credit losses have returned to pre-crisis levels of about 0.1 per cent 

of gross loans and advances. 

 Th e minimum capital adequacy ratio for South African banks is 

9.5 per cent, which is higher than the minimum 8 per cent ratio 

established by the Basel II requirements. Th e actual capital adequacy 

ratio for the banking sector increased from 13 per cent at the end of 

2008 to 14.1 per cent at the end of 2009 to 14.9 per cent at the end 

of 2010. Tier 1 capital adequacy improved from 10.2 per cent at the 

end of 2008 to 11 per cent at the end of 2009 to 11.8 per cent at the 

end of December 2010 (well in excess of even Basel III’s 7 per cent 

requirement).

 Nevertheless, certain features of the South African banking system can create potential vulnerability to funding market illiquidity, 

in particular the reliance on short-term wholesale funding from a 

concentrated depositor base. Th is places a burden on banks to ensure 

that they are constantly able to roll over borrowed funds from their 

2012-08-054_000000000000125
72 the brics report

corporate clients and other fi nanciers. While foreign exchange 

liquidity risk is currently low, the gradual liberalization of exchange 

controls can place a higher burden on the fi nancial system to monitor 

and manage liquidity vulnerability. So far, SARB has imposed a prudential liquid asset requirement on all banks, which stands at 5 per 

cent of average liabilities, as adjusted for non-remunerated reserves. 

South African policymakers, who have amended pension fund rules 

to encourage pension funds to place longer-term funding with banks, 

will review securitization rules and investigate why retail depositors 

have short-dated holdings in banks. In relation to the proposed 

global liquidity standards, South Africa will take a cautious, gradual 

approach in adopting standards such as those proposed by the Basel 

Committee on Banking Supervision (BCBS), in order to minimize 

their impact on the profi tability and credit extension of banks in South 

Africa. While South Africa generally takes a proactive approach to 

adopting international banking supervision standards once they are 

fi nalized, the global liquidity standards are likely to have a signifi cant 

impact on the economy as a whole, and not just the banking sector. 

As a result, a more conservative approach is being taken with respect 

to this specifi c area of the proposed global standards.

accessibility of financial services

Th e accessibility of the banking sector for the common man can be 

measured by various indicators. Some of these indicators are number of branches per unit area, branches per population, automatic 

teller machines (ATMs) in a unit area and per unit of population, 

and the depth of banking penetration at the aggregate level using 

indicators like deposit-to-GDP and loan-to-GDP rates. Based on 

available and comparable data for the period from 2005 to 2010, 

2012-08-054_000000000000126
overview of brics 73

BRICS economies signifi cantly improved the accessibility of banking services to the common man. Branches per 1,000 sq. km and 

branches per 100,000 adult population have increased in both India 

and Brazil, the number of ATMs per 1,000 sq. km and per 100,000 

adult population has increased in Brazil and Russia, and deposit to 

GDP as well as credit to GDP have increased signifi cantly in all the 

BRICS economies (Table 1.44).

 In South Africa, the banking sector is continuously studying ways 

to serve the previously unbanked market. Th e launch of the Financial 

Sector Charter (FSC) led to the establishment of an entry-level basic 

bank account called the Mzansi bank account in 2004. It is estimated 

that by the end of June 2010 more than 5 million Mzansi accounts 

had been opened. Banks also introduced additional products for lowincome people, and engaged with key partners to improve market 

share and the product base available to customers. Having surpassed 

their original target of R42 billion for the provision of aff ordable 

housing in terms of the FSC, banks made further strides to enhance 

access to housing fi nance. Among other things, a guarantee fund of 

R1 billion was made available to the banking sector by the government to accelerate the delivery of housing to low-income earners. 

Other initiatives by the South African banking sector, aimed at fi nancial inclusion, are related to increasing points of access in low income 

areas, especially due to the competition introduced by smaller banks 

focusing on unsecured lending, and the innovative use of technology 

to reach under-served areas.

credit depth

Credit depth information, which is measured in terms of accessibility 

and quality on a scale of 1–6 with higher values indicating easier and 

2012-08-054_000000000000127
Table 1.44 Financial Services Accessibility in BRICS

 Brazil Russia India China South Africa 

Indicator 2005 2009 2010 2005 2009 2010 2005 2009 2010 2005 2009 2010 2005 2009 20101 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Number of 2.08 2.37 2.33 – – – 23.86 27.86 29.14 – – – 1.91 2.64 2.8commercialbank branchesper 1,000 sq. kmNumber of 13.06 3.95 13.76 – – – 9.69 10.43 10.91 – – – 7.19 9.37 10.1commercialbank branches per 100,000 adultsOutstanding 34 46.32 47.51 18.66 33.12 – 47.31 60.11 – 123.21 137.11 – 41.31 44.68 41.62deposits with commercial banks(per cent of GDP)Outstanding loans 18.09 26.28 29.04 26.46 50.76 – 31.21 43.62 – 85.33 107.62 – 62.55 75.27 69.65from commercial banks (per centof GDP)Source: IMF.Note: – Not available.

2012-08-054_000000000000128
overview of brics 75

better quality of credit, showed that while Brazil had maintained a 

depth throughout the period of 2005–10, China and India improved 

from 2006 and remained stable since then, and Russia improved 

signifi cantly from 2009 onwards. South Africa maintained the 

highest credit depth of information among BRICS during 2005–10 

(Table 1.45).

Table 1.45 Credit Depth of Information Index (0 = low to 6 = high)

Country 2005 2006 2007 2008 2009 2010

1 2 3 4 5 6 7

Brazil 5 5 5 5 5 5

Russia 0 0 4 4 5 5

India 2 3 4 4 4 4

China 2 4 4 4 4 4

South Africa 5 5 6 6 6 6

Source: World Bank, Doing Business Project (http://www.doingbusiness.

org/).

Note: Th e credit depth of information index measures rules aff ecting the 

scope, accessibility, and quality of credit information available through 

public or private credit registries. Th e index ranges from 0 to 6, with higher 

values indicating the availability of more credit information, from either a 

public registry or a private bureau, to facilitate lending decisions.

domestic credit to gdp

Th e depth of credit in terms of domestic credit to GDP varies widely 

among the BRICS economies. While the ratio increased in the case 

of Brazil, India, and China during the period 1995–2009, there 

was a decline in the ratio in Russia during 2000–5. Th e quantum 

of domestic credit has been higher than GDP in South Africa since 

1990 and in China since 2000 (Table 1.46).

2012-08-054_000000000000129
Table 1.46 Domestic Credit Provided by Banking Sector

(per cent of GDP)

Country 1990 1995 2000 2005 2006 2007 2008 20091 2 3 4 5 6 7 8 9Brazil 89.3 58.9 74.6 81.5 86.6 92.2 96.9 97.5Russia 0 25.5 24.7 20.6 22.4 25.5 25.1 33.8India 51.4 44.1 53 60.1 60.9 60.8 68.2 69.4China 89.4 87.7 119.7 135.6 133.5 127.8 120.8 145.2South Africa 107 150.5 162.5 209 192.9 195.2 172.2 183.5Source: IMF, International Financial Statistics and data fi les, and World Bank and OECD GDP estimates.Note: Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. Th e banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.

2012-08-054_000000000000130
overview of brics 77

Concluding Observations

Since the macroeconomic parameters and features of development 

vary within BRICS economies, the challenges they face in making 

their growth processes sustainable also vary. In Brazil macroeconomic stabilization is a key precondition for successful reforms and 

sustainable growth. Th e challenges that the Brazilian economy faces 

are (i) its tradeable goods sector is small when compared to other 

EMEs like China; (ii) saving and investment rates have to increase 

as in other BRICS economies like China and India; (iii) improvements are required in the public sector, the public debt structure, and 

fi nancial intermediation; and (iv) it needs to enhance the depth and 

effi ciency of the fi nancial sector.

 In the case of Russia, the key challenges are accelerating the 

implementation of structural reforms, particularly in ineffi cient and 

undercapitalized natural monopolies, and strengthening the investment climate. For India, the major challenges are (i) making the 

growth process more inclusive, (ii) improving physical infrastructure, 

(iii) developing the agriculture sector, and (iv) enhancing delivery of 

essential public services, such as education and health, to large parts 

of the population.

 Similarly for China, policy changes are needed to address both 

domestic and external challenges. If China is to sustain its rapid economic growth, the economy needs to be restructured away from heavy 

dependence on export-led growth towards self-sustaining domestic 

demand, and the opportunity to share in the benefi ts of growth needs 

to be spread more equitably across all levels of society. To facilitate 

all-round, balanced, and sustainable development, fi nancial sector 

reforms are needed to improve the intermediation of China’s large 

private savings. Th e government also needs to raise social spending in 

2012-08-054_000000000000131
78 the brics report

the areas of education, healthcare, and pensions, which will serve to 

reduce precautionary saving and boost consumption over time. Th ere 

is also a need to improve the investment structure, advance reforms 

in the healthcare, pension, and education systems, and provide more 

support to rural areas and less-developed regions.

 In South Africa, the key challenge is to achieve higher levels of 

inclusive growth that raise employment and reduce inequality. 

Policies proposed in the New Growth Path constitute the key means 

to address these challenges through a development state that places 

employment at the center of the fi ght against inequality within a 

prudently managed macroeconomic framework. Policy measures 

focused on skill development, the expansion of infrastructure networks, small enterprise promotion, the development of rural economies, industrial policy that promotes higher-value added exports, 

green economy initiatives, and regional integration are prioritized. 

Low domestic savings, currency volatility, inadequate investment in 

productive sectors of the economy, and the effi ciency of government 

services delivery are some of the other challenges.

 To conclude, even though the BRICS have pursued diff erent 

paths of growth with diff erent macroeconomic parameters and varied 

institutional strengths, the world seems to be optimistic about their 

emergence based on their respective durable comparative advantages. 

Th e growing role of the BRICS is confi rmed by the rapid recovery of 

these economies from the global fi nancial crisis, which demonstrates 

that optimal global economic policy-making cannot be undertaken 

without including the BRICS economies at the highest levels of 

decision making.

2012-08-054_000000000000132
Impact of the Financial Crisis 

on BRICS

Introduction

Th e recent global fi nancial crisis that engulfed almost all economies 

marked a painful adjustment at the macro level coupled with microlevel distortions and incentives created by past policy actions. Th is 

included excessive leverage combined with inadequate regulation, 

lack of appropriate fi nancial supervision, fl awed credit ratings, and 

failure to appropriately identify the build-up of risks associated 

with fi nancial innovations. Th e low interest rate regime, which was 

the result of an accommodative monetary policy, led to debt levels 

acquiring unsustainable proportions. Th e global savings glut combined with aggressive marketing by housing fi nance institutions and 

under-pricing of risks fuelled the build-up of sub-prime mortgages. 

Th us, a number of micro- and macro-economic factors have been 

listed in the literature as the proximate causes of the crisis—the role 

of easy money, fi nancial innovations, and regulatory loopholes.

2

2012-08-054_000000000000133
80 the brics report

 Th e intensifi cation of the fi nancial crisis in September 2008 caused 

an abrupt increase in uncertainty and led to a downward reassessment of wealth and income prospects. Th ese developments, in turn, 

prompted households to postpone spending on most durables, even 

though falling commodity prices helped boost real disposable income. 

Th is drop in demand and dearth of credit set off an unprecedented 

collapse of real economic activity, sending a feedback loop to the 

stressed fi nancial sector. As a result, average growth in 2008 slowed 

by almost similar magnitudes in advanced and emerging economies, 

with some diff erentiation because of country-specifi c circumstances.

Manifestation of the Global Crisis

Global trade linkages and fi nancial integration led to the rapid transmission of shocks from the US and Europe to the rest of the world. 

Th e impact of the crisis was felt in almost all the economies of the 

world to varying degrees. Th e crisis spread to the BRICS through 

all four channels—trade, fi nance, commodity, and confi dence channels. Th e slump in export demand and tighter trade credit caused a 

deceleration in aggregate demand. Th e reversal of capital fl ows led to 

equity market losses and currency depreciations, resulting in lower 

external credit fl ows.

 During the initial phase of the crisis, the fi nancial shock was 

transmitted to the real economy, primarily through the equity price 

channel and, in a more diff erentiated fashion, through the credit 

channel. Th e shock to international confi dence had an immediate 

and sharp eff ect on capital fl ows to emerging markets, as investors 

reassessed risks and global capital fl ows collapsed. In addition to poor 

confi dence and wealth eff ects, the fall in equity prices led to a rise in 

2012-08-054_000000000000134
impact of the financial crisis on brics 81

the cost of capital and dampened investment confi dence. In terms 

of real linkages, the collapse in demand from advanced economies 

was transmitted through the integrated supply chain to developing 

economies, with dramatic eff ects on trade in these countries.

 Among the BRICS, the global fi nancial crisis erupted after the 

collapse of the US-based investment bank Lehman Brothers in 

September 2008. Th e banking sectors of the BRICS economies performed relatively well. In Brazil, the local currency and stock market 

saw huge fl uctuations as foreign investment dwindled, demand for 

commodity exports dried up, and external credit decreased. Th e 

external shock did interrupt the accelerated growth path by prompting a slight fall of 0.6 per cent in GDP in 2009 (Table 2.1). In terms 

of foreign trade, Brazilian exports reached US$ 160.6 billion in 2007, 

about 11.8 per cent of GDP and 1.18 per cent of world exports. In 

2009, total Brazilian foreign trade registered a fi gure of US$ 281 

billion in its fl ow, a reduction of 24.3 per cent relative to 2008 when 

US$ 371 billion was traded. Th is drop was the direct result of the 

global fi nancial crisis, which led to a reduction in the international 

prices of mineral and agricultural commodities and in the overall 

external demand for goods and services.

 In the midst of the crisis, the fi nancial markets in Russia froze due 

to a rise in risk aversion and signifi cant correction of equity markets 

since 2007. Sovereign credit default swap (CDS) spreads also jumped 

by several hundred basis points. Th e sudden change in exchange rate 

expectations triggered by the collapse of oil prices in September 2008 

led Russian banks and fi rms to seek to hedge their foreign currency 

exposures, exacerbating pressures on the rouble. Early in the crisis, 

the banking system was put under additional stress by deposit outfl ows and some bank failures. Several mid-sized banks (Kit Finance, 

Svyaz Bank, Globex Bank, and Sobinbank) had to be rescued by 

2012-08-054_000000000000135
Table 2.1 Global Financial Crisis and BRICS: Summary Indicators

Indicators/Country Brazil Russia India China South Africa

2008 2009 2008 2009 2008 2009 2008 2009 2008 2009

1 2 3 4 5 6 7 8 9 10 11GDP Growth 5.2 –0.6 5.2 –7.8 7.3 5.7 9.6 8.7 3.6 –1.7Investment Rate/GDP 18.2 16.6 26.2 22.7 35.6 34.5 42.5 44.8 22 19.4CPI Infl ation 5.7 4.9 14.1 11.7 8.3 10.9 5.9 –0.7 11.5 7.1Fiscal Defi cit/GDP –1.3 –3.2 4.3 –6.2 –7.4 –9.6 –0.4 –3 –0.5 –5.2Gross Debt/GDP 64.1 68.9 7.8 10.9 72.6 74.2 16.8 18.6 27.3 30.5CAD/GDP –1.7 –1.5 6.2 4.0 –2.2 –2.1 9.4 5.8 –6.2 –4.0Exports Growth 23.2 –22.7 33.1 –35.7 29.7 –15.2 17.3 –15.9 41.1 –24.5Imports Growth 43.4 –26.7 30.6 –34.3 40.3 –20.1 18.3 –11.3 38.5 –30.4Exchange Rate* 31.9 –25.5 5.1 –5.6 22.9 –3.7 –6.4 –0.1 -8.1 4.1Equity Market Indices –57.6 121.3 –51.9 58.8 –65.1 100.5 –74.2 100.3 –5.0 –13.1(percentage change) 

2012-08-054_000000000000136
Market Capitalization 35.7 73.2 23.9 70.5 53.2 85.4 61.8 100.3 178.5 249.3

(%GDP)PE Ratio** 7.9 17 –72.4 128.6 10.5 21.8 10.3 21.1 9.6 21.8NPA/Total Loan 3.8 9.7 2.4 1.6 2.3 2.3 2.4 1.58 5.9 5.8Source: IFS and World Bank database.Note: Sign ‘+’ means rouble appreciation, sign ‘–’ means depreciation.* Real eff ective exchange rate of the rouble against the basket comprising currencies of major trade partners (annual average rate of change). ** RTS Stock Exchange, Bank of Russia calculations, and shares included in RTS Index calculation base; Bloomberg.

2012-08-054_000000000000137
84 the brics report

state entities or private investors between mid-September and midOctober 2008.

 In the initial phase of the crisis, the Indian economy remained 

relatively insulated, but witnessed a slowdown in GDP annualized growth from around 7.5 per cent in the fi rst half to 6.0 per 

cent in the second half of 2008, amplifi ed by a sharp contraction 

in the performance of the manufacturing sector. Th e signifi cant 

export-orientation of manufacturing exposed the sector to external 

demand shocks. Further, a large part of manufacturing exports (42 

per cent) was accounted for by leather and manufactures, textile 

and textile products, gems and jewellery, and handicrafts, which are 

employment-intensive, with a major portion of exports in these sectors contributed by small-scale industries (SSIs). Th us, the external 

demand shock had a larger impact on output and employment in 

such industries, which had a direct bearing on domestic consumption demand.

 Th e impact of the fi nancial crisis on China took the form of a 

sharp drop in external demand, which in turn led to an economic 

slowdown, diffi culties for businesses, and rising unemployment. 

Structural problems also became more evident. Two indicators are 

widely accepted and used by economists to fi gure out the impact of 

the fi nancial crisis on China’s real economy. Th e fi rst one is industrial 

electricity consumption (which is a real indicator) and the other is 

industrial value-added (which is a value indicator). Th e trend of electricity use registered an increase of about 10 per cent every month, 

but from the third season of 2008, the rate of increase dropped dramatically. Th e outbreak and spread of the global fi nancial crisis had 

a severe impact on China’s fi nancial and real estate markets, which 

were mainly refl ected in the following: (i) Th e stock index fell in an 

accelerated manner. During the six months from May to October 

2012-08-054_000000000000138
impact of the financial crisis on brics 85

2008, the Shanghai stock exchange composite index dropped over 50 

per cent. (ii) Real estate prices continuously declined. Between July 

2008 and February 2009, the average sales prices index for buildings 

in 70 medium-to-large cities in China fell by about 2 per cent cumulatively. (iii) Money supply and loan supply growth rate continued to 

fall. From May to November 2008, the year-on-year M2 growth rate 

fell by 3.3 per cent and loan supply growth rate for the same period 

remained low. (iv) From July 2008 to February 2009, the RMB’s real 

eff ective exchange rate rose dramatically by 14.5 per cent, resulting in 

an unfavourable eff ect on China’s exports. Th e sharp drop in China’s 

exports lasted over a considerable period, and in the second half of 

2008, 15 per cent of export fi rms were forced to reduce output or 

even shut down.

 In South Africa, portfolio infl ows, which had accounted for the 

bulk of the fi nancing of South Africa’s large current account defi cits in 

the years leading up to the crisis, quickly turned to large net outfl ows, 

although overall net private fl ows remained positive as South African 

banks ran down foreign assets. Both export and import volumes 

plummeted, while the prices of most of South Africa’s main export 

commodities weakened, although this was outweighed by the eff ect 

of lower oil prices, resulting in an improvement in the terms of trade. 

Th e stock market, weakened directly by net outfl ows on the part of 

non-residents and indirectly by the large corrections in equity prices 

elsewhere, began falling in May 2008 but saw sharp declines between 

September and November 2008 in line with equities in other emerging markets.

 Th e global fi nancial crisis infl icted signifi cant loss in output in 

all the BRICS economies. In terms of real GDP growth, Russia witnessed the sharpest fall in growth on account of worsening oil prices 

exacerbated by a fall in other commodities prices. Brazil, which had 

2012-08-054_000000000000139
86 the brics report

signifi cant trade linkages with Mercosur, the US, the Euro zone, 

and China, also witnessed a fall in external demand. Th e real GDP 

growth rate fell to (–) 0.6 per cent in 2009 mainly due to external 

sector shocks. South Africa also suff ered its fi rst recession since the 

early 1990s with a fall in the real GDP growth rate to (–) 1.7 per cent 

in 2009 due to the negative trade shock and sharp fall in domestic 

demand. Infrastructure spending in the run-up to the 2010 FIFA 

World Cup helped to mitigate some of the eff ects of the crisis, but 

did not fully off set weak private investment.

 However, real GDP growth in India and China remained impressive even though they also witnessed some moderation on the face 

of weakening global demand. Large domestic demand and policy 

measures to move towards more domestic sectors-driven growth 

helped to achieve strong growth even during a period of shrinking 

external demand.

Policy Responses and Managing the Recovery 

by the BRICS

Th e global fi nancial crisis resulted in signifi cant weakening of 

economic activity led by poor consumer and investor confi dence. As 

a result, all the BRICS countries initiated fi scal stimulus measures. In 

response to the global economic slowdown, the BRICS also pursued 

discretionary measures to move towards more domestic demanddriven mode (Table 2.2).

 Brazil was one of the fi rst countries to emerge from the crisis, 

engaging in a V-shaped recovery process after just two quarters of 

GDP slump. Th e combination of monetary easing, credit stimulus, 

and countercyclical fi scal policies had a positive impact on private 

2012-08-054_000000000000140
impact of the financial crisis on brics 87

consumption, propelling industrial growth. As consumption and the 

unemployment rate were quickly restored, a well-calibrated monetary policy allowed infl ation to remain within its aimed oscillation 

boundaries. Brazil’s strong macroeconomic fundamentals, including 

an adequate level of foreign exchange reserves and a sound fi nancial 

system, were key factors in reducing the impact of the crisis and helping the country to emerge from it ahead of the other economies.

 To provide adequate domestic liquidity in Brazil, the rules concerning reserve requirements were relaxed. Th is resulted in the injection of 

additional liquidity equivalent to 4 per cent of the GDP (Table 2.3). 

However, as most of the additional liquidity was concentrated in the 

Table 2.2 Size of Discretionary Measures in Financial Crisis

(percentage of GDP)

Country 2008 2009 2010

1 2 3 4

BRICS 

Brazil 0 0.6 0.6

Russia 0 4.1 1.3

India 0.6 0.6 0.6

China 0.4 3.1 2.7

South Africa 2.3 3.0 2.1

Advanced Countries 

Italy 0 0.2 0.1

Japan 0.3 2.4 1.8

Korea 1.1 3.6 4.7

United Kingdom 0.2 1.6 0

United States 1.1 2.0 1.8

Source: IMF Staff Position Note, Fiscal Aff airs Department, International 

Monetary Fund, July 2009.

2012-08-054_000000000000141
Table 2.3 Measures by Central Banks

Country Monetary Measures

Brazil Brazil has featured high levels of reserve requirements, 

allowing the central bank to lower reserve requirements for 

macro-prudential purposes following the Lehman Brothers 

episode. In particular, to confront liquidity problems in 

the inter-bank market, the central bank reduced reserve 

requirements to support lending from large liquid banks to 

small illiquid banks. By introducing this liquidity provision 

mechanism during the crisis, the central bank was able to 

avoid fi nancial stability problems in the system.

Russia Th e authorities’ eff orts to stabilize the banking system during the fourth quarter of 2008 aimed to provide signifi cant 

liquidity while keeping the exchange rate stable to off set the 

abrupt loss of foreign fi nancing. Starting in April 2008, the 

government auctioned excess budgetary funds to banks, while 

the Central Bank of Russia (CBR) provided an ever-widening 

array of liquidity facilities, including long-term subordinated 

loans and uncollateralized loans, which had been provided 

under special federal laws. In 2008–9 the Bank of Russia 

broadened the range of assets that banks could use as collateral in refi nancing transactions and extended the terms of 

loans secured by non-market assets, such as promissory notes, 

credit claims, or credit institution guarantees. Th e CBR also 

off ered guarantees for inter-bank lending to qualifying banks, 

covering losses in the event that the licence of the counterparty was withdrawn. In March 2009, another bank recapitalization scheme was announced that entailed an exchange 

of preferred shares for government bonds. Adjustments in the 

interest rates were active tools in the Bank of Russia’s response 

to the global fi nancial crisis. Th e refi nancing rate was increased 

in the second half of 2008. Th en the Bank of Russia implemented a series of reductions in the refi nancing rate: from 

13 per cent in April 2009 to 7.75 per cent in June 2010. 

Th e CBR temporarily lowered the required reserve ratios in 

September and in October 2008. 

India Th e policy repo rate under the liquidity adjustment facility 

(LAF) was reduced by 400 basis points, from 9 per cent to 

5 per cent. Th e policy reverse repo rate under the LAF was 

2012-08-054_000000000000142
reduced by 250 basis points, from 6 per cent to 3.5 per cent. 

Th e cash reserve ratio (CRR) was reduced by 400 basis 

points from 9 per cent of net demand and time liabilities 

(NDTL) of banks to 5 per cent. Th e statutory liquidity ratio 

(SLR) was reduced from 25 per cent of NDTL to 24 per 

cent. Th e export credit refi nance limit for commercial banks 

was enhanced to 50 per cent from 15 per cent of outstanding 

export credit. A special 14-day term repo facility was instituted for commercial banks up to 1.5 per cent of NDTL. A 

special refi nance facility was instituted for scheduled commercial banks (excluding RRBs) up to 1 per cent of each 

bank’s NDTL as of 24 October 2008.

China China made eff orts to guide fi nancial institutions to make 

remarkable credit planning. Since September 2008, the PBC 

has lowered the benchmark deposit and lending rates fi ve 

times, from 4.14 per cent to 2.25 per cent and from 7.47 per 

cent to 5.31 per cent, respectively. To amplify liquidity in the 

banking system, the PBC cut the RMB reserve requirement 

ratio of fi nancial institutions four times in the latter half of 

the year 2008. Specifi cally, the reserve requirement ratio of 

large fi nancial institutions was cut by 2 percentage points 

cumulatively, whereas that of small fi nancial institutions was 

cut by 4 percentage points cumulatively. Th e 1-year central 

bank liquidity lending rate was cut from 4.68 per cent to 

3.33 per cent. Th e rediscount rate was cut from 4.32 per 

cent to 1.8 per cent. At the same time, the PBC eliminated 

quantitative ceilings for fi nancial institutions’ credit lending 

and promoted greater support for SME lending to increase 

their credit supply and optimize the credit structure. 

South Africa In response to the fi nancial crisis during December 2008, 

the Monetary Policy Committee of SARB reduced its policy 

rate by 50 basis points. Further cuts worth 600 basis points 

reduced the repo rate to an all-time low of 5.5 per cent by 

November 2010. Interest rate reductions were facilitated by 

an improved infl ation outlook against the backdrop of slowing economic growth (increasing output gap) and declining 

commodity prices.

Country Monetary Measures

2012-08-054_000000000000143
90 the brics report

larger fi nancial institutions, other measures were needed to spread 

liquidity to the whole system. To dispel fears about the soundness 

of the domestic banking sector, the central bank (BCB) allowed the 

Credit Guarantee Fund (FGC, known in Brazil as Fundo Garantidor 

de Crédito), the Brazilian deposit guarantee system that is privately 

funded and public regulated, to include an additional temporary 

guarantee for a special type of time deposit that was especially created to restore liquidity in the small and medium bank segments. 

Initiatives to inject liquidity in the foreign currency market comprised the selling of US$ 14.5 billion in the spot market, exchange 

rate swap operations of US$ 33 billion and auctions of US$ 24.4 

billion to provide short-term fi nancing to exporters. As the crisis 

deepened, the BCB initiated a series of interest rate cuts that lasted 

until July 2009 and totalled 5 per cent. To stimulate sales and production, the tax on manufactured goods (IPI) on vehicles, household 

appliances, capital goods, and building construction materials was 

signifi cantly reduced or, in some cases, set to zero. In an additional 

eff ort to boost consumption, the tax on fi nancial transactions (IOF) 

charged on credit operations to households was reduced from 3.0 per 

cent to 1.5 per cent. Apart from these measures, there were loans from 

state-owned banks, and injections by the treasury into BNDES, the 

state-owned National Development Bank, which boosted the bank’s 

lending capacity to energy and infrastructure sectors and allowed the 

launching of new credit facilities for exporters and for the production 

of capital and consumption goods. Th ese measures supplemented the 

growth recovery process in Brazil. Finally, in October 2008, the US 

central bank (the Fed) agreed to channel the BCB with a US$ 30 

billion swap line, which was not drawn upon. 

 Russia came up with one of the largest fi scal stimulus packages 

in the G-20. Th e expansionary fi scal stance manifested in a rise in 

2012-08-054_000000000000144
impact of the financial crisis on brics 91

government expenditure and pushed up the government (non-oil) 

defi cit from 8.25 per cent of GDP in 2008 to 15 per cent of GDP in 

2009. In the second half of 2008 the main challenges of the monetary 

policy were to ensure fi nancial stability and to curb capital outfl ow. 

Th en the Bank of Russia started to ease monetary policy in order to 

support economic growth: between April 2009 and June 2010, the 

refi nancing rate was reduced by 525 basis points to 7.75 per cent. Due 

to aggressive fi scal policies accompanied by monetary easing, Russia’s 

fi scal health emerged almost unscathed from the global crisis. Th ough 

the economy contracted by 7.8 per cent in 2009, it reverted to the 

path of stability in the fi rst quarter of 2010 with real GDP registering 

a growth of 3.5 per cent. In the case of Russia, prudent management 

of oil revenues provided the leeway, not only for substantial fi scal 

expansion in the face of the crisis, but also to monetize the defi cit. 

Th e stabilization funds were drawn down without any signifi cant risk 

to external vulnerability. As a result, apart from the improvement in 

the general indicators of economic recovery, Russia emerged from 

the crisis with a low public debt ratio (around 11 per cent of GDP), 

unlike the advanced economies of the West including those in the 

Euro zone and the US.

 India’s policy response to the crisis was aimed at containing the 

contagion from the outside—to keep the domestic money and credit 

markets functioning normally and to ensure that the liquidity stress 

did not trigger solvency cascades. In particular, three objectives 

were pursued with respect to the fi nancial sector: fi rst, to maintain 

a comfortable rupee liquidity position; second, to augment foreign 

exchange liquidity; and third, to maintain a policy framework that 

would keep credit delivery on track so as to arrest the moderation 

in growth. Besides challenges thrown by the global fi nancial meltdown, the policy responses also involved the challenge of balancing 

2012-08-054_000000000000145
92 the brics report

short-term mitigation and medium-term sustainability. Th e measures 

to meet these objectives came in several policy packages from the 

Government of India and the RBI starting in mid-September 2008.

 Th e fi scal policy measures undertaken by India in the form of three 

fi scal stimulus packages during the second half of 2008–9 constituted 

tax cuts, encouraging investment in infrastructure and increased 

expenditure on both investment and consumption. Th e expansionary fi scal stance continued in the Union Budget for 2009–10, which 

was presented against the backdrop of moderation of growth in the 

economy and signs of stabilization in the global economy. Th e allocation for crucial sectors such as infrastructure, education and health, 

rural employment, and empowerment of disadvantaged sections 

of the population was enhanced signifi cantly. Additional expenditure amounting to 3 per cent of GDP was provided through three 

supplementary demands for grants during October–December 2008 

and February 2009. Th e monetary policy response was in terms of 

easing liquidity in the system through conventional measures such 

as cutting policy rates (cash reserve ratio [CRR], reverse repo, and 

statutory liquidity ratio [SLR]) and open market operations, and 

unconventional measures, that is, opening refi nance facilities to 

SIDBI and EXIM Banks and rolling back prudential norms with 

regard to provisioning and risk weights. Th e total amount of actual/

potential liquidity injected was Rs 5,850 billion.

 China adopted a proactive fi scal policy and a moderately easy 

monetary policy, and put in place a package plan to ensure steady and 

relatively rapid economic growth. Th e most immediate and important goal of the package plan was to reverse the economic downturn 

and maintain steady growth. It was also designed to address structural problems constraining China’s economic development, speed 

up transformation of the growth pattern, and raise the quality and 

2012-08-054_000000000000146
impact of the financial crisis on brics 93

performance of factors of production in order to lay a more solid 

foundation for growth in the long run. First, it aimed to boost domestic 

demand in a comprehensive way and strengthen the role of consumer 

demand in driving economic growth to promote balanced economic 

development; second, it sought to improve infrastructure across the 

country and promote coordinated economic development; third, it 

attempted to enhance the competitiveness of industry and capacity for independent innovation and promote sustainable economic 

development; and fourth, it worked for all-round development of 

the people and promoted intensive economic development. To serve 

the overall objective of promoting economic growth and to expand 

domestic demand and restructure the economy, the People’s Bank of 

China (PBC) implemented a moderately easy monetary policy by 

adopting fl exible and eff ective measures to strengthen fi nancial support for economic growth, ensuring that the aggregate money and 

credit supply satisfi ed the needs of economic development. Th e PBC 

has conducted open market operations, timely and appropriately, to 

ensure suffi cient liquidity in the banking system in general, and to 

stabilize market expectations. In 2011, to tackle the potential risk 

of growth slowdown and the increasing pressure from rising prices, 

China continued its proactive fi scal policy and adjusted the moderately easy stance of monetary policy to a prudent one. Proactive fi scal 

policy eff ectively boosted domestic demand, promoted economic 

restructuring, and improved the people’s livelihood. Th e problem 

of price rise was addressed through the use of prudent monetary 

policy tools.

 Since September 2008, the PBC has lowered the benchmark 

deposit and lending rates of fi nancial institutions fi ve times, from 

4.14 per cent to 2.25 per cent, and from 7.47 per cent to 5.31 per 

cent, respectively. Th e deposit and lending rates between fi nancial 

2012-08-054_000000000000147
94 the brics report

institutions and the PBC were cut twice; in particular, the deposit 

rates of statutory reserve and excess reserve ratios with the PBC were 

cut from 1.89 per cent and 0.99 per cent to 1.62 per cent and 0.72 

per cent, respectively. Th e 1-year central bank liquidity lending rate 

(re-loan rate) was cut from 4.68 per cent to 3.33 per cent; the 1-year 

central bank lending rate to rural credit cooperatives was cut from 

3.96 per cent to 2.88 per cent; and the rediscount rate was cut from 

4.32 per cent to 1.80 per cent. To ensure suffi cient liquidity in the 

banking system, the PBC cut the required reserve ratios four times. 

Specifi cally, the reserve requirement ratio of large fi nancial institutions was cut by 2 percentage points cumulatively, while that of small 

fi nancial institutions was cut by 4 percentage points cumulatively. 

At the same time, the PBC eliminated quantitative ceilings for 

fi nancial institutions’ credit lending, guided fi nancial institutions 

to increase their credit supply, and optimize the credit structure, 

following the principle of diff erentiated treatment which encouraged 

growth in some sectors. Th e PBC strengthened credit services to 

agriculture, rural areas, farmers, small and medium-sized enterprises, 

employment programmes, post-disaster reconstruction, consumption expansion, and independent innovation, while ensuring that 

loans to eligible central government investment projects were granted 

in a timely manner.

 In South Africa, fi scal and monetary policies responded to the crisis 

in a countercyclical manner by allowing the fi scal defi cit to increase 

as government revenues dropped, increasing government spending 

and sharply reducing interest rates. Sound public fi nances during 

the pre-crisis boom period (2002–7) provided South Africa with the 

fi scal space to provide stimulus during the 2008–9 recession. Th e size 

of the budget defi cit had declined from 5.7 per cent of GDP in 1995 

to a surplus of about 1 per cent of GDP in 2007–8, which helped 

2012-08-054_000000000000148
impact of the financial crisis on brics 95

to reduce the government’s debt burden from 47 per cent of GDP 

to only 27.1 per cent in 2008–9. As a result, the government was 

able to sustain spending on crucial social services and infrastructure 

investment during the recession. Th e shortfall between expenditure 

and revenues was funded by increased borrowing.

 Th e consolidated government budget balance worsened by about 

5 percentage points of GDP in 2009–10, due in roughly equal 

measure to a decline in the revenue-to-GDP ratio and a rise in 

expenditures to GDP. Most of that deterioration was cyclical, refl ecting the emergence of a negative output gap and the operation of 

automatic stabilisers on the revenue side, but about 1.4 percentage 

points of GDP corresponded to a structural increase in expenditure. 

Th is was less a function of discretionary anti-crisis measures than 

the maintenance of pre-existing ambitious public sector investment 

plans (both on the part of the government and government loans to 

key state-owned enterprises for capital purposes). Public consumption also supported output during the decline. Th is was driven by 

above-budgeted public-sector wage settlements in 2009 and the 

choice to extend the child support grant up to a child’s 18th birthday, 

and fi nalization of previously announced extensions to the old age 

pension grant.

 Interest rates were reduced by 650 basis points between December 

2008 and November 2010. SARB began to ease rates in December 

2008 after the eff ects of the collapse of Lehman Brothers became 

apparent. Soon after the international crisis struck, the Monetary 

Policy Committee (MPC) moved to monthly meetings, from the 

earlier frequency of once every two months, to be more responsive to 

developments. Th e SARB’s repo rate bottomed out at 5.5 per cent and 

no emergency actions, like capital support for banks or quantitative 

easing to support lower interest rates were judged necessary, given the 

2012-08-054_000000000000149
96 the brics report

absence of severe diffi culties in the banking sector. Real interest rates 

were negative in South Africa in the fi rst half of 2009, but actually 

less than rates prevailing just before the crisis and, with the continued 

fall in infl ation by the second half of the year had turned substantially 

positive again. Th e growing sense of normalization was refl ected in 

the MPC’s move back to bi-monthly meetings in November 2009.

 An important element of South Africa’s resilience to the global 

economic crisis was that it did not experience a banking crisis. Despite 

the sharp swing from rapid economic growth into recession, and in 

particular the decline in house prices after a long mortgage lending 

boom, South Africa experienced no bank failures. Non-performing 

loan (NPL) rates did surge in 2009, but the surge in bad loans was 

not refl ected in major losses for the banks. Th ere were several reasons 

for this, including the banks’ strong profi tability, the low level of 

NPLs and comfortable capital cushions going into the downturn; 

their lack of direct exposure to problem assets in the US and Europe; 

bankruptcy laws that favour creditors in recovering collateral for bad 

loans; and conservative approaches on the part of both the regulator 

and the banks themselves. In addition, the lending boom was already 

cooling prior to the intensifi cation of the international crisis in 

September 2008, in part because the National Credit Act came into 

force and tightened standards on lending to households.

 Th e framework for South Africa’s response to the international economic crisis emphasised the urgent need to use industrial and trade 

policy, preferential treatment for domestic fi rms in procurement, and 

rescue packages for crisis-aff ected sectors, but there has been little 

concrete action in these areas. Some tariff s, mainly on clothing, were 

raised, and a small number of anti-dumping investigations were 

launched. Corporate bail-outs were also not a major feature of the 

downturn. Although macroeconomic policies were supportive and 

2012-08-054_000000000000150
impact of the financial crisis on brics 97

the downturn was not particularly deep compared to the international 

average, it was nonetheless relatively prolonged. Th e main reason why 

South Africa did not experience a V-shaped recovery, as did some 

other emerging markets, is that the country was already moving into 

a cyclical downturn when the international crisis struck.

 Growth has resumed in South Africa and has been strengthening. 

After three negative quarters, real GDP growth turned marginally 

positive (+0.2 per cent quarter-on-quarter seasonally adjusted, and 

not annualised) in the third quarter of 2009 and quickened to 0.8 

per cent in the fourth quarter, as private consumption growth resumed 

and the rate of inventory drawdowns slowed. Growth accelerated 

further in the fi rst quarter of 2010 and GDP expanded by 2.7 per 

cent in the year as a whole. Government consumption contributed 

positively throughout the recession and subsequent recovery, but private sector gross fi xed capital formation declined sharply and took a 

long time to recover. Both export and import volumes rebounded in 

the second half of 2009. Although some sectors, such as manufacturing, have experienced a signifi cant bounce-back from the low point 

of the recession, others, including wholesale and retail trade, agriculture and fi sheries, and fi nance and real estate, have lagged. Two 

important factors hindering the recovery appear to be credit growth 

and employment. With household debt levels remaining high and 

weakening labour market conditions, consumption has so far played 

less of a role in the recovery than in many other emerging countries.

Lessons from the Global Financial Crisis

In their well-researched book, Th is Time is Diff erent: Eight Centuries 

of Financial Folly, Kenneth Rogoff and Carmen M. Reinhart show 

2012-08-054_000000000000151
98 the brics report

how over a period of 800 years all fi nancial crises can be traced to the 

same fundamental causes. Each time, experts have chimed that ‘this 

time is diff erent’, claiming that the old rules do not apply and the 

new situation is dissimilar to the previous one. Th e crisis then came 

as a serious blow to the credibility of central banks and the reputation 

of central bankers. Th e challenge for central banks, as indeed for all 

policymakers, is to learn lessons from the crisis and incorporate them 

in their policies.

Balancing the Financial and Real Sectors

Th e fact that a well-developed fi nancial sector is necessary to act as 

the intermediary between entrepreneurs/investors and savers can 

hardly be overstated. An effi cient fi nancial sector reduces the cost and 

risk of producing and trading goods and services and, thus, makes an 

important contribution to raising the standards of living. Th e recent 

crisis, however, showed that the fi nancial sector had apparently 

assumed a quasi-autonomous existence without close connection 

with the fi nancing requirements of the real economy. Th e fi nancial 

industry, indeed, grew oversized in the preceding years as refl ected in 

rapid credit creation, asset price bubbles and high levels of indebtedness, particularly in advanced fi nancial systems. Th e disproportionate 

growth in the global fi nancial sector was largely due to the aggressive 

search for yield, engendered by easy liquidity in the global system 

that triggered a wave of fi nancial innovations. Complex fi nancial 

products were created by structuring and hedging, originating and 

distributing, all under the belief that real value could be created by 

sheer fi nancial engineering. As mentioned earlier, there were hardly 

2012-08-054_000000000000152
impact of the financial crisis on brics 99

any signs of growing capital formation due to the growing and 

increasingly complex fi nancial sector.

 In short, as a result of the excess liquidity that permeated the 

global economy, particularly in the US but also in other countries, 

there was excessive ‘fi nancialization’. Th e fi nancial sector grew more 

rapidly than other goods and services sectors. In a way, that made the 

growth of fi nance an end in itself and not a means to meet human 

needs such as food, fuel, health, and education. Given that the bursting of the oversized fi nancial sector has a devastating impact on the 

real sector, it becomes important (i) to examine the optimal size of 

the fi nancial sector relative to growth and development needs and (ii) 

to make fi nancial sector innovations more meaningful to cater to the 

needs of the real sector.

Domestic Demand as a More Durable Source of Growth

Th e impact of the crisis on the external demand of EMEs has been 

clearly visible since the last quarter of 2008. In the fi rst instance, the 

downturn in the US, Europe, and subsequently in Japan was manifested in a sharp contraction in exports from those EMEs that had 

become the largest exporters to the industrial world. Subsequently, 

exports of raw and intermediate goods from relatively smaller EMEs 

to larger EMEs declined. In some commodity-exporting countries, 

particularly Russia, exports fell by more than 40 per cent in the fi rst 

quarter of 2009. Since prices fell sharply as world growth slowed, 

they led to declining incomes in EMEs which, in turn, tended to 

reduce demand and growth. In view of the adverse impact of the 

crisis on domestic growth, EMEs may need to review their undue 

2012-08-054_000000000000153
100 the brics report

dependence on external demand and attempt to generate demand 

within their economies. A reasonably balanced macroeconomic 

management strategy appears to have enabled the BRICS economies to minimize the spill-over eff ects of the external shocks to a 

great extent.

Financial Sector Reforms

Emerging market economies, still in the process of developing their 

fi nancial systems, can take up this opportunity to learn from the crisis 

and develop a robust fi nancial sector with a sound systemic oversight 

framework. Th e experience of the recent crisis demonstrates that 

the fi nancial system in most emerging Asian countries was relatively 

resilient to global shocks as reforms, which had been put in place 

after the East Asian crisis, fostered transparency and governance, 

and strengthened regulation and supervision. Th e crisis lessons do 

not call for overregulation as this could restrain growth impulses. A 

judicious approach while formulating fi nancial liberalization measures, however, proved to be extremely eff ective as refl ected in the 

strengthening of banks by public recapitalization in some advanced 

economies. Alternatively, regulators and supervisors should work 

on proper regulation of the so-called ‘innovations’ that allowed the 

build-up of risks within the fi nancial sector to be disguised; monitoring and establishing limits to tame the overexposure of domestic 

banks to toxic assets globally; adequately regulating and supervising the real estate market, in order to avoid the excessive artifi cial 

growth of fi nancial investors in real estate; regulating the activities of 

systemically important non-bank fi nancial institutions as well as submitting all systemically important fi nancial institutions to intensifi ed 

2012-08-054_000000000000154
impact of the financial crisis on brics 101

supervisory procedures; and speaking out against hasty and potentially risky attempts to liberalize the capital account of the balance of 

payments. Th us, countries should self-insure against future crises by 

putting in place, as best as they can, robust economic and fi nancial 

policy frameworks that help minimize their vulnerabilities.

 It has been observed that banks that rely heavily on wholesale 

funding are naturally more vulnerable to any shock to market liquidity. When loans are larger than deposits, banks may resort to funding 

from foreign parents or domestic and international wholesale markets to fi nance the gap. Likewise, there is anecdotal evidence that the 

presence of foreign banks was associated with currency mismatches. 

Th is indicates that emerging markets, while encouraging the entry 

of foreign banks, should simultaneously strictly regulate their local 

lending practices.

Social Security System

Th e resilience of EMEs to external shocks is unlikely to be fully 

guaranteed given the increasing trade and fi nancial integration with 

advanced markets. Th erefore, it becomes important, albeit challenging, for emerging and developing countries to gradually put in place 

an eff ective social safety net system which not only helps as an automatic stabilizer but also attenuates the need for undertaking sudden 

large-scale discretionary fi scal policy measures that lead to long-term 

fi scal sustainability concerns. An improvement in both the social 

safety net system and fi nancial markets may foster the development 

of domestic demand contributing to enhanced market strength. An 

improvement in the social security system and the fi nancial markets 

may also decrease private savings in the long run.

2012-08-054_000000000000155
102 the brics report

Concluding Observations

Th e global economic crisis which originated in the fi nancial sector infl icted signifi cant output loss, impaired the balance sheets of 

households and corporations and caused an overall fall in economic 

activity. Th e crisis also exposed the structural weaknesses of the fi nancial and real sectors. Th e BRICS economies recovered swiftly with 

the support of domestic demand. Still, the recovery is yet to be made 

compatible with the fi scal consolidation process. Besides the current 

recovery process, there are specifi c lessons for BRICS economies from 

the recent crisis. Th ese lessons include (i) recognizing the invalidation 

of the decoupling hypothesis, (ii) allowing domestic demand to serve 

as a durable source of growth, (iii) instituting fi nancial sector reforms, 

(iv) monitoring speculative capital fl ows, (v) recognizing the creation 

of fi scal policy space on a sustainable basis as a central feature of their 

reform agenda, and (vi) focusing on infrastructure development and 

employment generation.

2012-08-054_000000000000156
Best Practices

Th is chapter looks at the best practices and institutions within the 

BRICS economies that have made signifi cant diff erences to these 

economies and contributed to their high growth rates. Th e purpose 

is to showcase successful practices and institutions for the rest of 

the world to draw lessons for social upliftment, poverty reduction, 

fi nancial sector stability, and faster economic growth. Many of these 

practices and institutions have relevance within the BRICS bloc for 

enhancing cooperation and creating synergies, so that the BRICS 

could collectively grow faster. Th is is the case despite the fact that the 

BRICS are culturally, demographically, and politically disparate, each 

with its own unique identity and institutions.

 Major showcase areas for Brazil include agricultural research, 

which has transformed the country into a major exporter; the use of 

bio-fuel for road transport, and the emergence of Embraer as a hightechnology aircraft manufacturer. In the social sphere, Conditional 

Cash Transfers that target poverty and the success of the anti-AIDS 

policy provide useful lessons. A regulatory framework that helped 

Brazil withstand the shock of the global crisis and the issuance of 

3

2012-08-054_000000000000157
104 the brics report

domestic currency-denominated international bonds, which transfer 

currency risk to investors, are other successful practices that have 

been highlighted.

 Russia’s major achievements include reforms during 1999–2009 

that promoted economic growth, lowered infl ation, and led to a 

dramatic fall in the number of people living below the poverty line. 

Specifi c achievements include setting up of the Oil Stabilisation Fund 

that was successful during the crisis, budgetary reforms through the 

devolution of decision-making powers, and the introduction of a fl at 

personal income tax rate of 13 per cent that ensured improvement 

in compliance.

 Th e main showcase institution for India is private entrepreneurship which has been instrumental in achieving 8–9 per cent annual 

growth of the economy in recent years. Private initiative has been 

responsible for the excellence achieved in the information technology 

sector and the innovative streak that has led to improvization and 

production of low-cost goods for the Indian mass market.

 Besides, the calibrated approach to capital account convertibility 

and the External Commercial Borrowing Policy have helped insulate 

the economy against surges and reversals of debt fl ows and maintained 

the external debt at sustainable levels. Th e Right to Information Act is 

increasing transparency and accountability of government operations 

and the Mahatma Gandhi National Rural Employment Guarantee 

Scheme is a major step towards making growth inclusive.

 Th e best practices and institutions of China are those that have 

helped ensure progress in terms of economic growth, enhancing its 

national strength and improving the living standards of its people as 

well as the success in making the historic transition from a highly 

centralized planned economy to a robust socialist market economy 

and from a closed and semi-closed country to a country that is open 

2012-08-054_000000000000158
 best practices 105

to the outside world. Specifi c areas are FDI attraction and utilization, 

and infrastructure fi nancing, among others.

 Th e Chinese globalization model has also been diff erent, in that 

foreign direct investment was encouraged. Th e sub-national governments (cities/provinces) have been successful in attracting foreign 

investment by providing improved infrastructure and a favourable 

regulatory environment. China also has experience in fi nancial macro-management. Th e reform and development of China’s banking 

industry and fi nancial market played a key role in promoting rapid 

and sustainable economic growth.

 South Africa has a long record of responsible macroeconomic 

management, which has helped to promote the development of a 

deep and liquid bond market and reduced external vulnerability. 

South Africa has strong institutions and a highly developed, wellregulated banking sector that escaped the worst eff ects of the fi nancial 

crisis. With the most developed industrial and fi nancial capabilities 

on the African continent, South Africa’s role in the integration of 

policies, markets, fi nance, and infrastructure is vital to Africa’s economic development and realization of the continent’s potential as 

a growth pole in the global economy. Outwardly oriented South 

African companies are among the largest sources of FDI in Africa 

and the country’s development fi nancing institutions are playing an 

increasing role in the funding of regional infrastructure investment.

Brazil

Agriculture

Brazilian agriculture has undergone dramatic changes in the past few 

decades. From a net importer of food grains, Brazil has emerged as 

2012-08-054_000000000000159
106 the brics report

a major exporter of food products. Th is change has been possible 

due to major technological breakthroughs and the extension of 

cultivation to previously uncultivable land. More important, the 

change has not happened at the expense of the Amazon rainforest, 

as is sometimes believed, but through the extension of cultivation 

to a region called the Cerrado, which is 1,000 km south of the 

Amazon forest and was earlier regarded as having limited cultivation 

potential.

 Th e FAO estimate for the total potential cultivable land of Brazil 

is over 400 million hectares. Th us far only 59.5 million is being used, 

with most of the new land in the Cerrado. Th e success of agriculture 

has also raised expectations that Brazil may be able to meet the 

growing global food demand–supply gap resulting from growth in 

population and per capita income.

Agricultural Research

Much of the credit for agricultural transformation in Brazil goes to 

Embrapa, which is the abbreviation for Empresa Brasileira de Pesquisa 

Agropecuaria or the Brazilian Agricultural Research Corporation. Th e 

organization was set up by the national government in April 1973 to 

develop agricultural technologies through research and innovation. 

Th e decision was prompted by a period of rapid population growth 

and a large increase in per capita income, which created the risk that 

the country might not be able to meet its growing domestic demand 

for food. Th e organization has since developed more than 9,000 

technologies for Brazilian agriculture, reduced production costs, and 

increased the supply of food while conserving natural resources and 

the environment.

2012-08-054_000000000000160
 best practices 107

 Among its major achievements, Embrapa is largely responsible for 

expanding the agricultural frontier into a region called the Cerrado, 

which was previously considered uncultivable. Th e Cerrado occupies 

about 23 per cent of the Brazilian territory and has acidic soil with 

low levels of nitrogen and phosphorous. To overcome this limitation, Embrapa developed, inter alia, acidity correction technologies 

by pouring industrial quantities of lime (pulverised limestone or 

chalk), encouraged the expansion of Brazil’s beef herd and adapted 

soybeans (a temperate climate crop) for the tropical climate. Today, 

the Cerrado accounts for 70 per cent of Brazil’s farm output. Th e 

region also accounts for 60 per cent of the country’s production of 

soybeans. Th is was followed by the development of a new variety of 

grass, which is a crossbreed with an African grass called brachiaria. 

Th e new variety produced 20–25 tonnes of grass feed per hectare, 

many times the native Cerrado grass output. Th is helped turn parts of 

the Cerrado into pastures, making possible the enormous expansion 

of Brazil’s cattle herd.

 In addition, Embrapa was successful in turning soybean into a 

tropical crop. Soybean is a temperate climate crop native to northeastern Asia (Japan, the Koreas, and north-east China) and is sensitive 

to temperature changes. All other large soybean producers (notably 

America and Argentina) have temperate climates. Earlier, Brazil 

was growing soybean in its temperate southern states. However, 

with cross-breeding, Embrapa began growing soybean in a tropical 

climate, on the rolling plains of Mato Grosso state, and in the Cerrado. 

More recently, Brazil has been importing genetically modifi ed soy 

seeds and is now the world’s second-largest user of genetically modifi ed seeds after the United States. Embrapa has won approval for its 

fi rst genetically modifi ed seeds. Embrapa has also pioneered ‘no-till’ 

agriculture, where the soil is not ploughed nor the crop harvested at 

2012-08-054_000000000000161
108 the brics report

ground level. Instead, the crop is cut high on the stalk and the remains 

of the plant are left to rot into organic material. Next year’s crop is 

then planted directly into the material, retaining more nutrients in 

the soil. In 1990, Brazilian farmers used no-till farming for 2.6 per 

cent of their grain output, which has now risen to over 50 per cent.

 Embrapa has a budget of over US$ 1.0 billion per year and employs 

almost 9,000 people. It is organized as a large network, comprising 

41 decentralized centres in all regions of the country. It has signed 68 

technical co-operation agreements with 46 countries and 89 foreign 

institutions, particularly in the area of agricultural research, and has 

ongoing multilateral agreements with 20 international organizations, 

involving research partnerships and technology transfers. Th e institution has established partnerships with laboratories in the United 

States and Europe (France, England, and Netherlands) for research in 

advanced technology. In the sphere of technology transfer to developing countries, achievements include the opening of the Embrapa’s 

technology transfer projects in Africa (Ghana), South America 

(Venezuela), and Central America and the Caribbean (Panama), 

which has allowed wider dissemination of innovations and technologies developed by Embrapa.

Bio-energy Fuels: Ethanol

Brazil has a track record of running the most successful bio-fuel programme in the world. Th e main objective of the Proálcool Programme, 

which was launched by the Brazilian government in the mid-1970s, 

was import substitution. Th e idea was to reduce imports of petroleum products by using ethanol in transport vehicles. Government 

subsidy was extensively provided for this purpose.

2012-08-054_000000000000162
 best practices 109

 In addition to government subsidy to promote ethanol use, the 

Brazilian car industry played a major role in disseminating this 

technology by developing fl ex-fuel engines that could run on both 

gasoline and ethanol. Consumers, therefore, have a choice regarding 

the use of gasoline or ethanol—the choice often depending on the 

relative prices. Last year, the proportion of fl ex-fuel vehicles in the 

Brazilian market exceeded 90 per cent. Ethanol now accounts for 90 per 

cent of liquid biofuels consumed in the world and ethanolproduction 

in Brazil and the world nearly quadrupled between 2000 and 2008.

 Research on the use of ethanol as a transport fuel began in Brazil 

in the 1930s and benefi ted from strong government support. Th e 

Proálcool Programme was launched in 1975, and provided for a 20 

per cent gasoline mix. Th e main purpose was to lower dependence on 

oil imports. Hydrated alcohol was introduced as a direct substitute 

for gasoline in 1979. Th is led to a sizeable increase in consumption 

and production of alcohol between 1976 and the mid-1980s.

 Th e programme received a setback at the beginning of the 1990s, 

due to the macroeconomic crisis that aff ected the Brazilian economy. 

Oil prices were falling and there was a lack of trust among consumers 

regarding hydrated alcohol. As a result, few cars using ethanol fuel 

were produced. Th e use of alcohol as a transport fuel was receiving 

hardly any serious international attention.

 Th e programme was revived early in 2000, with government support limited to supervision and regulation. A milestone was achieved 

in 2003 with the introduction of fl ex-fuel vehicles that are dual-fuel, 

that is, running on gasoline and ethanol. Th e decision regarding 

fuel choice lies with the consumer, depending on a comparison of 

prices. As a result, the production of ethanol doubled between 2003 

and 2010 from 12.6 to 25.7 billion litres. By 2005, 50 per cent of 

the cars sold in Brazil had fl ex-fuel engines and the fi gure rose to 

2012-08-054_000000000000163
110 the brics report

90 per cent in 2010. Brazil became the fi rst country in 2008 to use 

more biofuels than gasoline. Th is extraordinary success helped lower 

petrol dependency in the energy matrix from 45.5 per cent in 2000 

to 37.3 per cent by 2008.

 Environmental considerations have been fully integrated into the 

ethanol production policy. Net CO2

 emission is calculated at 260 

kilos for each 1,000 litres of ethanol against 2,280 in the case of 

gasoline, implying an 89 per cent reduction in emissions. Such a 

calculation takes into account the production /consumption cycle: 

from planting/harvesting; the high absorption capacity of gases during cultivation; the co-generation of energy as well as emissions in 

the process of generating energy; and the emissions during transport 

and consumption. Th e high absorption capacity of gases by sugarcane cultivation was recognized by the UN when it included ethanol 

in the Clean Development Mechanism (CDM) Scheme. Based on 

its success and the increasing eff orts by the world to expand the use 

of renewable energy sources, ethanol stopped being treated as a curiosity from Brazil. Indeed, key international players like Shell, BP, 

Cargill, and Bunge, among others, have stepped in through acquisition and joint-ventures since 2007 and reinforced the process of 

concentration and capitalization of the sector. Petrobras itself has set 

up a special division for biofuel and in 2010 ranked fourth in production in Brazil. In 2009, one of the major Indian sugar refi neries, 

Shree Renuka Sugars, also entered the market through acquisition 

of a Brazilian ethanol company. Ethanol as a bio-fuel has enormous 

potential for future development, as it is more effi cient and drastically diminishes land use. New technological pathways (hydrolyses 

of cellulosic materials) are being explored. Th e Brazilian experience 

suggests, therefore, that it is possible to harmonize food and bio-fuel 

production in a sustainable way.

2012-08-054_000000000000164
 best practices 111

Conditional Cash Transfers

Th e Conditional Cash Transfer (CCT) programme aims at directly 

transferring cash to the poor, provided that benefi ciaries fulfi ll 

certain conditions like enrolling children in school, getting regular 

medical check-ups, and receiving vaccinations. Th e programme is 

running in many South American countries along with Brazil and is 

regarded as an example of a best practice in the provision of a social 

safety net. 

 Th e Bolsa Família programme in Brazil was created in October 

2003 to improve the effi ciency and coherence of the social safety net. 

It is designed to meet two major goals: short-term poverty alleviation 

and the fi ght against intergenerational poverty traps. Th e former is 

addressed through cash-transfers, while the latter uses conditionalities to encourage families to persist in human capital investment. Th e 

programme requires 85 per cent school attendance for school-aged 

children, updated immunization cards for children up to six years 

of age, and regular visits to health centres for lactating and pregnant 

women. Conditional cash transfers proved to be an important factor 

in reducing inequalities. A study by the International Policy Centre 

for Inclusive Growth (IPC-IG) shows that, despite its small share 

in total income (about 0.5 per cent of GDP), the programme has 

helped reduce inequalities in Brazil by about 21 per cent between 

1995 and 2004.

Bolsa Família has also been eff ective in poverty reduction. Th e 

share of population living in extreme poverty (on less than US$ 1.25 

per day) reached 5.5 per cent in 2007, from about 11 per cent in the 

mid-1990s and 15 per cent at the end of the 1980s. According to the 

World Bank (Press Release No. 2011/093/LAC), the programme is 

among the most eff ective social protection programmes in the world, 

2012-08-054_000000000000165
112 the brics report

having helped raise approximately 20 million people out of poverty 

between 2003 and 2009 as well as signifi cantly reducing income 

inequality.

Anti-AIDS Policy

Brazil was the fi rst nation to provide anti-AIDS therapies at no cost 

to all patients who needed them since 1991 and has played a pivotal 

role in public policy debates concerning HIV/AIDS. Its national 

HIV/AIDS programme was praised as the best of its kind in the 

developing world by the United Nations and has served as a model 

for 31 other developing countries as well as for the global HIV/AIDS 

policy adopted by the World Health Organization (WHO) since 

2003. By 2010, about 200,000 patients in the country benefi ted 

from these therapies. By providing universal treatment, the country 

proved that it was possible for developing countries to off er effi cient 

AIDS treatment. Moreover, Brazil has demonstrated that a strategy 

that combines prevention and treatment is far more eff ective than 

concentrating on prevention alone.

 Th e success of the anti-AIDS programme can be seen from the 

fact that (i) the occurrence of opportunistic infections in Brazil fell 

by 80 per cent since triple therapies began to be administrated in 

1996. As a result, around 358,000 AIDS-related hospitalizations were 

avoided in the country, saving the Ministry of Health over US$ 2.1 

billion between 1996 and 2002, and (ii) anti-AIDS cocktails have 

prolonged and sensibly improved the life-quality of those infected 

with AIDS in Brazil. A study conducted throughout the country 

found a twelvefold increase in mean survival time of AIDS patients 

from the 1980s to the 2000s—a result similar to that observed in 

2012-08-054_000000000000166
 best practices 113

high-income countries. Th e study also showed that anti-retroviral 

therapies have allowed these patients to continue to work and interact with their families and friends.

 Although in 1992 the World Bank projected that by the year 2000 

Brazil would have 1.2 million HIV-positive people, it has in fact had 

only half as many, that is, about 600,000. From 1994 to 2000, it is 

estimated that Brazil’s treatment policy has avoided a large number 

of AIDS cases. Anti-retroviral treatment has thereby also signifi cantly 

reduced the economic costs generated by the loss of productivity of 

individuals deceased or handicapped by AIDS.

 AIDS treatment in Brazil has relied heavily on the local production of generic anti-retrovirals as a strategy to contain treatment costs. 

Th is strategy has not only reduced imports of unpatented anti-AIDS 

drugs but also forced brand-name pharmaceutical companies to 

concede large discounts in their prices of patented drugs in order to 

avoid having their patents’ monopoly rights overrun by compulsory 

licensing. Crucially, since the Ministry of Health began substituting 

expensive imports with local generic equivalents in 1996, the prices 

of unpatented anti-retroviral drugs fell by an average of 80.9 per cent 

in Brazil until 2001. By 2011, 11 of the 19 anti-AIDS drugs off ered 

in Brazil were locally supplied.

Regulatory Framework

During the global fi nancial crisis, the Brazilian banking system proved 

to be substantially resilient. Th is ensured that the crisis had a minimal 

eff ect on the Brazilian economy and there was a quick recovery. Four 

important aspects stand out and need highlighting as best practices: 

(i) supervision: Brazil adopted a consolidated approach, requiring that 

2012-08-054_000000000000167
114 the brics report

even non-fi nancial subsidiaries in a banking group undergo supervision and be subject to controls; (ii) regulatory capital: an 11 per 

cent capital requirement is demanded, compared to the 8 per cent 

recommended by the Basel Committee on Banking Supervision standards; (iii) stability: fi nancial innovations are permitted only after an 

analysis of their impact on fi nancial stability; and (iv) transparency: all 

operations must be kept on balance, with respective risk requirements 

and provisions. Operations concerning over-the-counter derivatives 

must be registered at a clearing house. Regulators have full access 

to information on all such operations. Accounting Reports show 

that Brazil’s credit provisioning criteria were eff ective during the last 

international fi nancial crisis. Since 1999, regulation requires risk 

classifi cation on all credit operations, considering not only the eff ective but also the expected loss. Moreover, regulation requires provisioning at the time the operation takes place, based on borrower and 

operation risks. Additionally, there is progressive minimum provisioning after 15 days of delinquency. Further enhancements, such as 

the write-off of disposed portfolios, are under consideration.

Public Debt Management

Brazil has frequently been mentioned by emerging markets as a reference in terms of public debt management due to its successful recent 

experiences. It has managed to considerably minimize its fi nancing 

costs and risks, when, for example, it moved from a participation of 

more than 70 per cent of its debt linked to the exchange rate in 1994 

to a modest share of 5.1 per cent in December 2010. Th e favourable 

macroeconomic environment over the past 10 years, a consequence 

of sound monetary and fi scal policies combined with the reduction 

2012-08-054_000000000000168
 best practices 115

of external vulnerability, mainly by accumulation of international 

reserves, allowed the government to adopt good debt management 

practices, culminating in its assignment as an investment-grade 

economy in 2008.

 One of the main strategies responsible for such a change was the 

consistent replacement of exchange rate instruments by fi xed-rate 

and infl ation-linked debt since 2003. Th e pace of the substitution 

was intensifi ed after the adoption of capital gains tax exemption for 

public debt bonds held by foreign investors in 2006. As these investors are less risk-averse and are used to investing in instruments with 

long-term maturities, their increasing presence in the domestic market helped to lengthen the maturity profi le of debt. Another sound 

practice adopted by Brazil is long-term debt planning through the 

defi nition of an optimal debt structure, a medium-term debt strategy 

and an annual borrowing plan (which has been released regularly 

since 2001). Finally, the eff orts of the Debt Management Offi ce to 

increase its transparency levels should be mentioned, making Brazil 

the fi rst country to achieve maximum score in Investor Relations 

and Data Transparency Practices at the Institute of International 

Finance (IIF).

 Regarding external debt, since 2006 the country no longer depends 

on external issuances as a source of funds, due to the considerably 

decreased need for external borrowing and the strong infl ow of 

dollars. Th is allowed the government to adopt several measures to 

improve the profi le of external debt and reduce its size, through 

measures that include prepayment of the IMF (2005) and the Paris 

Club (2006) debt, the recall of the Brady bonds and the introduction, 

in 2006, of a permanent programme to repurchase external debt 

bonds along the entire maturity curve. Nevertheless, the issuances 

in the external market continue, mainly in dollar and in Real, the 

2012-08-054_000000000000169
116 the brics report

Brazilian currency, whose yield curves are very useful as benchmarks 

to national companies’ issuances off shore. Th e external issuances 

in local currency are especially important since the currency risk is 

transferred to investors and helps to set a reference in the external 

market for a yield curve in domestic currency. In October 2010, 

Brazil issued US$ 650 million in local currency (R$ 1.1 billion), 

paying a yield of just 8.85 per cent and maturing in 2028.

Embraer

Embraer is currently the third-largest producer of civil aircraft in the 

world, only surpassed by Boeing and Airbus. Embraer was founded 

in 1969 by the Brazilian government as a mixed capital company, 

being ‘... the realisation of an old project of some Air Force military 

offi cers to constitute an aeronautical industry in the country’. Th e 

Aerospace Technical Center (CTA) of the Brazilian Air Force (FAB) 

had developed the Bandeirante aircraft, intended for civil and military use, and the company was initially created to produce it in series. 

With the creation of the company, its engineers, mostly from the 

Institute of Aeronautical Technology (ITA), but also from FAB and 

the CTA, began to develop other models of aircraft. Th e company 

was privatized and re-structured in 1994 with a focus on regional 

commercial jet planes (up to 120 passengers). Embraer, therefore, 

operates in a market space less occupied by the two giants of the 

aerospace sector, Boeing and Airbus, which are engaged mainly in 

the development and production of aircraft with capacity of over 

120 passengers.

 During its 40 years of existence, the company has already manufactured over 5,000 airplanes. Th e ERJ family models have been sold 

2012-08-054_000000000000170
 best practices 117

to over 37 companies in 24 diff erent countries. Its current structure 

employs more than 24,000 people worldwide. In the period 2000–9, 

its net earnings were, on average, US$ 8.6 billion annually. Th e company’s shares are traded as blue chips in Bovespa and are rated as 

investment-grade by both Moody’s and S&P.

Russia

Russia has undertaken major reforms in several sectors of the economy in the post-Soviet era. Th e Russian economy as a result grew by 

5.3 per cent per annum during 1999–2009, following a period of 

stagnation in the 1990s. Th e rate of infl ation decreased from 84.4 

per cent in 1998 to 8.8 per cent in 2009 and real average monthly 

wages increased by 7.4 per cent during the period 1999 to 2009. Th e 

growth has been accompanied by a rise in real incomes and a halving 

of the population living below the poverty line.

Stabilization Fund of the Russian Federation

Th e setting up of the Stabilization Fund of the Russian Federation 

in 2004 has helped Russia in several ways, including building up of 

international reserves, maintaining low public debt levels, and allowing fi scal space for expansionary policies during the fi nancial crisis. 

Th e Stabilization Fund of the Russian Federation could be drawn 

down during the crisis without signifi cant risk to the economy. As 

a result, the budget could swing from a surplus of 0.25 per cent of 

GDP in 2008 to a defi cit of 0.25 per cent of GDP in 2009 without 

major risk to external stability. Russia, as a result, emerged from 

2012-08-054_000000000000171
118 the brics report

the crisis with a low public debt ratio (around 7 per cent of GDP), 

unlike the situation in advanced economies. Th e Stabilization Fund 

of the Russian Federation was bifurcated in January 2008 to form 

the Reserve Fund (designed to weather and counter the eff ects 

of the fi nancial crisis) and the National Welfare Fund (that aided 

pension reform).

Labour Market

Supported by continued output growth, labour market conditions 

improved noticeably in 2010. Th e eff ect of seasonal unemployment 

appears to have been limited in 2010, suggesting robustness in the 

underlying recovery of the labour market. Unemployment fell from 

9.2 per cent in January 2010 to 7.2 per cent in December 2010 

(International Labor Organization defi nition), with the lowest level 

of unemployment registered in September and November 2010 at 6.6 

per cent. With the decline in seasonal employment at the onset of the 

Russian winter, however, unemployment started to pick up, reaching 

7.6 per cent in January 2011. But this fi gure is still signifi cantly lower 

than the 9.1 per cent rate registered in January 2010. Th is situation is 

refl ected in the relatively stable number of vacancies.

 Russia’s national poverty rate was broadly fl at in 2009 and continued to fall in 2010, essentially because of a massive counter-cyclical 

stimulus, increases in pensions and wages, and unemployment that 

was much lower than expected. Both the unemployment and poverty 

rates increased sharply in early 2009; however, as the large increases 

in public sector wages and pensions and unemployment benefi ts 

kicked in, and as unemployment began to fall as fi rms shifted to 

labour hoarding, the national poverty rate fell from 13.4 per cent in 

2012-08-054_000000000000172
 best practices 119

2008 to 13.2 per cent by the end of 2009. In 2010, the poverty rate 

was at 12.7 per cent, approximately 0.5 percentage point lower than 

in 2009 with about 0.7 million people moving out of poverty. Th e 

poverty rate is expected to decline in 2012 (10.0 per cent).

Tax Reforms

Tax reforms have boosted revenue collections of the Russian government. Most important has been the 13 per cent fl at tax on personal 

incomes. As a result, personal income tax collections registered a rise 

of 36.1 per cent between 2006 and 2007 due to better compliance. 

Th e lower and fl at tax slab off ers a useful lesson for other countries 

from the point of view of widening the tax base and increasing 

compliance.

Budgetary Reforms

Russia has undertaken budget reforms in stages over the period 

2001–10. Th ese reforms signify a move towards a more transparent budgetary framework. Th e emphasis has been on administrative 

decentralization via earmarking expenditure and revenue responsibilities to lower tiers of the government. Th e underlying non-oil 

defi cit of the federal government was projected to remain at around 

9 per cent of GDP in 2010, above its pre-crisis level. Withdrawal 

of the fi scal stimulus and fi scal consolidation, therefore, remain an 

important priority. Th e government has also set explicit targets for 

lowering the budget defi cit to zero by 2015. Th e annual goals, based 

on a projected oil price of US$ 70 per barrel, have been a budget 

2012-08-054_000000000000173
120 the brics report

defi cit of 4 per cent of GDP in 2011, 3 per cent in 2012, 2 per cent 

in 2013, 1 per cent in 2014, and 0 per cent of GDP in 2015.

Pension Reforms

A major achievement of the Russian government has been pension 

reforms. Pensions were raised in 2009–10 through comprehensive 

pension reforms, which were part of the stimulus package. Th e move 

was especially relevant because the share of the aged in the total 

population has been signifi cant. Increasing pensioners’ income was 

one of the major elements of the anti-crisis policy in 2009. During 

the course of the year, pensions were increased four times; as a result, 

an increase by 25 per cent in real terms was achieved in 2009. Th is 

policy helped prevent deterioration of the pensioners’ standard of 

living, mitigated the social consequences of the acute phase of the 

crisis, and resulted in an increase in demand for goods and services, 

which supported the Russian economy. Starting from 1 January 

2010, the so-called valourization of pensions, implying revision of 

the monetary value of pension rights acquired before 1 January 2002, 

has taken place. As a result, the value of the pensions for the corresponding group of retirees was substantially increased. Moreover, 

in 2010, the new concept of ‘minimal level of citizens’ pension provision’ was introduced, whereby starting from 1 January 2010, the sum 

of the pension and other social support measures for retirees would 

not be lower than the subsistence level for retirees. According to 

government estimates, the average level of old-age pensions in 2010 

grew by 36 per cent, while their ratio to the average salary reached 

40 per cent.

2012-08-054_000000000000174
 best practices 121

Monetary Policy Conditions

Over the period of reform, Russia has undergone a number of drastic 

changes related to the development of market mechanism in the 

economy and the fi nancial system. Th ese changes have increased the 

share of private sector in the economy, developed the banking system, 

created foreign exchange and securities markets, and considerably 

increased the role of monetary policy in the process of macroeconomic stabilization.

 From mid-2006, Russia terminated the provisions of the legislation ‘On Foreign Exchange Regulation and Foreign Exchange 

Control’, which had given the Russian government and the Bank 

of Russia the powers to set limits on foreign exchange operations by 

residents and non-residents related to capital fl ows. Th erefore, Russia 

completed the fi nal stage of liberalizing foreign currency legislation. 

With its current managed fl oating exchange rate regime, Russia is 

striving to make the mechanism of setting the exchange rate more 

fl exible. Russia has been able to overcome dollarization/foreign currency dominance in the economy and make the national currency—

the rouble—a reliable payment and settlement instrument to be used 

in international transactions.

 Strengthening of integration processes in CIS is a key factor in 

enhancing the role of corresponding countries, including Russia, in 

the global economy. In the EurAsEC framework, the treaty concerning the encouragement and protection of mutual investments has 

been concluded. It is expected to accelerate modernization of the 

member states’ economies and enhance the effi ciency of utilizing their 

productive potential. In the context of cooperation between Russia, 

Belarus, and Kazakhstan, the Common Economic Space is currently 

2012-08-054_000000000000175
122 the brics report

being formed. Its fi rst stage, that is, the Customs Union, is largely 

completed, with positive consequences including widening of markets, strengthening old production links, and forming new ones.

India

Private Entrepreneurship

A major attribute of India’s business environment is the presence of 

home-grown private entrepreneurship, which has been playing a key 

role in taking the country forward on a higher growth trajectory. It 

is sometimes said that India is being driven by 45 million entrepreneurs. Th ere are also a large number of private business conglomerates 

with diversifi ed business interests and international footprints. Th e 

acquisition of companies abroad in order to diversify into foreign 

markets has been one of the attributes of Indian business groups. 

Such outward foreign direct investment was of the order of US$ 18.8 

billion in 2007–8, US $ 17.5 billion in 2008–9, and US$ 12 billion 

in 2009–10. Th is excludes the money raised abroad for acquisitions.

 Th e information technology (IT) sector that accounted for net 

receipts of US$ 48.2 billion in 2009–10 is almost entirely dominated 

by the private sector. Some of the names with a large global presence 

in this sector are Tata Consultancy Services, Wipro Technologies, 

Infosys, and HCL. Th e role of the private sector is set to increase 

with further liberalization of the Indian economy.

Innovations

Grassroots innovation and improvization have been other hallmarks 

of Indian entrepreneurship. Th e main attribute has been lowering 

2012-08-054_000000000000176
 best practices 123

of costs to take advantage of economies of scale in a large domestic 

market. Such innovations are often an integral part of a supply chain, 

providing low-cost components to a larger production unit. 

 Realizing the market potential, many Indian fi rms have joined the 

race for low-cost innovations. Tata Chemicals, for example, makes a 

water fi lter that requires no power and can give safe drinking water 

to a family of fi ve for a month for Rs 30 ($0.65). Researchers at the 

Indian Institute of Technology and the Indian Institute of Science 

produced a prototype for a $35 laptop in July 2010. A fi rm called 

Ayas Shilpa makes suspension bridges for a tenth of the price of conventional ones; in a country where countless villages are connected 

to the outside world only by perilous rope bridges, this is a major 

way forward. Indian fi rms are also devising new business models. 

HCL Technologies, for example, helps clients to improve their IT 

systems on the understanding that if they reap no benefi ts, they 

pay nothing.

Telecommunications

India’s telecom sector has been one of the success stories of the 

market-oriented reforms. Deregulation and liberalization of telecommunication laws and policies have prompted rapid growth of 

the sector. Th e total number of telephones increased from 494.07 

million in August 2009 to 706.39 million in August 2010, showing 

an increase of 13.7 per cent and making India’s telecommunications 

network the second largest in the world. A characteristic feature has 

been the extremely rapid growth of cellular services combined with 

modest declines in fi xed lines. Wireless connections increased during 

the period from 456.74 million to 670.62 (14.8 per cent increase), 

2012-08-054_000000000000177
124 the brics report

while wire lines declined marginally from 37.3 million to 35.8 

million (3.2 per cent decline). Th e rise in rural connectivity has been 

more impressive, with an increase from 150.83 million in August 

2009 to 230.24 million in August 2010 (an increase of 14.7 per 

cent), with many attendant benefi ts for the farming community. As a 

result of the sharp rise in the number of connections, wireless density 

increased from 42.3 per cent in August 2009 (98.7 per cent urban 

and 18.4 per cent rural) to 59.6 per cent (134.1 per cent urban and 

27.8 per cent rural) in August 2010.

Inclusive Growth: MGNREGA

A large-scale employment guarantee scheme under the Mahatma 

Gandhi National Rural Employment Guarantee Act (MGNREGA) 

was introduced in India in a phased manner from February 2006. 

Th e Scheme covers all the districts in the country and provides the 

option of guaranteed 100 days paid employment in a fi nancial year at 

the minimum prescribed wage to all adult members of a rural household. MGNREGA has focussed on creating tangible assets, which 

include water conservation and water harvesting, drought proofi ng, 

micro and minor irrigation projects, fl ood control, and rural road 

connectivity. Assured employment and enhanced wage earning have 

led to improved living standards in rural areas. As a result of the 

Scheme, a number of states have reported a rise in minimum wages. 

Th ere has also been a fall in labour migration during lean periods. A 

total of 42.7 million household were provided employment during 

March 2009 and December 2009, and 2,007 million person days of 

employment was generated.

2012-08-054_000000000000178
 best practices 125

Right to Information

In order to promote transparency and accountability in administration, the Right to Information Act was enacted in October 2005. 

Th e law empowers Indian citizens to seek information from a public 

authority, thus making the government and its functionaries more 

accountable and responsible through mandating a timely response to 

citizen’s requests for government information. Th e Act has now been 

in operation for over four years and has led to the empowerment of 

the common man including the poor and the underprivileged.

 In the political sphere, the law contributes to the ability of citizens to become aware of the activities of the government. It raises 

the level of political debate and leads to a more productive process 

of policy-making. In the economic sphere, transparency increases 

effi ciency by making the investment climate more conducive. In 

public administration, transparency improves the decision-making 

of public servants by making them more responsive and accountable 

to the public and reduces corruption by making it more diffi cult to 

hide illegal agreements and actions. It also improves legitimacy and 

trust in the government, allowing for more eff ective implementation 

of public policies.

Capital Account Liberalization

India has followed a calibrated approach to capital account liberalization. While there is full convertibility on the current account, the 

capital account is being opened in phases, in line with development 

requirements and fi nancial sector developments. An important 

2012-08-054_000000000000179
126 the brics report

achievement of the calibrated approach was that India could largely 

avoid the fallout of the Asian crisis of the late 1990s. Similarly, the 

country was less aff ected by the global crisis of 2008–9, with the 

growth rate moderating to 6.7 per cent. A major advantage of 

the approach is that the fl ow of ‘hot money’ opportunely seeking 

interest arbitrage has been limited as foreign fi nancial institutions are not allowed unrestricted access to fi xed interest rupee 

debt market.

External Debt Management

Successfully lowering the external debt burden has been an important 

achievement of the Indian government. Th e country faced a balance 

of payments crisis in 1991–2, when foreign exchange reserves fell to 

two weeks’ worth of imports, the debt–GDP ratio had risen to 39 per 

cent and the debt–service ratio had risen to 30 per cent.

 Concerted eff orts were then made to lower the external debt 

burden of the economy. First, liberalization of the economy was 

introduced in stages, which helped build the growth momentum; 

this, in turn, helped lower the debt–GDP ratio with a higher GDP 

denominator. Second, an External Debt Monitoring Unit was set 

up in the Ministry of Finance to monitor long- and short-term debt 

and bring out an annual status report on external debt to increase 

transparency and provide Management Information Service (MIS) 

inputs for debt management decisions.

 Th e External Commercial Borrowing (ECB) Policy that places 

all-in-cost and end-use restrictions on commercial borrowings from 

abroad, plays a key role in external debt management. It has helped 

2012-08-054_000000000000180
 best practices 127

prevent the build-up of external debt to unsustainable levels and 

ensured that foreign debt fl ows were directed to priority sectors. 

Th e ECB Policy has also played an eff ective countercyclical role. 

Th is meant liberalization of the policy during downturns to attract 

higher capital fl ows and tightening during booms to discourage 

excessive fl ows. Th e Policy, therefore, has been an eff ective instrument for managing balance of payments in the changing global 

situation. Restrictions on ECB also minimized the risk of a balance 

sheet recession for Indian corporates during the recent global crisis, 

which could have arisen due to excessive borrowing in the precrisis period together with currency risks due to a fall in the value of 

the rupee. 

Accounting and Audit Standards

Th e Indian fi nancial system has been evolving and has withstood 

testing times during the recent global fi nancial crisis. Indian accounting standards are stringent. In some aspects, India has gone ahead 

of other countries in implementing additional regulatory safeguards 

with respect to, inter alia, countercyclical provisions and risk weights 

and safeguards for securitization. While depreciations in assets 

are taken into account, appreciations in such assets are ignored in 

accounting practices. Similarly, under securitization, the profi ts are 

not front-loaded, but distributed over the entire life of the asset. Th e 

inherent strengths that existed even prior to the crisis, as well as the 

reforms now being contemplated based on the recommendations 

of international standards-setting bodies, lend it resilience and have 

ensured that its stability has not been threatened. 

2012-08-054_000000000000181
128 the brics report

China

Attracting FDI

Several factors contribute to the successful and rapid development 

of a country, of which attracting and utilising FDI is one. Attracting 

foreign investment is an important part of China’s national policy 

of opening up and remarkable achievements have been made in 

this fi eld. By October 2010, a total of 704,000 foreign invested 

enterprises have been set up in China; a total of US$ 1.03 trillion of 

foreign investment has actually been used; 190 countries or regions 

have made investments in China; and 480 of the world’s top 500 

enterprises have invested or done business in China. According to 

the 2010 World Investment Report by UNCTAD, China ranked second in the world in attracting FDI and it has ranked fi rst among 

developing countries for 18 years at a stretch. Foreign invested 

enterprises have been an important component of China’s national 

economy, evidenced by the fact that 21 per cent of tax revenue, 

27 per cent of industrial output, 54 per cent of import and export, 

and about 45 million of employment are from such enterprises 

in 2010.

 Foreign investment has not only brought to resources to China 

but also advanced concepts and technological and managerial experience as well as international professionals, all of which have had a 

profound impact on diff erent aspects of the Chinese economy and 

its society. Foreign investment has greatly boosted China’s economic 

reforms and speeded up China’s participation in economic globalization. Foreign investors have earned substantial returns from investment in China and many foreign subsidiaries have become growth 

and profi t centres for their parent companies.

2012-08-054_000000000000182
 best practices 129

 Th e objective of the Chinese government, while furthering opening up, is to continue to attract foreign investment in an active and 

eff ective manner. China intends to step up eff orts at reform and 

innovation, by expanding the horizons of investment, improving 

investment facilitation, as well as enhancing and improving the services provided to foreign investors in order to create a more open and 

optimal investment environment and improve the quality and level 

of foreign investment utilization on a continuous basis.

 After opening up the economy in 1978, China received substantial labour-intensive FDI. In the 1990s, through further opening up, 

China took eff ective measures to push its integration with neighbouring economies. Th is was long before worldwide trade and investment 

liberalization set in following the Uruguay Round of negotiations 

and helped the country to successfully avoid the Asian fi nancial 

crisis. China’s economic performance has been outstanding in the 

early 21st century with the country turning out to be the ‘hot spot’ of 

global FDI. With its huge foreign exchange reserves, robust fi nancial 

system and strong fi scal position, China also remained in a relatively 

stronger position vis-à-vis other countries on the face of the global 

fi nancial crisis.

 In attracting foreign investment, China pursues a self-dependent 

industrial and economic development model instead of relying 

entirely on multinationals. Foreign investors play an important role 

in China’s economy by boosting its economic growth.

 China has been adjusting the FDI policy framework in line with 

its level of economic development to give full play to the positive 

role of FDI. By tapping China’s comparative advantage in manufacturing, the labour-intensive and export-oriented nature of FDI has 

also been successful in promoting China’s integration into the global 

economy. More importantly, FDI has brought market economy 

2012-08-054_000000000000183
130 the brics report

concepts and rules, the business philosophy of foreign enterprises, 

and managerial skills into the country. Such spill-over eff ects have 

led to market reforms and economic transformation in China, and 

enabled the local enterprises and industries to achieve a relatively 

advanced level of effi ciency within a short period.

Infrastructure Financing

Th e Chinese government has taken a number of steps to promote 

infrastructure development. Th e government’s role in infrastructure 

development has been defi ned and is confi ned to areas where the 

market cannot play a role. China, therefore, has been adjusting its 

investment structure by reducing investment in competitive sectors 

and increasing inputs into other sectors. Priority has been given to 

important sectors such as agriculture, forestry and water conservation, projects relating to public well-being including aff ordable housing for low-income groups, and areas of environmental protection 

like wastewater treatment.

 Th e roles and responsibilities of the central and local governments 

have been clearly defi ned. Th e central government, in addition to 

projects at the central level, is responsible for cross-regional and 

cross-river valley projects, as well as those having a greater impact on 

overall economic and social development. Other projects fall within 

the responsibility of local governments, with support from the central 

government, in terms of planning, guidance, and subsidy.

 Th e fi nancing mechanism for public infrastructure has been diversifi ed and improved over time. Direct investment by the government 

is in projects involving pure public goods, such as the treatment of 

major rivers. Subsidies or ‘substituting awards for subsidy’ are used 

2012-08-054_000000000000184
 best practices 131

to encourage social funding of profi t-oriented projects such as wastewater treatment in urban areas. Th e Build-Operate-Transfer (BOT) 

mode is used for projects with yields potential such as expressways 

that can be built and operated by social funds. New infrastructure 

fi nancing methods that include interest subsidy are emerging. Such 

new sources of fi nancing include local bank loans from policy banks 

and/or commercial banks; investment by public, quasi-public, or 

local private enterprises; foreign direct investments and loans; grants 

or concessional loans from multilateral and bilateral agencies; holding funds in trust; and bonds issued by the central government.

 Th e funds for infrastructure development have been well managed. First, performance budget management is implemented to 

urge the departments in charge of the projects to improve budget 

expenditure. Second, the treasury management system has been 

reformed to ensure that funds are used in a safe, timely, and eff ective 

manner. Th ird, supervision and regulation have been enhanced and 

mechanisms for budget compilation, implementation, and supervision have been put in place.

 Investment and fi nancing reforms are promoted through system 

innovation. Th e investments in infrastructure, which used to be 

governmental activities, are now open to market participants; 

public–private partnerships (PPP) are promoted to encourage social 

capital into infrastructure investment and to open up incremental 

asset markets. Th e attractiveness of infrastructure investment has 

been enhanced by creating market-oriented projects.

Macro-management of the Financial Sector

Since the reforms and opening up in 1978 and against the backdrop 

of the gradual introduction of a socialist market economy, China’s 

2012-08-054_000000000000185
132 the brics report

fi nancial macro-management has facilitated stable and healthy development of the national economy. Th e major approaches and experiences in this regard are elaborated in the following paragraphs.

 In China’s perception, fi nancial macro-management should 

gradually give way to indirect management. Macro-management 

should follow the principles of the socialist market economy and 

take initiatives to adapt to its requirements and should mainly rely 

on economic means, with legal and administrative instruments as 

supplementary tools. Th e market formation mechanism should be 

continuously optimized to gradually make use of price-based levers, 

like the interest rate, to guide the behaviour of the private sector. It 

is important to develop and optimize the fi nancial market and let it 

exercise various functions including that of price discovery, resource 

allocation, and risk evaluation.

 Financial macro-management must be in accordance with domestic conditions. When the per capita national income is relatively low 

and the economy is yet to catch up, it is important to concentrate 

on development, reform, and employment, with monetary policy 

supporting these objectives. At the same time, when economic development and employment growth are taking place, maintaining economic stability becomes an indispensable target. Macro-management 

should, therefore, underscore its price stabilizing function through 

gradual optimization of monetary policy targets and by attaching 

increased importance to the application of price-based tools so as 

to adapt to the requirements of the development of the socialist 

market economy.

 Financial macro-management should be self-initiated, proactive 

and eff ective. With a gradual increase in economic aggregates and 

further advancement in the level of opening up, a lack of fl exibility 

in the exchange rate mechanism could, to some extent, limit the 

2012-08-054_000000000000186
 best practices 133

manoeuvrability of domestic interest rates and increase the diffi culties 

in money and credit management; it is also disadvantageous to maintain a self-initiated and eff ective quantity management. Th erefore, it 

is necessary to increase the fl exibility of the exchange rate; promote 

exchange rate reform in a self-initiated, controllable, and gradual 

way; and strengthen the ability to manage the economy by means 

of money, credit, and interest rate management. Further, since there 

is always a time lag involved in monetary policy to have its desired 

eff ects, the monetary authority should be far-sighted, scientifi c, and 

dynamic in formulating and implementing policies.

 Th e coordination between monetary policy and other macropolicies such as fi scal and industrial policy should be strengthened. 

Th e complexity of macroeconomic operation determines that it is 

unrealistic to rely exclusively on monetary policy to solve all problems. 

Th e smooth implementation of monetary policy goes hand-inhand with the coordination of other macro-policies including fi scal 

policy. Monetary policy concentrates more on short-term quantity 

management, while fi scal policy is more concerned with middle-tolong-term structural adjustment. Consequently, macro-management 

must make use of both monetary and fi scal policies in their own 

ways according to the conditions of the economy, and implement 

appropriate and well-targeted policy portfolios in order to obtain the 

best of results.

 Managing the relationship between fi nancial stability and monetary policy should be emphasized. A stable system provides an environment in which fi nancial macro-management plays its part. Along 

with continuous deepening and refi ning of the fi nancial market, the 

process of market integration and the development of industry and 

institution-wide fi nancial products require measures to avoid systemic risk. Th e central bank must play a greater role in maintaining 

2012-08-054_000000000000187
134 the brics report

the overall fi nancial system stability instead of concentrating only 

on the risks of individual fi nancial institutions or individual industries. Th is requires the central bank to address fi nancial risks from 

a systemic perspective, build a macro-prudential policy framework, 

curb pro-cyclical fl uctuations in the fi nancial system, and promote 

policies that ensure sustainable support of the fi nancial system to 

the development of the economy. Th e central bank should also 

fulfi ll its responsibility as ‘lender of last resort’ according to law, 

maintain market confi dence and a complete and eff ective payment 

system, while ensuring the stable operation of the fi nancial system 

so as to guarantee a smooth operational environment for monetary 

policy.

Reform and Development of the Banking Industry

Since the reform and opening up of the economy, China’s banking 

industry has undergone major changes. First, a modern banking 

system has been established in the country. A service system has 

been preliminarily founded where big commercial banks are the 

main participants; policy fi nancing and commercial fi nancing are 

appropriately separated; diff erent types of fi nancial institutions with 

complementary functions cooperate and develop in a harmonized 

way; and multiple ways of fi nancing co-exist. Various fi nancial 

institutions have grown steadily, with the market share of small and 

medium-sized banking institutions rising steadily from 19.6 per cent 

in 1993 to 49.1 per cent in 2009. Meanwhile, a modern corporate 

governance structure has been established in banking institutions, 

the capacity and level of services have improved, a variety of fi nancial 

products have been introduced, and fi nancial services have moved 

2012-08-054_000000000000188
 best practices 135

from deposits and loans at the beginning of reforms to diverse and 

tailored activities.

 Second, China continues to adhere to the policy of opening up 

the economy and learning from the experiences of foreign countries. 

China sticks to an opening strategy of self-orientation, opening up in 

a prudent and orderly manner without compromising independence, 

and learning from advanced foreign experiences so as to elevate the 

core competitiveness of the banking industry. Th e process of opening 

up extended from attracting funds and technology, in the beginning, 

to bringing in funds, intellectuals and systems, and achieving 

shareholding reform by introducing strategic investors at home and 

abroad to deepen the transformation of banking industry systems 

and mechanisms.

 Th ird, international infl uence and status of the Chinese banking 

industry has steadily grown. According to the July 2010 Bankers’ 

magazine, China has 84 banks among the top 1,000 banks in the 

world. At present, ICBC and CCB rank as the top two banks in the 

world in terms of market value with ICBC being the most profi table 

bank for two consecutive years.

 Fourth, China has spared no eff orts in introducing innovation 

in the banking industry. Ever since the reform and opening up 30 

years ago, the country has been building a favourable environment 

for innovation and promoting innovation practices in every fi eld of 

banking. Based on national conditions, the banking industry carried 

out innovations in institutions, products and systems, opened new 

types of fi nancial institutions such as rural banks, micro-credit companies, automobile fi nance companies, money brokering companies, 

and developed business varieties including asset securitization, as well 

as domestic and overseas wealth management to meet the growing 

demand for fi nancial services.

2012-08-054_000000000000189
136 the brics report

 China has reinforced and improved macro surveillance and micro 

supervision to promote steady development of the banking industry. China strengthened and improved macro regulation to create 

a sound macroeconomic environment for the banking industry; 

reinforced micro supervision to consolidate the ‘fi rewall’ between 

credit and capital markets; and intensifi ed stockholder supervision, 

control over related parties, and management for tackling confl icts 

of interest. Under the segregated operations and augmented supervision framework, China steadfastly promoted the pilot operation 

of comprehensive business, appropriately balancing regulation and 

fi nancial innovation and prudently promoting fi nancial innovation 

in the banking industry. Laws and regulations were established and 

perfected with fi nancial infrastructure constantly being improved. 

In this way, the framework of macro and micro prudential supervision in China’s fi nancial industry gradually evolved and consistently 

improved.

 In the process of reform and development, China’s banking 

industry has accumulated rich experiences in the following areas. 

First, China persisted with the socialist market economy model and 

improved the quality of reforms. Th e reforms have extended from 

simple capital injection from the central government to spin-off 

bad loans, combining capital injection with transformation of bank 

ownership structure, corporate governance, and risk management 

systems. Reforms aim at enabling commercial banks in China to 

work under the principles of effi ciency, safety and liquidity with full 

autonomy, making them responsible for their operations, risks, profits, and losses. As a result of the reforms, China’s banking industry 

has been successfully transformed from being specialized banks to 

modern public banks.

2012-08-054_000000000000190
 best practices 137

Financial Market Developments

Since the beginning of reform and opening up, China’s fi nancial 

market has been transformed from a small and regional market to a 

large national market. During this process, with the scale of the market expanding, institutions achieving optimality and intermediary 

institutions and investors becoming mature, China’s fi nancial market 

evolved into a market that is in accordance with general international 

principles in terms of the legal system, trading rules, and the regulatory system. Th e transformation has made signifi cant contributions 

to the process of economic reform as well as social and economic 

development.

 China’s experience of capital market development has diff ered 

from that in some advanced countries where markets evolved mostly 

on their own. China’s capital market has been promoted both by 

the government and the market—a route of market economy reform 

that combines the government’s supporting hand and the market’s 

self-evolution. In the beginning, due to the limits imposed by the 

environment and the design of market institutions, China’s capital 

market accumulated some deep-rooted structural problems. Th e 

approach has been to solve these problems and contradictions by 

deepening the reform process. In recent years, the securities regulatory authority has started a series of important reforms aimed at 

strengthening market infrastructure, improving market quality and 

structure, and enhancing market effi ciency, which include, inter alia, 

non-tradeable share reform, comprehensive improvement in the 

quality of listed companies, reform of security company governance, 

deepening the share issuance system, reforms to promote the marketbased fund industry and the development of institutional investors, 

2012-08-054_000000000000191
138 the brics report

and attempts to optimize the legal system in the capital market and 

quicken the pace of developing a multi-layered capital market. Th ese 

reforms have achieved positive results and China’s capital markets 

have undergone a complete transformation, with constant improvement in its socialist market economy structure, standardization, and 

internationalization.

 China’s capital market developments also exhibit some basic principles. First, it is necessary to treat development of the capital market 

as an essential national strategy, constantly deepening society’s understanding of the importance of sound capital markets, and striving for 

coordination and consensus on various policies. Second, the development of the capital market should serve the national economy. 

In this context, it is important to ensure coordinated development 

of the capital market with the national economy and society. Th ird, 

the development of a socialist market economy has to be the focus 

of reform, and eff orts have to be made to encourage participants to 

move towards this objective. Fourth, endeavour must be made to 

strengthen the legal system in order to strengthen the capital market 

and, fi fth, opening up and enhancing the international competitiveness of capital markets must be steadily promoted.

 China’s bond market, which started in the 1980s, focused on 

private investors and small-to-middle institutional investors and was 

based on strict regulation and government guidance. Th e market is 

geared to meet the fi nancing of the development needs of the real 

economy. It developed from OTC trading (1988–91), exchangetraded market(1992–2000) to inter-bank bond market (2001–until 

now). During that time, the lack of effi cient market disciplines 

caused relatively large risks in the market. In recent years, the process 

of reform and innovation in the Chinese bond market has quickened 

and the market has already become an important platform for invest2012-08-054_000000000000192
 best practices 139

ment, fi nancing and liquidity management for fi nancial institutions 

and fi rms. Th e main development experiences are the following: 

First, China has positioned institutional investors as the principal 

players in the inter-bank bond market and has gradually pushed for 

a multi-layered investor structure that takes market-makers as the 

core, the fi nancial institutions as the main part, and combines the 

participation of other investors as well. Second, China steadily promotes fi nancial product innovation. To provide tools for commercial 

banks to manage balance sheet and increase capital, products viz. 

commercial bank fi nancial bonds, junior bonds, and hybrid capital 

bonds have been successively launched; to broaden the enterprises’ 

fi nancing channel, the People’s Bank of China has introduced shortterm fi nancing bonds and medium-term notes, derivatives viz. 

loan-backed securities, bond forwards, bond borrowing and lending, 

forward rate agreements, and RMB interest rate swaps. Th ird, China 

continuously develops the bond market infrastructure and optimizes 

the institutions of market-makers, bond settlement agency, currency 

brokerage, information disclosure, credit rating, and so on. Fourth, 

it prudently promotes the opening up of the bond market. Fifth, 

it is in the process of developing the exchange security market and 

establishing the interconnection with the inter-bank bond market.

 China’s money market has become an important channel for 

monetary policy transmission and infl uences aspects such as capital adjustment and the market interest rate. Th e money market is 

composed mainly of sub-markets, such as the inter-bank borrowing 

market and repo market.

 Th e inter-bank borrowing market started in 1984. After undergoing development for 20 years, it has evolved into a unifi ed inter-bank 

market with a unifi ed inter-bank interest rate that is determined by 

market demand and supply. Its development experiences include the 

2012-08-054_000000000000193
140 the brics report

following: Th e fi rst has been the establishment of a nationally connected inter-bank borrowing network and the gradual formation of 

a national unifi ed inter-bank borrowing market. Th e second was to 

continuously enlarge the scope of market participants and increase 

trading at the national inter-bank borrowing market. Th e third was 

to gradually abolish limits on inter-bank interest rate and establish 

an interest rate formation mechanism that is determined by demand 

and supply in the market. Th e fourth was to standardize management of the inter-bank borrowing market and avoid market risks by 

means of mechanisms including inter-bank borrowing market access 

management, duration management, quota management, record 

management, and transparency management. It was important to 

simultaneously guide market participants about the risks inherent in 

commercialization and the credibility of counterparties. Th e fi fth was 

to continuously optimize the functions and services of the trading and 

information system.

 Th e repo market was started in 1991 and has been developed into 

a market the structure of which focuses on inter-bank bond market 

repurchase with the functions of fi nancing and price discovery gaining prominence. Th e repo market has off ered a satisfactory market 

environment for resource allocation and macro-management reform. 

Th e development experiences include the following: First, it has continuously optimized the legal system that combines regulation, selfdiscipline, and market supervision, which has eff ectively restrained 

the tendency of market participants to break rules and/or default. 

Th e second has been to raise the level of safety of clients’ assets, 

reducing institutional risks, and guaranteeing stable operation of the 

repo market under low trading cost and low risk conditions through 

the proper design of a trading mechanism. Th e third has been to 

ceaselessly promote product innovation, enrich product lines, enlarge 

2012-08-054_000000000000194
 best practices 141

the scope, and deepen the market, while raising market liquidity and 

operational effi ciency.

Development-oriented Poverty Reduction Programme

Th e Chinese government has always made poverty alleviation as an 

important goal and task of national development, and worked hard 

to enable everyone to enjoy the fruits of economic and social development. Since the mid-1980s, the Chinese government has organized a 

large-scale, well-planned rural development-oriented poverty reduction programme, which has been incorporated into the Overall Plan 

of National Economic and Social Development. Th e government 

has formulated and implemented the National Seven-year Poverty 

Reduction Programme (1994–2000) and the Outline for Poverty 

Reduction and Development in China’s Rural Areas (2001–10), 

and earmarked special fi scal poverty reduction fund for the poor 

population and poor areas. Th rough the execution of the key antipoverty measures such as ‘Village-based Poverty Reduction Project’, 

‘Agricultural Industrialization’, ‘Labour Transferring Training’, and 

‘Voluntary Resettlement’, China has achieved large-scale poverty 

reduction, with the population of the poor declining from 250 million 

in 1978 to 26.88 million in 2010 and poverty incidence going down 

from 30.7 per cent to 2.8 per cent during the same period. Massive 

poverty has been basically eliminated in rural areas and production 

and employment structures in poverty-striken areas have been optimized remarkably with signifi cant improvement in income, living 

standards, and development capacity of farmers. Th ese achievements 

have contributed enormously not only to the economic development 

of the nation as a whole, political stability, and social harmony but 

also to the undertaking of global poverty reduction.

2012-08-054_000000000000195
142 the brics report

 Signifi cant achievements of China in poverty reduction are the 

result of the comprehensive strategic framework. Apart from special poverty interventions, other supplementary policies include 

institutional reforms, economic growth, industrial restructuring, 

public service delivery, and social security. Th erefore, rural poverty 

reduction has been achieved by optimizing asset distribution, market 

improvement, increasing productivity, adjusting the economic structure, promoting coordinated development among diff erent regions, 

between rural and urban areas and among industrial sectors, and 

advancing balanced economic and social progress, all of which have 

fundamentally altered the rural landscape.

 In 2011, given the new challenge to rural poverty reduction, the 

Chinese government has unveiled the Outline for Poverty Reduction 

and Development in China’s Rural Areas (2011–20). Th e Outline 

has set new goals for consolidating achievements already made, in 

solving the problems of food and clothing, accelerating the progress 

of poverty reduction, ameliorating the eco-system, enhancing development capacity, and narrowing development disparities. It aims to 

promote poverty reduction centreing on 14 extremely poor areas 

and consequently lays a solid foundation for the achievement of the 

national goal of building an all-around better-off society by 2020.

South Africa

Sound Macroeconomic Management

Successful fi scal adjustment was one of the major achievements of 

the post-Apartheid government. In the mid-1990s, a debt crisis was 

averted when the government took steps to reduce dissaving and 

2012-08-054_000000000000196
 best practices 143

broaden the tax base through more effi cient tax collection. Strong 

revenue growth through this period allowed the government to consolidate debt and tax relief for households and companies. Th e fi scal 

defi cit declined from almost 8 per cent of GDP in the early 1990s to a 

small budget surplus before the onset of the global crisis. Th e ratio of 

government debt to GDP declined sharply to a low of 27.1 per cent 

in 2008–9, from 49.5 per cent in 1995–6. Lower debt service costs 

created space for strong real growth in non-interest expenditure in 

the 2000s, which allowed the government to expand access to social 

services and step up infrastructure investment.

 Th e countercyclical fi scal stance adopted during the economic 

boom in 2006 created space for the government to sustain spending 

during the recession by increasing borrowing. South Africa‘s strong 

fi scal position meant the country could fi nance the R60 billion 

shortfall in tax revenue through additional borrowing in order to 

sustain existent spending on social grants, infrastructure investment, 

education, and health. In addition, the government extended the child 

support grant up to a child’s 18th birthday (previously only accessible 

until the age of 15). Th e government extended the expanded public 

works programme to support employment and increased the benefi t 

period for unemployment insurance from 6 to 9 months.

 South Africa will continue to manage public fi nances in a countercyclical manner to support long-run fi scal sustainability. Th e narrowing of the consolidated government balance will continue over 

the medium-term expenditure framework. Th is will be done through 

a moderation in the growth of expenditure and a recovery in revenue 

in line with the economic cycle. Th e public sector will continue to 

support large-scale infrastructure projects to address transportation, 

water, and energy sector bottlenecks. Social income grants provide a 

safety net for the poor, while initiatives to support job creation will 

2012-08-054_000000000000197
144 the brics report

be intensifi ed. Th e ratio of debt to GDP is expected to stabilize in 

2015–16 before declining.

 Th e 2011 Budget Review outlined a proposal for the adoption 

of fi scal guidelines to underpin the fi scal stance. Th ese would be 

based on three principles: (i) countercyclicality, (ii) long-term debt 

sustainability, and (iii) intergenerational equity.

 Monetary policy has operated under an infl ation-targeting regime 

since 2000. During this period, average headline infl ation has fallen 

from 9.9 per cent in the 1990s to 6.3 per cent in the period from 

2005–10. Th e average level of headline CPI infl ation declined to 3.5 

per cent in the second half of 2010, from 5.1 per cent in the fi rst 

half of 2010, notwithstanding substantial upward shocks to oil and 

commodity prices in 2007–8.

 Since the adoption of the infl ation-targeting framework, the average level of infl ation and real interest rates has declined, growth in 

real GDP and fi xed investment has been higher and less volatile, while 

monetary policy has generally been countercyclical. Communication 

between SARB and the public has become more transparent, and the 

SARB has an active engagement with key sectors of society, including business and unions which has encouraged greater policy debate. 

Th e independence of SARB and its focus on the infl ation target has 

improved policy credibility and helped to reduce the infl ation risk 

premium in South Africa and appears to have helped contain infl ation expectations.

Public Debt Management and the Development of the 

Local Bond Market

Th e management of South Africa’s government debt has evolved 

over almost two decades, with a notable and continuous improve2012-08-054_000000000000198
 best practices 145

ment of the government debt management framework since 1994. 

South Africa has one of the most liquid local currency bond markets 

in the world with about 90 per cent of government debt denominated in rand. As a risk benchmark, foreign currency denominated 

debt is limited to a maximum of 20 per cent of total debt. Th is has 

helped reduce the vulnerability of fi scal policy to fl uctuations in the 

exchange rate. External bond issuance by government has been primarily aimed at setting benchmarks for state-owned enterprises and 

private corporates, and at maintaining a presence in the key currency 

markets to diversify the country’s investor base.

 Prudent fi scal policy and active debt management helped to reduce 

debt service costs from a high of 5.7 per cent of GDP in 1998–9 to 

a low of 2.3 per cent in 2009–10. Active debt management entailed 

the consolidation of debt that was very costly for the government, 

limited issuance in off shore markets, and the introduction of more 

diverse local currency funding instruments—such as infl ation-linked 

bonds, fl oating rate notes, strips, and retail savings bonds—in order 

to deepen the investor base and enable the government to fund in all 

market conditions.

 Initiatives to consolidate debt have included switches and buybacks in the domestic market where high coupon, illiquid bonds with 

smaller outstanding amounts were either bought back or switched 

into large, liquid benchmarks bonds with low coupons. Th is has 

helped to consolidate and smooth the bond portfolio to ensure that 

instruments are effi ciently priced, thus reducing funding costs for the 

government over a sustained period. Th e tradability of bonds in the 

secondary market has increased considerably, with annual turnover 

reaching a high of R28 trillion in 2008.

 Sound macroeconomic policies have contributed to the deepening of South Africa’s capital markets. Th e responsibility for debt 

2012-08-054_000000000000199
146 the brics report

management was shifted from the South African Reserve Bank to the 

National Treasury early on to remove the inherent confl ict between 

monetary policy and debt management. Other initiatives that have 

contributed to domestic capital market development were the introduction of the primary dealer system in the late 1990s, setting of 

clear debt management objectives, and the publication of the government’s medium-term funding strategy in the National Budget.

 Active debt management has also helped to reduce South Africa’s 

external vulnerability by helping to sterilize the accumulation of 

offi cial foreign exchange reserves and lengthening the maturity 

profi le of the government’s debt portfolio by restructuring short-term 

foreign debt.

 Since 2006, South Africa has partnered with the OECD and 

regional debt managers to encourage the development of bond markets on the African continent and mutually agreed best-practices. Th e 

Centre on African Debt Management and Bond Markets based in 

South Africa was established in July 2011. Th e Centre will, amongst 

others, focus on: (i) promoting policy dialogue among African debt 

managers; (ii) drafting and publishing an African Bond Market 

monitor and compiling debt data and statistics; (iii) sharing exemplary practises in public debt management and the development of 

bond markets; (iv) engaging in capacity-building programmes to 

enhance skill levels; and (v) promoting the cooperation and coordination of the Centre with multilaterals, regional institutions, and 

other fi nancial institutions of complementary projects and activities.

Sound Institutions and Social Dialogue

According to the WEF’s 2010 Global Competitiveness Report, 

South Africa (54th overall) remains the highest-ranked country in 

2012-08-054_000000000000200
 best practices 147

sub-Saharan Africa, and second in Africa behind Tunisia, due to its 

strong performance in the quality of its institutions. Th e protection 

provided to intellectual property ranks South Africa 27th in the 

world and 29th in terms of property rights.

 Th ere is strong accountability of private institutions, with South 

Africa ranking 3rd globally. Th is is underpinned by the success of institutions and regulatory bodies such as the Competition Commission, 

Competition Tribunal, Financial Services Board, Registrars of Pension 

Funds and Medical Schemes, Securities Regulation Panel, and the 

new Companies and Intellectual Property Commission (CIPC).

 Since the 1990s, the multidisciplinary King Commission has 

produced a succession of increasingly stringent corporate governance 

standards—King 1, 2, and 3—that set out best practices in corporate governance. Th eir recommendations have informed legislation 

including the New Companies Act and market regulation, with the 

Johannesburg Stock Exchange adopting many of the King standards 

as part of its listing requirements. Likewise, the strength of auditing and reporting standards is supported by legislation that limits 

ownership and management of audit fi rms to registered auditors 

whose qualifi cations and right to practise are assured by law and by 

the Independent Regulatory Board for Auditors (IRBA) instituted 

in terms of the Auditing Profession Act (Act 26 of 2005) and the 

South African Institute of Chartered Accountants (SAICA). Th ese 

bodies work closely with the Johannesburg Stock Exchange to ensure 

compliance with IFRS standards and the development of new standards, such as the recently launched Integrated Reporting Standard 

Guidelines. Th is is now the principal annual report for all listed 

companies which fl ows from the latest King III Report.

 Th e National Economic Development and Labour Council 

(Nedlac) was established in 1995 to usher in a post-apartheid era 

2012-08-054_000000000000201
148 the brics report

of inclusive decision-making and consensus-seeking on major economic, social, and development policies between government, business, and labour.

Strong Financial Sector

Th e South African fi nancial sector did not experience the fi nancial 

upheaval seen in advanced economies, and thus the economy is in 

a favourable position to recover from the downturn and emerge 

stronger than before. Th e relative health of the fi nancial sector is 

emphasized by the 2010–11 WEF Global Competitiveness Report. 

South Africa ranked 6th out of 139 countries for the second year in 

a row in respect of soundness of banks for 2010 (up from 15th place 

in 2008), and 1st for regulation of securities exchanges (up from 2nd 

in 2009 and 5th in 2008). Th e policy components that protected 

the country from a fi nancial and subsequent sovereign crisis are 

elaborated in the following paragraphs.

• A sound framework for fi nancial regulation and wellregulated institutions. Th is ensured that potential risks were 

anticipated and appropriate action was taken to mitigate them. 

South African regulators have generally not followed a lighttouch approach. Sustainable credit extension has been possible 

through eff ective legislation, such as the National Credit Act, 

strong regulatory action, and good risk management systems at 

banks. Further, to avoid complacency, additional work is being 

done to strengthen the regulatory framework, bearing in mind 

the lessons of the global fi nancial crisis. Th ese are discussed in a 

2012-08-054_000000000000202
 best practices 149

recent document released by the National Treasury entitled ‘A 

Safer Financial Sector to Serve South Africa Better’.

• Appropriate and conservative risk management practices 

at domestic banks. Th e experience of the small banking crisis 

in 2002 and the adoption and implementation of the Basel 

II Capital Accord in 2008 have led to improved risk management practices and stronger crisis management arrangements at 

domestic banks. In addition, conservative practices at banks have 

ensured that far less securitization and derivatives trading has 

taken place relative to advanced markets.

• Limited exposure to foreign assets. Th e prudential regulation 

of foreign exposure as applied in the past decade, including limits on the extent of exposure to foreign assets by institutional 

investors and banks, has helped to limit overall foreign risk.

• Subsidiary structure and listing requirements. Registered 

banks have to be subsidiaries of the domestic or foreign parent 

company, so their assets and liabilities are ring-fenced even when 

the parent company is in distress. Th e listing requirement also 

ensures transparency, rigorous disclosure standards, and high 

standards of corporate governance, forcing banks to satisfy shareholders and stakeholders at all times.

Th e South African fi nancial system was protected by a broader set of 

prudent economic, fi scal, and fi nancial sector policies that insulated 

the economy from the worst of the global shocks. Th ese include: 

a robust countercyclical monetary policy framework capable of 

absorbing relatively large external shocks with minimum impact on 

the domestic economy; low private and public foreign indebtedness; 

countercyclical fi scal policy; a proactive approach to dealing with 

2012-08-054_000000000000203
150 the brics report

bank credit risks, including changes in capital adequacy requirements 

and conservative leverage ratios to curb excessive credit growth; and 

legislation to protect households from reckless lending practices 

(National Credit Act). Th ese elements are part of a comprehensive set 

of policies that will continue to ensure fi nancial stability and provide 

an excellent foundation to build on to increase the resilience of the 

fi nancial sector.

Expanded Public Works Programme

Th e expanded public works programme aims to increase employment 

opportunities for the most vulnerable. Focusing on infrastructure, 

social, environmental, and community projects administered by 

various departments, municipalities, and partner organizations, the 

programme has created about 1 million short-term jobs since Phase 2 

began in April 2009. Th e programme empowers individuals by off ering learnerships, training programmes, mentorships, and other skill 

development certifi cations, in an attempt to create a skilled labour 

force to achieve a sustained reduction in unemployment. Key success 

factors have been the technical assistance provided to under-skilled 

municipalities to enable them to expand access. A target of 800,000 

short-term jobs has been set for 2011–12.Th e budget for the programme is around R73 billion for the next three years.

Environmental and Climate Change Policies

Th e South African government has made a commitment to undertake 

initiatives as part of its response to climate change. Consequently, 

2012-08-054_000000000000204
 best practices 151

South Africa has adopted targets for reducing the country’s carbon 

emissions. Conditional on the country receiving fi nancial assistance, 

South Africa plans to reduce its emissions by 34 per cent and 42 

per cent by 2020 and 2025, respectively, relative to business as usual. 

Th e government is also responding to the challenge by placing a 

green economy at the centre of the New Growth Path. Th is builds on 

work undertaken on the National Climate Change Response Policy, 

the Green Economy strategy, the South African Renewable Initiative, 

the Energy Effi ciency Strategy, the Integrated Resource Plan, and the 

Integrated Policy Action Plan.

 Th rough these government policy initiatives, South Africa is 

tackling development issues innovatively while also considering the 

challenges of climate change. For instance, the Integrated Resource 

Plan departs from previous cost-based approaches to electricity generation strategies and focuses on a balanced approach to designing 

such strategies. Both traditional and alternative electricity generation 

methods are being included in the Integrated Resource Plan.

Resource Plan

South African business has also taken up the climate change challenge, 

launching the Carbon Disclosure Project (CDP) as early as 2000. 

Th e CDP is a voluntary global private sector initiative that aims to 

encourage companies to measure and report their carbon emissions 

and integrate the cost of climate change into the assessment of their 

fi nancial health and business prospects. Since the introduction of the 

project in South Africa, the response rate of South African businesses 

has been increasing with each passing year. In South Africa, 74 of 

the 100 largest corporations on the Johannesburg Stock Exchange 

2012-08-054_000000000000205
152 the brics report

participated in CDP 2010 (up from 68 in 2009), 31 companies have 

adopted greenhouse gas reduction targets, and 22 fi rms have committed to developing such targets. Carbon-intensive sectors, such 

as energy, industrials, and minerals, have the highest response rates 

for the CDP. Th e CDP response rate in South Africa is the fourth 

highest internationally, and this suggests that climate change remains 

suffi ciently high on the corporate agenda and South African companies are willing and ready to deal with the challenges.

 South Africa has a well-developed policy and legislative framework for the conservation and sustainable use of biodiversity. It is 

one of the few countries in the world to have a Biodiversity Act and 

a National Biodiversity Institute. By 2008, South Africa had 19 

marine-protected areas, covering almost 18 per cent of the South 

African coastline, declared under the Marine Living Resources Act of 

1998. Th e government’s goal is to have at least 20 per cent of South 

Africa’s coastline declared as protected areas.

 South Africa hosted the Conference of Parties 17 (COP 17) in 

November and December 2011, an international event as important 

as the Kyoto Protocol. South Africa’s hosting of the negotiations indicates its commitment to addressing this global challenge.

Competition Policy

Th e South African Competition Commission was set up in 1999 

under the Competition Act of 1998. Th e Commission is tasked with 

investigating anti-competitive conduct. It also assesses the impact 

of mergers and acquisitions on competition and takes appropriate 

action; monitors competition levels and market transparency in 

the economy; identifi es impediments to competition; and plays an 

2012-08-054_000000000000206
 best practices 153

advocacy role in addressing these impediments. Th e Commission has 

prioritised its work in four sectors in order to maximize the benefi ts 

to consumers from its work. Th ese sectors are food, agro-processing 

and forestry, infrastructure and construction, intermediate industrial 

products, and fi nancial services. Major progress has been made as a 

result of the Commission’s sustained focus on its priorities. Th e total 

amount of penalties confi rmed or determined by the Competition 

Tribunal in 2009–10 was higher than in any previous year and close 

to R500 million.

 Th e 2011 Global Competition Review, which is primarily based 

on a survey of legal practitioners, recently awarded South Africa’s 

Competition Commission the accolade of ‘Agency of the Year in 

Asia-Pacifi c, Middle East & Africa’. Th e Commission was also shortlisted in the category ‘Enforcement Matter of the Year’ for its innovative structured settlement with Pioneer Foods, which was concluded 

in November 2010. Separately, the 2010 WEF Global Competitiveness 

Report has ranked South Africa 40 out of 139 countries for goods 

market effi ciency. Th e Competition Commission is committed to 

increasing its enforcement capacity, particularly in the area of cartel 

investigations. To this end, the Commission has established a special 

investigative unit.

Industrial Policy

Th e South African government’s broad development strategy aims 

to promote and accelerate economic growth along a path that generates sustainable, decent jobs in order to reduce poverty and extreme 

inequalities that characterize South African society and economy. 

Th e National Industrial Policy Framework (NIPF), adopted in 2007, 

2012-08-054_000000000000207
154 the brics report

is a central component of this strategy. Th e NIPF seeks to encourage 

value-added, labour-absorbing industrial production and diversify 

the economy away from its current over-reliance on traditional commodities and non-tradeable services, thereby stimulating employment 

growth. Broader-based industrialization will assist in enhancing the 

participation of historically disadvantaged people and marginalized 

regions in the mainstream of the industrial economy.

 Th e implementation of industrial policy is set out in two Industrial 

Policy Action Plans (IPAP), namely, IPAP1 (2007/08) and IPAP2 

(2010/11–2012/13). IPAP targets sectors of the economy with high 

potential for export growth, employment creation, and technological 

upgrading. In addition, IPAP2 outlines four major transversal interventions: industrial fi nancing, competition policy, developmental 

trade policies, and public procurement.

Trade Policy

Tariff s are instruments of industrial policy and have implications for 

capital accumulation, technological change, productivity growth, 

and employment. South Africa has adopted a strategic approach to 

tariff reform that supports industrial and employment objectives. 

An evidence-based, case-by-case assessment will inform changes to 

tariff s. Tariff s on mature upstream input industries could be reduced 

or removed to lower the costs for downstream, labour-creating 

manufacturing. Tariff s on downstream industries with employment 

or value-addition potential could be retained or increased to ensure 

sustainability and job creation while observing international trade 

obligations in the WTO and other trade agreements.

2012-08-054_000000000000208
 best practices 155

Trade Strategy, including South–South Cooperation

South Africa’s trade strategy aims to consolidate links with key 

economies in the North, and build industrial complementarities 

with dynamic growing economies in the South to support the NIPF’s 

industrial development objectives and shift the structure of trade 

towards more diversifi ed, value-added exports. Given the widespread 

poverty, unemployment, and a host of other development challenges, 

global integration must not undermine domestic production or exacerbate unemployment. 

 South Africa sees enormous opportunities for ongoing engagement with BRICS countries to structure new kinds of trade and 

investment agreements that foster complementarities and cooperation in the industrial, agricultural, and service sectors and that avoid 

destructive competition. Appropriately structured preferential trade 

agreements (PTAs), procurement arrangements, sectoral cooperative 

agreements, alongside targeted investment and export promotion 

activities, can shape strategic integration among the BRICS. Such 

arrangements can encourage value added, sophisticated production 

and trade that embody higher levels of technology, support industrial 

upgrading, and place each of the BRICS on a long-term, sustainable 

economic development path.

 South Africa, together with its partners in the Southern African 

Customs Union (SACU), signed a PTA with Mercosur in 2009 and 

PTA negotiations with India are currently underway. In 2010, South 

Africa and China established a Comprehensive Strategic Partnership, 

which aims to promote value-added South African exports to China 

and increase inward investment by China in projects around mineral 

benefi ciation. Working groups have also been established to resolve 

2012-08-054_000000000000209
156 the brics report

non-tariff barriers with Brazil and India, which are often signifi cant 

barriers to higher levels of intra-South trade.

 South Africa is a strong proponent of multilateralism as the intergovernment response to managing globalization and the deepening interdependence of national economies. South Africa plays an 

active role in the WTO, both individually and collectively through 

its membership in key Southern coalitions: the Africa Group, 

G-20 and NAMA-11. South Africa will continue to press for a 

development outcome to the Doha Round to re-balance trade rules 

in favour of the development interests of developing countries. For 

South Africa, a development outcome is more important than an 

early conclusion of the trade round that does not deliver on the 

development mandate agreed on at Doha in 2001.

 Th e emerging deal at the Doha Round is particularly harsh for 

South Africa. While South Africa stands to gain very little or no 

additional market access for its agricultural exports due to the fl exibility granted to industrial countries, it will be required to make the 

deepest and widest industrial tariff cuts of all other WTO Members. 

Th is is the result of South Africa’s peculiar tariff structure which is an 

outcome of the Uruguay Round, where it was required to undertake 

tariff reduction commitments as a developed country.

Regional Integration

Deeper regional integration in Africa and Southern Africa are vital 

for engaging more competitively with the world economy. South 

Africa’s continental trade agenda is focused on supporting Africa’s 

economic integration in line with the New Economic Programme for 

African Development (NEPAD), the African Union, and the Abuja 

2012-08-054_000000000000210
 best practices 157

Treaty to establish the African Economic Community. South Africa 

is committed to promoting ‘developmental integration’ in Southern 

Africa, which combines trade integration with infrastructure development and sectoral policy co-ordination. Th ese interventions aim to 

build regional productive capacity and infrastructure, as experience 

has demonstrated that the main barriers to increasing intra-regional 

trade are often not tariff s. In particular, South Africa is expanding 

the role of its development fi nance institutions (DFIs) in supporting 

regional infrastructure development across Southern Africa.

 Consolidating regional economic integration among the Southern 

African Customs Union (SACU), the free trade area and integration 

agenda in the Southern African Development Community (SADC), 

East African Community and COMESA are vital in this respect.

Outward FDI and Internationalization of 

South African Companies

Several South African fi rms have expanded internationally and 

become major players in the global economy. During 2008, eight 

South African companies were among the top 100 non-fi nancial 

transnational corporations from the developing world, ranked by foreign assets. Th e list included: MTN Group Limited (telecommunications), Sasol Limited (chemicals), Sappi Limited (wood and paper 

products), Netcare Limited (other consumer services), Steinhoff 

International Holdings (other consumer goods), Gold Fields Limited 

(metal and metal products), Medi Clinic Corp. Limited (other consumer services), and Naspers Limited (other consumer services).

 South Africa is the only African country whose private sector has 

a strong corporate profi le and presence in the Chinese market, with 

2012-08-054_000000000000211
158 the brics report

investment valued at over US$ 600 million. Some South African 

fi rms have become market leaders in China, including SABMiller 

(breweries), Naspers (media), and Sasol (coal-to-liquid).

 South African fi rms are among the main investors in Africa. 

According to UNCTAD, South Africa was the largest emerging 

market investor in Africa between 2006 and 2008, with US$ 2.6 

billion in average annual FDI fl ows more directly invested than by 

China. Th e share of African host countries in the outward stock of 

South African FDI increased from less than 5 per cent before 2000 to 

22 per cent in 2008, reaching almost US$ 11 billion.1 Compared to 

Brazil, China and India, outward FDI from South Africa into Africa 

is more diversifi ed, with a strong presence in six sectors: mining, 

retail, construction and manufacturing, fi nancial services, telecommunications, and tourism and leisure.

International Investment Treaty Policy

Th e South African government adopted a new investment policy 

framework in July 2010. Th e policy aims to modernise and strengthen South Africa’s investment regime by implementing a series of 

policy measures that will ensure South Africa remains open to foreign investment, and provides adequate security and protection to all 

investors, while preserving the sovereign right of the South African 

government to pursue development public policy objectives. Th e 

new framework also aims to empower the domestic adjudication of 

investment disputes.

1

 UNCTAD (2010). World Investment Report: Investing in a Low-carbon 

Economy. UNCTAD: New York and Geneva.

2012-08-054_000000000000212
 best practices 159

 A core concern is that foreign investors’ claims against governments 

can bypass national courts and be brought directly to international 

arbitration. Experience shows that in international arbitration, matters of vital national public policy are subjected to a process where 

arbitrators tend to focus on narrow commercial interests over broader 

societal or development considerations. Core provisions of Bilateral 

Investment Treaties (BITs), such as ‘expropriation’ and ‘standards of 

treatment’, are often ill-defi ned. Expansive interpretations provide 

the grounds for foreign investors to challenge any policy deemed to 

undermine their investment interests. In this way, BITs have limited 

the government’s right to regulate in the public interest.

2012-08-054_000000000000213
Major Challenges

Introduction

In the past decade, the world has experienced signifi cant transformations in geopolitical and economic terms, as also in the organization 

and distribution of production. For several reasons, countries such as 

Brazil, Russia, India, China, and South Africa (BRICS) have acquired 

a key role in the world economy as producers of goods and services, 

receivers and exporters of capital, and/or as consumer markets with 

large potential. Given their large population (more than 40 per cent 

of world population), resurgent middle class and huge share of land 

(nearly 30 per cent of global share) and natural resources, the BRICS 

form a signifi cant part of the world economy. Further, the recent 

recovery of BRICS economies from the global economic crisis points 

towards their robust macroeconomic fundamentals and the nature 

of the recovery shows the growing signifi cance of the BRICS in the 

new global order.

 Important features of BRICS economies include their large geographical dimensions and the size of the population that represents 

4

2012-08-054_000000000000214
 major challenges 161

an enormous potential consumer market, complemented by access 

to regional markets. Th e number of people at the middle income 

threshold in BRICS is expected to grow several times during the next 

decade. It is widely perceived that all the BRICS markets have great 

potential for establishing the most stabilizing of forces, that is, a prosperous middle class. Th is middle-income group in each country is 

growing at varying rates but the future direction is clear: the middle 

class will both broaden and deepen, providing a solid base for the 

growth and development of these economies. Income inequality in 

Brazil and Russia is reducing rapidly and thus leading to a growing 

and vibrant middle class and the total percentage of South Africans in 

the middle class is projected to increase at a rapid pace. Russia, India, 

and Brazil are relatively more domestic demand-driven economies 

while China’s manufacturing success has boosted urban household 

spending.

 All fi ve countries are abundant in terms of workforce availability. 

Th is is signifi cant in the present context, where, with a few exceptions, 

most of the Western world has a declining population and a dwindling 

workforce. In some advanced countries, rapidly ageing societies and 

longer life-expectancies pose challenges in terms of the availability 

of work force while BRICS countries, particularly China, India, and 

Brazil, could gain from such opportunities.

Brazil

Brazil’s agricultural research has transformed the country into a major 

exporter; the use of bio-fuel for road and urban transport, and the 

emergence of Embraer as a high-technology aircraft manufacturer are 

major achievements. In the social sphere, Conditional Cash Transfers 

2012-08-054_000000000000215
162 the brics report

that target poverty and the success of the anti-AIDS policy provide 

useful lessons. Th e divergent challenges provide scope for cooperation and coordination in various socio-economic areas. For instance, 

in Brazil, macroeconomic stabilization is a key precondition for 

successful reforms and sustainable growth. Th e major challenges the 

Brazilian economy faces are (i) its tradeable goods sector is rather 

small in comparison to other EMEs like China; (ii) the saving and 

investment rates have to catch up with other BRICS economies like 

China and India; (iii) improvements are required in public sector 

management; (iv) the depth of the fi nancial sector has to be further 

enhanced; and (v) long-term fi nancing structure for the private sector needs to be improved.

Russia

Russia’s major achievements include reforms during 1999–2009 that 

promoted economic growth, lowered infl ation, and led to a dramatic 

fall in the number of people living below the poverty line. Specifi c 

achievements include setting up of the Oil Stabilisation Fund that 

proved useful during the crisis. Apart from its vast natural resources, 

Russia has vital capability in high-technology sectors, both ‘traditional’, where it already possesses some competitive edge (in nuclear 

and space technology and high-level programming), and ‘new’ (in 

nano- and bio-technology). Russia has made signifi cant advances in 

building technological know-how in science and high-technology 

for defence and spacecraft. However, accelerating the implementation of structural reforms, particularly in effi cient and undercapitalized natural monopolies, and strengthening the investment climate 

remain key challenges.

2012-08-054_000000000000216
 major challenges 163

India

India’s private entrepreneurship, which has been instrumental in 

the 8–9 per cent annual growth of the economy in recent years, can 

provide valuable lessons. Private initiative has been responsible for 

the excellence achieved in the information technology sector and the 

innovative streak that has led to improvization and production of 

low-cost goods for the mass Indian market. For India, the major challenges are (i) diversifying its growth towards manufacturing while 

maintaining its service-led growth model, (ii) making the growth 

process more inclusive, (iii) improving physical infrastructure, (iv) 

developing the agriculture sector, and (v) delivering essential public 

services such as education and health to large parts of the population.

China

Th e best practices and institutions for China are those that have facilitated a smooth transition to a robust economy that is economically 

wide open to the outside world. FDI and infrastructure fi nancing, 

inter alia, have been playing an important role in promoting economic 

growth. Th e cities/regions have been successful in attracting foreign 

investment by providing improved infrastructure and regulatory 

environment. China has experience in fi nancial macro-management. 

Th e reform and development of China’s banking industry and fi nancial market is an important driver of rapid and sustainable growth.

 Th e policy challenges for China are to sustain rapid and stable 

economic growth which is driven by exports and domestic demand 

in a more balanced way. To facilitate restructuring of the economy, 

2012-08-054_000000000000217
164 the brics report

fi nancial sector reforms are needed to improve the intermediation 

of China’s large private savings. Th e government also needs to raise 

social spending in the areas of education, healthcare, and pensions, 

which will serve to reduce precautionary saving and boost consumption over time. Th ere is also a need to improve the investment 

structure, advance reforms in healthcare, pension, and education 

systems, and provide more support to rural areas and less-developed 

regions.

South Africa

South Africa’s major strength lies in its record of responsible macroeconomic management, together with strong institutions, a deep 

and liquid local bond market, and a sophisticated and well-regulated 

banking sector. South Africa’s rich endowment of natural resources 

places it in a good position to benefi t from high commodity prices 

and increased investment in resources. With the most developed 

industrial and fi nancial capabilities on the African continent, South 

Africa role in the integration of policies, markets, fi nance, and infrastructure is vital to Africa’s economic development and realization 

of the continent’s potential as a growth pole in the global economy. 

Outwardly oriented South African companies are among the largest 

sources of FDI in Africa and the country’s development fi nancing 

institutions are playing an increasing role in the funding of regional 

infrastructure investment.

 Th e key challenge for South Africa is to achieve higher levels of 

inclusive growth that raise employment and reduce inequality. Low 

domestic savings, currency volatility, inadequate investment in 

productive sectors of the economy, skills shortages, and ineffi cient 

2012-08-054_000000000000218
 major challenges 165

government services delivery are some of the other challenges. 

Policies proposed in the New Growth Path constitute the key means 

to address these challenges through a development state that places 

employment at the centre of the fi ght against inequality. Within a 

prudently managed macroeconomic framework, the government 

is prioritizing policy measures focused on the expansion of infrastructure networks, skill development, interventions to raise youth 

employment, industrial policy that promotes higher-value added 

exports, the development of rural economies, small enterprise promotion, green economy initiatives, and regional integration.

Challenges to the BRICS as a Group

In the years to come, it is expected that the BRICS will become large 

global suppliers of manufactured goods and services as well as major 

suppliers and consumers of commodities. Th us, the BRICS have the 

potential to evolve into a powerful economic bloc.

 In recent years, the BRICS have been taking advantage of their 

abundant population and resources and, on the whole, achieving 

steady economic growth. However, the trends in GDP indicate that 

the individual countries have diff erent paces and levels of economic 

growth. China has been maintaining its long-term high economic 

growth trajectory, while India and Russia have been moving towards 

sustained high growth. In contrast, Brazil and South Africa have 

shown sustainable but lower economic growth rates since the early 

2000s, but have been making rapid strides along the path from crisis 

to stability and growth. For South Africa, the major challenges are 

the development of the socio-economic infrastructure and furthering 

the reforms process.

2012-08-054_000000000000219
166 the brics report

 Despite the resilience to the recent global crisis, there is a source 

of potential downward pressure on growth in the BRICS because of 

weak growth and the spillover eff ects of policy responses in advanced 

economies.

 While the infrastructure requirements of the BRICS economies 

are huge, public–private participation can help relax this constraint, 

provided that the institutional mechanism is sound enough for 

their optimal combination. In this context, strategic cross-sector 

reforms, resulting in improved policy as well as legal and institutional 

frameworks for greater private sector participation, anchored in good 

governance norms are required.

 A common challenge that the BRICS economies face is the need 

for institutional development without which sustainable growth 

cannot be ensured. Institutional development is still a long way off 

in most of these countries. At present, international investors may 

be bullish about the future potential of the BRICS economies as 

refl ected in AT Kearney’s FDI Confi dence Index and Global Retail 

Development Index, the remaining challenges should not be overlooked. Similarly, the credibility of the policy of reforms is crucial for 

the BRICS economies to make their growth processes more durable 

and development-oriented.

 In the BRICS countries, policy changes are needed to address both 

domestic and external challenges. China needs to take it as its priority 

tasks to transform the economic development pattern, expand domestic demand, and improve people’s well-being in advancing economic 

and social development. In case of Brazil, Russia, and South Africa, 

their current reliance on exports of natural resources such as oil and 

other primary commodities needs diversifi cation. Measures including industrial policy are required to improve the competitiveness of 

2012-08-054_000000000000220
 major challenges 167

manufactures in order to make economic growth less vulnerable to 

adverse movements in commodity prices.

 An important distinctive aspect among the BRICS economies lies 

in their respective levels of social and infrastructure development. 

Brazil, India, and South Africa are still to catch up with the level 

of infrastructure and human capital achieved by Russia and China. 

At the same time, growing inequality remains a problem in some 

BRICS countries. Such factors may lead to divergence in the speed 

with which the BRICS economies catch up.

 In the next decade, the manner in which challenges such as high 

fi scal defi cits in the post-crisis period, high global uncertainty leading 

to weak demand for exports, trade protectionism in the wake of the 

global fi nancial crisis, intolerably high unemployment levels, poverty, 

and inadequate public health and education facilities are met would 

be crucial in determining the development trajectory of the BRICS 

economies.

 Environmental degradation and climate change are grave threats 

for sustaining high levels of growth in the BRICS economies. Th e 

BRICS countries could collaborate in the above areas, complement 

and learn from each other, optimize each other’s science and technology resources, and jointly address challenges in these areas.

 Th e weight of the BRICS in investment portfolios could rise 

sharply. Th e volatility in capital infl ows could pose threats to fi nancial stability and the balance of payments.

 Going forward, fi scal policy after the global fi nancial crisis warrants a balance between supporting the recovery through sustained 

infrastructure investment and ensuring fi scal sustainability. Th e monetary policy stance has been appropriate and has to take into account 

the evolving global and domestic situation. More pressing are policies 

2012-08-054_000000000000221
168 the brics report

to engender higher economic growth. Th e various government initiatives to enhance the competitiveness of selected industries can be 

usefully complemented by reforms to improve the eff ectiveness and 

effi ciency of labour and product markets.

 In a post-global crisis world largely shaped by fi nancial instability 

and weak growth in major economies, the BRICS countries have a 

remarkable opportunity to coordinate their economic policies and 

diplomatic strategies not only to enhance their position as a grouping 

in the international economic and fi nancial system, but also to be a 

stabilization factor for the world economy as a whole. Th e BRICS 

should increasingly harmonize and coordinate their policies with a 

view to sustaining their growth momentum and capacity to weather 

global turbulence. Th e benefi t of cooperation is immense not only 

for the BRICS but also for the global economy. A strategic agenda 

for forging closer links among the BRICS, as outlined in this joint 

report, may contribute to consolidating and expanding their roles in 

global aff airs.

2012-08-054_000000000000222
BRICS Cooperation

In the BRICS economies, there exists huge opportunities to extend 

economic growth and development to the next level. In this regard, 

there is a possibility to increase cooperation among the BRICS 

to gain competitive advantages. Th is chapter looks at areas where 

greater cooperation among the BRICS economies could be explored. 

It is important to note that all the proposals laid out in this chapter 

might contribute to promote synergetic relationships among the 

BRICS economies, but their political and technical feasibility is yet 

to be determined while their implementation may require further 

deliberations. Th e areas of cooperation listed below should be seen 

as exploratory items to be included in further discussions and the 

agendas of future meetings between BRICS policymakers. Th e focus 

areas suggested are as follows:

(i) Intra-BRICS Trade and Investment Cooperation

(ii) Cooperation in Infrastructure Financing

(iii) Industrial Development and Cooperation

(iv) Cooperation in Transportation

5

2012-08-054_000000000000223
170 the brics report

(v) Cooperation in Food Security

(vi) Cooperation in Technical Education

(vii) Cooperation in Financial Market Development

(viii) Cooperation in Research and Development

(ix) Cooperation in Area of Culture and Tourism

(x) Cooperation in International Issues

(xi) Cooperation in Energy Security

(xii) Cooperation to Build Eff ective Institutions 

(xiii) International Development Bank for Fostering South–South 

Investment

(i) Intra-BRICS Trade and Investment Cooperation

Th ere is scope for considerable increase in intra-BRICS trade, leading 

to a rise in income and employment. To build trade and investment 

relations, BRICS countries should work together to identify niche 

areas, sectors, and markets that off er potential for trade and investment expansion to bolster productive sectors for mutual benefi t, 

avoiding destructive competition.

 Th e BRICS banking sector could play an important role in promoting trade and investment through innovative trade fi nancing 

facilities, export credit arrangements, and countercyclical measures 

which ensure that trade fi nance does not get aff ected during business 

downturns, as was the case during the recent global crisis. Th is would 

require concerted action by the banking sector in BRICS countries 

with the BRICS central banks playing the anchor role in chalking 

out a strategy to strengthen cooperation in trade and investment.

 One means of promoting intra-BRICS trade is through invoicing and settlement of trade in domestic currencies. Exports and 

2012-08-054_000000000000224
 brics cooperation 171

imports are subject to currency risk, because international trade 

transactions are mostly invoiced in major international currencies. Currency risk factors impede the growth of international 

trade, as exporters/importers are concerned about the implications 

of exchange rate fl uctuations, especially during times of high currency volatility. A way forward could be to explore the prospects of 

invoicing of trade in domestic currencies, with settlement of transactions in major international currency equivalents. Th is would help 

mitigate the negative impact of currency volatility on trade and 

help promote the international use of BRICS currencies. In this 

regard, it is worth mentioning that the BRICS Development Banks 

are working out means of promoting fi nancial transactions in local 

currencies.

 China has already made a pioneering eff ort in this direction by 

invoicing some of its bilateral trade in Renminbi and promoting 

an inter-bank and off shore bond market (Hong Kong-based) for 

Renminbi. Th is would create investment opportunities and liquidity in the market, encouraging wider use of the Renminbi for trade 

invoicing and settlement. As far as Brazil is concerned, the Local 

Currency Payment System in Local Currency (SML acronym in 

Portuguese) with Argentina began to operate in October 2008. It 

is a unique system designed by both Central Banks, which carefully 

reviewed various international experiences in the area of payment 

systems, especially those of early intra-regional trade in Europe. Th e 

Central Banks of Brazil and Argentina are responsible for implementation of this unique regional payments system. All individuals 

and companies are eligible to participate in the SML in transactions 

relating to trade in goods and services (such as freight and insurance), which are imports denominated either in Argentine pesos or 

exports in Brazilian Reals (BRL). Th e Central Bank of Brazil has been 

2012-08-054_000000000000225
172 the brics report

conducting studies on the feasibility of similar arrangements with 

other trading countries.

(ii) Cooperation in Infrastructure Financing

Some BRICS economies suff er from a ‘infrastructure defi cit’, especially in the areas of transport and energy. Th is defi cit is a constraining 

factor in sustaining high growth rates in the long run. Th ere is also 

scope to explore ways to enhance coherence among BRICS countries 

in promoting infrastructure development at the regional level.

 To address the problem, there is scope for cooperation among 

BRICS in increasing the availability of infrastructure fi nancing. Th is 

could be through setting up BRICS infrastructure funds to mobilize 

retail and institutional investors. Tax benefi ts could also be provided 

for investment in infrastructure bonds, as is being done in India.

 While the infrastructure requirements in BRICS economies are 

huge, public–private participation can help relax this constraint, 

provided that the institutional mechanism is sound enough for their 

optimal combination. Private equity players could also be encouraged 

to invest in infrastructure projects. It is understood that many of 

the large global private equity funds have accumulated a huge cash 

corpus for lack of investment opportunities, especially due to the 

global crisis. Th rough favourable policies and tax incentives, some 

of this money could be encouraged to fl ow towards infrastructure 

sectors in BRICS economies.

 Besides, attempts could be made to address the problem of excessive capital fl ows to emerging market economies by directing some 

of these fl ows to designated infrastructure sectors. Th e key to such 

a move is a policy framework with tax incentives that is carefully 

2012-08-054_000000000000226
 brics cooperation 173

thought through. Brazil has already initiated steps to direct the fl ow of 

capital into long-term corporate bonds by providing tax incentives.

 Th ere are also many infrastructure companies operating in the 

BRICS economies, with specialized knowledge of project development in emerging economy environments. Th ese may be encouraged 

to bid for road, railway, airport, and port projects in the BRICS, a 

measure that would help create a BRICS-wide infrastructure market.

(iii) Industrial Development and Cooperation

Sharing technology, expertise, and research in the industrial sector 

is another key area of cooperation among the BRICS. Exchanging 

experiences on policy measures that BRICS countries have undertaken to promote industrial development could be a valuable area 

of cooperation, including encouragement of industrial production 

networks amongst BRICS.

 Th ere are diverse areas where the BRICS could learn from the 

experiences of each other. In the fi rst place, BRICS economies boast 

of some of the largest private sector conglomerates in the emerging 

market economies. Many of these have been active players in the 

international market through collaboration and acquisitions abroad. 

Th ere is scope to learn from the experience of these countries to take 

the private sector forward in other BRICS and emerging economies. 

Th ere is also scope for drawing valuable lessons from the experience 

of encouraging private entrepreneurship in some countries which 

have excelled in the high-technology sector. Pooling of expertise 

and collaboration in such areas could contribute to an improvement 

in skills and technologies, leading to higher growth of the BRICS 

economies.

2012-08-054_000000000000227
174 the brics report

(iv) Cooperation in Transportation

Th ere is room for cooperation in building eff ective and effi cient 

transport links among the BRICS via initiatives like the sharing of 

transport technologies. Countries in BRICS could also learn and 

share experiences of developing mass rapid transport system.

(v) Cooperation in Food Security

Th ere is scope for increased cooperation among the BRICS to promote food security by raising agricultural productivity and output; 

promoting investments in the food supply chain; and developing a 

social safety net through conditional income transfer programmes 

for the poorest.

 More specifi cally, BRICS countries can strengthen food security 

cooperation via initiatives including the creation of basic agricultural 

information exchange system of BRICS countries; development of 

a general strategy for ensuring access to food for the most vulnerable section(s) of the population; undertaking measures to reduce 

the negative impact of climate change on food security, adapting 

agriculture to climate change; and enhancing agricultural technology 

cooperation and innovation as well as through promotion of trade 

and investment in agriculture.

 BRICS economies are major producers, consumers, and exporters of agricultural, horticultural, and meat products. Th e necessary 

expertise and research capabilities are already available in BRICS 

economies to raise production through increasing yields and to extend 

cultivation to previously non-cultivable land. With its credibility 

well established, the Brazilian Agricultural Research Corporation 

2012-08-054_000000000000228
 brics cooperation 175

(Embrapa) could play the anchor role in this respect. Arrangements 

to increase inter-agricultural trade among the BRICS could be mutually benefi cial, given their complementarity in this area, and hence 

should be explored. Th e BRICS countries could also envisage ways to 

promote food security and food production in Th ird World countries 

with a focus on famine-aff ected areas.

(vi) Cooperation in Technical Education

BRICS economies have some of the best engineering, architectural, 

medical, scientifi c, and management institutes that cater to the specifi c requirements of emerging market economies. Th eir expertise lies 

in the fact that the faculty and students develop niche understanding of emerging economy requirements and business conditions. 

Cooperation among BRICS institutions through skill transfer and 

shared curriculum, and student and faculty exchange would help the 

quality of BRICS technical education move up the value chain. Some 

of the institutions could also be encouraged to set up campuses in 

other BRICS countries on a reciprocal basis.

(vii) Cooperation in Financial Market Development

Th e fi nancial markets in BRICS are at diff erent stages of development. Th ere is considerable scope for the BRICS to learn from each 

other by exchanging experts and country experiences.

 A greater emphasis, however, has to be placed on a BRICS-wide 

corporate bond market, which still lacks depth and liquidity in 

2012-08-054_000000000000229
176 the brics report

some BRICS countries and has been the missing link in mobilizing 

resources for corporate investment.

 Many emerging sovereigns and corporations have been issuing 

international bonds on a regular basis. To create a BRICS-wide 

market for sovereign and corporate bonds, international and domestic bonds by BRICS sovereign, and corporate issuers that target 

the BRICS investor base could be explored. Th is will help create a 

niche BRICS bond market and forge closer links among sovereign/

corporate borrowers and the investor community in the BRICS 

economies. It would also help widen and deepen the BRICS sovereign/corporate debt markets. Th e main advantage for the investor 

would be the diversifi cation of the investor base and a greater choice 

of risk/return/maturity profi les. Key aspects like size, deepness, 

liquidity, fair pricing, pricing disclosure, clearing structure, regulation, taxation, investors base, hedging possibilities, transparency, 

and money market structure would need to be studied in detail for 

the purpose.

 It is diffi cult to identify similarities in each bond market specifi cically and to share usable experience in order to enhance market infrastructure. Starting with the sovereigns, local markets are far diverse 

from the common external market environment (either US-Dollar 

denominated or the Euro bond markets). Th ese markets are tagged 

with mainstream securities standards that fulfi l investor expectations 

in terms of market functioning and overall segmentation across different investor classes. Sovereign local markets, despite their size, may 

operate in disparate ways across nations. Th e corporate bond market 

is even more segmented.

 Public debt managers of BRICS could meet periodically to 

exchange information on best practices and recent initiatives undertaken in the fi eld of public debt management.

2012-08-054_000000000000230
 brics cooperation 177

(viii) Cooperation in Research and Development

BRICS countries can explore cooperation in the areas committed in 

the fi rst BRICS Senior Offi cial Meeting on Science, Technology and 

Innovation in 2011: exchanging of information on STI policies and 

programmes, promotion of technology transfer, new energy, renewable energy and energy effi ciency, nanotechnology, basic research, 

medicine and biotechnology, as well as setting up of STI Working 

Group responsible for promoting and materializing cooperation.

 In order to improve cooperation among BRICS countries, there 

is a need to conduct research studies at the inter-government level 

in potential areas of cooperation. Th ese studies may be undertaken 

in existing research institutes by providing academic support. In this 

regard, the existing cooperation among BRICS think tank institutes 

could be emphasized, and the Sanya Action Plan suggestion could be 

implemented by 2012.

 Creation of BRICS institutes in certain specifi c areas could be 

considered with the purpose of strengthening research in areas of 

collective interest. Th ese institutes should not necessarily be set 

up from scratch. Th ey could be formed by agreements of existing 

government-sponsored organizations as well as private and academic 

research centres that conduct research in areas of international trade, 

capital markets, and environment studies (either academic or funded 

by government think tanks) in each BRICS country.

(ix) Cooperation in the Area of Culture and Tourism

Th ere is remarkable diversity in culture, language, history, economy, 

and institutions among the BRICS. To enhance knowledge and 

2012-08-054_000000000000231
178 the brics report

understanding of this diversity, cooperation could be extended to 

cultural exchange and tourism. In the area of tourism, joint initiatives by offi cial tourism promotion agencies could be put in place 

to arouse interest in the private sector operators regarding the other 

BRICS countries. Th ese initiatives could also include information 

and educational exchanges with offi cial support, wherever required.

 Th e BRICS Bibliographic Catalogue, which contains works in 

many diff erent areas, such as history, literature, political science, and 

sociology of the BRICS countries, is an initiative which helps promote knowledge of each country, and, in this respect, the catalogue 

could be distributed in schools and universities located in the BRICS 

countries.

(x) Cooperation in International Issues

Th e global economy continues to face uncertainty. Th e eurozone 

debt crisis, high fi scal and sovereign debt levels, and weak aggregate 

demand are aff ecting recovery prospects in the advanced economies, 

with attendant implications for EMEs.

 Th ese risks have created fresh challenges for the BRICS economies, especially given the key role that the BRICS are expected to 

play in the post-crisis ‘new normal’ of the world economy. Th e 

BRICS should endeavour, therefore, to strengthen macro-prudential 

policies and supervision and address some of the causes of the global 

weaknesses.

 Th e BRICS could further cooperate among themselves in taking 

a coordinated position in several international organizations like the 

IMF, G-20, BIS, FSB, WTO, IOSCO, BCBS, etc. Given their size 

2012-08-054_000000000000232
 brics cooperation 179

and role in the global economy, the coordinated approach could lead 

to better synchronization of policies and improved outcomes.

(xi) Cooperation in Energy Security

Th e BRICS economies need to work towards increasing energy security. Th is would include coordination in multilateral fora to achieve 

better supervision of long-term swap contracts to fi x the price of future 

oil supplies, cooperation in oil exploration and refi ning, increasing 

natural gas supply through pipelines and setting up liquefi ed natural 

gas (LNG) terminals, raising the share of renewable energy in energy 

consumption, and encouraging conservation. Research and cooperation in renewable energy sources like solar, wind, tidal, biomass, and 

hydro-electric power would be important areas of cooperation and 

would go a long way in increasing energy security among the BRICS 

and other emerging economies. Lessons could also be drawn from the 

bio-fuel industry in Brazil especially in the motor transport sector. 

(xii) Cooperation to Build Eff ective Institutions

If one compares BRICS economies with the most advanced ones in 

terms of governance indicators, there is still a wide gap in governance 

eff ectiveness. Th e BRICS countries need to improve their governance 

and related institutional frameworks. Improvements in corporate 

governance, accounting standards, and the regulatory framework 

are essential to align standards in BRICS economies with the best 

international practices. Institutional soundness would enhance the 

2012-08-054_000000000000233
180 the brics report

capacity of the government to eff ectively formulate and implement 

sound policies.

(xiii) International Development Bank for Fostering 

South–South Investment

In order to safeguard against the emerging risks and uncertainties and 

to meet the challenges of development, it is critical for the BRICS 

countries to have an establishment like an international development 

bank for fostering South–South investment. Th e issue is particularly 

signifi cant in the context where global economic prospects remain 

fragile, contributing to instabilities in the fi nancial and investment 

fl ows across the economies amid varying risks and uncertainties, 

together with concerns on dangers arising from climatic and environmental changes. Such an institutional set-up may ensure a better 

allocation of hard-earned savings of developing and emerging economies, while rebalancing savings and investments within emerging and 

developing countries that would fi nance infrastructure and nurture 

higher growth in these economies. Th e proposal for international 

development bank for fostering South–South investment could also 

fi ll the gap in achieving their development goals through reorienting 

investments in low carbon infrastructure and technologies consistent 

with a more resilient and sustainable growth path.

2012-08-054_000000000000234
FM.indd 2 12/14/11 3:09:15 PM

2012-08-054_000000000000235
FM.indd 2 12/14/11 3:09:15 PM

2012-08-054_000000000000236
Philippines CTF IP Update December 2011

CLEAN TECHNOLOGY FUND

UPDATE 

OF 

INVESTMENT PLAN FOR THE PHILIPPINES

December 2011

2012-08-054_000000000000237
i 

Philippines CTF IP Update December 2011

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank

BRT Bus Rapid Transit

CIP CTF Country Investment Plan

CTF Clean Technology Fund

EE Energy Efficiency

EEEVs Energy Efficient Electric Vehicles

FIT Feed-in Tariff

GHG Greenhouse Gas

GoP Government of the Philippines

IBRD International Bank for Reconstruction and Development

ICE Internal Combustion Engine

IFC International Finance Corporation

MtCO2e Million tons of carbon dioxide equivalent 

RE Renewable Energy

WBG World Bank Group

2012-08-054_000000000000238
ii

Philippines CTF IP Update December 2011

TABLE OF CONTENTS

 

Section Page

I. Introduction 1

II. Status Of Original Investment Plan Implementation 1

III. Circumstances And Rationale For Investment Plan Update 4

IV. Proposed Changes To The Investment Plan 11

V. Potential Impacts Of Proposed Changes On Investment Plan Objectives 12

V. Additional Considerations of the Proposed Projects 16

Appendix 1: Market Transformation with Energy Efficient Electric Vehicles 21

Appendix 2: Accelerated Introduction of Energy Efficient Appliances 27

2012-08-054_000000000000239
Philippines CTF IP Update December 2011

EXECUTIVE SUMMARY

The Government of Philippines (GoP) proposes to reallocate resources in the Clean Technology 

Fund (CTF) Country Investment Plan (CIP) which was endorsed by the Trust Fund Committee 

(TFC) in December 2009. 

The Philippine Energy Reform Agenda has three pillars: (i) ensuring energy security, (ii) 

achieving optimal energy prices, and (iii) developing sustainable energy systems. Consistent 

with this reform agenda, the proposed changes to the CIP will attain timely use of CTF 

resources through reallocation of previously endorsed funds for renewable energy (net metering

with rooftop solar) to energy efficiency via deployment of more efficient domestic appliances and 

energy efficient electric vehicles (EEEVs). 

Philippine consumers pay one of the highest electricity tariffs in the world. As there are no 

subsidies for the generation sector, consumers and policy makers are rightfully concerned about 

further electricity price increases. At the same time, the feed-in tariff proposed by the electricity 

regulator has created large interest from the private sector for new investment, especially in 

solar and wind energy. In this context, the government has decided not to “crowd out” this 

significant private sector interest, which would be the case if the net metering project proposed 

in the original CIP were pursued. A project to finance roof-top solar power with net metering still 

remains a priority project but is not the highest priority at this stage. The Government plans to 

pursue this project at a later date once the price incentives are in place, with approved feed-in 

tariffs and established portfolio standards for each of the renewable energy technologies. At that 

time, if the sector requires public sector financing for market transformation, concessional 

resources may be sought to facilitate market penetration and transformation.

Since the original CIP was endorsed in December 2009, the GoP strategy has evolved to 

increase investment in end-use energy efficiency via public-led investment, as the highest

priority project for market transformation. As a net importer of energy, the shift in priority for CTF 

funding will improve energy security caused by rising global concern over heightened 

competition for depleting energy resources and greater price volatility.

The overall context and objectives of the CIP remain unchanged. No changes have been 

proposed to the CTF allocation for the World Bank Group (WBG) projects and programs. The 

proposed change will reallocate funds for public sector investments led by Asian Development 

Bank (ADB) to include energy efficiency (EE) and cleaner transport investments, consistent with 

the long-term objectives of the original CIP. Table ES1 summarizes the indicative financing plan 

as endorsed in December 2009. Table ES2 presents the indicative financing plan after the 

proposed reallocations. 

The overall context and objectives of the CIP are the same as the original CIP. The change in 

proposed ADB projects will achieve a better balance between supply and demand side 

investments without crowding out private sector investment in renewable energy and without 

compromising the Philippines energy reform objectives for affordable and sustainable energy 

security. The proposed projects will result in greater and more cost-effective GHG emissions 

than proposed in the original CIP, with enhanced development impacts.

This document has been revised considering CTF Trust Fund Committee discussion on 4 

November 2011 and subsequent written comments. Additional project-specific considerations 

2012-08-054_000000000000240
2 

Philippines CTF IP Update December 2011

will be addressed when specific projects reach the appraisal stage and are presented for 

funding approval by the Trust Fund Committee. 

Table ES1: Indicative Financing Plan Endorsed in December 2009 ($ million)

Financing Source Renewable Energy 

(WBG)

Urban Transport 

(WBG)

RE and EE 

(ADB) Total

CTF 75 50 125 250

GoP / DBP 180 50 50 280

IBRD Loans 250 250 0 500

IFC Loans 250 0 0 250

ADB Loans 0 0 400 400

Private sector 750 0 350 1,100

Total 1,505 350 925 2,780

Source: CTF Investment Plan for Philippines 2009

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, RE=renewable energy, WBG=World Bank Group 

Table ES2: Indicative Financing Plan After Reallocation ($ million) 

Financing Source

Renewable 

Energy 

(WBG) 

Urban 

Transport 

(WBG)

Energy Efficient 

Appliances 

(ADB) 

Energy 

Efficient 

Electric 

Vehicles 

(ADB)

Total

CTF 75 50 24 101a 250

GoP / DBP 180 50 46 99 375

IBRD Loans 250 180 0 0 430

IFC Loans 250 0 0 0 250

ADB Loans 0 0 100 300 400

Private sector 750 0 (tbd) b (tbd) b 750

Other cofinancing 0 20 0 0 20

Total 1,505 300 170 500 2,475

Source: MDB teams

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, RE=renewable energy, (tbd)=to be determinedWBG=World 

Bank Group 

Notes: 

a A CTF grant of $1 million is requested for fine-tuning of technology options, technology transfer, local industry 

support and capacity building (implementation support, including monitoring and evaluation activities will be financed 

by the ADB loan). b Private sector entities will participate in project implementation via supply of goods and services. For the EEEVs 

project, private sector investment is expected during replication and scale-up, and as such no private sector 

cofinancing is shown in Table 4. Private sector cofinancing for the EE appliances project has yet to be determined.

2012-08-054_000000000000241
1 

Philippines CTF IP Update December 2011

I. INTRODUCTION

1. The Philippines Clean Technology Fund (CTF) Country Investment Plan (CIP) was 

endorsed by the Trust Fund Committee (TFC) in December 2009, with an envelope of $250 

million in CTF cofinancing. The original CIP comprised clean energy and transport sector 

investments in both the public and private sector. 

2. The proposed change will reallocate funds for public sector investments led by Asian 

Development Bank (ADB) in net metering with solar power generation to include energy 

efficiency (EE) investments in public vehicles and domestic appliances. This change in 

investments is consistent with the long-term objectives of the original CIP. The overall context 

and objectives of the CIP are the same as the original CIP. The updated CIP is a business plan 

owned by the Government of the Philippines (GoP), and is a dynamic document with the 

flexibility to consider changing circumstances and new opportunities. 

3. No changes have been proposed to the CTF allocation for the International Bank for 

Reconstruction and Development (IBRD) and International Finance Corporation (IFC) and the 

IFC-led investment programs. Therefore, this document primarily covers the proposed changes 

and program to be implemented by the Asian Development Bank (ADB), and is organized as 

follows: 

• Section II -- Review of the status of the implementation of the original investment 

plan;

• Section III -- Explanation of the circumstances and rationale for revising the 

investment plan and making changes to the projects or programs included;

• Section IV -- Description of the proposed changes, i.e., proposed reallocation of 

funds as requested by the GoP through the Ministry of Finance’s letter dated 4 

October 2011 to the CTF Trust Fund Committee; and

• Section V -- Assessment of the potential impact of the proposed changes on 

achieving the objectives and targets of the original investment plan.

II. STATUS OF ORIGINAL INVESTMENT PLAN IMPLEMENTATION 

4. The status of project development and approvals is presented in Table 1 and discussed 

below. 

Table 1: Processing Status of IBRD and IFC Investment Programs

Project TFC Approval Date CTF Amount

($ million)

Leveraged Funding

($ million)

IFC RE Accelerator Program September 2010 20 330

IFC Sustainable Energy Finance Program February 2011 10 209

IBRD RE/EE Project May 2012 45 200

IBRD Urban Transport (BRT) June 2012 50 250

Source: MDB project teams

IBRD Renewable Energy Program

5. The IBRD/CTF operation would support investments in renewable energy (RE) 

generation and in utility-level energy efficiency (EE). The operation would build on IBRD

projects that are active in these sub-sectors. In RE, the focus will be on leveraging private 

2012-08-054_000000000000242
2 

Philippines CTF IP Update December 2011

sector investment in the context of the emerging policy and regulatory framework for 

renewables, and ensuring that CTF is used strategically to leverage as much private investment 

as possible. In EE, the goal is to scale-up the efforts of electric cooperatives (ECs) to continue 

to reduce losses, as one key input for enhancing the financial strength of these service 

providers. Stronger ECs will be better able to expand their customer bases, contributing to 

critical access objectives, and to serve those new customers with an increasing proportion of 

clean energy.

6. While the Philippines has an advanced framework for private participation and for 

attraction of private financing, there are significant barriers to the scale-up of RE and utility-led

EE. For example, for administrative ease, the country has opted for a single, national feed-in 

tariff (FIT) rate per technology; but supply chain and other costs vary widely in the country, so 

some economically beneficial projects will not be financially viable under the FIT mechanism. 

The FIT regime will also not extend to certain renewable technologies (e.g., geothermal), nor 

will it cover off-grid generation. CTF will be used to provide critical additionality and leverage 

such that more, good projects will be financed, especially in regions of the country that might not 

otherwise see much activity. In the EC sector, there are 119 service providers but only about 

half are currently rated credit-worthy, and investment flows are falling well short of requirements 

even for the credit-worthy. CTF is targeted at both the supply side – by leveraging the flow of 

private credit to support investments – and at the demand side, by establishing programmatic 

eligibility criteria that will help incentivize more ECs to become credit-worthy. 

7. GoP has made its formal request for project preparation funds from the CTF, and project 

preparation work is set to accelerate. Project appraisal is targeted for May 2012 and 

presentation to the IBRD Board is scheduled for October 2012.

IBRD Urban Transport Program

8. The Program comprises Investment and Advisory Services components to support the 

implementation of Bus Rapid Transit (BRT) projects in Cebu and Manila. The advisory services 

component includes support for implementation of the National Environmentally Sustainable 

Transport Strategy (NESTS). Since the Philippines CIP was prepared in December 2009, there 

have been a few minor changes made to the scope and design of the urban transport 

component. These adjustments are outlined below. 

9. Through project preparation work undertaken since the initial CTF investment proposal, 

it has become evident that to ensure successful implementation of a bus rapid transit (BRT) 

system in the Philippines, substantial capacity and institution building work will be necessary. To 

this end, it has been agreed with the counterparts that the BRT program would be undertaken in 

two phases, beginning with a demonstration project in Cebu City, from which lessons learned

and institutional structures derived would be applied to the second phase, the development of a 

BRT in Manila. Given the substantive social and political hurdles involved in the Manila phase, 

the counterparts agreed that a successful demonstration in Cebu would facilitate more rapid 

implementation in Manila. 

10. Also, for Phase I, to maximize greenhouse gas emissions mitigation benefits, as well as 

safety, gender, and poverty impacts, the program scope has been slightly expanded to also 

include upgrading the existing SCATS area traffic control system to better manage traffic and 

non-motorized transport (NMT) flows, not only on BRT corridors, but for the entire transport 

network. Further, Phase I will include significant training and capacity building work not just for 

the local government, but also relevant stakeholders, such as the jeepney operators. 

2012-08-054_000000000000243
3 

Philippines CTF IP Update December 2011

11. Finally, since the initial CTF proposal, a parallel Sustainable Urban Energy Program 

(P125401) has been undertaken by the IBRD in Cebu City, through which it was determined 

that the greenhouse gas emissions from the transportation sector were 721,000 tons CO2e in 

2010, about 40 percent of Cebu’s total greenhouse gas emissions. While this figure will be 

verified and refined during the CTF project preparation, the estimate provides a basis upon 

which to develop preliminary greenhouse gas emissions reduction targets that may be 

attributable to Phase I in Cebu, versus Phase II in Manila. Through the expanded project scope, 

a range of 100,000 to 150,000 tons CO2e emissions reductions per year may be a reasonable 

estimate for Phase I, with more substantive emissions reductions to be expected in Manila, 

which is many times the size of Cebu City and has a much higher motorization rate. The 

success of Phase 1 is critical to expanding the scope to Phase ii. However, in addition to CO2e 

emissions reductions, it is expected that Phase I demonstration project would have considerable 

impact on improving access to the poor, providing a safer and more effective transport services 

to all residents, and influencing changes in land use design with a long-term impact on the city’s 

ability to address climate change related issues.

12. Since the program will be undertaken in two phases, rather than one, funding allocations 

have been adjusted accordingly, as shown in Table 2. Further, additional financing and 

technical assistance funding has been secured from the Agence Française de Développement 

(AfD), which is also reflected in the revised figures. The CTF funds will continue to be needed to 

cover part of the additional costs of BRT systems compared to conventional bus networks. 

Table 2: Revised Financing Plan for IBRD Urban Transport Program (US$ million)

Funding Source

December 2009

Original Proposed 

Contribution

October 2011

Revised Proposed Contribution

Phase I Phase II

Government of the Philippines 50 15 35

IBRD 250 90 90

Clean Technology Fund 50 25 25

Agence Française de Développement 0 20 tbd

Total 350 150 150

Source: IBRD 

13. Overall progress is shown above in Table 1. Project preparation work is proceeding well 

and three missions have been undertaken since April 2011. The Government has made a 

formal request for project preparation funds from the CTF. Appraisal of the project is targeted for 

June 2012 and presentation to the Bank’s Board for November 2012. 

IFC Programs

14. As of October 2011, two private sector program proposals have proceeded: $20 million 

was approved in September 2010 for the IFC Renewable Energy Accelerator program, and $10 

million was approved in February 2011 for the IFC Sustainable Energy Finance program. 

IFC Renewable Energy Accelerator Program (REAP)

15. IFC would provide appropriate incentives for qualified solar, wind, and biomass 

developers to accelerate the implementation of RE projects. These projects would provide 

immediate GHG reduction impact and provide valuable information on the types and amounts of 

incentives required to catalyze RE development in the country. IFC will continue to develop 

2012-08-054_000000000000244
4 

Philippines CTF IP Update December 2011

projects with CTF support in close coordination with the GoP and the policies that govern 

private sector growth. The rationale is the same as envisioned in the original CIP. IFC continues 

to work with project developers and refining financial structures in the development of projects. 

Overall progress is shown above in Table 1.

IFC Sustainable Energy Financing Program (PSEFP)

16. The program supports the scale up of sustainable energy finance projects in Philippines. 

It aims to contribute to increasing private sector involvement, support captive and grid-tied RE 

development, EE market transformation, and enhance energy savings. The CTF funds will 

continue to be needed to incentivize local financial institutions to undertake financing in lower 

carbon emitting technologies. The rationale is the same as envisioned in the original CIP. IFC 

continues to work with various stakeholders in developing projects under the program. IFC has 

a pipeline of projects that are at various stages of development that would fully utilize IFC's CTF 

allocation.

III. CIRCUMSTANCES AND RATIONALE FOR INVESTMENT PLAN UPDATE

17. The overall rationale for CTF intervention in the energy and transport sectors remains 

unchanged. GoP has requested that the ADB allocation be revised to accommodate 2 projects, 

instead of the single intervention proposed in the original CIP. Major changes in circumstances 

since 2009 are as follows: 

(i) The specific rules for the Renewable Portfolio Standard (RPS), feed-in tariffs, and 

net metering have yet to be finalized and become fully effective. GoP is fully 

committed to the RPS, FIT, and net metering programs; finalization of the 

implementing rules is expected sometime in 2012. 

(ii) The Philippines Department of Energy has proposed that the RPS for solar power 

will be 50 MW over a 3-year period, limited to ground-mounted installations.1 The 

proposed feed-in tariff has attracted initial private sector interest for several times 

this capacity, obviating the need for concessional financing for solar power in the 

near term. 

(iii) Increases in fossil fuel prices since 2009 point to the need for additional 

investments in energy end-use efficiency, including in the efficient energy use by 

the transport sector. 

(iv) A successful pilot test of energy efficient electric vehicles (EEEVs)

2 conducted with 

ADB support is ready for scale up. 

18. Based on circumstances (i) and (ii), the net metering project using distributed solar 

power proposed in the original CIP is not yet ready for implementation, and given private sector 

interest under the proposed FIT and RPS it is not obvious that concessional finance is needed 

in the near term for the net metering program (or for other utility-scale solar power projects). 

Based on circumstances (iii) and (iv), GoP believes that concessional financing could be better

utilized in the near term to begin converting the public vehicle fleet to electric vehicles. 

Introduction of electric and hybrid vehicles is being complemented by other alternative and 

 

1 Philippines Department of Energy, Resolution dated 28 June 2011. 2 The vehicles are motorcycles with side cars which provide taxi services, known locally as “tricycles”; this tricycle 

design is somewhat unique to the Philippines. The pilot-tested EEEVs are also referred to as “e-trikes.” The transport 

services provided by tricycles are similar to auto-rickshaws utilized in other Asian countries including Bangladesh 

India, Indonesia, and Thailand. Hence the potential for replication and scale-up is regional in scope.

2012-08-054_000000000000245
5 

Philippines CTF IP Update December 2011

cleaner fuel development including domestic production of renewable diesel and ethanol to 

meet mandated blending requirements. 

19. Given the need for convergence between climate change and energy security 

objectives, GoP has requested to shift the original $125 million of CTF resources slated for the 

net metering project, and re-direct $24 million to investments in energy efficient appliances and 

$101 million to the EEEVs project. The prospective investments are appropriate for CTF support 

given their transformational nature and the replication and scale-up potential. The shift toward 

demand-side investments from the original net metering project—which combines supply- and 

demand-side aspects—is fully consistent with GoP energy and transport policies. The proposed 

projects are discussed in more detail below and in Appendices 1 and 2.

Addressing Energy Security and the Philippines Energy Roadmap

20. GoP is committed to reducing energy intensity and greenhouse gas (GHG) reductions 

through a comprehensive policy framework as described in the original CIP. Figure 1 illustrates 

trends in total primary energy supply, indicating that coal and natural gas have displaced oil for 

power generation, while the share of renewables has not increased substantially during the past 

several years. The trend of increasing coal use is of particular concern with respect to energy 

security and GHG emissions. The IBRD and IFC programs (noted above in Section II) will 

continue to focus on RE and EE investments which are intended to reduce demand, add clean 

generation capacity, and offset future fossil power capacity additions.

Figure 1: Trends in Total Energy Supply

Source: IEA, accessed on 11 August 2011 from: http://www.iea.org/stats/pdf_graphs/PHTPES.pdf

2012-08-054_000000000000246
6 

Philippines CTF IP Update December 2011

21. In 2010, the Philippines spent approximately $8.78 billion3 on imported oil–39% more 

than in 2009, about 66% of which was used by the transport sector. With growing population 

and urbanization, the cost of fuel imports is likely to grow by multiple times in the next 10-15 

years. GoP plans to improve energy security—a national priority—with EEEVs, RE, and other 

EE investments. 

22. Based on the McKinsey marginal abatement cost curve (Figure 2) and a study by ADB 

(Figure 3), GoP developed the investment strategy for the energy sector as shown in Figure 4, 

where $250 million was to be financed by the CTF. Energy efficient vehicles, although a GoP 

priority, were not part of the original CIP prepared in 2009 as no project or program had been 

formulated at that time. GoP proposes to change the prioritization considering the changed 

circumstances in relation to increased private investor interest in RE generation projects, 

consumers’ concern on potential impacts of feed-in tariff, and prospect of higher electricity 

tariffs. 

Figure 2: McKinsey Marginal CO2 Abatement Cost Curve

$30 million

Scale up project

23. The government’s priority projects are illustrated in Figure 4, below. The outer circle 

represents overall potential investment in various clean energy interventions, including private 

sector investments, superposed on the McKinsey curve for the Philippines. The small ellipse at 

the lower left represents investment potential in more efficient lighting, which has been partly 

addressed through public sector investment with ADB financial support. The larger ellipse 

represents the bulk of potential clean energy investment, toward which the original CIP directed 

$250 million in CTF cofinancing. Of this $250 million, $125 million was proposed to cofinance 

the startup of the net metering program with solar photovoltaic (PV) systems. 

 

 

3 Source: Department of Energy, available at: http://www.doe.gov.ph/DO/Report2010.htm

2012-08-054_000000000000247
7 

Philippines CTF IP Update December 2011

Figure 3: Philippines Marginal CO2 Abatement Cost Curve

Figure 4: Investment Strategy and Priority CTF Project (December 2009)

24. The GoP remains fully committed to its development policy framework for energy 

security, climate change, environmental management, and public health. The general 

2012-08-054_000000000000248
8 

Philippines CTF IP Update December 2011

approach and overall objectives for low-carbon development presented in the original CIP 

remain the same. GoP is committed to reducing energy intensity and greenhouse gas (GHG) 

reductions through a comprehensive policy framework as described in the original CIP. The 

energy and transport policy frameworks discussed in the original CIP remain in effect. The GoP 

remains fully committed to its development policy framework for energy security, climate 

change, environmental management, and public health. The general approach and overall 

objectives for low-carbon development presented in the original CIP remain the same.

25. The strategic rationale for CTF intervention in the energy and transport sectors 

remains unchanged. The transport sector, power generation, and other energy end-use are

highly dependent on imported fuels, which render the country vulnerable to energy supply 

disruptions and global price fluctuations. The Philippines has a variety of RE resources—

biomass/biogas, geothermal, small hydropower, and wind—with estimated total potential of 

about 7400 MW, of which about 60% has been developed. In the near term, biomass, 

geothermal, hydropower, and wind are expected to account for most of the new RE capacity 

additions. Additional potential from solar and waste-to-energy is high but commercial 

development of these resources has very high start-up costs; solar and waste-to-energy are not 

expected to contribute at the gigawatt scale in the foreseeable future. Therefore, investments in 

more efficient appliances and energy efficient transport systems are critical in the near to 

medium term. Figure 5 illustrates the proposed reallocation of CTF funding to EEEVs and 

energy efficient appliances which are discussed in more detail below. Comparison of Figures 4 

and 5 clearly shows that the underlying clean energy and cleaner transport strategies have not 

changed.

Figure 5: Investment Strategy and Priority CTF Project (November 2011) 

2012-08-054_000000000000249
9 

Philippines CTF IP Update December 2011

Status of Renewable Energy and Energy Efficiency Development

26. The Philippines RE potential is high, but new investment has been limited during the last 

several years relative to the potential (except in wind energy). The estimated RE potential is 

2,000 megawatts (MW) for biomass; 3,400 MW for hydropower, of which 1,700 MW is small 

hydro; 1,070 MW for geothermal; and 500 MW for wind, as well as large potential for solar.4 To 

catalyze investment in RE, the government approved the Renewable Energy Law in 2009. The 

Renewable Energy Law mandates a universal charge on all customers to finance the proposed 

incentives for renewable energy, especially the proposed feed-in tariff.5 The potential increase 

in electricity price from this tariff could potentially further harm the broader economic 

development and investment climate. Although high electricity prices in the Philippines make

clean energy projects financially attractive, without broad market transformation the desired 

objectives of the Renewable Energy Law will be difficult to achieve. The desired transformation 

requires adoption of new clean energy systems at scale, more responsive regulation, and 

consumer acceptance. 

27. With the region’s highest retail electricity tariffs, the Philippines should be the one of the 

most attractive places for investments in EE. The high electricity prices provide excellent 

incentives to undertake EE projects; unfortunately, very few EE projects have been 

implemented to date. The main barriers are lack of flagship projects and general awareness of 

EE opportunities by end users. The government has addressed the issue of lighting and building 

inefficiencies through the Philippine Energy Efficiency Project (PEEP), which is being 

implemented with ADB support. The PEEP is financing development of energy service 

companies (ESCOs) and implementation of a large-scale program to switch from incandescent 

to compact fluorescent lamps (CFLs); the PEEP is providing valuable learning experience to 

inform project design for EEEVs and EE appliances. 

Priority Introduction of Energy Efficient Electric Vehicles 

28. Transport sector energy consumption will continue to grow at an average annual rate of 

3.2%, with road transport accounting for 90% of energy demand for transport by 2030. The 

transport sector, mainly tricycles, jeepneys, and buses, contributes a large portion of CO2

emissions: 3.5 million registered motorcycles and tricycles release 10 million tons of CO2 into 

the atmosphere each year and consume close to $3 billion worth of fuel. Introducing new 

technology is the best immediate option to mitigate transport emissions. Electric vehicles are 3–

5 times more efficient than internal combustion engine vehicles (ICE), whether fueled by 

gasoline, compressed natural gas (CNG), or liquefied petroleum gas (LPG). The public transport 

sector can save a significant portion of imported energy by switching to energy-efficient electric 

vehicles (EEEVs). 

29. EEEVs represent a new technology with the promise to transform the way energy is 

used compared to today’s ICE vehicles. For net energy importing countries such as the 

Philippines, EEEVs can dramatically reduce the country’s oil dependency and improve longterm energy security. EEEVs generate no harmful air and noise pollution [at street level] and 

can be powered by indigenous RE sources such as solar, hydropower or geothermal resources.

The envisioned fleet conversion will contribute to making the transport sector’s energy use 

sustainable, by introducing new technology that eventually will allow domestic solar, wind and 

 

4 Commercial potential is noted as at least 800 MW, based on private sector commitments pursuant to the proposed 

feed-in tariff. 5 The incentives include a renewable energy certification scheme, feed-in tariffs, renewable energy portfolio 

standards, net metering schemes, priority dispatch options, and support for renewable energy host communities.

2012-08-054_000000000000250
10

Philippines CTF IP Update December 2011

hydropower power to be used as a fuel source for the transport sector, replacing the fossil fuels 

used today.

6

 

30. GoP’s preliminary modeling shows that a 7% electric vehicle penetration by 2015 and 

15% by 2030 can reduce fuel imports by approximately 6% in 2015, 13% in 2020, and more 

than 40% by 2030 with concomitant reductions in GHG emissions and other air pollution. The 

proposed electric vehicle policy7 directly supports electric vehicle related businesses and will 

exempt importation of all electric vehicles (plug in and hybrid) from taxes for nine years. The 

proposed EEEVs project will support the Department of Energy’s Fueling Sustainable Transport 

Program and the Alternative Fuel Vehicles Incentives Act of 2011. This move to begin 

electrification of the vehicle fleet is fully consistent with the National Environmentally 

Sustainable Transport Strategy (NESTS) described in the original CIP. 

31. The transport sector accounted for about one-third of total GHG emissions in 2009 

(excluding emissions from land use change and forestry). Transport sector emissions have 

increased by about 6-10% per year since 1990, from about 10 million tons per year carbon 

dioxide equivalent (MtCO2e/y) in 1990 to about 29 MtCO2e/y in 2007.8 Vehicles are one of the 

dominant sources of urban pollution that threatens both people’s health and economic activity. 

In the Philippines, motorcycles and tricycles comprise more than 52% of vehicle population, and 

these vehicles are the bottom of the transport sector “pyramid.” Compared to other vehicles, 

motorcycles and tricycles are less expensive (and therefore more affordable), they are very 

visible in most cities of the country, and play an important role in the transport market, 

particularly as a key short-distance transport mode. However, the use of these vehicles 

contributes to the already declining state of the environment, particularly air quality in urban 

areas. In an ADB study, transport sector emissions accounted for 30% of air pollution in the 

Philippines and about 80% of air pollution in Metro Manila.

32. In order to improve urban transportation systems, control pollution from fossil fuels, 

enhance energy security, and mitigate long-term GHG impacts, the GoP has embarked on an 

ambitious program to introduce electric and compressed natural gas (CNG) vehicles into the 

public transportation fleet.9

 ADB is supporting a demonstration project10 for introduction of etrikes in Mandaluyong City (part of the Metro Manila core urban area). The initial results have 

been positive11, and GoP has requested ADB to provide financial support for the commercial 

deployment of 20,000 e-trikes, first phase of the 100,000 e-trikes to be eventually set out by 

2016.

12 The proposed EEEVs project will create an early-adopter opportunity to innovate in 

establishing sustainable local e-Trike manufacturing capacity, battery and vehicle leasing 

schemes, and associated services for vehicle operation and maintenance: the project is being 

designed to deliver an end-to-end infrastructure solution for cleaner transport which is 

 

6 Today, fossil fuels are trucked to the remotest consumption points from thousands of kilometers away. Domestic 

petroleum production (dominated by natural gas) is predominantly in basins located hundreds of kilometers offshore. 7 Senate Committee Report No. 44 on Senate Bill No. 285–Electric, Hybrid and Other Alternative Fuel Vehicles 

Incentives Act of 2011. 8 CTF Investment Plan for the Philippines; paragraph 8 and Figure 3. 9 CNG is used in some other countries (e.g., South Asia) for autorickshaws, and conceivably could be used for 

tricycles. However, GoP’s emphasis on energy security and reduction of petroleum product imports points toward 

electrification as a preferred option.

10 Financed by RETA 6441: Efficiency Improvement and Connectivity Strengthening in Southeast Asia. Manila. 11 A summary of the initial results of the pilot and project concept can be found at: 

http://www.adb.org/projects/etrike/etrike-industry-presentation.pdf 12 ADB. 2010. Technical Assistance to the Republic of the Philippines for Mitigation of Climate Change through 

Increased Energy Efficiency and the Use of Clean Energy. Manila. (TA 7754-PHI). 

2012-08-054_000000000000251
11

Philippines CTF IP Update December 2011

consistent with GoP’s overall energy security, economic development, and climate change 

objectives.

IV. PROPOSED CHANGES TO THE INVESTMENT PLAN

33. The original CIP identified several prospective interventions in EE, RE, and urban 

transport. The indicative financing plan endorsed in December 2009 is summarized in Table 3.

Table 3: Indicative Financing Plan Endorsed in December 2009 ($ million) 

Financing Source Renewable Energy (WBG) Urban Transport (WBG) RE and EE (ADB) Total

CTF 75 50 125 250

GoP / DBP 180 50 50 280

IBRD Loans 250 250 0 500

IFC Loans 250 0 0 250

ADB Loans 0 0 400 400

Private sector 750 0 350 1,100

Total 1,505 350 925 2,780

Source: CTF Investment Plan for Philippines 2009

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, RE=renewable energy, WBG=World Bank Group 

34. The major change proposed is to reallocate CTF funds for the Energy Efficient 

Electric Vehicles and Appliances projects to be cofinanced with ADB. In particular, EEEVs

promise to transform the way energy is used by light-duty vehicles. For net energy importing 

countries such as the Philippines, electric vehicles can dramatically reduce the country’s 

dependence on imported energy resources, which in turn will offset some short term price 

volatility and improve long term energy security. Electric vehicle technology presents the 

opportunity to transition from conventional fossil-fueled vehicles to vehicles which do not directly 

generate harmful air and noise pollution and can be powered by indigenous renewable energy 

resources such as solar, hydropower or geothermal. 

35. These prospective investments are appropriate for CTF support given the 

transformational nature of the projects and the replication and scale-up potential.13 The 

proposed changes will allocate $101 million to the ADB EEEVs project and $24 million to the EE

Appliances project, as shown in Table 4. Concept papers for the candidate investments are 

presented in Appendices 1 and 2.

Table 4: Indicative Financing Plan After Reallocation ($ million) 

Financing Source

Renewable 

Energy 

(WBG)

Urban 

Transport 

(WBG)

Energy Efficient 

Appliances

(ADB)

Energy Efficient 

Electric Vehicles

(ADB)

Total

CTF 75 50 24 101 a 250

GoP / DBP 180 50 46 99 375

IBRD Loans 250 180 0 0 430

IFC Loans 250 0 0 0 250

ADB Loans 0 0 100 300 400

Private sector 750 0 (tbd) b (tbd) b 750

Other cofinancing 0 20 0 0 20

Total 1,505 300 170 500 2,475

Source: MDB teams 

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

 

13 Pakistan, Indonesia, Malaysia, Bangladesh and Thailand have expressed interest in exploring options for 

implementing similar projects.

2012-08-054_000000000000252
12

Philippines CTF IP Update December 2011

Development, IFC=International Finance Corporation, RE=renewable energy, (tbd)=to be determined, WBG=World 

Bank Group 

Notes to Table 4: a A CTF grant of $1 million is requested for fine-tuning of technology options, technology transfer, local industry 

support and capacity building (implementation support, including monitoring and evaluation activities will be financed 

by the ADB loan).

b Private sector entities will participate in project implementation via supply of goods and services. For the EEEVs 

project, private sector investment is expected during replication and scale-up, and as such no private sector 

cofinancing is shown in Table 4. Private sector cofinancing for the EE appliances project has yet to be determined.

V. POTENTIAL IMPACTS OF PROPOSED CHANGES ON INVESTMENT PLAN 

OBJECTIVES

36. The proposed changes will enhance both the EE and cleaner transport programs by 

using CTF resources to accelerate investment in advanced electric vehicle systems, and will

contribute directly to the near-term strategic EE investment program. An assessment of 

potential impacts of the proposed changes on achieving the objectives and targets of the 

original CIP is summarized in Table 5 and discussed below. 

37. Transformational impact will be enhanced. The scope of EE and cleaner transport 

sector interventions will be expanded relative to the original CIP, bringing additional value by 

opening a new “window” for deploying EEEVs in sustainable transport systems. More efficient 

battery technologies are providing a cleaner alternative to pollution-emitting ICE-powered 

vehicles. In some cases, conventional motorcycles emit more pollution than large sport utility 

vehicles because the former are not equipped with equivalent emissions-control technology.14

Electric motorcycles and tricycles can immediately eliminate tailpipe emissions, significantly 

reducing urban air pollution. Commercial success of e-trikes can be replicated in other types of 

vehicles, including jeepneys and buses (although technical complexity increases with larger 

vehicles). 

Table 5: Summary Assessment of Proposed Changes

CTF Investment 

Criteria

Original Investment Plan: 

Net Metering with Solar PV

Updated Investment Plan: 

EE Appliances and Energy Efficiency Electric 

Vehicle Projects

Potential for 

GHG Emissions 

Savings

Direct reductions would be 

relatively modest but replication 

and scale-up potential is quite 

high as the investments would 

promote GHG reductions through 

RE and EE.

ADB program will target end-use efficiency 

improvements which represent permanent energy 

savings via avoided generating capacity and avoided 

fuel imports. Replication and scale-up potential is high 

for both EE and electric vehicles.

Costeffectiveness

Initial direct reductions of 

100,000 tCO2e per year with 10 

to 1 replication and scale-up 

potential

Cost effectiveness: CTF$125 / 

MtCO2e / year with replication 

and scale-up (see additional 

calculations presented in Tables 

9 and 10) 

EE appliances project: 10 – 30% annual electricity 

savings are expected at a cost of 1/3 or less of new 

generating capacity. Energy savings of about 250 

gigawatt-hour per year are expected to deliver GHG 

reductions of about 125,000 tCO2e per year; with 10-

year lifetime, total GHG reductions are 1.25 MtCO2e. 

Replication and scale-up potential is at least 10 to 1.

Cost effectiveness: CTF$24 million / 1.25 MtCO2e = 

CTF$19 / tCO2e, declining to CTF$1.92 / tCO2e with 

replication and scale-up.

EEEVs project: 100,000 vehicles will deliver net 

reduction of 270,000 tCO2e per year; with 10-year 

 

14 The Technology Review, published by MIT, 2007, available at: http://www.technologyreview.com/energy/19069/

2012-08-054_000000000000253
13

Philippines CTF IP Update December 2011

CTF Investment 

Criteria

Original Investment Plan: 

Net Metering with Solar PV

Updated Investment Plan: 

EE Appliances and Energy Efficiency Electric 

Vehicle Projects

vehicle lifetime total GHG reductions are 2.7 MtCO2e. 

Replication and scale-up potential is at least 20 to 1.

Cost effectiveness: CTF$101 million / 2.7 MtCO2e = 

CTF$37 / tCO2e, declining to CTF$3.74 / tCO2e with 

replication and scale-up of 10 to 1 

[See additional calculations in Tables 9 and 10 and 

Appendix 1]

Demonstration 

Potential at 

Scale

Transformation potential a of at 

least 10 

Transformation potential is estimated to be

> 10 for EE appliances and > 20 for EEEVs 

Development 

Impact

The proposed investment would 

demonstrate viability of the net 

metering system (and business 

model) and accelerate 

development of the solar PV 

industry in the Philippines

The EE appliances and EEEVs projects will accelerate 

growth of the respective industries in the Philippines by 

demonstrating new technology / systems and business 

models. 

Impacts with respect to energy security and 

environmental benefits will be higher than the original 

CIP; impacts on employment also may be higher than 

the original CIP given the potential benefits accruing to 

e-trike owner/operators and private sector firms 

involved in supply of hardware and after-market 

services.

Implementation 

Potential 

As the implementing rules and 

feed-in tariff for net metering 

have not been finalized, the 

originally proposed project is not 

ready for implementation.

The EEEVs project has been developed based on a 

successful pilot project in the Metro Manila region and 

is at an advanced stage of preparedness. The EE

appliances project is in early development and is 

tentatively scheduled for ADB Board consideration in 

2012. See Table 7 for discussion of implementation 

risks and mitigation.

Additional 

Costs and Risk 

Premium

The additional costs of the solar 

PV systems and first-mover risk 

associated with net metering 

clearly justified the use of CTF 

resources.

The proposed projects will focus on using CTF for 

covering additional costs associated with introduction of 

electric vehicle systems and for covering additional 

costs and first-mover risks in EE investments (see 

Appendices 1 and 2). a Transformation potential is defined in paragraphs 15 - 17 of the CTF Investment Criteria for Public Sector 

Operations dated 9 February 2009. 

CIP=CTF Country Investment Plan, CTF=Clean Technology Fund, EE=energy efficiency or energy efficient, 

EEEVs=energy efficient electric vehicles, GHG=greenhouse gas, RE=renewable energy, tCO2e=tons carbon dioxide 

equivalent

38. Emissions reductions from the EE Appliances and EEEVs investments will be 

higher than the original investment plan, with higher replication and scale-up potential. 

The direct investments in the EE Appliances and EEEVs projects will result in net avoided fossil 

fuel emissions estimated to be at least 0.4 million tCO2e/y, but with better cost-effectiveness and 

higher replication and scale-up potential than the original CIP as shown above in Table 5 (see 

additional discussion below at Tables 9 and 10, and in Appendix 1). The EEEVs project will 

bring environmental and public health co-benefits equal to or greater than that which would be 

realized under the original Investment Plan.

39. Replication and scale up potential will be higher than originally planned.

Commercial deployment of EEEVs will expand the urban transport program beyond the original 

CIP. The replication potential for e-trikes and motorbikes alone is at least 20 to 1 based on the 

2012-08-054_000000000000254
14

Philippines CTF IP Update December 2011

current vehicle fleet size; however, replication and scale-up is conservatively assumed to be 10 

to 1 for purposes of calculating total emissions reductions and cost-effectiveness. Replication 

potential for investment in EE appliances is well over 10 to 1. Using CTF to cofinance 

investment on these types of pioneer projects will eliminate first-mover risk and will help 

mobilize future commercial investment for replication and scale up. Private sector firms will be 

actively engaged in project implementation via service, supply, and maintenance contracts; the 

private sector is expected to take a more prominent role in replication and scale-up.

40. Development impacts and co-benefits will be maintained or enhanced. Expanded 

investment in EE appliances and new investment in EEEVs will improve energy security, reduce 

GHG emissions, and reduce conventional pollutant emissions with substantial public health 

benefits. Using CTF to cofinance these types of pioneering projects will help mobilize future 

commercial investments (mainly by private sector entities) for replication and scale up, which 

will stimulate economic growth and facilitate the long-term transition to low-carbon development.

A comparison of proposed results indicators is presented in Table 6.

Table 6: Results Indicators 

Results Indicator Baseline

Expected 

Program Results 

in Original CIP: 

Net Metering with 

Solar PV

Expected Program Results For 

EE Appliances and EEEVs 

Projects 

Cost of solar power 

units 

$18,000 with 9.8 year 

payback

$10,000 with 2.5 

year payback a n/a

Number of 

commercial buildings 

with solar panels and 

net metering

Limited 30,000 buildings n/a

Number of e-trikes 

and support 

infrastructure in 

commercial operation 

20 (with lithium ion batteries, 

post-pilot test) and about 

200 using conventional lead 

acid batteries and less 

efficient motors.

n/a

15,000 e-trikes operating by 2013 

and about 100,000 by 2016. 

Public charging infrastructure and 

battery leasing established in 

respective regions. 

Overall quality of 

appliances in the 

Philippines

Most commonly used 32 

inch TV wattage is 100 Watt 

to 125 Watt

n/a

Benchmark Wattage established 

(40 Watt – 50 Watt). At least 50% 

of TV Wattage is below 60 Watt by 

2015. Similar benchmark for 

(Computer monitors, refrigerators, 

room air-conditioners and fans) 

Notes: a Indicators are from Table 1 of Executive Summary of the original CIP. 

Source: October 2011 Joint Mission 

41. Implementation potential for the EE Appliances and EEEVs projects is high. The

EEEVs project is nearing the appraisal stage and is scheduled for presentation to ADB’s Board 

of Directors in early 2012. The EE Appliances project is under preparation and is expected to be 

presented for ADB Board consideration in the first half of 2012. Risks and mitigation measures 

are summarized in Table 7. 

42. The Philippines Department of Energy (DOE) will be the executing agency for these 

proposed projects, as DOE is the designated agency for EE activities as well as alternative fuels 

including electric vehicles. The scope and implementation arrangements of the proposed 

projects have considered substantial learning curve from the Philippines Energy Efficiency 

Project (PEEP, supported by ADB financial and technical assistance), and the EEEVs pilot 

projects in Mandaluyong and Taguig Cities. A key lesson learned from the EEEVs pilot projects 

2012-08-054_000000000000255
15

Philippines CTF IP Update December 2011

is that for transformational impact to be realized, the investments must include the complete 

spectrum of stakeholders including vehicle owner/operators, equipment suppliers, and aftermarket service providers, i.e., the project must facilitate “end-to-end” infrastructure development

including the development of a credible battery industry with new technology. 

Table 7: Risks and Mitigation Measures

Risk Mitigation Measure Residual 

Risk

Policy and regulatory framework: 

Clarity of policies related to EE and 

cleaner transport

• High energy prices and price volatility provide macroeconomic support to end-use efficiency investments

• Application of innovative financing to cover part of frontend capital costs and to reduce first-mover risks

L 

Implementation Capacity: Readiness 

of owner-operators to procure and 

operate electric vehicles

• Technical assistance to transfer know-how on project 

planning, financing, risk management, especially for 

pioneering projects

L/M

Technology: Limited know-how for 

after-market service of electric 

vehicles

• Technical assistance and know-how transfer for newlyintroduced electric vehicles will be provided based on 

experience from pilot project M/H

Finance: 

• E-trike operators are expected to improve net income 

by 50% 

• Carbon finance will be mobilized to the maximum extent 

possible, including prospective post-2012 carbon 

revenue.

L/M

Environmental Management: 

Management and disposal of used 

appliances and batteries 

• Battery leasing and recycling programs are integrated 

into the e-trikes projects. Recycling / de-manufacturing 

program will be included in the EE appliances project. 

• Rigorous application of GoP regulatory framework and 

ADB safeguards for environmental and social impact.

L 

Development Impact: Mobilization 

of investment for replication and 

scale-up; potential disruption of 

access to energy to “last mile” 

consumers

• Work closely with vehicle owners, business 

associations, and domestic financial institutions to raise 

awareness and promote future investment in EE 

appliances and electric vehicles. 

• Electricity demand from the EEEVs project will be offset 

by efficiency gains from the EE appliances project and 

near-term solar power capacity additions funded by the 

private sector

L 

Carbon finance delivery risk: 

Verification bottlenecks are currently 

delaying annual payments and 

affecting the financing structure of 

large scale transactions. Adders 

may preclude demonstration of CDM 

additionality.

• Coordinate with ADB Future Carbon Fund to identify

opportunities to maximize potential carbon revenues, 

and reduce or eliminate delays in methodology and 

verification processes

• Consider voluntary transaction in secondary carbon 

markets

M/H

Procurement : Limited number of 

global suppliers for electric vehicle 

technologies may limit competition in 

some instances

• Competitive bidding will be utilized in accordance with 

MDB and GoP requirements. M/H

Overall risk after mitigation Moderate

43. Additional costs and risk premiums justify use of CTF. The EEEVs and EE 

appliances projects are both first-of-a-kind in the Philippines, and the e-trikes project will be the 

largest effort in the Asia region to begin electrification of the public vehicle fleet. These pioneer 

projects face first-mover risk, and present higher-than-normal end-user costs with respect to 

purchase of new vehicles and appliances (e.g., the e-trikes cost at least $1000 more per unit 

than conventional gasoline-powered trikes). Lower operating costs will offset the initial purchase 

2012-08-054_000000000000256
16

Philippines CTF IP Update December 2011

costs, but at present there is no mechanism to monetize the life-cycle savings to assist endusers in the initial purchase. 

44. Carbon finance is increasingly at risk due to post-2012 market uncertainties. Carbon 

finance opportunities will be pursued but any revenue is expected to be “on delivery” and will not 

be sufficient to catalyze up-front investment. Also, any CDM funds are uncertain until 

registration with the UN, which typically occurs after the projects’ financial close. 

VI. ADDITIONAL CONSIDERATIONS OF THE PROPOSED PROJECTS

Net Impact on the Electricity Grid and GHG Reductions

45. Overall, the additional energy required by the electric vehicles under the proposed ADB 

project will depend on the relative contribution of public charging stations used during peak time 

(6 MW, distributed and non-coincident) and overnight home-based chargers (60 MW, off-peak). 

As both modes of charging will be implemented, and considering that overnight charging will 

provide night-time “valley filling” benefits, the incremental demand presented by the EEEVs 

project is expected to be less than 60 MW. A “maximum demand” case of 60 MW represents 

incremental demand of about 0.37% of total installed generating capacity of 16,359 MW.

15 Total 

incremental energy demand due to the project is estimated at 150 GWh per year (assuming etrike consumption of 5 kWh per day, 300 days per year operation, and fleet of 100,000 

vehicles), which represents incremental consumption of about 0.22% of reported generation 

output in 2010. This additional demand on grid-supplied electricity is considered to be 

negligible.16 Table 8 presents estimated changes in energy balance assuming that the EEEVs 

and EE appliances project are both implemented, along with the near-term solar power 

development (noted above in Section III). 

46. The efficient appliances component will include about 200,000 efficient air-conditioners, 

150,000 refrigerators, 350,000 fans and 100,000 televisions. Collectively, the avoided energy 

consumption will be about 250 GWh and GHG reductions are estimated at 125,000 tCO2e per 

year (additional information on estimated GHG reductions is presented in Appendix 2). The 

energy saved by the appliances (efficient and super-efficient) will more than offset the increase 

in demand by EEEVs, even if 100% of the electricity is taken from the existing grid, as shown in 

Table 8. 

Table 8: Avoided New Energy Capacity, Megawatts (MW) 

Avoided Capacity Additions from Energy Efficient Appliances MW

Air-conditioners 60

Refrigerators 22

Fans 18

Televisions 10

Subtotal 110

Near-term RE Power Additions (see Appendix 1, Table A1.2) 138.5

Subtotal 248.5

Maximum Demand from EEEVs Project 60

 

15 Installed capacity is spread across 3 regional grids, as illustrated in the original CIP, Figure 11. 16 Considering that 1200 MW of coal-fired capacity is being developed in addition to the 138.5 MW of RE noted in 

Table 8, grid-supplied electricity would not be stressed until replication and scale-up of 20:1 is achieved, i.e., 

deployment of 2 million e-trikes.

2012-08-054_000000000000257
17

Philippines CTF IP Update December 2011

Net -188.5

 Source: ADB staff estimates

47. In the case of the Philippines with a large share of RE in the generation mix, the GHG 

reductions and overall end-use EE gains will be quite significant. As shown in Figure 6, clean 

energy accounts for about 66% of power generation and about 39% of total primary energy.17

The GoP plans to establish solar charging stations wherever area and site access constraints 

do not exist, which will make the carbon footprint of these vehicles close to zero. With 

consumption of 5 kWh per day and 300 days per year operation, an electric tricycle will use 

about 1.5 MWh of electricity per year, resulting in 780 kg CO2e per year using a grid emission 

factor of 0.52 tCO2e/MWh,

18 versus an equivalent ICE tricycle which produces about 3.5 tons of 

CO2 each for the same service delivery—more than 70% GHG reduction. This estimated GHG 

reduction is consistent with a recent study by MIT, which stated that accounting for the total 

energy consumed from well to wheel19, electric vehicles can reduce energy consumption by up 

to 50% and greenhouse gas emissions by up to 60% compared to ICE vehicles. The savings is 

in even more in congested urban areas as the average speed is low (no electricity is used while 

stranded in traffic jams and these vehicles will not use any air conditioning). The energy losses 

in electric motors are less than ICE vehicles, and transmission and distribution of electricity is 

more efficient and cost effective than transportation of liquid fuels to the end user. [Additional 

calculations of GHG reductions are presented in the Appendices.] 

Figure 6: Primary Energy and Power Generation Mix (2010)

 

17 Figure 6 reflects the current situation with oil dominating the transport sector, which presents a tremendous

opportunity for end-use efficiency gains via electric vehicles. 18 The grid emissions factor of 0.52 tCO2e/MWh is consistent with 2010 generation output and various CDM projects, 

and is lower than equivalent emissions from gasoline-powered vehicles (see additional calculations and discussion in 

Appendix 1).

19 Energy consumed and green house gases (GHGs) emitted from the time a vehicle’s energy source leaves the well

to the time it is consumed by the vehicle, details available at: http://web.mit.edu/evt/summary_wtw.pdf

2012-08-054_000000000000258
18

Philippines CTF IP Update December 2011

Choice of Lithium-ion Battery and Disposal Implications 

48. ADB’s publication on electric bikes20 identified lead pollution as an inherent problem with 

electric vehicles and, as long as electric vehicles use lead acid batteries, the overall pollution 

loads will be several times higher than ICE. According to the United States Environmental 

Protection Agency, Li-ion batteries are not an environmental hazard21, and are safe for disposal 

in the normal municipal waste stream. 22 While other types of batteries include toxic metals such 

as cadmium, the metals in Lithium-ion batteries–cobalt, copper, nickel and iron–are considered 

safe for landfills or incinerators. Therefore, the e-Trikes will use Li-ion batteries at the outset; the 

battery leasing business model will allow for more advanced batteries to be supplied in the 

future. 

Cost Effectiveness of the Proposed EEEVs Project

49. Tables 9 and 10 show additional calculations of the cost effectiveness and 

transformative impacts of the EEEVs project, assuming a conservative replication and scale-up 

factor of 10 to 1. Table 9 indicates that cost effectiveness is well below the upper limit presented 

in CTF investment guidance, even in a pessimistic scenario discounted by 30% for potential 

“rebound effects.” The pessimistic scenario shown in Table 9 shows that the proposed EEEVs 

project would be more cost-effective than the net metering project proposed in the original CIP. 

50. Table 10 illustrates how the cost of avoided CO2 drops significantly with larger 

transformation brought about by the CTF investment.23 In the small, medium, and large project 

 

20 ADB. 2009. Electric bikes in the PRC: Impact on the Environment and Prospects for Growth. Manila. 21 http://www.ehso.com/ehshome/batteries.php 22 http://www.epa.gov/osw/hazard/wastetypes/universal/batteries.htm 23 Table 10 assumes a replication and scale-up factor of only 10 to 1 versus the 20 to 1 factor used in Table 5.

2012-08-054_000000000000259
19

Philippines CTF IP Update December 2011

scenarios, CTF cost-effectiveness is well below the upper limit guidance of $200 per ton. 

Assuming a full transformation and scale-up and replication of 10-to-1, the lifecycle CO2 cost will 

be well below the $5 per ton estimated for the net metering project proposed in the original CIP. 

These e-trikes will generate significant fuel savings and other social co-benefits: about $10,000 

over the 10 year life, the overall cost of avoided CO2 is about “-$200 per ton”—not uncommon 

for end-use EE projects, which is also reflected in the McKinsey abatement cost curve for “Fuel 

efficiency in vehicles” (Figure 2, above) of about “-Euro 50 per ton” or “-$69 per ton” (based on 8 

November 2011 exchange rate). 

Table 9: CTF Cost-effectiveness of EEEVs Project vs. Original Net Metering Project

Net GHG 

Reductions 

(MtCO2e/year)

Cost Effectiveness 

(CTF$/tCO2e/year)

Cost Effectiveness

(CTF $/tCO2e) a Scenario / Assumptions

0.33 306.06 30.06 National electricity and heat emissions 

factor of 0.6 tCO2e/MWh b 

0.27 374.07 37.41 ADB base case with grid emissions 

factor of 0.52 tCO2e/MWh c

0.231 437.23 43.72 0.33 MtCO2e/year discounted 30% for 

“rebound effect” d

2.31 43.72 4.37 Replication and scale-up of 10:1 on case

assuming “rebound effect”

0.1 1250 50 Original CIP: net metering with solar PV; 

25-year project lifetime e

1 125 5 Original CIP: net metering with solar PV;

replication and scale-up of 10:1 e

Source: ADB Estimates. 

Notes: 

a Clean Technology Fund, Investment Criteria for Public Sector Operations, 9 February 2009; paragraph 11 notes 

that “...CTF co-financing will ordinarily not be available for investments in which the marginal cost of reducing a ton of 

CO2-equivalent exceeds US$200....“ Considering estimated total project costs of $500 Million, the cost effectiveness 

estimates may be multiplied by 5. b Emissions factor calculated for Philippines electricity and heat consumption by UK Defra. c Additional discussion of emissions factors is presented in Appendix 1.

d Consideration of potential rebound effects is not required by CTF guidance. e Adapted from Original CIP, Annex 2.

Table 10: EEEVs Project Cost-Effectiveness vs. Investment Scale 

CTF Allocation and

Scale Effects

Small isolated 

grids/ no CTF Small Project Medium Project Large Project

Transformational Impact Zero Minimum Partial 

transformation

Full 

transformation

Net Avoided CO2e (t/y) 2.5 2.6 2.6 2.7

Number of EEEVs 5,000 20,000 50,000 100,000

EEEV Cost ($/unit) 5,000 4,700 4,500 4,000

Total Cost ($ Million) 25 94 225 400

CTF Amount ($ Million) 0 30 70 101

CTF Cost-effectiveness ($/t/y) n/a 576.92 538.46 374.07

Lifecycle Cost-effectiveness 

($/t) n/a 57.69 53.85 37.41

Cost-effectiveness with 10x 

Replication and Scale-up ($/t) n/a 5.77 5.38 3.74

 $ = US dollars, CO2e = carbon dioxide equivalent, t = ton carbon dioxide equivalent, y = year

 Source: ADB staff estimates

2012-08-054_000000000000260
20

Philippines CTF IP Update December 2011

Technology Options

51. A recent ADB study concluded that to make tricycles more energy-efficient and green, 

two technology options were available: (a) retrofit of existing units using conversion kits to LPG 

and CNG fuels; or (b) replace the propulsion system with either hybrid or purely batteryoperated, or with more efficient internal combustion engine (ICE). Only the battery operated 

option can reduce the country’s reliance on fossil fuels. Battery operated electric vehicles can 

also be “zero-emission vehicles”, because the electricity can be generated from 100% 

renewable sources and these vehicles have no tail-pipe emissions. The electric option also 

represents a one-step solution, while retrofitting from gas to LPG entails a two-step solution that 

merely postpones the inevitable shift to electric. E-trikes offer the highest net income potentials 

for tricycle operators and drivers. The annual operating cost is nearly 50% lower than a

conventional gasoline-fueled trike. 

52. The EE appliances project will support accelerated introduction of more efficient 

appliances (liquid crystal display (LCD) and light-emitting diode (LED) televisions (TVs), 

computer monitors, fans, air conditioners and refrigerators, etc.). The proposed investment 

project will address the market failure for efficient appliances in the Philippines. For example, a 

conventional 27 inch cathode ray tube (CRT) television contains 2 kilograms of lead and 

consumes about 125 watts. Consumers are now switching to new generation LCD and LED TVs 

and literally dumping old TVs in landfills, each with 2 kilograms of lead. However, currently in 

the domestic market, the most energy efficient 32 inch LCD consumes about 100 Watt and the 

most efficient LED TV consumes about 72 Watt, while the “best in the world” 32 inch TV 

consumes 40 Watts. This is an obvious market failure, as substandard products are being 

brought in the market. 

Further, a large number of very old CRT TVs (which can be considered electronic waste) are 

being brought into the country from developed countries including Japan, Taiwan and South 

Korea; these obsolete TVs are mostly purchased by the poorest consumers at “throw-away” 

prices. A key objective of the proposed EE appliances project is to (i) build awareness, (ii) 

improve local standards (e.g., mainstream 32 inch TVs consuming 40-50 Watts), (iii) reduce 

price through bulk procurement, and (iv) establish a “hire-purchase” scheme working with local 

power and cable companies. For example if 10,000 televisions are bought in bulk for $35 

million, it will reduce the electricity demand by 1 MW; the energy savings to the consumer will 

recover the investment for the TVs within 3 years. The proposed project will be implemented in 

a manner similar to that being implemented for more efficient lighting and the proposed EEEVs

project.24 Additional details of the proposed project, which is still in the initial development stage, 

are presented in Appendix 2.

 

24 The physical investments will be complemented with technical assistance and capacity building including public 

awareness and retail consumer credit facilitation to ensure that more efficient lighting, appliances, and electric 

vehicles can be deployed to end-users at scale. Additional notes on recent experience and proposed implementation 

approaches are included in Appendices 1 and 2.

2012-08-054_000000000000261
21

Philippines CTF IP Update December 2011

Appendix 1: Market Transformation with Energy Efficient Electric Vehicles (ADB)

Problem Statement

1. The Philippines transport sector accounted for about one-third of total GHG emissions in 

2009 (excluding emissions from land use change and forestry); transport sector emissions have 

increased by about 6-10% per year since 1990, from about 10 million tons per year carbon 

dioxide equivalent (MtCO2e/y) in 1990 to about 29 MtCO2e/y in 2007.25 Vehicles are one of the 

dominant sources of urban pollution that threatens both people’s health and economic activity. 

In the Philippines, motorcycles and tricycles comprise more than 52% of vehicle population. 

Compared to other vehicles, motorcycles and tricycles are less expensive. They are very visible 

in most cities of the country and play an important role in the transport market particularly used 

as alternative mode transport for short distances. However, the use of these vehicles 

contributes to the already declining state of the environment, particularly air quality in urban 

areas. In an ADB study, transport sector emissions accounted for 30% of air pollution in the 

Philippines and about 80% of air pollution in Metro Manila. 

2. Accounting for the total energy consumed from well to wheel26, electric vehicles can 

reduce energy consumption by up to 50% and greenhouse gas emissions by up to 60% 

compared to internal combustion engine (ICE) vehicles. Electric vehicles will also reduce 

greenhouse gases and other harmful emissions because: (i) electric vehicles use no electricity 

while stranded in traffic jams (no air conditioning), (ii) electric motors have higher efficiencies 

than internal combustion engines, and (iii) transmission and distribution of electricity is more 

efficient and cost effective than transportation of liquid fuels to the end user. 

3. In the Philippines, a typical tricycle driver uses about $5 worth (5 liters) of gasoline to 

drive 100 km in a day and can save about $4 a day by switching to an electric tricycle–for 100 

km, an electric tricycle will consume about 5 kWh of power costing about $127. With large-scale 

adoption, these individual savings would accumulate to a significant national savings. 

Replacement of 100,000 gasoline tricycles with electric tricycles at a cost of about $450 million, 

for example, can generate about $175 million each year from avoided fuel costs. As noted in the 

main text (paragraph 43), e-trikes are expected to cost at least $1000 more than conventional 

trikes, but this cost will be more than recovered through reduced operating costs over a nominal 

10-year lifetime. Although the daily and life-cycle cost savings favor electric tricycles, there is 

no ready mechanism to monetize these savings for acquisition and deployment of electric 

vehicles at fleet scale. 

Proposed Transformation

4. CTF cofinancing will be utilized to overcome the first-mover risks and cost barriers 

associated with introducing electric tricycles as a first step in electrification of the public vehicle 

fleet: the proposed project will facilitate deployment of 100,000 e-trikes. This will be the largest 

known project of this scope implemented in the Asia-Pacific region. The project outputs include: 

(i) e-trike procurement, (ii) battery leasing, (iii) efficient electric motor supply chain, (iv) public 

charging stations, (iv) recycling and disposal, and (vi) communication, social mobilization, and 

 

25 CTF Investment Plan for the Philippines, 2009; paragraph 8 and Figure 3. 26 Energy consumed and green house gases (GHGs) emitted from the time a vehicle’s energy source leaves the well 

to the time it is consumed by the vehicle, details available at: http://web.mit.edu/evt/summary_wtw.pdf 27 Assuming cost of electricity of $0.20 / kWh in the Philippines.

2012-08-054_000000000000262
22

Philippines CTF IP Update December 2011

technology transfer. CTF funds will be used alongside ADB’s loan to amortize up-front capital 

costs over a longer period than otherwise possible. 

5. Successful demonstration of the electric vehicles at this scale will facilitate replication 

and scale up of e-trikes and other public vehicles including jeepneys and buses. Further, 

development of local battery suppliers and maintenance/service industries will be fostered. 

Implementation Readiness

6. The E-trikes project is nearing the appraisal stage and is scheduled for presentation to 

ADB’s Board of Directors in early 2012. The GoP is working on an electric vehicle policy28, 

which among others will exempt importation of all electric and vehicle free of taxes for 9 years. 

In addition there will be others incentives to set up electric vehicle businesses in the Philippines.

Rationale for CTF Financing

7. Electric vehicle deployment is both constrained and favored by several factors: 

• Commercial development and deployment of electric vehicles will increase Philippines’s 

energy security, save foreign exchange, and protect against global price fluctuations by 

using non-tradable domestic energy sources.

• Fleet-scale electric vehicle projects are at the pioneer stage and face additional costs 

and risks which are not being covered by conventional project financing. Creative 

financing approaches, including the use of concessional funds, are needed overcome 

first-mover risks and mainstream large-scale vehicle fleet financing.

• Carbon finance can provide some financial support, but is not sufficient to overcome the 

cost and risk barriers noted above. 

• CTF can provide a catalytic role in reducing or eliminating first mover risk for fleet-scale 

projects, and foster accelerated replication and scale-up in the near term. 

• The replication potential for e-trikes alone is more than 20 to 1. A substantial learning 

curve has already been overcome during the pilot project.

• GHG reductions and cost-effectiveness are comparable to or better than the original CIP 

(as discussed in the main text).

Financing Plan

Source Amount (US $ million)

GoP 99

ADB 300

CTF (loan) 100

CTF (grant) a 1

Total 500

Carbon Finance b 20 a A CTF grant of $1 million is requested for fine-tuning of technology options, technology transfer, local industry 

support and capacity building (implementation support, including monitoring and evaluation activities will be financed 

by the ADB loan).

b No provision has been made for the carbon finance risks associated with possible lack of agreement on a post-2012 

successor to the Kyoto Protocol. The carbon finance estimate is preliminary and subject to further revision, and is not 

included as upfront project co-financing. 

 

28 Senate Committee Report No. 44 on Senate Bill No. 285–Electric, Hybrid and Other Alternative Fuel Vehicles 

Incentives Act of 2011.

2012-08-054_000000000000263
23

Philippines CTF IP Update December 2011

Project Preparation Timetable

Milestone Date

ADB Project Identification May 2011

Appraisal / Negotiations January 2012

ADB Board Consideration (Approval) March 2012

Project Completion March 2016

Additional Notes on GHG Calculations and Electric Vehicle Eligibility for CTF

Grid Emissions Factors

8. ADB has taken a reasonably conservative approach to estimating GHG reductions. The 

main text notes that GHG reductions are based on a grid emissions factor of 0.52 tCO2e/MWh, 

which is at the mid-range of emissions factors used for several recently registered Clean 

Development Mechanism (CDM) projects in the Philippines. Typical emissions factors29

reported the following margins30 assuming that the Luzon and Visayas grids are taken as a 

common unit: 

Operating Margin: 0.598 tCO2e / MWh

Build Margin: 0.339 tCO2e / MWh

Combined Margin: 0.469 tCO2e / MWh

9. The combined margin for the combined Luzon-Visayas grid is 9.8% less than the grid 

factor of 0.52 tCO2e / MWh noted in the main text. Considering that most of the EEEVs would 

be deployed in the Luzon-Visayas grid, the estimated GHG reductions are conservative

(alternatively stated, about 10% “rebound effect” has already been considered for the LuzonVisayas grid, even though CTF guidance does not require any consideration of rebound 

effects). 

10. As the pilot-tested EEEVs have higher passenger capacity than conventional trikes, 

potential GHG reductions have been estimated on a per vehicle basis as well as a per 

passenger-kilometer basis. The range of estimates is shown in Table A1.1, assuming 100,000 

vehicles in full operation. 

Table A1.1: Emissions Reduction Estimates (tCO2e/year)

Case Reduction on Per 

Vehicle basis

Total 

Reductions

Reduction on Per 

Passenger Basis

Total 

Reductions Grid Mix

Optimistic 3.634 363,400 6.361 636,100 100% RE

Base 2.698 269,800 5.425 542,500 Current mix

Worst case 1.834 183,400 4.561 456,100 100% coal

Source: ADB staff estimates

 

29 Taken from Project Design Document for “ANAEROBIC DIGESTION SWINE WASTEWATER TREATMENT WITH 

ON-SITE POWER PROJECT (ADSW RP2024),” registered on 7 January 2011. The Project Design Document was 

accessed online on 14 November 2011 at: 

http://cdm.unfccc.int/filestorage/S/2/Z/S2ZGB9RM5FO7D6W0E4PL3INVQCK8TH/2010.pdf?t=RFR8bHVvMXd5fDDh

1GRICO3d4xwrYQ2HbisL

30 These margins are lower than the first CDM project registered in the Philippines, the Northwind Bangui Bay Project 

which was registered in 2006.

2012-08-054_000000000000264
24

Philippines CTF IP Update December 2011

Electric Vehicle Eligibility

11. Clean Technology Fund, Investment Criteria for Public Sector Operations, 9 February 

2009; footnote 6 to paragraph 6 (b) (iv) states: 

“Plug-in electric vehicles would be considered only when the energy systems from which 

they draw the power are less carbon intensive than the emissions from a stand-alone 

electric hybrid.” 

12. In this case, the pilot-tested e-trikes are considered to be “plug-in electric vehicles.” 

However, to the best of ADB and GoP knowledge, “stand-alone electric hybrid” trikes or 

motorcycles have not been marketed and pilot-tested, so an “apples-to-apples” comparison is 

not possible. The calculations presented below are intended to demonstrate that the EEEVs 

project meets the CTF eligibility criteria.

13. The grid-equivalent emissions factor for gasoline is calculated as follows: 

Gross energy content: 34.2 Megajoule (MJ) / liter (L)

Converted to kWh: 34.2 MJ / L x (1 kWh / 3.6 MJ) = 9.5 kWh / L

Theoretical Carbon intensity: (2.3 kg CO2e / L) / (9.5 kWh / L) = 0.2421 kg CO2e / kWh 

14. This theoretical carbon intensity of gasoline, which assumes 100% thermodynamic 

efficiency, appears to be much lower than the emissions factors noted above (at paragraph 8). 

More realistic carbon intensities of gasoline-powered tricycles, assuming 40%, 30%, and 20%

thermodynamic efficiencies, are higher than the Operating Margin of 0.598 tCO2e / MWh noted 

above: 

(0.2421 kg CO2e / kWh) / 0.4 = 0.605 kg CO2e / kWh

(0.2421 kg CO2e / kWh) / 0.3 = 0.807 kg CO2e / kWh

(0.2421 kg CO2e / kWh) / 0.2 = 1.211 kg CO2e / kWh

15. In practice, thermodynamic efficiencies of motorcycle/tricycle engines are probably on 

the order of 20%, suggesting that the emissions factor of no less than 0.807 kg CO2e / kWh is 

an appropriate benchmark for the current fleet of gasoline-powered tricycles. Matching the 

Combined Margin factor for the Luzon-Visayas grid noted above would require a 

thermodynamic efficiency greater than 51% (which is unrealistic for gasoline-fired internal 

combustion engines31), calculated as follows: 

0.2421 / 0.469 = 0.5162 = ~ 52%

16. Until a stand-alone electric hybrid 3-wheeler appears on the market so that an apples-toapples comparison can be made the foregoing calculations indicate that the proposed e-trikes 

project meets the CTF eligibility requirement. Changes in the grid emissions factor are 

discussed below.

 

31 Automobiles with internal combustion engines have typical efficiencies of about 25%; the highest reported 

efficiency for ICEs is 52% for the Wartsila-Sulzer marine engine. The Toyota Prius equipped with an Atkinson cycle 

engine has efficiency of 34% at peak power output of 52 kW. Source: David J.C. MacKay. 2009. Sustainable Energy 

Without the Hot Air;” page 262. Available on line at: www.withouthotair.com. 

2012-08-054_000000000000265
25

Philippines CTF IP Update December 2011

Projected Changes in Grid Emissions Factors

17. The Philippines Department of Energy Power Development Plan 2009-2030 reports that 

near-term generation expansion comprises 1338 MW of committed capacity, of which 1200 MW 

is coal-fired, 70 MW is geothermal, 51 MW is hydropower, and 17.5 MW is biomass (see Table 

A1.2, below). Projecting beyond the current commitments is difficult, as the generation mix will 

be affected by the renewable portfolio standard and feed-in tariffs discussed in the main text. 

Table A1.3 presents generation output for 2010 and expansion scenarios assuming (i) current 

commitments shown in Table A1.1, (ii) increase in emissions factor equating to 40% gasoline 

thermodynamic efficiencies noted above, and (iii) increase in emissions factor equating to 30% 

gasoline thermodynamic efficiencies noted above. Of these 3 expansion scenarios, the first is 

considered to be firm, the second is considered to be plausible, and the third is considered to be 

unlikely. 

18. The third scenario presented in Table A1.3 would presents a grid emissions factor which 

is lower than the emissions factor of 0.807 kg CO2e / kWh noted above as an appropriate 

benchmark for the current fleet of gasoline-powered tricycles. Alternatively stated, even with 

expansion of coal-fired power 10 times beyond current level, with no additional RE capacity 

additions, the grid supplied power would still be less carbon-intensive than the gasoline-fired 

ICE vehicles being replaced. This conclusion is consistent with the estimates shown in Table 

A1.1.

Table A1.2: Near-term Generation 

Expansion

Sou

rce: Philippines Department of Energy, Power Development Plan 2009-2030; Table 4.

2012-08-054_000000000000266
26

Philippines CTF IP Update December 2011

Table A1.3: Grid Emissions Scenarios

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Base Case: generation output in 2010

Oil-based 7101 10% 0.6 4260600

Hydro 7803 12% 0 0

Geothermal 9929 15% 0 0

Other RE 90 0% 0 0

Coal 23301 34% 0.9 20970900

Natural gas 19518 29% 0.5 9759000

Total 67742 100% 0.517 34990500

Expansion Scenario 1: Current Generation Expansion shown in Table A1.2; no other renewable 

energy is added. Grid factor increases to 0.553 tCO2e/MWh.

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Oil-based 7101 9% 0.6 4260600

Hydro 8026 10% 0 0

Geothermal 10420 14% 0 0

Other RE 213 0.3% 0 0

Coal 31711 41% 0.9 28539900

Natural gas 19518 25% 0.5 9759000

Total 76989 100% 0.553 42559500

Expansion Scenario 2: Coal output expanded by 2x; all others fixed at 2010 output. Grid emissions 

factor would be slightly higher than gasoline emissions factor @ 40% thermodynamic efficiency of 

0.605 tCO2e/MWh.

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Oil-based 7101 8% 0.6 4260600

Hydro 7803 9% 0 0

Geothermal 9929 11% 0 0

Other RE 90 0% 0 0

Coal 46602 51% 0.9 41941800

Natural gas 19518 21% 0.5 9759000

Total 91043 100% 0.615 55961400

Expansion Scenario 3: Coal output expanded by 10x; all others fixed at 2010 output. Grid emissions 

factor would approximately equal gasoline emissions factor @ 30% thermodynamic efficiency of 

0.807 tCO2e/MWh.

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Oil-based 7101 3% 0.6 4260600

Hydro 7803 3% 0 0

Geothermal 9929 4% 0 0

Other RE 90 0% 0 0

Coal 233010 84% 0.9 209709000

Natural gas 19518 7% 0.5 9759000

Total 277451 100% 0.806 223728600

Source: ADB staff estimates, based on Philippine Power Statistics, 2010. 

Note: Scenario 1 assumes that the additional biomass, coal, and geothermal, run at 80% output; and that additional 

hydropower runs at 50% output. 

 

2012-08-054_000000000000267
27

Philippines CTF IP Update December 2011

Appendix 2: Accelerated Introduction of Energy Efficient Appliances (ADB)

Problem Statement

1. Under the business-as-usual scenario (2010 – 2030), energy-related emissions from the 

commercial, industry, power, and residential sectors will increase by 123% from 77.4 MtCO2e/y 

to 172.5 MtCO2e/y.32 Aggressive development of RE resources and investments in EE 

throughout the supply chain are necessary to promote energy security and reduce the economic 

and financial impacts of energy imports and price volatility. 

2. The Philippines is leading energy efficiency and use of indigenous renewable energy in 

the ASEAN region: it was the first country to declare plans to phase out incandescent bulbs and 

was the first country to establish energy labeling for air-conditioners (1992). In March 2009 ADB 

approved a loan project and a grant (Philippine Energy Efficiency Project, PEEP),33 to start up a 

comprehensive energy efficiency program to identify a range of pilot which could be scaled up 

later. 

3. Retail electricity tariffs are the highest in the region after Japan, which should provide a 

ready market for the most efficient appliances; unfortunately the reality is quite different. The 

power consumption (wattage) of locally available “best” main consumer appliances (TVs, fans, 

computer monitor, air-conditioners, refrigerators etc.) consume more than 100% of the “world’s 

best”. For example, the local “best” of commonly used 32 inch TV (100 Watt) consumes 150% 

more energy than the world’s best (40 Watt). 

4. Based on a recent Lawrence Berkeley Lab report, the global TV market has undergone 

a quantum transition from cathode ray tube (CRT) TVs to Liquid Crystal Displays (LCDs). It is 

expected that LCD TVs will represent 90% of global TV market through 2012. At the same time, 

LCDs using cold cathode florescent lamp backlights are rapidly being replaced by LCDs using 

light emitting diode (LED) backlights34. Based on market research, without government 

intervention, the average power consumption of a typical 32 inch TV will not fall below 100 

Watts, as the manufacturers are unwilling to bring the more efficient products to this pricesensitive market. Improving appliance efficiencies requires market intervention and 

transformation. 

5. The Government of the Philippines (GoP) has requested ADB assistance in a longerterm investment program which will build on the success of the PEEP, including accelerated 

introduction of more efficient appliances - especially TVs, air conditioners, and refrigerators - 

which account for the bulk of residential electricity consumption. More efficient appliances can 

reduce household consumption by an estimated 10 - 30%, but the upfront cost presents a 

barrier to most consumers. At present there is no mechanism to monetize the life-cycle savings 

of more efficient appliances to support consumer purchases. 

Proposed Transformation

6. The legal framework and the economic incentives provided by high energy cost have not 

been sufficient for adoption of clean energy and EE by ordinary citizens and businesses. The 

 

32 Emissions data are from APEC Energy Demand and Supply Outlook of 2006. 33 ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the 

Republic of the Philippines for the Philippine Energy Efficiency Project. Manila. 34 Display Research (2011) Global TV Shipment Growth Improves to 15% Y/Y in Q4’10 as LCD Share Surges

http://www.displaysearch.com/cps/rde/xchg/displaysearch/hs.xsl/110222_global_tv_shipment_growth_improves_to_1

5_y_y_in_q4_10_as_lcd_share_surges.asp

2012-08-054_000000000000268
28

Philippines CTF IP Update December 2011

recent development in EE actually is growing the technology divide, most evident by average 

citizen's ignorance not just of how to utilize EE in everyday life but more importantly in even 

knowing what technology choices they have. The proposed project will bridge the growing 

technology-divide between the informed (often public sector and the rich among the population) 

and the ill-informed (non-urban and poor) by attacking it from two different angles: usability 

(through implementation) and education (through awareness). In addition, the project will

incorporate the three proven elements from the CFL distribution component of the PEEP which 

set it apart from similar initiatives: (i) scale economy-bulk procurement of 13 million CFLs

reduced unit cost by more than 60 percent of the retail price, (ii) improve technology credibilitythe consumer markets were made aware of the benefits of the technology and pushed "10,000 

hour" bulbs when the local market only carries CFLs with life between 1000 and 6,000 hours, 

and (iii) CDM ready-being a large project, it qualified and was able to finance the initials costs 

for CDM under the "Program of Activities" approach. The "CFL experience" has taught all a 

lesson: compelling economics, short-payback periods and friendly regulation is not sufficient for 

"big-bang" large impact changes, which is only possible with large investments that can "shake 

up" the existing paradigm and mindsets which are often the main barrier to new technology 

investments. 

7. As part of GoP’s plan to scale up the PEEP success, a new project is being prepared to 

support the long-term EE investment program. The proposed project will transform the 

appliance market which comprises (i) about 5 million air-conditioners which are more than 5 

years old, (ii) 10-15 million refrigerators in the market, (iii) 7 million TV sets (with 1 million cable 

subscribers), (iv) more than 2 million computer monitors, and (v) close to 30 million in-efficient 

fans. 

8. The project will purchase about 200,000 efficient air-conditioners, 150,000 refrigerators, 

350,000 fans and 100,000 televisions under the program and a revolving energy efficiency trust 

fund will be established. The consumers will pay for the appliances over a 36 months hirepurchase scheme. Collectively, the avoided energy consumption will be about 250 GWh and 

GHG reductions are estimated at 125,000 tCO2e per year. 

9. CTF cofinancing will be utilized to support accelerated introduction of more efficient 

appliances by overcoming the cost barriers to consumers. CTF funds will be used alongside 

ADB’s loan to amortize up-front capital costs over a longer period than otherwise possible. The 

proposed project is still at the definitional stage; lessons learned from PEEP implementation will 

be incorporated into project design.35 

Implementation Readiness

10. The EE project is under preparation and is expected to be presented for ADB Board 

consideration in the first half of 2012. The GoP is working on additional incentive policies to 

promote EE investments, including possible import tax waivers for a limited period. 

Rationale for CTF Financing

11. Introduction of more efficient appliances is both constrained and favored by several 

factors: 

 

35 The general approach for accelerated introduction of appliances is not unlike the “cash for clunkers” program for 

introduction of more fuel efficient vehicles in the United States.

2012-08-054_000000000000269
29

Philippines CTF IP Update December 2011

• Accelerated introduction of more efficient appliances will increase Philippines’s energy 

security, save foreign exchange, and protect against global price fluctuations by using 

non-tradable domestic energy sources.

• Consumers face additional costs for more efficient appliances which are not being 

covered by conventional supplier credit or other retail financing. Creative financing 

approaches, including the use of concessional funds, are needed to cover additional upfront capital costs to consumers. 

• Carbon finance is not expected to overcome the cost barriers noted above. 

• CTF can provide a catalytic role in removing the cost barriers for wide scale adoption of 

more efficient appliances, and foster accelerated replication and scale-up in the near 

term. 

• The replication potential is at least 10 to 1.

• GHG reductions and cost-effectiveness are comparable to or better than the original CIP 

(as discussed in the main text).

Financing Plan

Source Amount (US $ million)

GoP 46

ADB 100

CTF 24

Total 170

Carbon Financea 5 a No provision has been made for the carbon finance risks associated with possible lack of agreement on a post-2012

successor to the Kyoto Protocol. Carbon finance estimate is preliminary and subject to further revision.

Project Preparation Timetable

Milestone Date

ADB Project Identification March 2012

Pilot Project (“TV Olympics”) June 2012 

Appraisal / Negotiations January 2013 

ADB Board Consideration (Approval) March 2012 

Project Completion June 2016

Additional Notes on GHG Calculations

12. Figures A2.1, A2.2, and A2.3 (below) present additional information about estimated 

energy savings, financial benefits, and GHG reductions. As noted above, the EE Appliances 

project is still in conceptual developmentthe detailed project scope has not been finalized, and 

projected market penetration rates and GHG reduction estimates are subject to evolution going 

forward. 

2012-08-054_000000000000270
30

Philippines CTF IP Update December 2011

Figure A2.1: Sample Cost Benefit Analysis for Energy Efficient TVs

Indicators 21” CRT 22” LED 32” LED

Wattage 100W 25W 40W

Annual Electricity Cost ($) 41 9 15

Annual Savings ($) 32 26

Lifetime Savings ($) 320 260

CO2 Equivalent Avoided 

(Metric Tons)

1.08 0.89

Sample Cost Benefit Analysis

Assumptions:

Current electricity cost: 0.2$/kWh

Daily TV usage: 5 hours

Electricity Use Emission Factor = .00068951 MT/kWh

TV Life span = 10 years

Figure A2.2: Estimated Financial Benefits and GHG Reductions (Base Case)

Scenario Analysis Scale Up 

(100,000 Units)

Indicators 29 Inch CRT 22 Inch LED 32 Inch LED

Annual Savings (Million $) -0.6 3.2 2.6

Lifetime Savings (10 years in Million $) -6.4 32 26

CO2 Equivalent Avoided (Metric Tons) -22,000 108,000 89,000

2012-08-054_000000000000271
31

Philippines CTF IP Update December 2011

Figure A2.3: Estimated Financial Benefits and GHG Reductions with Replication and 

Scale-up to 90% of Philippine Households 

Scenario Analysis Scale Up 

(12.6 million Households)

Indicators 29 Inch CRT 22 Inch LED 32 Inch LED

Annual Savings (Million $) -0.6 403 328

Lifetime Savings (10 years in Billion $) -10.2 4.03 3.28

Lifetime Savings (10 years in Billion PhP) -434 171.3 139.4

CO2 Equivalent Avoided (in Million Metric 

Tons) -3,700,000 13,608,000 11,214,000

2012-08-054_000000000000272
Page 1 

CLEAN TECHNOLOGY FUND

MARKET TRANSFORMATION THROUGH INTRODUCTION OF 

ENERGY EFFIICIENT ELECTRIC TRICYCLES PROJECT 

Independent Review Letter: June 22, 2012

1. Endorsement

I have reviewed the Asian Development Bank (ADB) draft Report and Recommendation of the President 

(RRP) dated June 2012 for Republic of the Philippines: Market Transformation through Introduction of 

Energy Efficient Electric Vehicles Project, which is proposed for Clean Technology Fund (CTF) cofinancing. In order to assess the decision-making context for this project, I have also reviewed the 

original CTF Country Investment Plan (CIP) and the proposed revision to the Philippines CIP (also dated 

June 2012). The findings from this review – summarized below – are that the proposed changes are

consistent with both the criteria for the CTF and the long-term objectives of the original CIP. I conclude 

that the proposed electric vehicles project is consistent with the CIP Update and meets the CTF eligibility 

criteria.

2. Review Summary

The proposed revision to the CIP would reallocate the $125 million of CTF funds originally identified for a 

net metering program using distributed solar power to cover two new projects – one for energy efficient 

electric vehicles (EEEVs) and the other a reformulated solar energy development project. The major 

circumstances leading to the change are cited as: promotional rules for renewables (RPS, feed-in tariffs, 

and net metering) have yet to be finalized and are being focused on large ground-mounted systems; and 

a successful pilot test of 3-wheel EEEVs was recently conducted with ADB support is ready for scale up. 

The Government of the Philippines (GoP) supports the funding shift to re-direct $105 million to EEEV

project and $20 million to the reformulated solar energy development project centered on rooftop PV 

applications. This review focusses on the EEEV project and finds that the prospective investment is 

consistent with the long-term objectives of the original CIP – as noted below – and appropriate for CTF 

support given their transformational nature and replication and scale-up potential. 

Potential for GHG Emissions Savings: The EEEV project has significantly greater GHG emission reduction 

potential. 100,000 3-wheel EEEVs will deliver 270,000 tCO2e per year compared to a GHG reduction

potential of about 100,000 tCO2e per year for the original project. In addition, the reformulated solar 

energy project is expected to achieve approximately 30,000 tCO2e per year GHG reductions. 

Demonstration Potential at Scale: The potential of the EEEV project at scale is considered quite 

significant given its high likelihood of being replicated and its broader market size both in the Philippines 

as well as the region. The replicability of the EEEV project is considered high because of the 

fundamental cost-effectiveness of the EEEVs on a life-cycle basis. The primary market entry barriers 

(and first-mover risks) are the lack of a mechanism to monetize the life-cycle savings to assist end-users 

in the initial purchase, which is what this project is designed to do. The scale-up potential is estimated 

to be more than 20 to 1 for the EEEVs, given the similarities to auto-rickshaws used in other Asian 

countries including Bangladesh India, Indonesia, and Thailand. However, the analysis assumes a more 

conservative 10 to 1 scale-up.

2012-08-054_000000000000273
CTF Update to CIP for the Philippines

Independent Review Letter: June 22, 2011 Page 2 

Cost-effectiveness: The EEEV project is also more cost-effective with CTF funds than the original. The 

EEEV project is projected to achieve 0.27 MtCO2e per year of GHG reductions at a CTF cost of $105

million, which is $39/ton-year, declining to $3.89/ton-year with replication and scale-up. The original 

solar net metering projects was projected to achieve 0.1 MtCO2e per year of GHG reductions at a CTF

cost of $125 million, which is $125/ton-year, declining to $12.50/ton-year with replication and scale-up. 

Development Impact: The EEEV project will accelerate the growth of new industries in the Philippines

by demonstrating new, cost-effective technologies, systems and business models and by reducing firstmover risks for both vehicle purchases and charging stations. Impacts with respect to local 

environmental benefits, energy security and employment are considered to be much more significant

than in the original project. In particular, the solar charging station component, for which CTF grant 

support is requested, would demonstrate technological viability and help set the stage for more EEEV 

charging by renewable energy, which will maximize their GHG emission reductions in the longer term. 

Implementation Potential: The EEEV project addresses significant market entry barriers and is evaluated 

as having moderate implementation risk as discussed below. 

The project is based on a successful pilot project in the Metro Manila region but will face technical, 

marketing and systems development challenges. The pilot project involved 20 locally made electric 3-

wheelers (e-Trikes) powered by lithium-ion batteries. The proposed project intends to scale-up the 

program to 100,000 e-Trikes and transform the electric tricycle industry of the Philippines by

establishing new electric vehicle supply and support industries and developing new marketing, sales, 

financing mechanisms. The project outputs appear inclusive and consist of (i) e-Trike procurement

including a standard (not less than 3-years) warranty on mechanical and technical performance, (ii) 

development of battery supply chain and e-Trike service businesses, (iii) establishing 4 pilot projects for 

solar charging stations, (iv) development of recycling and disposal programs for both batteries and 

retired gasoline-engine tricycles, and (v) public communication, social mobilization and technology 

transfer. Interestingly, no new or changed government policy is required to develop this market.

The project investment plan is understandably dominated by the e-Trike purchases. Funds for 

supporting infrastructure and consulting support appear adequate. Implementation arrangements 

appear well designed with a Steering Committee consisting of the major government stakeholders, a 

financial executing agency and technical implementing agencies at the national and local levels. The 

establishment of an effective project management unit will be critical to the project’s success – as noted 

in the RRP, and the project will benefit from staff and consultants experiences with ADB procurement 

guidelines.

Rationale for CTF Financing: The new EEEV project proposes to use CTF for covering additional costs 

associated with first-mover risks. These are related to the introduction of electric vehicles, solar 

charging stations and new business models for vehicle ownership and operations.

3. Conclusions

In this reviewer’s assessment, the proposed EEEV project is clearly eligible for CTF co-financing, and in 

the broader development context the updated CTF Investment Plan for the Philippines is an appropriate 

and rational adjustment in response to changing circumstances and new opportunities. Commercial 

development and deployment of electric vehicles will decrease gasoline consumption and increase 

energy security in the Philippines thereby saving foreign exchange and protecting consumers against 

global price fluctuations.

2012-08-054_000000000000274
CTF Update to CIP for the Philippines

Independent Review Letter: June 22, 2011 Page 3 

Carbon finance – an increasingly uncertain area - can provide some financial support, but is unlikely to 

be sufficient to overcome the cost and risk barriers noted above. The CTF is better suited to provide a 

catalytic role in reducing or eliminating first mover risks and cost barriers for wide scale adoption of 

efficient electric vehicles at the fleet-scale. 

Respectfully submitted,

Dr. Pascal (Pat) DeLaquil

CEO, DecisionWare Group LLC

Annapolis, MD, USA

202 494-8836, pdelaquil@comcast.net

2012-08-054_000000000000275
1

CTF PRIVATE SECTOR PROPOSAL 

Name of Project or Program ADB Thailand Private Sector Renewable Energy Program [the Program]

CTF amount requested Investment – up to US$99.5 million equivalent in loans and guarantees

Implementation and supervision budget - US$500,000 

Country targeted Thailand

Indicate if proposal is a 

Project or Program

Program. The proposed program comprises a pipeline of renewable energy projects being 

developed by the private sector. The program will catalyze the demonstration, replication, 

and scale-up of utility scale projects in Thailand. 

As part of the development of this program proposal ADB has already begun to engage with clients for the proposed subprojects. To maintain credibility in the market, ADB could only engage further if there is confirmation that funds would be 

available to disburse when called by the client. For this reason, per paragraph 34 of the CTF Financing Products, Terms 

and Review Procedures for Private Sector Operations, dated on March 17, 2010 and approved on March 29, 2010, ADB is 

requesting the CTF Trust Fund Committee to approve and direct the Trustee to provide ADB with an unconditional letter of 

commitment for the entire amount of funds required for the Program. Such approval would allow for the upfront transfer of 

up to the entire amount of the Program from the Trustee to the ADB, based on the confirmation of availability of US $100

million by the Trustee as evidenced in Annex B. The transfer would be subject to (a) approval by the ADB Board of 

Directors of the investment sub-projects, and (b) submission of a transfer request to the Trustee including the anticipated 

closing date of the relevant sub-projects.

DETAILED DESCRIPTION OF PROGRAM

Fit with Thailand’s Country Investment Plan (CIP) and CIP Update (CIP-U)

This proposal is consistent with Thailand’s Country Investment Plan (CIP) which was endorsed by the CTF Trust 

Fund Committee (TFC) on 2 December 2009 and Thailand’s Country Investment Plan Update (CIP-U) which was 

endorsed by the CTF TFC in March 2012. Thailand’s CIP and CIP-U describe the country’s GHG emissions profile 

and indicate that energy efficiency (EE) and renewable energy (RE) are key strategic areas where Clean 

Technology Fund (CTF) resources can be applied, including through direct private sector initiatives. The Thailand

CIP/CIP-U specifically endorses the multilateral development banks to support private sector RE projects. 

The Government of Thailand (GoT) is committed to mitigating climate change. Among the developing countries, 

Thailand has developed a ―National Strategy on Climate Change (2008-2012)‖ approved by the Cabinet in January 

2008, and identified greenhouse gas reduction in the energy sector through clean technology implementation as one 

of its core approaches in its climate change mitigation agenda. Thailand’s 11th National Economic and Social 

Development Plan (NESDP) also aims to build energy security to support the country’s path towards sustainable 

development and low carbon economy1.

The GoT remains fully committed to its development policy framework for energy security, climate change, 

environmental management, and public health. The general approach and overall objectives for low-carbon 

development presented in the CIP and CIP-U remain valid. GoT is committed to reducing energy intensity and 

greenhouse gas (GHG) reductions through a comprehensive policy framework. 

The government is also focused on its policy of having alternative energy as a national agenda through encouraging 

production and use of indigenous renewable resources. The Electricity Generating Authority of Thailand (EGAT)

Power Development Plan 2010 – 2030 (PDP), released in 2010 has been found to be fully consistent with the 

 

1

 GoT targets the energy production sector to reduce CO2 emissions intensity to 0.42 kg CO2/kWh by the end of the 11th NESDP (2012-2016).

2012-08-054_000000000000276
2

earlier RE Development Plan covering the 2008 to 2022 planning period. The PDP calls for electricity supplies to 

be progressively decarbonized, requiring the continued addition of clean energy to the generation mix, 

complemented by conservation and efficiency gains. The goal of decarbonization requires that all future fossil 

electric power generation capacity additions be completely offset by electricity produced through the utilization 

zero-carbon electric power generation methods, coupled to an additional 25% decrease in GHG intensity. This 

decarbonisation objective requires the effective neutralization of GHG emissions from approximately 12,000 

megawatts (MW) of existing and future coal-fired generating plants by 2030, as shown in Figure 1. To this end, the 

Ministry of Energy (MOE) through the Department of Alternative Energy Development and Efficiency (DEDE) is 

preparing an updated RE Development Plan with a revised target for alternative energy use to increase to 25 % of 

total energy consumption in the year 2022 from the previous target of 20%. 

Figure 1. GHG Intensity for Electricity Supply.

In a recent statement, the Thai Council of Ministers approved as policy, the utilization of sustainable energy sources to 

resolve the energy requirements of the country with a target of replacing 25% of the energy generated through the use 

of fossil fuels with clean energy within the next decade. 2 The GoT has further identified RE industries, among others, 

as a ―new industry‖ sector to foster the creation of income from domestic demand and increased employment. 

As such, CTF support will have the transformational impact of scaling up utility-scale solar, wind, and waste-toenergy (WTE) projects in the country, which would substantially curb Thailand’s emission growth curve. Private 

sector RE projects will establish additional benchmarks for cost and performance, which will facilitate institutional 

and policy reforms, and promote economies of scale that could ultimately make the cost of RE-based power 

development more competitive with fossil-fuel based power sources. 

Overview of the ADB Renewable Energy Program 

The program represents an initiative of the ADB, as implemented in part by the Private Sector Operations 

Department (PSOD), towards accelerating the participation and scale-up of investments by the private sector, with 

 

2

 Policy Statement delivered by Prime Minister Yingluck Shinawatra to the National Assembly on 23 August 2011. Accessed on 10 

October 2011 from http://www.mfa.go.th/internet/document/govPolicyEng.pdf 

2012-08-054_000000000000277
3

particular focus on the development of utility-scale solar, wind, and WTE power generation projects. Specifically, 

the program targets the utilization of CTF funds along with ADB financing support to implement candidate projects 

located in various provinces within the country being considered by PSOD for further development. The 

completion of these projects has been expected to provide Thailand with a total aggregate capacity addition 

amounting to approximately 520 MW while diversifying the primary energy mix and reducing GHG emissions. 

Financial support for most of the individual projects included in the program will be provided on a non-recourse 

project finance basis with revenue streams generated from the supply of RE electricity to EGAT and the Provincial 

Electricity Authority (PEA) under standard power purchase agreements (PPAs) with additional regulatory supports, 

such as feed-in tariffs (―adders‖), provided under the Small Power Producers (SPP) and Very Small Power 

Producers (VSPP) Program. 

Under the ADB initiative, PSOD has recently closed financing on two utility-scale solar projects with additional 

financial support in the form of grant resources from other fund sources and commenced with the construction of 

the facility. Additional private sector investments on projects of similar nature are currently under consideration by 

PSOD, with more prospective projects in the pipeline. 

While there has been increased interest in entering the RE market, private developers implementing these ―pioneer‖ 

projects continue to face additional costs associated with state-of-the-art RE technologies and systems and firstmover risk associated with deployment of these RE systems in Thailand. Regulatory support, though significant, 

has not been sufficient to mobilize capital financing at the scale necessary to meet RE electricity objectives as 

proposed by the GoT (as discussed in the original CIP and the CIP-U). In order to overcome these barriers, ADB 

provided grant resources to assist the project owners in project development and financing enhancing overall 

financial profile of these projects. Additional concessional funds are being sought from CTF to support a much 

larger investment pipeline and accelerate the growth of the sector to a sustainable scale. 

In a wider scope, the program seeks to establish a track record of completed projects and investments, with high 

replication potentials and demonstrable developmental effects, to facilitate private sector participation and further 

catalyze market transformation within a realistic economic and technical context.

Thailand’s GHG emissions profile

Thailand has been one of the fastest growing economies in Asia during the last decade, with GDP averaging 7% 

annually, even allowing for the economic slowdown experienced from 2007 to 2009. The growth in economic 

activity from 1990 to 2007 correlates to a higher demand for energy, met primarily by increasing energy production 

and electric power generation capacity, resulting to a corresponding growth in total emissions, per capita emissions, 

and per capita energy use (Figure 2). 

The energy demand has been estimated to increase at an average rate of 4.2% annually from 146,182 gigawatthours (GWh) in 2009 to 347,947 GWh in 2030. Energy sector related emissions based on the 2000 National GHG 

Inventory in Thailand reached 159.38 million tons of CO2 equivalent accounting for 69.6% of the total Thai 

national CO2 emissions, with more than 40% of the energy sector related emissions attributed to activities related to 

energy production and electric power generation.3 

In addition, studies conducted in 2010 estimated the annual rate of CO2 emissions from the combustion of fossil fuels 

in thermal power plants to be 172.04 kilotons of CO2 per year, with a thermal plant producing 0.31 to 1.03 kilograms 

of CO2 for every kilowatt-hour of electricity generated depending on the type of fuel used.4

RE Market Description

Thailand is endowed with abundant renewable energy resources—biomass/biogas, small-scale hydropower, solar, 

and WTE —with estimated total potential of 57,000 MW. Less than 3% of this potential has been developed. As 

 

3 Office of Natural Resources and Environmental Policy and Planning, Ministry of Natural Resources and Environment, 2010. Thailand: 

Second National Communication under the United Nations Framework Convention on Climate Change. Bangkok, Thailand.

4 N. Parkpoom. 2010. Generation Planning in the Context of Carbon Dioxide Emission and Associated Risk in the Thailand Power 

System. Bangkok, Thailand. http://www.aesieap0910.org/upload/File/PDF/4-Technical%20Sessions/TS07/TS0703/TS0703_FP.pdf

2012-08-054_000000000000278
4

of 2010, total alternative energy consumption was estimated at 7,148 kilotons oil equivalent, of which 62% was in 

the form of heat, 22% in the form of natural gas for transport, 6.6% biodiesel, and 4.6% ethanol; only 4.3% was in 

the form of electricity.

5

Solar potential accounts for the vast majority of RE resources, with aggregate estimated generation potential of more 

than 50,000 MW.6 Wind potential is estimated at 1,600 MW. WTE is estimated at about 400 MW. In 2009, GoT 

launched its 15-year Renewable Energy Development Plan and targets to increase the share of RE from 6.4% to 20% 

in 2022. Specifically, it originally targets a 500 MW capacity to be supplied by solar power. As of July 2011, the 

installed power generation capacity in Thailand was 31,447 MW with VSPP’s contributing less than 1% of the total.7

Thailand’s plentiful solar resources make it an ideal location for solar photovoltaic (PV) energy installations. Solar 

development has been limited to stand-alone decentralized solar PV systems, with utility scale installations still in 

the early development stage. Wind and WTE are in early stages of exploitation. Several projects are under 

development, but none have been completed. Despite the favourable presence of feed-in tariffs (―adders‖), the RE 

sector remains underdeveloped (with the exception of first-generation renewable fuels). As discussed in the original 

CIP and the CIPU, the adders have not been sufficient to mobilize financing at the scale necessary to meet the 

renewable electricity objectives. 

Figure 2. Thailand’s GHG Emission Profile

Sector and project level barriers

While there is great potential, the renewable electricity sub-sector is still in its nascent development stage. 

Challenges to large-scale development include lack of long-term financing, higher upfront capital costs, and higher 

back-ended risk premium for new technology deployment.

 

5

 Department of Alternative Energy Development and Efficiency. 2010.Thailand Energy Statistics (Preliminary) 2010. p.10. 

6

 Department of Alternative Energy Development and Efficiency. 2008. Fifteen-Year Alternative Energy Plan of Thailand.

7

 Source: Energy Planning and Policy Office (EPPO). http://www.eppo.go.th/info/stat/T05_01_01.ppt

2012-08-054_000000000000279
5

ADB's long-term local currency loan combined with upfront monetization of expected Certified Emission 

Reductions (CERs) and CTF support will help to provide sufficient amortization profile and tenor needed in order 

to reach financial close and achieve economic and financial viability of RE generation plants.

Thailand’s increasing demand for electricity, abundant RE resources, available land area for solar and wind 

installations, favorable feed-in tariffs (―tariff adders‖), and grid connection readiness encourage RE power 

development investments in the country. The regulatory and financial support for RE projects are expected to 

sustain projects in the long term but, in the short and middle-term, there is still need for concessional funding and 

risk mitigation mechanisms to make sure that first-mover projects move from planning to commissioning and 

operation phase. The limited experience of grid-connected, utility-scale RE power projects in Thailand and the still 

high perceived risk of these resources and technologies necessitate CTF support.

Summary of the Program and use of CTF funds

The Program falls under the GoT’s Alternative Energy Development Plan and will support GoT’s objectives for 

alternative energy development and climate change mitigation. The Program will help clean energy projects move 

towards implementation stage, and will have a catalytic effect with respect to mobilizing additional development 

and expansion in the solar, wind, and WTE sub-sectors. CTF funds may be structured as loans or guarantees 

alongside ADB. ADB would ensure that all projects also comprise funding from at least one commercial bank in 

order to achieve a catalytic effect over the medium term as local banks get more familiar assessing credit risk of RE 

projects. 

The Investment Component

The Program comprises solar, wind, and WTE projects across several provinces in Thailand, with aggregate 

capacity of up to 520 MW. . Most of the projects will be financed on a project finance basis. Individual projects

may benefit from the upfront financing of CERs by ADB's Carbon Market Initiative (CMI). The CMI team will 

work on the Clean Development Mechanism (CDM) component with Sponsors, in parallel with the ADB financial 

assistance discussions. 

Market Transformation

The CTF supported investments will help Thailand hasten and expand private sector investment in RE 

infrastructure to facilitate the attainment of targets contained in the GoT's Alternative Energy Development Plan. 

By demonstrating the commercial viability of private sector utility-scale energy generation projects, the Program 

with assistance from CTF has been envisaged to bridge the gap between perceived and actual risks associated with 

investments in a relatively new industry, serving as a catalyst towards encouraging the participation of other private 

sector developers, investors, and financial institutions in subsequent power development projects utilizing solar, 

wind, and WTE technologies. 

The Program presents a further transformational role by enhancing sectoral capacity in implementing RE and WTE 

projects by establishing replicable business models and performance benchmarks within the technical and economic 

realities of these RE technologies in the Thai context. These models and metrics may also provide a suitable 

framework for other ADB developing member countries (DMCs) in the development and conduct of RE based 

power projects. 

As mentioned above, ADB would ensure that at least one commercial bank also participates in the financing of each 

project (albeit with shorter debt tenors) in order to achieve a catalytic effect. As such, the support of CTF and the 

potential demonstrable effects triggered by implementing the Program offer added assurance for local financial 

institutions to lend to future RE projects, which in turn will sustainably accelerate the growth of the sector and 

subsequently serve as a mechanism to achieve GoT's long-term development objectives.

Terms of the CTF funds 

The program will cover multiple RE projects which face similar development and implementation barriers as discussed 

above and in the original CIP and CIP-U. Detailed financing plans will vary from project to project. 

2012-08-054_000000000000280
6

FIT WITH INVESTMENT CRITERIA

i) Potential GHG Emissions Savings:

Emissions reductions are estimated as follows: 

Estimated GHG Reductions a

Total GHG reductions directly supported by CTF Total GHG Reductions with potential replication and scale up

Wind power projects 643,860 tons / year CO2e

1250 MW b wind at 

30% output 2,299,500 tons / year CO2e

Waste-to-energy 

projects

245,280 tons / year CO2e

350 MW c waste-toenergy at 80% output 1,716,960 tons / year CO2e

Solar power projects 183,960 tons / year CO2e

5000 MW dsolar at 

25% output 7,665,000 tons / year CO2e

Total 1,073,100 tons / year CO2e Total 11,681,460 tons / year CO2e

a GHG reductions assume that RE displaces fossil power in the grid at 0.7 tons CO2e/MWh. Using an average grid emissions factor of 0.55 

tons CO2e/MWh, the total direct emissions reductions would be about 843,150 tons CO2e/year.

b Assumes replication and scale-up potential is limited to total of 1600 MW potential identified in the AEDP (see Table 8 of original CIP)

c Assumes replication and scale-up potential is limited to total of 400 MW potential identified in the AEDP (see Table 8 of original CIP)

d Assumes replication and scale-up potential is 10% of total of 50,000 MW potential identified in the AEDP (see Table 8 of original CIP)

ii) Cost-Effectiveness:

Based on the table above, cost effectiveness assuming $100 million in CTF cofinancing:

Cost Effectiveness based on total GHG reductions 

directly supported by CTF

Cost effectiveness based on Total GHG Reductions 

with potential replication and scale up

CTF $93 ton / year CO2e

~ CTF $4.66 / ton assuming 20 year project lifetime

CTF $8.56 ton / year CO2e

~ CTF $0.43 / ton assuming 20 year project lifetimes

iii) Demonstration Potential at Scale:

The Program targets the acceleration and scale-up of investments by the private sector, with particular focus on the 

development of utility-scale solar, wind, and WTE power generation projects, through the use of CTF funds along 

with ADB financing support. The completion of individual projects under the Program will have high 

demonstration impact by developing a replicable model for national and regional independent SPPs and VSPPs 

which generate electricity from RE resources and by establishing a track record of completed projects that will 

reduce the perception of risk, resulting in a significantly lower cost of capital and in turn enable future projects to 

achieve financial close and sustainability through domestic regulatory support (feed-in tariffs/adders) alone.

With the reduction of financial and market risks, the Program anticipates the further participation of private sector 

project developers and additional end users at scale.

Based on initial estimates for the Program, the installation and operation of an additional renewable generating 

2012-08-054_000000000000281
7

capacity amounting to approximately 520MW will result in the avoided GHG emissions estimated at 1 million tons 

of CO2 equivalent per year at the end of a five-year period commencing of the date of operation. Given a 10:1 

replication potential, the Program further estimates the potential avoided GHG emissions to amount to about 11 

million tons of CO2 equivalent per year.

iv) Development Impact:

The primary development impact from the implementation of the Program includes the diversification of Thailand's 

energy mix through the addition of RE-based generating capacity and demonstration of the viability of utility-scale 

private sector RE power generation projects. The completion of these projects will greatly assist in propelling the 

country to achieve the target of having 20.3% of the primary commercial energy supply coming from alternative 

and renewable resources by 2022, which ensures the access of the Thai people to secure, reliable, and sustainable 

sources of electricity, reduced reliance on fossil fuels, and a lower exposure to commodity and exchange rate risk. 

Specifically, the demonstrable outcomes of the Program are the increased generation of electricity supplied by the 

use of solar, wind, and WTE resources through the installation, commissioning and operation of up to 520 MW of 

RE power generation facilities and a reduction in GHG emissions. Other specific performance indicators to quantify 

developmental impacts shall be finalized on a project-by-project basis. 

The Program will enable the development and completion of private sector RE projects that would otherwise not 

be implemented by reducing financial and market risks associated with ―pioneer‖ projects by establishment of a 

track record of completed projects and investments that in turn would further capacitate the private sector and 

catalyze market transformation. As a result, the anticipated increase in participation by the private sector through 

project development and scale-up of investments should initiate direct and indirect prospects for the creation of 

employment opportunities.

The environmental co-benefits of improved air quality due to reduced emissions of local pollutants (NOx, SO2, 

particulate matter, mercury and other heavy metals) from avoided coal-fired power plants, minimal waste, reduced 

noise, and a lower carbon footprint provide healthier and more sustainable living condition for the people of 

Thailand in consonance with the goals of the 11th National Economic and Social Development Plan. Moreover, the 

Program also supports the GoT’s long-term objective, as contained in the CIP and CIP-U, to reallocate CTF 

resources to the private sector.

The implementation of the Program will be expected to have a direct effect on local poverty reduction within the 

vicinity of individual projects. During construction and eventual operation of electricity generation facilities, the 

employment opportunities for local skilled/unskilled labor should increase the level of income for men and 

women who qualify for employment. In turn, the added income will increase consumption of goods/services and 

contribute to the economic activities within the project area. In addition, the Program will be expected to 

indirectly increase the economic well-being in individual project areas by providing a clean and reliable source of 

electricity that will serve as an investment multiplier in the production of goods and delivery of services. Further 

discussions on specific performance indicators for measuring direct and indirect poverty reduction impacts will 

be finalized on a project-by-project basis.

On a wider scale, the high level of replication potential and the scalability of the Program indicate a good 

probability of extending developmental effects and the spillover of environmental and economic benefits to 

countries within the Greater Mekong Subregion.

v) Implementation Potential:

As of January 2012, ADB has closed financing for two utility-scale solar projects which are now under 

construction, and additional projects are presently under consideration. Individual RE projects will enter into 

standard PPAs with EGAT or PEA, fixed-price turnkey Engineering, Procurement and Construction (EPC) 

2012-08-054_000000000000282
8

arrangements for plant installations, and interconnection arrangements with EGAT or PEA. The operation and 

maintenance of the individual projects will be undertaken by the sponsors or qualified operators. These 

activities are significantly less complex than conventional power plants and are not expected to present major 

technical challenges.

The CIP-U supports the acceleration and expansion of private sector investment in clean energy infrastructure in 

the country. The Program will play a significant role in achieving the updated CTF targets for Thailand. The ADB 

and CTF assistance will play a crucial role in helping individual projects to obtain financial close and appropriate 

long-term financing.

vi) Additional Costs & Risk Premium:

As discussed above, the RE projects to be supported by the Program entail additional costs and risks. CTF funding 

will be structured to achieve the envisioned market transformations with minimum concessionality appropriate to 

the needs of the individual projects. 

vii) Financial Sustainability

The viability of individual projects comprising the Program will be ensured primarily through the off-take pricing 

arrangements in the PPAs negotiated for each project, with additional revenues from regulatory support 

(supplemental feed-in tariffs) provided through the SPP and VSPP Program of the GoT and from CERs from 

carbon trading in the long-term.

CTF cofinancing will be structured to enhance the financial viability of the project by reducing the weighted 

average cost of capital. 

viii) Effective Utilization of Concessional Finance

The total cost of projects to be supported by the Program is estimated to be $1 billion. The demonstration impact is 

expected to facilitate replication and scale-up via other solar, wind, and WTE power projects. CTF cofinancing for 

individual projects will be priced in accordance with minimum concessionality principles.

ix) Mitigation of Market Distortions

The Program will ―crowd in‖ commercial investment and will not distort the market, as there is still limited private 

sector investment in the RE market at present. ADB will ensure that at least one commercial bank participates in 

the financing of each project (albeit with shorter debt tenors) in order to achieve a catalytic effect. ADB’s and 

CTF’s longer tenor will reduce risks for all financing parties because annual debt service payments are reduced and 

debt service coverage improved. Lower risk for debt service will play a crucial role in mobilizing commercial bank 

funding for RE projects with intermittent revenue generation, such as solar and wind power. 

The GoT remains committed towards continuing support to RE development via public sector financing through 

EGAT and PEA. 

x) Risks

The major implementation risks and proposed mitigants for the Program are as follows.

(i) Solar radiation and wind variability risk. Solar panels should be installed in a location with good and reliable 

sunlight since the intensity of solar irradiance impacts the capacity factor. Solar plant design will be based on 

insolation data available from GoT agencies, US NASA, METEONORM, and other sources. Wind farm design will 

2012-08-054_000000000000283
9

be based on at least 1 year of site-specific wind mapping data, consistent with industry best practice. Individual 

projects with be subject to due diligence on renewable resource availability, by qualified technical advisors. 

(ii) Cost of installation / technology risk. Key challenges for solar power generation projects are managing high 

upfront costs for the solar PV panels and ensuring the panels' efficiency over the long-term in converting solar 

radiation to electricity in the specific climatic conditions of the project site. Unlike conventional energy projects 

where ongoing fuel expenses are a key driver of commercial viability, solar power projects' viability is primarily a 

function of capital, financing costs and variability of power generation. Therefore, choosing the right solar PV 

technology is important in order to strike a balance between cost and efficiency. For individual projects, qualified 

technical advisor will review and confirm the reliability and durability of the selected technology, the adequacy of 

the panel supplier’s performance warranties, the project costs, as well as construction and interconnection 

arrangements. Wind power technology is subject to lesser perceived risks, as the available technologies for the 

wind farms under consideration are well-established, although the intermittency of power generation has to be 

carefully assessed. Wind power projects and WTE projects will be subject to similar technical advisor review and 

assessment as required.

(iii) Off-take risk. The electricity generated from each project will be purchased by EGAT or PEA, so the ability of 

both to fulfil its obligations under the PPAs will be carefully reviewed. EGAT and PEA creditworthiness, GoT 

support, the reasonableness of the PPAs, and the fundamental demand-supply in the power market will be examined 

during the due diligence. 

(iv) Legal and regulatory risk. The legal and regulatory environment pertaining to the SPP and VSPP programs and 

to the power market in general in Thailand may change over the course of the Program. Legal due diligence will 

include a review of the regulatory framework for the energy sector and include an analysis of the risk of change in 

law during the term of the financing. Legal due diligence will also include a review of all major project documents, 

including the PPAs, supply contract and all interconnection arrangements.

xi) Performance Indicators

The performance indicators outlined below are derived from the CTF Results Measurement Framework and 

Thailand’s CIP and CIP-U. These indicators will be tracked at least annually.

1) CTF Related Performance Indicators

Program Performance Indicator Baseline

Anticipated Results

by December 2017 (5 years)

GHG emissions avoided by the Program 

(including replication and scale up)

N/A 1 MtCO2e/year at the end of the five-year 

period 2012 to 2017 as direct result of 

ADB/CTF resources8

CTF financial leverage for the Program N/A

CTF cost effectiveness for the Program N/A Replication and scale up achieves 5 

MtCO2e/year at the end of the 15-year 

operation period through 2027.

Total emissions for the 20 years of the 

Program is estimated at 85 MtCO2e

9

 

8 This estimate assumes that 520 MW of capacity is operating with emissions reductions as estimated in the table above.

2012-08-054_000000000000284
10

Direct reductions => CTF$5 / ton CO2e 

decreasing to CTF$1.18 / ton CO2e

Or

0.2 t CO2e ton CO2e /CTF$ invested, 

increasing to 0.85 ton CO2e /CTF$ invested 

with replication and scale up

NOTE: Other performance targets and indicators quantifying developmental impacts will be included in the formulation 

of a Project Design and Monitoring Framework for each individual project to be supported under this program. 

 

9

 This assumes that RE capacity is built out with GHG reductions of 1 Mt/y for years 1 – 5 [5 million tons total], 5 Mt/y for years 6 – 15 

[50 million tons], then 6 Mt/y for years 16-20 [30 million tons]; total is 85 million tons over 20 years.

2012-08-054_000000000000285
JUSTIFICATION FOR APPROPRIATIONS

FY 2013 BUDGET REQUEST

U . S . D E P A R T M E N T O F T H E T R E A S U R Y 

INTERNATIONAL PROGRAMS

2012-08-054_000000000000286
2012-08-054_000000000000287
iii

TREASURY INTERNATIONAL PROGRAMS

TABLE OF CONTENTS

Treasury International Programs

Justification for Appropriations

FY 2013 Budget Request

Letter from the Secretary .

Executive Summary .

Tables: Appropriations Request and Arrears .

Economic Growth, National Security and Poverty Reduction . 

The World Bank Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

International Development Association (IDA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

International Bank for Reconstruction and Development (IBRD) . . . . . . . . . . . . . . . . . . 1

African Development Bank Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

African Development Fund (AfDF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

African Development Bank (AfDB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Asian Development Bank Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Asian Development Fund (AsDF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Asian Development Bank (AsDB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Inter-American Development Bank Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Inter-American Development Bank (IDB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Food Security . 

Global Agriculture and Food Security Program (GAFSP) . . . . . . . . . . . . . . . . . . . . . . . . . 2

International Fund for Agricultural Development (IFAD) . . . . . . . . . . . . . . . . . . . . . . . . . . 2

World Bank Environmental Trust Funds . 

Global Environment Facility (GEF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Clean Technology Fund (CTF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Strategic Climate Fund (SCF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2012-08-054_000000000000288
iv

TREASURY INTERNATIONAL PROGRAMS

Debt Relief . 

Enhanced Heavily Indebted Poor Countries (HIPC) Initiative . . . . . . . . . . . . . . . . . . . . . . 3

Multilateral Debt Relief Initiative (MDRI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Technical Assistance . 

Office of Technical Assistance (OTA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

MDB Basics . 

2012-08-054_000000000000289
1

TREASURY INTERNATIONAL PROGRAMS

Letter from the Secretary

DEPARTMENT OF THE TREASURY

WASHINGTON, DC

Dear Member: 

On behalf of President Obama, it is my pleasure to submit the Congressional Presentation Document for the Department of the Treasury’s International Programs for Fiscal Year 2013.

Treasury’s FY 2013 request follows on Congress’s landmark actions in FY 2012 in support of the 

multilateral development banks (MDBs). For FY 2013, our request is for a continuation of funding 

for our multi-year commitments to the MDBs, as well as to the Food Security and Environment 

trust funds at the World Bank. Congress provided funding toward these commitments last year. In 

addition to funding these commitments, we are seeking funding in support of anticipated bilateral 

debt forgiveness obligations and for the ninth replenishment of the International Fund for Agricultural Development (IFAD). While the IFAD request reflects a new replenishment, we are not 

seeking an increase in funding as our pledge maintained funding at current levels.

Investments in multilateral institutions remain a cost-effective way to promote our national security, support future economic growth, and address key global challenges. Our continued support 

also will preserve U.S. leadership at the MDBs – leadership that has greatly benefited both the 

MDBs and U.S. taxpayers for the last 60 years. 

In this past year, we sought the support of the MDBs in leveraging economic reform in the Middle 

East and North Africa in the wake of the Arab Spring. The successful transformation of this region 

is critical to our national security, and will depend on countries’ ability to generate broad-based 

growth and jobs. 

As we know from the experience of the transition in Eastern Europe and the former Soviet Union, 

fundamental change on this scale requires substantial resources and sustained and intensive engagement. The MDBs are well-positioned to provide the investments in soft and hard infrastructure that underpin growth as well as the long term strategic engagement needed to support the 

transition to democratic governance and a market economy. As I have noted previously with Secretary Panetta in a joint letter to Congress, “the MDBs are essential partners with the United States 

as we confront and contain emerging threats.”

In addition to supporting our strategic interests and national security priorities, we look to the 

MDBs to drive domestic growth by developing the open and transparent market economies that 

will become the next generation of U.S. trading partners, supporting U.S. exports and jobs. The 

MDBs complement our bilateral assistance programs by leveraging capital to mobilize financing for 

large-scale infrastructure and other private investment. For example, in countries such as Turkey, 

Colombia, and Indonesia that have benefited from MDB investments, development has fueled rapidly increasing demand for U.S. products, and our exports to these economies have grown by more 

than 200 percent over the last ten years. 

2012-08-054_000000000000290
2

TREASURY INTERNATIONAL PROGRAMS

Letter from the Secretary

The MDBs, as well as specialized trust funds such as the Global Agriculture and Food Security 

Program (GAFSP), are also uniquely designed to help address critical global priorities such as food 

insecurity, energy insecurity, and environmental degradation. These complex challenges, which 

know no geographic boundaries, were put into stark relief this year as millions suffered in famine 

ravished parts of Africa. This crisis underscored the need to invest in sustainable food security and 

adaptations of agriculture to changing weather patterns. This crisis also highlighted the instability 

that the lack of such investments can yield. GAFSP, in its first two years of operation, has worked to 

address the global challenge of food insecurity by providing nearly $500 million to poor countries 

that are demonstrating strong leadership and results in transforming their agriculture sectors. The 

MDBs contributed to the initial, immediate relief effort in the Horn of Africa, with the World Bank 

approving $250 million from its new Crisis Response Window last September. Equally important, 

the World Bank, the African Development Bank, and IFAD are making crucial investments in agricultural productivity to address some of the underlying causes of this humanitarian catastrophe.

While these institutions actively promote critical U.S objectives, our commitments represent only 

a fraction of the resources that they bring to bear. For example, at the World Bank, burden-sharing 

with other shareholders coupled with an increase in the Bank’s ability to borrow from markets allows each dollar of U.S. capital to support additional Bank lending of $25. Over time, this effect 

is compounded, as demonstrated by a capital increase contribution of $420 million made under 

the Reagan Administration that helped support $325 billion in lending over the subsequent two 

decades. In FY 2013 alone, financial commitments from the MDBs are expected to approach $80 

billion. 

For these reasons, I believe that the investments outlined in this document continue to represent 

an outstanding value for money. At a time when we must continue to seek the best returns for taxpayer resources, these commitments are an extremely sound investment in national security, future 

economic growth, and the preservation of global public goods. 

I look forward to working with you on this important request. 

Sincerely,

Timothy F. Geithner

2012-08-054_000000000000291
3

TREASURY INTERNATIONAL PROGRAMS

“These institutions [the World Bank and Asian Development Bank] are the largest donors to Afghanistan after the United 

States, and they have been critical to the success of important projects, such as the Ring Road and the Uzbek-Afghan 

railroad. We need these critical enabling institutions, and further U.S. support for them will ensure that they are able to 

continue to contribute as significantly as they have in the past.”

– General David H. Petraeus

Commander, International Security Assistance Force and Commander U.S. Forces Afghanistan

Statement Before Senate Committee on Armed Services, March 15, 2011

“As we carefully shift our major combat engagements towards long term partnership and cooperation efforts across the 

whole of government, the multilateral development banks can play an even greater role helping to restore stability, prosperity, rule of law and good order to these nations.”

– Rear Admiral Michelle Howard 

Testimony before the House Financial Services Subcommittee on 

International Monetary Policy and Trade, September 21, 2011

“As U.S. Forces leave Iraq and Afghanistan, we need international institutions to provide front-line States with sufficient 

support for lasting economic development. In fact, one of the most important lessons of the wars in Iraq and Afghanistan 

is that military success is not sufficient to win peace. Broad-based economic development, institution building, and provision of basic services to the people are essential for long-term success.”

– Secretary of Defense, Leon E. Panetta 

and Secretary of the Treasury Timothy F. Geithner 

Joint Letter to Congressional Leaders, September 21, 2011

“American businesses understand these institutions’ vital role in fostering prosperity. MDB loans and expertise help developing countries become reliable trading partners and open up their markets for U.S. goods, and over half of all U.S. exports 

now go to developing countries that have received assistance from the MDBs. These loans come with conditions, such as 

strengthening transparency, promoting good governance, and improving the investment climate.”

–Business Roundtable, Coalition for Employment through Exports, 

Emergency Committee for American Trade, National Foreign Trade Council, U.S. Council for 

International Business and U.S. Chamber of Commerce 

Letter to Members of the United States Congress, June 7, 2011

“They [the multilateral development banks] provide opportunities for developing nations to build economic infrastructure and capacity, create private sector growth and supply chains, and reform custom regulations and barriers for economic growth, all of which raise the standard of living in these nations and create new markets and consumers for U.S. 

companies.”

- James T. Kolbe, Former Member of Congress, Senior Transatlantic Fellow, 

German Marshall Fund of the United States 

Testimony before the House Financial Services Subcommittee on 

International Monetary Policy and Trade, July 27, 2011

“With downside risks still threatening the global economic outlook, MDB assistance to poor and emerging economies also 

means preserving and advancing the interests of U.S. business and American workers of companies that trade and invest 

in these countries.”

Henry Kissinger, Lee Hamilton, Brent Scowcroft, William Cohen, 

Charlene Barshefsky and other members of the Bretton Woods Committee

Joint Letter to Congressional Leaders, October 4, 2011

2012-08-054_000000000000292
4

TREASURY INTERNATIONAL PROGRAMS

2012-08-054_000000000000293
5

TREASURY INTERNATIONAL PROGRAMS

Executive Summary

EXECUTIVE SUMMARY

Economic Growth, National Security and Poverty Reduction: 

Multilateral Development Banks

The FY 2013 request for the multilateral development banks (MDBs) is comprised almost entirely 

of annual commitments negotiated in previous years. This includes a continuation of funding 

for the General Capital Increases (GCIs) at the International Bank for Reconstruction and Development (IBRD), the Inter-American Development Bank (IDB), the Asian Development Bank 

(AsDB), and the African Development Bank (AfDB). The only new commitment, for the ninth 

replenishment of the International Fund for Agricultural Development (IFAD), is a flat line of our 

current contribution level. Meeting these commitments will secure our leadership at these institutions, enabling them to continue their vital roles in boosting economic growth in export markets 

for American businesses and strengthening our national security.

Our MDB request includes a first year payment of $70 million for the Selective Capital Increase 

(SCI) at the IBRD. Treasury requested and obtained authorization to subscribe to the SCI in FY 

2012. Proceeding with the first year payment of $70 million will enable us to begin to meet our 

obligations under the World Bank’s “voice and vote” reform, which was agreed by World Bank 

shareholders in 2010. Meeting this obligation is necessary to prevent a drop in U.S. shareholding 

below the 15 percent threshold. This threshold is critical, as it enables the United States to block 

amendments to the World Bank’s Articles of Agreement, which govern critical issues such as the 

role of the World Bank President, membership, and the role of the Board of Executive Directors. 

We are the only member with this veto power. 

Treasury’s request also includes funding for the special MDB facilities that support the world’s 

poorest countries: the International Development Association (IDA), housed at the World Bank; 

the Asian Development Fund (AsDF), based at the Asian Development Bank; and the African Development Fund (AfDF), which is part of the African Development Bank Group. These facilities 

are the most important sources of financing of development needs and priorities in many of the 

world’s most fragile states. 

In addition to the annual commitments for FY 2013, the request includes funds to pay for arrears 

associated with our general capital increase commitment at the AsDB. These arrears were generated by the 0.2 percent across the board rescission in FY 2011, and their payment is necessary to 

prevent a permanent loss of U.S. shareholding. A loss would end the U.S. status as a co-equal shareholder with Japan and forfeit influence at a time when other shareholders have expressed interest 

in purchasing any shares we relinquish. 

Food Security

The FY 2013 request includes $134 million for a contribution to the Global Agriculture and Food 

Security Program (GAFSP).  This global fund partners with developing countries to enable small 

farmers to grow more and earn more.  It is one of the most effective ways of working to end global 

2012-08-054_000000000000294
6

TREASURY INTERNATIONAL PROGRAMS

Executive Summary

hunger, because it rewards developing countries that are contributing their own resources and demonstrating leadership to improve agriculture. To date, the fund has allocated nearly $500 million 

based on a competitive application process. Through FY 2012, the United States (through funds 

from the Department of Treasury and the Department of State) will have contributed $341 million, 

or nearly 72 percent of the U.S. pledge. The FY 2013 request will bring the total U.S. contribution to 

the $475 million pledged by the United States in 2010.

In addition to GAFSP, the food security budget includes $30 million for first year of the ninth 

replenishment of the International Fund for Agricultural Development (IFAD), the only global 

development finance institution solely dedicated to improving food security for the rural poor. The 

$30 million is equivalent to our annual commitment under the previous replenishment (which was 

made in 2008).

Environment and Clean Energy

The FY 2013 request includes $364.4 million for the Global Environment Facility (GEF), the Clean 

Technology Fund (CTF), and three Strategic Climate Funds (SCF): the Pilot Program for Climate 

Resilience (PPCR), the Forest Investment Program (FIP) and Program for Scaling up Renewable 

Energy in Low-Income Countries (SREP). FY 2013 funding for Treasury’s multilateral environment and clean energy programs will directly result in action and investments by other countries 

to reduce their pollution, curbing the damage that they inflict on our shared spaces, such as the 

atmosphere and the oceans. Such global action mitigates threats to our domestic environment that 

increasingly originate beyond our borders, enhances our national security, and provides opportunities for U.S. businesses, particularly in clean energy. 

Addressing global environmental challenges now will significantly reduce what we would otherwise have to pay later. By acting now, we avoid paying even higher costs in the future for natural 

disasters, instability, and conflict emanating from environmental degradation. These programs 

also provide access to modern forms of energy, critical for helping the world’s poorest countries 

advance out of poverty. Moreover, these programs offer cost-effective returns on our investments. 

The U.S. contribution leverages significant funding from other donors, developing country governments, development institutions, and the private sector. Each U.S. dollar contributed to the GEF, 

CTF, and SCF leverages four to five additional dollars from other donors and six to 10 times that 

from other funding sources (including private sector). 

Debt Relief 

The FY 2013 budget includes $250 million for the debt restructuring account to meet potential U.S. 

bilateral debt relief commitments under the Heavily Indebted Poor Country (HIPC) framework. 

Specifically, Treasury anticipates that Sudan could become eligible and reach HIPC decision point 

in FY 2013. The $250 million request reflects the estimated budget cost of forgiving 100 percent of 

Sudan’s outstanding debt to the United States (currently $2.4 billion). Prior to obligating funds for 

HIPC treatment of Sudan’s debt, the U.S. will require progress on various fronts that we have identified as pre-conditions for any U.S. support for debt relief. These pre-conditions include fulfillment 

of the agreement reached by the governments of Sudan and South Sudan under the Comprehensive 

2012-08-054_000000000000295
7

TREASURY INTERNATIONAL PROGRAMS

Executive Summary

Peace Agreement. The obligation of funds will also depend on Sudan’s ability to meet current legislative requirements tied to HIPC debt relief, including determinations on human rights and state 

sponsorship of terrorism.

Given the uncertainty of the situation in Sudan at the time of this submission, Treasury is also 

requesting transfer authority that would enable the Department to repurpose these funds to help 

meet other multilateral assistance commitments in the event that Sudan is not likely to reach the 

HIPC decision point by the end of FY 2014. 

Although we are not seeking funds for FY 2013 in support of our Multilateral Debt Relief Initiative 

(MDRI) commitments, we do continue to anticipate the need in future years for a combination of 

appropriated funds and early encashment credits to meet our obligations during the IDA16 and 

AfDF12 replenishment periods. 

Technical Assistance 

The FY 2013 request includes $25.4 million for Treasury’s Office of Technical Assistance (OTA).

This is equal to the FY 2012 base funding level, but the FY 2013 request does not include a request 

for Overseas Contingency Operations (OCO) funding for OTA. The FY 2013 request would enable 

OTA to maintain its current footprint of technical assistance programs globally. OTA helps finance 

ministries and central banks of developing countries strengthen their capacity to manage public 

finances and mobilize domestic resources. OTA also helps countries develop anti-money laundering regimes and fight corruption.

2012-08-054_000000000000296
8

TREASURY INTERNATIONAL PROGRAMS

Appropriations Request

APPROPRIATIONS REQUEST

Summary of Appropriations and Requests

Treasury International Programs

FY2011-FY2013 (in millions of $)

FY 2011 

Approp.

FY 2012 

Approp.

FY 2013 

Request

FY 2013 Request 

Full Numbers

Economic Growth, National Security and Poverty Reduction 

(MDBs) 

International Development Association (IDA) 1,232.5 1,325.0 1,358.5 1,358,500,0

Int’l Bank for Reconstruction and Development (IBRD) 0.0 117.4 187.0 186,956,8

Inter-American Development Bank (IDB and FSO) 0.0 75.0 102.0 102,020,4

Multilateral Investment Fund (MIF) 25.0 25.0 0.0

Inter-American Investment Corporation (IIC) 21.0 4.7 0.0

Asian Development Bank (AsDB) 106.4 106.6 106.8 106,798,8

Asian Development Fund (AsDF) 0.0 100.0 115.3 115,250,0

African Development Bank (AfDB) 0.0 32.4 32.4 32,417,7

African Development Fund (AfDF) 109.8 172.5 195.0 195,000,0

European Bank for Reconstruction & Development (EBRD) 0.0 0.0 0.0

Subtotal 1,494.6 1,958.5 2,096.9 2,096,943,9

Food Security

Global Agriculture and Food Security Program (GAFSP) 99.8 135.0 134.0 134,000,0

Int’l Fund for Agricultural Development (IFAD) 29.4 30.0 30.0 30,000,0

Subtotal 129.2 165.0 164.0 164,000,0

World Bank Environmental Trust Funds

Clean Technology Fund (CTF) 184.6 184.6 185.0 185,000,0

Strategic Climate Funds (SCF) 49.9 49.9 50.0 50,000,0

Global Environment Facility (GEF) 89.8 89.8 129.4 129,400,0

Subtotal 324.4 324.4 364.4 364,400,0

Debt Relief

Bilateral Debt Reduction 33.5 0.0 250.0 250,000,0

Multilateral Debt Relief Initiative (MDRI) for IDA15 0.0 91.0 0.0

MDRI for IDA16, AfDF12 0.0 83.5 0.0

Tropical Forest Conservation Act (TFCA) 16.4 12.0 0.0

Subtotal 49.9 186.5 250.0 250,000,0

Technical Assistance

Treasury Office of Technical Assistance 25.4 27.0 25.4 25,448,0

TOTAL TREASURY REQUEST 2,023.5 2,661.4 2,900.8 2,900,791,902 

2012-08-054_000000000000297
9

TREASURY INTERNATIONAL PROGRAMS

Arrears

ARREARS

Summary of Arrears

Multilateral Development Banks

FY2002 - FY2012

(Budget Authority; in $)

MDBs

Arrears

end-FY2002

Arrears

end-FY2003

Arrears

end-FY2004

Arrears

end-FY2005

Arrears

end-FY2006

Arrears

end-FY2007

Arrears

end-FY2008

Arrears

end-FY2009

Arrears

end-FY2010

Arrears

end-FY2011

Arrears

end-FY2012

IDA 73,015,000 78,540,000 120,727,880 327,527,880 337,027,880 377,877,880 385,572,880 505,572,880 478,072,880 480,542,880 423,042,880

MIGA 10,892,087 9,271,689 8,154,321 8,154,321 6,867,321 6,867,321 6,867,321 6,867,321 6,867,321 6,867,321 6,867,321

AfDF 220,000 10,849,144 16,789,221 29,637,221 30,994,221 32,351,221 33,366,261 39,421,261 40,476,261 86,636,261 109,136,261

AfDB 13,420 42,126 67,315 619,934 2,036,730 3,453,526 1,433,026 631,375 615,239 615,239 615,239

AsDF 133,158,400 138,908,527 98,339,611 102,139,611 118,389,611 134,639,611 175,345,350 185,595,350 195,845,350 311,095,350 326,345,350AsDB 0 0 0 0 0 0 0 0 0 213,020 212,868

IDB 0 0 0 0 0 0 0 0 0 0 27,022,861

MIF 88,772,000 64,341,172 39,488,672 28,576,672 26,852,572 50,128,472 50,330,972 50,330,972 50,330,972 50,380,972 50,380,972

IIC 16,055,000 22,822,619 47,822,619 47,822,619 46,098,519 46,098,519 46,098,519 46,098,519 41,428,519 20,470,519 15,800,519

IFAD 11,000 104,857 189,339 309,339 459,339 3,609,339 3,683,722 3,683,722 3,683,722 4,243,722 4,243,722GEF 210,937,600 171,585,848 140,668,364 141,528,364 169,828,364 170,628,364 169,527,644 169,527,644 163,027,644 205,057,644 258,987,644

EBRD 0 232,732 441,776 725,225 10,157 10,157 0 0 0 0 0

TOTAL 533,074,507 496,698,714 472,689,118 687,041,186 738,564,714 825,664,410 872,225,695 1,007,729,044 980,347,908 1,166,122,928 1,222,655,637 

Notes: 1. The amount of AfDB arrears ($615,239) corresponds to the 51 capital shares from GCI-V forfeited by the United States2. The United States has not had arrears to the IBRD, IFC, IDB FSO or NADBank during the FY2002-FY2012 Period

2012-08-054_000000000000298
10

TREASURY INTERNATIONAL PROGRAMS

Executive Summary

2012-08-054_000000000000299
11

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

ECONOMIC GROWTH, NATIONAL 

SECURITY AND POVERTY 

REDUCTION

The World Bank Group

International Development Association (IDA) Request: $1,358.5 million

Second of three installments

Start of current Replenishment: FY 2012

Treasury requests $1,358.5 million for the second of three annual payments to the Sixteenth Replenishment of the International Development Association (IDA16). 

 IDA:

•	 makes highly concessional loans and grants to the world’s 79 poorest countries – home to 2.5 

billion people, 1.5 billion of whom survive on $2 a day or less;

•	 is the single largest source of development finance in the world’s poorest countries, and operates across a range of sectors, including primary education, basic health, clean water and sanitation, the environment, infrastructure and agriculture; and

•	 was ranked “best performer” in aid transparency status in an independent ranking of 58 donor 

organizations in 2011.1

IDA’s strong leveraging of other donor contributions, coupled with internal World Bank resources, 

make it an effective organization in which to invest limited U.S. development resources. Every $1 

contribution from the United States leverages almost $12 in contributions from other donors and 

internal Bank resources. There are now 52 country donors to IDA.

In 2011, IDA’s commitments reached a record $16.3 billion, funding 230 new operations in 72 

countries. This funding led to improved lives for tens of millions of people in all corners of the 

globe while fostering global stability and promoting U.S. security interests. Specific examples of 

IDA engagement include: 

•	 A $300 million IDA loan for the Primary Education Development Program in Bangladesh, 

expanding on two previous programs that resulted in marked improvements in enrollment 

and completion rates, achievement of gender parity in access and construction of 30,000 new 

classrooms.

1 The ranking appeared in the 2011 “Aid Transparency Index” released by Publish What You Fund, a U.K.-based coalition of civil society 

organizations working on governance, aid, effectiveness and access to information.

2012-08-054_000000000000300
12

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

•	 An $18 million IDA project in Mongolia that has created a new insurance market to support 

the 30 percent of Mongolians who are nomadic farmers. This type of risk management has 

been identified as an essential component of strategies designed to support smallholder farms. 

Building on the success of the Second Sustainable Livelihoods Project in Mongolia, IDA approved an additional $11 million credit in 2011 to scale up activities in pastoral risk management and community initiatives, such as health facilities and improved water supply.  

•	 An $82 million loan to encourage local and foreign currency private financing of a natural 

gas-fired power plant in Cameroon. The project – owned and operated by U.S.-based AES 

Corporation – will add over 200 megawatts of generating capacity in Cameroon. The project 

is an example of how IDA is providing innovative tools to help Africa address its infrastructure 

needs to spur economic growth. 

•	 A $22 million IDA credit in Afghanistan to help develop the legal and regulatory regime for the 

telecommunications sector, which has attracted $1 billion in private investment and led to a 95 

percent decline in the cost of phone calls to 10 cents/minute.

Country-specific results can be found at: http://www.worldbank.org/ida/ida_abc.html.

U.S. Leadersh

The United States was the driving force behind the creation of IDA in 1960 and remains its largest shareholder. U.S. funding for IDA has helped save tens of millions of lives, eradicating extreme 

hunger and poverty around the world while promoting global stability and prosperity. This work 

helps to support U.S. national security objectives by addressing the root causes of extremism and 

conflict. 

In 2011, we strongly encouraged IDA to support South Sudan’s transition to statehood. IDA has 

responded by providing technical assistance to help the newly independent country build the institutional capacity to take full advantage of its programs once the country completes the steps to 

becoming an IDA member. In anticipation of engagement by IDA, the World Bank established a 

$75 million South Sudan Transition Trust Fund (SSTTF) to help provide health care, infrastructure, and employment for the people of South Sudan.  

As part of the IDA16 replenishment negotiations, we supported a Crisis Response Window (CRW) 

within IDA, designed to provide resources for countries hit by natural disasters (such as Haiti) and 

severe, external economic shocks, such as global food price spikes or regional financial crises. This 

past year, IDA was able to mobilize this new window in response to the crisis in the Horn of Africa, 

a region facing its worst drought in 60 years. IDA mobilized a total of $1.9 billion in resources for 

the crisis, including $250 million in front-loaded financing from the CRW. IDA’s response in the 

Horn of Africa is appropriately balanced between rapid response and the type of long-term recovery and resilience efforts that fall squarely within its area of comparative advantage.

2012-08-054_000000000000301
13

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

International Bank for Reconstruction and 

Development (IBRD) Request: $187.0 million

Second of five installments for the GCI ($117.4 million)

First of four installments for the SCI ($69.6 million)

Treasury requests $117.4 million for the second of five installments of the United States capital 

subscription to the World Bank’s General Capital Increase (GCI), which funds the IBRD. Treasury 

is also requesting $69.6 million for the first of four installments of the World Bank’s Selective Capital Increase (SCI). This is needed to allow the U.S. claim the portion of shares that will preserve 

our shareholding above the 15 percent veto threshold. With 15.8 percent, the United States is the 

World Bank’s largest shareholder and the only country with a valuable veto over changes to the 

World Bank’s Articles of Agreement. 

IBRD: 

•	 is the largest global development institution;

•	 aims to reduce poverty in middle-income and creditworthy poorer countries, where one-third 

of the world’s people are living on less than $2 per day live, through loans, guarantees, risk 

management products, and analytical and advisory services;

•	 helps poor people gain access to jobs, markets and social services; 

•	 provides financing for essential services such as water, electricity and roads;

•	 is uniquely positioned to address global challenges, such as food insecurity and environmental 

degradation; and 

•	 yields healthy returns for U.S. economic, security and humanitarian interests by strengthening 

new sources of global growth, working effectively with governments to improve governance, 

accountability and public financial management, and supporting and coordinating post-conflict relief efforts.

IBRD General Capital Increase 

In 2010, IBRD shareholders committed to increase the Bank’s capital so as to forestall a substantial 

decrease in lending capacity, from an average of $15 billion a year to less than $8 billion a year. The 

reduced level would be less than a third of even the most conservative projections of demand for 

Bank funding, and would dramatically curtail the Bank’s ability to respond to regional and global 

challenges. 

A key outcome of the capital increase negotiations was a commitment to transfer additional IBRD 

resources to finance IDA. As a result, each $1 contributed to capital will leverage nearly $8 in income transfers from IBRD to IDA, providing a total of $6.6 billion of internal transfers over the 

next nine years. Without the capital increase, the dramatic decline in lending would mean that the 

income from loan reflows needed to support the internal transfers to IDA would be absent—leav2012-08-054_000000000000302
14

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

ing donor nations to shoulder a greater burden for IDA contributions. 

U.S. support for the IBRD’s capital increase has a strong multiplier effect. Each dollar of U.S. capital 

supports additional Bank lending of $25, due to burden-sharing with other shareholders and an increase in the Bank’s ability to borrow from markets. This funding will enable the Bank to continue 

vital work to improve health and educational outcomes and to expand the access of poor people to 

basic services. For example, between 2005 and 2007, an IBRD project aimed at HIV prevention in 

the Dominican Republic resulted in a tenfold increase in voluntary HIV testing. A similar project 

in Jamaica resulted in an increase in voluntary HIV testing from under 30 percent in 2004 to nearly 

50 percent in 2008. 

In Brazil, the World Bank’s Second Bolsa Família Project ($200 million), approved in 2010, is helping to reduce poverty and inequality.  Bolsa Família is the core of Brazil’s social safety net strategy.  

The key project component is the conditional cash transfer that provides grants to mothers or 

other designated family members, enabling them to access health, education and other services.  

The project will further improve targeting and integrate other social programs.  In Mexico, 6.8 

million students received better education when coverage under the Quality Schools Program was 

increased from 21,000 to 39,000 schools in poor and very poor communities (2006 to 2009). Both 

these projects demonstrate the IBRD’s strength in promoting economic development in key U.S. 

trading partners: U.S. goods exports to Mexico and Brazil reached nearly $200 billion in 2010, up 

from $153 billion in 2006. 

IBRD Selective Capital Increase

The Selective Capital Increase (SCI) is a mechanism to adjust ownership shares of the World Bank 

to enhance the voice and participation of developing and transition economies in the Bank, while 

preserving the voice of the very poorest members. The multi-year SCI negotiation was generated 

by a recognition that the Bank’s legitimacy and effective governance required a shift in its ownership structure to better reflect major changes in the global economy. Under the SCI, the U.S. 

preserves both its relative voting share and position as largest IBRD shareholder, while “overrepresented” countries, principally in Europe, cede voting power to developing countries.

A key outcome of the SCI was to preserve the current shareholding of the United States in the Bank 

at 15.8 percent, above the threshold of 15 percent, below which we would lose our veto power over 

amendments to the Bank’s Articles of Agreement. This objective is in line with our position as the 

world’s largest economy with a legitimate claim to remain the largest shareholder at the Bank. Failure to fully finance the SCI at $69.6 million, however, could result in a permanent decrease in U.S. 

shareholding and voting share, as well as a loss of our veto power.

U.S. Leadersh

As the Bank’s leading shareholder for more than 65 years, the United States has helped shape the 

global development agenda, advancing approaches that encompass core American values, such as 

enabling environments for the private sector, good governance (e.g., transparency and accountability), a more prominent role for civil society, and universal access to health and education.

2012-08-054_000000000000303
15

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

In the wake of the 2011 “Arab Spring”, the World Bank, in close coordination with the United States, 

engaged actively in the Middle East and North Africa, providing critical financing and technical 

assistance in support of the historic transitions underway in the region. In Tunisia, for example, 

the IBRD provided a $469 million Development Policy Loan (DPL) to support citizen-demanded 

governance reforms by the interim government. The IBRD also partnered with the Bank’s private 

sector window to provide Tunisia with $50 million from the Micro, Small and Medium Enterprise 

Facility.

The United States continues to be a vocal advocate for strong fiscal controls at the World Bank. 

For example, since FY 2006 the World Bank has operated under a flat real administrative budget 

framework, increasing efficiencies in order to achieve greater value for donor resources. In 2011, 

the Bank continued this work by strengthening the alignment between its strategic priorities and 

the allocation of its administrative budget. 

2012-08-054_000000000000304
16

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

African Development Bank Group

African Development Fund (AfDF) Request: $195 million

Second of three installments

Start of current replenishment: FY 2012

Treasury requests $195.0 million for the second of three annual payments to the twelfth replenishment of the African Development Fund (AfDF-12). 

AfDF:

•	 provides highly concessional loans and grants to the 40 poorest countries in Africa to support 

clean water and sanitation, a cleaner environment, business climate improvements, infrastructure and institutional development;

•	 supports recovery and rehabilitation in fragile states and war-ravaged communities;

•	 rewards performance by allocating resources based on results; and

•	 provides dedicated resources to support regional projects, helping to integrate regions into 

more economically viable market areas.

U.S. contributions to AfDF provide substantial returns for U.S. economic, security and humanitarian interests, particularly considering that every $1 provided by the United States leverages $9 from 

other donors. 

AfDF investments in fragile states are supporting stability in countries such as South Sudan and 

Liberia, combating conditions that breed terrorism and trans-national crime. Based on her experience as Counter Piracy Taskforce Commander in 2009, Rear Admiral Michelle Howard emphasized in her September 2011 Congressional testimony that responding to trans-national crime in 

failed states like Somalia pulls U.S. military resources away from other priority missions, such as 

ballistic missile defense. Rear Admiral Howard also stressed the vital importance of the AfDF and 

other MDBs in strengthening governance and basic infrastructure in post-conflict states to enable 

the U.S. military to transition from its security role and return home. 

Notable AfDF projects include the Lungi-Port Loko Road in Sierra Leone, which will connect the 

north and east of the country with the international airport in Lungi. AfDF’s Fragile States Facility 

has also provided critical support to Liberia in recent years, helping to strengthen public financial 

management and the overall business environment in this transitioning economy. 

In addition, AfDF investments in energy and transportation infrastructure are helping reduce bottlenecks that hold back private investment and job growth. For example: 

•	 The AfDF’s investment in the Bamako-Dakar road corridor, in Mali and Senegal, is providing 

strong benefits to communities along the route and is reinforcing regional integration. Associated activities, including the laying of secondary roads, the drilling of boreholes, and the 

2012-08-054_000000000000305
17

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

construction of schools, health clinics and animal rest areas, have made a significant difference 

in the lives of rural dwellers in the region. The walking distance for women fetching water has 

been reduced to one kilometer (km) on average, from 5 km previously. The halving of travel 

times, decline in livestock losses, and drop in travel costs have breathed new life into local agriculture. Illicit fees and charges have fallen considerably, reaching $140 per truck trip on the 

Bamako-Dakar corridor, a steep decline from $351 per truck trip along the prior route.

•	 The AfDF-financed Nigeria-Benin Interconnection Project linked Nigeria’s electricity grid to 

the already connected grids of Benin, Togo, Ghana, Cote d’Ivoire and Burkina Faso, making 

supply more reliable. Power from Nigeria now meets over 40 percent of demand in Benin and 

Togo, and the project helped forge stronger relations among power authorities in the three 

countries.

AfDF investments in water, sanitation and agricultural infrastructure are helping meet the basic 

human needs of Africa’s poorest communities. Projects completed in 2008-2010 resulted in over 

12,000 boreholes and wells drilled and equipped, 750 km in drinking water pipes constructed and 

nearly 26,000 latrines built. Through these projects, over 8.5 million people benefitted from new or 

improved access to water and sanitation.

•	 Water sector projects in Malawi, Mozambique, and Zambia have provided access to clean water 

and reduced the labor time of women and children, who are the primary collectors of water. 

There has been a reduction in water-borne diseases, increasing community well-being and productivity. The projects have also directly generated local employment opportunities.

•	 The Community Agricultural Infrastructure Improvement Program in Uganda is strengthening food security for 2.6 million people in eastern and central Uganda through investments 

in community access roads, district feeder roads, rural markets, and agro-processing facilities 

such as coffee hullers, maize mills and milk coolers. Project activities have contributed to dramatically higher farm gate prices of staples like cassava, maize and milk, a 50 percent reduction 

in travel times and costs, and an estimated 20 percent reduction on post harvest losses, especially for perishables such as cabbage, tomatoes, pineapple and watermelon.

U.S. Leadershi

With our strong support, the AfDF has undertaken significant reforms to strengthen institutional 

effectiveness in recent years, including identification of a limited set of strategic objectives in areas 

of comparative advantage and the development of a robust Results Measurement Framework. 

2012-08-054_000000000000306
18

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

African Development Bank (AfDB) Request: $32.4 million

Second of eight installments for the GCI

Treasury requests $32.4 million for the second of eight installments for the AfDB’s sixth General 

Capital Increase (GCI-6). 

AfDB:

•	 serves 46 countries in Sub-Saharan Africa in addition to the Arab Spring countries of North 

Africa;

•	 makes public sector loans to middle income countries in Africa where over 400 million people 

live on less than $1.25 dollars a day;

•	 extends private sector loans to both middle- and low-income countries at market-oriented 

rates that are below what these borrowers could access independently;

•	 yields healthy returns for U.S. economic, security and humanitarian interests by strengthening 

new sources of global growth, supporting nascent democracies in North Africa, and lifting 

people from poverty. 

The United States’ contribution is generating a substantial increase in the AfDB’s sustainable lending capacity, from $1.8 billion per year (before the GCI) to $5 billion per year. Our support for the 

capital increase has a strong multiplier effect, as each additional dollar of U.S. capital supports additional lending of $20 due to burden-sharing with other shareholders and an increase in the Bank’s 

ability to borrow from markets. 

The United States is the African Development Bank’s largest non-regional shareholder with a 6 1⁄2 

percent voting share. The United States needs to fulfill its financial obligations under the GCI to 

avoid any dilution of this shareholding, and the associated loss of the privilege of maintaining a 

single seat on the Executive Board. (The U.S. is the only country with a single seat on the Board of 

each MDB.)

The AfDB is a leader in supporting transportation and energy infrastructure in middle-income 

countries on the continent, investments that are critical to unleashing the region’s growth potential. 

For example, the AfDB-financed Marrakech-Agadir highway in Morocco cut travel time between 

the two cities in half, promoting tourism and agro-industrial development in Grand Agadir and 

neighboring provinces. The National Rural Roads program has supported construction of 6,700 

km of rural roads throughout Morocco, serving to reduce travel times and costs, and leading to 

higher school attendance and access to health facilities. 

In addition to supporting the enabling environment for the private sector through lending to governments for physical infrastructure and strengthening legal, regulatory and financial policies, the 

AfDB also provides catalytic support directly to private sector projects continent-wide. 

AfDB lending to the private sector has grown substantially in recent years, averaging about $1.5 

billion annually in support of projects such as a line of credit to support affordable housing de2012-08-054_000000000000307
19

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

velopment in Uganda, and the Kivuwatt integrated-methane gas extraction and power facility in 

Rwanda. AfDB private sector loans are boosting growth prospects and regional integration on the 

continent. For example, an AfDB loan of $14.5 million to the East African Submarine Cable System (EASSy) financed a high-capacity fiber-optic telecommunications network spanning 9,000 km 

along Africa’s east coast, connecting 20 coastal and land-locked African countries and dramatically 

reducing the cost of voice and data communications. Together with other cable companies, this 

project has contributed to a 60 percent reduction in bandwidth prices in Tanzania and a 90 percent 

reduction in wholesale rates by Kenya’s largest wholesale provider. Kenya and Tanzania each registered increases over 150 percent in international bandwidth use within six months of the EASSy 

cable coming into use in 2010.

U.S. Leadersh

As the largest non-regional shareholder in the AfDB, the United States championed a number of 

key institutional reforms during the GCI negotiations. These included adoption of a comprehensive income model to ensure financial sustainability, budget discipline and steady transfers to the 

soft loan window (the AfDF); increased transparency and disclosure; stronger risk management; 

and a heightened focus on results. Such reforms are aimed at solidifying the major strides that the 

AfDB has taken over the past five years to improve its institutional effectiveness by narrowing its 

strategic focus and strengthening controls on project quality.

In 2011, the AfDB was very responsive to U.S. requests to play a major role in supporting the transitions of the North African countries. For example, working closely with the World Bank, the AfDB 

supported governance and transparency reforms in Tunisia through a $500 million budget support 

loan. The AfDB also provided a $124 million loan to support water and sanitation improvements 

in Tunisia’s poor rural regions, and $174 million to finance a key road corridor that will promote 

economic inclusion within Tunisia and support regional integration across the Mahgreb region. In 

addition, the AfDB’s private sector window provided a $50 million line of credit for small and medium enterprises in Tunisia. SME development, which provides job opportunities particularly for 

youth and women, is a critical element of Tunisia’s transition to more inclusive economic growth. 

2012-08-054_000000000000308
20

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

Asian Development Bank Group

Asian Development Fund (AsDF) Request: $115.3 million

Fourth of four installments

Start of current replenishment: FY 2010

For FY 2013, Treasury requests $115.3 million for the fourth installment of a four-year commitment under the agreement of the ninth replenishment of the AsDF (AsDF10). 

AsDF:

•	 is the primary source of financing for development in the 15 poorest countries in the AsiaPacific region, focusing on the construction of critical infrastructure such as roads, water and 

sanitation infrastructure, electricity grids, and schools;

•	 is a key source of financing for an additional 13 countries, which are making the critical transition from low- to middle-income status; 

•	 rewards performance by allocating resources based on results; and

•	 has been recognized by the United States national security community as critical to the success 

of our political and security objectives in Afghanistan.

Between 2004 and 2010, AsDF operations have generated impressive results. The impact of AsDF 

projects is exemplified by better access to economic opportunities and social services for more than 

211 million people. Over this period, the AsDF has financed the construction and rehabilitation 

of more than 44,000 km of roads, provided access to clean water for over 2 million households 

through the installation or rehabilitation of 18,000 km of water supply pipes, and improved industrial productivity and economic growth through the connection of over 1.6 million households 

and firms to electricity by building or upgrading more than 34,000 km of power transmission and 

distribution lines. In addition, the AsDF has provided expanded access to quality education for 

more than 21 million children through the delivery of over 135,000 new or upgraded classrooms 

and 667,000 trained teachers. 

The scope of the AsDF’s operations is illustrated by the following project outcomes:

•	 In 2001, the AsDF began a decade-long project to support microfinance institutions in Papua 

New Guinea, many of which were barely surviving. Recognizing the importance of a vibrant 

microfinance sector to stem poverty and help move the population out of subsistence, the 

AsDF supported the microfinance industry through intensive training and the generation of 

products designed to meet the needs of the poor and those not served by regular banks. The 

project brought financial services to over 400,000 new clients in rural areas and helped establish Nationwide Microbank, which now serves more than 100,000 clients through 14 branches. 

2012-08-054_000000000000309
21

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

In addition, the AsDB created an institution to provide support and training to microfinance 

institutions and set up the country’s first credit agency.

•	 In Lao PDR, the AsDF has helped to introduce innovation and incentives to address a serious 

widespread problem of poor water supply and unhealthy sanitation conditions in the country‘s 

small towns. To improve living conditions in these urban centers, especially for the poor, the 

project tied the construction of household latrines to the availability of free water supply connections. By amortizing these connection costs through the fees charged for water delivery, 

and structuring the fees in a way that attracted the majority of town residents, this project 

made the new water system more affordable. Demand for the connections has been high and 

the use of basic sanitation facilities in the 12 targeted towns has soared, with significant grant 

assistance provided to the poorest households to allow them to install their sanitation facilities. 

•	 The $9.4 million Rural Electrification and Network Expansion Project in Bhutan, which began 

in 2004, brought electricity to over 8,000 new consumers, including poor households, hospitals 

and schools. The project included a special feature to provide electrification kits to the poorest households to help address the connection costs and internal wiring for their homes. As a 

result, children can study in the evening, women have more time to augment family income, 

and environmental pressure on forests as a source of fuel has abated.

The United States’ contribution to AsDF10 is leveraged by a factor of nearly 24 by other funding 

sources – including that of other donors and net income transfers from the Asian Development 

Bank – stretching each dollar invested in the AsDF. 

U.S. Leadershi

The AsDF has been highly responsive to U.S. interests. Management has channeled resources towards infrastructure finance in U.S. priority countries, including Afghanistan, where the AsDF is 

the third largest donor. For example, in 2011: 

•	 $754 million was approved to rebuild Afghanistan’s shattered road and rail network, bringing 

to more than $1.7 billion the amount that the AsDF has contributed to reconstruction of the 

country’s infrastructure over the past decade. The multi-tranche financing facility will upgrade 

600 km of priority roads – some 7 percent of the total national and regional highway network. 

It will also fund construction of new facilities to complement the recently completed train line 

connecting the northern hub of Mazar-e-Sharif and Uzbekistan. An AsDF project is underway 

to complete the final section of the Afghan ring road, for which a U.S. company was awarded 

the $397 million civil works contract.

Other U.S. priorities adopted by the AsDF in 2010-2011 include:

•	 introduction of a more systematic process to assess the effectiveness of AsDF operations 

through the use of impact evaluations;

•	 more effective implementation of the AsDF’s Safeguard Policy Statement by adding more safeguard staff positions at the AsDB, and providing training and tool kits for its developing mem2012-08-054_000000000000310
22

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

ber country stakeholders; and

•	 promotion of gender equality through increased mainstreaming of gender strategies and sector gender diagnostics in virtually all new country partnership strategies, together with greater 

senior staff accountability for achieving gender goals.

2012-08-054_000000000000311
23

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

Asian Development Bank (AsDB) Request $106.8 million 

Third of five installments for the GCI

Treasury requests $106.8 million for the third of five installments of the United States capital subscription to AsDB’s GCI. This includes $213,000 to cover arrears created by the FY 2011 0.2 percent 

across the board rescission. These arrears have reduced U.S. shareholding below parity with Japan 

(the AsDB’s other largest shareholder), lowering U.S. standing within the institution as a result. 

Further, a failure to meet this commitment could force us to forfeit these shares to other countries 

like China, who have been eager to increase their shareholding and influence in the Bank. 

AsDB: 

•	 meets important needs in 31 creditworthy developing economies in Asia through the provision 

of loans, technical support and policy advice;

•	 extends private sector loans to both middle- and low-income countries at market-oriented 

rates below what these borrowers could access independently; and

•	 supports US. economic, security and humanitarian interests by strengthening new sources of 

global growth through the construction of thousands of schools, bridges, health clinics and 

roads, providing opportunities for people to lift themselves out of poverty. 

The United States and Japan have historically been the Bank’s largest shareholders, with 15.7 percent each, though with the shortfall in FY 2011, U.S. shareholding has been temporarily diluted 

below this level. 

In 2009, the AsDB sought support for a General Capital Increase – its first in 15 years – to forestall 

a dramatic drop in lending from $10 billion annually to $4 billion. With the onset of the global 

financial crisis and a G-20 request for increased lending from the MDBs, shareholders agreed that 

new capital was necessary to ensure an adequate level of development assistance to the region with 

the world’s largest number of people living in absolute poverty. 

Each dollar of U.S. capital supports additional Bank lending of $20, due to burden-sharing with 

other shareholders and an increase in the Bank’s ability to borrow from markets.

The AsDB is a critical assistance provider in a region of significant strategic and commercial importance. For example, in 2010, the AsDB responded to the heavy flooding in Pakistan – which 

inundated entire villages and destroyed thousands of hectares of crops – by immediately undertaking an assessment of the flood’s impact in conjunction with the World Bank.  Recognizing the 

special vulnerability of women and girls to natural disasters, and the important role they must play 

in recovery, the AsDB is developing a project that will not only transfer assets and skills to women, 

but also empower them and include them in public life outside the domestic sphere.

In the Philippines, the AsDB helped the government expand its social protection program and 

associated sector reforms through a $400 million project, which was based on globally successful 

conditional cash transfer programs. More than half a million poor families will benefit. 

2012-08-054_000000000000312
24

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

In Indonesia, the AsDB has supported the provision of key infrastructure to over 36,000 village 

communities, including building or upgrading more than 40,000 km of rural roads, 9,000 bridges, 

1,000 irrigation systems, 10,450 clean water supply units, and 4,822 sanitation units. In addition, 

the AsDB’s support to upgrade urban slums assisted some 180,000 poor urban households in 32 

cities, with plans to further provide 2.7 million people with access to improved sanitation.

U.S. Leadershi

The AsDB has aligned itself with key U.S. priorities, including support for global economic growth 

and national security. 

The AsDB is providing significant assistance to bolster growth in the region by lending to build 

critical infrastructure to relieve bottlenecks and to educate and provide health services to growing 

populations. This region has served as a vital engine of growth for the global markets, with estimated real GDP growth of over 8 percent in 2011. This high growth has fueled demand for U.S. 

exports to Asian countries, which grew by over 13 percent from 2010 to 2011. 

The AsDB’s work in Pakistan and throughout Central Asia helps to address U.S. national security 

interests by tackling poverty, corruption and other potential sources of instability. 

U.S. engagement and leadership during the GCI negotiations enabled us to leverage meaningful 

changes within the Bank to strengthen safeguards, improve internal accountability, measure results, increase civil society participation and direct more resources to the poor.

In 2011 at U.S. urging, the AsDB reviewed its Public Communications Policy to determine ways 

to increase transparency and accountability to the people it serves. The following reforms were 

adopted as a result of this review:

•	 a commitment to disclose audited project financial statements;

•	 the creation of an independent appeals mechanism for information requests; 

•	 agreement to increase access to Board decision-making through simultaneous disclosure of the 

majority of Board documents to the Board and the public; and

•	 better integration of communications plans and information sharing into projects and programs.

2012-08-054_000000000000313
25

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

Inter-American Development Bank Group

Inter-American Development Bank (IDB) Request: $102.0 million

Second of five installments for the GCI

For FY 2013, Treasury is requesting $102.0 million for the second of five installments for the InterAmerican Development Bank’s (IDB) ninth General Capital Increase (GCI). 

The IDB:

•	 is the largest source of development financing for Latin America and the Caribbean, a region of 

significant commercial and strategic importance to the United States;

•	 provides 26 borrowing member countries close to half of their multilateral financing for major 

development priorities, including infrastructure, private sector growth, regional integration 

and social safety nets; and 

•	 buttresses U.S. strategic national security objectives by supporting citizen security initiatives. 

The United States supported a recapitalization of the IDB in 2010 to avert a sharp reduction in 

lending to approximately $7 billion a year, well below our estimates of the $12 billion in borrowing 

needs of member countries. The GCI agreement also secures a total of $2 billion in grants for Haiti 

through 2020. With a 30 percent stake, the U.S. is the IDB’s largest shareholder and has an effective 

veto on key governance decisions at the Bank. 

The U.S. contributions leverage significant additional resources: every additional dollar of U.S. capital allows lending to increase by over $10 due to burden-sharing with other shareholders and the 

Bank’s ability to borrow in the markets.

The IDB has been a strong partner for the United States in the region, particularly in Haiti where 

it is the lead provider of multilateral development assistance. In 2011, through the Haiti Grant 

Facility, the IDB approved seven projects for $241 million and financed more than 800 temporary 

classrooms across 57 sites, built or rehabilitated 160 kilometers of roads, and vaccinated 50 percent 

of Haitian farmers against swine fever and other diseases. 

In addition, the IDB established a Haiti Social Investment Fund with assets totaling $68 million. 

This fund will operate for 12 years to provide financing for SMEs by increasing the availability of 

loans and reducing borrowing costs by offering preferential interest rates. In November, the Bank 

organized the Second Investment Forum in Port-au-Prince, bringing together over 1,000 entrepreneurs in a massive show of private sector interest in the country’s economic potential.

The IDB has also been an important partner in promoting our national security objectives throughout the region. Most notably, the IDB recently announced a pledge of $500 million over the next 

two years to support a regional security strategy and citizen security programs in Central America, 

a key U.S. foreign policy objective. Since 1998, five IDB projects for citizen security with a total cost 

of $107 million have been completed, nine projects worth $274 million are currently being imple2012-08-054_000000000000314
26

TREASURY INTERNATIONAL PROGRAMS

Economic Growth, National Security and Poverty Reduction

mented, and nine more are in the 2012 pipeline for $286 million. The IDB’s strong engagement in 

support of U.S. national security was recognized by Admiral Stavridis who stated that the “IDB 

plays an important role in the region contributing directly to U.S. strategic interests”. 

Finally, the IDB is helping to accelerate economic growth in leading markets for U.S. exports. From 

2004 to 2009, U.S. exports to the region grew by 86 percent, and are on-track to more than double 

by 2014. 

U.S. Leadersh

By virtue of our large shareholding in the institution, the United States exercises strong influence 

over the Bank’s policies and programs, which further strengthens the role of the IDB as a partner in 

advancing U.S priorities in the Western Hemisphere. The United States’ influence was evident during the capital increase negotiations in which we effectively consolidated key institutional reforms 

to improve the strategic direction of the IDB. These reforms enabled us to shape important policy 

outcomes in 2011, including:

•	 New sector strategies to address urgent regional needs. The IDB adopted new sector strategies 

including: the Integrated Strategy for Climate Change Adaptation and Mitigation, and Sustainable and Renewable Energy; the Strategy on Social Policy for Equity and Productivity; the 

Strategy to Support Competitive Global and Regional Integration; and the Sector Strategy on 

Institutions for Growth and Social Welfare, with special emphasis on access to financial markets for small- and medium-sized enterprises.

•	 Improved resource management. The IDB submitted its second budget subject to the discipline 

of the Income Management Model (IMM) that requires loan charges to cover 90 percent of 

administrative expenses, while allowing for full support of the $200 million in annual income 

transfers to Haiti. 

•	 New public information policy. The new Access to Information Policy took effect on January 1, 

2011. This policy’s provisions meet best international practices in the field, and contain several 

significant advances with respect to the Bank’s previous Information Disclosure Policy. In the 

first year of implementation, an online system was established to manage information requests; 

responses have been provided to nearly 1,800 requests received through this system.

•	 New Independent Consultation and Investigation Mechanism. This year was the first full cycle of 

operations for the new Independent Consultation and Investigation Mechanism (ICIM). An 

unprecedented milestone was met in relation to the number of requests received and declared 

eligible. ICIM handled a total of 31 requests (9 in 2010, and 22 received in 2011), 14 of which 

were declared eligible either for the Consultation Phase or for the Compliance Phase and processed as cases over the course of the year.

2012-08-054_000000000000315
27

TREASURY INTERNATIONAL PROGRAMS

Food Security

FOOD SECURITY

Global Agriculture and Food Security 

Program (GAFSP) Request: $134 million

Trust Fund Contribution

For FY 2013, Treasury requests $134 million for the Global Agriculture and Food Security Program 

(GAFSP). Launched in April 2010, GAFSP, the multilateral component of the President’s Feed the 

Future initiative, seeks to strengthen food security at the country level by:

•	 Providing additional financing for low-income countries that demonstrate a comprehensive 

approach to strengthening food security;

•	 Aligning the resources of other donors with U.S. global food security priorities;

•	 Promoting best practices in the transparency of its operations and in the measurement of results.

In its first two years of operation, GAFSP awarded $481 million in grants to 12 countries in Africa, 

Asia and Latin America through a competitive process. These initial investments are expected to 

help 7.5 million smallholder farmers and their families increase their income and strengthen their 

nutritional outcomes. These awards were possible due to contributions of $531 million from seven 

donors – the United States, Canada, Ireland, South Korea, Australia, Spain and the Bill and Melinda 

Gates Foundation. 

The crisis in the Horn of Africa is a stark example of the continued importance of helping lowincome countries become more resilient and food secure. In 2012, GAFSP will issue a third call 

for proposals and is likely to award new grants in the summer of 2012. Implementation of existing 

grant awards will also continue, with the majority of the first 12 grants disbursing by June 2012.

GAFSP’s private sector window should also be fully operational in 2012, using contributions from 

the United States, Canada and the Netherlands.

U.S. Leadersh

The United States has been a driving force behind GAFSP since its inception. We have worked 

to incorporate important design features in the fund that support high levels of transparency, include the voice of civil society, and closely track the results of GAFSP’s investments. Our financial 

contributions to the fund have also underscored U.S. commitment and have mobilized additional 

contributions in the last year from Australia, South Korea, and the Netherlands. Key areas of U.S. 

focus include:

•	 Transparency. GAFSP strives for full transparency in its operations with all project proposals, Steering Committee meeting minutes, and other relevant governance documents posted 

online (www.gafspfund.org). GAFSP also recently completed its first annual report, which is 

2012-08-054_000000000000316
28

TREASURY INTERNATIONAL PROGRAMS

Food Security

also available online. As project result reporting and impact evaluations for individual grants 

become available, these will also be posted online.

•	 Inclusive governance. Key decisions concerning grant allocations and governance are made by 

GAFSP’s Steering Committee, which is comprised of recipient country representatives, donor 

partners, civil society organizations, MDBs, and a representative of the UN Secretary General’s 

Office. The discussions have been open and transparent, and minutes are posted online. 

•	 Results measurement. The fund has put in place several mechanisms to track results. These 

include common results indicators for all GAFSP projects that will allow aggregation of results 

across the GAFSP portfolio, an annual GAFSP report, and the use of rigorous impact evaluations on at least 30 percent of all GAFSP-financed projects.

•	 Competition. Demand for GAFSP resources has been high, with 25 countries applying for 

grants in the first two calls for proposals. Grant awards have been based on objective criteria 

including need, the quality of a country’s food security strategy and GAFSP proposal, and the 

policy environment. An independent group of experts, the Technical Advisory Committee, 

ranks country proposals against these criteria and makes recommendations to the Steering 

Committee.

2012-08-054_000000000000317
29

TREASURY INTERNATIONAL PROGRAMS

Food Security

International Fund for 

Agricultural Development (IFAD) Request: $30 million

First of three installments

Start of current Replenishment: FY 2013

We request $30 million for the first of three installments for the Ninth Replenishment of the International Fund for Agricultural Development (IFAD-9). 

IFAD:

•	 serves 138 countries globally, with 40-50 percent of resources dedicated to Sub-Saharan Africa;

•	 is a small, highly focused development finance institution that provides loans and grants to 

support smallholder agriculture and rural development, with the aim of improving food security and nutrition in the poorest regions around the globe;

•	 works with developing country governments, poor rural people’s organizations, non-governmental organizations and the private sector to design innovative programs and projects that fit 

within national priorities for agriculture and rural development. 

The U.S. investment of $30 million will support IFAD programs of about $1 billion annually.

IFAD’s projects have a strong track record of improving rural livelihoods. Over 80 percent of IFAD 

projects completed in 2009 through 2011 achieved positive scores on rural poverty impact, as 

confirmed by IFAD’s Office of Independent Evaluation. This was up from 71 percent in the 2006 

through 2008 period. One example of this positive impact is the Support Project for the Transformation of Agriculture in Rwanda, which contributed to increases in meat and milk consumption 

in the project area, as well as a doubling of yields of rice, maize, beans, cassava and sweet potatoes. 

These increases resulted from a combination of improved techniques (e.g. soil conservation and 

cultivation methods) and improved inputs (e.g. seeds and fertilizers).

IFAD program design takes into account the critical importance of women’s empowerment in agriculture. Giving women the same access as men to agricultural resources and inputs has the potential to increase production on women’s farms by 20 to30 percent. IFAD’s Independent Evaluation 

Office found that 88 percent of IFAD projects completed in 2009 through 2011 had positive results 

in addressing rural women’s specific needs, and improving their general situation with respect to 

education, workload, access to credit, and employment opportunities.

For example, IFAD interventions are bringing about important changes in the traditional village 

society of Mauritania. The Poverty Reduction Project in Aftout South and Karakoro has given 

women a voice in local decision-making through consultative communal committees that are established under the project and are direct partners of municipal councils. The project’s employment of women trainers and the creation of 30 women’s cooperatives have had a positive impact on 

the image of women at the village level.

IFAD programs in fragile states help improve rural livelihoods among people who have lost their 

farms or businesses during conflict, reducing the sources of conflict and promoting social cohe2012-08-054_000000000000318
30

TREASURY INTERNATIONAL PROGRAMS

Food Security

sion and stability. For example, social instability and rebellion in Northern Mali have been a threat 

to peace over many years, and lack of development is a root cause. Following IFAD’s long-term 

commitment to work in the northern regions at a time when no other donors were willing to engage there, the government of Mali designated IFAD as a lead donor. IFAD projects in Gao, Tombouctou and the pastoral regions of Kidal are working to reduce competition for access to natural 

resources and improve living conditions of poor rural people. 

U.S. Leadersh

The United States has been highly effective in encouraging IFAD to improve institutional effectiveness through measures such as stronger in-country project supervision and best-practice 

transparency policies. During the IFAD-9 replenishment negotiations in 2011, the United States 

successfully pressed for institutional strengthening in the areas of financial and human resources 

management and project impact evaluation. For example: 

•	 IFAD’s new Chief Financial Officer is modernizing the system for employing IFAD’s own internal resources (loan reflows and investment income) to maximize their sustainable use and 

thereby reduce the burden on donor contributions.

•	 IFAD is playing a catalyzing role on human resource issues within the UN system, including by 

freezing administrative staff salaries in 2010 and forcing a UN reevaluation of all Rome-based 

administrative staff salaries. IFAD is also working within the UN system to pilot a new pay-forperformance model for its staff during the IFAD-9 period.

•	 IFAD is strengthening measurement of its programs’ impacts on child malnutrition, length of 

hungry season, and household assets by undertaking impact assessments and, in select cases, 

rigorous project impact evaluations.

•	 Following recommendations from an independent evaluation, IFAD is developing a corporate 

gender policy to systematize, intensify and scale up its efforts to close gender gaps and improve 

the economic and social status of rural women.

2012-08-054_000000000000319
31

TREASURY INTERNATIONAL PROGRAMS

World Bank Environmental Trust Funds

WORLD BANK ENVIRONMENTAL 

TRUST FUNDS

Global Environment Facility (GEF) Request: $129.4 million 

Third of four installments

Start of current Replenishment: FY 2011

Treasury requests $129.4 million for the third of four installments to the fifth replenishment of the 

Global Environment Facility (GEF) covering the period from July 2010 to June 2014. 

GEF:

•	 Is the largest funder of projects to improve the global environment, supporting capacity building and innovative, cost-effective investments whose design and environmental benefits can be 

replicated by others. 

•	 Provides grants to developing countries for projects addressing biodiversity and conservation, 

clean energy and sustainable landscapes, international waters, land degradation and desertification, the ozone layer, and persistent organic pollutants. 

•	 Directly benefits the United States by:

•	 Reducing harmful, long-lived chemicals such as mercury in U.S. air and water

•	 Protecting international marine resources including fish stocks

•	 Protecting tropical rainforests and other natural areas that conserve biodiversity and absorb carbon dioxide emissions 

•	 Developing markets for the export of U.S. environmental technologies

•	 Improving U.S. national security by reducing the instability caused by population displacement, declines in global food supply, and major water shortages.  

Over its 20 year track record, the GEF has allocated $10 billion, supplemented by more than $47 

billion in co-financing, for more than 2,800 projects in 168 developing countries and countries with 

economies in transition. Each dollar contribution from the U.S. leverages $30 to $50 in contributions from other donors and co-financiers, including internal resources from implementing agencies, to deliver cost-effective global environmental benefits. Through its Small Grants Program, 

the GEF has also made more than 13,000 small grants directly to civil society and communitybased organizations, totaling $634 million. 

The GEF has achieved significant global environmental benefits, including by:

•	 Contributing substantially to the global achievement of 10 percent of the world’s land area under 

protection. As the largest funding mechanism for conservation areas worldwide, the GEF has 

invested in the establishment and management of 1,600 protected areas covering nearly 900 

2012-08-054_000000000000320
32

TREASURY INTERNATIONAL PROGRAMS

World Bank Environmental Trust Funds 

million acres, more than twice the size of Alaska. These investments include the world’s largest 

tropical forest conservation program, the Amazon Region Protected Areas in Brazil.

•	 Showing how small-scale technology demonstration and dissemination projects can make a difference in the poorest countries. A $1.45 million grant to reduce barriers to the import of solar 

products was recently awarded to Liberia. The program will replace 100,000 kerosene lanterns 

with solar lanterns with a longer term goal of reaching 200,000 households or approximately 1 

million people.

•	 Working to reduce environmental degradation and improve food security, including through limiting land desertification and degradation and promoting sustainable fisheries management. 

For example, a new $50 million grant will introduce sustainable management practices for tuna 

fisheries. Supported by $270 million in co-financing from public and private partners, including the Food and Agriculture Organization, the World Wildlife Fund, and the International 

Seafood Sustainability Foundation, the project will lead to restored ecosystems and result in a 

reduction in illegal, unreported, and unregulated fishing. 

U.S. Leadershi

The United States, one of the largest contributors to the GEF Trust Fund, has used its position to 

advocate successfully for strong fiduciary, environmental, and social safeguards while improving 

efficiency in the GEF’s operations. During the GEF’s fifth replenishment negotiations, the U.S. 

sought and achieved important policy reforms to improve the GEF’s effectiveness, particularly with 

regard to results-based management and country-owned business plans for GEF funding and resource allocation. 

“Through this collective partnership of our sustainability allies, we can ensure that proper management systems are successfully developed and we can demonstrate to the world that we don’t 

need to sacrifice economic development in order to maintain ocean biodiversity.” 

-- Christopher Lischewski, Board Chair of the International Seafood Sustainability 

Foundation, and President and CEO of Bumble Bee Foods  

2012-08-054_000000000000321
33

TREASURY INTERNATIONAL PROGRAMS

World Bank Environmental Trust Funds 

Clean Technology Fund (CTF) Request: $185 million

Trust Fund Contribution 

CTF:

•	 Improves global energy security

•	 Has become the largest vehicle for mobilizing multilateral finance for clean energy

•	 Delivers value for money: the $4.3 billion CTF pipeline is attracting co-financing of $36.7 billion for a leverage ratio of 1:8.6

The CTF improves global energy security by helping developing countries move towards reliable, 

diversified and more cost-effective energy supplies. Developing countries account for nearly all of 

the growth in global energy demand, increasing international competition for scarce conventional 

energy resources. Financing from the CTF mobilizes large-scale investment in clean power, transport, and energy efficiency by helping close the price gap between commercially available clean 

technologies and the conventional alternatives.

Through the CTF, 15 countries are implementing 63 projects, using $4.3 billion from the fund to 

mobilize total planned investments of over $36 billion. The CTF aims to transform energy sectors 

in CTF countries by introducing new clean technologies at scale and to crowd-in private investment. To date, $248 million in CTF funding has leveraged over $2 billion in direct financing for 

private sector activities. An excellent example of this is in Turkey, where the EBRD combined $50 

million in funding from the CTF with $240 million in credit lines to 5 Turkish banks to create a 

fund that will provide energy efficiency and small-scale renewable investments. Spurred by the 

CTF experience, EBRD partnered with the same banks and other investors to create a $1.46 billion 

fund for larger scale renewable energy and industrial energy efficiency projects. Altogether, the 

initial CTF contribution of $50 million is catalyzing $1.8 billion in investments delivered through 

the Turkish banking sector by proving the viability of a new market. 

CTF investments have spurred economic opportunities for our partners in developing countries. 

Egypt is using $150 million in CTF funds along with $646 million from the World Bank, European 

Investment Bank and others to construct over 300 km in transmission lines with capacity to transmit 3,000 megawatts of wind power. In Indonesia, which is estimated to have 27,000 megawatts of 

potential geothermal resources, the IBRD is pairing a $175 million loan with a $125 million CTF 

concessional loan as part of a $575 million project to develop geothermal power.1

 The project will 

help Indonesia set up a regulatory framework for geothermal investment, undertake costly exploration, and finance construction in order to catalyze further investments of this major domestic and 

clean, base load power resource. 

The CTF contributes to broader efforts to position the United States as a world leader in the development and manufacture of innovative energy technologies that create jobs in the United States, 

build and innovate American industry, and expand exports. Through direct investments, technical 

assistance and capacity building, CTF helps to level the clean energy playing field by creating open, 

fair and functioning markets in which American businesses can compete and win.

2012-08-054_000000000000322
34

TREASURY INTERNATIONAL PROGRAMS

World Bank Environmental Trust Funds 

U.S. Leadersh

As a result of strong U.S. leadership working closely with other countries, over the past three years, 

the CTF has become the largest multilateral vehicle for mobilizing clean energy finance. This program is a critical complement to bilateral programs because it enables large-scale investments in 

energy infrastructure. U.S. efforts ensure that the funds make selective and targeted engagements 

and promote country ownership, international coordination, value for foreign assistance dollars 

and private sector participation. 

2012-08-054_000000000000323
35

TREASURY INTERNATIONAL PROGRAMS

World Bank Environmental Trust Funds 

Strategic Climate Fund (SCF) Request: $50 million

Trust Fund Contribution 

SCF:

•	 Pilots ways to manage the environmental drivers of instability in poor countries

•	 Focuses on clean energy solutions that expand productive capacity in low income countries 

•	 Encourages private sector expansion in clean energy, forestry sectors and adaptation investments

The SCF reduces global instability by combating environmental degradation in developing countries, and by helping the most vulnerable countries prepare for and respond to the impacts of global 

warming. Deteriorating environmental conditions abroad, including drought, melting glaciers, 

loss of biodiversity, contaminated waterways, desertification, rising sea levels, and deforestation, 

pose a long-term threat to our national security as migration, and scarcity of food and water exacerbate instability in vulnerable countries. Left unaddressed, these pressures threaten to roll back 

significant development gains in many vulnerable countries. SCF investments work to reduce the 

damage from such threats.

SCF is comprised of three targeted programs. The Pilot Program for Climate Resilience (PPCR)

is working with 18 highly vulnerable countries to respond to climate change by integrating adaptation into core development planning in sectors such as water management, agriculture, land use 

and coastal zones and infrastructure. The Forest Investment Program (FIP) reduces deforestation in developing countries by addressing its underlying causes. The FIP will work with national 

governments, the private sector, indigenous peoples and local communities on sustainable management of forests. The FIP will also work to improve forest-related regulation and enforcement to 

reduce illegal logging, which can undercut the market for products of more responsible producers. 

This helps to level the playing field for U.S. producers who play by the rules. The Program for 

Scaling-up Renewable Energy in Low-Income Countries (SREP) helps the poorest countries use 

renewable energy to expand energy access, stimulate economic growth, and reduce vulnerability 

to energy shocks. SREP projects aim to develop best practices and viable business models for both 

utility-scale projects and small-scale projects in remote areas that can be used in all developing 

countries. 

Through the SCF, 31 developing countries are accessing $1.96 billion to mobilize several billion 

dollars in external financing. The SREP has endorsed 4 investment plans which use $195 million 

to mobilize $1.8 billion in planned investments. For example, Mali will use SREP funds to develop 

sustainable, renewable energy mini-grids and mini hydro installations in remote communities. 

Honduras will use $30 million from SREP to leverage an additional $242 million in MDB finance, 

private investment and other public funds to deploy renewable energy connected to the grid and 

in remote areas.

The FIP recently approved $40 million in funding for a Mexico project that will pilot, in two large 

areas selected for replication potential, a multi-sectoral approach aligning forest, agricultural, and 

2012-08-054_000000000000324
36

TREASURY INTERNATIONAL PROGRAMS

World Bank Environmental Trust Funds 

livestock programs and policies. 

The PPCR has endorsed 12 investment plans that use about $800 million in grant and highly concessional loan resources to mobilize at least $1.7 billion in planned investments. The PPCR and 

Bangladesh are investing in coastal afforestation and climate resilient embankment infrastructure 

to protect Bangladeshi citizens and economic assets from extreme coastal weather events. In Niger, $15 million from the PPCR, coupled with $59 million of World Bank Group co-financing, will 

improve water resource management to help Niger adapt to changing climate patterns, increase 

agricultural production and enhance food security.

2012-08-054_000000000000325
37

TREASURY INTERNATIONAL PROGRAMS

Debt Relief

DEBT RELIEF

U.S. efforts on debt relief and debt restructuring are fundamental to helping some of the world’s 

poorest countries generate economic growth and reduce poverty and instability. These programs 

include the Heavily Indebted Poor Countries (HIPC) initiative, the HIPC Trust Fund, the Tropical 

Forest Conservation Act, and the Multilateral Debt Relief Initiative (MDRI). Over 40 countries, 

including Haiti, Afghanistan, and Liberia, have benefitted from U.S. debt relief and restructuring 

programs.

Enhanced Heavily Indebted Poor Countries 

(HIPC) Initiative Request: $250 million

The Enhanced Heavily Indebted Poor Countries (HIPC) initiative was launched in 1999 to provide 

deeper, broader, and faster debt reduction for the poorest heavily indebted countries that have 

made real commitments to economic reform and poverty reduction. Countries that demonstrate 

the performance on economic policies and poverty reduction required to complete the HIPC process also qualify for additional debt relief under the Multilateral Debt Relief Initiative (MDRI), 

which provides 100 percent debt cancellation on eligible obligations to the International Monetary 

Fund (IMF), the International Development Association (IDA), and the African Development 

Fund (AfDF).

With strong U.S. leadership, these multilateral debt relief initiatives have been widely recognized as 

successes, both in terms of effectiveness and donor follow through. A 2010 DATA report on G-8 

debt relief commitments calls them “the clearest examples of a promise fulfilled.” In total, 36 out of 

40 HIPCs have qualified for HIPC initiative assistance, of which 32 have reached the “completion 

point” and received irrevocable debt relief from the international financial institutions. They are 

benefitting from debt relief that, together with MDRI and “beyond HIPC” relief from Paris Club 

creditors, will lower their stock of debt by over 90 percent, allowing for increased poverty reduction expenditures in areas such as health, education, and rural development. Debt relief committed 

under the HIPC and MDRI initiatives to date amounts to about $155 billion in nominal terms.

The FY 2013 budget includes $250 million to help fulfill the U.S. commitment to the Enhanced 

HIPC initiative. This request reflects the estimated budget cost of forgiving 100 percent of Sudan’s 

outstanding debt to the United States (currently $2.4 billion). Sudan is one of three remaining potential HIPC-eligible countries, and developments related to the Comprehensive Peace Agreement 

(CPA) between Sudan and South Sudan create the prospect for HIPC treatment for Sudan during 

the FY 2013 period. While HIPC treatment is envisioned for debt assumed by Sudan, this arrangement is a critical component of the CPA, which led to the creation of South Sudan, and is supported 

by South Sudan. As such, proceeding with HIPC treatment of Sudan’s debt at the appropriate time 

will ultimately help to ensure success for the new country of South Sudan. 

However, in making this request, the Administration remains mindful that the situation on the 

ground in Sudan will have to change dramatically in order for the United States to participate in 

HIPC debt relief. Along with fulfilling CPA commitments -- including on Abyei, South Kordofan, 

2012-08-054_000000000000326
38

TREASURY INTERNATIONAL PROGRAMS

Debt Relief

and Blue Nile -- progress on Darfur will be necessary. Should Sudan make progress on these conditions, Sudan would also have to be removed from the list of state sponsors of terrorism. Because of 

these uncertainties, Treasury requests transfer authority for this $250 million to other multilateral 

assistance accounts in Treasury’s portion of the 150 account, if it is determined that Sudan is not 

likely to reach HIPC decision point by the end of FY 2014, so that the funds may be put towards 

other priorities.

2012-08-054_000000000000327
39

TREASURY INTERNATIONAL PROGRAMS

Debt Relief

Multilateral Debt Relief Initiative (MDRI) Request: $0

Building upon the HIPC initiative, MDRI provides 100 percent cancellation of remaining eligible 

debts owed to the IMF, IDA and AfDF for countries that complete the HIPC initiative. MDRI is 

expected to provide over $53 billion in additional debt relief beyond HIPC to 42 countries. 

To make this major debt relief possible, donors committed to offset the cost of MDRI debt relief 

at IDA and the AfDF on a dollar-for-dollar basis. To meet its share of this effort, the United States 

has committed, subject to the enactment of appropriations legislation, to provide a total of about 

$7.6 billion for IDA and $1 billion for AfDF over roughly four decades (2006 -2044). The timing 

of these contributions is spread out over a long period in order to match the period during which 

these debts would otherwise have been repaid. Internal resources were available to cover the costs 

at the IMF.

For FY 2013, we expect to rely on “early encashment” credits from our IDA and AfDF payments to 

partially meet our MDRI commitments for IDA16 and AfDF12. However, we anticipate the need 

for direct funding in future years since these credits will not be sufficient to fully meet our MDRI 

commitments. Treasury expects to meet its IDA16 and AfDF12 MDRI commitments by the end of 

their respective replenishment periods.

2012-08-054_000000000000328
40

TREASURY INTERNATIONAL PROGRAMS

Debt Relief

2012-08-054_000000000000329
41

TREASURY INTERNATIONAL PROGRAMS

Technical Assistance

TECHNICAL ASSISTANCE

Office of Technical Assistance (OTA) Request: $25.4 million

Effective government financial management is a core element of a functioning state. It fosters 

national economic growth and enables a government to provide better services for its citizens. 

For over 20 years, Treasury’s Office of Technical Assistance (OTA) has been highly successful in 

helping developing countries worldwide to strengthen their capacity to manage public finances 

– through efficient revenue collection, well-planned and executed budgets, judicious debt management, fundamentally sound banking systems, and strong controls to combat corruption and 

economic crimes. 

The President’s FY 2013 request for OTA provides $25.4 million to strengthen economic and financial governance in fragile and developing countries. This is equal to the FY 2012 base funding level, 

but the FY 2013 request does not include funding for Overseas Contingency Operations (OCO) 

for OTA.

The request supports OTA’s focus on five core financial disciplines: revenue policy and administration, budget and financial accountability, government debt issuance and management, banking and 

financial services, and economic crimes. The President’s request enables OTA to maintain its current footprint of technical assistance programs globally, including in priority areas, such as providing more infrastructure finance, increasing access to financial services, and better management of 

revenues derived from extractive industries, including oil and gas sectors. The request also furthers 

OTA’s efforts to promote regional integration and increased capital flows among countries in East 

Africa, West Africa, and Central America. 

U.S. Leadershi

OTA’s experts work side-by-side with government officials in finance ministries and central banks 

in approximately 50 countries around the globe – in Asia, the Middle East, Africa, Latin America 

and the Caribbean. OTA advisors are engaged in national security priority countries, including Iraq 

and Afghanistan. They are also helping to increase public financial management effectiveness and 

remove constraints on economic growth in countries targeted under the President’s Partnership for 

Growth, such as El Salvador, Ghana, the Philippines and Tanzania. By building public financial capacity, OTA’s work enables the success and sustainability of other U.S. foreign assistance programs 

– from agriculture to global health to democracy to conflict prevention. Further, Treasury technical assistance provides countries with the knowledge and skills required to move towards financial 

self-sufficiency – the capability to raise and better manage their own revenues and eventually to 

move beyond international aid. OTA programs build a framework for a country’s anti-corruption 

efforts through direct means – mentoring the investigation of financial crimes – and indirect means 

– improving the professionalism of the civil service. 

OTA is recognized as one of the most comprehensive repositories of U.S. Government expertise 

in financial sector capacity building and one of the greatest values for the U.S. development dollar. 

2012-08-054_000000000000330
42

TREASURY INTERNATIONAL PROGRAMS

Technical Assistance

With a relatively modest budget, OTA helps partner countries to safeguard scarce public resources, 

finance critical services, and achieve sustainable and tangible outcomes that affect peoples’ lives.

•	 In Haiti, OTA, in cooperation with the U.S. Department of Justice (DOJ), increased capacity 

building at the country’s specialized financial law enforcement agencies. These efforts resulted 

in the longest sentence ever imposed in a case involving the U.S. Foreign Corrupt Practices Act.  

DOJ singled out evidence-gathering assistance from the Haitian agencies as being instrumental 

in the case, in which the defendant received a 15-year sentence for his role in a scheme to pay 

bribes to officials at Haiti Teleco, a state-owned telecommunications company.  OTA has been 

working with the Haitian agencies, including Haiti’s Financial Intelligence Unit, since 2008 to 

improve their ability to investigate corruption and other complex financial crimes.

•	 In Liberia, OTA, in partnership with the Liberian tax administration, created an anti-corruption investigation unit from the ground up. OTA mentored the organization on everything 

from personnel policy and organizational structure to case management and standard operating procedures. In its first year of operation, the new investigation unit opened 55 cases and 

recovered $76,000 in revenue, an important achievement as the country works to increase domestic revenues to support critical government services to citizens. 

•	 In Afghanistan, OTA mentored and conducted workshops for central ministries and their provincial directorates as part of a pilot budgeting project to link local projects with national priorities. Guidance was developed for provincial plans to elevate them from being “wish lists” 

and allow them to provide value as inputs to budget formulation. 

•	 In Lesotho, OTA is working to upgrade the investigative capability of the local revenue administration. Efforts have focused on the creation of an organizational structure and development 

of position descriptions and standard operating procedures for the investigative unit. The unit’s 

effectiveness was evidenced by the successful prosecution of a high profile tax evader, who faces 

fines and back taxes amounting to $872,000, important resources to support public programs. 

The case received considerable attention in the press, maximizing the deterrent effect of the 

conviction and providing a public relations boost for the revenue agency.

•	 In Cambodia, OTA is working with the Ministry of Economy and Finance to improve government budgeting, allowing for the decentralization of financial and budget controls to line ministries. The reforms will improve financial accountability for governmental services by making 

departmental managers responsible for their respective budgets, and improve the transparency 

of the budget through the inclusion of greater information on the services being provided at the 

departmental level of the ministries. 

To ensure that program resources are wisely allocated and effectively spent, OTA has developed a 

robust project monitoring and evaluation process. The process features documentation of shared 

goals between partner country officials and Treasury in each project’s Terms of Reference and work 

plans; regular project reporting to track progress on specific objectives and supporting activities; 

on-site review by Treasury senior managers; and an annual rating of success in achieving every objective in project work plans. At present, OTA is developing additional mechanisms to strengthen 

2012-08-054_000000000000331
43

TREASURY INTERNATIONAL PROGRAMS

Technical Assistance

ties between project plans and results, and provide a structured system for soliciting and utilizing 

feedback from partner country officials to verify progress against mutually defined goals and objectives.

2012-08-054_000000000000332
44

TREASURY INTERNATIONAL PROGRAMS

Technical Assistance

2012-08-054_000000000000333
45

TREASURY INTERNATIONAL PROGRAMS

MDB Basics

MDB BASICS

What are the MDBs? 

The United States is a member of several multilateral development institutions, including the: 

•	 World Bank 

•	 Inter-American Development Bank 

•	 Asian Development Bank 

•	 African Development Bank 

•	 European Bank for Reconstruction and Development 

•	 International Fund for Agricultural Development 

•	 North American Development Bank 

The development banks are not banks in the usual sense. They are owned by member countries 

and provide financial and technical assistance to emerging markets and developing countries. The 

United States is the largest shareholder in the World Bank and Inter-American Development Bank, 

the co-largest shareholder (with Japan) at the Asian Development Bank, and the largest non-regional shareholder of the European Bank for Reconstruction and Development and the African 

Development Bank. 

What is Treasury’s role? 

In the United States Government, Treasury is charged with leading the United States’ engagement 

in the multilateral development banks. For the five largest institutions, the United States appoints 

an Executive Director (USED), who is based at the banks and represents U.S. interests. Treasury 

works closely with the USEDs and a wide-ranging interagency group on development bank issues, 

with the Department of State and USAID playing important roles as Alternate Governors of the 

MDBs. 

How do the MDBs finance development projects? 

Most of the MDBs have two financing facilities, which are frequently referred to as “windows,” 

from which they make loans and provide grants:

•	 The “soft loan” window is for concessional lending that provides loans on highly favorable 

terms (e.g., extremely low or no interest, long repayment periods or grants) to countries that 

are too poor or unstable to borrow from private markets. These are the “soft loan” or concessional windows for each MDB: 

•	 International Development Association (World Bank Group) 

•	 Fund for Special Operations (Inter-American Development Bank) 

2012-08-054_000000000000334
46

TREASURY INTERNATIONAL PROGRAMS

MDB Basics

•	 Asian Development Fund (Asian Development Bank Group) 

•	 African Development Fund (African Development Bank Group) 

Because the European Bank for Reconstruction and Development is private sector-oriented, it does 

not have a “soft loan” window. 

•	 The “hard loan” window is for non-concessional lending that provides loans to middle-income 

countries, such as Colombia and Botswana, and some creditworthy low-income countries, 

such as Indonesia and Nigeria, at market-based interest rates. These are the “hard loan” or nonconcessional windows for each MDB: 

•	 The International Bank for Reconstruction and Development (World Bank) 

•	 Inter-American Development Bank 

•	 Asian Development Bank 

•	 African Development Bank 

•	 European Bank for Reconstruction and Development 

How are the MDBs funded? 

Countries are referred to as “shareholders” in an MDB and hold a certain percentage of shares 

based on their contributions. 

At times, shareholders provide new funding to support the hard loan or soft loan windows. This 

funding can take three forms: 

•	 Capital replenishments 

•	 General capital increases 

•	 Selective capital increases 

Capital Replenishments: Because financing for the “soft loan” windows is provided on such generous terms to the very poorest countries, concessional funds need to be replenished every three to 

four years. When fully funded, U.S. funding commitments are paid out in equal installments over 

the replenishment period. 

General Capital Increases 

Under a general capital increase (GCI), MDB shareholder governments agree to increase capital 

to support the MDBs “hard loan” windows by purchasing additional shares in the institution. Unlike replenishments, GCIs happen infrequently because these windows are largely self-financing. 

Periodically however, MDBs will seek to bolster their capital in order to increase or sustain lending 

levels. 

The financing arrangements for GCIs are unique. Unlike replenishments, only a small portion of 

the total commitment is paid directly to an MDB. This portion is called “paid-in” capital, and typically ranges from 5-10 percent of the total increase. The pay-in period often ranges significantly 

(e.g., from three to eight years). 

The remainder of the commitment is made in the form of “callable capital.” Callable capital repre2012-08-054_000000000000335
47

TREASURY INTERNATIONAL PROGRAMS

MDB Basics

sents a financial commitment made by shareholders, but there is no actual transfer of funds. These 

commitments are meaningful because they enable the MDBs to borrow against them, and, in turn, 

lend to borrowers at rates lower than what they could obtain in the markets. An MDB can only 

seek the transfer of callable capital its own accounts in the unlikely event that it becomes unable to 

access private capital markets or use its own resources to cover obligations on its own loans (i.e., 

funds borrowed on the market) or on loans it has guaranteed. No MDB has ever made a call on 

callable capital. 

Selective Capital Increases 

A selective capital increase (SCI) is not used as, strictly speaking, a fundraising vehicle, but is used 

to allocate new shares to eligible members based on economic weight, financial contributions and 

development contributions. An SCI is a means of realigning shareholding to increase the share of 

developing countries and countries with economies in transition in an MDB’s decision making. 

Unlike a GCI, where shares are allocated to members in proportion to their existing shareholding, 

an SCI realignment is important to better reflect global trends and ensure that the poorest countries have a voice. 

What do new capital commitments mean for the United States? 

Negotiations for new capital are not limited to questions of financing needs. In fact, the United 

States has used the opportunity created by capital increase negotiations to pursue a robust agenda 

for new policy commitments from the MDB and other shareholders. The United States has consistently used its leadership position to advocate for new initiatives designed to strengthen development effectiveness. Typically, we focus on policies to strengthen transparency, governance, 

accountability and results. Recently, we have also emphasized the need for policies to strengthen 

fiscal discipline within the MDBs and protect capital. In addition, we have successfully pressed for 

MDBs to transfer an increasing share of profits from the hard loan windows to the soft loan windows that support the poorest countries. These transfers achieve two important objectives: they 

help the MDBs maintain their focus on the neediest borrowers and they reduce the financial burden on shareholders. 

What are the implications for failure to meet these U.S. obligations to th

MDBs? 

GCIs: When a shareholder fails to purchase the shares that it agreed to buy in the capital increase 

negotiations, the relative shareholding of that country will become diluted. Voting shares are adjusted to reflect contributions as they come in from shareholders, such that delayed contributions 

will have an impact on the current U.S.’s voting share. Any shares allocated to a country that are not 

paid for within the allotted subscription period will be moved to the MDB’s unallocated capital, 

potentially making these shares available for other shareholders to acquire. Several countries seeking to expand their influence in the MDBs, have expressed an interest in purchasing shares when 

they become available in this manner. 

2012-08-054_000000000000336
48

TREASURY INTERNATIONAL PROGRAMS

MDB Basics

Replenishments: Almost two-thirds of U.S. arrears to the MDBs are to the institutions that provide 

support for the poorest countries (International Development Association, the Asian Development 

Fund, and the African Development Fund). 

Our large and longstanding arrears not only deprive MDB borrowing countries of resources, they 

also undermine our leadership in these institutions. For example, during the negotiations at the 

latest replenishment of the GEF, the United States sought to leverage a significant increase in U.S. 

support in exchange for similarly large increases from other donors. However, other shareholders 

pointed to the significant U.S. arrears as evidence that the U.S. would not be able to deliver on an 

increased pledge and scaled back their own pledges accordingly. Similarly, some countries now link 

their contributions to U.S. payments, which magnifies the impact of any U.S. arrears.

2012-08-054_000000000000337
Alan MILLER

Principal Climate Change Specialist

Climate Business Group

International Finance Corporation

G-20 Study Group on Climate Finance

23 September 2012, Mexico

2012-08-054_000000000000338
I. Current Flows and the Need for 

More Capital Allocated Differently

2012-08-054_000000000000339
43

214

67

336

119

187

Wind Solar Other 

renewables

Biofuels Efficiency & low 

carbon 

tech/services

Energy 

efficiency & low 

carbon 

transport

Total

Developed countries

Developing countries

109

307

6 20

28

80

550

Source: Bloomberg New Energy Finance, HSBC, staff estimates 1: Pro-rated split between developed and developing countries

1

Climate investment has grown fast and has more 

potential if market failures and barriers can be tackled

by sector (US$ billion), 2010 data

2012-08-054_000000000000340
ANNUAL INVESTMENT REQUIRED TO ACHIEVE 2°C PATHWAY 

Source: Transition to a low carbon economy: the role of banks, (2011), by Credit Suisse and World Wildlife Fund

2012-08-054_000000000000341
Climate Investment Goal: More

Capital Allocated Differently

 Investment for global energy increases due to high 

capital intensity of many productivity levers

 “Considerable shifts in the composition of this 

investment” -- energy supply drops 30%, efficiency, 

renewables and T&D increase markedly

 Mostly in developing countries – 90% of power 

generation improvements, 60 percent in transport, 

about 80% in agriculture

 Source: McKinsey, “Resource Revolution” (2011)

2012-08-054_000000000000342
II. Potential Sources of 

Additional Private Investment

2012-08-054_000000000000343
2009 GLOBAL FUND MANAGEMENT INDUSTRY: 

ASSETS UNDER MANAGEMENT (US$TN)

Source: The Role of Pension Funds in Financing Green Growth Initiatives. (2011), Della Croce, R., Kaminker, C., Stewart, F., OECD 

2012-08-054_000000000000344
Carbon markets: alive despite very low prices

 A viable, cost-effective means to 

reduce emissions and to 

catalyze low-carbon investment 

 Joining EU and NZ, 6 

jurisdictions passed climate 

bills, including market 

initiatives

 Australia, California, China, 

Quebec, Republic of Korea, 

Mexico

 Durban decisions increased the 

regulatory clarity on existing 

market and advanced on new 

market instruments

A $100 mln global partnership for 

carbon market innovation:

• Build market readiness

• Pilot new concepts for market 

instruments

• Foster technical discussions 

and exchange on lessons and best 

practices

• Connect countries and 

collectively foster a global carbon 

market.

25 countries (15 implementing)

Partnership for Market 

Readiness (PMR)

2012-08-054_000000000000345
III. Barriers to the Increase of 

Private Climate Flows

2012-08-054_000000000000346
RISKS INVOLVED IN SECURING CLIMATE CHANGE FINANCE

Source: adapted from Can Capital Markets Bridge the Climate Change Financing Gap? (2010), by Parhelion and Standard & Poor’s

Transactional 

Risks 

• Risk/Reward Imbalance 

• Private Sector Funding 

Shortage 

• Complexity Risk

• Policy Development Risk

• Currency Risk

• Economic/Commodity 

Price Volatility

• Fungibility Risks

• Liquidity Risk

• Branding Risk

Project Risks

• Transaction Cost Risk 

• Fraud/Cash Leakage 

• Physical Risk 

• Scale Risk 

• Technology Risk 

Policy Risks

• Additionality Risk 

• Cannibalization Risk 

• Enforcement Risk 

• Illegitimate Policy 

Changes 

• Inconsistency Risk 

• Legitimate Policy Changes 

• Longevity Risk 

• Methodology, Reporting 

&Verification (MRV) Risk 

Capacity Risks

• Multitude Risk 

• Aggregation/ 

Commoditization Risk 

• Human / Operational 

• Infrastructure 

• Institutional - property 

rights

• Institutional - Regulatory 

• Quality assurance risk

2012-08-054_000000000000347
BARRIERS FOR SELECTED CLIMATE SECTORS 

IN DEVELOPING COUNTRIES

Source: Climate Finance: Engaging the Private Sector, (2011), IFC

PROJECT TYPE KEY BARRIERS HOW TO ADDRESS

Renewable Energy • Fossil fuel subsidies

• Large up-front capital cost

• Some technology risk

• Network effects

• Price externality 

• Feed-in tariffs

• Predictable regulation

• Risk reduction measures

• Network upgrades

• Develop project risk data

Industrial Energy Efficiency • Energy pricing distortions

• Lack of standards

• Lack of ESCOs / in-house technical 

expertise

• Transaction costs

• Inability to price risk

• Develop and enforce standards

• Local banking capacity

• Risk reduction measures

• Demonstration projects

• Develop industry/risk data

Building Energy Efficiency In addition to the barriers for industrial 

energy efficiency:

• Agency problems

In addition to the measures for industrial energy 

efficiency:

• Reduce builder-user information 

asymmetry by establishing building codes 

and performance standards

Supply Chains for RE and EE • Dependent on downstream market • Develop downstream markets for EE and 

RE

Cleantech • Weak local venture capital or 

private equity markets

• Most technology innovation 

originating from developed 

countries

• Support local R&D

• Supportive tech transfer regime

• Support local venture capital / private 

equity funds

2012-08-054_000000000000348
IV. Potential Solutions -- including 

MDB Financial Instruments -- to 

Increase and Redirect Financial 

Flows to Climate-Related 

Investments

2012-08-054_000000000000349
SUMMARY OF FINANCIAL 

LEVERAGING TOOLS

Source: Leveraging private investment: the role of public sector climate finance, (2011), Brown, J. and Jacobs, M., Overseas Development Institute

Mechanism Direct 

public 

financing or 

guarantees

Debt or 

equity?

Risk 

level

Mitigates 

many risks 

or few?

Estimated 

leverage 

ratio

When tool most useful /in 

what contexts?

Loan 

guarantees

Guarantee Debt High Many 6x-10x Countries with high political 

risk, dysfunctional energy 

markets, lack of policy 

incentives for investment

Policy 

insurance

Guarantee Debt Medium Adaptable to 

many, but 

ultimately 

one

10x & above Countries with strong 

regulatory systems and policies 

in place, but where specific 

policies are at risk of 

destabilizing

Forex

liquidity 

facility

Direct 

Financing

Debt Low One ? Countries with currency 

fluctuations

Equity 

‘pledge’ fund

Direct 

Financing

Equity Low Many 10x Projects with strong IRR, but 

where equity cannot be 

accessed. Projects need to be 

proven technology, established 

companies 

Subordinated 

equity fund

Direct 

Financing

Equity High Many 2x-5x Risky projects, with new or 

proven technologies, new or 

established companies

2012-08-054_000000000000350
Abatement Cost

Financial instruments and support mechanisms can 

facilitate energy sector investments

Source: Adapted from Pathways to a Low-Carbon Economy, Version 2 of the Global Greenhouse Gas 

Abatement Cost Curve, McKinsey & Company, 2009

GtCO2e/yr

 Regulation (e.g. technical 

standards for buildings, 

transportation)

 Access to finance (e.g. 

credit lines)

 Risk mitigation (e.g. 

guarantees)

 TA & capacity building

 Carbon credits

Energy Efficiency (e.g. 

lighting, HVAC, 

insulation, industry, 

transportation)  Effective carbon pricing

 Carbon credits

 Targeted systems for agriculture 

and deforestation linked to 

national development agendas

 Risk mitigation (e.g. guarantees, 

subordinated debt, mezzanine, 

equity, concessional loans) 

 Feed-in tariffs

 TA & capacity building

Renewable Energy

(e.g. small hydropower, wind, 

biomass, solar)

 Mechanisms to drive selected 

key technologies down the 

learning curve

 Research and development

 Risk mitigation (e.g. cost buy 

down, patient capital)

 CAPEX subsidies

 Feed-in tariffs

Commercially Unproven 

Technologies

(e.g. carbon capture & 

storage, wave power, 2nd

generation biofuels) 

 Conducive policy environment, e.g. remove energy pricing distortions, price carbon externality, consistent and predictable 

regulation, overall ease of doing business

 Clean Technology (upstream): R&D, technology transfer, venture capital /private equity

 Supply chain (e.g. access to finance for component manufacture)

 Awareness raising (e.g. education campaigns demonstration projects)

Low Carbon Investment Pre-requisites

2012-08-054_000000000000351
A. Pooling flows to support targeted 

concessional lending

 New ways to contribute, e.g., longterm concessional loans with Clean 

Technology Fund

 New sources, e.g., private foundations 

and emerging donors 

 More flexibility in structuring

 Learning opportunities from health 

sector (AMC, IFFIm)

B. Leveraging shareholder capital 

with private market borrowing

 Limited current headroom for 

additional climate financing

 A climate-focused capital increase 

could be considered in the longer term

 Leverage factor of 3 to 4 for new 

climate loans

 Solutions needed to accommodate 

climate capital increase with 

shareholder structure 

Role of MDBs: 

Mobilizing and Leveraging Finance and Markets

2012-08-054_000000000000352
2012-08-054_000000000000353
1 

Public Sources of Climate Finance 

Ian Parry

Fiscal Affairs Department, IMF

Fiscal Affairs Department

2012-08-054_000000000000354
Carbon pricing vs other domestic, 

climate-related instruments 

2 

2012-08-054_000000000000355
3 

 Exploits all emission reduction opportunities:

 fuel switching in power generation, reducing 

demand for electricity, transportation, heating fuels

 other tax instruments less effective

 Greater revenue potential—in US, revenue 

potential from (sector-based) taxes relative to that 

from comprehensive carbon pricing is about

 40% (electricity)

 35% (transportation)

 25% (heating)

Carbon pricing—two advantages

2012-08-054_000000000000356
4 

 Choice less important than doing one of them, but 

getting design details right:

 comprehensive coverage 

 raising revenue and putting it to good use

 price stability provisions for ETS

 aligning prices to environmental damages

Carbon taxes vs. ETS

2012-08-054_000000000000357
5 

...in 2020 would:

 Provide $25 bn for climate finance if 10% is made 

available

 Policy need not be costly if domestic revenues 

used to cut taxes on work effort and investment

A $25/ton CO2 charge in developed countries... 

2012-08-054_000000000000358
6 

 Reduce excise taxes on electricity, vehicle 

ownership.

 Strengthening social safety nets is more targeted 

way to help low-income households than holding 

down energy prices.

 Forthcoming IMF paper looking at case studies.

Compensating households: options 

2012-08-054_000000000000359
7 

 Carbon price floor among major emitters

 Border tax adjustments (≈$10 bn of revenue).

 Production subsidies for trade-exposed firms.

Addressing competitiveness/leakage: options

2012-08-054_000000000000360
Charges for International 

Aviation/Maritime 

8 

2012-08-054_000000000000361
9 

 National governments have weaker claim on tax 

base

 Under-taxed from

 environmental perspective (no excise tax)

 broader fiscal perspective (e.g., passenger 

tickets not subject to VAT) 

 Reflects 

 legal constraints in aviation

 competition for mobile tax base

Natural source of climate finance

2012-08-054_000000000000362
10

 Charges could be levied on fuel (nationally or 

internationally):

 at refineries (extension of motor fuel taxes)

 as fuel is disbursed at airports and ports

 directly on aircraft and ship operators

Administration 

2012-08-054_000000000000363
11

 International coordination over fuel charges is 

especially important for maritime (ease of refueling at ports where charges not applied)

 But such measures will harm developing 

countries—compensation needed for fairness and 

to encourage their participation

Cooperation and Compensation

2012-08-054_000000000000364
12

 Much of the burden (including for tourism 

destinations) would likely fall on passengers from 

wealthy countries

 So fully rebating aviation fuel charges could 

provide over-compensation

 Alternatively, developing country participation 

could be voluntary (and they would gain from 

joining as revenues borne by overseas 

passengers)

Compensation Schemes: Aviation

2012-08-054_000000000000365
13

 Ships may not re-fuel where they offload goods 

fuel tax rebate may not provide adequate 

compensation (e.g., landlocked countries)

 Compensate by shares in seaborne imports (e.g. 

Ethiopia would receive $9 mn p.a. if revenue were 

$15 bn)

Compensation Schemes: Maritime

2012-08-054_000000000000366
14

 Raise $22 billion for climate finance in 2020 (after 

developing country compensation)

 $7 billion (aviation)

 $15 billion (maritime) 

 Price impacts relatively modest:

 passenger tickets 2-4 percent

 import prices 0.2-0.3 percent

Revenue and price impacts

2012-08-054_000000000000367
15

 Further work is needed (e.g., compensation 

schemes)

 But acceptable and desirable proposals should be 

feasible

Conclusion

2012-08-054_000000000000368
Thank you! 

16

2012-08-054_000000000000369
THE WORLD BANK

As the global population heads toward 9 billion by 2050, 

decisions made today will lock countries into growth patterns 

that may or may not be sustainable in the future. Care must be 

taken to ensure that cities and roads, factories and farms are 

designed, managed, and regulated as efficiently as possible 

to wisely use natural resources while supporting the robust 

growth developing countries still need. Economic development 

during the next two decades cannot mirror the previous two: 

poverty reduction remains urgent but growth and equity can 

be pursued without relying on policies and practices that foul 

the air, water, and land.

Inclusive Green Growth: The Pathway to Sustainable 

Development makes the case that greening growth is 

necessary, efficient, and affordable. Yet spurring growth 

without ensuring equity will thwart efforts to reduce poverty 

and improve access to health, education, and infrastructure 

services. Countries must make strategic investments and 

farsighted policy changes that acknowledge natural resource 

constraints and enable the world’s poorest and most vulnerable to benefit from efficient, clean, and resilient growth. Like 

other forms of capital, natural assets are limited and require 

accounting, investment, and maintenance in order to be 

properly harnessed and deployed. By maximizing co-benefits 

and avoiding lock-in, by promoting smarter decisions in 

industry and society, and by developing innovative financing 

tools for green investment, we can afford to do the things 

we must. 

ISBN 978-0-8213-9551-6

SKU 19551
GG_i-xiv.indd ii 5/8/12 

2012-08-054_000000000000371
Inclusive Green Growth

The Pathway to Sustainable Development

GG_i-xiv.indd i 5/8/12 

2012-08-054_000000000000372
GG_i-xiv.indd ii 5/8/12 

2012-08-054_000000000000373
Inclusive Green Growth

The Pathway to Sustainable Development

GG_i-xiv.indd iii 5/8/12 

2012-08-054_000000000000374
© 2012 International Bank for Reconstruction and Development / International Development 

Association or The World Bank

1818 H Street NW

Washington DC 20433

Telephone: 202-473-1000

Internet: www.worldbank.org

1 2 3 4 15 14 13 12 

This volume is a product of the staff of The World Bank with external contributions. The fi ndings, interpretations, and conclusions expressed in this volume do not necessarily refl ect the views of The World 

Bank, its Board of Executive Directors, or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, 

colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or 

acceptance of such boundaries.

Rights and Permissions

The material in this work is subject to copyright. Because The World Bank encourages dissemination of 

its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as 

full attribution to the work is given.

For permission to reproduce any part of this work for commercial purposes, please send a request 

with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 

01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.

All other queries on rights and licenses, including subsidiary rights, should be addressed to the Offi ce 

of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; 

e-mail: pubrights@worldbank.org.

ISBN (paper): 978-0-8213-9551-6

ISBN (electronic): 978-0-8213-9552-3

DOI: 10.1596/978-0-8213-9551-6

Cover design: Richard Fletcher, Fletcher Design.

Library of Congress Cataloging-in-Publication Data has been requested.

GG_i-xiv.indd iv 5/8/12 

2012-08-054_000000000000375
 v

Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii

Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

 Greening growth is necessary, effi cient, and affordable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

 But obstacles are plentiful, and green growth is no substitute for good inclusive 

growth policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

 The way forward: Good and inclusive growth policies tailored to real-world challenges . . . . 15

 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

1 An Analytical Framework for Inclusive Green Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

 Why not grow now and clean up later? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

 Delaying action can be costly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

 Is green growth really possible? The analytical basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

 A real-world framework for green growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

 What about welfare? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

 Trade-offs and synergies between green policies and growth . . . . . . . . . . . . . . . . . . . . . . . . . 40

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2 Infl uencing Firms, Consumers, and Policy Makers through Market and 

Nonmarket Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

 Incentivizing: Providing effective market signals to spur green growth . . . . . . . . . . . . . . . . . . 47

 Informing and nudging: Using information and framing to infl uence economic actors . . . . . 52

 Imposing: Using rules and regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

GG_i-xiv.indd v 5/8/12 

2012-08-054_000000000000376
v i C O N T E N T S

3 Green Innovation and Industrial Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

 Innovation policies: Tailoring mixes of instruments to a country’s innovation potential . . . . 67

 Green industrial policies: Ensuring that the standard caveats apply . . . . . . . . . . . . . . . . . . . . 80

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

4 Human Capital: Implications of Green Growth Policies for Labor Markets and Job 

Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

 Green policies may create jobs, but are no substitute for sound labor markets . . . . . . . . . . . . 92

 But environmental regulation need not kill jobs either . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

 Smoothing the transition to greener growth paths for the labor market . . . . . . . . . . . . . . . . . 99

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

5 Natural Capital: Managing Resources for Sustainable Growth . . . . . . . . . . . . . . . . . . . . . . 105

 Extractable renewable resources: Defi ning property rights and moving up the 

value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

 Cultivated renewable resources: Innovation, sustainable intensifi cation, and integrated 

landscape approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

 Nonprovisioning services: Creating knowledge and markets for economic valuation . . . . . . 117

 Nonrenewable resources: Promoting rent recovery and reinvestment . . . . . . . . . . . . . . . . . . 123

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

6 Physical Capital: The Role of Infrastructure in Green Growth Strategies . . . . . . . . . . . . . . 133

 Infrastructure as the heart of green growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

 Recognizing the need for effi ciency: Meeting large unsatisfi ed infrastructure needs 

within tight fi scal constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

 Minimizing the potential for regrets and maximizing short-term benefi ts . . . . . . . . . . . . . . 149

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

7 Crafting a Green Growth Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

 The challenges of developing a green growth strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

 A step-by-step process for crafting a green growth strategy . . . . . . . . . . . . . . . . . . . . . . . . . 158

 Uncertainty and the need for robust decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Boxes

O.1 What is the aggregate economic support to the (over)use of natural capital? 

$1 trillion to $1.2 trillion annually . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

O.2 The many ways in which green policies can contribute to growth . . . . . . . . . . . . . . . . . . 11

O.3 Why “grow dirty and clean up later” is misleading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

O.4 Morocco: The importance of political economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

O.5 “Green” cash transfers are helping poor communities in the Brazilian Amazon . . . . . . . 24

O.6 Joining forces: A common platform to move forward on greening our economies 

and growth processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

1.1 Persistent concerns about local pollution in high-income countries . . . . . . . . . . . . . . . . . 32

1.2 An economic framework for green growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

1.3 Using individual transferable quotas to revitalize fi sheries . . . . . . . . . . . . . . . . . . . . . . . . 38

GG_i-xiv.indd vi 5/8/12 

2012-08-054_000000000000377
CONTENTS vii

1.4 Reducing vulnerability to oil shocks by increasing energy effi ciency . . . . . . . . . . . . . . . . 40

2.1 Institutional and market failures that help explain why growth is often 

environmentally unsustainable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

2.2 Lessons from CO2 emission trading schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

2.3 The political economy of subsidy reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

2.4 What is “green accounting”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

2.5 Changing the default option to spur the use of renewable energy . . . . . . . . . . . . . . . . . . 55

2.6 Modifying car buyer behavior in France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

2.7 How are PERPs faring in developing countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

2.8 What is the best way to promote vehicle fuel economy? . . . . . . . . . . . . . . . . . . . . . . . . . . 58

3.1 Market failures that can justify innovation and industrial policies . . . . . . . . . . . . . . . . . 66

3.2 Shedding light on green innovation, technologies, and industrial policies . . . . . . . . . . . . 68

3.3 What are green base-of-pyramid innovations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

3.4 Rapidly growing champions of “new sustainability” . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

3.5 African monsoon multidisciplinary analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

3.6 “Pinstripe greens”: Private fi nanciers making millions from clean-tech ventures . . . . . . . 77

3.7 Voluntary standards support the sustainable management of South African 

deep-sea fi shing and Indonesian palm oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

3.8 The role of green procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3.9 Comparison of photovoltaic support policies in Germany and China . . . . . . . . . . . . . . . 82

3.10 Lessons from a “green” industrial policy: U.S. biofuels . . . . . . . . . . . . . . . . . . . . . . . . . . 85

4.1 A framework to estimate the impacts of green policies on jobs . . . . . . . . . . . . . . . . . . . . 97

4.2 Shortage of skills and inadequate training provisions can undermine 

green programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

5.1 Job creation and revenue generation from off-shore capture fi sheries 

in Namibia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

5.2 Reform of forest tenure in Albania and China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

5.3 Conservation agriculture in Brazil and Zambia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

5.4 The use and misuse of agricultural input subsidies in India . . . . . . . . . . . . . . . . . . . . . . 114

5.5 Producing a better backyard chicken in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

5.6 Involving local communities in nature-based tourism in Indonesia . . . . . . . . . . . . . . . . 119

5.7 Scoring a triple win in Ethiopia by restoring the landscape . . . . . . . . . . . . . . . . . . . . . . 122

5.8 How the mining sector is investing in communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

6.1 The case for immediate action in the transport sector . . . . . . . . . . . . . . . . . . . . . . . . . . 136

6.2 The impact of technologies on transport policies—not enough? . . . . . . . . . . . . . . . . . . 137

6.3 Benefi ts from using photovoltaic electricity in rural areas . . . . . . . . . . . . . . . . . . . . . . . 138

6.4 Hydropower as a green choice for lower-income countries . . . . . . . . . . . . . . . . . . . . . . 138

6.5 The energy challenge: Expanding access and increasing supply in an effi cient, 

clean, and cost-effective manner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140

6.6 Pairing cost recovery with deregulation in Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

6.7 Using noneconomic incentives to reduce the demand for water and sanitation . . . . . . . 145

6.8 Harnessing smart information and communication technologies to shape a 

green future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

7.1 Implementing a green growth strategy in the Republic of Korea . . . . . . . . . . . . . . . . . . 157

7.2 MCA4Climate: A practical framework for planning pro-development 

climate policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

7.3 Using a policy framework to analyze the benefi ts of Morocco’s Ouarzazate 

concentrated solar power project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

7.4 Incorporating uncertainty in protecting Ho Chi Minh City. . . . . . . . . . . . . . . . . . . . . . 166

7.5 Using robust decision making in water planning in southern California water . . . . . . . 168

GG_i-xiv.indd vii 5/8/12 

2012-08-054_000000000000378
viii C O N T E N T S

Figures

O.1 The three pillars of sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

O.2 As incomes increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

O.3 As incomes increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

O.4 The Loess plateau, before and after the watershed restoration program . . . . . . . . . . . . . . 8

O.5 Up-front investment costs for energy supply and energy effi ciency could 

be substantial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

O.6 Reducing environmental degradation would provide substantial economic benefi ts . . . . 12

O.7 Developing countries may have substantial unexploited potential in green exports . . . . 14

O.8 Fossil fuel subsidies benefi t primarily the rich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.1 The three pillars of sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

1.2 Global pollutants and local, visible ones follow different paths . . . . . . . . . . . . . . . . . . . . 33

1.3 The denser the city, the lower the transportation emissions . . . . . . . . . . . . . . . . . . . . . . . 34

1.4 Green policies hold the potential to sharply boost output . . . . . . . . . . . . . . . . . . . . . . . . 37

B2.4.1 Some regions are doing better than others in wealth creation . . . . . . . . . . . . . . . . . . . . . 53

2.1 Energy-reporting electrical outlet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

B2.6.1 A sudden shift to greener cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

B2.8.1 Fuel effi ciency standards are key to reducing emissions from the transport sector . . . . . 59

3.1a Green frontier innovation occurs mostly in high-income countries... . . . . . . . . . . . . . . . 69

3.1b . . . with East Asia leading the way in developing regions . . . . . . . . . . . . . . . . . . . . . . . . . . 69

3.1c . . . but worldwide green patents remain low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

3.2 Green exports are growing, especially in the East Asia and Pacifi c region . . . . . . . . . . . . 71

3.3 Developing countries may have a substantial unrealized potential for producing 

green exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

3.4 Green imports are vital worldwide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

3.5 Snapshot of technology creation and diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

4.1 Many developing countries need to increase their enrollment in technical 

tertiary education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

5.1 Current fi shery practices are not sustainable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

5.2 Not enough wealth creation from natural capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

6.1 Urban densities determine cities’ options for greening . . . . . . . . . . . . . . . . . . . . . . . . . . 135

B6.1.1 As income rises, will countries choose low energy consumption in road transport? . . . 136

6.2 Upfront investment costs for energy supply and greater energy effi ciency could 

be substantial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

B6.6.1 Access to basic infrastructure services has risen dramatically in Colombia . . . . . . . . . . 143

6.3 Too few countries are implementing plans to mitigate against natural disasters . . . . . . 148

7.1 Schematic for crafting solutions in the presence of deep uncertainty . . . . . . . . . . . . . . . 167

Tables

O.1 Some guiding principles for establishing green growth strategies . . . . . . . . . . . . . . . . . . . 17

O.2 Financing mechanisms need to be tailored to the maturity of the local 

fi nancial sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1.1 Potential benefi ts of green growth policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

5.1 Poor soil quality and land degradation hurt economic growth . . . . . . . . . . . . . . . . . . . 110

5.2 Impacts of payment for ecosystem services schemes on poverty reduction . . . . . . . . . . 121

6.1 Sectors in which inertia and sensitivity to climate conditions are great . . . . . . . . . . . . . 134

6.2 Gaps in access to infrastructure in developing countries remain large, 

particularly in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

GG_i-xiv.indd viii 5/8/12 

2012-08-054_000000000000379
CONTENTS i x

6.3 Effect of land use and density on use of public transport . . . . . . . . . . . . . . . . . . . . . . . . 147

7.1 Inter-ministerial arrangements for coordinating on climate change strategy 

in selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156

7.2 Channels through which green policies could contribute to growth . . . . . . . . . . . . . . . 159

7.3 Some guiding principles for establishing green growth strategies . . . . . . . . . . . . . . . . . . 161

7.4 Framework for measuring potential benefi ts from green growth policies . . . . . . . . . . . 164

B7.3.1 Co-benefi ts of the Ouarzazate concentrated solar power project . . . . . . . . . . . . . . . . . . 165

GG_i-xiv.indd ix 5/8/12 

2012-08-054_000000000000380
GG_i-xiv.indd x 5/8/12 

2012-08-054_000000000000381
 xi

Foreword

Inclusive green growth is the pathway to sustainable development.

Over the past 20 years economic growth 

has lifted more than 660 million people out 

of poverty and has raised the income levels 

of millions more, but growth has too often 

come at the expense of the environment. A 

variety of market, policy, and institutional 

failures mean that the earth’s natural capital 

tends to be used in ways that are economically inefficient and wasteful, without suffi cient reckoning of the true social costs of 

resource depletion and without adequate 

reinvestment in other forms of wealth. These 

failures threaten the long-term sustainability of growth and progress made on social 

welfare. Moreover, despite the gains from 

growth, 1.3 billion people still do not have 

access to electricity, 2.6 billion still have no 

access to sanitation, and 900 million lack 

safe, clean drinking water. Growth has not 

been inclusive enough.

This report argues that sustained growth 

is necessary to achieve the urgent development needs of the world’s poor and that there 

is substantial scope for growing cleaner without growing slower. Green growth is necessary, effi cient, and affordable. It is the only 

way to reconcile the rapid growth required 

to bring developing countries to the level 

of prosperity to which they aspire with the 

needs of the more than 1 billion people still 

living in poverty and the imperative of a better managed environment. 

Indeed, green growth is a vital tool for 

achieving sustainable development. But sustainable development has three pillars: economic, environmental, and social sustainability. We cannot presume that green growth is 

inherently inclusive. Green growth policies 

must be carefully designed to maximize benefi ts for, and minimize costs to, the poor and 

most vulnerable, and policies and actions 

with irreversible negative impacts must be 

avoided. 

Green growth also requires improved indicators to monitor economic performance. 

National accounting indicators like GDP 

measure only short-term economic growth, 

whereas indicators like comprehensive 

wealth—including natural capital—help us 

determine if growth is sustainable in the long 

run. 

The Conference on Environment and 

Development, held in Rio in 1992, focused 

on inclusion and the environment but failed 

to mention growth. In the lead up to Rio+20, 

we are reminded that, in 1987, Gro Harlem 

Brundtland, then Prime Minister of Norway, 

framed the call for governments to change 

GG_i-xiv.indd xi 5/8/12 

2012-08-054_000000000000382
xii F O R E W O R D

their approach to growth: “What is needed 

now is a new era of economic growth—

growth that is forceful and at the same time 

socially and environmentally sustainable.”

Today, more than ever, we must pay 

attention to the triple bottom line. Inclusive 

growth must be green. Green growth must be 

inclusive.

Rachel Kyte

Vice President

Sustainable Development Network

The World Bank

GG_i-xiv.indd xii 5/8/12 

2012-08-054_000000000000383
 xiii

Acknowledgments

This report was written by a team led 

by Marianne Fay and Stéphane Hallegatte and composed of Marjorie-Anne 

Bromhead, Alex Bowen, Michael Chaitkin, 

Mark Dutz, Atsushi Iimi, Urvashi Narain, 

and David Tréguer. Signifi cant contributions 

were made by Antonio Estache, Adrian Fozzard, Kirk Hamilton, Tim Kelly, Masami 

Kojima, Andreas Kopp, Somik Lall, Eduardo 

Ley, Marcelino Madrigal, Diego Rodriguez, 

Siddharth Sharma, and Adrien Vogt-Schilb.

Geoffrey Heal acted as adviser to the 

report, in addition to being a key contributor 

to developing the analytical framework. 

This report benefi ted from extensive discussions with Milan Brahmbhatt. We gratefully acknowledge the comments and advice 

provided by our peer reviewers: Rosina Bierbaum, Richard Damania, Uwe Deichmann, 

Vivien Foster, Jean-Charles Hourcade, Mike 

Toman, David Popp, Thomas Sterner, Jeff 

Vincent, and Zhang Yongsheng. Other useful inputs and suggestions were provided by 

Zoubida Allaoua, Edward Andersen, Jock 

Anderson, Ruben Bibas, Dan Biller, James 

Brumby, Christophe Crepin, Jacqueline 

Devine, Casper Edmonds, Louis-Gaëtan 

Giraudet, Céline Guivarch, Bernard Hoekman, Guy Hutton, Vijay Jagannathan, Nalin 

Kishor, Franck Lecocq, Robert Lempert, 

Robin Mearns, Aurélie Méjean, Christopher 

Neal, Junko Narimatsu, Elisa Portale, Valentin Przyluski, Riikka Rajalahti, Apurva 

Sanghi, Randeep Sudan, Nancy Vandycke, 

Xiaodong Wang, and Monika Weber-Fahr.

Finally, the report drew on background 

papers produced for the inaugural con ference 

of the Green Growth Knowledge Platform (available at http://www.greengrowth 

knowledge.org) by Brian Copeland; Stefan 

Dercon; Jaime de Melo; Tony Gomez-Ibañez; 

Winston Harrington, Richard Morgenstern, 

and Daniel Velez-Lopez; Larry Karp and 

Megan Stevenson; Howard Kunreuther and 

Erwann Michel-Kerjan; David Popp; Guido 

Porto; Andreas Schäfer; Sjak Smulders and 

Cees Withagen; Jeff Vincent; and Elke Weber 

and Eric Johnson. 

The report was edited by Barbara Karni 

and Laura Wallace. 

This report was sponsored by the Sustainable Development Network of the World 

Bank under the leadership of Inger Andersen 

and Rachel Kyte. 

GG_i-xiv.indd xiii 5/8/12 

2012-08-054_000000000000384
GG_i-xiv.indd xiv 5/8/12 

2012-08-054_000000000000385
 xv

Abbreviations

$ US$ unless otherwise indicated

AMMA African Monsoon Multidisciplinary Analyses

ANS adjusted net savings

CO2 carbon dioxide

CO2-eq carbon dioxide equivalent

COMTRADE Commodity Trade Statistics database

ESCO energy service company

ESTD early-stage technology development

ETS Emissions Trading System

EU European Union

GDP gross domestic product

GGKP Green Growth Knowledge Platform

GRP Green Rating Project (India)

Gt gigatons

HPS Husk Power Systems

IEUA Inland Empire Utility Agency

IFI international fi nancial institution

ITQ individual transferable quota

ITS Intelligent Transport Systems

MCA4Climate Multi-Criteria Analysis for Climate

MDG Millennium Development Goal

NOx nitrogen oxides

OECD Organisation for Economic Co-operation and Development

PES payments for environmental services

PERP performance evaluation and ratings program

PM10 particulate matter up to 10 kilometers in size

GG_i-xiv.indd xv 5/8/12 

2012-08-054_000000000000386
xvi A B B R E V I A T I O N S

PNK Putri Naga Komodo (Indonesia)

ppm parts per million

PPP purchasing power parity

PROPER Program for Pollution Control, Evaluation, and Rating (Indonesia)

PV photovoltaic

R&D research and development

REDD Reducing Emissions from Deforestation and Forest Degradation

RSPO Roundtable on Sustainable Palm Oil

SME small and medium enterprise

SO2 sulfur dioxide 

TAC total allowable catch

UNEP United Nations Environment Programme

UWMP Regional Urban Water Management Plan

VC venture capital

WAVES Wealth Accounting and Valuing Ecosystem Services

GG_i-xiv.indd xvi 5/8/12 

2012-08-054_000000000000387
Overview

 1

Our current growth patterns are not 

just unsustainable; they are also 

deeply ineffi cient. As a result, they 

stand in the way of sustainable development 

and its objectives of social, environmental, 

and economic sustainability (fi gure O.1). The 

past 20 years have shown that the economic 

and social goals are not only highly compatible, but also largely complementary. Growth 

drives poverty reduction (though the extent 

to which it does so depends on the degree of 

inequality). And improved social outcomes, 

such as better health and education and 

greater equality of opportunity, are good 

Key Messages

• Greening growth is necessary, efficient, and affordable. It is critical to 

achieving sustainable development 

and mostly amounts to good growth 

policies. 

• Obstacles to greening growth are political and behavioral inertia and a lack 

of fi nancing instruments—not the cost 

of green policies as commonly thought. 

• Green growth should focus on what 

needs to be done in the next five to 

10 years to avoid getting locked into 

unsustainable paths and to generate 

immediate, local benefi ts.

• The way forward requires a blend of 

economics, political science, and social 

psychology—smart solutions to tackle 

political economy constraints, overcome deeply entrenched behaviors and 

social norms, and develop the needed 

fi nancing tools.

• There is no single green growth model. 

Green growth strategies will vary 

across countries, refl ecting local contexts and preferences—but all countries, rich and poor, have opportunities to make their growth greener and 

more inclusive without slowing it. 

WB_354_GG_Overview.indd 1 5/7/12 

2012-08-054_000000000000388
2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

for growth. Not so with the economic and 

environmental pillars: for the past 250 years, 

growth has come largely at the expense of the 

environment. And environmental damages 

are reaching a scale at which they are beginning to threaten both growth prospects and 

the progress achieved in social indicators. 

What can be done to turn this situation 

around? We argue that what is needed is 

green growth—that is, growth that is effi -

cient in its use of natural resources, clean in 

that it minimizes pollution and environmental impacts, and resilient in that it accounts 

for natural hazards and the role of environmental management and natural capital 

in preventing physical disasters. And this 

growth needs to be inclusive.

Inclusive green growth is not a new paradigm. Rather, it aims to operationalize sustainable development by reconciling developing countries’ urgent need for rapid growth 

and poverty alleviation with the need to 

avoid irreversible and costly environmental 

damage. As such, efforts to foster green 

growth must focus on what is required in 

the next five to 10 years to sustain robust 

growth, while avoiding locking economies 

into unsustainable patterns, preventing irreversible environmental damage, and reducing 

the potential for regret. 

Moreover, rapid action is needed to keep 

the costs of greening growth manageable and 

avoid irreversible losses. This urgency applies 

to developing and developed countries alike:

• Developing countries—which will account 

for the vast majority of global growth in 

income, infrastructure, and population 

in the coming decades—need to choose 

whether to build right or risk facing costly 

policy reversals in the future.

• High-income countries—which, with 16 

percent of world population, still account 

for more than 75 percent of global consumption and 41 percent of global emissions of carbon dioxide (CO2)—must act 

according to their responsibility. Most 

important are changes in the patterns of 

consumption and production that boost 

demand for green technologies. This is 

essential to stimulate technological innovation and the scale of production necessary 

for prices to drop and green technologies 

to become competitive. Thus, Germany’s 

aggressive solar feed-in tariff was critical in boosting global demand for solar 

panels, thereby reducing their cost. 

As to how to make growth greener, textbooks going back at least to the 1950s offer 

the basic instruments, with environmental 

taxation, norms, and regulations being the 

main tools of a green growth strategy. Today, 

technology is making it easier to implement 

these measures and monitor their impacts. 

However, making these measures work 

is complex in real-world settings plagued 

by governance failures, market failures, 

and entrenched interests and behaviors. It 

requires complementary policies, including 

public investments, innovation and industrial policies, education and training, labor 

market reforms, and communication. Making matters worse is the urgency with which 

Social

sustainability

Environmental

sustainability

Sustainable

development

Economic

sustainability

FIGURE O.1 The three pillars of sustainable development

Note: Economic and social sustainability, on the one hand, and social and environmental sustainability, on the other, have been found to be not only compatible, but also largely complementary. 

Not so with economic and environmental sustainability, as growth has come largely at the expense 

of the environment—hence, the dotted line on this fi gure—which is why green growth aims to 

ensure that economic and environmental sustainability are compatible. 

WB_354_GG_Overview.indd 2 5/7/12 

2012-08-054_000000000000389
OVERVIEW 3

these policies must be designed and implemented, especially in the face of enormous 

uncertainty about the future climate and 

technology. 

Although we have much theoretical and 

empirical knowledge to draw on, green 

growth raises challenging questions, especially when it comes to the developing world. 

For example, how can developing countries 

avoid locking in unsustainable and ineffi cient 

socioeconomic systems? Will technology 

allow developing countries to pursue a less 

environmentally damaging development path 

than industrial countries did? What is the 

best way to manage growth with scarce fi scal 

resources and limited planning and technical 

know-how? Is green growth just an aspirational goal—desirable from an environmental and ethical point of view, but unattainable given competing economic needs?

At heart, these are questions of economics, 

which is why the report takes an economic 

approach—using the standard tools of mainstream growth and environmental economics—with some forays into what social psychology can tell us about the determinants 

of human behavior. Chapter 1 examines 

whether green growth is, in fact, feasible and 

the implications for welfare—the ultimate 

goal of economic policy. It argues that our 

current system is ineffi cient, thereby offering 

opportunities for cleaner (and not necessarily 

slower) growth. And it identifi es the fl aws in 

the “grow now, clean up later” argument.

The next two chapters tackle the crosscutting issues of market and governance failures. Chapter 2 looks at the range of tools 

that can be marshaled to change behavior 

with respect to environmental and natural 

resources—tools that aim to improve social 

welfare through greener growth. These 

include effective market signals, properly 

framed and judiciously used information, 

and rules and regulations. Chapter 3 explores 

the need to navigate between market and 

governance failures through the careful use 

of innovation and industrial policies, such as 

research and development (R&D) subsidies 

for drought-resistant crops, national strategies for electric cars, and efforts to create 

new green industries (such as China’s promotion of solar photovoltaic production). 

The subsequent three chapters focus on 

human, natural, and physical capital and 

their roles in a greener production function. 

Chapter 4 tackles the debate on whether 

green growth will create jobs, with political 

leaders keen to promote the idea of green jobs 

to reduce high unemployment levels. It fi nds 

that, while there is surely potential to create 

green jobs, the net impact is what matters, 

and that will depend largely on the nature 

of the policy chosen and the soundness of 

labor markets and the business environment. 

Importantly, evidence on past regulation suggests that fears about massive job losses are 

misplaced. 

Chapter 5 reviews what we know about 

managing natural capital. Depending on the 

type of resource (such as extractable or cultivated renewable), the tools include defi ning 

property rights, helping fi rms to move up the 

value chain, managing trade-offs between 

higher growth and greener outcomes, and 

incorporating the economic values of services 

in policy decisions. 

Chapter 6 explores why infrastructure is 

at the core of inclusive green growth policies, underscoring the high potential for both 

regret (given the tremendous inertia built 

into infrastructure investments) and benefi ts 

(given the need for massive increases in infrastructure services in developing countries). 

Chapter 7 fi lters the key lessons through a 

political economy lens and provides a framework for building an inclusive green growth 

strategy—in light of the technical tools available, the need to maximize local and immediate benefi ts while minimizing lock-in, and the 

uncertainties about the future climate and 

technologies. 

What are the overall messages of the 

report? 

First, inclusive green growth is necessary, efficient, and affordable. It is necessary because sustainable development cannot 

be achieved without it. It is effi cient in that 

addressing the market and governance failures that plague our economic systems will 

create plenty of scope for growing cleaner 

WB_354_GG_Overview.indd 3 5/7/12 

2012-08-054_000000000000390
4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

without necessarily growing slower. The best 

example is the $1 trillion to $1.2 trillion currently being spent on environmentally harmful subsidies for fossil fuel, agriculture, water, 

and fisheries. Green growth is affordable 

because many green policies pay for themselves directly, and the others make economic 

sense once externalities are priced and ecosystem services are valued.

Second, greening growth is constrained by 

social and political inertia and by a lack of 

fi nancing instruments—not affordability, as 

is commonly believed. Entrenched behavior, 

special interests, and the complicated political economy of reform explain why measures 

that amount to good growth policies have 

not yet been implemented. Also, many green 

growth measures require increased up-front 

capital. Yet the debate on fi nancing remains 

focused on who pays what, rather than 

on how to finance economically (let alone 

socially) profi table investments. 

Third, greening growth should be carefully sequenced—not occur in one fell 

swoop—with priority going to what needs 

to be done in the next 5 to 10 years, both 

to avoid getting locked into unsustainable 

paths and to offer immediate, local benefi ts.

Those benefi ts will help to reduce the cost 

of the transition and facilitate the political 

economy of reform. Urban forms that are 

created today will affect city structures and 

housing and transport options for decades 

or even centuries. With urban populations 

in developing countries set to increase by 1.5 

billion over the next 20 years, there is a window of opportunity to affect urban patterns 

at low cost.

Fourth, the search for solutions needs 

to shift from a search for more financial 

resources (diffi cult anyway amid today’s fi scal woes) to “getting smart”: 

• Smart about learning the lessons of complex reforms to tackle difficult political 

economy questions, given that many green 

policies trade immediate costs for later benefi ts or redistribute benefi ts from one group 

to another. Notable successes include trade 

reforms across the world, reform of fi sheries in Namibia, reform of the Common 

Agricultural Policy in the European Union 

(EU), and progress on fossil fuel subsidies 

in the Islamic Republic of Iran, where care 

was taken to manage the losers and publicize the benefi ts. 

• Smart about changing the behavior of consumers and fi rms and the view of societies 

about what constitutes social success and 

acceptable behavior. This entails combining economic incentives with well-framed 

information and the marketing techniques 

that public health specialists (or car salesmen) commonly use. 

• Smart about developing the appropriate 

fi nancing tools for the private sector, especially small firms, for local governments 

(China’s cities are developing in a sprawling fashion in part because land sales at 

their peripheries are an important source of 

revenue for city governments; World Bank 

and DRC 2012), and for national governments, which are sometimes so fiscally 

constrained that they have to choose the 

investment with the lowest up-front cost 

(such as a thermal power plant) over one 

that may be less expensive in the medium 

term (such as a hydroelectric plant in a 

country with abundant water resources). 

Fifth, there is no single green growth 

model. Inclusive green growth strategies 

will vary across countries, refl ecting local 

contexts, preferences, and resources, but 

all countries—rich and poor—have opportunities to green their growth without 

slowing it. 

Greening growth is necessary, 

effi cient, and aff ordable 

Necessary: Making development 

sustainable requires inclusive green 

growth 

Growth—even measured with such an 

imperfect metric as gross domestic product 

(GDP)—is now recognized as a critical driver 

of poverty reduction (figure O.2, panel a; 

Ferreira and Ravallion 2009). It has resulted 

WB_354_GG_Overview.indd 4 5/7/12 

2012-08-054_000000000000391
OVERVIEW 5

in an 80 percent increase in GDP per capita 

in developing countries over the past 20 years, 

despite substantial increases in population. 

Living standards have improved for many 

(fi gure O.2, panels b and c), with more than 

660 million rising out of poverty and remarkable progress being made in literacy, education, life expectancy, malnutrition, and infant, 

child, and maternal mortality. And while 

China drove much of global poverty reduction, other countries that experienced growth 

also saw poverty decline rapidly. Ghana, for 

example, grew much faster than the African 

average and managed to reduce its poverty 

rate from 51 to 30 percent between 1990 and 

2005 (World Bank 2011c). 

Moreover, growth need not cause income 

inequality. The famous Kuznets curve argument, which posits that inequality first 

increases and then decreases with income, is 

not supported by the evidence. Inequality has 

increased substantially in recent decades in 

China, but also in the United States and most 

of Europe. And it has declined in much of 

Latin America (Milanovic 2010). Some countries reduce inequality as they grow; others 

let it increase. Policies matter.

Thus, the links between the economic and 

social pillars of sustainable development are 

generally self-reinforcing. But the story is 

not so simple when it comes to the economic 

and environmental pillars. Economic growth 

causes environmental degradation—or has 

for much of the past 250 years—driven by 

market failures and inefficient policies. As 

with inequality, overall environmental performance does not fi rst get worse and then 

improve with income—no Kuznets curve 

here either. Of course, some local and visible environmental public goods do worsen at 

fi rst and eventually improve with income—

typically local air quality. But this is not true 

of local pollutants with invisible or long-term 

impacts (such as the accumulation of pesticides and toxic chemicals in land and water) 

or global pollutants (such as greenhouse gases 

in the atmosphere). These often get worse 

with higher income (fi gure O.3).

Against this backdrop, some observers, 

mostly in high-income countries, have argued 

FIGURE O.2 As incomes increase . . .

–5

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

0 5,000 10,000 15,000 20,000 25,000

GDP per capita ($, PPP)

a. . . . Poverty recedes (poverty headcount and GDP per capita)

% of the population living on

$1 a day or less

GDP per capita (2005 $, PPP)

b. . . . Literacy rises (female literacy rate and GDP per capita, 2009)

female literacy rate

(% of females ages 15 and above)

GDP per capita (2005 $, PPP)

c. . . . Child mortality falls (mortality rate for children under five

and GDP per capita, 2010) 

mortality rate (deaths of children

under 5 per 1,000 live births)

0

20

40

60

80

100

120

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

0

20

40

60

80

100

120

140

160

180

200

Source: For panel a, Ferreira and Ravallion 2009; for panels b and c, World Bank 2011c. 

WB_354_GG_Overview.indd 5 5/7/12 

2012-08-054_000000000000392
6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

against the need for more growth, suggesting 

that what is needed instead is a redistribution 

of wealth (Marglin 2010; Victor 2008). They 

point to the happiness literature, which suggests that above a country average of $10,000 

to $15,000 per capita, further growth does 

not translate into greater well-being (Easterlin 1995; Layard 2005). 

While this argument has value, it remains 

more relevant for high-income countries, 

where average annual incomes hover around 

$36,000. Developing countries—with average income of around $3,500 per capita—are 

still far from the point at which more wealth 

will bring decreasing returns to well-being. In 

fact, in low-income countries, average income 

is only about $500 (World Bank 2011c).1 A 

redistribution of world income across rich 

and poor countries—even if it were politically 

feasible—would leave all with an income of 

about $8,000 per person per year. 

Further, even after the rapid growth of the 

past decade, some 1.3 billion people do not 

have access to electricity, 900 million do not 

have access to clean water, 2.6 billion lack 

access to improved sanitation, and around 

800 million rural dwellers do not have access 

to an all-weather road and are cut off from 

the world in the rainy season (Fay and others 

2010; IEA 2011). Even with the rapid decline 

in the share of people living in poverty, close 

to 1 billion could still be living on $1.25 per 

day in 2015. With continued growth at about 

the same speed as during the past 20 years, 

developing countries would account for about 

half of the world’s income and consumption 

(but close to 90 percent of the world population) by 2050. 

Continued rapid population growth in 

several developing regions further complicates matters. Current projections are that 

the world will reach some 9 billion people 

by 2050. This implies that even more rapid 

growth is needed to tackle poverty, and more 

aggressive social policies are needed to ensure 

that children, especially girls, and mothers 

receive the care, nutrition, schooling, and 

employment opportunities they need. And, of 

course, this demographic challenge puts further stresses on the environment, particularly 

because much of the rapid population growth 

is happening in environmentally fragile locations, notably in Africa. 

Thus, growth is a necessary, legitimate, and 

appropriate pursuit for the developing world, 

but so is a clean and safe environment. Without ambitious policies, growth will continue to 

degrade the environment and deplete resources 

critical to the welfare of current and future 

generations. And what about the argument 

that ambitious policies would be too costly 

and destroy jobs? The evidence reviewed in 

this report suggests that there is plenty of room 

to green growth without slowing it. 

FIGURE O.3 As incomes increase . . .

Source: For both panels, World Bank 2011c.

GDP per capita (2005 $, PPP)

a. . . . Local and visible pollutants tend to decline (PM10 concentration

and income per capita, 2008)

country-level PM10 concentration

(micrograms per cubic meter)

GDP per capita (2005 $, PPP)

b. . . . Global pollutants, such as CO2 emissions, tend to increase

(CO2 emissions and income per capita, 2008)

CO2 emissions

(metric tons per capita)

0

20

40

60

80

100

120

140

160

180

0 5,000

0 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000

0

5

10

15

20

30

25

40

35

10,000 15,000 20,000 25,000 30,000 35,000 40,000

WB_354_GG_Overview.indd 6 5/7/12 

2012-08-054_000000000000393
OVERVIEW 7

Effi cient: Current patterns of growth 

are not only unsustainable, but also 

wasteful

There is mounting evidence that our patterns 

of growth and consumption are unsustainable at the scale required by our current and 

projected population. Much of this, however, 

is owing to ineffi cient production and consumption and poor management of natural 

resources. 

Unsustainable

Population and income growth and the 

resulting increase in demand for food have 

driven the expansion of agricultural production around the world.2 Intensification 

and productivity increases have helped to 

limit ecosystem loss in many countries, but 

poorly managed intensifi cation has also exacerbated agrochemical and water pollution, 

soil exhaustion, and salinity. Extensive farming, driven by large-scale expansion in some 

regions and poverty-level subsistence agriculture in others, has contributed to land degradation and deforestation; forest losses averaged 5.2 million hectares annually between 

2000 and 2010, mostly in tropical—and, 

hence, more intensely biologically diverse—

regions (FAO 2010). By 2008 one quarter of 

the world’s land surface was degraded as a 

result of soil erosion, salinization, nutrient 

depletion, and desertifi cation (Bai and others 

2008).

Income and population growth have also 

stretched water supplies. Water withdrawals 

have tripled in the past 50 years, leading to 

water scarcity and groundwater depletion 

(World Bank 2007b). Withdrawals are projected to increase in developing countries by 

another 50 percent by 2025, by which time 

roughly 5.5 billion people—two thirds of 

the projected global population—will live in 

areas facing moderate-to-severe water stress 

(UNESCO and WWAP 2006).

Growth has similarly strained ecosystems, 

with roughly 60 percent of ecosystem services now of lower quality than 50 years ago 

(MEA 2005). Additionally, the current rate 

of species extinction, stemming mainly from 

habitat loss and degradation, is 100 to 1,000 

times higher than before humans walked the 

planet (Pimm and others 1995). In 2008, 

875 species became extinct, and more than 

17,000 others are at high risk (IUCN 2009).

Carbon dioxide emissions are accumulating in the atmosphere, approaching a level that 

will make it impossible to maintain global 

mean temperature below 2°C in excess of 

the preindustrial level, even though the probability of irreversible environmental changes 

is increasing with temperature (for example, 

rapid ice loss in Greenland and forest dieback in the Amazon). Carbon dioxide is also 

affecting the world’s oceans. Because of global 

warming, we have already committed to high 

probabilities of coral bleaching and mortality by the late twenty-fi rst century, which will 

significantly harm reef ecosystems (World 

Bank 2010d). The concurrent acidifi cation of 

oceans, which absorb about one quarter of 

the excess carbon dioxide in the atmosphere, 

is threatening marine food webs and could 

undermine the global fishing industry and 

food security (Laffoley and Baxter 2009).

Lastly, energy prices are likely to be high 

in the future, because oil resources that are 

easy and cheap to extract and use have already 

been extracted, and the world is now turning 

toward fossil fuels that are more expensive—

and more damaging to the environment—such 

as shale gas, tar sands, oil from deep offshore 

wells, or even liquefi ed coal. Without signifi -

cant changes in energy policy, the amount 

of resources the world economy will have to 

dedicate to fossil fuel extraction and energy 

production is likely to increase substantially, 

making higher energy efficiency even more 

desirable in the future than it is today. 

Wasteful

The environment can be thought of as natural capital that is often ineffi ciently managed, with many precious resources wasted. 

Investing in natural capital—just like 

investing in human or physical capital—is 

therefore good growth policy. The value 

of the services provided by well-managed 

ecosystems is illustrated by the impact of 

reforestation and watershed restoration 

WB_354_GG_Overview.indd 7 5/7/12 

2012-08-054_000000000000394
8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

programs. In China’s Loess plateau, such 

programs were associated with a near doubling of household incomes as a result of 

higher-value agricultural production as 

well as reduced frequency of landslides and 

fl ooding and increased resilience to drought 

(fi gure O.4; World Bank 2005b). 

This ineffi ciency stems partly from the 

fact that many natural resources are common property, so consumption by one person precludes consumption by another, and 

it is hard to exclude potential users. Openaccess regimes for common property create incentives to use up such resources as 

quickly as possible. Open access fi sheries are 

a classic example in which catch per fi sher 

and per vessel has been declining steadily 

because of overfi shing, and continued depletion threatens the livelihood of more than 

100 million people and the food security of 

many more.

Subsidies exacerbate common property 

problems, yet substantial resources are allocated to environmentally harmful price support schemes (box O.1). Global subsidies 

to fisheries are estimated at $10 billion to 

$30 billion and are partly to blame for the 

sixfold increase in the fleet capacity index 

between 1970 and 2005 (World Bank and 

FAO 2009).3 In Mexico, subsidies for energy 

used in irrigation, amounting to around 1 

percent of GDP, are exacerbating excessive 

groundwater withdrawals and the depletion 

of key aquifers. India suffers from the same 

problem in addition to spending some 2 percent of GDP on a fertilizer subsidy overly 

weighted in favor of nitrogen; the resulting 

use of fertilizer is causing serious pollution 

problems. 

Production and consumption processes 

are often wasteful, too. This is particularly 

obvious in the energy sector. Existing energy 

efficiency technologies can cost-effectively 

reduce energy use in new buildings by at least 

30 percent. In fact, making new buildings in 

China more energy efficient would reduce 

energy costs by more than 50 percent, while 

increasing construction costs by only 10 percent. Waste also plagues food production. 

Some 15 to 30 percent of food produced in 

developing countries is lost before it reaches 

the market due to poor storage and transport 

facilities. In high-income countries, meanwhile, one third of food is wasted through 

losses in supermarkets and homes and “platewaste” (Foresight 2011). 

The possibility of solving market and 

governance failures opens the way to policies that have both economic and environmental benefi ts and is at the heart of green 

growth strategies. (In that respect, greening 

growth is fi rst and foremost based on good 

growth policies.) These market and governance failures have long been understood, 

FIGURE O.4 The Loess plateau, before and after the watershed restoration program

Source: For the left-hand image, Till Niermann, March 25, 1987, http://en.wikipedia.org/wiki/File:Loess_landscape_china.jpg; for the right-hand image, 

http://digitalmedia.worldbank .org/slideshows/china1005/.

WB_354_GG_Overview.indd 8 5/7/12 

2012-08-054_000000000000395
OVERVIEW 9

and their persistence suggests that the difficulty of correcting them should not be 

underestimated. 

Aff ordable: Much of green growth 

pays for itself, and an innovative 

private sector keeps costs in check

Environmental policies should, in principle, 

improve social welfare and economic efficiency by reducing excessive pollution and 

other environmental bads. Nevertheless, such 

policies clearly have costs. They can hit taxpayers who have to pay the bill (for subsidies 

to renewable energy or public spending on 

green R&D) or producers and consumers if 

the policies mandate the use of more expensive or less productive technologies (such as 

renewable energy resources that are more 

costly than fossil fuel). Environmental policies alter relative prices and therefore change 

the structure of demand, requiring costly 

adjustments in the structure of production. 

Demand may decrease in sectors that have 

high capacity (coal production) and increase 

in sectors that have limited capacity (public 

transport). As a result, effi ciency may fall, at 

least during an adjustment phase, jobs may 

be lost, and the poor may suffer if compensatory measures are not adopted. 

Moreover, the up-front capital requirements are high. The energy investments 

needed globally to achieve greenhouse gas 

concentration of 450 parts per million (ppm) 

carbon dioxide equivalent (CO2-eq; the level 

needed to maintain a 50 percent chance of 

not exceeding global warming of 2°C above 

preindustrial temperatures) could amount to 

BOX O.1 What is the aggregate economic support to the (over)use of natural capital? $1 

trillion to $1.2 trillion annually

A compilation of estimates by international organizations of aggregate support for the use of natural 

capital suggests an approximate total of $1 trillion 

to $1.2 trillion, consistent with McKinsey’s estimate 

of $1.1 trillion (McKinsey and Company 2011). This 

support includes the following: 

• This Fossil fuel subsidies: $455 billion–$485 billion. 

includes subsidies to fossil fuel production or use 

in Organisation for Economic Co-operation and 

Development (OECD) countries ($45 billion to $75 

billion a year between 2005 and 2010) and consumption in developing economies ($409 billion in 

2010; IEA 2011). 

• This Water subsidies: $200 billion–$300 billion. 

represents subsidies to groundwater extraction or 

irrigation infrastructure—estimated as the difference between the market value of water and the 

part of costs covered by tariffs. Limited data are 

available, but Myers and Kent (2001) estimate 

water sector subsidies at $230 billion in 2000 and 

McKinsey (2011) cites estimates of $200 billion to 

$300 billion. 

• This Fishery subsidies: $10 billion to $30 billion. 

encompasses a wide variety of instruments such as 

fuel price supports, grants, concessional credit and 

insurance, and direct payments to industry. Estimates range from $10 billion per year (World Bank 

and FAO 2009) to $27 billion per year (UNEP 

2011).

• This rep- Transfers to agriculture: $370 billion. 

resents total support to the agriculture sector in 

OECD countries (OECD 2011a) and includes different types of instruments, some environmentally 

harmful, such as market price supports, but some 

not, such as payments decoupled from production 

levels.

While these estimates suffer from errors of inclusion (some of the OECD countries’ agricultural subsidies that were included are not environmentally 

harmful) and exclusion (they do not include developing countries’ subsidies to agriculture, estimated by 

the OECD at about $200 billion for the few emerging economies for which data were available) and 

are therefore neither precise nor exhaustive, they do 

suggest that substantial resources go to environmentally harmful subsidies. 

WB_354_GG_Overview.indd 9 5/7/12 

2012-08-054_000000000000396
1 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

between $350 billion and $1.1 trillion per 

year by 2030 (figure O.5). A 550 ppm target appears much easier to achieve, requiring 

some $50 billion–$200 billion of additional 

investments per year, but an additional $75 

billion to $100 billion would still be needed to 

adapt to climate change (World Bank 2010d). 

Adding needed investments in water and land 

to energy, annual investments of $900 billion to $1,700 billion could be needed over 

and above business-as-usual requirements 

(McKinsey and Company 2011). 

But many of these capital investments will 

be recouped through subsequent savings, so 

the net financial costs will be much lower. 

For example, the high capital cost of wind 

and solar energy or hydropower is offset by 

their low operating costs. Globally $1 spent 

on energy effi ciency saves $2 through investments in new supply, with the savings even 

greater in developing countries (World Bank 

2010d). As a result, the World Bank estimates 

that more than half the measures needed to 

decarbonize the energy systems of developing countries would eventually pay for themselves, bringing the fi nancial costs down to 

between $140 billion and $175 billion per 

year in 2030 or perhaps half a percentage 

point of developing countries’ GDP (World 

Bank 2010d). In East Asia, the estimated 

additional net fi nancing required for a sustainable energy path is $80 billion, not much 

more than the $70 billion the region currently spends on fossil fuel subsidies (Wang 

and others 2010; IEA 2008). 

Furthermore, determining affordability is 

about more than a fi nancial ledger. Green policies can contribute to growth (box O.2) and 

boost a nation’s overall wealth. And they help 

to reduce the damage done by environmental degradation, which is costly for an economy: equivalent to 8 percent of GDP across a 

sample of countries representing 40 percent 

of the developing world’s population (fi gure 

O.6). As a result, benefi ts may well outweigh 

the costs (implying a negative net economic 

cost). $900 billion to $1,700 billion of green 

investments in land, water, and energy could 

yield economic returns of around $3 trillion 

per year, rising to $3.7 trillion with carbon 

at $30 per ton and no energy, agricultural, 

or water subsidies (McKinsey and Company 

2011). 

Thanks to such benefits, the net costs 

of greening growth appear manageable, 

although affordability will, of course, depend 

on the speed and ambition of the greening (as 

illustrated by the difference between the 450 

ppm and 550 ppm targets) and on the design 

of policies. But the worse the environmental 

degradation and existing inefficiency, the 

greater the potential benefi ts to be obtained 

from green policies.

At the fi rm level, the cost of environmental 

regulation to fi rms is typically modest, with 

costs lower than expected thanks to the ability of fi rms to adapt and innovate (chapter 3). 

As a result, there is no evidence that environmental regulation systematically hurts profitability. While studies from the 1980s and 

1990s found negative impacts, more recent 

papers find more positive results, partly 

because they allow a few years for fi rms to 

adapt and partly perhaps because we have 

become better at designing environmental 

regulations that promote efficiency gains 

additional annual investment

in 2030 ($ billions)

0

200

400

600

800

1,000

1,200

550

ppm

450

ppm

550

ppm

450

ppm

550

ppm

450

ppm

450

ppm

MESSAGE TIAM-WORLD ReMIND IEA

FIGURE O.5 Up-front investment costs for energy supply and 

energy effi ciency could be substantial

(additional investment needed in the energy sector, both in energy supply and 

demand, in 2030 to reach a 450 ppm and a 550 ppm CO2-eq objective, according to 

four global models)

Source: More information on these models can be found in the following sources: on MESSAGE, van 

Vliet and others 2012; on ReMIND, Luderer and others 2012; on TIAM-WORLD, Loulou and Labriet 

2008; on IEA, IEA 2011. 

Note: IEA (2011) does not provide estimates for a 550 ppm scenario.

WB_354_GG_Overview.indd 10 5/7/12 

2012-08-054_000000000000397
OVERVIEW 1 1

(Ambec and others 2011). Further, where revenues from environmental taxes are used to 

reduce taxes on labor and income, the impact 

on GDP is likely to be neutral or positive, as 

found in an analysis of seven EU countries 

(Andersen and others 2007, cited in Ambec 

and others 2011).

Other ex-post analyses confi rm this conclusion. The EU Emissions Trading System has no negative impact on net imports 

in the aluminum, steel, and cement sectors 

(Ellerman and others 2010; Quirion 2011; 

Sartor 2012) or on the performance of German fi rms in general (Anger and Oberndorfer 2008). Meanwhile, the climate levy on 

U.K. fi rms seems to affect energy effi ciency, 

but not economic performance and fi rm exit 

(Martin and others 2009). 

Refineries located in Los Angeles significantly increased productivity in the 

late 1980s and early 1990s, a time of 

dramatically expanded regulation in California and decreasing refi nery productivity 

in the rest of the United States. Interviews 

with plant managers suggest productivity increases resulted from a careful redesign of production processes to comply 

with the new regulations (Berman and Bui 

2001 and others). Similarly, the productivity of the Mexican food-processing industry increased with stronger environmental 

regulations (Alpay and others 2002, cited in 

Ambec and others 2011). 

Moreover, there is no evidence that environmental policies have led to an exodus of 

fi rms to “pollution havens” (locations with 

lax environmental policies). Tighter environmental regulation may cause fi rms to relocate, but they will choose locations that are 

more attractive overall, as pollution abatement costs represent a small share of production costs for most industries (Copeland 

BOX O.2 The many ways in which green policies can contribute to growth

Green policies and practices can contribute to growth 

through three channels (see chapter 1). First, they 

can help to increase the amount of natural, physical, 

and human capital available: Better-managed soil is 

more productive. Well-managed natural risks result 

in lower capital losses from natural disasters (Hallegatte 2011). Healthier environments result in more 

productive workers: a recent California study shows 

a strong impact of air quality on the productivity of 

farm workers (Graff Zivin and Neidell 2011).

Second, they can promote effi ciency. For instance, 

imposing environmental taxes (taxing “bads”) and 

removing distortionary subsidies creates fi scal space 

for governments to lower labor taxes or subsidize 

green public “goods” such as public transport or 

renewable energy. In London, congestion taxes, 

besides reducing traffic, helped to finance investments in the aging public transport system, thereby 

increasing effectiveness of the price signal by reducing the costs or “disutility” associated with switching from single-car use to public transport (Transport for London 2008). And many fi rms—including 

large multinationals such as Hewlett Packard, Cisco, 

Clorox, and FedEx—are fi nding that embracing sustainability has improved the bottom line in part by 

promoting greater effi ciency (Nidumolu and others 

2009).

Third, green policies stimulate innovation. Study 

after study reports that well-designed environmental regulations stimulate innovation by firms, as 

measured by R&D spending or patents (see chapter 

3). Surveys of fi rms in the European Union identify 

existing or future environmental regulation as the 

main driver for the adoption of incremental innovations. Similarly, international sustainability standards can help local fi rms to upgrade their environmental practices, a form of catch-up innovation. In 

developing countries, green policies can also encourage the adaptation and adoption of greener technologies that have been developed elsewhere. 

Finally, green policies also accrue non-growth 

gains to welfare. They can reduce inequality through 

job creation and poverty alleviation, and they can 

reduce output volatility by increasing resilience to 

environmental and economic shocks, like natural 

disasters or spikes in commodity prices. A modeling exercise suggests that half of the cost of climate 

policies to limit greenhouse gas concentration at 550 

ppm could be paid for by less vulnerability to oil 

scarcity (Rozenberg and others 2010).

WB_354_GG_Overview.indd 11 5/7/12 

2012-08-054_000000000000398
1 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

2012). Factors such as availability of capital, 

labor abundance, location, institutions, and 

agglomeration effects are more important 

than environmental policy in determining 

the location choice and competitiveness of 

fi rms. 

But obstacles are plentiful, and 

green growth is no substitute for 

good inclusive growth policies

If green growth is necessary, efficient, and 

affordable, what is impeding it? Across 

countries and income levels, a mix of governance and market failures, complex political 

economy, entrenched interests and behaviors, and fi nancing constraints are signifi cant 

obstacles. Further, despite much rhetoric to 

the effect, green growth is no panacea and 

will not substitute for a good business environment and the reforms that are needed to 

promote growth and protect the poor. 

When fi rst-best recommendations meet 

second-best situations

Much of green growth is about good growth 

policies—addressing market failures and 

“getting the price right” by introducing environmental taxation, pricing environmental 

externalities (such as carbon pricing), creating tradable property rights, and reducing inappropriate subsidies. These measures 

are critical for enabling the private sector to 

undertake needed investments and innovations and for getting consumers to internalize 

the true costs of their behavior. But as with 

all good economic policy making, textbook 

policy recommendations, however appropriate, must be applied with insights into behaviors, political economy, and governance and 

market failures. This is an enormous challenge for a variety of reasons. 

First, getting prices right may be diffi cult 

because of political or social acceptability 

issues. The benefi ts are usually diffuse and 

uncertain, while the costs (the burden of the 

price increase) are immediate, visible, and 

often concentrated on a vocal minority. This 

is why price changes can be achieved only 

when political economy issues are managed 

with appropriate complementary policies. 

Second, getting prices right may not be 

sufficient because other market imperfections can prevent prices from being the silver 

bullet of environmental policies. These market imperfections include the following: 

0 2 4 6 8 10 12

Ghana

cost of environmental degradation as

% of GDP equivalent

Tajikistan

China

Average

Central African

Republic

Nigeria

Iran, Islamic Rep.

Pakistan

Egypt, Arab Rep.

Bangladesh

Benin

Peru

Algeria

Morocco

Colombia

Lebanon

Nepal

Syrian Arab

Republic

Guatemala

El Salvador

Jordan

Tunisia

FIGURE O.6 Reducing environmental degradation would provide 

substantial economic benefi ts

(cost of enviromental degradation expressed as percentage of GDP equivalent)

Source: World Bank 2004, 2005a, 2006a, 2006b, 2006c, 2006d, 2006e, 2006f, 2007a, 2007b, 2007c, 

2008, 2009, 2010a, 2010b, 2010c, 2011a, World Bank and DRC 2012.

WB_354_GG_Overview.indd 12 5/7/12 

2012-08-054_000000000000399
OVERVIEW 1 3

• Low price elasticity. The ability of prices 

to trigger changes in behavior and technology is sometimes limited by substitution 

possibilities: the responsiveness of drivers 

to higher fuel prices is low in the absence 

of alternative means of transportation. The 

ability of fi rms in the renewable energy sector to respond to incentives will depend 

on whether transmission lines are built 

between centers of consumption and production. In these cases, price-based policies 

may have to be complemented with direct 

infrastructure investments (such as public 

transportation and transmission lines) and 

other policy actions, like changes in urban 

planning or in norms and regulations. But 

if substitution capacity is limited by alternatives, their provision may increase the 

economy’s effi ciency and boost income or 

promote economic growth, making the 

price increase more politically acceptable. 

• Missing markets or institutions. Specifi c 

institutional measures may be required to 

transform the “right price” into the right 

incentive. Where tenants are paying energy 

bills, for instance, owners and developers 

have little incentive to “build right” or to 

invest in more energy-effi cient appliances 

unless they can recoup their investments 

through higher rents or sales price. This 

“principal-agent” problem can be tackled 

through information (such as energy effi -

ciency labels for homes), specifi c schemes 

to fi nance investments in energy effi ciency, 

or norms (such as compulsory retrofi t when 

homes are sold). 

• Lack of credibility and predictability of 

price signals. Governments cannot commit to maintaining environmental price 

instruments over the long term, which 

puts them in a poor position to encourage 

fi rms to undertake long-term, risky investments (notably in R&D and long-lived 

infrastructure). 

• Coordination failures and knowledge externalities. Prices are ill-suited to address the 

“classic” market failures usually invoked to 

justify innovation and industrial policies. 

Think about electric cars whose development requires coordination between electricity providers, city planners, battery producers, and car manufacturers. 

Third, inertia and biases in behavior are 

such that many efficiency measures that 

might pay for themselves are not implemented. Household responses to higher 

energy prices are often disappointing, and 

fi rms do not always exploit all opportunities 

to improve effi ciency (Gillingham and others 2009; Allcott and Mullainathan 2010). 

Energy savings of 20–25 percent could be 

achieved through improved industrial processes in high-income and emerging economies (World Bank 2010d). 

Fourth, fi nancing tools to tackle up-front 

investments are inadequate. Take the case of 

solar, wind, or hydroelectric energy, which 

is characterized by much higher capital 

costs than fossil-based energy, but extremely 

low operating costs, or energy efficiency 

that requires up-front investments in new 

equipment or add-ons whose costs are then 

recouped over time through energy savings. 

Even with agriculture or fi sheries, a shift to 

more sustainable practices typically results 

in lower returns and investments in early 

years that are then offset by higher returns in 

the future. The need for up-front fi nancing 

can be a binding constraint for developingcountry governments (especially local ones 

with limited access to capital markets and a 

small tax base) and the private sector (especially small and medium enterprises). Few 

countries have a well-developed banking sector, let alone energy service companies that 

specialize in fi nancing investments in energy 

effi ciency. 

No substitute for good growth policy: 

The private sector needs an enabling 

environment 

Green growth strategies are growth strategies 

with the additional goal of fostering a better 

environment. As such, they cannot substitute for good growth policies: environmental measures are unlikely to offset distorted 

labor markets, illiquid fi nancial systems, or 

poor business environments.

WB_354_GG_Overview.indd 13 5/7/12 

2012-08-054_000000000000400
1 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

A case in point is “green jobs,” a topic that 

has attracted substantial attention following 

the recent global fi nancial crisis. Advocates 

stress that, in a situation of high unemployment, a green fi scal stimulus could effectively 

address recession-induced unemployment and 

set the stage for cleaner post-recession growth 

patterns. The argument is attractive: although 

green projects may not be the most labor 

intensive or “shovel ready,” they have the 

added advantage of carrying environmental 

benefi ts. That said, a fi scal stimulus—green 

or not—is effective only if unemployment is 

linked to insuffi cient demand rather than to 

structural issues (such as lack of skilled workers or a poor investment climate). 

Beyond stimulus effects, some countries—

including Brazil, China, Germany, Japan, the 

Republic of Korea, and Morocco—are looking at green growth as a potential source of 

longer-term growth through which to create new markets. And even though not every 

country can become the world leader in solar 

panels or wind turbines, developing countries 

may have substantial unexploited potential 

in green exports (fi gure O.7). Many developing countries have natural endowments that 

create a potential comparative advantage 

in green activities (such as water resources 

and hydropower potential or insolation and 

solar power potential). Realizing this potential could generate jobs and exports, thereby 

boosting growth and output. 

But green policies cannot address structural constraints to growth and employment 

creation, at least if deployed alone. They will 

not be effective at creating green jobs where 

labor markets are distorted and regulations 

discourage small business development. They 

will not offset an unattractive business environment. And where the labor force’s skills 

are inappropriate for developing a competitive manufacturing sector, environmental 

policies can hardly replace education. Thus, 

a recent study of South Africa concludes that, 

while the idea of developing green industries 

(such as solar power) is appealing, it has 

little chance of succeeding unless structural 

problems such as regulatory obstacles to the 

creation of small enterprises and the lack of 

skilled workers are addressed (World Bank 

2011b). 

Skill shortages already appear to be 

impeding the greening of growth. In China 

and India, rural electrifi cation programs are 

suffering from a lack of skilled workers. Reasons for these shortages include a scarcity 

of scientists and engineers, the poor reputation and limited attractiveness of some sectors important for the green transition such 

as waste management, and a limited number 

of teachers and trainers in environmental services (ILO and CEDEFOP 2011). 

In countries where the business environment is not conducive to investment and 

growth, better economic policies must be the 

fi rst step. Lessons from trade liberalization 

are telling: where labor mobility is limited 

by skills and regulations and where investments in the sectors that benefi t from trade 

liberalization are impaired by inappropriate 

policies, both workers and the private sector 

take longer to adjust. The benefi ts from more 

trade take longer to materialize, and adjustment costs are much higher. Similarly, economic benefi ts from green policies are more 

likely to be large and immediate if economic 

% of total exports

from developing countries

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 0

green exports close-to-green exports

FIGURE O.7 Developing countries may have substantial 

unexploited potential in green exports

(green and close-to-green exports as a share of total exports from developing 

countries, 2000–10)

Source: Dutz and Sharma 2012, based on data from the Commodity Trade Statistics database 

 (COMTRADE) and a six-digit proximity matrix based on COMTRADE.

Note: Close-to-green exports are exports of goods that are not “green” but require similar skills—in 

the way growing apples requires the same set of skills as growing pears so that a country that is 

good at the former is likely to be good at the latter.

WB_354_GG_Overview.indd 14 5/7/12 

2012-08-054_000000000000401
OVERVIEW 1 5

policies are conducive to change and favor 

the development of more environmentally 

friendly and more productive activities.

The poor and vulnerable need 

social protection

While there is a general presumption that the 

poor suffer most from environmental degradation and its impact, this need not imply that 

they would benefi t automatically from green 

growth policies. For example, removing fossil 

fuel subsidies would clearly reduce the poor’s 

purchasing power unless compensated for by 

other measures.

But subsidies are often regressive and can 

be replaced by better-targeted transfers at a 

fraction of the cost (fi gure O.8). By one estimate, the cost to the budget of transferring 

$1 to the poorest 20 percent of the population via gasoline subsidies is $33 (Arze del 

Granado and others 2010). Similarly, consumption subsidies for water and electricity 

can usefully be replaced by connection subsidies that are invariably better targeted, as the 

poor account for the majority of those without access to basic services.

In sum, hopes that green growth will singlehandedly solve countries’ employment, competitiveness, or poverty problems are probably 

as unfounded as the fear that environmental policies will lead to massive loss of jobs 

or competitiveness. Adjustment costs may 

vary across industries because some sectors 

are inherently more innovative than others 

and tend to adapt better. Better regulation—

particularly if supported by training, R&D 

support, and the recycling of environmental 

taxes into other tax cuts—will help to minimize these adjustment costs and maximize 

benefi ts. Also needed are steps to protect the 

poor from the potential downsides of green 

policies and to ensure that they benefi t fully 

from the likely upsides. 

The way forward: Good and 

inclusive growth policies tailored 

to real-world challenges

So greening growth requires good growth 

policies adapted to political economy realities 

and entrenched behaviors. It entails reforms 

in the patterns of pricing, regulation, and 

public investment that trigger resistance. It 

requires complex changes in behaviors and 

social norms because, even with efficiency 

gains and new technology, it is unlikely that 

middle-class consumers (whether in rich or in 

poor countries) can stick to current consumption patterns. And it requires knowing when 

to go for the politically expedient rather than 

the economically optimal, carefully deploying social marketing tools and making fi nancial tools available. 

Complicating matters is the fact that 

opportunities to green growth at a manageable cost are not evenly distributed over time. 

This creates urgency for some, though not all, 

green policies and is one of several arguments 

for why “grow dirty and clean up later” is 

not a good option even for poor countries 

(box O.3). 

What follows is a three-prong strategy for 

tackling entrenched interests and behaviors, 

fi nancing constraints, and the risk of lock-in.

bottom quintile

7%

Q4

11%

Q3

16%

Q2

23%

top

quintile

43%

FIGURE O.8 Fossil fuel subsidies benefi t 

primarily the rich

(fossil fuel subsidy allocation, by income quintile, average across 

20 countries, various years)

Source: Arze del Granado and others 2010.

WB_354_GG_Overview.indd 15 5/7/12 

2012-08-054_000000000000402
1 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Prong 1: Tailored strategies that 

maximize local and immediate benefi ts 

and avoid lock-in

Green growth policies require governments 

to do a better job of managing both market 

and governance failures. This is obvious in 

any discussion of green innovation or industrial policies, but also of the regulatory and 

market (“good growth”) reforms that are 

needed, some of which are complex. Even 

sophisticated administrations may struggle 

with market-based instruments, as experience with the European Trading System has 

demonstrated (Betz and Sato 2006). Optimal solutions will differ across countries 

with varying degrees of institutional capacity, transparency, accountability, and civil 

society capacity. Therefore, green growth 

strategies need to be tailored to a country’s 

circumstances, and “best practices” should 

be imported with caution.

Maximize local and immediate benefi ts. In 

addition to being tailored to local circumstances, strategies need to address the political economy of reform. Green growth strategies should aim to minimize transition costs 

by offsetting them to the extent possible, with 

visible and immediate benefi ts. This implies 

designing policies to maximize short-term, 

local benefits, such as increased efficiency 

and productivity, safety and resilience, job 

creation, and poverty alleviation. 

Avoid lock-in. Governments cannot make 

all of the changes needed at once: they have 

limited resources and limited implementation 

capacity to devote to complex problems; they 

also have limited political capital to defend 

BOX O.3 Why “grow dirty and clean up later” is misleading

Many argue that poor countries should focus on satisfying human needs before attending to nature, especially given their relatively small environmental footprint. This argument is misleading for several reasons.

First, not all environmental goods are superior 

goods whose share in total consumption increases 

with income. Individuals who struggle to feed and 

house themselves may not see biodiversity protection 

and climate change mitigation as priorities, but local 

environmental goods affect their daily lives, with 

signifi cant impact on income and welfare. The lack 

of solid waste disposal, for example, is not merely an 

environmental issue. By clogging drains, it leads to 

health hazards and fl ooding, with serious economic 

and human consequences:

• In Haiti, poor solid waste disposal is to blame for 

the resurgence of diseases such as dengue and for 

vulnerability to storms. 

• In India, better solid waste disposal systems were 

a principal recommendation of the fact-finding 

committee established to investigate the causes of 

the 2005 Mumbai floods, which caused almost 

$2 billion in damages and killed an estimated 500 

people. 

Similarly, mismanaging water resources impairs 

people’s ability to grow crops and feed their families. Where natural assets like soil quality, water, 

and standing forests serve as critical inputs into 

economic production, good environmental policies 

enhance income generation and poverty alleviation. 

Second, it may be impossible or prohibitively 

expensive to clean up later. The loss of many environmental assets—most obviously biodiversity—is 

irreversible. This is also the case with climate. 

Because greenhouse gases reside in the atmosphere 

for a long time, each emitted molecule will infl uence 

the climate over decades (for methane), centuries 

(for CO2), or longer. Irreversibility may also occur 

because of economic and technological lock-in. A lot 

of infrastructure is long lived, and today’s choices 

will be hard to reverse. Urban forms are largely 

determined when city populations are increasing 

rapidly and most buildings and transport systems 

are being built. The consequences of development 

based on a low-density, individual-vehicle transportation model are largely irreversible, as evidenced by 

the current struggles of U.S. urban planners to densify and develop public transport systems. 

WB_354_GG_Overview.indd 16 5/7/12 

2012-08-054_000000000000403
OVERVIEW 1 7

policies against interest groups and political opposition. A focus on the sectors and 

interventions that are most urgent—that is, 

those that can help to prevent irreversibility 

or reduce inertia—is thus called for.

Table O.1 illustrates the implications for priority setting of emphasizing local and immediate benefi ts and urgency. While lower-carbon 

energy from renewable sources is highly desirable, it is easier to build renewable plants later 

(even if this requires retiring thermal power 

plants) than to try and reverse poor land-use 

planning that has resulted in sprawling cities. Good land-use planning and urban public 

transport can provide short-term benefi ts—for 

instance, by reducing congestion and exposure 

to disasters and by favoring denser and more 

energy-effi cient development. Table O.1 provides general statements on a few green policies; this analysis needs to be carried out at 

regional, national, and local scales to take into 

account specifi c contexts (see, for instance, an 

application to the Mediterranean countries in 

CMI 2012).

Developing countries (especially lowincome countries) should prioritize policies 

that (a) have a negative or zero economic cost 

thanks to synergies with development (such 

as developing hydropower where appropriate, 

implementing effective urban plans, or scaling 

up family planning policies to manage population pressures and improve health and education outcomes), (b) have a positive economic 

cost but large direct welfare impacts (that is, 

when they target local environmental goods 

such as local air pollution or natural risks), 

or (c) are fi nanced from external resources 

(including through carbon trading). 

Actively manage the political economy of 

reform. Managing the political economy of 

reform also entails measures that target those 

segments of the population that would otherwise oppose reforms. For example, in 2010 

the Islamic Republic of Iran increased domestic energy prices by up to 20 times, reducing 

fossil fuel subsidies by some $50 billion–$60 

billion. It offset them with $30 billion in cash 

transfers that benefi ted 80 percent of its population, thereby addressing the fact that opposition to the reform of such subsidies usually 

comes from the middle class. The combination of cash transfers with a well-orchestrated 

public relations campaign was critical to the 

success of the reform (Guillaume and others 

2011). 

Understanding the sources of resistance to 

a reform helps to design the reform process 

in a way that minimizes this resistance (box 

O.4). Sound information about winners and 

TABLE O.1 Some guiding principles for establishing green growth strategies

Local and immediate benefi ts

LOWER

(Trade-off s exist between short-and 

long-term or local and global benefi ts)

HIGHER

(Policies provide local 

and immediate benefi ts)

Inertia and/or risk of lock-in 

and irreversibility

LOWER

(action is less urgent) • Lower-carbon, higher-cost energy 

supply

• Carbon pricing

• Stricter wastewater regulation 

• Drinking water and sanitation, solid waste 

management

• Lower-carbon, lower-cost energy supply

• Loss reduction in electricity supply

• Energy demand management 

• Small-scale multipurpose water reservoirs

HIGHER

(action is urgent) • Reduced deforestation

• Coastal zone and natural area 

protection 

• Fisheries catch management

• Land use planning

• Public urban transport

• Family planning

• Sustainable intensifi cation in agriculture

• Large-scale multipurpose water reservoirs

WB_354_GG_Overview.indd 17 5/7/12 

2012-08-054_000000000000404
1 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

losers enables an information campaign to be 

tailored to potential critics.

One way of improving public decisions 

and determining priorities is to inform decision makers of the value of the services provided by natural ecosystems, so that this 

value can be compared directly with the economic costs and benefi ts of their decisions. 

Indeed, most environmental assets do not 

have widely accepted prices either for their 

intrinsic value or for the services they provide (such as fl ood protection). As a result, 

decisions that involve a trade-off between 

economic interests and natural assets (such 

as building a road through a rain forest) are 

diffi cult to assess. 

Green accounting extends beyond the 

valuation of natural assets and focuses on a 

country’s stock of natural and other assets 

(its wealth) rather than on a flow measure 

like GDP. By doing so, it helps to identify 

situations in which economic growth does 

not create wealth (because natural assets are 

consumed more rapidly than other assets are 

created) and is not sustainable. For instance, 

a green accounting exercise suggests that 

China’s growth would be much lower than 

its offi cial GDP growth of nearly 10 percent a 

year if environmental depletion and degradation were included. Indeed, calculations put 

China’s adjusted net national income growth 

at about 5.5 percent a year (World Bank and 

DRC 2012). 

Prong 2: Measures that promote and 

incentivize smart decision making

Even though the information provided by 

green accounting can help inform and balance the debates on political choices and 

BOX O.4 Morocco: The importance of political economy

A sound understanding of the winners and losers of 

possible green growth strategies helps policy makers 

fi nd ways to address tough economic reforms—as 

Morocco has recently learned in its quest to overhaul 

a universal subsidy system that rewards fossil fuel 

consumption. By gaining insights into the political 

economy of reform, Morocco is now poised to reform 

its energy subsidy, which would sharply reduce fi scal 

costs and facilitate a greener growth path. 

The problems with the energy subsidy are multiple. Its fiscal impact reached 5.5 percent of GDP 

in 2011, absorbing roughly 17 percent of the total 

investment budget. It undercuts Morocco’s ambitious mitigation goals by keeping the price of fossilbased energy products low, thus making renewable 

and effi ciency investments less competitive. And it is 

regressive, with the wealthy benefi tting the most.

So why has Morocco hesitated to reform the 

subsidy? A big reason is that the subsidy reform 

was believed to be unpopular, although the government had never done a survey to ascertain just how 

unpopular, among which segments of society, and 

whether alternatives could motivate changes. For 

that reason, the World Bank offered to conduct such 

a poll in 2010 using a nationally representative sample of 1,600 households.

The results are astonishing: more than 70 percent 

of the population was unaware of the existence of 

energy subsidies. Thus, the vast majority of buyers 

of 12 liter cooking gas bottles—a product as widespread as bread—did not know that the real market 

price was more than DH 100 ($14) instead of the 

standard retail price of DH 40 ($5.6). In addition, 

a large majority opposed the idea of reducing subsidies—although this majority decreased once offered 

a well-targeted social program, and fell even further 

when the program was explained in detail. In the 

end, it was the wealthy that remained the group 

most opposed to reform. 

This simple exercise in revealing political 

awareness and preferences helped the previous 

government develop a communication strategy 

over the medium term, starting from informing 

the population of the existence of the subsidy system and explaining its disadvantages. A communication campaign ensued in the fi rst months of 

2011, and the government elected in November 

2011 now has energy subsidy reform at the top of 

its agenda. 

Box text contributed by Andrea Liverani.

WB_354_GG_Overview.indd 18 5/7/12 

2012-08-054_000000000000405
OVERVIEW 1 9

public investments, it does not constitute an 

incentive for fi rms and individuals. To infl uence their behavior, additional measures are 

required, and it is here that governments can 

play a critical role by ensuring that market 

incentives promote green behavior on the 

part of fi rms and individuals. 

Getting the prices right will influence 

consumer demand as well as firms’ choice 

of production processes (for example, higher 

energy prices will make fi rms use more energy-efficient technologies to minimize their 

production costs) and products (to respond to 

consumer demand that changes with relative 

prices). But it will also make them innovate, 

develop, and implement new technologies 

and processes. 

Getting prices right also has a central role 

in shaping the built-up structure of cities. 

Land developers respond to price signals so 

that higher land prices lead to higher density—enhancing productivity spillovers and 

the supply of affordable housing and managing demand for transport. When “offi cial” 

land prices do not reflect demand and are 

depressed at the urban periphery, sprawl or 

suburbanization likely will be excessive. 

But market incentives will not suffi ce. For 

green policies to succeed, governments will 

need all of the arrows in the public policy 

quiver. 

Informing and nudging to infl uence 

individuals and address behavioral biases 

Behavioral biases limit the impact of market incentives and complicate the design of 

environmental policies. For example, one 

explanation for the large unexploited potential that exists in energy efficiency springs 

from the “cognitive myopia” that prevents 

individuals from accurately weighing future 

benefi ts against immediate costs. Also, individuals measure gains and losses with respect 

to a reference point and weigh losses more 

than gains (Tversky and Kahneman 1992); 

as a result, they tend to consider the cost of 

new environmental policy as a loss and to 

disregard environmental damages avoided. 

People are biased toward the status quo, tend 

to choose the default option, and have an 

aversion to ambiguity, resulting in a tendency 

to delay decision making related to complex 

problems such as climate change (Tversky 

and Shafi r 1992). At the same time, people 

like to “do the right thing” and are heavily 

infl uenced by social norms. 

As a result, how messages are framed, what 

values are appealed to, and how the needed 

efforts are presented are critical. When given 

the choice of voluntarily paying for a carbon 

offset for an airline ticket, some 60 percent 

of Americans will do so regardless of political affi liation. When the offset is referred to 

as a carbon tax, support falls from 60 to 25 

percent among Republicans (Hardisty and 

others 2010). More generally, framing green 

policies as a way to reach an ambitious and 

positive social goal (such as becoming carbon 

neutral by 2050 or becoming a leader in solar 

technologies) makes them more acceptable 

(and less prone to reversal at the next change 

of government) than if they are perceived as a 

constraint to economic development. 

Another approach showing promising 

results is tweaking “choice architectures” to 

“nudge” people to make better decisions for 

the environment or other desirable outcomes 

without restricting their freedom of choice 

(Thaler and Sunstein 2008). To count as 

a nudge, the intervention must be easy and 

cheap, but not constitute a mandate. Changing the default options—without changing 

the options themselves—can be an effi cient 

way to promote greener behaviors. In two 

cases where the default option offered by the 

electricity provider was a cleaner but more 

expensive one, fewer than 5 percent of customers requested a shift to a cheaper, but 

less green, source of electricity (Picherta and 

Katsikopoulos 2008). 

Policies that unleash the power of the 

private sector

Firms have a major role to play in providing solutions to green growth. Through their 

capacity to innovate and adjust their production processes, fi rms are key to keeping the 

cost of green policy in check. This means that 

governments need to infl uence the behavior 

of fi rms by providing appropriate incentives 

and regulations in addition to the right economic incentives.

WB_354_GG_Overview.indd 19 5/7/12 

2012-08-054_000000000000406
2 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Use information. Besides prices, firms are 

subject to pressures from their customers, 

stakeholders, and investors, and this pressure 

can be used to green their behavior. Promoting transparency and access to information 

on environmental impacts can create social 

pressure to reduce these impacts. A 1996 

amendment to the U.S. Safe Drinking Water 

Act requiring community drinking water systems to report regulatory violations publicly 

has been suffi cient to reduce the incidence of 

subsequent violations, even in the absence of 

additional fi nancial incentives. 

In China, Indonesia, the Philippines, and 

Vietnam, performance evaluation and ratings 

programs that reported emissions data and 

assessed plants’ environmental performance 

helped a large number of plants initially rated 

as “noncompliant” to rise to “compliant” (in 

contrast, plants rated as “fl agrant violators” 

and “compliant” stayed in those categories). 

One reason these programs work is that they 

provide the information needed for civil society and legal and political systems to act to 

reduce pollution. But it also works because 

they attract the attention of managers to effi -

ciency-increasing opportunities, which can 

be implemented at low or even negative cost. 

Impose where it makes sense. Market and 

price instruments are sometimes diffi cult to 

implement or to enforce, they lack predictability and credibility over the long term, 

and they may be ineffi cient when economic 

actors do not take them fully into account, 

such as not fully valuing fuel economy when 

buying a car (Greene 2010). This is why it is 

sometimes easier to implement norms and 

regulations, as is done by Australia, Canada, 

China, the European Union, Japan, Korea, 

and the United States for car fuel effi ciency 

standards (An and others 2007). 

Use innovation and industrial policy, but 

with caution. Prices are notoriously limited 

instruments for transforming economies or 

triggering investments with long-term or 

uncertain payoffs. Since they depend on government actions, they have long-term credibility and predictability issues. They also 

cannot address the “classic” market failures 

that are usually invoked to justify innovation 

or industrial policies: increasing returns and 

knowledge externalities in new industries, 

information asymmetries, capital market 

imperfections, and the coordination needed 

across different sectors to permit a technological transition. As a result, most countries 

resort to some form of innovation and industrial policies in their growth strategies. 

Such policies need to be used with care 

and tailored to the country context. Today, 

frontier innovation and basic R&D are highly 

concentrated in high-income countries and a 

few large emerging economies. High-income 

countries have a critical responsibility to step 

up their efforts on green innovation and its 

deployment as well as to take new technologies to scale through demand-side policies. 

Failure to do so will severely compromise 

the ability of developing countries to pursue 

green growth. 

In lower-income countries, capacity is often 

not suffi cient for frontier innovation; what is 

needed are policies to support the adaptation and dissemination of existing technologies. These technologies have been developed 

and tested in richer countries, making their 

support through trade, dissemination, and 

industrial policies less risky than the development of new technologies. The best way to 

accelerate technology diffusion is to reduce 

trade barriers. In China, photovoltaic panel 

fabrication technologies were introduced 

mainly through the import of manufacturing equipment from Europe. Also critical are 

policies to increase adaptation and adoption 

capacity through education and training as 

well as trade and industrial policies (such as 

local content requirements).

Moreover, several developing countries 

are pursuing green industrial policies—biofuels in Brazil and solar energy in China and 

Morocco. Lessons from past successes and 

failures of standard industrial policies are 

clear: governments should subject firms to 

competition, have clear sunset clauses, and 

focus on well-identifi ed market failures, spillover, or latent comparative advantages (for 

example, solar potential in North Africa). But 

WB_354_GG_Overview.indd 20 5/7/12 

2012-08-054_000000000000407
OVERVIEW 2 1

most green industries will require some type 

of policy support, making a market test more 

complex to design (is a technology not competitive because the government is not pricing 

the externality correctly or because the technology is not the most competitive available?) 

and making it even more imperative for government to navigate carefully the twin risks of 

policy and market failures. Typically, environmental policy (such as a carbon tax) should 

address the environmental externality, while 

the standard tools of innovation and industrial policies are used to address knowledge 

externalities and other market failures such as 

economies of scale and coordination failures. 

Prong 3: Innovative fi nancing tools that 

tackle higher up-front fi nancing needs 

Even when environmental or green infrastructure policies and investments pay for 

themselves, they can involve signifi cant upfront costs and require specifi c fi nancial tools. 

Innovative financing is therefore urgently 

needed, especially where gains from better 

environmental management cannot immediately be monetized. 

Resources are available but remain small 

relative to need, so they need to be leveraged. 

With respect to climate change mitigation, 

recent estimates suggest that a package of 

public sources (including a redirection of subsidies currently destined for fossil fuels), multilateral development bank fl ows, and carbon 

offset fl ows could leverage some $200 billion 

to $400 billion in 2020 in additional private 

flows (MDB Working Group on Climate 

Finance 2011). This is close to the expected 

investment needed to reach a 550 ppm CO2-

eq target, but about half of what is needed to 

reach a 450 ppm CO2-eq target. As for the 

biodiversity market, offset and compensation 

programs offi cially amount to some $2.4 billion to $4 billion per year, but may be much 

bigger, given that most of the existing markets are not transparent or analyzed enough 

to estimate their size (Madsen and others 

2011).

Increasing the role of the private sector 

is critical. Many of the needed investments 

could benefit from public-private partnerships. Private participation in infrastructure 

has grown at a steady pace (13 percent a 

year) over the past 20 years but remains concentrated in a few middle-income countries 

and a few sectors, namely, telecom and, to a 

lesser extent, energy (World Bank and PPIAF 

2012). New investments in renewable energy 

are largely private (some $143 billion of the 

$211 billion invested in renewables in 2010), 

but 82 percent of private renewable energy 

investments that take place in developing 

countries occur in Brazil, China, and India 

(UNEP and Bloomberg New Energy Finance 

2011). Yet the need for innovation, effi ciency, 

and “smart investments” (smart grids, smart 

transportation, and smart houses) makes the 

role of the private sector even more critical 

in green growth policies than it already is in 

traditional infrastructure fi nance. 

Three weaknesses hold back private fi nancing of infrastructure—green or not (MDB 

Working Group on Infrastructure 2011):

• The scarcity of resources to prepare projects and bring them to a stage at which 

they are “bankable” (that is, attractive to 

private sectors). Developing-country governments—at least those with limited experience with public-private partnerships—

are often reluctant to borrow to prepare 

uncertain projects, while private investors 

are unwilling to invest in preparing a project they may have to bid for and not win.

• The mismatch between the tenor of the 

funds available, with the preference of 

investors for short-term funds and the 

needs of infrastructure for long-term funds 

(15–25 years). Few countries have well-developed capital markets or banking institutions able to transform short-term deposits 

into long-term products, and not enough 

refi nancing tool options are available. 

• The challenge of cost recovery. The ability 

to charge at full cost is behind the massive expansion in telecom services, but few 

other infrastructure sectors are able to do 

so, although where they have, investors 

have come, as they did in Colombia’s water 

sector. Solutions include measures to price 

WB_354_GG_Overview.indd 21 5/7/12 

2012-08-054_000000000000408
2 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

infrastructure services close to cost recovery, while ensuring affordability for lowincome households. 

Another weakness springs from the additional policy risk created by the fact that 

the profitability of green investments is 

often dependent on public policies (such as 

feed-in tariffs or environmental taxation). 

Thus, Spain’s retroactive reductions in solar 

feed-in tariffs, Germany’s and France’s decisions to reduce the amount of support for 

future projects, and the lack of progress on 

a U.S. energy bill all combined to depress 

the private sector’s appetite for renewable 

energy investments in 2010. As a result, 

clean energy share prices dipped, refl ecting 

investor concerns, despite continued strong 

government support for renewable energy in 

China (UNEP and Bloomberg New Energy 

Finance 2011). 

Renewable energy and energy efficiency 

illustrate the need for innovative public 

financing instruments (World Bank forthcoming b). Renewable energy is capital intensive with a long payback period and may face 

the technology risks associated with emerging 

technologies (such as concentrated solar) or 

unique resource risks (drilling for geothermal). Energy effi ciency suffers from the fact 

that most local banks rely on balance sheet 

fi nancing, rather than project-based fi nancing 

that is based on the cash fl ow generated by the 

investments. The result is that the customers 

most in need of fi nancing (small businesses 

and households) are typically deemed not 

creditworthy. And energy efficiency investments tend to be small, with high transaction 

costs, so that banks may not fi nd them attractive in the absence of dedicated credit lines to 

increase confi dence and capacity and instruments to aggregate small deals. 

Furthermore, access to fi nancing is particularly problematic for small and medium 

enterprises (SMEs), which account for a large 

share (60 percent in many countries) of pollution and resource use. Some 65 to 72 percent of all SMEs (between 240 million and 

315 million fi rms) lack access to credit, with 

a particularly daunting picture in Asia and 

Africa (Global Partnership for Financial 

Inclusion 2011). Even in the more sophisticated markets, most fi rms fi nd it tough to 

get credit for investments aimed at business 

activities other than expansion. 

How can these obstacles to green investments be overcome? The public sector, international financial institutions (IFIs), and 

bilateral donors can help by providing funds 

for project preparation as well as concessional elements for pioneer investments. Such 

support can go a long way toward changing 

risk-return profi les and giving investors more 

confi dence in the long-term viability of their 

projects. 

More generally, well-designed public 

fi nance mechanisms help to mobilize private 

investments in energy effi ciency and renewable energy (World Bank forthcoming b). In 

the case of renewable energy and energy effi -

ciency, the following tends to have the greatest leverage: 

• Credit lines or guarantee instruments to 

engage private banks. The experience of 

the International Finance Corporation is 

telling: between 1997 and 2011 some $65 

million in concessional funding, primarily for risk-sharing facilities, generated 

$680 million in sustainable energy fi nance 

investments (IFC 2011). 

• “Fund of funds” under which the government invests a relatively small amount of 

long-term capital in a range of private, professionally managed funds that then invest 

in clean energy or energy effi ciency

• Public funds to reduce interest rates for 

consumer financing, typically through 

fi nancial institutions or utilities. 

In addition, energy service companies 

(ESCOs), which provide clients with energy 

auditing, propose energy-savings measures, and fi nancing, can help consolidate 

multiple small transactions. ESCOs as an 

industry often require public support to 

establish: in China, it took more than a 

decade of support by the government and 

the World Bank before the ESCOs grew to 

a $1 billion industry in 2007 (World Bank 

2010d).

WB_354_GG_Overview.indd 22 5/7/12 

2012-08-054_000000000000409
OVERVIEW 2 3

Overall, the relevant mix of financing 

instruments will depend on the market barriers (access to credit, transaction cost, or perception of risk), market segments (SMEs, large 

developers, or polluters), and local context 

(such as the maturity of the local fi nancial sector) in which they seek to operate (table O.2). 

In addition, payments for environmental 

services (PES)—whereby farmers and landowners are compensated for maintaining 

their land’s ability to provide ecosystem services (such as the regulation of water fl ows, 

water purification, control of soil erosion, 

and habitats for wildlife)—are promising, but 

underutilized. Fortunately, efforts to develop 

REDD+ are helping to develop PES schemes.4

In addition, in developing countries, policy 

makers have tried to design PES programs to 

benefi t the poor. But whether these schemes 

in fact benefi t the poor depends on the nature 

of the scheme. Brazil appears to have been 

successful in this regard, building on its 

experience in developing social safety nets for 

the poor (box O.5).

Conclusions

In sum, this report approaches green growth 

from a pragmatic point of view. The current 

model is not just unsustainable, it is ineffi -

cient. Improving it is good economics, so let’s 

fi x market failures, internalize externalities, 

assign property rights, improve governance, 

and infl uence behaviors. But making green 

growth happen and ensuring it is inclusive 

will also require an acute understanding of 

political economy and social psychology. 

As such, this report speaks primarily to 

those who fear that greening growth may 

be too expensive, may be too ambitious at 

an early stage of development, or should 

concern only high-income countries. To 

them, the report makes a clear case that 

greening growth is neither unaffordable nor 

technically out of reach, there are plenty of 

TABLE O.2 Financing mechanisms need to be tailored to the maturity of the local fi nancial sector

(context-dependent fi nancing tools for clean energy in East Asia and the Pacifi c)

Level of fi nancial sector development

Indicator Low Medium High

Country income level Low income (e.g., Lao PDR) Middle income 

(e.g., Thailand)

Upper middle income 

(e.g., Malaysia)

Banking services Basic banks Full-range banks Universal banks

Non-bank fi nancial services None • Government bonds

• Equity

• Government and 

corporate bonds

• Equity

• Alternatives (private equity, 

venture capital)

Interest rate Administrative setting Largely market based Fully market based

Access to fi nance for SMEs Limited Partial Readily available

Availability of long-term 

fi nancing

Limited (up to 1 year) Partial (up to 7 years) Full (up to 15 years)

Risk management Weak Adequate Robust

Appropriate clean 

energy fi nancing 

instruments

• Lines of credit 

(liquidity support)

• Concessional fi nancing

• Dedicated debt funds

• Lines of credit 

(demonstration)

• Partial risk guarantee

• Lines of credit 

(demonstration)

• Partial risk guarantee

• Equity funds

• Consumer fi nancing

Source: World Bank forthcoming b.

WB_354_GG_Overview.indd 23 5/7/12 

2012-08-054_000000000000410
2 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX O.6 Joining forces: A common platform to move forward on greening our 

economies and growth processes

How does the World Bank’s defi nition of green growth 

as economic growth that is environmentally sustainable compare to those advocated in recent major 

reports on green growth? The OECD defi nes green 

growth as “fostering economic growth and development, while ensuring that natural assets continue 

to provide the resources and environmental services 

on which our well-being relies” (OECD 2011b). The 

United Nations Environment Programme (UNEP) 

defines a green economy as “one that results in 

improved human well-being and social equity, while 

signifi cantly reducing environmental risks and ecological scarcities” (UNEP 2011). Like the approach promoted in this report, these defi nitions are consistent 

with sustainable development as an ultimate objective and with green growth or a green economy as a 

means to reconcile its economic and environmental 

pillars, without ignoring social aspects. 

So while the three reports differ in their focus 

and target audience, they are fully consistent in 

their broad vision and policy advice. This common 

vision is being developed further in the context of 

the Green Growth Knowledge Platform (GGKP), a 

partnership of the three institutions and the Global 

Green Growth Institute. The GGKP—launched in 

January 2012—is a global network of researchers 

and development experts seeking to identify and 

address major knowledge gaps in green growth theory and practice. Through widespread consultation 

and world-class research, the GGKP aims to provide 

practitioners and policy makers with better tools to 

foster economic growth and implement sustainable 

development (http://www.greengrowthknowledge 

.org).

BOX O.5 “Green” cash transfers are helping poor communities in the Brazilian Amazon

An innovative addition to the Brazilian Bolsa Família (family allowance) conditional cash transfer 

program—the world’s largest and one of the best 

regarded in terms of coverage and targeting—is 

being implemented for communities living inside 

protected areas in the Amazon region. 

The Bolsa Floresta (forest allowance) rewards traditional communities for their commitment to stop 

deforestation by distributing payments for ecosystem 

services to families, communities, and family associations. In order to be eligible to receive the grants, 

families must enroll their children in school, sign a 

zero deforestation commitment, and attend a twoday training program on environmental awareness. 

Each eligible family receives a monthly stipend of 

R$50 ($30), paid to the mother. Community associations can also be eligible to receive payments of up 

to R$4,000 ($2,500) to support sustainable income 

generation activities, such as honey production, fi sh 

farming, and sustainable forest management.

Investments for administrative support to community associations make up 10 percent of the total 

paid to families during the year. Bolsa Floresta is 

being implemented by the State Government of 

Amazonas and the Fundação Amazônia Sustentável 

(Sustainable Amazonia Foundation). The funds are 

generated by the interest on an endowment initially 

established with contributions from the state government and private donors. Deforestation is monitored 

on a yearly basis by the Amazonas State Secretariat 

for the Environment and Sustainable Development 

through satellite imagery analyzed by independent 

institutions. The program currently benefi ts 7,614 

families in 15 protected areas, covering around 10 

million hectares of forests. The State of Amazonas 

has succeeded in halving the deforestation rate over 

the past fi ve years. 

Box text contributed by Adriana Moreira.

WB_354_GG_Overview.indd 24 5/7/12 

2012-08-054_000000000000411
OVERVIEW 2 5

immediate benefi ts and a poor country can 

reap economic benefi t from better environmental management. And although highincome countries, which still account for 75 

percent of global consumption and a disproportionate share of environmental degradation, absolutely have to implement ambitious 

environmental measures, all countries will 

gain from starting early. 

Greening growth need not entail slower 

growth and is affordable. However, achieving 

a green economy overnight probably is not. 

The costs of greening growth will depend 

on the degree of ambition. Rapidly and 

dramatically decreasing our impact on the 

planet would be quite costly. So, too, would 

delaying action for too long. Dramatic shifts 

would entail much slower growth at least in 

the medium run, and avoiding a brutal transition is the main incentive to start acting as 

early as possible.

This report adds to the chorus started by 

the Organisation for Economic Co- operation 

and Development and United Nations Environment Programme (UNEP) in recent reports 

supporting the idea that inclusive green growth 

is good economics and good development policy (box O.6). While we are still far from being 

able to price ecosystem services properly, they 

clearly are valuable. As such, neglecting natural capital, like neglecting human and physical 

capital, is simply bad management, bad economics, and bad for growth. 

Notes

1. The equivalent amount using purchasing power 

parity (PPP) that allows for better cross-country 

comparisons of purchasing power is $6,000 PPP 

for all developing countries and $1,300 PPP in 

low-income countries. 

2. This section is based on World Bank (forthcoming a). 

3. The fl eet capacity index is the relationship 

between the capacity of a fi shing fl eet to catch 

a particular quantity of fi sh and the quantity of 

fi sh that it actually catches.

4. Reducing Emissions from Deforestation and 

Forest Degradation (REDD) is an effort to create a fi nancial value for the carbon stored in 

forests, offering incentives for developing countries to reduce emissions from forested lands 

and invest in low-carbon paths to sustainable 

development. REDD+ goes beyond deforestation and forest degradation and includes the 

role of conservation, sustainable management 

of forests, and enhancement of forest carbon 

stocks (http://www.un-redd.org/). 

References

Allcott, H., and S. Mullainathan. 2010. “Behavior and Energy Policy.” Science 327 (5970): 

1204–05.

Alpay, E., S. Buccola, and J. Kerkvliet. 2002. 

“Productivity Growth and Environmental 

Regulation in Mexican and U.S. Food Manufacturing.” American Journal of Agricultural 

Economics 84 (4): 887–901.

Ambec, S., M. A. Cohen, S. Elgie, and P. Lanoie. 

2011. “The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and 

Competitiveness?” Resources for the Future 

Discussion Paper 11-01, Washington, DC.

An, F., D. Gordon, H. He, D. Kodjak, and 

D. Rutherford. 2007. “Passenger Vehicle 

Greenhouse Gas and Fuel Economy Standards: 

A Global Update.” International Council on 

Clean Transportation, Washington, DC.

Andersen, M. S., T. Barker, E. Christie, P. Ekins, 

J. F. Gerald, J. Jilkova, S. Junankar, M. Landesmann, H. Pollitt, R. Salmons, S. Scott, and S. 

Speck, eds. 2007. “Competitiveness Effects of 

Environmental Tax Reforms (COMETR).” 

Final report to the European Commission, 

DG Research, and DG TAXUD (Summary 

Report), National Environmental Research 

Institute, University of Aarhus. 

Anger, N., and U. Oberndorfer. 2008. “Firm Performance and Employment in the EU Emissions 

Trading Scheme: An Empirical Assessment for 

Germany.” Energy Policy 36 (1): 12–22.

Arze del Granado, J., D. Coady, and R. Gillingham. 2010. “The Unequal Benefits of Fuel 

Subsidies: A Review of Evidence for Developing Countries.” IMF WP/10/02, International 

Monetary Fund, Washington, DC. 

Bai, Z. G., D. L. Dent, L. Olsson, and M. E. 

Schaepman. 2008. “Proxy Global Assessment 

of Land Degradation.” Soil Use and Management 24 (September): 223–34.

Berman, E., and L. T. M. Bui. 2001. “Environmental Regulation and Productivity: Evidence 

from Oil Refineries.” Review of Economics 

and Statistics 83 (3): 498–510.

WB_354_GG_Overview.indd 25 5/7/12 

2012-08-054_000000000000412
2 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Betz, R., and M. Sato. 2006. “Emissions Trading: 

Lessons Learnt from the First Phase of the EU 

ETS and Prospects for the Second Phase.” Climate Policy 6 (4): 351–59.

CMI (Center for Mediterranean Integration). 

2012. “Toward Green Growth in Mediterranean Countries: Implementing Policies to 

Enhance the Productivity of Natural Assets.” 

CMI, Marseille.

Copeland, B. R. 2012. “International Trade and 

Green Growth.” Paper presented at the Green 

Growth Knowledge Platform inaugural conference, Mexico City, January 12–13. 

Dutz, M. A., and S. Sharma. 2012. “Green 

Growth, Technology, and Innovation.” Policy 

Research Working Paper 5932, World Bank, 

Washington, DC.

Easterlin, R. A. 1995. “Will Raising the Income 

of All Increase the Happiness of All?” Journal 

of Economic Behaviour and Organization 27: 

35–47.

Ellerman, A. D., F. Convery, and C. de Perthuis. 

2010. Pricing Carbon. Cambridge, U.K.: Cambridge University Press.

FAO (Food and Agriculture Organization of 

the United Nations). 2010. “Global Forest 

Resources Assessment 2010: Main Report.” 

FAO Forestry Paper 163, FAO, Rome.

Fay, M., A. Iimi, and B. Perrissin-Fabert. 2010. 

“Financing Greener and Climate Resilient 

Infrastructure in Developing Countries: Challenges and Opportunities.” EIB Papers 15 (2): 

35–59. 

Ferreira, F. H. G., and M. Ravallion. 2009. “Poverty and Inequality: The Global Context.” In 

Oxford Handbook of Economic Inequality,

ed. B. Nolan, W. Salverda, and T. Smeeding, 

ch. 24. Oxford: Oxford University Press.

Foresight. 2011. The Future of Food and Farming: Final Project Report. London: Government Offi ce for Science.

Gillingham, K., R. Newell, and K. Palmer. 2009. 

“Energy Efficiency Economics and Policy.” 

Annual Review of Resource Economics 1: 

597–619.

Global Partnership for Financial Inclusion. 2011. 

“Report to the Leaders of the G20.” G20, 

Cannes. http://www.mofa.go.jp/policy/ 

economy/g20_summit/2011/pdfs/annex06 

.pdf.

Graff Zivin, J. S., and M. J. Neidell. 2011. “The 

Impact of Pollution on Worker Productivity.” 

NBER Working Paper 17004, National Bureau 

of Economic Research, Cambridge, MA.

Greene, D. L. 2010. “How Consumers Value Fuel 

Economy: A Literature Review.” EPA–420–

R–10–008, U.S. Environmental Protection 

Agency, Washington, DC.

Guillaume, D., R. Zytek, and M. R. Farzin. 2011. 

“Iran: The Chronicles of the Subsidy Reform.” 

IMF Working Paper WP 11/167, International 

Monetary Fund, Washington, DC.

Hallegatte, S. 2011. “How Economic Growth and 

Rational Decisions Can Make Disaster Losses 

Grow Faster Than Wealth.” Policy Research 

Working Paper 5617, World Bank, Washington, DC.

Hardisty, D. H., E. J. Johnson, and E. U. Weber. 

2010. “A Dirty Word or a Dirty World? Attribute Framing, Political Affi liation, and Query 

Theory.” Psychological Science 21 (1): 86–92. 

IEA (International Energy Agency). 2008. World 

Energy Outlook. Paris: IEA.

———. 2011. World Energy Outlook. Paris: IEA.

IFC (International Finance Corporation). 2011. 

“Sustainable Energy Finance: Innovative Concessional Finance with Financial Intermediaries.” IFC, Washington, DC.

ILO (International Labour Organization) and 

CEDEFOP (European Centre for the Development of Vocational Training). 2011. Skills for 

Green Jobs: A Global View. Geneva: ILO.

IUCN (International Union for Conservation of 

Nature). 2009. Extinction Crisis Continues 

Apace. Gland: IUCN. http://www.iucn.org/

knowledge/news/?4143/Extinction-crisiscontinues-apace. 

Laffoley, D. d’A., and J. M. Baxter, eds. 2009. 

“Ocean Acidification: The Facts; A Special 

Introductory Guide for Policy Advisers and 

Decision Makers.” Ocean Acidifi cation Reference User Group, European Project on Ocean 

Acidifi cation. 

Layard, R. 2005. Happiness: Lessons from a New 

Science. London: Penguin Press.

Loulou, R., and M. Labriet. 2008. “ETSAPTIAM: The TIMES Integrated Assessment 

Model Part I: Model Structure.” Computational Management Science 5 (1, special issue: 

Managing Energy and the Environment): 

41–66. 

Luderer, G., R. Pietzcker, E. Kriegler, M. Haller, 

and N. Bauer. 2012. “Asia’s Role in Mitigating Climate Change: A Technology and Sector 

Specifi c Analysis with ReMIND-R.” Preprint. 

Madsen, B., N. Carroll, D. Kandy, and G. Bennett. 2011. “Update: State of Biodiversity Markets.” Forest Trends, Washington, DC. 

Marglin, S. 2010. “What’s Wrong with Unlimited 

Growth?” Department of Economics, Harvard 

University, Cambridge, MA. 

WB_354_GG_Overview.indd 26 5/7/12 

2012-08-054_000000000000413
OVERVIEW 2 7

Martin, R., U. J. Wagner, and L. B. de Preux. 

2009. “The Impacts of the Climate Change 

Levy on Business: Evidence from Microdata.” 

CEP Discussion Paper, Centre for Economic 

Performance, London School of Economics, 

London, U.K.

McKinsey and Company. 2011. “Resource Revolution: Meeting the World’s Energy, Materials, 

Food, and Water Needs.” McKinsey Global 

Institute. 

MDB (Multilateral Development Banks) Working 

Group on Climate Finance. 2011. “Mobilizing 

Climate Finance” Paper prepared at the request 

of G20 Finance Ministers. http://climate 

change.worldbank.org/content/mobilizingclimate-fi nance.

MDB (Multilateral Development Banks) Working 

Group on Infrastructure. 2011. “Supporting 

Infrastructure in Developing Countries.” Paper 

submitted to the G20. 

MEA (Millennium Ecosystem Assessment). 2005. 

Ecosystems and Human Well-being: Synthesis. Washington, DC: Island Press.

Milanovic, B. 2010. “Global Inequality Recalculated and Updated: The Effect of New PPP 

Estimates on Global Inequality and 2005 Estimates.” Journal of Economic Inequality. DOI 

10.1007/s10888-010-9155-y.

Myers, N., and J. Kent. 2001. “Perverse Subsidies: How Tax Dollars Can Undercut the 

Environment and the Economy.” International Institute for Sustainable Development, 

Winnipeg. 

Nidumolu, R., C. K. Prahalad, and M. R. Rangaswami. 2009. “Why Sustainability Is Now 

the Key Driver of Innovation.” Harvard Business Review 87 (9, September): 56–64. 

OECD (Organisation for Economic Co-operation 

and Development). 2011a. Agricultural Policy Monitoring and Evaluation 2011. Paris: 

OECD.

———. 2011b. Towards Green Growth. Paris: 

OECD.

Picherta, D., and K. V. Katsikopoulos. 2008. 

“Green Defaults: Information Presentation 

and Pro-Environmental Behaviour.” Journal of 

Environmental Psychology 28: 63–73.

Pimm, S. L., G. J. Russell, J. L. Gittleman, and 

T. M. Brooks. 1995. “The Future of Biodiversity.” Science 269 (5222): 347–50.

Quirion, P. 2011. “Les quotas échangeables d’émission de gaz à effet de serre: Éléments d’analyse 

économique.” Mémoire d’Habilitation à diriger les recherches, Ecole des Hautes Études en 

Sciences Sociales, Paris.

Rozenberg, J., S. Hallegatte, A. Vogt-Schilb, O. 

Sassi, C. Guivarch, H. Waisman, and J-C 

Hourcade. 2010. “Climate Policies as a Hedge 

against the Uncertainty on Future Oil Supply: 

A Letter.” Climatic Change Letters 101 (3): 

663–69.

Sartor, O. 2012. “Carbon Leakage in the Primary 

Aluminium Sector: What Evidence after 61⁄2 

Years of the EU ETS?” CDC Climat Research 

Working Paper 2012-12, Caisse des Dépots, 

Toulouse.

Thaler, R., and C. Sunstein. 2008. Nudge. New 

Haven, CT: Yale University Press.

Transport for London. 2008. “Central London 

Congestion Charging Impacts Monitoring: 

Sixth Annual Report, July 2008.” Mayor of 

London, London. http://www.tfl .gov.uk/assets/

downloads/sixth-annual-impacts-monitoringreport-2008-07.pdf.

Tversky, A., and D. Kahneman. 1992. “Advances 

in Prospect Theory: Cumulative Representation of Uncertainty.” Journal of Risk and 

Uncertainty 5: 297–323.

Tversky, A., and E. Shafi r. 1992. “The Disjunction Effect in Choice under Uncertainty.” Psychological Science 3 (5): 305–09.

UNEP (United Nations Environment Programme). 

2011. Towards a Green Economy: Pathways to 

Sustainable Development and Poverty Eradication. Geneva: UNEP. http://www.unep.org/

greeneconomy.

UNEP (United Nations Environment Programme) 

and Bloomberg New Energy Finance. 2011. 

Global Trends in Renewable Energy Investment 2011. Nairobi: UNEP.

UNESCO (United Nations Educational Scientifi c 

and Cultural Organization) and WWAP (World 

Water Assessment Program). 2006. “Water: A 

Shared Responsibility.” United Nations World 

Water Development Report 2, UNESCO, 

Paris. http://www.unesco.org/water/wwap/

wwdr/wwdr2/table_contents .shtml.

Van Vliet, O., K. Volker, D. McCollum, S. 

Pachauri, Y. Nagai, S. Rao, and K. Riahi. 

Forthcoming 2012. “Synergies in the Asian 

Energy System: Climate Change, Energy Security, Energy Access and Air Pollution.” Energy 

Economics, in press. Published online February 14, 2012.

Victor, P. A. 2008. Managing without Growth: 

Slower by Design, Not Disaster. Cheltenham, 

U.K.: Edward Elgar. 

Wang, X., N. Berrah, S. Mathur, and F. Vinuya. 

2010. Winds of Change: East Asia’s Sustainable 

Energy Future. Washington, DC: World Bank. 

WB_354_GG_Overview.indd 27 5/7/12 

2012-08-054_000000000000414
2 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

World Bank. 2004. “Tunisia Country Environmental Analysis (1992.2003).” Report 25966-

TN, World Bank, Washington, DC.

———. 2005a. “Arab Republic of Egypt Country 

Environmental Analysis (1992.2002).” Report 

31993-EG, World Bank, Washington, DC.

———. 2005b. “China: Second Loess Plateau 

Watershed Rehabilitation Project.” Implementation Completion and Results Report 34612, 

World Bank, Washington, DC.

———. 2006a. “Republic of Bangladesh Country 

Environmental Analysis.” Report 36945-BD, 

World Bank, Washington, DC.

———. 2006b. “Republic of Colombia: Mitigating 

Environmental Degradation to Foster Growth 

and Reduce Inequality.” Report 36345-CO, 

World Bank, Washington, DC.

———. 2006c. “Republic of El Salvador Country 

Environmental Analysis: Improving Environmental Management to Address Trade Liberalization and Infrastructure Expansion.” Report 

35226-SV, World Bank, Washington, DC.

———. 2006d. “Republic of Guatemala Country 

Environmental Analysis: Addressing the Environmental Aspects of Trade and Infrastructure 

Expansion.” Report 36459-GT, World Bank, 

Washington, DC.

———. 2006e. “Nigeria Rapid Country Environmental Analysis (CEA).” World Bank, Washington, DC.

———. 2006f. “Pakistan Country Environmental Analysis.” Report 36946-PK, World Bank, 

Washington, DC.

———. 2007a. “Ghana Country Environmental 

Analysis.” Report 36985-GH, World Bank, 

Washington, DC.

———. 2007b. “Nepal Country Environmental 

Analysis: Strengthening Institutions and Management Systems for Enhanced Environmental 

Governance.” Report 38984-NP, World Bank, 

Washington, DC.

———. 2007c. “Republic of Peru Environmental 

Sustainability: A Key to Poverty Reduction in 

Peru.” Report 40190-PE, World Bank, Washington, DC.

———. 2008. “Tajikistan Country Environmental Analysis.” Report 43465-TJ, World Bank, 

Washington, DC.

———. 2009. “Hashemite Kingdom of Jordan 

Country Environmental Analysis.” Report 

47829-JO, World Bank, Washington, DC.

———. 2010a. “Central African Republic Country Environmental Analysis: Environmental 

Management for Sustainable Growth.” World 

Bank, Washington, DC.

———. 2010b. “The Cost of Environmental Degradation Case Studies from the Middle East 

and North Africa.” Report 56295, World 

Bank, Washington, DC.

———. 2010c. “République du Bénin Analyse 

Environnementale Pays.” Report 58190-BJ, 

World Bank, Washington, DC.

———. 2010d. World Development Report: 

Development and Climate Change. Washington, DC: World Bank. 

———. 2011a. “Republic of Lebanon Country 

Environmental Analysis.” Report 62266-LB, 

World Bank, Washington, DC.

———. 2011b. “South Africa: Economic Update; 

Focus on Green Growth.” World Bank, Washington, DC.

———. 2011c. World Development Indicators. 

Washington, DC: World Bank.

———. Forthcoming a. How Environment Sustains Development: The World Bank Group 

Environment Strategy; Toward a Green, Clean, 

and Resilient World for All. Washington, DC: 

World Bank.

———. Forthcoming b. Maximizing Leverage of 

Public Funds to Unlock Commercial Financing for Clean Energy in East Asia. Washington, DC: World Bank.

World Bank and DRC (Development Research 

Center of the State Council, China). 2012. 

“Seizing the Opportunity of Green Development in China.” Supporting Report 3 for 

China 2030: Building a Modern Harmonious, 

and Creative High-Income Society. Washington, DC: World Bank. http://www-wds.

worldbank.org/external/default/WDSContent 

Server/WDSP/IB/2012/02/28/000356161_ 

20120228001303/Rendered/PDF/671790 

WP0P127500China020300complete.pdf.

World Bank and FAO (Food and Agriculture 

Organization). 2009. “The Sunken Billions: 

The Economic Justification for Fisheries 

Reform.” World Bank, Washington, DC; Food 

and Agricultural Organization, Rome.

World Bank and PPIAF (Public-Private Infrastructure Advisory Facility). 2012. Private Participation in Infrastructure Database. World Bank, 

Washington, DC. http://ppi.worldbank .org/.

WB_354_GG_Overview.indd 28 5/7/12 

2012-08-054_000000000000415
1 An Analytical Framework 

for Inclusive Green Growth

 29

Key Messages

• It is ineffi cient either to pursue growth and 

only later worry about its environmental consequences, or to promote environmental sustainability and subsequently worry about its 

growth implications.

• The analytical case for green growth is strong: 

green policies can indeed contribute to economic growth over the short term, if they are 

designed in an appropriate framework.

• Green policies can contribute to growth 

through four effects: an input effect (increasing production factors), an efficiency effect 

(bringing production closer to the production 

frontier), a stimulus effect (stimulating the 

economy in times of crisis), and an innovation effect (accelerating development and 

adoption of technologies).

• Green policies can also contribute to welfare through direct environmental benefi ts, 

through distributional effects (including

poverty reduction and job creation), and 

through increased resilience to shocks 

(including natural disasters and commodity price volatility). Welfare impacts will be 

greater if efforts are made to make green 

policies inclusive.

China grew at about 10 percent a year 

over the past 30 years, transforming it from a poor country to the 

world’s second-largest economy. Yet, the 

Chinese government is now reconsidering 

the strategy that permitted this economic 

miracle in the hope of greening its development process (World Bank and DRC 2012). 

Two factors motivate this possible change in 

approach. First, the cost of environmental 

degradation, estimated at 9 percent of gross 

domestic product (GDP), is threatening both 

economic competitiveness and welfare. As 

a result, China’s population is demanding 

a cleaner and safer environment. Second, 

China is looking for new sources of growth, 

supported by innovation and higher value 

added production, and wants to be an early 

This chapter is based on Hallegatte and others (2011).

WB_354_GG_CH01.indd 29 5/7/12 

2012-08-054_000000000000416
3 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

mover in the race toward greener production 

processes and products.

China is not the only such country. 

Brazil, Indonesia, Mexico, Morocco, and 

Tunisia are greening their growth process or 

looking to use green industries as sources of 

growth. Ethiopia is developing a green growth 

strategy. Kenya is investing heavily in geothermal power. And many other countries are 

hoping to better balance the environment and 

the economic imperative of rapid growth.

The reality is that the world needs green 

growth, and it needs it now. But what exactly 

does “green growth” mean? Green growth 

can be thought of as economic growth that 

is environmentally sustainable. More specifi cally, it aims to operationalize sustainable 

development by enabling developing countries 

to achieve robust growth without locking 

themselves into unsustainable patterns. The 

World Bank’s environmental strategy defi nes 

green growth as growth that is effi cient, clean, 

and resilient—effi cient in its use of natural 

resources, clean in that it minimizes pollution 

and environmental impacts, and resilient in 

that it accounts for natural hazards and the 

role of environmental management and natural capital in preventing physical disasters.

Importantly, green growth is not inherently inclusive. Its outcome will likely be good 

for the poor, but specifi c policies are needed 

to ensure that the poor are not excluded from 

benefi ts and are not harmed in the transition. 

The welfare impacts of green policies will be 

greater if efforts are made to make the policies inclusive.

Greening growth is essential to achieving 

sustainable development and its objectives 

of social, economic, and environmental sustainability (fi gure 1.1). Economic growth and 

social achievements are widely recognized 

as complementary, but growth and environmental sustainability are often perceived as 

antithetical. Greening growth would reconcile the need for environmental sustainability with that for economic growth and social 

improvement.

Fortunately, many policies provide both 

environmental and economic benefits. 

Informal settlements can pose economic, 

environmental, and social problems. Utilities often refuse to serve them and insecure 

property rights discourage residents from 

investing in establishing connections to water 

or electricity networks. Creating functioning 

land markets with secure land tenure helps 

informal settlers access solid waste removal, 

sanitation and drainage, and drinking water. 

It also increases welfare and labor productivity, both directly and indirectly, by giving 

such settlers greater access to credit and by 

allowing them to invest in small businesses, 

thereby increasing aggregate output. One 

example of the environmental benefits of 

a green growth policy is the World Bank–

fi nanced water quality and pollution control 

project around the Lake of Guarapiranga 

in Brazil. Urban renewal and slum upgrading were critical to improving water quality, 

which in turn provided a reliable water supply source for the city of São Paulo.

Most green growth policies are environmental policies in the sense that their primary 

objective is to preserve the environment. But 

not all of them are. Policies that improve 

energy security or reduce urban congestion, 

for example, may yield substantial environmental benefi ts even if doing so is not their 

primary objective.

Many observers have argued that environmental issues will “solve themselves” with 

economic development. This chapter examines the flaws in the “grow now, clean up 

later” argument and discusses what growth 

theory and evidence reveal about the compatibility of environmentally sustainable 

policies and growth. It investigates whether 

green growth is in fact feasible—beginning 

with the analytical case for green growth 

before reviewing the implications for welfare, 

the ultimate goal of economic policy—and 

explores how to identify trade-offs and synergies implied by a green growth strategy.

Why not grow now and clean 

up later?

The “grow now, clean up later” argument 

is based on the idea that environmental 

quality first deteriorates with growth and 

WB_354_GG_CH01.indd 30 5/7/12 

2012-08-054_000000000000417
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 3 1

then improves—an environmental Kuznets curve.1 In this framework, the environment eventually improves as national 

income rises because the environment is a 

“superior good” (a good whose consumption increases more than proportionately 

with income).2 The framework implies that 

poor people care less about the environment 

than wealthier people, give priority to consumption over environmental quality, and 

act upon these preferences. Once basic needs 

have been met, this argument goes, people 

place greater weight on the environment, 

leading to investments in environmental 

protection and clean-up that increase environmental quality, assuming appropriate 

collective action proves possible. Economic 

growth will therefore automatically lead 

countries to environmental protection.

There are serious fl aws in this argument. 

First, a distinction needs to be made between 

environmental impacts that affect welfare 

through income and consumption and those 

that affect welfare through the amenity value 

of environmental assets. In urban areas, poor 

households that struggle to feed and house 

themselves will indeed place a lower priority on the amenities provided by a park than 

wealthier households might. However, they 

care deeply about the absence of solid waste 

management and its results—dengue epidemics, clogged urban drains, and the destruction 

of their homes and small businesses by fl oods. 

In rural areas, protecting forests to prevent the 

extinction of rare animals may not be a priority for households that struggle to feed themselves (unless of course the poor can share in 

the benefi ts from wildlife protection). But the 

same households are likely to care about protecting soil quality and managing water fl ows, 

which allow them to grow crops.

Second, even when poor communities care 

about the environment, they may not have 

the “voice” to make their concerns heard. 

Policies implemented in developing countries may be more representative of the preferences of the elite than of the poor or may 

refl ect institutional constraints, such as those 

imposed by poorly defi ned property rights (as 

in open access resources).

Third, it is difficult to infer preferences 

about collective goods from individual behavior. Cities offer many more jobs and opportunities than rural areas but also much higher 

levels of local pollution. The fact that people 

move from rural areas to cities does not mean 

they would not prefer slightly fewer opportunities and higher environmental quality. Their 

preferences are not completely revealed by 

the binary choice of “moving or not moving 

to the city,” because they do not have a continuum of choices of increasing opportunities 

and decreasing environmental quality.

Fourth, because the infl uence of environmental quality and welfare is often indirect, 

people may not link environmental problems 

(such as water or soil quality) to the health 

problems they confront.3 Better information, not just higher incomes, may be needed 

if individuals are to demand higher environmental quality at earlier stages of development. Even developed countries are only 

beginning to address the complex issue of 

Social

sustainability

Environmental

sustainability

Sustainable

development

Economic

sustainability

FIGURE 1.1 The three pillars of sustainable development

Note: Economic and social sustainability, on the one hand, and social and environmental sustainability, 

on the other, have been found to be not only compatible, but also largely complementary. Not so 

with economic and environmental sustainability, as growth has come largely at the expense of the 

environment—hence, the dotted line on this fi gure—which is why green growth aims to ensure that 

economic and environmental sustainability are compatible.

WB_354_GG_CH01.indd 31 5/7/12 

2012-08-054_000000000000418
3 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

the environmental damages of pesticides and 

chemicals.

Fifth, although some dimensions of environmental quality improve with average 

income, many others do not. Local environmental issues with short-term, highly visible 

manifestations (such as local air and some 

types of water pollution) are usually resolved 

spontaneously as countries develop. In contrast, global public goods with long-term 

consequences (such as climate change or biodiversity) and local environmental issues with 

complex and less visible consequences can keep 

getting worse (box 1.1).

The case of Costa Rica illustrates the 

contrast between local, visible pollutants 

and global ones. In 1978, when per capita 

GDP was about $2,200, emissions of nitrogen oxides (NOx) and sulfur dioxide (SO2) 

peaked, before leveling off and then declining slightly. Over the same period, however, 

carbon dioxide (CO2) emissions continued to 

rise (fi gure 1.2).

Delaying action can be costly

Making the “grow now and clean up later” 

argument even less palatable is the fact 

that it may simply be too costly to do so. 

Indeed, it may be more economical to 

reduce or prevent pollution at an early stage 

of growth than to incur the higher clean-up 

costs at later stages, even when future costs 

and benefi ts are discounted. Acting early is 

critical when the choice of technology and 

infrastructure can “lock in” high-carbon 

or polluting lifestyles or economic structures. This issue is particularly relevant in 

developing countries, where most of the 

infrastructure will be built in the next few 

decades.

As for climate change, a variety of 

experts have studied the optimal timing of 

action (Nordhaus 1992; Wigley and others 

1996). Prematurely depreciating investments 

can be costly if climate change turns out 

to be less threatening than expected or if 

the discount rate used to calculate future 

losses is too low. But early action may well 

result in savings. Lecocq and others (1998) 

fi nd that in the absence of perfect foresight, 

specifi c policies regarding green infrastructure and long-lived capital must be adopted 

early to achieve mitigation objectives at a 

lower cost. Jaccard and Rivers (2007) show 

that early action is preferable in long-lived 

BOX 1.1 Persistent concerns about local pollution in high-income countries

Complex and “invisible” local environmental issues 

do not necessarily improve with income. In countries 

like France, efforts to understand the transfer of 

pesticides to the environment (mostly water bodies) 

began only some 20 years ago, under the pressure 

of a European Union Directive regulating drinking 

water (Aubertot and others 2005). Soil contamination is harder to monitor and can lead to severe 

long-term environmental and health hazards, as the 

example of the insecticide chlordecone illustrates.

Chlordecone, which was banned only recently, 

was used extensively in the French West Indies 

for more than 30 years, exposing the population 

to severe health hazards (Multignier and others 

2010). The chemical remains in the soil for decades, 

polluting water and agricultural productions, and 

contains known carcinogenics (Aubertot and others 

2005; Multignier and others 2010).

In the United States, the Safe Drinking Water Act 

regulates only 91 contaminants, despite the fact that 

more than 60,000 chemicals are used within the 

country’s borders. Scientists have examined many of 

these chemicals and have identifi ed hundreds associated with a risk of cancer and other diseases at small 

concentrations in drinking water, according to an 

analysis of government records by the New York 

Times (Duhigg 2009). The implication is that millions of Americans are exposed to water that does 

not meet safety standards meant to protect against 

cancer or other serious diseases.

WB_354_GG_CH01.indd 32 5/7/12 

2012-08-054_000000000000419
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 3 3

FIGURE 1.2 Global pollutants and local, visible 

ones follow diff erent paths 

(relationship between GDP and emissions in Costa Rica, 

1970–2009)

0

10

20

30

40

50

60

70

4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000

GDP per capita (constant year 2000 $, PPP)

SO2 and NOx emissions (thousand tons)

0

1

2

3

4

5

6

7

CO2 emissions (million tons)

NOx emissions (left)

CO2 emissions (right)

SO2 emissions (left)

Source: Based on data from the International Energy Agency, the Joint 

Research Center, and World Development Indicators.

capital sectors, such as infrastructure and 

urbanization, even if marginal costs are 

higher there. Denser cities have lower CO2

emissions from transportation (fi gure 1.3). 

But Gusdorf and others (2008) find that 

infl uencing the shape and density of cities 

(“changing urban forms”) to make them 

less energy consuming is extremely costly. 

Developing countries would therefore do 

well to prevent their cities from growing in 

a low-density manner dependent on automobiles if their target for the end of the 

21st century is to have high-density, energyeffi cient cities.

One measure of the importance of early 

action is provided by Davis and others (2010), 

who estimate that without early scrapping, 

existing energy infrastructure commits us 

to warming of about 1.3°C above preindustrial temperatures. Introducing other types of 

infrastructure (including the capital that constrains the demand for transport, such as distant suburbs) and non-CO2 gases, Guivarch 

and Hallegatte (2011) estimate this “commitment” at 1.7°C. These results imply that 

keeping the increase in global warming below 

2°C (the internationally recognized objective of climate policies [World Bank 2009]) 

requires that almost all new infrastructure 

be designed with climate change in mind 

and that urgent action be taken on long-lived 

infrastructure. In the absence of such action, 

physical capital will have to be replaced earlier, at great cost.

Another argument for early action has to 

do with the fact that the needed technologies will not become affordable unless there 

is suffi cient demand to deploy them to scale. 

Countries or fi rms may be tempted to wait 

for better and less expensive technologies to 

become available. But these technologies will 

be developed only if serious commitments to 

pollution reduction are made (Goulder and 

Mathai 2000; Manne and Richels 2004; Sue 

Wing 2006). Early action is thus justifi ed by 

the technological changes that action would 

induce. Developing these technologies is a 

critical role of high-income countries and the 

main reason why they need to act quickly on 

issues such as climate change.

And even worse, some damages cannot be 

reversed. In such cases, investments in environmental quality protection can be necessary in the short term. In Kenya, for example, traditional forests are being destroyed. 

Replanting can restore the country’s water 

tower and other functions, but most biodiversity losses are probably irreversible (Chapin 

and others 2000).

Climate change itself may be irreversible. 

This irreversibility is a clear incentive for early 

action, as the consequences of warming exceeding 2°C are highly uncertain and potentially 

severe (Ambrosi and others 2003; Ha-Duong 

and others 1997; World Bank 2009). The 2°C 

objective, for example, is achievable only if signifi cant emission reductions can be made before 

2030 (Meinshausen and others 2009; O’Neill 

and others 2009). 

If growing dirty now and cleaning up later 

is not an option, then what is needed are joint 

green and growth policies. It is inefficient 

to pursue growth and then worry about its 

environmental consequences or to promote 

environmental sustainability and then worry 

about its growth implications. But the possibility to green growth has been questioned. 

The next section provides a framework to 

investigate the potential for greening growth 

without slowing it.

WB_354_GG_CH01.indd 33 5/7/12 

2012-08-054_000000000000420
3 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Is green growth really possible? 

The analytical basis

Modern growth theory dates back to 

1956, when Robert Solow put forward a 

formal model that suggested that growth 

in output—GDP—comes from increases 

in physical capital, labor, and productivity (box 1.2). In this model, physical capital increases thanks to investment. Labor 

increases as a result of population growth, 

greater labor force participation, and better health and education. And productivity 

increases thanks to technological change—

which can stem from investments in education and research and development (R&D), 

economies of scale, and learning by doing.

What is missing in this model, however, is 

the notion that economic production depends 

directly on the stock of natural resources 

and the quality of the environment—that 

is, that the environment is a factor in the 

production function. This notion has been 

around at least since Malthus ([1798] 1965), 

but it was not until the early 1970s that 

classical growth theory was modified to 

embrace the environment— referred to as 

“natural capital”—as a factor of production 

(Dasgupta and Heal 1974; Nordhaus 1974; 

Solow 1974).4 If the environment is considered as productive capital, it makes sense to 

invest in it, and environmental policies can be 

considered as investment.

In this “greener” framework, environmental policies increase economic output directly 

by improving environmental conditions (for 

example, better forestry management reduces 

soil erosion, leading to more productive agriculture). Failure to manage the environment 

results in the depreciation and destruction of 

natural capital, with direct adverse impacts 

on output. Cleaning up the environment 

also increases human well-being directly, by 

improving air and water quality and reducing 

exposure to natural hazards, although these 

benefi ts are not necessarily captured by conventional (GDP) statistics.

Whether investing in the environment 

increases only the level of production or also 

its rate of growth is likely to depend on the 

context in which the investment is made. 

Where credit constraints limit output growth, 

investing in the environment will accelerate 

Atlanta

Houston

5,000

6,000

7,000

8,000

San Francisco

Los Angeles

Toronto

Riyadh

Brussels

Bangkok

Singapore

São Paulo Seoul Curitiba

Barcelona Hong Kong, China

Tunis

Manila

Chennai

Mumbai

1,000

2,000

3,000

4,000

0

0

50 100 150 200 250 300 350 400

per capita transport emissions (kg CO2)

population density (persons per hectare)

FIGURE 1.3 The denser the city, the lower the transportation emissions 

(relationship between urban density and per capita emissions)

Source: Kenworthy and Laube 2001.

WB_354_GG_CH01.indd 34 5/7/12 

2012-08-054_000000000000421
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 3 5

BOX 1.2 An economic framework for green growth

Classical growth theory (Solow 1956) assumes that 

output (Y) is produced using technology (A), physical capital (K), and labor (L). The relationship can 

be written as follows:

Y = f (A, K, L).

Growth in output results from increases in production factors (physical capital and labor) and 

productivity, which rises as a result of technological change, including changes in organization and 

practices. In this approach, the environment plays no 

productive role.

The idea that economic production depends 

directly on the stock of natural resources and 

the quality of the environment—that is, that the 

environment is an argument in the production 

function—has been around at least since Malthus 

(1798). It was further developed in the environmental economics literature that took off in the early 

1970s. In this approach, the environment becomes 

“natural capital,” an input in economic production 

and growth. The production function can thus be 

rewritten as follows:

Y = f (A, K, L, E),

where E represents the environment (natural 

capital).

To analyze the effect of green growth policies, 

however, growth models need to be modified to 

incorporate market failures and the fact that the 

economy is not at its optimal equilibrium. A fi rst 

modifi cation replaces the production function with 

the production frontier—the maximum production 

level possible with the available technology, physical capital, labor, and environment, assuming maximum effi ciency. Actual production is given by

Y = y f (A, K, L, E),

where y (a value between 0 and 1) measures the effi -

ciency of the production process.

A second modifi cation introduces PE, which can 

be thought of as the effort dedicated to environmental policies:

Y = y (PE) f [A (PE), K (PE), L (PE), E (PE)].

In this case, environmental policies can create synergies with economic output by increasing productive 

capital (K, L, and E), improving effi ciency y, and 

accelerating technological change by increasing A.

Ultimately, it is welfare that matters, not output. 

This means that the model needs to account for the 

impact of output on welfare (or utility, U). As investment does not increase welfare directly, utility can 

be modeled as depending only on the current level 

of consumption, C, plus the direct effect of the environment, E:

U = u (C, E).

In practice, environmental policies can affect 

utility directly (positively or negatively), with effects 

that are not mediated by aggregate consumption or 

the state of the environment such as distributional 

impacts or increased resilience. The utility function 

can thus be written as follows:

U = u (C, E, PE).

Distribution (how total consumption is distributed across individuals) and volatility (how total 

consumption is distributed over time) affect welfare 

and can be influenced directly by environmental 

policies. Everything else equal, many people favor 

stable consumption patterns and lower consumption 

inequality; the utility function can thus include an 

aversion for risk and inequality.

Sources: Hallegatte and others 2011 and World Bank.

growth, because a higher production level 

increases income and savings. Where growth 

is limited by investment opportunities, it will 

fail to boost growth, because institutions are 

not in place to allow investors to benefi t from 

their investment revenues. Where people are 

engaged in low-return activities, a limited 

increase in the production level may improve 

welfare but will not spur economic growth, 

because these economic activities do not generate suffi cient returns to allow households to 

save and accumulate assets.

A key question in this framework is the 

extent to which production factors are complements or substitutes. If they are complements (or weak substitutes), protecting the 

environment is necessary to maintain economic production. If they are substitutes, in 

WB_354_GG_CH01.indd 35 5/7/12 

2012-08-054_000000000000422
3 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

principle, increased investment in physical 

or human capital or technological change 

can compensate for damage to the environment. In fact, the ability to do so appears 

limited.5 Food production requires soil and 

water, even if technology and increased labor 

intensity can reduce the quantities needed. 

The low elasticity of substitution between 

natural capital and other inputs implies that 

a small percentage increase in natural capital 

can free large percentage quantities of other 

inputs.6

While direct economic benefi ts from environmental policies occur mainly over the 

long term, green policies can also contribute 

to short-term economic growth because the 

world’s economies perform far from their 

optimum levels. Indeed, many market failures hurt both the environment (by reducing 

the effective supply of natural capital) and 

the economy (by causing an extremely ineffi cient use of natural resources). Correcting 

these market failures, although sometimes 

costly, can increase efficiency and yield 

benefits that go beyond the environment. 

An example is urban congestion, which not 

only causes air pollution but also reduces 

the productivity and economies of scope 

cities provide. The reality is that the use 

and management of “natural capital” are 

plagued by extensive market failures, such 

as unpriced externalities and poorly defi ned 

property rights.

The problem for analysts is that models 

of economic growth usually fail to capture environmental contributions, partly 

because they generally ignore the role of 

natural capital and partly because they 

assume a world with no market failures. As 

the potential for green policies to accelerate 

income growth arises from market failures, 

such models cannot be used to assess the 

impact of such policies.

A real-world framework for 

green growth

To be useful for analyzing the effect of 

green growth policies, a broader framework 

is needed that is modified to account for 

market failures and other suboptimalities, 

such as the following:

• Knowledge spillovers and economies 

of scale that lead to underinvestment in 

R&D

• Underutilization of physical capital or 

labor, for temporary (crisis) or structural 

reasons

• Behavioral biases, such as the inability 

to make decisions about low-probability 

events (Camerer and Kunreuther 1989; 

Tversky and Shafi r 1992)

• Other market failures, such as principalagent issues, information asymmetry in 

capital markets, and coordination failures.

Actual economic output depends on the 

“production frontier” (the maximum production level possible with the available 

technology, physical capital, labor, and environment, assuming maximum efficiency) 

and on effi ciency (how close the real-world 

production system actually is to the production frontier).

Green growth policies can thus be seen as 

policies that move the economy away from 

suboptimalities and increase effi ciency—and 

hence contribute to short-term growth—

while protecting the environment. Suboptimalities often persist because removing 

them is complex or requires large upfront 

investments. Assessing the possibility to correct these market failures requires devoting 

attention to their causes, to institutional and 

political obstacles, and to transaction costs.

How do environmental policies increase 

conventionally measured GDP? They do 

so through four channels linked to input, 

effi ciency, stimulus, and innovation effects. 

Figure 1.4 illustrates each of these effects.

Input eff ect

The input channel works by increasing the 

quantity of natural, human (labor), and physical capital (arrow i in fi gure 1.4). Specifi cally, 

green policies can achieve the following:

• Increase natural capital through better 

management of scarce resources. Individual 

transferable fi shing quotas, for example, 

WB_354_GG_CH01.indd 36 5/7/12 

2012-08-054_000000000000423
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 3 7

help maintain and even increase fi sheries and thus the economic activity that 

depends on them (box 1.3).

• Increase labor by improving health 

(Hanna 2011). Better environmental policies can decrease atmospheric pollution in 

cities, reduce the severity and incidence of 

respiratory diseases, increase labor effectiveness, and reduce days lost to illness. A 

study on the link between air pollution and 

labor productivity on farms in California 

shows that a decrease in ozone concentrations of 10 parts per billion (for an average value of 50 parts per billion) increased 

worker productivity by 4.2 percent (Graff 

Zivin and Neidell 2011).

• Increase physical capital by better managing natural risks, which in turn leads 

to lower capital losses from natural 

disasters (Hallegatte and others 2007). 

Protecting mangroves, for instance, not 

only protects biodiversity, it can also 

improve the resilience of coastal zones 

to hurricanes and storm surges, thereby 

reducing economic losses caused by 

coastal fl oods.

Effi ciency eff ect

The efficiency channel works by increasing productivity, through correcting market failures and infl uencing behaviors, and 

by enhancing the effi ciency of resource use 

(arrow ii in figure 1.4). One example is 

energy efficiency. Many firms and households fail to make cost-effective energyefficiency investments—probably because 

of market failures and behavioral biases 

(Gillingham and others 2009). Improving 

the insulation of new buildings is often costeffective, but firms and households often 

fail to do so because of a lack of information and the fact that building and housing 

prices do not adequately refl ect differences 

in heating costs. Environmental policies 

that aim to reduce energy consumption and 

carbon emissions may correct these market 

output

production frontier 

suboptimal production

Z

maximum 

output

actual 

output

(i)

shifted production frontier 

(iii)

(ii)

enhanced efficiency

Z = composite of human (labor), physical,

and natural capital 

Note: Arrow (i) represents increase in factors of production. Arrow (ii) represents enhanced effi ciency and stimulus eff ect. Arrow (iii) represents shift in 

 production frontier.

FIGURE 1.4 Green policies hold the potential to sharply boost output

WB_354_GG_CH01.indd 37 5/7/12 

2012-08-054_000000000000424
3 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 1.3 Using individual transferable quotas to revitalize fi sheries

Lack of property rights in the sea has led to overfi shing—in some cases with devastating results. The 

use of individual transferable quotas (ITQs) can correct this market failure, increasing both output and 

employment in the fi shing industry.

ITQs operate by setting a cap on the total allowable catch (TAC). The cap is set at a level that is 

consistent with the long-term survival of the species 

(that is, less than the rate of growth of the fi sh stock). 

Once a TAC is set, it is divided into individual quotas, the amounts that particular boats or skippers 

can catch. Only quota owners are allowed to fi sh. 

If the TAC changes from year to year, the number 

of tons represented by the quota also changes, but 

the fraction of the TAC assigned to individuals does 

not. These quotas are transferable: they can be sold, 

given, or bequeathed to others. (A related approach 

is that of “catch shares,” under which each boat or 

owner is entitled to a share of the TAC but the shares 

are not transferable.)

The value of the ITQ depends on the productivity of a fi shery—1 percent of a thriving and productive fi shery with large fi sh stocks is worth far more 

than 1 percent of an almost-extinct fi shery. The ITQ 

system thus provides an incentive for quota owners (fi shers) to invest in the long-run health of their 

fi shery. The quotas generally represent a substantial 

share of fi shers’ wealth; if they overexploit the fi shery, they thus risk impoverishing themselves. Under 

this system, they have an incentive to leave fi sh in the 

water to breed and generate future catch, an incentive they otherwise lack. ITQs align the interests of 

fi shers and the fi shery, generally improving both the 

health of the fi shery and the profi ts of the men and 

women who depend on it.

Are ITQs making a difference? In studies of more 

than 11,000 fi sheries, 121 of which had instituted 

ITQs, Costello and others (2008) and Heal and 

Schlenker (2008) fi nd a substantial increase in catch 

within a few years of the implementation of ITQs 

and a signifi cant decrease in the chance of a fi shery 

collapsing once it is managed as an ITQ. On average, 

within 17 years of implementing an ITQ, the catch 

at fi sheries with ITQs rose by a factor of fi ve, with 

yields of some fi sheries rising by a factor of 200. The 

institution of ITQs allows fi sheries to prosper, generating better livelihoods for the people who work in 

them and more food for the world as a whole.

failures or infl uence these behaviors, leading to less environmental damage and to 

a more efficient economy, with a higher 

growth potential.

Stimulus eff ect

The stimulus channel can occur during an 

economic recession, when capacity utilization and employment are low (also arrow 

ii in fi gure 1.4). Large investments in green 

infrastructure increase demand, potentially increasing employment over the short 

term (Zenghelis 2011). Underemployment 

is not always related to demand, however; 

it can be structural, especially in developing countries.7 In this case, a stimulus 

may prove costly and do little to increase 

employment.

Innovation eff ect

Environmental policies can shift the production frontier (increasing the potential 

output the economy can produce) by accelerating the development and dissemination of innovation and creating knowledge 

spillovers (arrow iii in figure 1.4).8 Given 

that investments in knowledge tend to 

be lower than desirable in the absence of 

public intervention, policies that encourage green technologies can thus usefully 

increase R&D (Acemoglu and others 2012; 

Fischer and Newell 2008; Gerlagh 2006; 

Otto and Reilly 2008).9 (The opposite effect 

is also possible, as research on green technologies could crowd out research on other 

productivity-increasing technologies [Popp 

and others 2009].) The innovation effect is 

WB_354_GG_CH01.indd 38 5/7/12 

2012-08-054_000000000000425
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 3 9

illustrated by investments in R&D on photovoltaic power motivated by the desire to 

mitigate greenhouse gas emissions. Success 

could make photovoltaics competitive with 

fossil fuels, increase the supply of electric 

power, and reduce the cost of providing 

electric power to remote off-grid communities (see chapter 6).

At the same time, the costs associated 

with environmental efforts create a trade-off 

between environmental protection and economic production. For example, environmental efforts may have the following effects:

• Reduced productivity, by causing producers to use more expensive or less productive technologies or by crowding out 

R&D in nonenvironmental domains.

• Early retirement of physical capital 

based on polluting technologies (Grubb 

and others 1995; Jaccard and Rivers 

2007). This effect can be represented as 

a decrease in capital or an increase in 

capital depreciation. In addition to the 

direct cost, the increase in investment 

needed to replace retired capital reduces 

consumption—and thus welfare—at 

least over the short term.

• Increases in the pricing of some goods 

and services, altering relative prices. 

By changing the structure of demand, 

environmental policies may reduce the 

ability of the structure of production to 

meet demand. For example, policies may 

reduce demand in some sectors that have 

a high production capacity (such as road 

transport) and may increase demand in 

sectors that have more limited production capacity (such as public transportation). This effect can be measured as 

lower effi ciency.

These costs, and their assessment, 

depend on the defi nition of economic output. In a green accounting framework that 

includes valuation of ecosystem services, a 

reduction in economic productivity because 

of environmental regulations can be more 

than compensated for by a reduction in 

externalities—through, for example, the 

preservation of ecosystem services (a topic 

explored in chapter 2).

What about welfare?

Ultimately, however, what matters is welfare, not output. The next step, therefore, 

is to broaden the framework to take into 

account the impact of the environment on 

welfare (or utility), which can be positive or 

negative. Welfare can be assessed by viewing utility as depending on the current level 

of consumption and the direct effect of the 

environment (through its health effects and 

amenity value).

Welfare also depends on income distribution and employment. As such, analysts must 

take into account the fact that environmental 

policies may affect different social groups or 

regions differently. These policies may create jobs for some types of workers in some 

regions and eliminate jobs for other types 

of workers in other regions. Because women 

tend to be more dependent on common property resources and more vulnerable to the 

impacts of natural resource degradation than 

men (Foa 2009), environmental protection 

and green policies can also help improve gender equality, with many economic and social 

co-benefits. These distributive effects have 

both social and political economy implications that may require the implementation 

of complementary policies to compensate 

losers (see chapter 2). If compensatory fi nancial transfers are possible at zero cost and 

labor markets are perfect, efficiency can 

be separated from equity. If such transfers 

are impossible or costly and labor markets 

are imperfect, it is necessary to pursue effi -

ciency and equity simultaneously, which may 

require setting more modest goals (Goulder 

and Parry 2008).

Analysts must also factor in the fact 

that environmental policies can increase 

or decrease volatility. These policies can 

create shocks in the economy and can 

distort intertemporal trade-offs. But they 

can also reduce potential risks to growth 

by increasing resilience to environmental 

WB_354_GG_CH01.indd 39 5/7/12 

2012-08-054_000000000000426
4 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

shocks (such as natural disasters) or economic shocks (such as oil shocks or spikes 

in commodity prices) (box 1.4).10 In so 

doing, they can stabilize output and consumption, increasing welfare if risk aversion is accounted for.

Trade-off s and synergies between green policies and 

growth

Armed with this framework for green growth, 

how do policy makers weigh the trade-offs 

between the costs (possible reductions in 

investments, income, and consumption) and 

benefi ts (possible improvements on the environmental, social, and economic fronts)? 

Given that the net impact varies depending 

on the policy considered, the context, and 

the time horizon,11 a start is classifying the 

potential benefi ts of green growth policies, as 

done in table 1.1. In a green growth context, 

any new policy should be examined for ways 

to maximize the potential for short-term benefi ts while minimizing the costs.

Measuring the net impacts of green growth 

policies also requires capturing suboptimal 

conditions caused by market or government 

failures or nonrational behaviors. Models 

based on fi rst-best assumptions (perfect markets, rational expectations, and so forth) can 

assess the costs of these policies in a perfect 

world; they cannot be used to estimate their 

benefi ts.

The balance between costs and benefits 

will be affected by how they are defi ned. In 

a narrow economic framework, a policy to 

protect a mangrove forest has an economic 

opportunity cost (because it prevents shrimp 

farming or tourism development, for example) and no direct benefi t. In contrast, in a 

framework that includes the valuation of 

ecosystem services, the policy also has economic benefi ts, including protection against 

coastal storms, the creation or maintenance 

of a breeding ground for fisheries, and the 

availability of wood for the local community. 

The “green accounting” approach incorporates the valuation of ecosystem services into 

national accounts, thereby providing a much 

BOX 1.4 Reducing vulnerability to oil shocks by increasing energy effi ciency

The vulnerability of the world economy to oil shocks 

has diminished since the 1970s (Nordhaus 2007). 

Possible explanations for this decline include the 

decrease in the average oil intensity of world GDP; 

the increased flexibility of labor markets (in particular wages), so that pass-through infl ation is less 

likely for a given monetary policy; a change in the 

nature of oil shocks (the 1973 and 1979 shocks followed supply disruptions; the 2008 shock resulted 

from increased demand from emerging markets); and 

improved confi dence in monetary policy, which stabilized infl ationary expectations as a result of nearly 

three decades of low and stable infl ation (Blanchard 

and Gali 2010; Gregorio and others 2007).

Specifi c energy security policies drove the decrease 

in GDP oil intensity. In some countries, higher taxes 

on gasoline consumption reduced oil consumption. 

In others, norms and regulations reduced energy 

consumption by cars, industries, and the residential 

sector.

Over the longer term, climate policies may have 

similar results: by driving technological change and 

investment away from oil-intensive patterns, these 

policies reduce oil consumption and vulnerability 

to oil shocks (Rozenberg and others 2010). Climate 

policies can thus reduce vulnerability to oil scarcity and uncertainty over oil reserves. In particular, such policies might reduce the obsolescence of 

capital in case of large changes in energy prices. 

Cities that are denser, less dependent on individual 

vehicles, and less energy consuming are also less 

vulnerable to volatility in oil prices (Gusdorf and 

Hallegatte 2007). Climate policies and other policies aiming at higher effi ciency in the use of natural 

resources can thus increase the security and resilience of the economy.

WB_354_GG_CH01.indd 40 5/7/12 

2012-08-054_000000000000427
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 4 1

better measure of trade-offs than traditional 

national income accounting. As such, it is 

central to green growth strategies.

In sum, although many observers fear that 

green policies require incurring large costs 

now for benefi ts that will materialize only in 

the long term, the reality is that many of the 

benefi ts can occur in the short and medium 

term. Moreover, green policies can contribute 

to growth. Action therefore needs to be taken 

now—at least on issues that carry a risk of 

lock-in and irreversibility—to minimize 

regret and avoid costly policy reversals. In 

the next two chapters, we look at the crosscutting issues of market and governance, 

beginning with the range of tools that can be 

marshaled to change behavior with respect to 

environmental and natural resources—tools 

that aim to improve social welfare through 

greener growth.

Notes

 1. Kuznets argued that as a country develops and national income rises, inequality 

increases, but once a certain national income 

level is reached, inequality then declines. His 

now disproved theory was extended to the 

environment, where it has also been rejected 

(Andreoni and Levinson 2001; Barbier 1997; 

Brock and Taylor 2010). 

 2. Another common interpretation is that the 

environmental Kuznets curve refl ects structural transformation of an economy. As 

economies become more industrial, environTABLE 1.1 Potential benefi ts of green growth policies

Type of benefi t Impact on welfare Channels through which policy aff ects welfare 

Environmental Increases welfare directly Improved environment 

Economic Increases welfare by raising income Increase in factors of production (physical capital, 

human capital, and natural capital)

Accelerated innovation, through correcting market 

failures in knowledge

Enhanced effi ciency, through correcting 

nonenvironmental market failures and infl uencing 

behaviors

Social Increases welfare through distributional eff ects, 

reduced volatility, and other social indicators

Increased resilience to natural disasters, commodity 

price volatility, and economic crises

Job creation and poverty reduction 

mental quality deteriorates. But as economies 

shift from industry to services, environmental 

quality improves.

 3. In some cases, even specialists debate the 

importance of these relationships.

 4. Later efforts to explicitly model the environment into an endogenous growth framework include work by Smulders (1994) and 

Bovenberg and Smulders (1996); for a review, 

see Smulders (1999). 

 5. Few studies examine the potential for substituting other inputs for natural capital 

(Markandya and Pedroso-Galinato 2007).

 6. It may be possible to compensate for the loss 

of natural capital with other types of capital 

in the short term but not the long term. An 

example would be increasing the use of fertilizer to compensate for soil degradation—

a short-term solution that is not sustainable 

over the long term.

 7. For an illustration of this point in the context 

of South Africa, see World Bank (2011).

 8. This argument on the impact of green policies 

on productivity is the macro-scale equivalent 

of the Porter hypothesis (Porter and van der 

Linde 1995), which states that regulation 

can enhance innovation and business performance at the micro scale (for a review, see 

Ambec and others 2011).

 9. A frequently asked question is whether public support of green innovation should target 

green innovation or general innovation. The 

opposite question—can green innovation 

policies accelerate innovation in general?—is 

posed here.

10. Hallegatte (2011) suggests that development 

can increase or decrease risk, depending 

WB_354_GG_CH01.indd 41 5/7/12 

2012-08-054_000000000000428
4 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

on its structure and pattern. Green growth 

strategies aim to make development risk 

decreasing, thereby increasing the resilience 

of the economic system.

11. For instance, the GDP losses associated with 

a carbon tax differ widely depending on how 

tax revenues are used (Goulder 1995). 

References

Acemoglu, D., P. Aghion, L. Bursztyn, and 

D. Hemous. 2012. “The Environment and 

Directed Technical Change.” American 

Economic Review 102 (1): 131–66.

Ambec, S., M. A. Cohen, S. Elgie, and 

P. Lanoie. 2011. The Porter Hypothesis at 

20: Can Environmental Regulation Enhance 

Innovation and Competitiveness? Washington, 

DC: Resources for the Future.

Ambrosi P., J.-C. Hourcade, S. Hallegatte, 

F. Lecocq, P. Dumas, and M. Ha Duong. 2003. 

“Optimal Control Models and Elicitation 

of Attitudes towards Climate Damages.” 

Environmental Modeling and Assessment

8 (3): 133–47.

Andreoni, J., and A. Levinson. 2001. “The Simple 

Analytics of the Environmental Kuznets 

Curve.” Journal of Public Economics 80 (2): 

269–86.

Aubertot J. N., J. M. Barbier, A. Carpentier, 

J. J. Gril, L. Guichard, P. Lucas, S. Savary, 

I. Savini, and M. Voltz., ed. 2005. Pesticides, 

agriculture et environnement: réduire 

l’utilisation des pesticides et limiter leurs 

impacts environnementaux. Expertise 

scientifique collective, synthèse du rapport, 

INRA et Cemagref (France).

Barbier, E. 1997. “Environmental Kuznets Curve 

Special Issue: Introduction.” Environment and 

Development Economics 2: 369–81.

Blanchard, O. J., and J. Gali. 2010. “The 

Macroeconomic Effects of Oil Price Shocks: 

Why Are the 2000s So Different from the 

1970s?” NBER Working Paper 13368, 

National Bureau of Economic Research, 

Cambridge, MA.

Bovenberg, A. L., and S. Smulders. 1996. 

“Transitional Impacts of Environmental Policy in 

an Endogenous Growth Model.” International 

Economic Review 37 (4): 861–95.

Brock, W. A., and M. S. Taylor. 2010. “The Green 

Solow Model.” Journal of Economic Growth

15 (2): 127–53.

Camerer, C., and H. Kunreuther. 1989. “Decision 

Processes for Low Probability Events: Policy 

Implications.” Journal of Policy Analysis and 

Management 8 (4): 565–92.

Chapin, F. S., III, E. S. Zavaleta, V. T. Eviner, 

R. L. Naylor, P. M. Vitousek, H. L. Reynolds, 

D. U. Hooper, S. Lavorel, O. E. Sala, S. E. 

Hobbie, M. C. Mack, and S. Diaz. 2000. 

“Consequences of Changing Biodiversity.” 

Nature 405: 234–42.

Costello, C., S. D. Gaines, and J. Lynham. 

2008. “Can Catch Shares Prevent Fisheries 

Collapse?” Science 321 (5896): 1678–81.

Dasgupta, P., and G. Heal. 1974. “Optimal 

Depletion of Exhaustible Resources.” The

Review of Economic Studies 41 (1974): 3–28. 

http://www.jstor.org/stable/2296369.

Davis, K., S. J. Caldeira, and H. D. Matthews. 

2010. “Future CO2 Emissions and Climate 

Change from Existing Energy Infrastructure.” 

Science 329 (5997): 1330–5.

Duhigg, C. 2009. “That Tap Water Is Legal 

but May Be Unhealthy.” New York Times, 

December 16. http://www.nytimes.com

/2009/12/17/us/17water.html.

Fischer, C ., and R. G. Newell. 20 08. 

“Environmental and Technology Policies 

for Climate Mitigation.” Journal of 

Environmental Economics and Management

55 (2): 142–62.

Foa, R. 2009. “Social and Governance Dimensions 

of Climate Change Implications for Policy.” 

Policy Research Working Paper 4939, World 

Bank, Washington, DC.

Gerlagh, R. 2006. “ITC in a Global GrowthClimate Model with CCS: The Value of 

Induced Technical Change for Climate 

Stabilization.” Energy Journal, Special issue 

on Induced Technological Change and Climate 

Change: 55–72.

Gillingham, K., R. Newell, and K. Palmer. 2009. 

“Energy Efficiency Economics and Policy.” 

Annual Review of Resource Economics

1: 597–619.

Goulder, L. 1995. “Environmental Taxation and 

the ‘Double Dividend’: A Reader’s Guide.” 

International Tax and Public Finance 2 (2): 

157–83.

Goulder L . H., and K. Mathai. 2000. 

“Optimal CO2 Abatement in the Presence of 

Induced Technological Change.”Journal of 

Environmental Economics and Management

39 (1): 1–38.

Goulder, L. H., Parry, I. W. H. 2008. “Instrument 

Choice in Environmental Policy.” Review 

of Environmental Economics and Policy

2: 152–74.

WB_354_GG_CH01.indd 42 5/7/12 

2012-08-054_000000000000429
AN ANALY TICAL FRAMEWORK FOR INCLUSIVE GREEN GROW TH 4 3

Graff Zivin, J. S., and M. J. Neidell. 2011. “The 

Impact of Pollution on Worker Productivity.” 

NBER Working Paper 17004, National 

Bureau of Economic Research, Cambridge, 

MA.

Gregorio, J. D., O. Landerretche, and C. Neilson. 

2007. “Another Pass-Through Bites the Dust? 

Oil Prices and Infl ation.” Journal of LACEA 

Economia 7 (2): 155–208.

Grubb, M., T. Chapuis, and M. H. Duong. 

1995. “The Economics of Changing Course: 

Implications of Adaptability and Inertia for 

Optimal Climate Policy.” Energy Policy

23 (4–5): 417–31.

Guivarch C., and S. Hallegatte. 2011. “Existing 

Infrastructure and the 2°C Target.” Climatic 

Change Letters 109 (3–4): 791–825.

Gusdorf, F., and S. Hallegatte. 2007. “Compact or 

Spread-Out Cities: Urban Planning, Taxation, 

and the Vulnerability to Transportation 

Shocks.” Energy Policy 35 (10): 4826–38.

Gusdorf, F., S. Hallegatte, and A. Lahellec. 

2008. “Time and Space Matter: How Urban 

Transitions Create Inequality.” Global 

Environment Change 18 (4): 708–19.

Ha-Duong, M., M. Grubb, and J.-C. Hourcade. 

1997. “Influence of Socioeconomic Inertia 

and Uncertainty on Optimal CO2–Emission 

Abatement.” Nature 390 (6657): 270–3.

Hallegatte, S. 2011. “How Economic Growth 

and Rational Decisions Can Make Disaster 

Losses Grow Faster than Wealth.” Policy 

Research Working Paper 5617, World Bank, 

Washington, DC.

Hallegatte, S., G. Heal, M. Fay, D. Treguer. 

2011. “From Growth to Green Growth: 

A Framework.” Background paper for the 

Flagship Report on Green Growth, Policy 

Research Working Paper 5872, World Bank, 

Washington, DC.

Hallegatte, S., J.-C. Hourcade, and P. Dumas. 

2007. “Why Economic Dynamics Matter 

in Assessing Climate Change Damages: 

Illustration on Extreme Events.” Ecological 

Economics 62 (2): 330–40.

Hanna, R. 2011. “The Effect of Pollution on 

Labor Supply: Evidence from a Natural 

Experiment in Mexico City.” NBER Working 

Paper 17302, National Bureau of Economic 

Research, Cambridge, MA.

Heal, G., and W. Schlenker. 2008. “Economics: 

Sustainable Fisheries.” Nature 455 (7216): 

1044–5.

Jaccard, M., and N. Rivers. 2007. “Heterogeneous 

Capital Stocks and the Optimal Timing 

for CO2 Abatement. Resource and Energy 

Economics 29 (1): 1–16.

Kenworthy, J. and F. Laube. 2001. Millennium 

Cities Database for Sustainable Transport.

Brussels: International Union of Public 

Transport and Institute for Sustainability and 

Technology Policy.

Lecocq, F., J. Hourcade, and M. Ha Duong. 

1998. “Decision Making under Uncertainty 

and Inertia Constraints: Sectoral Implications 

of the When Flexibility.” Energy Economics

20 (4–5): 539–55.

Malthus, T. (1798) 1965. First Essay on 

Population. London: J. Johnson. Reprint, New 

York: A. M. Kelley.

Manne, A., and R. Richels. 2004. “The Impact of 

Learning-by-Doing on the Timing and Costs 

of CO2 Abatement.” Energy Economics 26 (4): 

603–19.

Markandya, A., and S. Pedroso-Galinato. 2007. 

“How Substitutable Is Natural Capital?” 

Environmental & Resource Economics 

(European Association of Environmental and 

Resource Economists) 37 (1): 297–312.

Meinshausen, M., N. Meinshausen, W. Hare, 

S. Raper, K. Frieler, R. Knutti, D. Frame, and 

M. Allen. 2009. “Greenhouse Gas Emissions 

Targets for Limiting Global Warming to 2oC.” 

Nature 458: 1158–62.

Multignier, L., J. R. Ndong, A. Giusti, 

M. Romana, H. Delacroix-Maillard, S. 

Cordier, B. Jégou, J. P. Thome, and P. 

Blanchet. 2010. “Chlordecone Exposure and 

Risk of Prostate Cancer.” Journal of Clinical 

Oncology 28 (21): 3457–62.

Nordhaus, W. D. 1974. “Resources as a Constraint 

on Growth.” American Economic Review

64 (May): 22–26.

———. 1992. “An Optimal Transition Path for 

Controlling Greenhouse Gases.” Science 258 

(5086): 1315–9.

———. 2007. “Who’s Afraid of a Big Bad Oil 

Shock?” Brookings Papers on Economic 

Activity 2007 (2): 219–238. http://www.jstor.

org/stable/27561607.

O’Neill, B. C., K. Riahi, and I. Keppo. 2009. 

“Mitigation Implications of Midcentury 

Targets That Preserve Long-Term Climate 

Policy Options.” Proceedings of the National 

Academy of Sciences of the United States 107: 

1011–6.

Otto, V. M., and J. Reilly. 2008. “Directed 

Technical Change and the Adoption of 

CO2 Abatement Technology: The Case 

of CO2 Capture and Storage.” Energy 

WB_354_GG_CH01.indd 43 5/7/12 

2012-08-054_000000000000430
4 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Economic 30: 2871–90. doi:10.1016/j.

eneco.2007.07.001.

Popp, D., R. G. Newell, and A. B. Jaffe. 2009. 

“Energy, the Environment, and Technological 

Change.” NBER Working Paper 14832, 

National Bureau of Economic Research, 

Cambridge, MA.

Porter, M., and C. van der Linde. 1995. “Toward 

a New Conception of the EnvironmentCompetitiveness Relationship.” Journal of 

Economic Perspective 9 (4): 97–118.

Rozenberg J., S. Hallegatte, A. Vogt-Schilb, 

O. Sassi, C. Guivarch, H. Waisman, and 

J.-C. Hourcade. 2010. “Climate Policies as 

a Hedge against the Uncertainty on Future 

Oil Supply.”Climatic Change Letters 101 (3): 

663–9.

Smulders, J. 1994. Growth Market Structure and 

the Environment: Essays on the Theory of 

Endogenous Economic Growth. Tilburg, the 

Netherlands: Tilburg University.

———. 1999. “Endogenous Growth Theory 

and the Environment.” In Handbook of 

Environmental and Resource Economics, ed. 

J. C. J. M. van den Berg, 610–21. Cheltenham, 

United Kingdom: Edward Elgar.

Solow, R. M. 1956. “A Contribution to the Theory 

of Economic Growth.” Quarterly Journal of 

Economics 70 (1): 65–94.

———. 1974. “The Economics of Resources 

or the Resources of Economics.” American 

Economic Review 64: 1–14.

Sue Wing, I. 2006. “Representing Induced 

Technological Change in Models for Climate 

Policy Analysis.” Energy Economics 28 (5–6): 

539–62.

Tversky, A., and E. Shafir. 1992. “Choice 

under Conflict: The Dynamics of Deferred 

Decision.” Psychological Science 3 (6): 

358–61.

Wigley, T. M. L., R. Richels, and J. A. Edmonds. 

1996. “Economic and Environmental 

Choices in the Stabilization of Atmospheric 

CO2 Concentrations.” Nature 379 (6562): 

240–3.

World Bank. 2009. World Development Report 

2010: Development and Climate Change. 

Washington, DC: World Bank.

———. 2011. South Africa: Economic Update. 

Focus on Green Growth. Washington, DC: 

World Bank.

World Bank and DRC (Development Research 

Center of the State Council, the People’s 

Republic of China). 2012. Seizing the 

Opportunity of Green Development in China. 

Supporting Report 3 for China 2030: Building 

a Modern, Harmonious, and Creative HighIncome Society, Conference Edition, World 

Bank, Washington DC.

Zenghelis, D. 2011. A Macroeconomic Plan 

for a Green Recovery. London: Grantham 

Research Institute on Climate Change and the 

Environment.

WB_354_GG_CH01.indd 44 5/7/12 

2012-08-054_000000000000431
2 Infl uencing Firms, Consumers, 

and Policy Makers through Market 

and Nonmarket Mechanisms

 45

Key Messages

• Because economic incentives promote efficient solutions, “getting the prices right” is 

key to greening growth without slowing it. 

Complementary policies will be needed to 

mitigate negative distributional impacts.

• Economic incentives cannot induce all of the 

changes needed to protect the environment, 

given market failures, behavioral biases, and 

political economy considerations.

• Other tools—such as information judiciously 

deployed to infl uence economic actors, and

norms and regulations—are also needed. 

The starting point in greening growth 

is an understanding of why so much 

of traditional economic growth has 

been “non-green”—that is, why the world 

is not using environmental assets effi ciently, 

a reality that is harming economic growth 

and the environment.

For economists, achieving greener growth 

is fundamentally about changing the incentives that have led to environmental degradation and depletion—that is, “getting 

the prices right.” The reasons markets are 

failing to appropriately price the environment and thus create incentives to encourage greener growth are many (Sterner 2003). 

They include institutional and policy failures; market failures, such as externalities, 

the public-good nature of many environmental goods; and missing or incomplete 

property rights (box 2.1). With a common 

pool resource like a fi shery or a shared aquifer, for example, the lack of property rights 

(such as individual quotas) can lead to overexploitation and ultimately a collapse of the 

resource.

For psychologists, achieving greener 

growth is about compensating for behavioral 

biases, tailoring information and messages 

to the way people learn, and improving the 

way in which environmentalists and economists communicate the costs and benefi ts of 

greener behaviors. Examples include social 

marketing campaigns that changed social 

norms around water usage in Australia or 

GG_45-64.indd 45 5/8/12 

2012-08-054_000000000000432
4 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

littering behavior in the United States. So for 

psychologists, incentives also matter but they 

must be tailored to how people process information and react to it.

Unfortunately, inappropriate incentives, 

or the lack of incentives, led to the current 

widespread ineffi ciency in the way natural 

resources are used. This chapter examines the range of tools that can be marshaled to increase effi ciency by changing 

behavior with respect to the environment 

and natural resources—tools that aim to 

increase social welfare through greener 

growth. The tools fall into the following 

areas:

• Incentivizing: providing effective market 

signals to spur green growth

• Informing and nudging: using information and framing to infl uence economic 

actors

• Imposing: using rules and regulations.

BOX 2.1 Institutional and market failures that help explain why growth is often 

environmentally unsustainable

Growth may be environmentally unsustainable 

because of institutional and policy failure. Institutions and governments may themselves face bad 

incentives, driven by political economy. Or they may 

lack information on the overall impact of the policies they promote. Subsidizing energy “to benefi t the 

poor” is a classic example—the subsidy encourages 

energy consumption, thereby increasing emissions 

of local air pollutants that often disproportionately 

affect the health of the poor. Moreover, it is generally the nonpoor who benefi t most from energy subsidies, because they can afford an energy-intensive 

lifestyle.

Alternatively, market failures may be to blame. 

Under some technical assumptions, competitive markets are an effi cient means of allocating goods. But 

real markets deviate from the ideal in a multitude 

of ways that can have severe consequences for the 

environment and social welfare. Examples include 

the following:

• Externalities. These are uncompensated damages 

imposed by one economic agent on another. For 

example, a factory owner can maximize profi ts 

from production by releasing untreated effl uents 

into a river rather than incurring the costs of 

treatment. But the resulting water pollution can 

damage the health of people drinking the water 

downstream. This health damage is external to the 

profi t-maximizing decisions of the factory owner, 

with the result that the social benefi ts from production are less than private profi ts.

• Public goods. Many environmental assets have a 

public-good nature—they provide services, such 

as amenities or the regulation of water fl ow, that 

are nonrival (one person’s enjoyment of the amenity does not decrease another person’s enjoyment) and nonexcludable (there is no practical 

way to prevent people from enjoying an amenity 

such as a beautiful view). The result is that public 

goods are typically underprovided by private markets, because there is no way for private actors 

to appropriate all the benefi ts from providing the 

public good.

• Information asymmetries and agency problems. If 

different agents have different information, environmental impacts can result. Factory owners 

typically have much more information about pollutants, treatment measures, and treatment costs 

than environmental regulators, which can reduce 

the effectiveness of regulation. Landlord-tenant 

relationships lead to a type of agency problem 

with regard to energy effi ciency: If the landlord 

pays the energy bills, the tenant has no incentive 

to conserve energy; if the landlord owns the furnace but the tenant pays the energy bills, the landlord has no incentive to invest in a more effi cient 

furnace.

• Missing or incomplete property rights. For common pool resources (for example, a fi shery or a 

shared aquifer), the lack of property rights (such 

as individual quotas) can lead to overexploitation 

and ultimately the collapse of the resource. From 

an economic perspective, overexploitation manifests itself as dissipation of resource rents: in the 

absence of quotas, exploitation efforts by users of 

the common pool drives up costs to the point at 

which economic profi ts drop to zero.

Source: Sterner 2003.

GG_45-64.indd 46 5/8/12 

2012-08-054_000000000000433
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 4 7

Incentivizing, informing and nudging, or 

imposing—some combination of the three 

is likely to be needed. Determining the best 

mix requires a solid understanding of how 

individual decisions are made and framed. 

Behavioral economics and social psychology thus provide indispensable insights into 

how to green growth. Economists will ignore 

them at their peril.

Incentivizing: Providing eff ective 

market signals to spur green 

growth

Economic incentives promote effi cient 

solutions

Economic incentives—traditional price and 

quantity instruments—are critical to promoting green outcomes, because they change 

behavior in a manner that typically leads to 

least-cost solutions. The intuition behind this 

approach can be seen in markets for tradable 

pollution emission rights. Because polluting 

fi rms use different technologies for production, their pollution abatement costs differ, 

often markedly. Firms with high marginal 

abatement costs therefore tend to prefer to 

pollute more and purchase permits from 

fi rms that have low marginal abatement costs 

and fi nd it profi table to invest in less polluting 

processes and sell their pollution rights. This 

trade allows the market to minimize the overall cost of achieving a given pollution target.

Economists recommend a variety of 

incentive-based instruments to reduce environmental damage and depletion—such as 

taxes, tradable permits, subsidies, depositrefund schemes, and refunded emission 

payments—that focus on either price or 

quantity. In the case of carbon dioxide 

(CO2), for example, the debate has centered 

on emission taxes, subsidies, and tradable 

emission permits.

Price instruments. These instruments 

aim to change behavior by ensuring that the 

prices paid for goods and services refl ect their 

full social costs, including externalities. To 

the extent that environmental taxes replace 

other distortive taxes (say, on labor), there 

can be a double dividend. Countries in the 

Organisation for Economic Co-operation and 

Development (OECD) have imposed some 

375 environment-related taxes and about 

250 environment-related fees and charges 

(OECD 2006). However, about 90 percent of 

revenues from these taxes comes from taxes 

on fuels and cars (OECD 2011). The majority of OECD countries also tax water usage 

in agriculture. Although they appear to have 

improved water effi ciency, these price instruments still fall short of full cost recovery 

(OECD 2010, cited in OECD 2011).

In addition to refl ecting social and environmental costs in prices through taxes, 

“full-cost pricing” implies the phasing out of 

harmful subsidies, such as subsidies on fossil fuels, fi sheries, forestry, water use, land 

use, and agriculture. These subsidies not only 

encourage carbon emissions, resource depletion, and environmental degradation, they 

also distort trade and strain public fi nance. 

Reforming them should be a high priority, 

although it may not be easy.

Quantity instruments. Unlike pollution 

taxes and subsidy reforms, which affect 

existing markets, quantity instruments (such 

as tradable permit schemes) create new markets for pollution allowances by affecting the 

costs of production. Once these new markets reach equilibrium and the permit price 

is determined, the cost of acquiring pollution 

permits affects the costs of production in a 

manner equivalent to a pollution tax. Tradable permits or quotas have also shown good 

results in managing renewable environmental 

assets, notably fi sheries.

“Cap and trade” schemes for pollution emissions have become the dominant 

market-based approach to controlling oxides 

of sulfur (SOx) and nitrogen oxides (NOx) in 

the United States, in the European Union’s 

Emission Trading Scheme for CO2, and in 

many other jurisdictions. The basic principle is that regulators determine the total 

allowable emissions per year (the cap) and 

allocate permits to polluters based on a variety of schemes (including “grandfathering” 

based on historical emissions or auctioning 

of all permits); fi rms are then free to trade 

GG_45-64.indd 47 5/8/12 

2012-08-054_000000000000434
4 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

permits. The evidence on the effi ciency of the 

U.S. SOx trading scheme is positive: markets 

have been liquid and permit prices (hence, 

total cost to firms) have been lower than 

originally estimated (Fullerton and others 

1997). Moreover, international experience 

with CO2 emission trading schemes suggests 

that they can be used to assign a price to polluting emissions from large sources, although 

implementation can be diffi cult (box 2.2).

Price versus quantity instruments. 

Although price schemes and cap and trade 

schemes are theoretically equivalent instruments, they have distinctive characteristics 

in practice (World Bank 2010). For example, 

permit systems create certainty regarding 

emission reductions but uncertainty about 

price; taxes provide certainty regarding price 

but uncertainly about emission reductions. 

They also differ regarding economic and 

administrative effi ciency and their ability to 

generate revenues (theoretically both do, but 

in practice countries have tended to allocate 

permits free of charge). As such, many jurisdictions, particularly in Europe, have opted 

for hybrid schemes to control carbon emissions: tradable permits for large emitting 

sectors and taxes for smaller sectors characterized by many actors, such as transport.

But imperfect markets and political 

economy complicate matters

Although in theory, economic incentive–

based instruments are the most effective, in 

practice, market imperfections and political economy mean that additional measures 

may be needed to make these instruments 

more efficient. One well-known case concerns innovation and long-lived investments, 

for which prices are not always effi cient (see 

chapter 3). But there are other circumstances 

BOX 2.2 Lessons from CO2 emission trading schemes

A review of existing and proposed carbon trading 

schemes in Alberta, Australia; the European Union 

(EU); New Zealand; Switzerland; Tokyo; and the 

United States (both national and state-level schemes) 

shows that these schemes are complex to implement 

but can be used to create a price of carbon for large 

emitters. To implement them effectively, policy makers should keep in mind the following dos and don’ts:

• Targets. Ambitious long-run targets are needed 

if firms are to invest in reducing their carbon 

footprints.

• Allocation. Free allocation of permits to producers in the electricity generation sector should be 

avoided, because it leads to windfall profi ts at the 

expense of consumers (electric utilities are typically free to pass costs along to consumers). Free 

allocation to new entrants should also be avoided, 

because it risks locking in high-carbon footprints 

(by, in effect, subsidizing a new source of emissions). The EU Emission Trading Scheme is reducing the free allocation of permits.

• Start-up. Trading schemes have tended to overallocate permits in the initial phase, leading to a price 

collapse. Allowing permits to be banked—that is, 

allowing permits from one period to be used in 

subsequent periods—can overcome this problem, 

but this solution simply carries forward the surplus 

permits into the next phase. Other options include 

establishing a price fl oor, with cancellation of any 

unsold permits, or initially using a fi xed price to 

aid the collection of data on emissions and abatement costs that can then be used to determine the 

subsequent allocation.

• Offsets or links to other trading zones. Trading 

outside the permit scheme can help reduce permit 

prices, but doing so runs counter to policy goals 

to reduce domestic emissions and provide incentives for innovation in achieving this reduction.

• Support to carbon-intensive sectors. Concerns 

about the competitive impacts on carbon-intensive 

sectors will lead to lobbying for fi nancial support 

to these sectors. Any support should be time limited, and communicated as such, to reduce fi scal 

costs and provide incentives for fi rms to invest in 

less polluting technologies.

Source: IEA 2010.

GG_45-64.indd 48 5/8/12 

2012-08-054_000000000000435
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 4 9

in which narrow reliance on incentive-based 

instruments is misplaced. These include 

cases when:

Feasible alternatives are lacking. For pricing mechanisms to be successful in addressing environmental issues, feasible alternatives 

must be readily available or easily brought 

to market. One example is high fuel prices, 

which will be more effective at reducing individual car use if public transport is available 

or cities have been designed in such a way 

that walking or cycling are options. Another 

example is the emissions pricing scheme of 

the U.S. acid rain program, which successfully reduced SO2 because the required technologies were available and well understood 

(Zysman and Huberty 2010). In this case, 

prices were a powerful incentive for adopting 

existing alternative technologies.

Market imperfections exist. Prices may 

be ineffective incentives because of market 

imperfections or imperfect contracts. For 

example, contracts may need to be designed 

in a particular way to address the principalagent problem (the difficulty of motivating one party [the agent] to act on behalf of 

another [the principal]). An example is when 

building owners are responsible for insulation 

and heating systems but tenants pay energy 

bills; if owners cannot transfer the cost of 

higher energy effi ciency through higher rents, 

they will under-invest in energy efficiency 

regardless of energy prices.

Another example is fl ood insurance if it is 

not “risk-based”—that is, if the premium is 

not calculated as a function of the risk level, 

which is itself based on the characteristics 

and location of the asset. Insurance that is not 

risk-based creates a moral hazard problem, as 

it reduces incentives to invest in prevention. 

Households or businesses investing in risk 

mitigation improvements (such as a reinforced roof or windows) are not rewarded 

fully for their investments. Moving toward 

a “risk-based” premium would encourage 

prudent behavior. However, this approach is 

diffi cult to implement with one-year insurance contracts, because investing in risk 

mitigation produces benefi ts over decades—

meaning that a homeowner who sells his 

or her house may not be able to recoup the 

benefi ts from the investment. In this case, 

attaching a long-term insurance contract to 

the property rather than the owner could 

help create the right incentives (Kunreuther 

and Michel-Kerjan 2012).

Prices are difficult to change. The fact 

that so much pricing is currently ineffi cient 

suggests complex political economy considerations. Whether it takes the form of preferential access to land and credit or access 

to cheap energy and resources, every subsidy 

creates its own lobby. Large enterprises (both 

state owned and private) have political power 

and lobbying capacity. Energy-intensive 

export industries, for example, will lobby for 

subsidies to maintain their competitiveness. 

In emerging economies, industries that are 

likely to be most affected by climate change 

policies are export-based industries, which 

are also the most infl uential and most able to 

oppose environmental policies (Mattoo and 

others 2011; Victor 2011). Thus, governments 

need to focus on the wider social benefi ts of 

reforms and need to be willing to stand up to 

lobby groups (box 2.3).

In considering pricing reforms or the 

introduction of new taxes, policy makers 

need to consider social impacts. Increasing 

energy prices, for example, has far-reaching 

impacts, because energy is used pervasively in 

production and in households. And although 

energy subsidies almost invariably benefi t the 

rich much more than the poor, their removal 

can have devastating impacts on the purchasing power of the poor (Arze del Granado 

and others 2010).1

To prevent this from happening, policy 

makers need to adopt complementary policies, such as the use of existing safety nets 

(where available), alternative short-term mitigation measures and subsidies, and energypricing solutions. In middle- and high-income 

countries, social safety nets can be used for 

compensation. In low-income countries, 

where safety nets are often lacking, ad hoc 

measures are frequently necessary. Information to target support is often not available, 

especially in urban areas, where geographic 

targeting is very ineffi cient (Kanbur 2010).

GG_45-64.indd 49 5/8/12 

2012-08-054_000000000000436
5 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Moreover, the political economy of 

reform will likely require compensatory 

transfers to the middle class. In the Islamic 

Republic of Iran, for example, where the 

law that reformed fuel and food subsidies 

stipulated that 50 percent of the revenues 

raised had to be redistributed to households, 

the initial thought was to target the bottom 30–50 percent of the income scale. In 

the end, 80 percent of households received 

signifi cant transfers (Guillaume and others 

2011)—no doubt contributing to the success 

of the reform.

In the end, the redistributive impacts of a 

carbon price scheme depend on how revenues 

from the scheme are used. Compensatory 

measures can offset unwanted distributional 

effects. However, such schemes require the 

institutional capacity to manage the classical 

challenges of redistributive policies: political 

acceptability, imperfect information and targeting, and behavioral issues.

To be eff ective, incentives must 

refl ect behaviors

Designing effective environmental policies requires a good understanding of 

how behaviors are determined and how 

they can be infl uenced.2 The hypothesis of 

rational behavior—under which price-based 

instruments are optimal—is only a rough 

approximation of how people actually make 

decisions. In practice, individuals make decisions in a variety of ways: “by the head” 

(based on calculation), “by the heart” (based 

on emotion), and “by the book” (based on 

rules) (Weber and Lindemann 2007). Alternative or complementary policies and measures 

are therefore needed to address behavioral 

biases or changes in values and preferences.

Four types of behavioral biases are 

particularly important. First, “cognitive 

myopia” prevents people from accurately 

balancing future benefits and immediate 

costs and from assessing the desirability of reductions in immediate benefi ts in 

exchange for future gains (Ainslie 1975; 

Benartzi and Thaler 2004).

Second, individuals are inconsistent in 

their treatment of time (Ainslie 1975): they 

apply high discount rates to costs and benefits that will occur at some point in the 

future, discounting much less when both 

time points are in the future and one occurs 

later than the other, in a kind of “hyperbolic 

discounting.” These biases explain why it 

is diffi cult to implement policies that entail 

immediate costs but future benefi ts even if 

the result is a net (discounted) gain. A classic 

example is the failure of consumers to buy 

more energy-effi cient appliances even when 

BOX 2.3 The political economy of subsidy reform

What lessons have been learned about subsidy 

reform? An analysis of the political economy of subsidy reform—which looks at the few attempts that 

have been successful—suggests the need for careful 

analysis of the likely social impact of the reform and 

implementation of a program of appropriate support 

for those affected (Nikoloski 2012). Other elements 

of success include political will and institutional 

capacity, as well as an effective communications and 

outreach strategy that explains the justifi cation for 

the reform and the benefi ts to be derived from it. 

As for the timing and pace of the reform, there is 

no clear lesson as to whether “big bang” or gradual 

approaches are more successful.

Another study, which focuses on petroleum product subsidies, confi rms the importance of addressing 

the political logic that led to subsidy creation and 

either compensating the political interest that would 

otherwise oppose reform or fi nding a way to insulate 

the reform from its opposition—advice that applies 

to any subsidy reform (Victor 2009). In addition, it 

is critical to ensure the transparency of the costs and 

purpose of the subsidy. Reforming a subsidy may be 

easier if all members of society are fully aware of the 

costs they are paying and the extent to which they or 

others are benefi ting.

GG_45-64.indd 50 5/8/12 

2012-08-054_000000000000437
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 5 1

future energy savings would more than compensate for higher up-front purchase costs 

(Gillingham and others 2009).

Third, individuals suffer from “loss 

aversion”—that is, they weigh losses more 

than gains, evaluating both relative to a reference point (Tversky and Kahneman 1992). 

If individuals use the current situation as the 

reference point, they will consider the cost of 

environmental policy as a loss and weigh it 

more heavily than the gain (averted environmental damages). If the reference point is the 

future, when the loss is the environmental 

destruction, they will weigh it more heavily 

than the gain (the averted cost of environmental policies). Weber and Johnson (2012, 

16–17) make the following observation about 

farmers:

Skillful insurance salespeople have long known 

that they need to move a farmer’s reference 

point, away from its usual position at the status 

quo, down to the level of the possible large loss 

that could be incurred in case of drought. By 

focusing the insuree’s attention on the severity of 

the possible loss and resulting consequences, all 

smaller losses (including the insurance premium) 

are to the right of this new reference point, making this a decision in the domain of (forgone) 

gains, where people are known to be risk averse 

and will choose the sure option of buying the 

insurance.

Fourth, individuals have an aversion to 

ambiguity, which causes them to delay making decisions (Tversky and Shafir 1992).3

Aversion to ambiguity is particularly problematic for environmental issues, such as climate change, that involve huge uncertainties: 

while it disappears if decision makers regard 

themselves as expert in a domain (Heath and 

Tversky 1991), few people consider themselves experts in environmental policy.

Different behavioral changes can be 

triggered by different learning processes—

such as learning by being hurt, being told, 

and observing and imitating (Weber and 

Johnson 2012).

Learning by being hurt. Learning by 

being hurt refers to learning from personal 

experience. Because recent events have a 

strong impact, which recedes over time 

(Hertwig and others 2004), reactions to 

low-probability, high-severity events often 

appear erratic. In particular, people usually overreact when a rare event eventually occurs (Weber and others 2004). For 

instance, extremely ambitious fl ood defense 

projects were designed after each big fl ood 

in New Orleans, but none has been completed so far, as public interest in the issue 

faded a few years after each event. This 

tendency to overreact to recent events and 

then forget needs to be taken into account 

in developing green growth strategies, especially for disaster risk management (Hallegatte 2011).

Learning by being told. Learning by 

being told involves the absorption of objective information. For instance, hydrometeorological data can be collected and analyzed 

to generate quantifi ed risk assessments that 

help individuals make informed choices. But 

providing information will not be enough 

to induce appropriate risk management or 

environment-friendly behavior, because 

people treat abstract information on distant events differently from concrete, emotionally charged information linked with 

real-world experience (Trope and Liberman 

2003). So what is needed is a combination 

of communication tools that accounts for 

this bias and practical information on what 

needs to be done—for instance, rules to 

save energy or water or how to react in case 

of disasters.

Learning by observing and imitating. 

Learning by observing and imitating has 

the concreteness that “being told” does not 

have, making action more likely. One way of 

encouraging learning by observing and imitating is to help individuals compare their 

behaviors with more environment-friendly 

ones and to provide them with feedback on 

their consumption and with tips on how to 

change their behaviors. In one experiment, 

an Internet-based tool that combined feedback on past consumption, energy saving 

tips, and goal setting was used to encourage households to reduce their energy consumption. Households with access to the 

tool reduced their direct energy consumption by 5 percent; household without access 

to the tool increased their consumption by 

GG_45-64.indd 51 5/8/12 

2012-08-054_000000000000438
5 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

0.7 percent (Abrahamse and others 2007). 

Indicators are thus critical—even when they 

are imperfect—because they allow individuals to monitor their effort.

All of these biases vary with culture 

and education (Weber and Hsee 1998). For 

instance, individuals with greater ability 

to reason with numbers are more likely to 

rely on calculation-based processes to make 

their decisions (Peters and others 2006). 

This diversity means that policy makers may 

need to align their approaches with the cognitive biases present in a given country or 

population.4

Informing and nudging: Using 

information and framing to 

infl uence economic actors

Many motives other than price signals drive 

individuals’ behavior. It is therefore critical 

that information on the environmental consequences of their actions go beyond price. 

Information needs to be framed in a manner that accounts for behavioral biases and 

the ways in which people learn and make 

decisions. Governments have a role to play 

to ensure that the required information is 

produced and disseminated effectively. Fortunately, they can rely on the experience 

gained from decades of public health campaigns. However, a vibrant civil society will 

be essential to ensure that action follows 

information.

Informing to infl uence policy makers: 

The role of green accounting

Environmental assets are seldom traded 

through markets and thus do not have readily 

identifi able prices. In such cases, development 

decisions (such as building a road through a 

rainforest) are often made with incomplete 

information. As a result, they may not maximize social benefi ts. Given that the outputs 

of environmental projects generally do have 

a readily identifi ed economic value—a road 

may increase the access of farmers to markets 

and thus increase food production—it is vital 

that economic values for environmental assets 

be comparable to other economic values.

Environmental valuation can help in a 

number of ways:

• It estimates people’s willingness to pay 

for environmental goods and services or 

willingness to accept compensation for 

the loss of an environmental asset (Bolt 

and others 2005; Ley and Tran 2011).

• It assesses the value of the services provided by natural ecosystems. Because 

ecosystem services are typically provided 

as externalities—for example, an upland 

forest provides water regulation services 

to lowland farmers—the natural systems 

providing these services may be at risk 

when decisions are made that ignore the 

fl ow of services from natural areas and 

their benefi ts to people.

• It establishes the schedule of marginal 

benefits associated with the provision 

of different quantities of environmental 

goods and services—such as changes in 

the volume of pollution emitted. This 

information is useful when setting tax 

rates on environmental “bads” or when 

determining total quota sizes, such as 

the number of pollution emission permits 

that will be issued in a given time period.

• It facilitates “green accounting” (box 2.4), 

which focuses on a country’s stock of 

assets (its wealth) rather than relying on 

a fl ow measure such as GDP. As such, it 

promotes good economic management, 

identifies situations in which economic 

growth is not wealth creating (because 

the growth degrades natural resources 

faster than it creates wealth), and assesses 

whether a country’s economic trajectory 

is sustainable. However, green accounting 

and environmental valuation are not substitutes for price signals, because they do 

not affect incentives faced by individuals 

and fi rms.

Informing and nudging to infl uence 

individuals: Tackling behavioral biases

Good design and careful interventions can 

help align individual preferences with social 

goals and address behavioral biases.

GG_45-64.indd 52 5/8/12 

2012-08-054_000000000000439
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 5 3

BOX 2.4 What is “green accounting”?

All accounts serve two purposes: a scorekeeping 

purpose, providing indicators on how well you 

are doing, and a management purpose, providing 

detailed statistics so that anybody who does not like 

the “score” has the information to understand and 

do something about it.

In standard national accounting, GDP is measured as the market value of all goods and services 

produced by a country within a specified time 

period. Changes in GDP indicate whether the economy is growing, but not whether this growth is sustainable. In particular, the use or misuse of natural 

capital is not taken into account.

Green accounting extends national accounts to 

include the value of the damage and depletion of the 

natural assets that underpin production and human 

well-being. In particular, net saving, adjusted for 

the depreciation of produced assets and the depletion and degradation of the environment, indicates 

whether well-being can be sustained into the future. 

Negative net saving indicates that it cannot, because 

the assets that support well-being are being depleted 

(Asheim and Weitzman 2001; Dasgupta and Mäler 

2000; Hamilton and Clemens 1999).

At the regional level, East Asia and South Asia 

have exhibited strong wealth creation over more than 

a decade. In contrast, Sub-Saharan Africa, where 

the depletion of oil and minerals has been offsetting 

savings by the public and private sectors, displays a 

worrisome trend (fi gure B2.4.1). At the country level, 

China’s near 10 percent annual GDP growth is being 

partly offset by environmental depletion and degradation, reducing its adjusted net national income 

growth to an estimated 5.5 percent (World Bank and 

DRC 2012).

With green accounting, the scorekeeping indicators (such as wealth accounts) can be used alongside 

GDP to better assess how well a country is doing 

for the long term. It also provides detailed accounts 

for management of natural capital, which many 

countries have adopted over the past 20 years—

especially for water, energy, and pollution. However, 

few countries have adopted the revised macroeconomic indicators.

b. Genuine saving rates in EAP, ECA and SAR

0

5

10

15

20

25

30

35

% GNI

East Asia &

 Pacific (EAP)

year year

Europe & Central Asia (ECA)

South Asia (SAR)

a. Genuine saving rates in LCR, MNA and SSA

–20

–15

–10

–5

0

5

10

15

197519781981

19841987199019931996

1999200220052008

197519781981

198419871990

1993

1996

1999

20022005

2008

% GNI

Latin America &

Caribbean (LCR)

Sub-Saharan Africa (SSA)

Middle East & North

Africa (MNA)

Source: World Bank 2011.

Note: GNI = gross national income.

FIGURE B2.4.1 Some regions are doing better than others in wealth creation

(net saving by region, 1975–2008)

(continued next page)

GG_45-64.indd 53 5/8/12 

2012-08-054_000000000000440
5 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Avoiding fear mongering. Given cognitive myopia and people’s tendency to weigh 

emotion-filled consequences more heavily 

than abstract consequences, policy makers 

may be tempted to scare people into adopting environment-friendly behavior. Using 

“catastrophism” to make people change 

their behavior is ineffective, however, for two 

reasons. First, fear is only briefl y effective. 

Once people get used to the problem, they 

revert back to their initial behavior (Weber 

1997). For example, farmers informed about 

weather risks have a tendency to implement 

one mitigating measure (such as buying 

insurance), after which they consider their 

vulnerability problem solved, without considering how additional action may help.

Second, people have only a limited ability to worry; an increase in worry about one 

hazard decreases worry about other hazards 

(Weber 1997, 2006). This means that a policy based on fear leads to competition among 

hazards, and success in one area (for example, climate change) comes at the cost of failure in others (for example, water pollution).

Greening default options. An important 

behavioral bias that environmental policy 

makers can use to their advantage is the 

tendency of people to stick with the default 

option (box 2.5). In European countries, 

where organ donation is the default option, 

more than 85 percent of people are organ 

donors. In contrast, in neighboring countries 

where people must designate themselves as 

organ donors, less than 30 percent of people do so (Johnson and Goldstein 2003). In 

the United States, automatically enrolling 

employees in saving programs and requiring 

them to opt out if they preferred not to participate increased participation from 37 percent (under the opt-in design) to 86 percent 

(Madrian and Shea 2001).

Using nudging. In recent years, behavioral 

economists and the behavior change community overall have stepped up their interest 

in the potential role of nudges to infl uence 

behaviors. This approach advocates tweaking “choice architectures” to nudge people 

to make better decisions about their health, 

the environment, or other desirable outcomes 

without restricting their freedom of choice 

(Thaler and Sunstein 2009). To count as a 

nudge, the intervention must be easy, inexpensive, and voluntary. Nudges are increasingly being used to stimulate green behaviors; 

studies show promising results. For example, 

an electrical outlet (designed by Muhyeon 

Kim) that displays how much power it is 

using makes people more conscious of their 

energy use (fi gure 2.1). The Danish Nudging 

BOX 2.4 (continued)

A new partnership—Wealth Accounting and 

Valuing Ecosystem Services (WAVES)—is expanding 

efforts to account for ecological services. Botswana, 

a WAVES partner country, has defined one of its 

overarching objectives as to continue to grow while 

diversifying away from diamonds (which currently 

account for about 35 percent of national income) 

and eradicating poverty. Several natural resource–

based sectors are being tapped to play a lead role 

in this development strategy, including nature-based 

tourism, mining (especially coal for export), and 

irrigated agriculture.

Water plays a critical role in Botswana’s development, given its scarcity; the increasing reliance 

on shared, international water resources; and the 

water-intensive nature of sectors identified for 

economic growth and diversifi cation. A key component of WAVES in Botswana will be the establishment of water accounts—physical supply and use 

accounts as well as monetary accounts (for supply 

costs, tariffs paid, and the value of water in different uses). Water accounts will enable Botswana 

to answer the following questions: Is there enough 

water in the right places to support the diversification strategy? What are the economic tradeoffs among competing users? How can incentives 

for water effi ciency be created? In the wake of the 

recent privatization of water under full cost recovery management, what will happen to poor households’ access to water resources? The answers to 

these questions are critical for helping policy makers 

chart the best path forward.

GG_45-64.indd 54 5/8/12 

2012-08-054_000000000000441
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 5 5

Network even hosts a Web site, iNudgeYou.

com, dedicated to sharing applications and 

study fi ndings.

Framing decisions judiciously. The way 

economic actors react to policies depends 

on many factors, including how the policy is 

presented, or framed. Firms know this well, 

which is why they rely on marketing tools 

and branding in addition to price signals. By 

priming or framing personal behavior as part 

of a larger social goal, the public and private 

sectors can induce people to behave in more 

environment-friendly ways, particularly when 

they act as groups, as group decisions have 

been found to be made with less selfi shness 

than individual decisions (Milch and others 

2007). By framing environmental protection as a “social project,” policy makers can 

make individuals think in terms of social and 

collective goals. For example, surveys show 

that many passengers are willing to pay more 

for fl ights to account for the environmental 

damage that flying causes. However, their 

willingness to do so depends partly on what 

the surcharge is called: simply relabeling a 

carbon “tax” as a carbon “offset” increases 

its acceptability (Hardisty and others 2010).

In addition, people are more likely to 

accept increases in energy prices if they perceive them as needed to reach an ambitious 

Source: Webster 2012.

Note: Designer Muhyeon Kim has designed a switch that displays how much power it is using. Research has found that people are more conscious of their 

energy use when they can see it in action.

FIGURE 2.1 Energy-reporting electrical outlet

BOX 2.5 Changing the default option to spur the use of renewable energy

To spur, rather than coerce, the purchase of renewable energy, policy makers could rewrite the default 

electricity purchase contract to include a minimum 

share of electricity produced from renewable sources. 

Consumers would have to opt out to purchase their 

electricity without this constraint, at a lower cost.

A study of the impact of such “green default” 

in electricity provision provides support for this 

approach (Picherta and Katsikopoulos 2008). It 

looked at two cases in which electricity providers 

offered green options with more renewable energy 

and a higher price as the default option. In both 

cases, fewer than 5 percent of customers decided to 

shift to less expensive, less green options.

GG_45-64.indd 55 5/8/12 

2012-08-054_000000000000442
5 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

and positive social goal than if they perceive 

them as top-down government decisions to 

reduce oil imports or protect the climate. 

Germany presented its decision to gradually replace its nuclear plants with renewable 

energy sources as a collective national project 

that positions it as a leader in the transition 

toward a greener economy. This framing 

makes it more likely that the public will accept 

the resulting increases in the price of electricity. It also reduces the risk that the decision 

will be reversed by the next government. 

The certainty afforded by the decrease in the 

chance of policy reversal increases incentives 

for long-term investments in research and 

development and new technology.

It may be more effi cient to change the values related to the emotional part of decisions 

than to count on prices and other policies 

to counteract emotion-based decisions. For 

instance, many consumers prefer big and ineffi cient cars for status-related reasons. As long 

as such cars provide status, raising their price 

may not reduce consumers’ desire to own 

them. For this reason, price mechanisms may 

be less effective than efforts to make green 

and effi cient cars a status symbol (Griskevicius 

and Tybur 2010). Ideally, price mechanisms 

and behavioral changes can reinforce each 

other, as recent trends in French car purchases 

show (box 2.6).

It may also be more effi cient to infl uence 

consumer behavior through advertising than 

through price—witness the hundreds of billions of dollars firms spend every year to 

advertise consumer products (Bertrand and 

others 2009). What is true for commercial 

consumption choices is likely to be true for 

environmental behaviors.

Informing and nudging to infl uence 

fi rms: Enabling public pressure and 

focusing managers’ attention

Information allows citizens or governments to 

put pressure on businesses—the goal of programs that collect and disseminate information about fi rms’ environmental performance. 

This approach has been deemed the “third 

wave” in environmental regulation, after 

command-and-control and market-based 

approaches (Tietenberg 1998). Studies show 

that it is making signifi cant inroads in terms 

of environmental benefi ts.

One type of disclosure program relies on 

emissions data without using them to rate or 

otherwise characterize environmental performance. Regulations requiring U.S. electric utilities to mail bill inserts to consumers 

reporting the extent of their reliance on fossil fuels led to a signifi cant decrease in fossil 

fuel use (Delmas and others 2007). Another 

type of scheme involves reporting regulatory 

violations. A policy of publicly disclosing the 

identity of plants that are noncompliant or 

“of concern” spurred emissions reductions in 

a sample of pulp and paper plants in British 

Columbia (Foulon and others 2002).

Performance evaluation and ratings programs (PERPs) report emissions data and use 

them to rate plants’ environmental performance. Examples include China’s GreenWatch 

program; India’s Green Rating Project (GRP); 

Indonesia’s Program for Pollution Control, Evaluation, and Rating (PROPER); the 

Philippines’ EcoWatch program; and 

Vietnam’s Black and Green Books initiative 

(box 2.7). These programs—which require 

no enforcement capacity or even a welldefined set of environmental regulations 

but do require an active civil society, local 

activism, or both—are particularly helpful 

in developing countries, where weak formal 

institutions make traditional enforcement of 

environmental regulations diffi cult. Thanks 

to advances in information technology, the 

administrative cost of such programs (mainly 

data collection and dissemination) is falling 

(Dasgupta and others 2007).

Public disclosure can improve environmental performance through a variety of 

channels. It can have the following effects 

(Powers and others 2011):

• Affect demand for fi rms’ products (output market pressure).

• Affect demand for publicly traded companies’ shares and the ability of such 

companies to hire and retain employees 

(input market pressure).

• Encourage private citizens to sue polluters (judicial pressure).

GG_45-64.indd 56 5/8/12 

2012-08-054_000000000000443
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 5 7

BOX 2.6 Modifying car buyer behavior in France

From 2003 to 2009, the average emissions of new 

cars in France decreased, dropping precipitously in 

2008 when the government introduced a “feebate” 

that increased the price of high-energy and reduced 

the price of low-energy-consuming cars (figure 

B2.6.1). The average willingness to pay for a reduction of 10 grams of CO2 per kilometer increased by 

€536 during the period. This shift in preferences 

accounts for 20 percent of the overall decrease in 

average CO2 emissions of new cars—of which 34 percent is related to the type of cars on the market and 

46 percent to price effects (gasoline prices and the 

feebate). The biggest preference changes occurred 

among young people and rich people.

130

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

135

140

145

150

155

160

grams per kilometer

feebate compulsory

energy labels

observed emissions trend

Source: Durrmeyer and others 2010.

FIGURE B2.6.1 A sudden shift to greener cars 

(average CO2 emission of new cars in France, 2003–09)

BOX 2.7 How are PERPs faring in developing countries?

Performance evaluation and ratings programs 

(PERPs)—which are increasingly being used 

throughout the world—appear to generate environmental benefi ts. Indonesia’s Program for Pollution 

Control, Evaluation, and Rating (PROPER) spurred 

signifi cant emissions reductions in wastewater discharges (García and others 2007, 2009). A qualitative evaluation of PERPs in China, Indonesia, the 

Philippines, and Vietnam found that in all programs examined a large number of plants initially 

rated “noncompliant” rose to “compliant” over 

time (in contrast, plants rated “fl agrant violators” 

and “compliant” tended to remain in these categories) (Dasgupta and others 2007). This evidence is 

consistent with the findings of other studies that 

concluded that performance ratings led to improvements among plants with moderately poor performance records but not among plants with either 

very bad or good records (García and others 2007; 

Powers and others 2011).

GG_45-64.indd 57 5/8/12 

2012-08-054_000000000000444
5 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

• Build support for new pollution control 

legislation or more stringent enforcement of existing legislation (regulatory 

pressure).

• Enhance pressure from community 

groups and nongovernmental organizations (community pressure).

• Provide new information to managers about their plants’ discharges and 

options for reducing them (managerial information) (Blackman and others 

2004; Tietenberg 1998).

The impact of information disclosure goes 

beyond its effect on environmentally conscious 

consumers. Even when environmental concerns are low and consumers are unlikely or 

unable to change their consumption patterns, 

disclosure can create an incentive for businesses to reduce their environmental impacts.

Imposing: Using rules and 

regulations

Price-based instruments such as taxes and 

polluting permits are generally considered 

preferable to norms and standards, under 

the simplifying assumptions of economic 

modeling (competitive industry, no enforcement cost, and so forth) (Baumol and Oates 

1988; Morgenstern and others 1999). This 

may not be the case when additional complexities are considered (Helfl and 1999).

When enforcement costs and political 

economy constraints (such as reaction against 

increases in fuel prices) are factored in, 

standards-based solutions may be more effi -

cient than incentive-based solutions in some 

contexts. Moreover, introducing a new standard may prove easier, especially in sectors 

that are already regulated, than increasing 

(or introducing) prices. In such cases, existing 

institutions can be relied upon to enforce new 

norms, and complex policy making may not 

be necessary.

That said, the enforcement costs of norms 

and standards should not be underestimated. 

Enforcement of a norm on emissions or a 

trading scheme requires the establishment of 

emission measurement and reporting systems, 

which are costly to create and operate.

Norms and regulations can also have 

negative side effects, by favoring incumbent 

fi rms at the expense of new entrants, thereby 

reducing the ability of the economy to innovate and grow (Copeland 2012). To avoid 

such a risk, policy makers must design environmental regulation in a way that does not 

create additional barriers to entry into markets, especially for small firms, which are 

often innovative and create the most jobs.

Policy makers must also avoid the risk of 

a rebound effect. Promoting water conservation technologies may increase the acreage 

of crops requiring irrigation, resulting in an 

increase in total water consumption (Pfeiffer 

and Lin 2010). Improving the fuel effi ciency 

of automobiles, by making it cheaper to drive, 

leads to an increase in car use, reducing by 

30 percent any energy gain reaped by 

improved technology (Sorrel and others 2009) 

(box 2.8).

BOX 2.8 What is the best way to promote vehicle fuel economy?

Are incentive-based measures or norms and regulations more effective in increasing individual car fuel 

economy? Proponents of incentives argue that higher 

fuel prices are more effi cient than stricter fuel effi -

ciency standards. The latter, they contend, increase 

the costs of new vehicles, causing car owners (including organizations with fl eets) to wait longer to replace 

their cars. The result is that fuel consumption remains 

the same rather than decreasing as owners continue 

to drive aging, and therefore less fuel-effi cient, cars. 

In addition, when car owners do purchase more fueleffi cient cars with unchanged fuel price, their ability 

to drive more for the same price can result in rebound 

effects, thus reducing energy savings and leading to 

increased traffi c congestion. In contrast, fuel taxes 

cause car owners to drive less, thereby not only 

decreasing local pollution but also reducing traffi c 

congestion and accidents. In addition, by increasing 

(continued next page)

GG_45-64.indd 58 5/8/12 

2012-08-054_000000000000445
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 5 9

0

50

year

100

grams CO2 per kilometer, normalized to NEDC

150

200

250

300

199519971999200120032005

2007200920112013

201520172019

20212023

2025

US-LDV US-Car California-LDV

California-Car Canada-LDV Canada-Car

European Union Australia Japan

China Korea,Rep. Mexico

Sources: International Council on Clean Transportation; An and others (2007).

Note: The NEDC is a driving cycle used in Europe to assess car emissions. LDV = light duty vehicle.

Figure B2.8.1 Fuel effi ciency standards are key to reducing emissions from the transport sector

(historical fl eet CO2 emissions and current or proposed standards, 2000–25)

BOX 2.8 (continued)

tax revenues, fuel taxes can potentially allow other, 

more distorting taxes to be reduced without affecting 

the budget.

Proponents of fuel effi ciency standards argue that 

consumers may not appropriately value fuel economy 

when buying a car (Greene 2010). If consumers undervalue fuel economy, fuel efficiency standards will 

improve welfare. They also argue that opposition to 

fuel taxes makes their imposition diffi cult politically.

The debate over which approach is better ultimately depends on the mitigation burden that should 

be borne by the automobile sector—that is, picking an appropriate carbon price as the basis for fuel 

taxes. The problem is that there is no consensus as 

to what could constitute an “appropriate” carbon 

price. Moreover, the carbon prices that have been 

implemented in the industrial sector (for example, 

the European Union’s Emission Trading System) are 

not high enough to trigger manufacturer’s investments in the technologies needed to dramatically 

reduce emissions (Vogt-Schilb and Hallegatte 2011).

In such a situation, fuel effi ciency standards, like 

the ones implemented in Australia, Canada, China, the 

European Union, Japan, the Republic of Korea, and 

the United States (An and others 2007), are a reasonable second-best solution, particularly when they are 

announced early enough to let manufacturers adapt 

their investments plans accordingly (figure B2.8.1). 

Standards are best applied in combination with price 

increases to minimize the risk of rebound.

GG_45-64.indd 59 5/8/12 

2012-08-054_000000000000446
6 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

The efficiency of market-based instruments is compromised by the existence of 

market failures that cannot be fi xed. Emission intensity standards, for example—which 

are widely considered to be less effective than 

emission taxes—can be preferable in sectors 

where production has positive external consequences (for example, knowledge creation, 

transportation), because they generally have 

less of an impact on output. Emission intensity standards can also improve social welfare relative to emission taxes in the presence 

of market power (Holland 2009). The idea 

that a unique carbon price in the economy 

is the optimal policy has been challenged in 

situations in which future carbon prices are 

unpredictable (Vogt-Schilb and Hallegatte 

2011); technologies exhibit lock-ins, making 

it diffi cult to disseminate new technological 

options (Kalkuhl and others 2011); or labor 

markets or revenue-raising taxes are distortionary (Richter and Schneider 2003).

Norms and standards are usually costly 

in economic terms. They should not be 

implemented without a detailed analysis of 

their costs and benefi ts—but predicting and 

measuring the economic cost of regulations 

and norms is diffi cult. For instance, a pollution regulation can increase production 

costs for industries and lead to reduced output and employment, but it can also favor 

more labor-intensive technologies and create 

jobs. A study of pulp and paper mills, plastic manufacturers, petroleum refiners, and 

iron and steel mills in the United States fi nds 

that the impact of regulation on employment 

is industry specific and the overall impact 

insignifi cant (Morgenstern and others 2002). 

When they target local public goods, regulations can even lead to net economic gains—

by reducing health impacts from pollution, 

decreasing health costs, and increasing labor 

productivity, for instance.

In an analysis of U.S. environmental regulations, Morgenstern and others (1999) fi nd 

that ex ante estimates of total (direct) costs 

tend to exceed actual costs, suggesting that 

environmental regulations may be less costly 

than usually predicted. The overestimation of 

total costs arises not from an overestimation 

of per unit abatement costs (how much it costs 

to reduce pollution by one unit) but from 

errors in the quantity of emission reductions 

achieved (how much pollution is reduced by a 

given regulation). This fi nding suggests that 

if regulation costs are often overestimated, so 

may their benefi ts.

In sum, rules and regulations are generally 

considered second-best solutions in situations 

with perfect markets (markets with perfect 

information and competitive industries). In 

the real world, where settings are imperfect, 

they can be a useful complement to pricebased incentives. In the next chapter we look 

at the need to navigate between market and 

governance failures through the careful use 

of innovation and industrial policies.

Notes

 1. In a review of energy subsidies across more 

than 30 countries, Arze del Granado and 

others (2010) estimate that it costs $33 to 

transfer $1 to poor households through a 

gasoline subsidy. The fi gure is high because 

the vast majority of gasoline is consumed by 

higher-income households. 

 2. Weber and Johnson (2012) provide a comprehensive review of this issue in a background 

paper for this report.

 3. The Ellsberg paradox (Ellsberg 1961) shows 

that when faced with a choice between risk 

(which is represented by known probabilities) and uncertainty (in which probabilities 

are not available) decision makers display a 

preference for risk. This tendency is known 

as ambiguity aversion.

 4. This is a different issue from cultural differences, which may make certain policies 

unacceptable (rather than ineffective) in 

particular countries. For example, London 

successfully adopted congestion charges, 

whereas such schemes are considered exclusionary in France, which explains why they 

have not been applied in Paris to date.

References

Abrahamse, W., L . Steg, C. Vlek, and 

T. Rothengatter. 2007. “The Effect of 

Tailored Information, Goal Setting, and 

Tailored Feedback on Household Energy Use, 

GG_45-64.indd 60 5/8/12 

2012-08-054_000000000000447
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 6 1

Energy-Related Behaviors, and Behavioral 

Antecedents.” Journal of Environmental 

Psychology 27 (4): 265–76.

Ainslie, G. 1975. “Specious Reward: A 

Behavioral Theory of Impulsiveness and 

Impulse Control.” Psychological Bulletin

82 (July): 463–96.

An, F., D. Gordon, H. He, D. Kodjak, and 

D. Rutherford. 2007. Passenger Vehicle 

Greenhouse Gas and Fuel Economy, 

Standards: A Global Update. Washington, 

DC: International Council on Clean 

Transportation.

Arze del Granado, J., D. Coady, and R. 

Gillingham. 2010. “The Unequal Benefits 

of Fuel Subsidies: A Review of Evidence for 

Developing Countries.” IMF WP/10/02, 

International Monetary Fund, Washington, 

DC.

Asheim, G. B., and M. L. Weitzman. 2001. “Does 

NNP Growth Indicate Welfare Improvement?” 

Economics Letters 73 (2): 233–9.

Baumol, W. and W. Oates. 1988. The Theory of 

Environmental Policy. 2nd ed. Cambridge: 

Cambridge University Press.

Benartzi, S., and R. H. Thaler. 2004. “Save More 

Tomorrow: Using Behavioral Economics 

to Increase Employee Saving.”Journal of 

Political Economy 112 (S1): 164–87.

Bertrand, M., D. Karlan, S. Mullainathan, 

E . Shafir, J. Zinman. 2009. “What’s 

Advertising Content Worth? Evidence from a 

Consumer Credit Marketing Field Experiment,” 

Center Discussion Paper 968, Yale University, 

Economic Growth Center, New Haven, CT.

Blackman, A., S. Afsah, and D. Ratunanda. 2004. 

“How Does Public Disclosure Work? Evidence 

from Indonesia’s PROPER Program.” Human 

Ecology Review 11 (3): 235–46.

Bolt, K., G. Ruta, and M. Sarraf. 2005. Estimating 

the Cost of Environmental Degradation. 

Washington, DC: World Bank Environment 

Department.

Copeland, B. R. 2012. “International Trade 

and Green Growth.” Paper presented at the 

Green Growth Knowledge Platform inaugural 

conference, Mexico City, January 12–13.

Dasgupta, P., and K.-G. Mäler. 2000. “Net 

National Product, Wealth, and Social WellBeing.” Environment and Development 

Economics 5: 69–93.

Dasgupta, S., D. Wheeler, and H. Wang. 

2007. “Disclosure Strategies for Pollution 

Control.” In International Yearbook of 

Environmental and Resource Economics 

2006/2007: A Survey of Current Issues, ed. 

T. Teitenberg and H. Folmer. Northampton: 

Edward Elgar.

Delmas, M., M. Montes-Sancho, J. Shimshack 

2007. “Information Disclosure Policies: 

Evidence from the Electricity Industry.” 

Working Paper, Department of Economics, 

Tufts University.

Durrmeyer, I., X. D’Haultfoeuille, and P. Février. 

2010. “The Willingness to Pay for Global 

Warming Reduction: Lessons from the French 

Automobile Market.” Congrès de l’Association 

Française de Science Economique.

Ellsberg, D. 1961. “Risk, Ambiguity and the Savage 

Axioms.” Quarterly Journal of Economics

75: 643–79.

Foulon J., P. Lanoie, and B. Laplante. 2002. 

“Incentives for Pollution Control: Regulation 

or Information?” Journal of Environmental 

Economics and Management 44 (1): 

169–87.

Fullerton, D., S. P. McDermott, and J. P. Caulkins. 

1997. “Sulfur Dioxide Compliance of a 

Regulated Utility.” Journal of Environmental 

Economics and Management 34 (1): 32–53.

García, J. H.,Afsah S, Sterner T 2009. “Which 

Firms Are More Sensitive to Public Disclosure 

Schemes for Pollution Control? Evidence 

from Indonesia’s PROPER Program.” 

Environmental and Resource Economics

42 (2): 151–68.

García, J. H., T. Sterner, S. Afsah 2007. 

“Public Disclosure of Industrial Pollution: 

The PROPER Approach for Indonesia?” 

Environment and Development Economics

12: 739–56.

Gillingham, K., R. Newell, and K. Palmer. 2009. 

“Energy Efficiency Economics and Policy.” 

Annual Review of Resource Economics

1: 597–619.

Greene, D. L. 2010. “How Consumers Value Fuel 

Economy: A Literature Review.” EPA–420–

R–10–008, U.S. Environmental Protection 

Agency, Washington, DC.

Griskevicius, V., and J. M. Tybur. 2010. “Going 

Green to Be Seen: Status, Reputation, and 

Conspicuous Conservation.” Journal of 

Personality and Social Psychology 98 (3): 

392–404.

Guillaume, D., R. Zytek, and M. R. Farzin. 2011. 

“Iran: The Chronicles of the Subsidy Reform.” 

IMF Working Paper WP 11/167, International 

Monetary Fund, Washington, DC.

Hallegatte, S. 2011.“How Economic Growth 

and Rational Decisions Can Make Disaster 

GG_45-64.indd 61 5/8/12 

2012-08-054_000000000000448
6 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Losses Grow Faster Than Wealth.” Policy 

Research Working Paper 5617, World Bank, 

Washington, DC.

Hamilton, K., and M. Clemens. 1999. “Genuine 

Savings Rates in Developing Countries.” 

World Bank Economic Review 13 (2): 

333–56.

Hardisty, D. H., E. J. Johnson, and E. U. Weber. 

2010. “A Dirty Word or a Dirty World? 

Attribute Framing, Political Affiliation, and 

Query Theory.” Psychological Science 21 (1): 

86–92.

Heath, C., and A. Tversky. 1991. “Preference and 

Belief: Ambiguity and Competence.” Journal 

of Risk and Uncertainty 4: 5–28.

Helfl and, G. E. 1999. “Standards versus Taxes 

in Pollution Control.” In Handbook of 

Environmental and Resource Economics, 

ed. J. C. J. M. van den Bergh, 223–34. 

Cheltenham: Edward Elgar.

Hertwig, R., G. Barron, E. U. Weber, and I. Erev. 

2004. “Decisions from Experience and the 

Effect of Rare Events.” Psychological Science

15: 534–9.

Holland, S. P. 2009. “Taxes and Trading 

versus Intensity Standards: Second-Best 

Environmental Policies with Incomplete 

Regulation. Leakage or Market Power?” 

NBER Working Paper 15262, National Bureau 

of Economic Research, Cambridge, MA.

IEA (International Energy Agency). 2010. 

Reviewing Existing and Proposed Emission 

Trading Systems. Paris: IEA.

Johnson, E. J., and D. Goldstein. 2003. “Do Defaults 

Save Lives?” Science 302 (5649): 1338–9.

Kalkuhl, M., O. Edenhofer, and K. Lessmann. 

2011. Learning or Lock-In: Optimal 

Technology Policies to Support Mitigation. 

Munich: CESifo Group.

Kanbur, R. 2010. “Macro Crisis and Targeting 

Transfers to the Poor.” In Globalization and 

Growth: Implications for a Post-Crisis World, 

ed. M. Spence and D. Leipziger. Washington, 

DC: World Bank and the Commission on 

Growth and Development. 

Kunreuther, H., and E. Michel-Kerjan. 2012. 

“Impact of Behavioral Issues on Green 

Growth Policies and Weather-Related Disaster 

Reduction in Developing Countries.” Paper 

presented at the Green Growth Knowledge 

Platform inaugural conference, Mexico City, 

January 12–13.

Ley, E., and N. B. Tran. 2011. “The Role of Prices.” 

Background Paper for the Green Growth 

Report. World Bank, Washington, DC.

Madrian, B., and D. Shea. 2001. “Behavior.” 

Quarterly Journal of Economics 116: 

1149–87.

Mattoo, A., A. Subramanian, D. van der 

Mensbrugghe, and J. He. 2011. “Can Global 

De- Carbonization Inhibit Developing 

Country Industrialization?” World Bank 

Economic Review doi:10.1093/wber/lhr04.

Milch, K. F., E. U. Weber, K. C. Appelt, M. 

J. J. Handgraaf, and D. H. Krantz. 2007. 

“From Individual Preference Construction to 

Group Decisions: Framing Effects and Group 

Processes.” Mimeo.

Morgenstern, R., W. Harrington, and P.-K. 

Nelson. 1999. “On the Accuracy of Regulatory 

Cost Estimates,” Discussion Paper 99-18, 

Resources for the Future, Washington, DC.

Morgenstern, R. D., W. A. Pizer, J.-S. Shih. 2002. 

“Jobs Versus the Environment: An IndustryLevel Perspective.” Journal of Environmental 

Economics and Management 43: 412–436.

Nikoloski, Zlatko. 2012. “The Political Economy 

of Energy Subsidies: Country Narratives.” 

MNA Urban and Social Development Unit, 

World Bank Washington, DC. 

OECD (Organisation for Economic Co-operation 

and Development). 2006. The Political 

Economy of Environmentally Related Taxes. 

Paris: OECD.

———. 2010. Pricing Water Resources and 

Water and Sanitation Services. Paris: OECD.

———. 2011. Towards Green Growth. Paris: 

OECD.

Peters, E., D. Västfjäll, P. Slovic, C. K. Mertz, 

K. Mazzocco, and S. Dickert. 2006. 

“Nu merac y and Decision M ak i ng.” 

Psychological Science 17: 407–13.

Pfeiffer, L., and C.-Y. C. Lin. 2010. “The Effect 

of Irrigation Technology on Groundwater 

Use.” Choices 25 (3).

Picherta, D., and K. V. Katsikopoulos. 2008. 

“Green Defaults: Information Presentation 

and Pro-Environmental Behaviour.” Journal 

of Environmental Psychology 28: 63–73.

Powers, N., A. Blackman, T. Lyon, and 

U. Narain, 2011. “Does Disclosure Reduce 

Pollution? Evidence from India’s Green 

Rating Project.” Environmental & Resource 

Economic, 50 (1): 131–55.

Richter, W. F., and K. Schneider. 2003. “Energy 

Taxation: Reasons for Discriminating in 

Favor of the Production Sector.” European 

Economic Review 47 (3): 461–76.

Sorrell, S., J. Dimitropoulos, and M. Sommerville. 

2009. “Empirical Estimates of the Direct 

GG_45-64.indd 62 5/8/12 

2012-08-054_000000000000449
INFLUENCING FIRMS, CONSUMERS, AND POLICY MAKERS 6 3

Rebound Effect: A Review.” Energy Policy

37: 1356–71.

Sterner, T. 2003. Policy Instruments for 

Environmental and Natural Resource 

Management. Washington, DC: Resources for 

the Future Press.

Thaler, Richard H., and Cass R. Sunstein. 2009. 

Nudge: Improving Decisions About Health, 

Wealth and Happiness. New York: Penguin.

Tietenberg, T. H. 1998. Environmental Economics 

and Policy. Boston: Addison-Wesley.

Trope, Y., and N. Liberman. 2003. “Temporal 

Construal.” Psychological Review 110: 

403–21.

Tversky, A., and D. Kahneman. 1992 . 

“Advances in Prospect Theory: Cumulative 

Representation of Uncertainty.” Journal of 

Risk and Uncertainty 5 (4): 297–323.

Tversky, A., and E. Shafi r. 1992. “The Disjunction 

Effect in Choice under Uncertainty.” 

Psychological Science 3 (5): 305–9.

Victor, D. 2009. Untold Billions: Fossil-Fuel 

Subsidies, Their Impacts and the Path to 

Reform. International Institute for Sustainable 

Development, Global Subsidies Initiative, 

Geneva. http://www.globalsubsidies.org/en/

research/political–economy.

———.2011. “National Effects of Global Policy.” 

Nature Climate Change 2: 24–5.

Vogt-Schilb, A., and S. Hallegatte. 2011. 

“When Starting with the Most Expensive 

Option Makes Sense: Use and Misuse of 

Marginal Abatement Cost Curves.” Policy 

Research Working Paper 5803, World Bank, 

Washington, DC.

Weber, E. U. 1997. “Perception and Expectation 

of Climate Change: Precondition for 

Economic and Technological Adaptation.” In 

Psychological Perspectives to Environmental 

and Ethical Issues in Management, ed. 

M. Bazerman, D. Messick, A. Tenbrunsel, 

and K. Wade-Benzon, 314–41. San Francisco, 

CA: Jossey-Bass.

———. 2006. “Experience-Based and DescriptionBased Perceptions of Long-Term Risk: Why 

Global Warming Does Not Scare Us (Yet).” 

Climatic Change 70: 103–20. 

Weber, E. U., and C. Hsee. 1998. “Cross-Cultural 

Differences in Risk Perception, but CrossCultural Similarities in Attitudes towards 

Perceived Risk.” Management Science 44 (9): 

1205–17.

Weber, E. U., and E. J. Johnson. 2012. 

“Psychology and Behavioral Economics 

Lessons for the Design of a Green Growth 

Strategy.” Paper presented at the Green Growth 

Knowledge Platform inaugural conference, 

Mexico City, January 12–13.

Weber, E. U., and P. G. Lindemann. 2007. 

“From Intuition to Analysis: Making 

Decisions with Our Head, Our Heart, or 

by the Book.” In Intuition in Judgment 

and Decision Making, ed. H. Plessner, C. 

Betsch, and T. Betsch, 191–208. Mahwah, 

NJ: Lawrence Erlbaum.

Weber, E. U., S. Shafir, and A.-R. Blais. 2004. 

“Predicting Risk-Sensitivity in Humans and 

Lower Animals: Risk as Variance or Coeffi cient 

of Variation.” Psychological Review 111 (2): 

430–45.

Webster, George. 2012. “Is a ‘Nudge’ in the 

Right Direction All We Need to Be Greener?” 

CNN, updated Friday February 12. http://

www.cnn.com/2012/02/08/tech/innovation/

green-nudge-environment-persuasion/index.

html 

World Bank. 2010. World Development Report 

2010: Development and Climate Change. 

Washington, DC: World Bank.

———. 2011. The Changing Wealth of Nations: 

Measuring Sustainable Development in the 

New Millennium. Washington, DC: World 

Bank.

World Bank and DRC (Development Research 

Center of the State Council, China). 2012. 

“Seizing the Opportunity of Green Development 

in China.” Supporting Report 3 for China 

2030: Building a Modern Harmonious, and 

Creative High-Income Society. Washington, 

DC: World Bank. 

Zysman J., and M. Huberty. 2010. “An Energy 

Systems Transformation: Framing Research 

Choices for the Climate Challenge.” Research 

Policy 38 (9): 1027–29.

GG_45-64.indd 63 5/8/12 

2012-08-054_000000000000450
GG_45-64.indd 64 5/8/12 

2012-08-054_000000000000451
3 Green Innovation and 

Industrial Policies

Brazil has supported the development 

of a biofuel industrial sector for 

decades. China is subsidizing research 

and development (R&D) and industrial production of photovoltaic (PV) panels, most of 

which it exports. Morocco is investing public resources in producing electricity from 

concentrated solar power and plans to sell 

renewable energy to Europe. In all three 

cases, the policy objective is both to produce 

environmental benefi ts and to create growth 

and jobs.

These countries are not alone in pursuing 

such approaches. Indeed, most countries tap 

these types of environmental policies—which 

really amount to green innovation policies 

and green industrial policies. Some commonly used policies include R&D subsidies 

for drought-resistant crops, national strategies for electric cars, and efforts to create new 

green industries such as China’s promotion of 

solar PV production.

Why are these policies even needed? Getting prices right is critical to addressing environmental externalities and providing the 

right signal for economic agents to modify 

their consumption, production, and investment patterns. But as chapter 2 showed, 

 65

Key Messages

• Innovation and industrial policies are potentially useful tools to spur green growth, as 

they can correct market (environmental and 

nonenvironmental) failures, but they should 

be designed to minimize risks from capture 

and rent-seeking behaviors.

• More advanced countries need to invest 

in frontier innovation through research 

and development; lower-income countries 

(with more limited technological capacity) 

should focus on adapting and disseminating technologies already developed and 

demonstrated.

• Although green growth and trade interact, 

it is not through the much publicized but 

seldom observed “pollution haven” effects. 

Green policies create opportunities for developing exports of green products; meanwhile, 

imports facilitate the adoption of greener, 

more effi cient technologies.

WB_354_GG_CH03.indd 65 5/7/12 

2012-08-054_000000000000452
6 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

doing so is diffi cult because of behavioral 

quirks, political reasons, market or contract imperfections, and low price elasticities (how responsive quantities demanded or 

provided are to a certain price change).

And prices are notoriously limited instruments for transforming economies or triggering investments with long-term or uncertain 

payoffs. Indeed, they are ill-suited to address 

the “classic” market failures usually invoked 

to justify innovation and industrial policies: 

knowledge externalities, latent comparative 

advantage and increasing returns, information asymmetries, capital market imperfections, and the coordination needed across 

industries to permit a technological transition (box 3.1).

Further, for green growth, getting the 

price right requires pricing externalities, 

which requires government intervention. 

Future government policies (on carbon prices 

or pollution limits) determine the size and 

BOX 3.1 Market failures that can justify innovation and industrial policies

Many market failures may justify the broad innovation policies and more targeted innovation and 

industrial policies that aim to support a specific 

green industry, fi rm, or technology:

• Knowledge externalities and capital market imperfections. Absent government intervention, knowledge spillovers create a gap between the private 

and social returns to producing knowledge that 

typically leads to under-provision of knowledge. 

And this is amplifi ed by information asymmetry 

in capital markets. Competitive innovation projects may struggle to fi nd fi nancing, making it diffi cult for new businesses and activities to start. 

This is especially true because young businesses 

have more diffi culty securing fi nancing than large 

established companies, even though they may be 

very innovative.

• Latent comparative advantages and increasing 

returns. Latent comparative advantages—that 

is, future as opposed to current comparative 

advantages—are sometimes cited as a justification for industrial policies (Harrison and 

Rodríguez-Clare 2009; Khan 2009; Rodrik 

2004). Industrial policies may be warranted 

if the advantage includes learning or increasing returns to scale, which require support at 

an early stage. When two or more technologies 

(some not even invented) are substitutes, profi tmaximizing innovators may focus on improving the productivity of existing technologies 

(“building on the shoulders of giants”) because 

the market for these technologies is large and the 

returns are higher. Support—through production 

subsidies or trade protection—can be provided 

to foster new technologies.

• Industrial policies may Coordination failures.

be warranted to address coordination failures 

within and across industries (Murphy and others 

1989; Okuno-Fujiwara 1988; Pack and Westphal 

1986; Rodenstein-Rodan 1943; Trindade 2005). 

The idea is that developing a comparative advantage in an activity can depend on another activity in the region or country. (Morocco is hoping 

to develop a concentrated solar industry, which 

requires creating the demand, the needed transmission lines, and the domestic supply chain for 

those parts in which Morocco can develop a competitive advantage—such as mirrors.) An industrial policy through which the government acts 

as the precommitment mechanism can solve this 

problem (Rodrik 2004). The same argument holds 

for “soft” industrial policies—policies that support particular clusters by increasing the supply 

of skilled workers, encouraging technology adoption, and improving regulation and infrastructure 

(Harrison and Rodríguez-Clare 2009).

• Some industries are International rent shifting.

characterized by fixed costs or indivisibilities 

limiting the number of entrants and creating 

oligopolies, with significant rents for installed 

businesses. A classic example is the competition between Airbus and Boeing (Baldwin and 

Krugman 1988; Helpman and Krugman 1989). 

Depending on the case, it can be welfare enhancing to either introduce specifi c taxes to capture 

and redistribute the rent or support new entrants 

to increase competition and reduce rents.

(continued next page)

WB_354_GG_CH03.indd 66 5/7/12 

2012-08-054_000000000000453
GREEN INNOVATION AND INDUSTRIAL POLICIES 6 7

BOX 3.1 (continued)

• Spatial, redistributive, and political economy motivations. Industrial policies are frequently used to 

promote regional balance and stimulate job growth 

and other economic activity where unemployment 

is worse, the population poorer, or a geopolitical 

reason exists to promote production in an area 

(such as Manaus in Brazil). Industrial policies are 

also used to smooth economic transitions—when, 

for example, structural change or trade liberalization leads to unemployment and workers fi nd it 

diffi cult to shift from sunset to sunrise industries. 

In this case, an industrial policy can support a 

declining industry to mitigate transitional costs 

and allow time for retraining and shifting workers 

toward growing industries.

profi tability of the future green market. But 

because they cannot credibly commit to 

future policies, governments create policy 

risks for green fi rms. It thus makes sense for 

governments to share risks through investment subsidies. To the extent that such subsidies reduce the future cost of green policies, 

they enable today’s governments to infl uence 

future policies: it is more likely that carbon 

prices will be implemented in the future if 

inexpensive low-carbon alternatives are available (Karp and Stevenson 2012).

For these reasons most countries resort 

to some form of innovation and industrial 

policies in their growth strategies. But given 

the mixed record of these policies—rife with 

both successes and failures—green growth 

strategies must heed the lessons from innovation and industrial policies over the past 

decades.

This chapter explores the concepts of 

green innovation and industrial policies and 

identifi es their main benefi ts and potential 

pitfalls. It fi nds that they represent potentially useful tools for facilitating green 

growth, provided that they are tailored to 

country contexts and that care is taken to 

navigate between the risks of market and 

governance failures.

Innovation policies: Tailoring 

mixes of instruments to a 

country’s innovation potential

Green innovation, which includes both the 

creation and commercialization of new 

frontier technologies and the diffusion and 

adoption of green technologies new to the 

firm, is critical to greening growth processes.1 Achieving greener growth requires 

both green innovation policies, supported 

sometimes by more targeted industrial policies, and environmental policies to create 

demand where the traditional environmental 

externalities are not fully refl ected in market 

prices (box 3.2).

Green frontier innovation is growing fairly 

rapidly, albeit from a small base. But the 

lion’s share of this growth is in high-income 

countries, raising concerns about the ability 

of developing countries to access and adapt 

new technologies tailored to their needs. A 

few large middle-income economies— Brazil, 

China, India—can become signifi cant frontier 

green innovators; they are already leading in 

incremental process innovation in the wind, 

solar, and biofuel markets. Other countries 

need to rely on global frontier innovation 

efforts while developing the capacity to identify, adapt, and absorb relevant technologies 

that are new to their fi rms.

The challenge is to combine innovation 

and environmental policies to make them 

effective and ensure that they are suitably 

balanced among policies that support frontier innovation (relevant mostly for more 

technologically advanced countries); policies 

that promote catch-up innovation and the 

adoption and spread of suitably adapted technologies; and policies that improve domestic 

absorptive capacity, including strengthening 

local skills.

WB_354_GG_CH03.indd 67 5/7/12 

2012-08-054_000000000000454
6 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 3.2 Shedding light on green innovation, technologies, and industrial policies

Green innovation is the development and commercialization of new ways to solve environmental 

problems through improvements in technology, with 

a wide interpretation of technology as encompassing product, process, organizational, and marketing 

improvements. In addition to frontier (new-to-theworld) innovations, this defi nition includes catchup (new-to-the-fi rm) innovations—also known as 

absorption—which covers the diffusion (both across 

and within countries), adoption, adaptation (to local 

contexts), and use of green technologies.

Green technologies comprise many fundamentally different technologies to achieve more resourceeffi cient, clean, and resilient growth. They include 

technologies needed to achieve the following goals:

• Reduce pollution and achieve greater resource 

efficiency in buildings (thermal insulation and 

new materials, heating, energy-efficient lighting); production processes (new uses of waste 

and other by-products from firms); agriculture 

(from improved and resilient crop and livestock 

breeds, water management, and farming systems 

to mechanical irrigation and farming techniques); 

and infrastructure and urban design (such as land 

use zoning).

• Mitigate climate change through a cleaner energy 

supply (wind, solar, geothermal, marine energy, 

biomass, hydropower, waste-to-energy, hydrogen 

fuels); low-carbon end use (electric and hybrid 

vehicles, climate-friendly cement); and carbon 

capture and storage.

• Reduce vulnerability and adapt to climate change 

with tools for understanding climate risks, better 

early-warning systems, and climate-resistant technologies (sea-walls; drainage capacity; reductions 

in the environmental burden of disease; water, forest, and biodiversity management).

• Support wealth creation from the more productive and sustainable uses of biodiversity, including 

natural cosmetics, pharmaceutical products, other 

sustainable bioprospecting, nature-based tourism, 

more sustainable production of plants and livestock, and ecosystem protection.

Green innovation policies are policies seeking to 

trigger green innovation by encouraging innovation 

broadly (horizontal policies) or supporting a specifi c 

technology (vertical policies).

Green industrial policies are policies aiming to 

green the productive structure of the economy by 

targeting specifi c industries or fi rms. They include 

industry-specifi c research and development subsidies, capital subsidies, and tax-breaks; feed-in tariffs; and import protection. They do not include 

policies targeting demand (such as consumer mandates), which can be met by imports without changing local production.

In practice, green innovation and industrial policies can be diffi cult to separate. Brazil’s support for 

biofuels relies on a range of policy tools from broad 

innovation to targeted industrial policies, with the 

ultimate goal of triggering innovation. Germany’s 

support for solar photovoltaic power amounts to 

innovation policy using industrial policy tools. Both 

countries would likely consider these efforts as part 

of their environmental policies.

Source: Dutz and Sharma 2012 and World Bank.

Frontier innovation and catch-up 

innovation

Since the mid-1990s green frontier innovation has increased substantially worldwide, 

mostly in high-income countries (fi gure 3.1a). 

In recent years the gap between developed 

and developing countries for green patents—

those based on key greenhouse gas–mitigation technologies—continued to widen, with 

the richer countries granted some 1,500 

patents in the United States compared with 

only 100 patents granted to poorer countries. Within the developing world the East 

Asia and Pacifi c region has by far the largest number of patents; the Middle East and 

North Africa has the smallest number of patents (fi gure 3.1b). China, in 10th place globally in number of patents fi led in more than 

one country, is the only emerging economy 

represented among the top 10 “high-quality” 

innovating countries (Dechezleprêtre and 

others 2011). The number and share of green 

WB_354_GG_CH03.indd 68 5/7/12 

2012-08-054_000000000000455
GREEN INNOVATION AND INDUSTRIAL POLICIES 6 9

patenting remains very small—less than 

1 percent—in both developed and developing 

regions (fi gure 3.1c).

In the developing world a few technologically sophisticated countries are surfacing as significant innovators; appropriate 

green innovation policy in these countries 

is likely to differ from appropriate policy 

in other developing countries. A group of 

nine emerging economies (Argentina, Brazil, 

China, Hungary, India, Malaysia, Mexico, 

the Russian Federation, and South Africa) 

accounted for nearly 80 percent of all U.S. 

green patent grants to developing countries, 

over 2006–10.2 And unlike the less technologically sophisticated countries, these “high 

flyer” economies display a sharp upward 

trend in green patenting, with their green 

patent grants more than doubling between 

2000–05 (30 grants) and 2006–10 (more 

than 70 grants).

But even if there is little capacity for frontier green innovation in most developing 

countries, substantial capacity may exist for 

catch-up green innovation through the adoption and adaptation of green technologies as 

well as indigenous base-of-pyramid innovations, aimed at meeting the needs of poor 

consumers (box 3.3).

Trade data suggest that there is substantial potential for catch-up innovation. Environmental goods constitute a nontrivial and 

rising share of exports (3.4 percent in developing countries in 2010, 6 percent in highincome regions; fi gure 3.2). But, except for 

the East Asia and Pacifi c region, the share 

of green exports has not been rising, suggesting a need for greater diffusion of green 

technologies. The policy implication of this 

trend depends on the extent to which it 

refl ects some underexploited comparative 

advantages in developing countries that 

account for lower levels of home production and export of green goods and services, whether driven by specifi c market or 

policy failures. Information on the extent 

to which weaker environmental regulations 

in many developing countries account for 

these differences could suggest appropriate 

policies.

FIGURE 3.1A Green frontier innovation occurs mostly in 

high-income countries...

(number of green patents granted in the United States, developing 

versus high-income countries)

Source: Dutz and Sharma 2012, based on data from PATSTAT (the European Patent Offi ce’s 

Worldwide Patent Statistical Database).

0 1,000 2,000 3,000 4,000 5,000 6,000

developing

countries

high-income

countries

2006–10 2001–05 1996–2000

number of green patents granted

FIGURE 3.1B . . . with East Asia leading the way in developing 

regions . . .

(number of green patents granted in the United States, by developing 

region)

Source: Dutz and Sharma 2012, based on data from PATSTAT (the European Patent Offi ce’s 

Worldwide Patent Statistical Database).

Notes: Total U.S. Patent Offi ce grants in OECD green technology areas. Developing regions are 

AFR (Africa), EAP (East Asia and Pacifi c), ECA (Europe and Central Asia), LAC (Latin America and the 

Caribbean), MNA (Middle East and North Africa), and SAR (South Asia).

0

15

30

45

60

ECA

number of green patents granted

MNA AFR

region

LAC SAR EAP

1996–2000 2001–05 2006–10

WB_354_GG_CH03.indd 69 5/7/12 

2012-08-054_000000000000456
7 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Even if developing countries are not 

increasing their exports of green products, 

they could have substantial potential for 

moving into green industries to the extent 

that they are producing nongreen goods that 

use inputs or technologies similar to those 

used to produce green goods. The concept of 

“proximity” between products is useful for 

examining this broader capability for green 

exports.3 For example, a country with the 

ability to export apples will probably have 

most of the conditions suitable for exporting 

pears but not necessarily the conditions for 

producing electronics. Indeed, trade in green 

and close-to-green goods is about three to 

five times that of green goods alone, with 

East Asia and Pacifi c and Latin America and 

the Caribbean countries on par with highincome countries (fi gure 3.3). This difference 

suggests a potential for developing exports 

in green products.

As for green imports, studies show that, as 

a share of all imports, they are as important 

FIGURE 3.1C . . . but worldwide green patents remain low

(green patents granted as a percentage of all patent grants in the United 

States, by region)

Source: Dutz and Sharma 2012, based on data from PATSTAT (the European Patent Offi ce’s Worldwide Patent Statistical Database).

Note: Ratio of three-year moving averages of U.S. Patent Offi ce grants in OECD green technology 

areas to all U.S. Patent Offi ce grants.

0

0.2

0.4

0.6

0.8

1.0

1.2

ECA LAC SAR EAP developing high

income

percent

1998 2004 2010

BOX 3.3 What are green base-of-pyramid innovations?

Base-of-pyramid innovations are defi ned as innovations that meet poor consumers’ needs. They include 

formal innovations for the poor—namely, innovations by global and local formal private companies 

and public institutions, whether fully privately provided, supported by public subsidies, or produced 

through public-private partnerships (such as medicines for neglected diseases and seeds for “neglected” 

soil types and climates). They also include informal 

innovations by local grassroots inventors, largely 

through improvisation and experimentation. Often 

facilitated by co-creation with poor consumers 

themselves, the innovations typically seek to better 

meet the needs of poor households at dramatically 

lower costs per unit, aided by signifi cant scale-up 

in volumes. They thus seek “to do more (products) 

with less (resources) for more (people)” (Prahalad 

and Mashelkar 2010). Three examples are described 

below.

Aakash Ganga (“river from sky”). In Rajasthan, 

India, ancient rainwater harvesting systems have 

been modernized to collect safe drinking water. 

This low-cost adaptation in arid regions has spurred 

additional innovations, generating many co-benefi ts 

for effi ciency and inclusiveness:

• Automation of the traditional surveying system 

with satellite imaging, which shortens design time, 

minimizes earthwork, and reduces material costs.

• Creation of a numbering plan for reservoirs, 

which facilitates co-investments.

• Inducement of demand for stretchable roofs, 

which has spurred more innovation.

• Introduction of accounting transparency, which 

has spurred policy debate on broader inequities in 

water affordability.

Novel uses of rice husks. Rice husks are one of 

India’s most common waste products. Husk Power 

WB_354_GG_CH03.indd 70 5/7/12 

2012-08-054_000000000000457
GREEN INNOVATION AND INDUSTRIAL POLICIES 7 1

in developing countries as they are in highincome countries, indicating the international transfer of green technology as 

embodied in green consumer products (fi gure 

3.4). Inasmuch as some of these products are 

used as inputs, this also indicates the greening of the input mix, which may refl ect adoption and adaptation of technologies by local 

fi rms. For instance, the purchase of manufacturing equipment in international markets 

is the main channel through which Chinese 

producers acquired the technologies and 

skills necessary to produce PV panels (de la 

Tour and others 2011). And the importing of 

green products may be a response to domestic demand-side green policies in developing 

countries. However, there has not been any 

signifi cant upward trend in any region.

The dissemination of green technologies 

can be accelerated through policies that 

increase adaptation and adoption capacity 

(such as education in relevant disciplines, 

especially sciences and engineering) and 

through trade and industrial policies (such 

as local content requirements and technology transfers). A good example is the success of the high-speed train program initiated in the Republic of Korea in 1993 by the 

purchase of the French Alstom TGV (train à 

grande vitesse). The contract included technology transfers (partly through training 

Korean workers in France) and the localization of 50 percent of manufacturing in 

Korea (Lee and Moon 2005). Today, Korea 

BOX 3.3 (continued)

Systems (HPS), winner of the 2011 Ashden Awards 

for sustainable energy, has adapted and converted a 

biomass gasifi cation using diesel technology into a 

single-fuel rice husk gasifi er for rural electrifi cation. 

Households stop using dim kerosene lamps when 

they get HPS electricity, thereby saving on kerosene 

(and reducing CO2 emissions) and facilitating evening studying and other productive activities. Tata 

Consulting Services sells a $24 Swach (“clean” in 

Hindi) water fi lter that uses ash from rice milling to 

fi lter out bacteria. It is intended for rural households 

that lack electricity and running water.

Affordable green housing. In Mexico, Vinte specializes in building affordable, sustainable housing 

for low- and middle-income families. Its research 

and development in new technologies helped it introduce innovations such as home designs that reduce 

energy costs by 75 percent.

Source: Dutz and Sharma 2012.

FIGURE 3.2 Green exports are growing, especially in the East Asia 

and Pacifi c region

(export of green goods and services as a percentage of all exports, 

2000, 2005, 2010)

Source: Dutz and Sharma 2012, based on data from COMTRADE + OECD list of environmental sixdigit harmonized system categories.

Note: Developing regions are AFR (Africa), EAP (East Asia and Pacifi c), ECA (Europe and Central Asia), 

LAC (Latin America and the Caribbean), MNA (Middle East and North Africa), and SAR (South Asia).

0

1

2

3

4

5

6

7

MNA AFR SAR ECA LAC EAP developingcountry

average

highincomecountry

average

percent

2000 2005 2010

is among the fi ve top world competitors in 

exports of high-speed trains. In Morocco 

the contract for high-speed trains and 

the Casablanca tramway included a local 

factory (created by Alstom and Nexans) 

specializing in railway beam and wire production, which will produce for the local 

and international markets.

WB_354_GG_CH03.indd 71 5/7/12 

2012-08-054_000000000000458
7 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

FIGURE 3.3 Developing countries may have a substantial 

unrealized potential for producing green exports

(export of green versus green plus close-to-green goods and services 

from developing regions, as a percentage of all exports from developing 

regions, 2000–10)

Source: Dutz and Sharma 2012, based on data from COMTRADE.

0

year

2

4

6

8

10

2000

2001

2002

20032004

200520062007200820092010

percent

green exports (as share of total) close-to-green exports (as share of total)

FIGURE 3.4 Green imports are vital worldwide

(imports of green goods and services, as a percentage of all imports, 

2000, 2005, 2010)

Source: Dutz and Sharma 2012, based on data from COMTRADE and OECD List of environmental 

six-digit harmonized system categories.

Note: Developing regions are AFR (Africa), EAP (East Asia and Pacifi c), ECA (Europe and Central Asia), 

LAC (Latin America and the Caribbean), MNA (Middle East and North Africa), and SAR (South Asia).

0

2

4

6

8

SAR developing- AFR ECA LAC EAP MNA

country

average

highincomecountry

average

percent

2000 2005 2010

Green imports from higher-income countries may not, however, meet the needs of 

poorer consumers in low-income countries. 

In principle, home-grown base-of-pyramid 

innovations can offer a complementary supply of relevant green technologies (box 3.3). 

But few green base-of-pyramid innovations 

have been suffi ciently scaled up to date, suggesting the need for more focused policy 

efforts in this area.

The adaptation of green technologies to 

local conditions is also critical for developing countries. Using green technologies effi -

ciently requires them to be more varied than 

nongreen technologies, given the signifi cant 

variance of the underlying environment by 

locality. For instance, turbine designs need to 

be adapted to work effi ciently in India, where 

wind speeds are lower than in Europe. Such 

adaptations can yield important co-benefi ts, 

including more sustainable corporate cultures (box 3.4).

Fostering innovation

The policy instruments relevant to promoting the development, dissemination, and 

adaptation of green technologies will differ 

depending on the maturity of the technologies and the market failures the policies seek 

to address. No single green bullet exists, so 

countries will need to employ a mix of instruments (fi gure 3.5).

Policies to foster innovation should aim to 

strengthen entrepreneurship and local fi rm 

absorptive capacity, support new knowledge 

creation and commercialization, and support 

diffusion and adaptation of existing knowledge to new local contexts. The importance 

of each and the modalities used depend on a 

country’s level of technological sophistication 

and implementation capacity.

Strengthening entrepreneurship and 

absorptive capacity: The importance of 

skills and the broader business environment

For fi rms to understand and assimilate the 

discoveries of others as well as create new 

technologies, they need strong absorptive 

WB_354_GG_CH03.indd 72 5/7/12 

2012-08-054_000000000000459
GREEN INNOVATION AND INDUSTRIAL POLICIES 7 3

BOX 3.4 Rapidly growing champions of “new sustainability”

In principle, the home-grown green ideas of companies to reduce costs, motivate workers, and shape 

their business environments by forging new relationships should make it easier for their peers in developing countries to emulate such approaches. Several 

examples are described below.

Century Energy (Colombia) develops small-scale 

hydroelectric power plants in Colombian river basins, 

diverting fast-rushing stream water without the need 

for reservoirs and thus avoiding displacement. In the 

next 5 years it plans to develop up to 10 facilities, 

adding 250 megawatts of capacity to Colombia.

Energy Development Corporation (the Philippines) pioneered the use of watershed management 

and recharge reinjection in its geothermal power 

plants as a way to extend the economic life of its facilities and reduce maintenance costs. These practices 

have since been mainstreamed across the industry 

and are now a regular part of industry regulation.

Equity Bank agricultural financial products 

(Nairobi, Kenya) worked with mobile telecom provider Safaricom to create a mobile banking system 

on its existing platform. The system offers credit for 

inputs and supports farmers throughout the value 

chain of production, transport, processing, and 

marketing. It has partnered with groups such as the 

International Fund for Agricultural Development to 

reduce its risks when lending to smallholders.

Jain Irrigation Systems (Jalgaon, India) adapted 

drip irrigation systems to meet the needs of smallholder farmers. The company works closely with 

customers to teach “precision farming” (optimizing 

the balance among fertilizers, pesticides, water, and 

energy to increase output) and uses dance and song 

to explain the benefi ts of drip irrigation to illiterate 

farmers.

Natura Organic Cosmetics (São Paulo, Brazil)

worked transparently with rural communities and 

local governments to adapt its formal business practices to the local context. It tapped traditional knowledge about how to extract raw materials sustainably 

(receiving the Forest Stewardship Council certifi cate 

for these raw materials), and then educated suppliers in sustainable sourcing and production practices 

(such as reusing, refi lling, and recycling packaging 

and adopting a new green plastic derived from sugar 

cane, which is eventually expected to reduce greenhouse gas emissions by more than 70 percent). The 

company also gives bonuses to workers who find 

ways to reduce the fi rm’s impact on the environment.

Source: IFC 2010; World Economic Forum 2011, cited in Dutz and Sharma 2012; 

and Russell Sturm (personal communication).

capacity. Absorption is a subset of innovation that focuses on the use of new-to-thefi rm technologies rather than the creation 

and commercialization of new-to-the-world 

technologies. Absorption of existing technologies can be improved by tackling the 

cross-cutting business environment constraints that impede experimentation, global 

learning, and attracting and retaining talent, as well as enhancing human capital in 

the public and private sectors.

An important starting point is to ensure 

that the business environment does not constrain entrepreneurship and innovative behavior, whether green or complementary to green. 

Many cross-cutting policy measures are vital 

for creating a business environment that spurs 

and enables entrepreneurs and fi rms to create, 

commercialize, absorb, and adapt knowledge. 

They include the following:

• Policies to overcome the stigma of failure and encourage opportunities for 

reentry and renewed experimentation.

Making it easier to wind up businesses 

is one of the best ways to get more people to try new ideas, even though doing 

so involves difficult legal reforms and 

changes in attitude toward debt. Closing 

a terminally ill business takes fewer than 

10 months and allows more than 90 cents 

on the dollar to be recovered in Singapore, 

Tokyo, or Toronto. By contrast, in Mumbai 

it still takes on average 7 years to recover 

roughly 20 cents on the dollar (World Bank 

2012). Other policies include publicizing 

WB_354_GG_CH03.indd 73 5/7/12 

2012-08-054_000000000000460
7 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

innovative role models (such as India’s 

Tata Group’s awarding of an annual prize 

for the best failed idea) and reducing the 

sunk costs of trying to commercialize an 

idea, such as removing impediments to 

deeper rental and resale markets.

• Policies to facilitate global connectivity 

and learning. Here the emphasis should 

be on linking up with international 

consortia and helping firms insert into 

global value chains. International mobility of workers was critical to the rapid 

development of wind energy capabilities 

in China and India. Suzlon, the leading Indian wind turbine manufacturer, 

established R&D facilities in Germany 

and the Netherlands to have its workers 

learn from European expertise. Goldwind, the leading Chinese manufacturer, 

sent employees abroad for training.4

Learning networks were also critical in 

the development of China’s PV panel 

industry.5 Mexico’s Green Supply Chains 

Program—a public-private partnership 

program—highlights a way to diffuse 

eco-effi ciency techniques to small- and 

medium-size enterprises.6

• Policies to increase the livability and 

“stickiness” of cities to attract and retain 

talent. Dense urban-industrial agglomerations spur technological upgrading 

and productivity growth by opening up 

opportunities and stimulating supplies 

of capital and skills. China’s establishment of special economic zones, followed by a range of support by national 

and local governments for further industrial deepening in its three major urban/

industrial agglomerations and in a 

number of inland cities, highlights how 

FIGURE 3.5 Snapshot of technology creation and diff usion

Source: IEA 2008 (Deploying Renewables: Principles for Eff ective Policies © OECD/International Energy Agency 2008, fi gure 1, page 25). 

Note: FIT= feed-in tariff s; FIP = feed-in premiums; PV = photovoltaic; RD&D = research, development, and demonstration; TGC = tradable green certifi cate.

Technology-neutral

competition

TGC

carbon trading (EU, ETS)

Stimulate market pull

voluntary (green)

demand

Mature technologies

(e.g., hydro)

Imposed market

risk, guaranteed

but declining

market return

Stability, low-risk

incentives

price-based: FIT, FIP

quantity bassed : tenders

High cost-gap

technologies (e.g., PV) Prototype &

demonstration stage

technologies (e.g., 2nd

generation biofuels)

Continuity, RD&D, create market

attractiveness

capital cost-incentives, investment tax

credits, rebates, loan guarantees etc

market deployment

Development Niche markets Mass market Time

Low cost-gap

technologies

(e.g. wind onshore)

WB_354_GG_CH03.indd 74 5/7/12 

2012-08-054_000000000000461
GREEN INNOVATION AND INDUSTRIAL POLICIES 7 5

a mix of instruments can be used (Yusuf 

and others 2008).

In addition, green innovation, like innovation in general, depends on people who 

are able to generate and apply knowledge 

in the workplace and society at large. 

Required innovation skills include basic 

skills (reading, writing), technical skills 

(science, engineering), generic skills (problem solving, multicultural openness, leadership), managerial and entrepreneurial 

skills, and creativity and design skills.7 The 

green economy requires greater emphasis on design and multidisciplinary teamwork, strategic leadership and adaptability, 

and knowledge of the sciences (CEDEFOP 

2009; OECD 2011).

Even advanced developing countries are 

far behind high-income countries in the share 

of professionals engaged in creating knowledge and managing research projects. Highincome countries like Denmark and Finland 

have about 15 researchers per 1,000 employees. By contrast, China, Mexico, and South 

Africa each has fewer than 2 researchers per 

1,000 employees. And in developing countries 

the business sector plays a much smaller role 

in the national R&D system than the higher 

education and government sectors. In the 

United States, four of fi ve researchers work 

in businesses. By contrast, in Chile, China, 

Mexico, Poland, the Slovak Republic, South 

Africa, and Turkey the number of researchers per 1,000 employees in industry is less 

than 1. Developing country fi rms need more 

individuals with research and related creativity skills in the workforce if they are to play 

a greater role in accessing green technologies 

and adapting them for local use.

Thus, policies are needed to strengthen 

market signals so that tertiary education institutions and technical and vocational education and training systems are better attuned 

to fi rm demands. These institutions should 

ensure that the costs of skills upgrading are 

shared by students, employers, and the government in line with benefi ts, and that periodic independent and transparent national 

assessments are adopted to ensure quality and 

consistency (OECD 2009). In West Africa an 

effort to better monitor monsoon variability and impacts illustrates solutions to build 

relevant skills in a developing-country setting (box 3.5). This case highlights the need 

to attract West African scientists trained in 

BOX 3.5 African monsoon multidisciplinary analyses

West Africa is extremely vulnerable to weather and 

climate variability because of its dependence on rainfed agriculture, on which 80 percent of the Sahel’s 

population relies. The African Monsoon Multidisciplinary Analyses (AMMA) is a research project funded by agencies from Africa, the European 

Union, France, the United Kingdom, and the United 

States to better monitor West African monsoon variability and the impacts on society and the environment, including on climate. To do so, the AMMA 

community was created in 2002. It now comprises 

more than 600 people from 30 countries, including 250 in Africa, among them 80 African PhD 

students. The AMMA community has established 

local university research programs in climatology, 

agronomy, and related social science fi elds, and has 

convened functional research teams to build new 

capacity for improved early-warning systems. These 

teams and programs will continue to train cohorts 

of African specialists, thus cultivating a community 

whose mutual interest in AMMA–related issues will 

help ensure sustainability.

AMMA has done fairly well in building a partnership between the international community and 

Africans in phase one (2002–10). The main challenge for phase two (2010–20) is clarifying the needs 

of users (farmers, hydropower and fl ood managers, 

and health care professionals) and identifying what 

science can offer. Stronger user demand should 

increase political support for scientifi c resources.

Source: Thorncroft 2011.

WB_354_GG_CH03.indd 75 5/7/12 

2012-08-054_000000000000462
7 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

better-equipped universities in high-income 

countries and the need to ensure enough local 

demand for established scientifi c and research 

facilities.

Promoting frontier innovation: Approaches 

depend on extent of local technological 

sophistication

Policies for frontier innovation include both 

supply-side “technology-push” elements 

(which reduce the costs of knowledge creation in advance of commercialization) and 

demand-side “market-pull” elements (which 

increase revenues from sales after commercialization). Key recommendations to 

guide the design of such policies include the 

following:

Limit local technology-push support 

to countries with enough technological 

capabilities. Government funding for earlystage and pre-commercialization technology 

is a vital element of many innovation systems, including direct funding of public labs 

and universities; grants, matching grants, 

and soft loans (which give the government 

control over what research is conducted); 

and indirect R&D tax subsidies (which allow 

fi rms to choose the most profi table research 

opportunities, switching some marginal projects from unprofi table to profi table). All these 

tools have their drawbacks. Grants allow 

coordination of research efforts with little or 

no duplication but may fail to integrate information from markets about what consumers 

want and are willing to pay for. They also 

run the risk of crowding out private R&D 

funding and need to be transparently allocated. Tax incentives may promote distorting 

tax avoidance rather than productive investment in countries with a weak tax enforcement system.

Despite these drawbacks, supply-push 

R&D support, through direct or indirect 

government funding, may generate new 

frontier innovations more effectively than 

demand-pull policies such as feed-in tariffs and regulations—at least where local 

technological capabilities and good governance mechanisms exist. For wind power, 

the marginal million dollars spent on public 

support to R&D in wind power technology 

generated 0.82 new inventions, whereas the 

same amount spent on demand-pull policies 

induced, at best, 0.06 new inventions (Dechezleprêtre and Glachant 2011).

Consider carefully structured publicprivate partnerships as only one of many 

measures to foster early-stage financing.

Much of the investment needed for green 

growth will come from private business. 

Many of these investments face uncertain 

cash fl ows and require signifi cant risk taking because they involve new technologies, 

including new business models. Once new 

ideas with commercial potential have progressed to the proof-of-concept stage, further 

fi nancing and mentoring support for earlystage technology development (ESTD) are 

required.

The range of ESTD finance options 

includes both public and private resources. 

At this early stage, private sources are typically restricted to internal fi nancing (personal 

savings and retained earnings), friends and 

family, angel investors (successful wealthy 

entrepreneurs), venture capital (VC), private 

equity, and private corporations (which fund 

ideas developed in-house, operate their own 

VC units, and acquire young start-up companies; see box 3.6). Among these sources, 

private equity and VC are uniquely suited to 

fi nance climate-friendly investments that are 

risky and fairly small. Although they will not 

provide more than a fraction of the resources 

needed, they can fi ll a key niche for driving 

green innovation.

However, developing the private equity 

and venture capital market for climate- and 

environment-friendly investments in emerging markets is hindered by capital market 

and carbon market barriers. These barriers include high management expenses, a 

shortage of good fund managers, long time 

horizons for investment returns and regulatory uncertainties, and the uncertainty of 

raising capital and having profitable exit 

opportunities for new technologies with 

no track record of historical returns. The 

public sector and international financial 

institutions can assist in capitalizing such 

WB_354_GG_CH03.indd 76 5/7/12 

2012-08-054_000000000000463
GREEN INNOVATION AND INDUSTRIAL POLICIES 7 7

funds by anchoring new funds, fi nancing 

new fund development, supporting pioneer 

investments, and supporting improved carbon payments. Even more important will 

be helping with the structure, management, and exit routes for venture capital 

investments—for example, by providing 

equity contributions to increase potential 

returns or reduce potential risks, which 

would play a helpful demonstration role if 

there is enough deal fl ow.8 But experience 

suggests that the government role should be 

restricted to that of fi nancial backer, and 

not manager, with funds administered professionally, free of bureaucratic burdens, 

and independent of political interference 

(Lerner 2009).

But capital market–based, arms-length 

forms of fi nance that structure and price each 

transaction on its merits require deep fi nancial markets, which most developing countries still lack. Moreover, a number of other 

factors—such as government R&D expenditures, the extent of patenting by entrepreneurial firms, and national environmental 

deployment policies designed with the longterm perspective of creating a market for 

environmental technologies—appear to be 

more important in affecting the amount of 

private fi nancing of frontier innovation in the 

clean-tech sector.9

Provide global support for bottom-ofpyramid and neglected technologies. It is 

not advisable for countries with weak technological capabilities and no comparative 

advantage in creating frontier technologies 

to dedicate significant public resources to 

this objective. But given the global nature of 

benefi ts from many green innovations, stable, 

long-term global public spending on R&D 

should be increased and channeled into programs that facilitate the development and 

adoption of technologies applicable to developing countries.

BOX 3.6 “Pinstripe greens”: Private fi nanciers making millions from clean-tech ventures

Although global venture capital investment in green 

energy declined with the 2008/09 recession and 

shares in clean-tech businesses have recently underperformed the wider market by a large margin, a 

world of U.S. solar titans, German wind moguls, 

Brazilian biofuel magnates, and Chinese battery 

tycoons has emerged over the past decade. One 

often hears that green energy could be the biggest 

economic opportunity of the 21st century. In 2010 

the global clean energy sector (wind farms, solar 

parks, and related technologies) attracted a record 

$243 billion in new investment, nearly 5 times the 

volumes of 6 years earlier. Between 2000 and 2010 

the global market for solar and wind power rose 

from $6.5 billion to $132 billion, the number of 

hybrid electric car models jumped from 2 to 30, and 

the number of certifi ed green buildings grew from 

3 to 8,138. Examples of private green financing 

include the following:

• is a venture capital fi Khosla Ventures rm founded 

by Vinod Khosla in 2004. Its clean-tech portfolio spans utility-scale and distributed generation, 

electrical and mechanical efficiency, batteries, 

building materials, plastics and chemicals, agriculture, cellulosic alcohol, and advanced hydrocarbons. The portfolio also includes investments in 

a low-emission engine (with Bill Gates) and twobladed wind turbines (with Goldman Sachs).

• is a provider of Bloomberg New Energy Finance

analysis, data, and news about clean-tech, including 

renewable energy, energy-smart technologies, carbon, carbon capture and storage, renewable energy 

certificates, nuclear, power markets, and water. 

The company, founded by Michael Liebreich in 

2004, has generated more than $1 billion in profi ts 

in 2011.

• is a Chinese company founded in 2001 Suntech

by Dr. Zhengrong Shi and floated on the New 

York Stock Exchange in 2005. It is the world’s 

largest producer of solar panels, with solar modules installed in more than 80 countries (and a 

low-carbon museum in Wuxi, west of Shanghai, 

opened by Al Gore).

Source: Dutz and Sharma 2012.

WB_354_GG_CH03.indd 77 5/7/12 

2012-08-054_000000000000464
7 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Prize funds and advance market commitments—also called purchase guarantees—

can be useful market-pull mechanisms for 

promoting R&D in neglected technologies.

• Prize funds are most appropriate when 

objectives can be well defined but the 

technologies are unknown. They may be 

particularly relevant for promoting more 

radical green innovations likely to be fostered not through the traditional linear 

R&D approach but rather through outof-the-box new knowledge, involving 

co-creation and codesign by scientists, 

engineers, entrepreneurs, producers, and 

users from different disciplines.

• Advance market commitments work best 

when key characteristics of the desired 

technology are known and can be specified in a contract, typically for fairly 

homogeneous technologies rather than 

the more differentiated ones required for 

green growth. Although to date they have 

been used to provide affordable access to 

health care in low-income countries, they 

may help stimulate innovations and access 

to a few affordable green solutions—such 

as a nutrient-fortifi ed staple food crop or 

improved storage technologies in contexts of land and water scarcity, climate 

change, and declining crop yields.

Promoting catch-up innovation: 

Facilitating technology access and 

stimulating technology adoption

Promoting green growth in developing 

countries is typically more about catch-up 

innovation and the diffusion and adaptation 

of already-existing technologies than about 

frontier innovation. Relevant policies need 

to facilitate access to existing technologies, 

as well as stimulate their uptake.

Policies to facilitate access to green technologies. The best way to facilitate access to 

green technologies is through openness to 

international trade, foreign direct investment, 

technology licensing, worker migration, and 

other forms of global connectedness. Many 

green technologies are embodied in technology licensing agreements and in equipment, 

machinery, and imported capital goods. 

Some are knowledge-based processes or 

business models that diffuse through movements of people attached to multinational 

corporations or from the diaspora. Some 

can be recreated by emulating imported fi nal 

goods, copying lapsed patents, or studying 

and inventing around patents that are still 

in effect. Technology and skill transfer also 

occur through the purchase of manufacturing 

equipment on global markets, because suppliers usually provide worker training with 

their equipment. This channel was critical in 

the ability of Chinese producers to become 

world leaders in PV panel production (de la 

Tour and others 2011).

Other underused policies to boost access 

to existing technologies include patent buyouts, compulsory licenses, patent pools, and 

open source approaches. A patent buy-out 

increases access to existing or future products 

that already benefi t from adequate innovation incentives. Making it easier for countries 

to issue compulsory licenses under appropriate circumstances can help ensure more 

affordable access to patented green innovations by poorer households in low-income 

countries.10

Patent pools provide a one-stop voluntary 

licensing service that combines multiple patents and licenses them, with patent holders 

getting royalties on the sales of adapted, more 

affordable products, and generic manufacturers getting access to broader markets. An 

example is the Medicines Patent Pool, funded 

by the international drug-purchasing facility 

UNITAID, which increases access to HIV 

medicines in developing countries. In open 

source development, a body of original information is made available for anyone to use. 

Usually, any party using the original material 

must agree to make its enhancements publicly 

available. Open source projects are inherently 

royalty free. Both of these approaches could 

be used for neglected seeds for drought-prone, 

saline environments, or other green solutions 

for lower-income countries.

However, and perhaps most important, countries should avoid imposing tariffs on renewable energy technologies and 

WB_354_GG_CH03.indd 78 5/7/12 

2012-08-054_000000000000465
GREEN INNOVATION AND INDUSTRIAL POLICIES 7 9

subsidizing fossil fuels, given that most studies show that these tools do more than patent protection to limit the transfer of clean 

technologies (Barton 2007 and Copenhagen 

Economics 2009, as cited in Hall and Helmers 2010). A World Bank (2008) study 

finds that eliminating tariff and nontariff 

barriers in the top 18 developing countries 

ranked by greenhouse gas emissions would 

increase imports by 63 percent for energyeffi cient lighting, 23 percent for wind power 

generation, 14 per cent for solar power generation, and 4.6 percent for clean coal 

technologies.11

Policies to stimulate adoption of green 

technologies. Green technologies are often 

more costly for firms to adopt and are not 

always immediately more attractive to enduse customers. When feasible, ensuring that 

prices reflect the environmental externality and removing subsidies that favor brown 

technologies are the best tools with which to 

encourage the adoption and spread of green 

innovation.

When prices cannot be adjusted, demandpull technology-deployment innovation 

policies (standards, regulations, public procurement) are needed. Demand-side policies 

include guaranteed feed-in tariffs for renewables, taxes and tradable permits for emissions 

pollution, tax credits and rebates for consumers of new technologies (compact fl uorescent 

light bulbs), comparison labeling (to inform 

consumers about the relative efficiency of 

products), endorsement labeling (“CFC–

free”), government regulations (limits to polluting emissions from industrial plants), and 

industry-driven standards (home and offi ce 

building insulation). In contrast with radical innovation, demand-side policies appear 

to be effective in spurring fi rms to introduce 

incremental environmental innovations and 

adopt existing technologies.

Indeed, European Union surveys show 

that firms in most countries identify existing or future environmental regulations, followed by market demand from customers, 

as the main driver behind adopting incremental processes (Dutz and Sharma 2012). 

In high-income countries as a whole, most 

studies report that well- designed environmental regulations stimulate innovation by 

fi rms, as measured by R&D spending or patents. That said, the induced innovation may 

not be enough to fully overcome the added 

costs of regulation (Ambec and others 2011). 

As for designing environmental regulations, 

studies emphasize the need for stability, predictability, and a focus on end results rather 

than means—allowing firms to choose the 

most cost-effective approach to meet the end 

result.

Voluntary sustainability standards for 

products and processes can help local fi rms 

upgrade environmental practices, a form of 

catch-up innovation for business practices. 

Roundtables and other multi-stakeholder initiatives provide new ways to manage natural 

resources more sustainably and efficiently. 

The best-known are international initiatives 

that group together producers, processors, 

traders, and other actors in a commodity’s 

supply chain with banks and civil society 

groups concerned about the harmful impacts 

of agriculture and aquaculture expansion. 

They aim at building consensus and setting 

voluntary standards on what constitutes 

responsible production and processing, along 

with promoting proven management practices 

to reach the set targets. Linking local fi rms 

to the global value chains of multinational 

corporations that have adopted sustainability 

standards helps leverage international market 

pressures (box 3.7).

Finally, a better financial infrastructure 

could significantly boost green technology 

absorption. In a study on adopting effi cient 

stoves, small biogas plants, and efficient 

tobacco barns for commercial farmers in 

Malawi, Rwanda, and Tanzania, financing 

emerged as the main stumbling block for all 

projects because of high start-up costs (Barry 

and others 2011). A study of low-income 

countries fi nds that higher fi nancial intermediation signifi cantly helps non-hydroelectric 

renewable energy generation per capita, 

because investment in renewable energy is 

constrained in environments where access 

to long-term loans is limited (Brunschweiler 

2010). Regarding China, a study cites access 

WB_354_GG_CH03.indd 79 5/7/12 

2012-08-054_000000000000466
8 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

to fi nancial credit and quality of after-sales 

service as key barriers to adopting solar home 

systems (D’Agostino and others 2011). And a 

study on Europe’s reconstruction after World 

War II emphasizes that the largely bankbased, relationship-based fi nancial systems 

provided vital support for lower-risk technology absorption by fi rms (Wolf 2011).

Green industrial policies: 

Ensuring that the standard 

caveats apply

Many countries include green industrial policies that target industries, fi rms, or technology-specifi c innovation and production in 

their environmental policy mix, from feed-in 

tariffs for PV solar energy to tax breaks for 

innovative fi rms in specifi c environmental 

industries and green procurement (box 3.8). 

But given that this approach is vulnerable to 

powerful lobbies, rent-seeking behavior, and 

costly mistakes caused by information asymmetries, there is no consensus on whether it 

is desirable.

Moreover, while industrial policies can 

transform an economy’s structure, the debate 

over whether they are effective instruments 

for accelerating growth continues. Some 

argue that industrial policies played a key 

role in the rise of Japan and other Asian 

countries (Chang 2006); others consider this 

catch-up a consequence of large investments 

(and a catch-up in capital intensity) in countries with high levels of education and institutional capacity (Krugman 1994). Whatever 

the case, it is critical to not blindly apply the 

lessons from East Asia to countries with very 

different characteristics, including low education levels and weaker institutions.

Whether even Asia’s industrial policies 

would have passed a cost-benefit analysis 

is unclear (Harrison and Rodríguez-Clare 

2009; Noland and Pack 2003). But because 

green industrial policies offer environmental 

benefits, they could be desirable even with 

no net positive impact on growth or job creation. For instance, whether or not Brazil’s 

ethanol policy accelerated economic growth 

or created jobs, there is little doubt that it 

led to the creation of a dynamic biofuel sector that would, in the absence of that policy, 

probably not exist (or would at least be much 

smaller; Karp and Stevenson 2012). For their 

part, the biofuel policies of Europe and the 

United States can be considered examples of 

green industrial policies that failed to generate even an environmental benefit, as they 

are generally considered to have harmed the 

environment.

BOX 3.7 Voluntary standards support the sustainable management of South African 

deep-sea fi shing and Indonesian palm oil

A highly visible and credible certifi cation that deep-sea 

hake fi shing was sustainably managed by the international nongovernmental standards organization (the 

Marine Stewardship Council) constrained local regulators in South Africa from allowing excessive new 

entry of fi shers, which would have depleted stocks. 

It also led to restructuring of the equity structures 

of companies to meet the country’s Black Economic 

Empowerment goals.

For palm oil there was no comprehensive, 

agreed-upon sustainability standard that producers 

could adopt, despite the crop’s impact on deforestation and biodiversity loss. On top of environmental 

and social risks, this uncertainty raised the cost of 

World Bank loan preparation and monitoring and 

added potential reputation risk issues, affecting the 

availability and pricing of Bank fi nancing. Thanks to 

guidelines issued by the Roundtable on Sustainable 

Palm Oil (RSPO)—supported by the Indonesia Palm 

Oil Producers Association, Unilever, the Hong Kong 

and Shanghai Banking Corporation, the World Wildlife Federation, Oxfam, the International Finance 

Corporation, and other key members—the share of 

RSPO-certifi ed palm oil has risen to 11 percent of 

the total market. To raise this share to the next level, 

broader government support in the consuming countries is needed to complement achievements driven 

by consumer activism.

Source: Levy and others 2011; IFC 2010; RSPO 2012.

WB_354_GG_CH03.indd 80 5/7/12 

2012-08-054_000000000000467
GREEN INNOVATION AND INDUSTRIAL POLICIES 8 1

Whether green environmental policies are 

desirable, many countries, mostly middle and 

high income, are actively engaged in policies 

that support specifi c industries. Some of these 

policies aim to provide direct environmental 

benefi ts (biofuel production in Brazil, concentrated solar power in Morocco). Others aim 

to produce related upstream goods and services (solar PV panels in China, high-speed 

trains in Europe). It is worth exploring the 

motivations for green industrial policies and 

the lessons from past experience with standard industrial policies.

What role for green industrial policies?

Green industrial policies can be implemented 

for multiple reasons. All these reasons are 

linked to different market failure or policy 

objectives.

Compensate for the uncertainty in future 

environmental policy and promote new 

industries and technologies. Most countries 

that adopt green industrial policies claim to 

do so to take advantage of a latent comparative advantage, create jobs, and pursue new 

sources of growth. The underlying argument 

is that prices are not enough to address the 

standard market failures that hamper new 

industries (such as increasing returns, coordination failures, and underdeveloped fi nancial 

markets).

Even if prices were to fully reflect the 

environmental externality, current and new 

green industries would face many challenges. Pricing policies are politically vulnerable, and the lack of credible long-term 

commitments and regulatory uncertainty 

discourages the private sector from making 

long-term investments in green industries. 

Witness the European carbon emission 

trading scheme, which effectively created a 

carbon price but did little for environmental innovation (Borghesi and others 2012; 

Rogge and others 2011). When long-term 

innovation, deployment, and production 

scale-up is needed, pricing policies may need 

to be complemented by innovation and more 

targeted industrial policies (Vogt-Schilb and 

Hallegatte 2011), as with PV solar energy in 

Germany and China (box 3.9).

Level the playing fi eld. The risk of pollution leakage from countries with strict 

environmental regulations to laxer countries has been used to justify green tradebased industrial policies.12 The fear is that 

BOX 3.8 The role of green procurement

When governments look for ways to infl uence the 

economy to achieve greener growth, public procurement stands out as a viable tool. For this reason, both industrial and developing countries are 

now pursuing green public procurement. In recent 

years many countries—Brazil, China, the Republic 

of Korea, Turkey—have implemented green initiatives to protect the environment and mitigate emissions (OECD 2010; Thomson and Jackson 2007). 

Green procurement is estimated to have accounted 

for 6 percent (Korea) to 60 percent (Sweden) of total 

public procurement in 2005 (OECD 2007).

The preferences of governments for green products in the early stages can help fi rms reduce production costs. They can also have dynamic effects in relevant markets. New companies can be motivated to 

enter the market, leading to further market development. If the market evolves rapidly, private users of 

similar products will also be educated to use greener 

products. In addition, the dynamic market development may lead to signifi cant economic competitiveness in such technological domains. For instance, a 

French company that invested in R&D to develop 

an environment-friendly paint for public road signs 

also developed other paint products that now lead 

the market (OECD 2007).

Governments can take advantage of standardraising demonstration effects and the provision of 

a guaranteed demand to foster markets of green 

products, change technological standards, generate 

green jobs, adapt public assets (such as buildings 

and infrastructure), and take a lead in educating 

consumers and fi rms to engage in more sustainable 

consumption and production. From a global welfare 

and climate change perspective, such procurement 

should not discriminate against foreign suppliers.

WB_354_GG_CH03.indd 81 5/7/12 

2012-08-054_000000000000468
8 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 3.9 Comparison of photovoltaic support policies in Germany and China

Germany and China are emerging as leaders in the 

global photovoltaic (PV) market, thanks to developing a dual industry composed of vertically integrated firms and segment specialists (Grau and 

others 2011). Public support aims to trigger cost 

reductions through economies of scale and additional technological innovation. It is directed at 

three activities:

• Both China Direct R&D to support innovation.

and Germany provide support to R&D, especially 

to promote radical innovation that is not the 

usual focus of the private sector. But this support 

remains limited, with only 1 percent (in China) 

and 3 percent (in Germany) of the total support 

these countries provide to PV panel production 

(Grau and others 2011).

• Standard environmental policies to support 

deployment. Both China and Germany are using 

feed-in tariffs to support the large-scale deployment of PV modules. The German example points 

to the inherent risks resulting from a stable, longterm commitment to buy electricity from PV. 

When the price of PV modules dropped in 2009, 

the sudden surge in profi tability led to a rush to 

install PV modules, infl ating the total cost of the 

program and jeopardizing its existence.

• Investment to support manufacturing plants.

Investment to support manufacturing plants 

embraces direct subsidies, reduced taxes, public 

guarantees, and reduced-interest loans. Neither 

China nor Germany links investment support to 

specifi c innovation requirements.

Striking the right balance among the three forms 

of support is critical for reducing costs. But support 

schemes are further complicated by information 

asymmetries between the industry and the government and by market power exerted by different 

actors in the industry.

Has public support made a big difference? There 

is little doubt that it helped achieve the large reduction in solar panel costs, which yielded global benefi ts. But there are growing concerns that this support 

is increasingly focused on the interests of domestic 

producers rather than global welfare objectives.

In Germany the issue is whether hefty feed-in 

tariffs mainly benefit Chinese PV manufacturers 

who export to Germany. But Chinese producers are 

concentrated in the downstream segments of the PV 

panel supply chain, which are highly labor-intensive 

and are where the country has a comparative advantage (de la Tour and others 2011). These downstream segments have limited margins and small 

profits compared with upstream segments, such 

as silicon production, where industrial countries, 

including Germany, still dominate. (Germany also 

manufactures some of the machinery used in China 

for PV production.) In China the issue is whether 

the policy leads to the import of mature technology, 

thus preventing the takeoff of an internal innovation 

capacity for more radical technology changes.

stricter environmental regulations in one 

country may cause “dirty” industries to 

move to pollution havens rather than adopt 

cleaner processes. There is little support for 

this argument in the current context. Pollution abatement costs represent only a small 

fraction of production costs for most industries. And while environmental regulation 

may cause fi rms to move from a particular 

location, the destination location chosen 

likely has other draws (skilled labor, good 

business environment, and a well-developed 

fi nancial sector).

And studies show that the impact of 

current environmental regulations on fi rm 

competitiveness remains limited. Quirion 

and Hourcade (2004) calculate that in the 

European Union, a €20-per-ton CO2 tax 

has a lower impact on marginal cost than 

interannual exchange rate variations, even 

in energy-intensive industries and without 

tax revenue recycling. Econometric studies 

found no negative impact of the EU Emissions Trading System (ETS) on net imports 

in the aluminum, steel, and cement industries (Ellerman and others 2010; Quirion 

2011; Sartor 2012). Anger and Oberndorfer (2008) reach the same conclusion on 

German fi rms and the EU ETS. Panel data 

from the U.K. production census suggest 

WB_354_GG_CH03.indd 82 5/7/12 

2012-08-054_000000000000469
GREEN INNOVATION AND INDUSTRIAL POLICIES 8 3

that the climate change levy (an energy tax) 

had a signifi cant impact on energy intensity but no detectable effects on economic 

performance or on plant exit (Martin and 

others 2009).

Empirical evidence fails to support the 

notion of “pollution havens” (Copeland 

2012), though this could change if environmental policies, such as carbon taxes, become 

much stricter. Should this happen, trade policies may become an important complement 

to environmental policies: specifi c trade policies—from bilateral and multilateral agreements on environmental regulation to border 

tax adjustments, with or without revenue 

transfers to the exporting country—can help 

level the competitiveness playing fi eld.

Smooth the transition. Countries may opt 

to use industrial policies to support ailing 

industries to facilitate the political economy 

of a green transition. Japan supported declining traditional industries to make the transition toward high-productivity, high-skill 

industries more acceptable for the population. In the same manner a green strategy 

may need to include some transitional support to (declining) energy-intensive industries. This component of the green growth 

package can be a requirement for its political 

acceptability, despite its cost. The aim of such 

support would be to smooth the transition, 

help businesses adjust their production technologies, and help workers adapt by moving 

to other industries—while ensuring that any 

public support remains transitory, with clear 

sunset clauses.

Heeding the lessons of the past

The desirability of innovation and industrial 

policies—green or not—cannot be assessed 

without analyzing a country’s economic situation, the benefi ts it can expect from these 

policies, and its ability to avoid capture by 

vested interests. Experiences around the 

world with these policies show that the following six lessons are key.

First, the relevant policy intervention 

depends on what market failure needs 

addressing (Baldwin 1969). Designing 

industrial policies requires that the government be able to identify and analyze market 

failures (Pack and Saggi 2006). To do so, the 

government may need information on which 

firms and industries generate knowledge 

spillovers or benefi t from economies of scale 

and dynamics effects (for example, learning 

by doing). Without a clear understanding of 

the market failures that need to be corrected, 

innovation and industrial policies will be 

ineffi cient or detrimental, particularly if they 

are used as a substitute for an enabling business environment.

Second, horizontal (or output-based) policies should be favored over vertical policies

(“picking winners” or at least the winning 

technology) when possible. Vertical policies 

should be contemplated only when technologies or solutions have been demonstrated in 

other contexts or are justifi ed by industry or 

technology-specifi c characteristics.

But applying this recommendation to 

green growth policies may be challenging. 

For example, absolute technology neutrality hardly applies as a guiding principle of 

climate policy (Azar and Sanden 2011). An 

example is feed-in tariffs (payments of a 

cost-based rate to energy producers for the 

electricity they generate from renewable 

resources), which can be designed to offer 

the same premium for any low-carbon electricity, thereby freeing electricity producers 

to choose the technology. But in the presence of learning-by-doing, a higher feed-in 

tariff may be desirable for the technology 

whose potential is estimated to be larger 

(del Rio Gonzalez 2008; Johnstone and others 2010).

In the early 2000s, advocates of feed-in 

tariffs to support PV electricity production 

(rather than other carbon-free technologies, 

such as wind power) pointed to the large 

potential of this technology, its fairly high 

initial cost, and the improvements expected 

from learning-by-doing, which made it 

unlikely to be picked up under horizontal 

support to any carbon-free electricity production technology.

Fortunately, picking winning technologies 

may be less risky for developing countries 

WB_354_GG_CH03.indd 83 5/7/12 

2012-08-054_000000000000470
8 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

implementing green growth, as they may be 

able to choose environmental technologies 

already developed and tested in high-income 

countries. This fact may partly explain why 

developing countries adopt environmental 

regulations at earlier stages of development 

and at lower cost than developed countries 

(Lovely and Popp 2011). Examples include 

technologies with large potential for economies of scale (such as solar PV) and technologies broadly used in industrial countries (such 

as low-sulfur fuels or wastewater treatment 

technologies). Technology support may also 

be less risky when a latent (that is, future 

rather than current) comparative advantage 

can be observed in an objective manner—for 

instance, renewable energies that depend on 

natural endowments, such as the potential 

for solar energy in North Africa and hydropower in Central Africa.

Third, the desirability of innovation and 

industrial policies depends on the balance 

between market failure and government 

failure. These policies need strong institutions, because they are vulnerable to capture 

and rent seeking and to inefficient micromanagement of the innovation and investment process (Laffont 1999; Rodrik 2005). 

In climate policy, rent-seeking behavior is 

likely to infl uence policies even in countries 

with high institutional capacity and appropriate “checks and balances” (Anthoff and 

Hahn 2010; Helm 2010). Neven and Röller 

(2000) identify factors that make such problems more likely: sharply partisan political 

systems, weak governments, and absence of 

transparency. But rent capture remains possible even in the most efficient, balanced, 

and transparent country, because industrial 

lobbies are powerful actors in any economy 

(box 3.10).

Fourth, successfully using innovation 

and industrial policies requires the capacity 

to remove support when it is no longer justifi ed, especially if one technology proves 

less promising than expected. Regardless 

of their ability to “pick the winner,” there 

are plenty of political economy reasons 

to explain why governments find it difficult to interrupt support when a project or 

business fails. One option is to make support conditional on some market test. East 

Asian countries used export competitiveness, an indicator diffi cult to manipulate by 

local fi rms. They were fairly ruthless in terminating support to underperformers and 

made continued protection in the domestic 

market contingent on export performance 

(World Bank 1993).

Subjecting green policies to a market 

test is more challenging than with standard industrial policies (Karp and Stevenson 

2012). When the market does not price the 

environmental externality—that is, in the 

absence of complementary price policies—

a market test cannot be used to decide 

whether the supported technology is the 

appropriate one. For instance, R&D subsidies or feed-in tariffs that help the solar 

panel industry reach scale and technology 

maturity may need to be permanent to make 

the industry competitive in the absence of a 

carbon price. The profi tability of the lowsulfur refining industry will depend on 

permanent subsidies in the absence of regulations on vehicle sulfur emissions. Contrary to classical industrial policies, which 

are supposed to be temporary because they 

correct temporary market failures (such as 

increasing returns to scale), green industrial 

policies may need to be permanent if they 

are supposed to correct permanent market 

failures (such as an environmental externality). To avoid this issue it is preferable 

to use price-based instruments to correct 

permanent environmental externalities and 

industrial policies to cope with transient 

externalities.

Fifth, the benefits from innovation and 

industrial policies vary depending on the 

scale of assessment. When these policies 

make it possible to create a domestic industry 

with signifi cant market share, local benefi ts 

can be large in terms of jobs and income. But 

the assessment can be completely different at 

the global scale if market shares are gained 

thanks to public support at the expense of 

more effi cient foreign producers. The desirability of these policies should be evaluated 

in view of trade-offs, especially if ambitious 

WB_354_GG_CH03.indd 84 5/7/12 

2012-08-054_000000000000471
GREEN INNOVATION AND INDUSTRIAL POLICIES 8 5

BOX 3.10 Lessons from a “green” industrial policy: U.S. biofuels

In recent decades, concerns about national energy 

security, dwindling reserves of easily recoverable 

petroleum (and oil price hikes), and health and 

safety have prompted many industrial countries to 

look for renewable energy alternatives, including 

biofuels. The U.S. biofuels program offers useful 

lessons on green industrial policies—two of which 

appear particularly relevant for developing-country 

policy makers.

First, biofuel industrial policies have mixed consequences for competition among technologies. The 

relationship between fi rst-generation (ethanol, primarily from corn and sugar) and second-generation 

(or cellulosic) biofuels, which are being developed to 

prevent higher food prices and land use changes, has 

long been viewed as a cooperative process. By developing an infrastructure for handling large volumes 

of biomass and constraining fuel refi ners to blend 

increasing quantities of biofuels in fossil fuels, producers of fi rst-generation biofuels would naturally 

pave the way for a new generation of biofuels. But 

a recent study suggests that fi rst-generation biofuels 

would be a tough competitor for the nascent industry of next-generation biofuels (Babcock and others 

2011). And the diffi culty of the nascent technology is 

heightened by the fact that “declining industries are 

generally more successful in forming lobby groups 

and securing policy concessions from governments” 

(Damania 2002).

Second, the reversibility of a policy (and thus 

the risk from capture) depends on the instrument 

used. Producers of biofuels used to be supported 

through subsidies (or, equivalently, tax breaks). 

In the United States the corn-based ethanol tax 

credit has been complemented by an import tariff 

on all sources of ethanol, with the tax credit working with federally mandated blending minimums to 

ensure a domestic market for ethanol. U.S. ethanol 

subsidies are estimated to have cost taxpayers $6 billion in 2009 (Karp and Stevenson 2012). They likely 

imposed signifi cant costs on developing-country suppliers that are more effi cient—such as Brazil, which 

uses sugar cane as a feedstock (though in 2009/10, 

Brazil imported small amounts of ethanol from the 

United States due to high food demand for sugar 

and competing crops worldwide). The subsidies 

sharply pushed up corn prices, though part of that 

increase could have been avoided if the U.S. market 

had been open.

The phasing out of the U.S. tax credit (and tariff) 

at the end of 2011 marked the end of the taxpayer’s 

support to biofuels. But the support by the consumer 

still remains, through the blending requirement of 

increasing amounts of ethanol. What is worrisome 

is that the consumption mandates appear far more 

difficult to reverse than direct subsidies—which 

were subject to annual review by legislative bodies 

in the United States and in most European Union 

member states. With consumption mandates, biofuel 

policies are less susceptible to public fi nance pressure. Although the amounts at stake are substantial, 

the fact that the burden is spread across millions of 

consumers reduces the political pressure to relieve 

it. Indeed, substantial coordination would be needed 

on the consumer side to stand up against the mandates if warranted from a cost-benefi t perspective.

policies in a few countries lead to escalating 

support globally, beyond what is justifi ed by 

market failures.

Sixth, green growth is about synergies 

between economic growth and environmental protection. And more targeted innovation and industrial policies represent a way 

to capture these synergies. Indeed, if and 

where these policies can promote growth 

cost- effectively and provide environmental 

benefi ts, it is possible that they can be developed to generate synergies between economic 

and environmental objectives.

In sum, a balanced view of costs, potential 

benefi ts, side-effects, and risks is needed to 

analyze the desirability of green innovation 

and industrial policies. The fact that these 

policies have infl uenced the structure of several economies suggests that they are options 

for transforming economies and bringing 

them toward more environment-friendly 

patterns. But the potential for costly failure 

and waste of scarce public resources always 

needs to be factored into any policy decision. 

In the following three chapters, we explore 

the three key inputs in a greener production 

WB_354_GG_CH03.indd 85 5/7/12 

2012-08-054_000000000000472
8 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

function—human, natural, and physical 

capital—beginning with labor markets and 

whether green growth creates jobs.

Notes

 1. This section is based on Dutz and Sharma 

(2012), a background paper produced for 

this report.

 2. Indicators of technological sophistication 

(R&D personnel per capita) as well as the scale 

of the R&D sector (total R&D personnel) were 

considered in making this distinction.

 3. Hausmann and Klinger (2006) show that as 

countries change their export mix, there is 

a strong tendency to move toward related 

goods rather than to goods that are farther 

away, where “relatedness” or “proximity” of 

products is defi ned at the global level.

 4. See Popp (2012), who highlights the work of 

Lewis (2007) documenting how both countries went from having no wind turbine manufacturing capacity to having almost complete local production in fewer than 10 years. 

Sauter and Watson (2008) highlight this as a 

case study of “environmental leapfrogging,” 

explaining how the adoption of cutting-edge 

technologies was facilitated by the creation of 

learning networks.

 5. See Popp (2012), who highlights international mobility of workers as a more important source of information than foreign direct 

investment or licensing, and de la Tour and 

others (2011) for the underlying analysis.

 6. The initiative, led by the Commission for 

Environmental Cooperation, established by 

the North American Free Trade Agreement, 

included the environmental authority of 

the state of Queretaro and the Global 

Environmental Management Initiative, a 

nonprofi t organization of leading U.S. multinational corporations focused on environmental sustainability. It is a 10-week 

eco-effi ciency educational training program 

emphasizing learning-by-doing with a commitment by participating small and mediumsize enterprises to generate and implement 

pollution prevention projects, with recommendations for change made by the participants themselves. Investments related to the 

implementation of the improvement projects 

were provided by individual participants, 

who became convinced of their value. Lyon 

and van Hoof (2010) fi nd that the average 

participant generated a project with a net 

present value of more than $150,000, saved 

1,900 cubic meters of water and 42,000 Kwh 

per year of electricity a year, reduced CO2

emissions by 61 tons a year, and cut waste 

disposal by 1,455 tons.

 7. Chapter 4 addresses the labor market–related 

questions concerning skills.

 8. See chapter 4 of Zhang and others (2009) for 

an overview and recommendations of policies 

to strengthen the ecosystem for the venture 

capital industry in China, and see chapter 7 

of Dutz (2007) for India.

 9. Regression results (based on comprehensive 

deal-level data on high-growth fi nancing and 

enterprises seeking investment in the cleantech sector over 2005–10 in 26 countries 

including Brazil, China, the Czech Republic, 

and India) suggest that deployment policies 

such as feed-in tariffs and tradable certifi cates, 

government R&D, and fi rm-level patenting 

are associated with higher levels of investment 

in clean-tech industries than short-term fi scal 

policies such as tax incentives and rebates. 

No signifi cant correlation is found between 

public investment loans or public fi nancing 

of venture capital and the amount of private 

fi nancing of innovative ventures (Criscuolo 

and Menon 2012). 

10. Henry and Stiglitz (2010) document how 

the United States used the threat of a compulsory license to manufacture Cipro during the anthrax scare following September 

11, 2001.

11. The assessment is based on fi rst-round 

approximations rather than full general equilibrium effects.

12. This is a different issue from the rise in 

imported emissions to high-income countries 

from developing countries, which is associated with their general deindustrialization. 

In 2008, China emitted about 1,400 MtCO2

through its production of exported goods; 

the United States imported goods amounting 

to about 600 MtCO2 of emissions. 

References

Ambec, S., M. A. Cohen, S. Elgie, and P. 

Lanoie. 2011. “The Porter Hypothesis at 

20: Can Environmental Regulation Enhance 

Innovation and Competitiveness?” Discussion 

Paper 11-01, Resources for the Future, 

Washington, DC.

WB_354_GG_CH03.indd 86 5/7/12 

2012-08-054_000000000000473
GREEN INNOVATION AND INDUSTRIAL POLICIES 8 7

Anger, N., and U. Oberndorfer. 2008. “Firm 

Performance and Employment in the EU 

Emissions Trading Scheme: An Empirical 

Assessment for Germany.” Energy Policy 36: 

12–22.

Anthoff, A., and R. Hahn. 2010. “Government 

Failure and Market Failure: On the Ineffi ciency 

of Environmental and Energy Policy.”Oxford 

Review of Economic Policy 26 (2): 197–224.

Azar, C., and B. A. Sanden. 2011. “The Elusive 

Quest for Technology-Neutral Policies.” 

Environmental Innovation and Societal 

Transition 1: 135–9.

Babcock, B. A., S. Marette, and D. Tréguer. 2011. 

“Opportunity for Profitable Investments in 

Cellulosic Biofuels.” Energy Policy 39: 714–9.

Baldwin, R. E. 1969. “The Case against Infant 

Industry Protection.” Journal of Political 

Economy 77 (5–6): 295–305.

Baldwin, R. E., and P. R. Krugman. 1988. 

“Industrial Policy and International 

Competition in Wide Bodied Jet Aircraft.” In 

Trade Policy Issues and Empirical Analysis, 

ed. R. E. Baldwin, 45–78. Chicago: University 

of Chicago Press.

Barry, M.-L., H. Steyn, and A. Brent. 2011. 

“Selection of Renewable Energy Technologies 

for Africa: Eight Case Studies in Rwanda, 

Tanzania, and Malawi.” Renewable Energy

36: 2845–52.

Barton, J. H. 2007. “Intellectual Property and 

Access to Clean Energy Technologies in 

Developing Countries.” ICTSD Issue Paper 2, 

International Centre for Trade and Sustainable 

Development, Geneva.

Borghesi, S., G. Cainelli, and M. Mazzanti. 2012. 

“Brown Sunsets and Green Dawns in the 

Industrial Sector: Environmental Innovations, 

Firm Behavior and the European Emission 

Trading.” Nota di Lavoro 3.2012, Fondazione 

Eni Enrico Mattei, Milan, Italy.

Brunschweiler, C. N. 2010. “Finance for 

Renewable Energy: An Empirical Analysis 

of Developing and Transition Economies.” 

Environment and Development Economics

15: 241–74.

CEDEFOP (European Centre for the Development 

of Vocational Training). 2009. Future Skill 

Needs for the Green Economy. Luxembourg: 

Publications Offi ce of the European Union.

Chang, H.-J. 2006. The East Asian Development 

Experience: The Miracle, the Crisis, and the 

Future. London: Zed Press.

Copeland, B. R. 2012. “International Trade 

and Green Growth.” Paper presented at the 

Green Growth Knowledge Platform inaugural 

conference, Mexico City, January 12–13.

Copenhagen Economics. 2009. “Are IPRs a 

Barrier to the Transfer of Climate Change 

Technology.” Report commissioned by the 

European Commission (DG Trade), Brussels.

Criscuolo, C., and C. Menon. 2012. “The Role 

of Government Policies, Local Knowledge 

Stocks and Firms Patenting Activity for HighGrowth Financing in Clean Technologies.” STI 

Working Paper, Organisation for Economic 

Co-operation and Development, Paris. 

D’Agostino, A. L., B. K. Sovacool, and M. 

J. Bambawale. 2011. “And Then What 

Happened? A Retrospective Appraisal of 

China’s Renewable Energy Development Project 

(REDP).” Renewable Energy 36: 3154–65.

Damania, R. 2002. “Influence in Decline: 

Lobbying in Contracting Industries.” 

Economics & Politics 14: 209–23.

de la Tour, A., M. Glachant, and Y. Ménière. 2011. 

“Innovation and International Technology 

Transfer: The Case of the Chinese Photovoltaic 

Industry.” Energy Policy 39 (2): 761–70.

Dechezleprêtre, A., and M. Glachant. 2011. 

“Does Foreign Environmental Policy Infl uence 

Domestic Innovation? Evidence from the Wind 

Industry.” Working Paper 44, Grantham 

Research Institute on Climate Change and the 

Environment, London, UK.

Dechezleprêtre, A., M. Glachant, I. Hascic, 

N. Johnstone, and Y. Ménière. 2011. “Invention 

and Transfer of Climate Change Mitigation 

Technologies: A Global Analysis.”Review of 

Environmental Economics and Policy 5 (1): 

109–30. 

Dechezleprêtre, A., M. Glachant, and Y. Ménière. 

2009. “Technology Transfer by CDM Projects: 

A Comparison of Brazil, China, India and 

Mexico.” Energy Policy 37 (2): 703–11.

del Rio Gonzalez, P. 2008. “Policy Implications 

of Potential Conflicts between Short-Term 

and Long-Term Effi ciency in CO2 Emissions 

Abatement.” Ecological Economics 65 (2): 

292–303.

Dutz, M. A. 2007. Unleashing India’s Innovation: 

Toward Sustainable and Inclusive Growth. 

Washington, DC: World Bank.

Dutz, M. A., and S. Sharma. 2012. “Green 

Growth, Technology and Innovation.” Policy 

Research Working Paper 5932, World Bank, 

Washington, DC.

Ellerman, A. D., F. Convery, and C. de Perthuis. 

2010. Pricing Carbon. Cambridge, UK: 

Cambridge University Press.

WB_354_GG_CH03.indd 87 5/7/12 

2012-08-054_000000000000474
8 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Financial Times. 2011. “How Green Were Their 

Ventures.” November 5.

Grau, T., M. Huo, and K. Neuhoff. 2011. Survey 

of Photovoltaic Industry and Policy in 

Germany and China. Berlin: Climate Policy 

Initiative.

Hall, B. H., and C. Helmers. 2010. “The Role of 

Patent Protection in Clean/Green Technology 

Transfer.” Santa Clara High Technology Law 

Journal 26 (4): 487–532.

Harrison, A., and A. Rodríguez-Clare. 2009. 

“Trade, Foreign Investment, and Industrial 

Policy for Developing Countries.” In 

Handbook for Development Economics, ed. 

D. Rodrik and M. Rosenzweig, vol. 5, 4039–

214. Amsterdam: North Holland.

Hausmann, R., and B. Klinger. 2006. “Structural 

Transformation and Patterns of Comparative 

Advantage in the Product Space.” Working 

Paper RWP06-041, Harvard University, 

John F. Kennedy School of Government, 

Cambridge, MA.

Helm, D. 2010. “Government Failure, RentSeeking, and Capture: The Design of Climate 

Change Policy.” Oxford Review of Economic 

Policy 26 (2): 182–96.

Helpman, E., and P. R. Krugman. 1989. Trade 

Policy and Market Structure. Cambridge, 

MA: MIT Press.

Henry, C., and J. E. Stiglitz. 2010. “Intellectual 

Property, Dissemination of Innovation and 

Sustainable Development.” Global Policy

1 (3): 237–51.

IEA (International Energy Agency). 2008. 

Deploying Renewables: Principles for 

Effective Policies. Paris: IEA.

IFC (International Finance Corporation). 2010. 

Telling Our Story: Renewable Energy. 

Washington, DC: IFC.

Johnstone, N., I. Hašcic, and D. Popp. 

2010. “Renewable Energy Policies and 

Technological Innovation: Evidence Based on 

Patent Counts.” Environmental and Resource 

Economics 45: 133–55.

Karp, L., and M. Stevenson. 2012. “Green 

Industrial Policy: Trade and Theory.” Paper 

presented at the Green Growth Knowledge 

Platform inaugural conference, Mexico City, 

January 12–13.

Khan, M. H. 2009. “Learning, Technology 

Acquisition and Governance Challenges 

in Developing Countries.” Research Paper 

Series on Governance for Growth, University 

of London, School of Oriental and African 

Studies, London.

Krugman, P. 1994. “The Myth of Asia’s Miracle.” 

Foreign Affairs 73 (6): 62–78.

Laffont, J.-J. 1999. “Political Economy, 

Information, and Incentives.” European 

Economic Review 43: 649–69.

Lee, H., and D.-S. Moon. 2005. “Next 

Generation of Korea Train Express (KTW): 

Prospect and Strategies.” Proceedings of the 

Eastern Asia Society for Transportation 

Studies 5: 255–62.

Lerner, J. 2009. Why Public Efforts to Boost 

Entrepreneurship and Venture Capital Have 

Failed—and What to Do about It. Princeton, 

NJ: Princeton University Press.

Levy, B., A. de Jager, B. Meehan, and T. Leiman. 

2011. Regulatory Efficacy in a Changing 

Political Environment: A Tale of Two South 

African Fisheries. Washington, DC: World 

Bank.

Lewis, J. I. 2007. “Technology Acquisition 

and Innovation in the Developing World: 

Wind Turbine Development in China and 

India.” Studies in Comparative International 

Development 42 (3–4): 16–35.

Lovely, M., and D. Popp. 2011. “Trade, 

Technology and the Environment: Does 

Access to Technology Promote Environmental 

Regulation?” Journal of Environmental 

Economics and Management 61 (1): 16–35.

Lyon, T. P., and B. van Hoof. 2010. Evaluating 

Mexico’s Green Supply Chains Program. Ann 

Arbor, MI: University of Michigan, Ross 

School of Business.

Martin, R., U. J. Wagner, and L. B. de Preux. 

2009. “The Impacts of the Climate Change 

Levy on Business: Evidence from Microdata.” 

CEP Discussion Paper, Centre for Economic 

Performance, London School of Economics, 

London.

Murphy, K. M., A. Shleifer, and R. W. Vishny. 

1989. “Industrialization and the Big Push.” 

Journal of Political Economy 97 (5): 

1003–26.

Neven, D. J., and L.-H. Röller. 2000. “The Political 

Economy of State Aids: Econometric Evidence 

for the Member States.” In The Political 

Economy of Industrial Policy: Does Europe 

Have an Industrial Policy? ed. D. J. Neven and 

L.-H. Röller. Berlin: Edition Sigma.

Noland, M., and R. Pack. 2003. Industrial Policy 

in an Era of Globalization. Washington, 

DC: Petersen Institute for International 

Economics.

OECD (Organisation for Economic Co-operation 

and Development). 2007. “Improving the 

WB_354_GG_CH03.indd 88 5/7/12 

2012-08-054_000000000000475
GREEN INNOVATION AND INDUSTRIAL POLICIES 8 9

Environmental Performance of Public 

Procurement: Report on Implementation of the 

Council Recommendation.” Working Party on 

National Environmental policies, ENV/EPOC/

WPNEP(2006)6/Final, OECD, Paris.

———. 2009. Learning for Jobs: OECD 

Policy Review of Vocational Education 

and Training: Initial Report. Paris: OECD 

Publishing.

———. 2010. “Interim Report of the Green 

Growth Strategy: Implementing Our 

Commitment for a Sustainable Future.” 

Meeting of the OECD Council at Ministerial 

Level, C/MIN(2010)5, OECD, Paris.

———. 2011. Skills for Innovation and Research. 

Paris: OECD Publishing.

Okuno-Fujiwara, M. 1988. “Interdependence 

of Industries, Coordination Failure, and 

Strategic Promotion of an Industry.” Journal 

of International Economics 25 (1/2): 

25–43.

Pack, H., and K. Saggi. 2006. “Is There a Case for 

Industrial Policy? A Critical Survey.” World 

Bank Research Observer 21 (2): 267–97.

Pack, H., and L. E. Westphal. 1986. “Industrial 

Strategy and Technological Change ” Journal 

of Development Economics 22 (1): 87–128.

Popp, D. 2012. “The Role of Technological 

Change in Green Growth.” Paper presented 

at the Green Growth Knowledge Platform 

inaugural conference, Mexico City, January 

12–13.

Prahalad, C. K., and R. A. Mashelkar. 2010. 

“Innovation’s Holy Grail.” Harvard Business 

Review (July–August): 132–41.

Quirion, P. 2011. “Les quotas échangeables 

d‘émission de gaz à effet de serre: éléments 

d‘analyse économique.” Mémoire d’habilitation 

à diriger les recherches, Ecole des Hautes 

Etudes en Sciences Sociales, Paris.

Quirion P., and J.-C. Hourcade. 2004. “Does 

the CO2 Emission Trading Directive Threaten 

the Competitiveness of European Industry? 

Quantifi cation and Comparison to Exchange 

Rate Fluctuations.” Paper presented at the 

Conference of the European Association of 

Environmental and Resource Economists, 

Budapest, June.

Rodenstein-Rodan, P. N. 1943. “Problems of 

Industrialization of Eastern and Southeastern 

Europe.” Economic Journal 53: 202–11.

Rodrik, D. 2004. “Industrial Policy for the 

Twenty-First Century.” CEPR Discussion Paper 

4767, Center for Economic Policy Research, 

Washington, DC.

———. 2005. “Growth Strategies.” In Handbook 

of Economic Growth, ed. P. Aghion and 

S. Durlauf. Amsterdam: North-Holland.

Rogge, K. S., M. Schneider, and V. H. Hoffmann. 

2011. “The Innovation Impact of the EU 

Emission Trading System: Findings of Company 

Case Studies in the German Power Sector.” 

Ecological Economics 70 (3): 513–23.

RSPO (Roundtable on Sustainable Palm 

Oil). 2012. “2011 RSPO CSPO Growth 

Interpretation Narrative.” RSPO Secretariat, 

Kuala Lumpur, Malaysia.

Sartor, O. 2012. “Carbon Leakage in the Primary 

Aluminium Sector: What Evidence after 6 1⁄2 

Years of the EU ETS?” CDC Climate Research 

Working Paper 2012–12, Caisse des Dépôts et 

des Consignations, Paris.

Sauter, R., and J. Watson. 2008. “Technology 

Leapfrogging: A Review of the Evidence.” 

Sussex Energy Group, University of Sussex, 

Brighton, UK.

Thomson, J., and T. Jackson. 2007. “Sustainable 

Procurement in Practice: Lessons from Local 

Government.” Journal of Environmental 

Planning and Management 50: 421–44.

Thorncroft, C. 2011. “African Monsoon 

Multidisciplinary Analysis.” University of 

Albany, Department of Atmospheric and 

Environmental Sciences, Albany, NY.

Tr i nd ad e , V. 2 0 05. “ T h e B i g P u s h , 

Industrialization, and International Trade: 

The Role of Exports.” Journal of Development 

Economics 78 (October): 22–48.

Vogt-Schilb, A., and S. Hallegatte. 2011. 

“When Starting with the Most Expensive 

Option Makes Sense: Use and Misuse of 

Marginal Abatement Cost Curves.” Policy 

Research Working Paper 5803, World Bank, 

Washington, DC.

Wolf, H. 2011. “Relationship-Based and ArmsLength Financial Systems: A European 

Perspective.” Policy Research Working Paper 

5833, World Bank, Washington, DC.

World Bank. 1993. The East Asian Miracle: 

Economic Growth and Public Policy. Oxford, 

UK: Oxford University Press.

———. 2008. International Trade and Climate 

Change: Economic, Legal and Institutional 

Perspectives. Washington, DC: World 

Bank.

———. 2012. Doing Business 2012: Doing 

Business in a More Transparent World. 

Washington, DC: World Bank.

World Economic Forum. 2011. Redefi ning the 

Future of Growth: The New Sustainability 

WB_354_GG_CH03.indd 89 5/7/12 

2012-08-054_000000000000476
9 0 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Champions. Geneva: World Economic 

Forum.

Yusuf, S., K. Nabeshima, and S. Yamashita. 

2008. Growing Industrial Clusters in Asia: 

Serendipity and Science. Washington, DC: 

World Bank.

Zhang, C., D. Z. Zeng, W. P. Mako, and J. Seward. 

2009. Promoting Enterprise-Led Innovation 

in China. Directions in Development. 

Washington, DC: World Bank.

WB_354_GG_CH03.indd 90 5/7/12 

2012-08-054_000000000000477
4 Human Capital: Implications of 

Green Growth Policies for Labor 

Markets and Job Creation

For many countries the promise of new 

sources of growth and job creation is 

what lies behind the attractiveness of 

green growth. They look at Brazil, China, 

Denmark, India, and Japan—world leaders 

in exports of green products, who created 

entirely new industries in wind, solar, and 

biofuels. They hear about the promised double dividend of a green fi scal stimulus that can 

create jobs in the short run while laying the 

foundations for a more sustainable future.

For others the fear of diminished competitiveness and job losses remains one of 

the main barriers to pursuing green growth. 

They worry that tightening environmental 

policies could lead to industries relocating 

in countries with laxer environmental policies (so-called “pollution havens”)—and that 

these policies will lead to trade wars.

Yet, to some extent, this is an old 

debate—one that centers on the complex 

relationships between environmental regulation and competitiveness, and the ensuing 

job impacts. The topic of “green jobs” is just 

the latest round, prompted by global economic worries.

 91

Key Messages

• Green growth cannot substitute for good 

growth policies, and employment is no 

exception: shortcomings in labor markets 

will not disappear with the adoption of environmental policies.

• But even if green jobs will not be a panacea, 

environmental regulation need not kill jobs 

either, and the net balance can be positive.

• To smooth the impacts on labor markets of 

the transition to green growth, policy makers need to tackle potential skill shortages 

and impediments to worker mobility—both

of which have constituted barriers to other 

types of economic adjustment, such as trade 

liberalization. 

This chapter is based on Bowen (2012), except section “. . . and Learn from the Lessons of Trade Adjustment,” which 

draws from Porto (2012).

WB_354_GG_CH04.indd 91 5/7/12 

2012-08-054_000000000000478
9 2 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Does green growth create jobs? The supporters argue that green policies are “a new 

engine of growth” and “a net generator of 

decent jobs” (UNEP 2011). The recent global economic downturn triggered many proposals for “green” fi scal stimuli to promote 

growth and job creation (Pollin and others 

2008). The Organisation for Economic Cooperation and Development (OECD) also 

suggested that investing in green activities has 

substantial potential to create jobs (OECD 

2011b). Chinese analysts estimate that measures to save energy, protect the environment, 

and replace polluting industries with hightech firms would lead to the net creation 

of some 10 million jobs over the next 5–10 

years, and that exports of green goods could 

create some 4–8 million jobs (CCICED 2011, 

cited in World Bank and DRC 2012).

But the critics claim that the potential 

is overestimated and that environmental 

policies may actually hurt labor markets 

(Michaels and Murphy 2009; Morriss and 

others 2009). A recent study of South Africa 

fi nds that while developing green industries is 

appealing, it has little chance of succeeding 

unless structural problems (regulatory obstacles to creating small enterprises, a lack of 

skilled workers) are addressed (World Bank 

2011a). Similarly, investments to promote 

research and development (R&D) in green 

industries will do little if educational and 

fi nancial systems produce few skilled workers and little risk capital.

To shed light on this debate, this chapter 

explores the net impact of green job creation—that is, whether more jobs will be created than lost—and the relationship between 

labor markets and green growth policies. It 

fi rst discusses what exactly green jobs are, 

then moves to the factors that influence 

whether green growth policies lead to job 

creation, and fi nishes with measures needed 

to smooth the transition to greener growth 

paths for labor markets.

The key fi nding is that environmental policies will lead to substantial job creation only 

if other inefficiencies—including those of 

labor markets—are tackled. In other words, 

green growth policies are no substitute for 

good growth policies. But while green growth 

may not be the answer to chronic unemployment and low competitiveness, fears that 

environmental regulations would result in 

job losses and lower competitiveness are misplaced—indeed, odds are that the impacts 

will be quite moderate. Meanwhile, better 

regulations (particularly those supported by 

training) support for R&D, and tax recycling 

(that is, using revenues from environmental 

taxes to reduce other taxes) will help minimize the risks posed by green growth policies 

and maximize co-benefi ts. 

Green policies may create jobs, 

but are no substitute for sound 

labor markets

A fi rst hurdle in framing the debate is that 

there is no agreement on how to define 

“green” jobs, even among economists. This 

lack of defi nition matters because it complicates the debate on the desirability of green 

policies.

Defi ning green jobs...

As “employment in ‘green’ industries”

Some defi nitions of green jobs are fairly narrow, including only jobs with an identifi able 

environmental focus or employment in industries (or specific projects) whose products 

are deemed to be of environmental benefi t. 

This would include employment in renewable 

energy, energy effi ciency, and environmental 

services or in developing less carbon-intensive 

products (such as building railways).

For the United Nations Environment Programme (UNEP), job content, as well as the 

characteristics of industry goods and services, 

also matters (UNEP 2008). UNEP defines 

green jobs as

work in agricultural, manufacturing, R&D, administrative, and service 

activities that contribute substantially 

to preserving or restoring environmental 

quality. Specifi cally, but not exclusively, 

this includes jobs that help to protect 

ecosystems and biodiversity; reduce 

WB_354_GG_CH04.indd 92 5/7/12 

2012-08-054_000000000000479
HUMAN CAPITAL 9 3

energy, materials, and water consumption 

through high-efficiency strategies; decarbonize the economy; and minimize or 

altogether avoid generation of all forms 

of waste and pollution (UNEP 2008).1

This defi nition takes a broad industry perspective, extending beyond employment in 

narrowly defi ned environmental services. In 

principle it embraces employment in producing any goods and services that have smaller 

adverse environmental impacts than close 

substitutes.

Some defi nitions focus on industries producing environmentally desirable outputs. 

The OECD/Eurostat defi nes the environmental goods and services industry as “activities 

that produce goods and services to measure, 

prevent, limit, minimize, or correct environmental damage to water, air, and soil, as 

well as problems related to waste, noise, and 

ecosystems. This includes technologies, products, and services that reduce environmental 

risk and minimize pollution and resources” 

(OECD 1999). For example, air and resource 

pollution management would qualify.

Using the OECD’s defi nition, green jobs 

constitute a small but signifi cant share of 

total employment—about 1.7 percent of 

total paid employment in Europe (European 

Commission 2007). That is probably a 

higher fraction than a global estimate along 

UNEP lines would suggest; as UNEP notes, 

much of the documented growth in green 

jobs has so far been in developed countries.2

Employees in many jobs might find that 

their jobs are not counted as “green” despite 

the nature of the goods and services that 

they help produce. For example, jobs in the 

car industry are excluded, even though some 

may be devoted to developing low-carbon 

vehicles.

As “the employment consequence of 

green policies”

Some defi nitions of green jobs follow a different track, focusing on what happens 

when public policies to correct environmental externalities are introduced—opening 

the possibility of including jobs created 

and destroyed across the whole economy. 

In effect they try to answer the question, 

“What are the employment consequences 

of introducing green policies (such as cap 

and trade) relative to a baseline case?” This 

approach requires implicit or explicit economic modeling of the policies.

Some studies in this vein count only jobs 

directly created by the policies—that is, 

“direct” employment effects. They focus on 

the specifi c labor requirements of technologies (“bottom-up” estimates, using simple 

spreadsheet-based analytical models in conjunction with engineering estimates).3 An 

important issue is the timing and duration 

of job creation. There is a key distinction 

between construction, manufacture, and 

installation—where jobs may be fairly shortlived—and ongoing operation, maintenance, 

and fuel processing—where the length of 

jobs depends on the durability of the relevant 

plant.

Other studies include both jobs created 

and jobs destroyed in sectors disadvantaged 

by green policies—that is, indirect and net 

employment effects. This net concept of 

employment change is crucial for evaluating the overall labor market impacts of environmental policies. It can be done through 

input-output tables or general equilibrium 

modeling. They include jobs created by the 

aggregate demand generated by the extra 

direct and indirect employment (“induced” 

employment effects). This approach allows 

jobs to be counted as green if they are created by green policies, even if they are in sectors with no obvious direct relationship to 

environmental objectives (such as communication) or with only a secondary relationship 

(such as fi nancial services). It also includes 

other economic feedbacks and mechanisms 

triggered by environmental policies, thus 

hopefully capturing jobs lost owing to higher 

prices and lower real wages, lower final 

demand, and lower investment. But many 

studies do not follow through with this 

netting-out process.

Another approach considers different time 

horizons—the further the time horizon, the 

more economic variables can be adjusted. 

WB_354_GG_CH04.indd 93 5/7/12 

2012-08-054_000000000000480
9 4 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

For example, a study of the impact of carbon price policies on U.S. industry considers outcomes along four time scales (Ho and 

others 2008):

• The very short run, where fi rms cannot 

adjust prices and profi ts fall accordingly.

• The short run, where firms can raise 

prices to refl ect the higher energy costs, 

with a corresponding decline in sales as a 

result of product or import substitution.

• The medium run, when in addition to 

the changes in output prices, the mix 

of inputs may also change, but capital 

remains in place, and economy-wide 

effects are considered.

• The long run, when capital may be reallocated and replaced with more energyeffi cient technologies.

It concludes that employment consequences of green policies differ strongly, 

depending on the time horizon. Short-term 

employment losses mirror output declines 

and are substantial in energy-intensive sectors, but gains in other industries would fully 

offset those losses in the longer term.

But few studies account for labor market 

rigidities and other obstacles to job creation, 

and yet they may impair any positive effect 

of green policies. As the World Bank study 

on South Africa (World Bank 2011a) noted, 

green policies cannot correct all the problems 

holding back job creation—such as skill mismatches and the dualism (insider-outsider) of 

the job market. Thus, the scope for green job 

creation is limited in the absence of parallel 

economic policy changes.

Evaluating the impact of green policies 

on jobs: Gross versus net job creation

What is the overall job creation impact of 

green policies in developing countries? Few 

studies have explicitly focused on this, and 

those that have suffer from many definitional issues, making comparisons diffi cult.4 They also fail to look at economywide effects. That said, the few that do 

exist suggest that climate-change policies 

in general and renewable energy policies in 

particular can generate considerable extra 

employment: 

• In South Africa, a study finds that an 

“energy revolution” scenario—that is, a 

scenario with a strong transition toward 

renewable energy—creates 27 percent 

more jobs than the International Energy 

Agency’s business-as-usual scenario and 

5 percent more than the growth-withoutconstraints scenario (Rutovitz 2010).

• In India, a study finds that low-carbon 

employment is one of the key co-benefi ts of 

promoting the renewables sector. It notes 

that solar power is more labor- intensive 

than wind power and better able to meet 

India’s requirements for small-scale, offgrid power. Biomass, green transport, and 

public works in water and forest management are also attractive ways of achieving both employment and environmental 

objectives (GCN 2010).

• In China, a study emphasizes the possible employment losses from the planned 

sharp reduction in the energy intensity of 

Chinese industry, but notes that this could 

be outweighed by increased employment 

in renewables and—quantitatively, much 

more important—the shift of the Chinese 

economy toward services and away from 

heavy industry (GCN 2010).

• In Brazil, a study argues that renewable 

energy sources have a stronger potential 

in Brazil than is envisioned in official 

studies and government policies, both in 

contributing to CO2 mitigation and generating jobs (GCN 2010).

What is the record of green fi scal stimuli 

on job creation in developing countries? The 

evidence is scant, but a few studies do show 

some job creation, with substantial variation 

in jobs created per dollars spent.

• In the Republic of Korea, forest restoration generated nearly eight times as 

many jobs per dollar as the least laborintensive green objective, “vehicles and 

clean energy” (Barbier 2009).

• In China, biomass spending was found 

to be nearly 30 times more effective in 

generating jobs per dollar than wind 

WB_354_GG_CH04.indd 94 5/7/12 

2012-08-054_000000000000481
HUMAN CAPITAL 9 5

power (UNEP 2008). That suggests that 

the focus on renewable energy and lowcarbon manufacturing prevalent in studies for Europe and the United States may 

miss the opportunities for employment 

creation from changes in land management and agriculture in developing countries, where these economic sectors are 

fairly more important.

• In Latin America, water network rehabilitation and expansion in Honduras is 

much more effective (by a factor of more 

than 10) in creating jobs than hydroelectric schemes in Brazil, with rural 

electrifi cation in Peru falling in between 

(Schwartz and others 2009).

While useful, these studies have limitations. They do not discuss the capital constraints that may hamper the (public or 

private) investments needed to create the 

green jobs. They assume people will move 

seamlessly from one sector to another and 

ignore labor market rigidities. They tend to 

focus narrowly on the energy sector when 

green growth options (even when limited to 

climate change concerns) exist in other sectors that may be more labor-intensive. And 

they do not always distinguish between 

substitution (using more labor and less 

capital, energy, and other inputs) and lower 

productivity (using more inputs to produce 

the same amount of output). This distinction matters because capital-labor substitution is desirable, at least for countries with 

excess labor supply, large unemployment, 

and limited access to capital; lower productivity is not.

Another question worth asking is 

whether green spending is a good way of 

creating short-term employment during a 

crisis. The argument in favor of green fi scal 

stimuli is that they can both create jobs and 

lay the foundations for more sustainable 

growth. But experience suggests the need 

to look across the range of possible green 

works (from renewable energy to reforestation) as not all are equally labor-intensive 

and “shovel-ready.”

To begin with, if employment creation 

is the objective, higher spending in sectors 

with lower capital intensities than either 

conventional or renewable energy—such as 

reforestation programs or even education 

and health services—may be more effective. But there may be tradeoffs between 

rapid employment creation and “greenness.” Road building, for example, is fairly 

labor-intensive and can help to provide valuable infrastructure, but it is not particularly 

green. And some sectors, such as energy, 

will not top the list for sustainable rapid job 

creation, given that they require a long lead 

time for replacing capital.

And programs that yield larger employment effects tend to lead to more employment 

gains for largely lower skilled workers, so that 

the long-term growth effects are fairly small. 

Long-term development, including sustainable development, requires more of a focus on 

growth-enhancing infrastructure investment, 

which is not necessarily labor-intensive.

More analysis is needed of how global 

markets will affect job creation—leakages of 

green jobs and spending to other countries 

depend on endowments of skills, existing 

industry structure, the nature of the technologies newly deployed, and the ways that 

comparative advantage is exploited (GCN 

2010).

The last point is a useful reminder that 

general equilibrium effects matter. Yet these 

are largely ignored in the green jobs literature. That may be particularly misleading 

for developing countries, as the next section 

discusses.

The eff ect of green policies on 

employment depends on labor market 

structure and the specifi c policy 

considered

The problem with studies that discuss job 

markets is that they tend to either model 

them as perfectly competitive, and thus 

adapting instantly to all shocks with no 

involuntary unemployment (the neoclassical model)—or as having involuntary unemployment that could be cleared with a fi scal 

stimulus (the Keynesian model). The fi rst set 

of assumptions implies that green jobs are 

WB_354_GG_CH04.indd 95 5/7/12 

2012-08-054_000000000000482
9 6 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

likely to displace as many jobs elsewhere in 

the economy.5 The second, that there will 

be no crowding out of jobs by green fi scal 

stimuli.

Neither approach is realistic. Most 

developing countries have surplus labor 

economies, so estimates limited to direct 

employment creation in the green jobs 

literature might be less misleading for 

developing countries than for industrial 

economies closer to full employment. But 

it is more complicated in “dual” economies 

with modern and traditional sectors or in 

three-sector economies with a traditional 

rural sector and both formal and informal 

urban sectors characteristic of many developing countries (Harris and Todaro 1970; 

Mazumdar 1976). In that case the (skilled) 

formal urban labor market is often very 

shallow and green job creations can have 

crowding-out effects on other activities.

So knowing how best to model how the 

aggregate labor market works—and, indeed, 

how the macroeconomy as a whole works—is 

crucial to properly assess overall (net) job creation. Babiker and Eckaus (2007) illustrate 

the value of the implicit or explicit macroeconomic framework, showing how climate 

policy could increase unemployment in the 

presence of real wage rigidities or barriers to 

the sectoral reallocation of labor. Guivarch 

and others (2011) highlight that climate policy costs depend signifi cantly on labor market rigidities and that policy cost estimates 

are much higher in models with imperfect 

labor markets. Overall, labor market impacts 

can also be infl uenced by how the revenues 

from other environmental taxes are used, as 

the literature on the “double dividend” from 

environmental taxation shows (Fullerton and 

Metcalf 1997; Sartzetakis and Tsigaris 2007). 

Studies tend to show that if tax revenues are 

used to reduce payroll tax—a tax on labor 

supply—employment will fall by less or even 

increase.

The key point is that the overall effects of 

green policies on employment depend on the 

characteristics of the economy’s labor markets 

and the nature of the policy interventions, 

including their funding, not just the input 

requirements of rival energy technologies. 

Indeed, underemployment can have multiple 

causes, and the consequences of green policies will differ depending on these causes. It 

thus helps to consider the implications of a 

wider range of theories of underemployment 

and labor market adjustment in different 

types of economy (box 4.1).

But environmental regulation 

need not kill jobs either

A major fear being voiced in the green jobs 

debate is that environmental regulation—

needed to price externalities and encourage 

fi rms to change their production processes—

will destroy jobs.

A tale of two antithetical hypotheses: 

the “pollution haven” and “Porter” 

hypotheses

For the past 20 years the debate on the 

implications of environmental policies on 

competitiveness (and jobs) has revolved 

around two antithetical hypotheses: the 

“pessimistic” pollution haven hypothesis, 

which contends that fi rms will fl ee locations 

with strong environmental regulations; and 

the “optimistic” Porter hypothesis, which 

argues that environmental regulation will 

lead to innovation (Porter and van der Linde 

1995). In the latter, innovation reduces the 

cost of regulation (weak Porter hypothesis) 

and may lead to increased competitiveness 

and profi tability (strong Porter hypothesis).

What is the latest thinking on this issue? 

As chapter 3 reported, there is no evidence 

that environmental policies have systematically led to job losses because of an exodus 

of fi rms to pollution havens. Tighter environmental regulation may cause fi rms to relocate, but they will choose locations that are 

more attractive overall, as pollution abatement costs represent a small share of production costs for most industries (Copeland 

2012). Factors such as availability of capital, 

exchange rates, labor abundance, location, 

institutions, and agglomeration effects are 

more important than environmental policy 

in determining firm location and competitiveness. Empirical evidence from existing 

WB_354_GG_CH04.indd 96 5/7/12 

2012-08-054_000000000000483
HUMAN CAPITAL 9 7

BOX 4.1 A framework to estimate the impacts of green policies on jobs

How can policy makers determine if green policies 

will create jobs? The following provides a framework to assess labor market consequences, exploring what would happen in an economy with two sectors: a clean one and a dirty one. The products are 

imperfect substitutes that are produced with many 

inputs, including labor. The fi rst two cases explore 

the impact of green growth policies that focus on 

the demand side, and the rest deal with policies that 

focus on the supply side.

Case 1. Demand defi cit and a green stimulus

In this case the economy is typified by “Keynesian” unemployment—that is, with insuffi cient overall 

demand. The green policy involves a fi scal stimulus 

with spending focused on the clean sector. What 

would happen? Greater demand for the clean sector’s 

product would stimulate greater employment in the 

clean sector, in turn pushing up wages in this sector, 

and thus increasing fi nal demand. Increased demand 

in the labor market would put upward pressure on 

wages throughout the economy, possibly causing a 

slight decline in employment in the dirty sector. Overall, employment would be expected to rise as long as 

job creation in the clean sector outweighs the (indirect) 

job losses elsewhere, facilitating a virtuous outcome.

Case 2. A green paradox: demand defi cit and a 

green stimulus meet a skills defi cit

Here again we have a Keynesian economy, but 

there is a skills defi cit in the clean sector. The green 

policy involves a fiscal stimulus with spending 

focused on the clean sector. Higher demand for the 

clean sector’s products would feed into higher wages 

across the economy, because employment in the clean 

sector cannot expand, but overall employment levels 

would not expand much, and may even decline. Thus, 

the green fiscal stimulus would be largely ineffectual, generate higher wages, and create little (if any) 

additional employment. (In an open economy the 

green stimulus may trigger imports, in which case it 

would have little impact on employment.)

Case 3. Pollution regulation with virtuous initial 

conditions

Now the green policy involves a pollution tax to 

correct a pollution externality in the dirty sector, and 

there are no wage or price rigidities in the economy. 

Faced with an emissions tax, the optimum response 

would be a contraction of output and an investment 

in pollution abatement. What would happen? The 

regulations would be expected to destroy jobs in 

the dirty sector, given that the tax raises production 

costs with the dirty technology and the price of these 

goods rises. As a result, demand for the clean substitute good rises and employment in the clean sector 

increases—imparting incentives to reduce the externality either through new production techniques or 

end-of-pipe abatement, which would boost jobs in 

pollution abatement.

This scenario suggests that overall employment 

would increase when there exists a close and clean 

substitute produced with more labor-intensive technology or when abatement is feasible and more laborintensive than dirty production (on the margin). This 

situation might apply to economies such as Japan’s or 

the Republic of Korea’s that are well endowed with 

labor skills and technology for cleaning up.

Case 4. Pollution regulation with immiserizing 

initial conditions

This is similar to the previous case but with two 

key differences: no clean substitute for the dirty 

good, and pollution abatement is either far too 

costly or unavailable, or is highly capital intensive. 

Production and employment in the dirty sector 

would decline, with little or no offsetting increase 

in cleaner jobs. This situation most likely applies to 

economies reliant on extractive industries—such as 

artisanal mining, where pollution abatement is typically far too costly for the small producers and there 

is no clean substitute available for the mineral.

Case 5. Renewable resource regulations—restore 

rents but not necessarily jobs

Here we have a classic open-access commonproperty resource such as a fishery. Entry occurs 

until the payoffs from harvesting decline to zero (or 

to the opportunity cost). If there is a tax or restriction on harvesting, this would lower employment but 

increase resource stocks and the payoffs. Thus, while 

employment may decline, economic returns increase 

and environmental benefi ts accrue. Conversely, if the 

policy were accompanied by expenditure on ecosystem restoration, there would be offsetting changes in 

employment, with ambiguous net impacts.

The bottom line is that the labor market consequences of green policies depend on the policy under 

consideration, technological parameters, and the 

state of the economy. There are cases where a given 

policy can create jobs, and other circumstances 

when it can destroy jobs.

Box text contributed by Richard Damania.

WB_354_GG_CH04.indd 97 5/7/12 

2012-08-054_000000000000484
9 8 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

regulation or environmental taxes confi rms 

this result (Anger and Oberndorfer 2008; 

Ellerman and others 2010; Martin and others 

2011; Morgenstern and others 2002; Quirion 

2011; Sartor 2012). But this evidence is based 

mostly on existing regulations in developed 

countries, and future research needs to ascertain whether these results extend to developing countries and to more ambitious environmental policies than have been applied to 

date.

For sectors intensive in natural capital—

with which many developing countries are 

well endowed—the pollution haven hypothesis is even less likely. After all, without sound 

environmental policies, the increased pressures coming from trade could rapidly deplete 

natural capital, and then the short-term benefits from increased trade would be wiped 

out by the subsequent collapse of the resource 

base of the activity (Copeland 2012).

The reality is that stringent environmental provisions are essential for guaranteeing 

the long-term sustainability of the economic 

activities (and jobs) that depend on natural capital. If a natural resource base is well 

managed, it can be used to create jobs (moving up the value chain by creating a downstream processing sector, for instance) and 

seize opportunities in global markets.

At the firm level, studies show that the 

impact of more stringent environmental regulation on productivity and competitiveness is 

modest and sometimes even positive, thanks 

to innovation (Ambec and others 2011). The 

large body of literature triggered by the seminal paper by Porter and van der Linde (1995) 

supports the weak version of the Porter 

hypothesis: innovation does reduce costs.

Further, recent studies have found an 

increasing number of cases where environmental regulation had positive impacts on 

profi ts (Ambec and others 2011). This may be 

due to the fact that regulators have become 

better at designing smart regulatory policies, 

as well as that the models used to assess the 

effects of environmental regulation on innovation and competitiveness were refi ned to 

account for the lagged structure of innovation (essentially they wait a few more years 

to evaluate the impact, giving the fi rm more 

time to adapt).

Thus, the overall effect of environmental 

regulations on jobs is likely to be limited. 

In the United States, an econometric study 

of highly regulated industries fi nds that the 

impact of stringent environmental regulations 

on U.S. jobs was negligible in most cases—

across all industries, 1.5 jobs were created per 

$1 million spent in additional environmental 

spending, with a standard error of 2.2 jobs 

(Morgenstern and others 2002).

Types of adjustment needed across 

countries

There is much variation across developing 

countries in the likely ease of transition to 

a low-carbon growth pathway. Chapter 3 

shows that developing a comparative advantage in the production of equipment for lowcarbon electricity depends on the manufacturing base of the country and on whether 

there are scale and learning economies in the 

technology. Some countries have a comparative advantage in particular renewable energy 

sources because of natural endowments. 

Brazil has the right climatic conditions and 

soils to give it a substantial cost advantage 

in biofuels, though other characteristics of 

the Brazilian economy also help, in addition 

to being very well endowed in hydroelectric 

potential (Kojima and Johnson 2005).

Developing countries that produce a high 

level of greenhouse gas emissions per unit of 

GDP face a more diffi cult challenge of structural adjustment. They are the ones in which 

more labor is likely to have to be reallocated 

from greenhouse gas–intensive activities, 

either by switching technologies within an 

industry or by moving labor between industry sectors. Given the importance of CO2

emissions from energy production, energyintensive economies will compose a large part 

of this group.

Endowments of fossil fuels combined with 

industrial development strategies that have 

favored carbon-intensive industry make a 

transition to low carbon much more challenging (EBRD 2011). If such economies 

WB_354_GG_CH04.indd 98 5/7/12 

2012-08-054_000000000000485
HUMAN CAPITAL 9 9

impose a carbon tax, the standard economic 

policy instrument to internalize the greenhouse gas externality, the relative returns to 

different factors of production are likely to 

change. The few empirical studies focusing 

on how carbon taxation might affect factor 

returns suggest that the incidence of a carbon 

tax is likely to be regressive when emission 

abatement measures are capital-intensive, 

requiring complementary policies (Fullerton 

and Heutel 2007, 2010). Countries such as 

Kazakhstan and Mongolia, with a much 

larger-than-average proportion of the labor 

force in mining and energy supply, are more 

likely to suffer as a result of this adjustment 

and also from the diffi culties of reallocating 

displaced labor to other sectors. Chapter 3 

discusses how industrial and other sectorspecifi c policies can facilitate this transition.

Smoothing the transition to 

greener growth paths for the 

labor market

Policy makers need to worry about skills 

that can limit job creation...

To what extent are the skills needed in the 

labor force for greener growth being altered? 

This matters because if the skills required 

are unavailable, that could place a major 

obstacle in the way of the transition to green 

growth.

Overall, “green restructuring” brings 

with it the usual challenges to policy makers 

trying to facilitate restructuring and reduce 

the labor market adjustment costs, including those from a changing skill mix. Many 

of the expanding industries are likely to be 

using new products and processes, refl ecting 

the transition to low-carbon technologies, 

so the generic skill requirements of many of 

the newly created jobs are likely to be higher 

than average, as they have to allow for 

assimilation of unfamiliar tasks and working methods and “learning-by-doing.” But 

a larger proportion of jobs in the renewable 

energy sector and in energy efficiency are 

lower skilled than in the fossil fuel energy 

sector (Pollin and others 2009). Contrary 

to the coal industry—which employs many 

low-skill workers in developing countries—

the oil and gas industries tend to have fairly 

well-paid workers and a large proportion of 

highly qualifi ed engineers and technicians.

Perhaps the most thorough study of green 

growth and skills so far is ILO/CEDEFOP 

(2011), which reports and synthesizes the 

results of 21 country reviews. It notes that the 

demand for skills is being affected in three 

ways by the transition to green growth:

1. Induced structural change across industries increases the demand for skills 

specifi c to expanding industries such as 

renewable energy and reduces the demand 

for skills such as those for coal mining.

2. Some new occupations are emerging—

such as photovoltaic (PV) fitters and 

carbon-footprint assessors—though there 

appear to be fairly few unique green 

skills.

3. The content of many jobs in current industries is changing, as companies focus on 

achieving better energy effi ciency, switching from fossil fuel sources to renewable 

energy, and producing capital equipment 

for expanding green industries. In agriculture, low- and no-till agriculture and 

reduced use of fertilizers and pesticides 

will entail changes in farmers’ practices, 

as will increased production of biofuel crops and efforts to increase forest 

cover—a development likely to have the 

most pervasive effects on labor markets, 

particularly in developing countries.

What is worrisome is that skill shortages 

may already be impeding the transition to 

green growth (box 4.2). In 2011 the OECD 

(2011a) drew attention to widespread skill 

shortages in energy-efficient construction 

and retrofitting, renewable energy, energy 

and resource efficiency, and environmental services. Many countries have reported 

specifi c bottlenecks, such as the shortage of 

skilled PV workers in Germany and the lack 

of design engineers for smart grids in the 

United Kingdom. Karp and Stevenson (2012) 

identify similar shortages in developing countries. In India, maintaining and operating the 

WB_354_GG_CH04.indd 99 5/7/12 

2012-08-054_000000000000486
100 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

renewable energy systems deployed by the 

Remote Village Electrifi cation is complicated 

by the lack of skilled workers (IEA 2010).

In 2001 China started the Township 

Electrifi cation Program to bring electricity 

to rural communities using solar PV, small 

hydro, and wind. While installation appears 

to be working well, there are problems with 

maintenance and operation, partly because 

of a lack of qualifi ed electricians. Reasons 

for these reported shortages include the 

underestimation of the growth of certain 

green sectors, the general shortage of scientists and engineers, the low reputation 

and attractiveness of some sectors important for the green transition such as waste 

management, and a shortage of teachers 

and trainers in environmental service (ILO/

CEDEFOP 2011).

Many of the skill shortages already 

reported in connection with green growth 

strategies appear to result from generic failings in education and training. And they 

refl ect long-standing issues such as the lack 

of functioning universities and research 

centers, the mismatch between students’ 

choices of discipline and the needed skills, 

the lack of incentives for employers to invest 

in developing the transferable skills of their 

workforces, the lack of access for the disadvantaged to time and finance for training, 

and the stickiness of relative pay rates.

Fortunately, there is a potential for synergies between green policies aimed at skill 

development and growth policies aimed at 

increasing labor capital, worker education, 

and labor productivity. Figure 4.1 shows that 

many developing countries need to increase 

their enrollment in technical tertiary education. Such an increase would accelerate 

growth and help with skill limitations created 

by green policies.

...and learn from the lessons of trade 

adjustment

Green growth is about transforming our 

production and consumption processes 

from a dirty, environmentally unsustainable 

model to a sustainable one. Like any structural transition it inevitably entails transition 

costs, which green growth policies must seek 

to minimize. As such, the trade literature, 

which has extensively documented adjustment costs associated with trade liberalization, offers interesting insights.

BOX 4.2 Shortage of skills and inadequate training provisions can undermine green 

programs

The problems that can arise when training provision is not up to the challenge of the induced structural change are illustrated by Australia’s experience 

with a new Home Insulation Program introduced in 

February 2009 as a key part of the government’s fi scal stimulus.

The program was designed partly to generate 

jobs for lower skilled workers in the housing and 

construction industries. At the start of the program 

only supervisors were required to satisfy one of three 

minimum competences—prior experience in the insulation industry, qualifi cations in an approved trade, 

or insulation-specifi c training. The program proved 

popular. At its peak, demand was running at almost 

2.5 times the anticipated level and some 1.1 million 

roofs of 2.7 million eligible were insulated. But fi res, 

fitters’ deaths, and reports of fraud undermined 

public confi dence, and the program was canceled in 

February 2010. A subsequent sample of inspections 

revealed that nearly 30 percent of installations had 

some level of defi ciency. Investigations showed that 

low skill levels in the industry, inadequate provision 

of training, and poor management of the program 

were among the factors responsible.

The importance of competent project management and national policy making in this case is a 

reminder of the key role of higher level management 

and planning skills in a policy-induced transition to 

green growth that is likely to take sustained effort 

and policy credibility over a long period.

Source: Australian National Audit Offi ce 2010.

WB_354_GG_CH04.indd 100 5/7/12 

2012-08-054_000000000000487
HUMAN CAPITAL 101

Adjustment costs, whether stemming 

from trade shocks or a transition to green 

growth, are fundamentally driven by factor 

immobility—sluggishness in capital or labor 

market adjustments.6 These costs would be 

zero were workers able to adjust instantly 

to the changing demand for skills (moving 

instantly from one industry to another) and 

were firms able to instantly modify their 

fixed capital following changes in carbon 

prices or pollution standards.

In the real world, labor markets are sluggish, as experience with trade liberalization shows. Trade liberalization creates and 

destroys jobs within industries. But the fl ow 

of labor across sectors—from shrinking to 

expanding ones—is slow. In Brazil it took 

several years for workers displaced from deprotected industries to be absorbed by sectors with comparative advantages (Muendler 

2010). In addition, large wage differences 

persist among workers with similar qualifi cations and status across industries, suggesting 

limited mobility of workers across industries 

(if workers were mobile, they would switch to 

the highest paying industry until wages equalized). This “industry-effect” explains a large 

fraction of wage differences across workers, 

and prevails in both developed and developing countries, for skilled and unskilled workers (Krueger and Summers 1989).

What does this sluggishness stem from? 

Slow labor market adjustments reflect 

demand-side (industries requiring specific 

skills) and supply-side (worker characteristics) factors. Whether sector-specifi c knowledge and training are a bigger impediment 

to mobility than labor market frictions (the 

time and costs associated with search and 

matching) depends on the extent to which 

worker experience is specifi c to each sector 

(Cosar 2010; Dix-Carneiro 2010). And there 

appears to be significant variation in the 

mobility of different types of workers, with 

lower adjustment costs for younger workers 

and skilled workers. The policies needed to 

help transition may thus differ by country 

(depending on the nature of the adjustment) 

or by affected worker categories (depending 

on age, skill, and so on).

As for capital stocks, a shift toward 

greener production processes is likely to 

require substantial changes, as firms may 

need to invest in new product lines, machines, 

and equipment. Yet, as experience with trade 

adjustment shows, the process may be quite 

costly—for example, following Argentina’s 

trade reform, the required capital adjustment 

averaged 14.5 percent of fi rms’ capital stock 

(Bet and others 2011). Thus, the capacity of 

economies to adjust to green policies may be 

limited by capital constraints, which could 

affect labor demand.

Because adjustment costs are a direct function of factor immobility, efforts to increase 

labor or capital mobility will be critical. And 

support policies should be targeted to facilitating the transition rather than cushioning 

potential losses. Simple unemployment insurance tends to hamper reallocation and skill 

formation. But employment subsidies can be 

useful if made conditional on working in the 

export-oriented (or green) sector (a form of 

industrial policy; see chapter 3).

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0 5,000 10,000 15,000 20,000

percent

GDP per capita ($,PPP)

Source: Authors based on UNESCO Institute for Statistics, http://stats.uis.unesco.org/unesco/

ReportFolders/ReportFolders.aspx (accessed March 18, 2012); World Bank 2011b.

Note: PPP = purchasing power parity.

FIGURE 4.1 Many developing countries need to increase their 

enrollment in technical tertiary education 

(enrollment in engineering, manufacturing, and construction in tertiary 

education as a percentage of the total population, 2009)

WB_354_GG_CH04.indd 101 5/7/12 

2012-08-054_000000000000488
102 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Ultimately, the cost of the transition will 

depend on the overall economic policy framework and the extent to which it facilitates the 

emergence and growth of new sectors and 

fi rms. So the ability to carry out and reap the 

benefi ts of a green growth policy will depend 

on good economic policy.

In sum, fears that environmental regulations will lead to massive job losses or loss of 

competitiveness are probably as unfounded as 

the hope that green jobs will single-handedly 

solve countries’ employment problems. That 

said, it is vital to invest in human capital to 

accelerate growth and to green growth. This 

is one of the inputs to economic production. 

Natural capital is another critical input, and 

the next chapter will look at why it is important to invest in this domain, too.

Notes

 1. UNEP also includes a provision that “green 

jobs need to be decent jobs” (UNEP 2008).

 2. At the same time developed countries are 

responsible for, by far, the largest share of 

the stock of greenhouse gases in the atmosphere. They have also probably made a 

disproportionate contribution to long-lived 

solid waste. So some of the green jobs refl ect 

the unsustainability of developed-country 

economies.

 3. See Kammen and others (2004) and Wei and 

others (2010) for a review.

 4. Further, studies use a range of methods, 

refl ecting the different defi nitions of green job 

creation discussed above, differ in coverage of 

countries and sectors and as to whether they 

include gross or net effects and whole value 

chain effects, and make varying assumptions 

concerning economic growth and businessas-usual scenarios (Bacon and Kojima 2011; 

Fankhauser and others 2008; GCN 2010; 

GHK 2009; Kammen and others 2004; Wei 

and others 2010). The few studies of developing countries conclude to signifi cant job creation, but offer no analysis of the net impact 

(see box 4.2). 

 5. In such models implementing carbon pricing 

will tend to both redistribute labor to lowcarbon activities and reduce overall labor 

supply due to the higher relative price of 

carbon-intensive goods and services. There 

can be net job destruction, depending on how 

the revenues from carbon pricing are used as 

in a study of the potential implications of a 

cap-and-trade system for the United States, 

which found signifi cant reductions in labor 

input in 29 of 35 U.S. industries without revenue recycling (Goettle and Fawcett 2009).

 6. For instance, Guivarch and others (2011) 

model economic transaction costs due to a 

climate policy with different levels of rigidity in the labor market, fi nding that mitigation costs are much larger when labor market 

imperfections are considered.

References

Ambec, S., M. A. Cohen, S. Elgie, and P. Lanoie. 

2011. “The Porter Hypothesis at 20: Can 

Environmental Regulation Enhance Innovation 

and Competitiveness?” Discussion Paper 

11-01, Resources for the Future, Washington, 

DC.

Anger, N., and U. Oberndorfer. 2008. “Firm 

Performance and Employment in the EU 

Emissions Trading Scheme: An Empirical 

Assessment for Germany.” Energy Policy

36: 12–22.

Australian National Audit Offi ce. 2010. “Report 

on the Home Insulation Program.” Auditor 

General Report 12, 2010–11, Canberra.

Babiker, M. H., and R. S. Eckaus. 2007. 

“Unemployment Effects of Climate Policy.” 

Environmental Science & Policy 10: 600–9.

Bacon, R., and M. Kojima. 2011. “Issues in 

Estimating the Employment Generated by 

Energy Sector Activities.” Background paper 

for the World Bank Group energy sector 

strategy, World Bank, Washington, DC.

Barbier, E. B. 2009. “A Global Green New Deal.” 

Policy Brief, United Nations Environment 

Programme, Geneva.

Bet, G., I. Brambilla, and G. Porto. 2011. “Trade 

Reforms, Wages and Employment with Labor 

Mobility and Capital Adjustment Costs.” 

Working Paper, Universidad Nacional de La 

Plata, Buenos Aires.

Bowen, A. 2012. “Green Growth, Green Jobs, 

and labor Markets.” Policy Research Working 

Paper 5990, World Bank, Washington, DC.

CCICED (China Council for International 

Cooperation on Environment and Development). 

2011. “Development Mechanism and Policy 

Innovation of China’s Green Economy.” 

CCICED Task Force Report, CCICED Annual 

General Meeting, November 15–17.

WB_354_GG_CH04.indd 102 5/7/12 

2012-08-054_000000000000489
HUMAN CAPITAL 103

Copeland, B. R. 2012. “International Trade 

and Green Growth.” Paper presented at the 

Green Growth Knowledge Platform inaugural 

conference, Mexico City, January 12–13. 

Cosar, A. K. 2010. “Adjusting to Trade 

Liberalization: Reallocation and Labor 

Market Policies.” University of Chicago, 

Booth School of Business, Chicago.

Dix-Carneiro, R. 2010. “Trade Liberalization 

and Labor Market Dynamics.” CEPS Working 

Paper 212, Princeton University, Department 

of Economics, Center for Economic Policy 

Studies, Princeton, NJ.

EBRD (European Bank for Reconstruction 

and Development). 2011. Special Report on 

Climate Change: The Low Carbon Transition. 

London: EBRD.

Ellerman, A. D., F. Convery, and C. de Perthuis. 

2010. Pricing Carbon. Cambridge, UK: 

Cambridge University Press.

European Commission. 2007. Facts and 

Figures: Links between EU’s Economy 

and Environment. Luxembourg: Office 

for Official Publications of the European 

Communities.

Fankhauser, S., F. Sehlleier, and N. Stern. 2008. 

“Climate Change, Innovation and Jobs.” 

Climate Policy 8: 421–9.

Fullerton, D., and G. Heutel. 2007. “Who Bears 

the Burden of a Tax on Carbon Emissions 

in Japan?” Environmental Economics and 

Policy Studies 8: 225–70.

———. 2010. “Analytical General Equilibrium 

Effects of Energy Policy on Output and 

Factor Prices.” NBER Working Paper 15788, 

National Bureau of Economic Research, 

Cambridge, MA.

Fullerton, D., and G. E. Metcalf. 1997. 

“Environmental Taxes and the DoubleDividend Hypothesis: Did You Really Expect 

Something for Nothing?” NBER Working 

Paper 6199, National Bureau of Economic 

Research, Cambridge, MA.

GCN (Global Climate Network). 2010. “LowCarbon Jobs in an Interconnected World.” 

Discussion Paper 3, GCN, London.

GHK. 2009. “The Impacts of Climate Change on 

European Employment and Skills in the Short 

to Medium-Term: A Review of the Literature.” 

Final Report to the European Commission 

Directorate for Employment, vol. 2, Social 

Affairs and Inclusion Restructuring Forum, 

London.

Goettle, R. J., and A. A. Fawcett. 2009. “The 

Structural Effects of Cap and Trade Climate 

Policy.” Energy Economics 31 (Special 

Supplement 2): 244–53.

Guivarch, C., R. Crassous, O. Sassi, and 

S. Hallegatte. 2011. “The Costs of Climate 

Policies in a Second Best World with Labour 

Market Imperfections.” Climate Policy

11: 768–88.

Harris, J. R., and M. P. Todaro. 1970. “Migration, 

Unemployment, and Development.” American 

Economic Review 60: 126–42.

Ho, M. S., R. D. Morgenstern, and J-S Shih. 

2008. “Impact of Carbon Price Policies on U.S. 

Industry.” Discussion Paper 08-37, Resources 

for the Future, Washington, DC.

IEA (International Energy Agency). 2010. 

Comparative Study on Rural Electrifi cation 

Policies in Emerging Economies: Keys to 

Successful Policies. Paris: IEA.

I LO/C E DE FOP ( I nter nat iona l L abou r 

Organization and European Centre for the 

Development of Vocational Training). 2011. 

Skills for Green Jobs: A Global View. Geneva: 

ILO.

Kammen, D. M., K. Kapadia, and M. Fripp. 

2004. “Putting Renewables to Work: How 

Many Jobs Can the Clean Energy Industry 

Generate?” Report of the Renewable and 

Appropriate Energy Laboratory, University of 

California, Berkeley.

Karp, L., and M. Stevenson. 2012. “Green 

Industrial Policy.” Paper presented at 

the Green Growth Knowledge Platform 

inaugural conference, Mexico City, January 

12–13.

Kojima, M., and T. Johnson. 2005. “Potential 

for Biofuels for Transport in Developing 

Countries.” Energy Sector Management 

Assistance Programme, World Bank, 

Washington, DC.

Krueger, A., and L. Summers. 1989. “Effi ciency 

Wages and the I nter-I ndustry Wage 

Structure.” Econometrica 56: 259–93.

Martin, R., U. J. Wagner, and L. B. de Preux. 

2011. “The Impacts of the Climate Change 

Levy on Manufacturing: Evidence from 

Microdata.” NBER Working Papers 17446, 

National Bureau of Economic Research, 

Cambridge, MA.

Mazumdar, D. 1976. “The Rural-Urban Wage 

Gap, Migration, and the Shadow Wage.” 

Oxford Economic Papers 28 (3): 406–25.

Michaels, R., and R. P. Murphy. 2009. “Green 

Jobs: Fact or Fiction? An Assessment of the 

Literature.” Institute for Energy Research, 

Houston, TX.

WB_354_GG_CH04.indd 103 5/7/12 

2012-08-054_000000000000490
104 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Morgenstern, R. D., W. A. Pizer, and J.-S. 

Shih. 2002. “Jobs versus the Environment: 

An Industry-Level Perspective.” Journal of 

Environmental Economics and Management

43 (3): 412–36.

Morriss, A. P., W. T. Bogart, A. Dorchak, and 

R. E. Meiners. 2009. “Green Jobs Myths.” 

Law & Economics Research Paper LE09-001, 

University of Illinois, Champaign, IL.

Muendler, M. 2010. “Trade Reform, Employment 

Allocation and Worker Flows.” In Trade 

Adjustment Costs in Developing Countries: 

Impacts, Determinants and Policy Responses, 

ed. G. Porto and B. M. Hoekman, 103–42. 

Washington, DC: World Bank.

OECD (Organisation for Economic Co-operation 

and Development). 1999. The Environmental 

Goods and Services Industry: Manual for 

Data Collection and Analysis. Paris: OECD 

Publishing.

———. 2011a. “Labor Markets in the Transition 

to Green Growth: Challenges and Policy 

Responses.” OECD, Paris.

———. 2011b. Towards Green Growth: A 

Summary for Policy Makers. Paris: OECD 

Publishing.

Pollin, R., H. Garrett-Peltier, J. Heintz, and 

H. Scharber. 2008. “Green Recovery: A 

Program to Create Good Jobs and Start 

Building a Low-Carbon Economy.” University 

of Massachusetts Political Economy Research 

Institute and the Center for American Progress, 

Amherst, MA, and Washington, DC.

Pollin, R, J. Heintz, and H. Garrett-Peltier. 2009. 

“The Economic Benefi ts of Investing in Clean 

Energy.” University of Massachusetts Political 

Economy Research Institute and the Center 

for American Progress, Amherst, MA, and 

Washington, DC.

Porter, M., and C. van der Linde. 1995. “Towards 

a New Conception of the EnvironmentCompetitiveness Relationship.” Journal of 

Economic Perspective 9 (4): 97–118.

Porto, G. 2012. “The Cost of Adjustment to 

Green Growth Policies: Lessons from Trade 

Adjustment Costs.” Paper prepared for the 

Green Growth Knowledge Platform inaugural 

conference, Mexico City, January 12–13.

Quirion, P. 2011. “Les quotas échangeables 

d‘émission de gaz à effet de serre: éléments 

d‘analyse économique.” Mémoire d’habilitation 

à diriger les recherches, École des Hautes 

Études en Sciences Sociales, Paris.

Rutovitz, J. 2010. “South African Energy Sector 

Jobs to 2030” Paper prepared for Greenpeace 

Africa by the Institute for Sustainable 

Futures, University of Technology, Sydney, 

Australia.

Sartor, O. 2012. “Carbon Leakage in the Primary 

Aluminium Sector: What Evidence after 

61⁄2 Years of the EU ETS?” CDC Climate 

Research Working Paper 2012-12, Caisse des 

Dépôts et des Consignations, Paris.

Sartzetakis, E. S., and P. D. Tsigaris. 2007. 

“Uncertainty and the Double Dividend 

Hypothesis.” Nota di Lavoro 99.2007, 

Fondazione Eni Enrico Mattei, November.

Schwartz, J. Z ., L . A. Andres, and G. 

Draboiu. 2009. “Crisis in Latin America. 

Infrastructure Investment, Employment 

and the Expectations of Stimulus.” Policy 

Research Working Paper 5009, World Bank, 

Washington, DC.

U N E P ( U n it e d N at ion s E nv i ron m e nt 

Programme). 2008. Green Jobs: Towards 

Decent Work in a Sustainable, Low-Carbon 

World. Washington, DC: Worldwatch 

Institute.

———. 2011. Towards a Green Economy: 

Pathways to Sustainable Development and 

Poverty Eradication—A Synthesis for Policy 

Makers. Geneva: UNEP. http://www.unep.org

/greeneconomy.

Wei, M., S. Patadia, and D. M. Kammen. 2010. 

“Putting Renewables and Energy Effi ciency to 

Work: How Many Jobs Can the Clean Energy 

Industry Generate in the US?” Energy Policy

38: 919–31.

World Bank. 2011a. South Africa Economic 

Update—Focus on Green Growth. 

Washington, DC: World Bank.

———.2011b. World Development Indicators. 

Washington, DC: World Bank.

World Bank and DRC (Development Research 

Center of the State Council, China). 2012. 

“Seizing the Opportunity of Green Development 

in China.” Supporting Report 3 for China 

2030: Building a Modern Harmonious, and 

Creative High-Income Society. Washington, 

DC: World Bank.

WB_354_GG_CH04.indd 104 5/7/12 

2012-08-054_000000000000491
5 Natural Capital: Managing 

Resources for Sustainable Growth

Meeting peoples’ needs for food, 

fuel, and fi ber depends on sound 

management of the natural 

capital—agricultural lands, forests, water, 

fisheries—on which production of these 

goods depends. Manufactured goods also 

depend on sustained production from natural capital, such as subsoil assets.

But what exactly is natural capital? The 

term refers to the stock of natural resources 

that provides flows of valuable goods and 

services. Major types of natural capital include 

agricultural lands; subsoil assets (oil, gas, coal, 

and minerals); forests; water; fi sheries; and the 

atmosphere.1 Goods and services provided by 

natural capital underpin conventionally measured economic growth by providing inputs to 

agriculture, manufacturing, and services and 

by increasing the productivity of agriculture 

and the reliability of infrastructure services 

through climate control.

Complementing natural capital with 

human, physical, and social capital greatly 

increases its productive capacity. But the 

 105

Key Messages

• Sustainable management of natural capital 

underlies green growth in key sectors—such 

as agriculture, manufacturing, and energy—

and is vital for resilience and welfare gains.

• Different resources require different types 

of policies. For extractable but renewable 

resources, policy should center on defi ning 

property rights and helping fi rms move up 

the value chain. For cultivated renewable 

resources, policy should focus on innovation, 

effi ciency gains, sustainable intensifi cation, 

and “integrated landscape” approaches.

• The elements of natural capital cannot be 

regarded in isolation. Integrated landscape 

approaches can increase production of both

“regulating” and “provisioning” services of 

natural capital.

• In some cases, growth and green outcomes—

such as cleaner air, cleaner water, less solid 

waste, and more biodiversity—will involve 

tradeoffs. But not all of these tradeoffs are 

inevitable: innovation, which can be supported through smart subsidies, can help 

minimize or eliminate some of them.

WB_354_GG_CH05.indd 105 5/7/12 

2012-08-054_000000000000492
106 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

extent to which other forms of capital can 

substitute for natural capital is bounded, 

because people require water, food, and air 

to live, and demand for water and food will 

increase as population and incomes rise.

How can better management of natural capital lead to green growth? Sustainable management of capture fisheries can 

increase economic returns. Restoration and 

enhancement of watershed services can 

enhance agricultural productivity. Conservation of biodiversity can generate economic 

returns through nature-based tourism and 

bioprospecting. Rents accrued from mineral 

extraction can be invested in infrastructure 

and human capital, thus generating economic 

returns.

But achieving these outcomes is not easy, 

given the myriad market and institutional 

failures at play. What is needed, therefore, 

is a package of measures encompassing both 

price and nonprice interventions to enhance 

the management of natural capital. Reaping 

higher economic returns from natural forests, for example, requires aligning policies, 

incentives, capacity, and governance. Reaping higher returns from mineral extraction 

requires policies that increase production 

effi ciency, fi scal policies that are fair to both 

the government and investors, and public 

expenditure policies that encourage the reinvestment of income for broader development 

gains.

This chapter explores how better managing natural capital can promote green 

growth. It looks at four broad categories: 

(1) extractable renewable resources (capture 

fisheries, natural forests, soil, and water); 

(2) cultivated renewable resources (crops, 

livestock, aquaculture, and forest plantations; (3) nonrenewable resources (oil, gas, 

coal, and minerals); and (4) ecosystems 

that provide regulating services (watershed 

management, climate regulating services, 

and nature-based tourism). The fi rst three 

categories provide “provisioning” services 

(those that directly produce goods and services, such as food and water); the fourth 

embraces “nonprovisioning” services (those 

that provide regulating services, supporting 

services, and cultural services).2

The key fi nding is that sustainable management of natural capital is essential for 

green growth in key sectors—such as agriculture, manufacturing, and energy—and is vital 

for resilience and welfare gains. The type of 

measure (both price and nonprice) needed will 

vary with the type of resource being targeted:

• For extractable but renewable resources, 

policy should center on defining property rights and helping fi rms move up the 

value chain.

• For cultivated renewable resources, policy 

should center on innovation, efficiency 

gains, sustainable intensification, and 

“integrated landscape” approaches that 

can lead to productivity gains without 

damaging the environment.3

• For nonprovisioning services, efforts 

should concentrate on increasing knowledge of the economic value of these services and incorporating these values in 

policy decisions.

• For nonrenewable resources, the focus 

should be on minimizing environmental damage and recovering and reinvesting rent optimally for broader economic 

development.

Second, the elements of natural capital 

cannot be regarded in isolation. Integrated 

landscape approaches can increase production of both “regulating” and “provisioning” 

services of natural capital—for example, by 

integrating the production of crops, trees, and 

livestock on the same land area or by managing animal waste to enhance soil fertility and 

produce energy rather than contributing to 

pollution. But solutions need to be adapted to 

local circumstances and need to include the 

right policy measures to provide incentives 

for innovation and adoption.

Third, in some cases, growth and green 

outcomes—such as cleaner air, cleaner water, 

less solid waste, and more biodiversity—will 

involve tradeoffs. These tradeoffs are most 

common in current cultivation practices in 

agriculture, livestock, aquaculture, and plantation forests. But not all of these tradeoffs 

are inevitable: innovation, which can be supported through smart subsidies, can help 

minimize or eliminate some of them.

WB_354_GG_CH05.indd 106 5/7/12 

2012-08-054_000000000000493
NATURAL CAPITAL 107

Extractable renewable resources: 

Defi ning property rights and 

moving up the value chain

Extractable renewable resources (capture 

fi sheries, natural forests, soil, and water) are 

often, though not always, common property 

resources—goods from which it is diffi cult 

to exclude potential users, whose consumption precludes consumption by others. The 

inability to exclude users often leads these 

resources to be managed under open access 

property rights regimes, under which no economic returns or rents accrue to the scarce 

natural capital. Under such a scenario, more 

factors of production are employed in the 

extraction of the resource than is effi cient, 

and more of the resource is extracted, accelerating its depletion.

If property rights were established, total 

output would increase (perhaps after a lag 

during which the resource regenerates itself), 

and rents would accrue to the scarce natural 

resource. Some factors of production, such 

as labor, could, however, be worse off once 

property rights were established, unless 

the rents were redistributed (Weitzman 

1974). The fact that establishment of property rights can reduce the returns to labor 

may explain the resistance to introducing 

such rights. These potential losses should 

be weighed against enhanced productivity, 

which can improve overall economic welfare 

and, with a supportive policy environment, 

can enhance opportunities for moving up 

the value chain (by shifting from extraction 

alone to downstream processing), providing 

new job opportunities.

Capture fi sheries

Globally, capture fi sheries added $80 billion 

in gross value and provided direct and indirect employment to more than 120 million 

people in 2004 (World Bank and FAO 2009). 

But because fi sh are mobile, marine capture 

fi sheries are very diffi cult to manage: only a 

handful of fi sheries are being managed reasonably effi ciently.

The open access nature of capture fi sheries has led to overcapitalization, rent loss, 

and overexploitation. Because of a shrinking 

resource base, the growing number of fi shers 

and fi shing overcapacity, the catch per fi sher 

and per vessel has been declining globally—

despite signifi cant technological change and 

investments in vessel capacity (figure 5.1). 

The prevalence of subsidies has reduced the 

cost of fi shing below its economic cost and 

has contributed both to overfishing and 

resource depletion and to the economic waste 

associated with overcapacity (World Bank 

and FAO 2009).

The good news is that well-managed fi sheries could accrue rents as high as $50 billion (World Bank and FAO 2009), which 

could be used to build wealth or increase 

productivity. Establishing property rights 

would help unlock the potential economic 

value of fi sheries. But defi ning and enforcing these rights remains a challenge. Highsea capture fi sheries (beyond the exclusive 

economic zone) are dominated by large 

commercial vessels, which are often largely 

unregulated, overcapitalized through subsidies, or both.4

For their part, inshore capture fisheries have long been used as a safety net 

FIGURE 5.1 Current fi shery practices are not sustainable

(productivity of global fi shing fl eet, 1970–2005)

Source: World Bank and FAO 2009.

Note: The fl eet capacity index is the relationship between the capacity of a fi shing fl eet to catch a 

particular quantity of fi sh and the quantity of fi sh it actually catches.

20 

40 

60 

80 

100 

120 

140 

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1970198019851990199520002005

catch per vessel (tons); catch per unit capacity (tons)

number of decked vessels (millions);

fleet capacity index (fishing power) 

decked vessels (number)

catch per vessel (tons) catch per unit capacity (tons)

fleet capacity index (fishing power)

WB_354_GG_CH05.indd 107 5/7/12 

2012-08-054_000000000000494
108 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 5.1 Job creation and revenue generation from off -shore capture fi sheries in Namibia

Soon after gaining independence from South 

Africa in 1990, the new Namibian government 

declared an extended economic zone, established a 

coherent fi sheries policy, and enacted comprehensive fi sheries legislation based on long-term fi shing 

rights (rights-based management) and payments 

for these rights. At the same time, it focused on 

the “Namibianization” of the processing sector. 

Before independence, all fish were exported (or 

transshipped at sea) whole and frozen for later 

processing into value-added products abroad. By 

investing in local processing capacity, Namibia 

created many jobs and increased the industry’s 

value added (although it also created considerable 

processing overcapacity).

With an average catch of 500,000–800,000 tons 

a year (in 2003 the total catch was about 636,000 

tons), the fisheries sector’s contribution to gross 

domestic product rose from about 4 percent at independence to 10.1 percent in 1998. About 95 percent 

of Namibia’s total fi sh production is exported, yielding about $375 million in foreign exchange in 2005. 

About 14,000 people were employed in the fi sheries 

sector in Namibia in 2003, about half of them in 

onshore processing.

Source: http://www.fao.org/fi shery/countrysector/FI-CP_NA/en. 

for the rural unemployed; for this reason, 

policy makers resist altering the status quo. 

Success stories suggest that policy interventions that directly address the job loss 

associated with defining property rights 

can make green growth politically feasible (box 5.1). In addition, moving up the 

value chain can help create jobs that are 

more productive. However, such “industrial” policies may not refl ect the country’s 

comparative advantage and would need to 

be justifi ed on a case-by-case basis (Hausmann and others 2008).

Natural (including managed) forests

Natural forests (including natural forests 

that are actively managed) provide a range 

of extractable commodities (from timber 

to wood fuel to various nontimber forest 

products) and a range of ecosystem services (from regulation of soil, water, and the 

climate to sequestration of carbon and provision of habitats). In Africa alone, forests 

account for 65 percent of the total primary 

energy supply. Nontimber forest products 

(fruit, nuts, medicinal plants, and game) are 

an important source of rural livelihoods.

Global demand for industrial wood was 

about 1.8 billion cubic meters in 2010, and 

it is projected to rise to 2.6 billion cubic 

meters by 2030, with most of the increase 

coming from Asia and Eastern Europe 

(FAO 2011).5

How will this growing demand be met 

given that natural forests are often not 

well managed? The global rate of deforestation remains high, especially in tropical 

regions, with deforestation averaging about 

1 percent a year in Latin America and Africa 

over the 1990–2010 period. The encouraging news is that the rate of deforestation has 

been declining since 2000 (FAO 2011), with 

impressive declines in some key countries such 

as Brazil. Moreover, some areas—such as 

temperate and boreal zones and some emerging economies—have witnessed increases in 

forest area through both natural forest recovery and reforestation. Indeed, more than 80 

percent of traded timber is produced in temperate countries.

A problem for the world’s forests—

80 percent of which are publicly owned—is 

poorly defined property rights. In many 

developing countries, forests are often 

treated as de facto open access areas. Signifi -

cant progress has been made in recent years 

toward devolving full or partial forest management to local communities to deal with 

the problems associated with open access 

WB_354_GG_CH05.indd 108 5/7/12 

2012-08-054_000000000000495
NATURAL CAPITAL 109

regimes (box 5.2). But there have been few 

assessments of the impact of changes in 

forests management regimes on the rate of 

deforestation or the productivity of forests. 

A review of 42 studies on community forest 

management concludes that little is known 

about the effect of community forest management on improving the productivity of 

forests or reducing poverty (Bowler and others 2010).

Another problem is that assessments 

of the economic value of forests are rare, 

especially in developing countries, particularly when it comes to valuing the economic 

contribution of nontimber forest products. 

These products are undervalued because, 

in many countries, they are not refl ected in 

national accounts systems, in part because 

they are produced informally. For example, 

in Europe, where these products are economically marginal, they were valued at $7 

billion in 2010. In contrast, in Africa, where 

they are much more important economically, they totaled only an estimated $0.5 

billion (FAO 2011).

Where these assessments do exist, they suggest that a number of factors limit the value 

added from these resources. A meta-study of 

61 case studies of production of and trade in 

nontimber forest products in Africa, Asia, 

and Latin America fi nds that, by and large, 

commercialization has not helped reduce 

poverty, for four reasons:

• Resources are often collected under open 

access regimes, where overexploitation is 

common, leading to rent dissipation.

• Access to markets tends to be poor, limiting economic returns.

• Fluctuations in quantity and quality make 

commercialization of nontimber forest 

products diffi cult.

• Middlemen often capture the bulk of 

added value (Belcher and others 2005).

As with capture fi sheries, increasing the 

economic returns from natural forests sustainably requires a package of measures that 

includes strengthening property rights; assessing the economic value of forests; and adopting measures, such as better market access 

BOX 5.2 Reform of forest tenure in Albania and China

In Albania serious degradation of the forests and 

pastures was observed in the early transition years. 

To address the problem, the government reformed 

and decentralized national institutions and 

increased support to pasture and forest management 

at the local level. Reforms transferred management 

rights of forests and pastures to local communities. 

To deal with fi re management and control illegal 

logging, the government adopted a cross-sectoral 

approach. It provided local investment support for 

the restoration of watersheds, forests, and pasture 

land using participatory planning approaches. This 

support included small-scale investments in the 

planting of forests and orchards in degraded lands, 

the thinning and cleaning of degraded forests and 

pastures, and measures to control erosion and grazing. This mix of policy, social, and natural capital 

investments enhanced resilience (erosion control 

and soil restoration), yielded environmental benefi ts 

(carbon sequestration), increased effi ciency (greater 

pasture and forest productivity), created jobs, and 

reduced poverty.

In China, the government has made substantial 

investments in tree planting across the country over 

the past 25 years to restore environmental balance and secure supplies of raw materials. It has 

also reformed forest user rights to collective forests 

(forests under the control of provinces and other 

subnational authorities). Like reforms to property 

rights of agricultural lands, these reforms sought 

to harness the productive energies of rural households and communities. They amount to the largest transfer of forest wealth ever recorded. Most 

reforms involve provisions that offer individual 

households a large degree of economic autonomy 

and independence to manage the forests, with 

households and farmers’ groups receiving certifi -

cates of use rights.

Source: World Bank 2010b, 2010c.

WB_354_GG_CH05.indd 109 5/7/12 

2012-08-054_000000000000496
110 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

and improved product quality, that increase 

economic returns and refl ect the full value of 

the service.

Soil

Soil quality reflects how well a soil performs the functions of maintaining biodiversity and productivity, supporting plants 

and other structures, and providing a slew 

of other nonprovisioning ecosystem services. Land degradation includes deterioration of soil quality, vegetation, and water 

resources (Nkonya and others 2011). It is 

a process that affects all agroecological 

zones, potentially reducing GDP (table 5.1). 

A quarter of the world’s agricultural land is 

estimated to be seriously degraded (Bai and 

others 2008).

Factors leading to land degradation 

include poor agricultural and grazing practices and forest degradation as well as factors outside the renewable natural resource 

sector, including poorly designed infrastructure and mining activities. Land degradation can, in turn, affect the operation 

of infrastructure installations by silting up 

key facilities such as ports and hydroelectric 

power generation facilities.

Land users need to be given the right economic incentives to invest in preventing or 

mitigating land degradation. The strength 

of these incentives depends on the nature of 

land tenure regimes (Deininger and Feder 

2001; López 2002) and on the way costs 

and benefi ts are shared. Costs, for example, 

are often borne only by the farmer, whereas 

environmental benefi ts accrue to society as 

a whole.

Well-defined, transparent, and secure 

land tenure systems are essential if farmers 

are to undertake the long-term conservation that underpins agricultural production 

and investments to improve natural capital 

and productivity. In Rwanda, for example, 

land tenure reform led to a rapid doubling 

of investment in soil conservation, with 

even larger increases for plots managed 

by female farmers (Ali and others 2011). 

Secure land tenure also leads to the development of land markets, which improves 

overall allocative effi ciency and the possibility of using land as collateral in formal 

credit markets. That said, land registration and tenure systems must be adapted 

to local conditions and customs (Deininger 

and Feder 2001). In Africa, approaches to 

land use rights increasingly recognize that 

customary and modern systems may exist 

side by side.

On-site approaches, such as conservation agriculture, can be tapped to foster 

natural ecological processes to increase 

agricultural yields and sustainability. This 

approach, which dates back to the 1930s, 

is based on three main principles: continuous minimum mechanical soil disturbance; 

permanent organic soil cover; and diversifi -

cation of crop species grown in sequences, 

associations, or both (FAO 2001). Its use 

yields environmental benefits (decreased 

nutrient pollution of waterways, increased 

carbon sequestration in soils), increases the 

effi ciency of production (through the use of 

lower levels of energy inputs), increases resilience (through frequent crop rotation), and 

increases long-run agricultural productivity 

(through decreased erosion and enhanced 

soil structure). Local conditions should dictate the technology (box 5.3).

Conservation agriculture tends to involve 

up-front costs (for new machinery necessary 

for direct seeding or for tree seedlings in 

TABLE 5.1 Poor soil quality and land degradation hurt economic 

growth

Country Type of degradation

Percentage of 

GDP lost

Central African Republic Cropland and soil 1.0

Colombia Land 0.8

Egypt, Arab Rep. Soil 1.2

Ghana Agricultural soils, forests, and 

savanna woodlands

5.3

Pakistan Soil salinity and erosion 1.2

Tajikistan Land, including soil erosion 

and salinity

3.7

Source: Country Environmental Analyses conducted by the World Bank (World Bank 2005a, 2006a, 

2006b, 2007c, 2008b, 2010a).

WB_354_GG_CH05.indd 110 5/7/12 

2012-08-054_000000000000497
NATURAL CAPITAL 111

agroforestry systems) and short-term yield 

reductions as farm systems are changed. 

Benefi ts may materialize only in the medium 

to long run. Smart subsidies and access to 

long-term fi nancial markets can help cover 

short-run costs and increase adoption.

Focusing public support measures on 

soil fertility can yield impressive results. 

In Brazil—where state support of agriculture is just 5 percent of aggregated gross 

farm receipts compared with an average of 

18 percent in Organisation for Economic 

Co-operation and Development (OECD) 

countries in 2010 (OECD 2011)—the government has concentrated on investments 

in soil fertility enhancement, land and 

water management systems, and crop and 

livestock breeding for varieties adapted to 

Brazil’s climate and ecosystems. Brazil’s 

public support of research and soil fertility 

has paid off handsomely, helping transform 

the country from a net food importer into a 

global food exporter.

Water

The sustainable management of water 

resources is becoming more urgent than 

ever as several global trends collide.6 In 

developing countries, growing populations 

are increasing demand for water to produce essential commodities like food and 

energy. Higher rates of urbanization fuel 

demand for water for domestic and industrial uses, putting stress on existing raw 

water sources. Exacerbating matters, climate change increases the risks of greater 

water variability.

One big worry is water scarcity. Developing countries account for 71 percent of global water withdrawals, and their demand is 

expected to increase by 27 percent by 2025 

(from 2010). In 2010, about 44 percent of 

the world population lived in areas of high 

water stress, and projections indicate that 

an additional 1 billion people will be living 

in areas with severe water stress by 2030 

(OECD 2008). And many countries in Asia 

BOX 5.3 Conservation agriculture in Brazil and Zambia

Conservation agriculture fi rst emerged in the 1930s 

during the severe dust storms in the United States. 

It has been gaining momentum worldwide since the 

1990s, when it was employed to deal with soil erosion crises in southern Brazil. Its use is now widespread globally. By 2007, for example, zero-tillage 

practices were in use on about 43 percent of arable 

land in Latin America (World Bank 2007a).

In Brazil, conservation agriculture relies on a 

variety of technologies, depending on the region. 

One approach supports a mixed livestock and crop 

system, rotating pastures with crops. The zerotillage system supplies residual nutrients for cheap 

pasture, thereby reducing pests, weeds, and diseases. 

The most common rotations are soybeans, cotton, 

and maize, followed by 1–3 years of pasture. These 

practices have increased pasture stocking rates and 

have reduced soil degradation and water runoff.

In Zambia, five basic conservation farming 

technologies are being used: retaining crop residues, concentrating tillage and fertilizer application in a permanent grid of planting basins or series 

of planting rows, completing land preparation in 

the dry season, weeding aggressively to reduce 

plant competition, and intercropping or rotating 

nitrogen-fi xing legumes on up to 30 percent of cultivated area.

Many farmers also incorporate nitrogen-fi xing 

trees, which provide fodder and fuelwood. As of 

2010, Zambia had restored 300,000 hectares in an 

effort that involved more than 160,000 households. 

Conservation agriculture practices doubled maize 

yields over those achieved with conventional plowing systems, and increased cotton yields 60 percent. 

A recent study finds returns of $104 per hectare 

for plots under conservation agriculture in Zambia—5.5 times the $19 per hectare of plots under 

conventional tillage (FAO 2010a).

Source: Landers 2005; FAO 2010a; Scherr and others 2011.

WB_354_GG_CH05.indd 111 5/7/12 

2012-08-054_000000000000498
112 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

and North Africa are exhibiting moderate 

or extreme scarcity, which is expected to 

increase in the future.

Another worry is poor water quality, 

which sets back growth because it degrades 

ecosystems; causes health-related diseases; 

constrains economic activities (such as agriculture, industrial production, and tourism); 

reduces the value of property and assets; and 

boosts wastewater treatment costs. For example, the annual costs of poor water quality 

stand at 0.6 percent of GDP in Tunisia and 

2.8 percent of GDP in the Islamic Republic of 

Iran (World Bank 2007b).

Yet another worry is natural hazards—the 

vast majority of which involve water—which 

affect almost everyone and retard growth. 

Kenya, for example, was hit by several disasters over a 3-year period that undid years 

of economic growth (an extreme fl ood cost 

its economy 16 percent of GDP, and extreme 

drought 11 percent of GDP) (World Bank 

2004). And when these natural hazards 

strike, it is the poor who suffer most, because 

of their locations, low incomes, insuffi cient 

infrastructure, and greater reliance on climate-sensitive sectors like agriculture.

What can policy makers do to better manage water resources? Four green growth 

water policies—none of them easy to design 

or implement—can be adopted:

• Correct distortions in water allocation 

decisions. New mechanisms for allocating water resources should embrace 

economic principles of allocative efficiency to correct for market failures 

and imperfections. These failures are 

compounded by the sector’s political 

economy and the fact that more effi cient 

water pricing boosts costs for some elements of society more than others. Decision makers need to devise effi cient and 

flexible ways to allocate water among 

competing quantity and quality demands 

for human use (energy, agriculture, fi sheries, and urban consumption) and ecosystems health (forests and wetlands) 

(World Bank 2010d). A study of China 

finds that improving water allocation 

could increase per capita income by 

1.5 percent a year between 2000 and 

2060 (Fang and others 2006).

• Expand the use of water pricing mechanisms to manage demand. The price of 

most water services does not include investment, operation, and maintenance costs or 

the scarcity value of the resources. Pricing 

could be used as an effective instrument to 

ensure the resource’s optimal allocation. 

Most countries fail to use it because of the 

political and social sensitivities of water 

management, particularly the need to 

ensure affordability for the poorest communities. Most countries allocate surface 

and groundwater by assigning fi xed quotas 

to major sectors and activities. Although 

far from effective, these quotas have been 

politically and socially acceptable. In the 

short term, they seem to be a more realistic option than full cost pricing.

• Create new markets. Tradable water 

rights are an effective water management 

instrument in the long term but have 

proven diffi cult to implement in the short 

term in most developing countries—

partly because success depends greatly on 

sound design and partly because it takes a 

long time to establish the necessary institutions (World Bank 2010d). Thus, in the 

short term, it is imperative to ensure that 

the proper institutional arrangements and 

capacities are in place.

• Strengthen the framework for analyzing 

the relationship between growth and 

water. There have been few attempts to 

analyze and quantify the relationship 

between water and economic growth 

and development because of the complex spatial and temporal dimensions 

of water and its management. There is a 

need to strengthen this analytical framework by examining regional differences 

in growth within a country or group of 

countries. This information would allow 

more informed decision-making processes 

by providing a clear understanding of the 

economic tradeoffs of policies in different 

sectors (such as energy, agriculture, urban, 

land use, environment, and health).

WB_354_GG_CH05.indd 112 5/7/12 

2012-08-054_000000000000499
NATURAL CAPITAL 113

Cultivated renewable resources: 

Innovation, sustainable 

intensifi cation, and integrated 

landscape approaches

Food production will need to increase by 

75 percent between 2010 and 2050 to cope 

with rising demand caused by population 

and income growth and changes in the 

structure of demand. As incomes increase, 

demand for higher-value horticultural and 

livestock products is likely to increase by 

more than direct demand for staples; demand 

for livestock products will likely increase 

85 percent between 2010 and 2030 (Foresight 

2011). Yet hunger remains a challenge: 

800 million people in the world remain food 

insecure. Improving agricultural productivity and access to food remain core elements 

of an inclusive growth agenda.

For cultivated renewable resources, 

the main policy challenges are to support 

sustainable increases in productivity and 

resource-efficient production by focusing 

on innovation, increasing effi ciency in input 

use, regulating pollution, and ensuring that 

smallholder farming more fully realizes its 

potential, especially in lower-income developing countries. In the future, a larger share 

of fi sh and wood products is likely to come 

from aquaculture and plantation forestry 

than from natural forests or wild fi sheries, 

further increasing the importance of sustainable management of cultivated renewable resources in meeting green growth 

objectives.

Agriculture, including livestock

Agricultural production is strongly affected 

by how natural capital—especially energy, 

land, water, forest, marine, and coastal 

systems—is managed. Agriculture, including 

livestock, accounts for 70 percent of fresh 

water consumption and 40 percent of land 

area. Many agricultural systems depend 

heavily on fossil fuels for nitrogen fertilizer, 

crop husbandry, harvesting, transport, and 

pumping water for irrigation. Thus, food 

and fossil fuel energy prices are closely 

linked. There are synergies and tradeoffs 

between maximizing production of food at 

low cost and conserving the environment. 

These synergies need to be maximized and 

the tradeoffs managed.

Strategies in support of a green growth 

agenda for agriculture need to differentiate 

between agriculture-dependent, transitioning, and urbanized economies and between 

land and water–dependent and land and 

water–abundant ecosystems and countries. 

In agriculture-dependent countries, agricultural productivity and inclusive growth are 

closely related: GDP growth in these sectors 

is estimated to benefi t the poor two to four 

times as much as GDP growth in other sectors (World Bank 2007a). Four elements may 

be considered in a green growth strategy for 

agriculture.

Increasing productivity while improving land and water management. 

Intensifi cation—producing more with less—

has been responsible for the dramatic rise in 

global cereal yields in recent decades. From 

1960 to 2010, rice yields rose 250 percent 

(from 1.8 to nearly 4.5 tons per hectare 

[Dobermann and others 2008; International Rice Research Institute data]), while 

between 1965 and 2000 cultivated land 

area increased by just 20 percent (from 125 

million to 150 million hectares [Khush and 

Virk 2005]). Attaining the same production 

increase with no growth in yields would 

have required increasing the area planted 

with rice to 300 million hectares, reducing further land availability for wetland or 

watershed protection functions. Extensive, 

poorly managed agricultural and grazing 

systems, often related to poverty and lack of 

access to fi nance or knowledge, contribute 

to the land degradation and loss of soil fertility described above. Sustainable intensifi -

cation can protect biodiversity, reduce deforestation, save water, and reduce greenhouse 

gas emissions. By integrating improved land, 

soil, and water management measures into 

production systems, such intensive systems 

can also increase productivity while maintaining and even enhancing the value of 

natural capital.

WB_354_GG_CH05.indd 113 5/7/12 

2012-08-054_000000000000500
114 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

In a number of agricultural systems intensifi cation has been accompanied by negative 

environmental consequences. Excessive and 

poorly managed fertilizer and agrochemical 

use has polluted water bodies and soils; runoff has created “dead zones” in coastal areas 

that cover about 245,000 square kilometers 

worldwide, mostly in OECD countries.7 Agricultural run-off from intensive farming is the 

single greatest water polluter in China and 

other intensively farmed countries, including 

Denmark, the Netherlands, and the United 

States (Chinese National Census of Pollution 

2010; Scheierling 1996).

Similar tradeoffs are linked to livestock production. In the United States, for 

example, production effi ciency in the dairy 

industry soared over the past 60 years. In 

2007, producing 1 billion kilograms of 

milk required just 10 percent of the land, 

21 percent of the animals, 23 percent of the 

feed, and 35 percent of the water used to do 

so in 1944. But there were plenty of negatives, including the geographical concentration of livestock waste, increased water and 

air pollution, and reduced animal welfare. 

These problems could be avoided with the 

right mix of incentives and regulation to 

protect water bodies and manage waste. 

Productivity increases, innovation, and 

genetic improvements are a “low-hanging 

fruit”: in India, average milk yields are only 

3.4 kilograms per day compared with the 

world average of 6.3 kilograms, and only 

20 percent of animals are cross-bred; doubling productivity would halve greenhouse 

emissions per cow.

But in Colombia, a mix of policies has 

supported sustainable productivity increases 

for livestock by encouraging landscapebased, mixed agro-sylvi-pastoral systems. 

The aim is to introduce trees and better 

pasture in grazing lands, provide improved 

fodder and shade, and reduce heat stress for 

animals and soil degradation. The results are 

impressive—including increased meat and 

milk yields as well as improved water infi ltration, increased bird populations, reduced 

methane generation, and improved carbon 

capture (López 2012). This livestock policy is 

part of a broader land use policy intended to 

support sustainable intensifi cation together 

with forest and landscape restoration. These 

approaches have helped achieve “triple wins” 

of increased productivity, enhanced resilience 

to climate variability, and reduced carbon 

emissions (“climate-smart agriculture”).

Some agricultural subsidies exacerbate the 

negative effects of intensification. In landscarce, intensely farmed agricultural systems 

with already high levels of inputs, subsidization of inorganic fertilizer encourages overuse, with deleterious effects on the environment (box 5.4). However, in countries with 

low-input/low-output systems, a fertilizer 

subsidy may initially be justifi ed to increase 

yields and enhance vegetative growth and 

soil carbon.

BOX 5.4 The use and misuse of agricultural input subsidies in India

In India, fertilizer and other input subsidies 

contributed to rapid development of irrigation 

and more intensive farming methods, resulting 

in increases in yields and food security: by 2010, 

irrigated wheat yields in some provinces averaged 

4.5 tons per hectare, up from 1.5 tons per hectare in 1975. However, subsidized energy is now 

contributing to excess groundwater withdrawals 

(about 75 percent of groundwater used in Punjab 

and Harayana originates from overexploited aquifers), requiring pumping water from ever-deeper 

aquifers and salinization of aquifers in some areas. 

In addition, the fertilizer subsidy—which cost 

the government $30 billion (2 percent of GDP) in 

2008—is contributing to excessive use of nitrogen 

compared with phosphorus and potassium, exacerbating nitrate pollution of rivers and aquifers.

Source: Prince’s Charities’ International Sustainability Unit 2011.

WB_354_GG_CH05.indd 114 5/7/12 

2012-08-054_000000000000501
NATURAL CAPITAL 115

Increasing effi ciency and reducing waste.

Reducing food waste involves some of the 

same issues encountered in increasing energy 

effi ciency: even where the saving potential is 

huge, many barriers, including transactions 

costs, prevent effi ciency-increasing investments 

from being made. The problem has been recognized for decades, but limited progress has 

been made. In both agriculture-dependent and 

OECD countries, up to one-third of food is 

lost or wasted. The reasons for this waste—

and the solutions to the problem—vary with 

the settings (Foresight 2011).

In agriculture-dependent countries, where 

food accounts for a large share of household 

expenditure (46 percent in Pakistan), there is 

little household waste, despite lack of refrigeration at home. But 15–30 percent of food 

produced is lost before it reaches markets, 

because of postharvest losses caused by poor 

storage and ineffi cient transport systems. The 

problem is compounded by food quality and 

food safety issues, which may preclude poor 

farmers from participating in value chains 

(Gómez and others 2011). For low-income 

countries, the following strategies could 

reduce food waste:

• Diffusing existing knowledge and technology in storage and investing in transport infrastructure.

• Investing in new technologies to reduce 

postharvest waste.

• Using information and communication 

technology to improve market information, helping match supply and demand 

in local markets.

• Investing in capacity building, infrastructure, and regulatory improvements in 

food quality and food safety.

OECD countries have developed effi cient 

supply chains from farm to market, with low 

spoilage rates and effective transport systems. But about one-third of food supplied is 

nevertheless wasted through losses in supermarkets (food thrown away because it is 

not sold by the sell-by date), losses in homes 

(food discarded before it is used), and plate 

waste (food that is served but not consumed). 

Because food accounts for a relatively small 

proportion of household expenditure in 

OECD countries (11 percent in Germany, 

7 percent in the United States), there is little price incentive to avoid waste. However, 

new technologies, such as enhanced sensor 

technologies to monitor the edibility of food, 

could help reduce wastage. The main challenge is changing consumer behavior.

Harnessing technology. Technological 

innovation plays a key role in green growth 

strategies for agriculture. It can be used to 

increase input efficiency, as is the case in 

irrigation water management, where advances 

in the use of remote sensing technologies permit estimation of crop evapo-transpiration 

(the sum of evaporation and plant transpiration to the atmosphere) on farmers’ fi elds and 

facilitate improvement of water accounting 

at the regional and basin-wide levels. China 

is adopting this approach with its Xinjiang 

Turpan Water Conservation Program, in 

an arid part of the country (World Bank 

2010c). This program monitors basin-wide 

evapo-transpiration with remote sensing 

and supports a combination of engineering, agronomic, and irrigation management 

measures to increase agricultural productivity measured in terms of evapo-transpiration. 

Innovation includes developing agricultural 

products that feature improved characteristics, such as being drought resistant, requiring 

less fertilizer, and being resistant to common 

pests and diseases (which reduces the need 

for pesticides)—as India is doing with better 

backyard chickens (box 5.5).

Innovation can also be used to increase 

access to weather and climate information 

services for farmers, which improves resilience, increases effi ciency, and raises income. 

In Florida, a timing tool helps farmers reduce 

the quantity of fungicide they use, reducing 

the harmful effects on the ecosystem and saving them money (Pavan and others 2010). But 

in many developing countries and transition 

economies, investment and expenditure in 

the classic public goods of weather and climate information generation and services 

is far too low (World Bank 2008a). A 2010 

study by NetHope in Kenya indicates that 

farmers gain access to information through a 

WB_354_GG_CH05.indd 115 5/7/12 

2012-08-054_000000000000502
116 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

range of methods, including SMS (cell phone 

messaging), radio, newspapers, and extension 

offi cers.8

Changing the structure of support policies. 

Changes in the structure of support policies 

can also help manage potential tradeoffs. In 

the European Union (EU)—and to a lesser 

extent the United States—the past 20 years 

have been characterized by a shift away from 

highly distortive price and quantity instruments (target prices, export subsidies, and 

quotas) toward lump-sum payments. The 

policy change has weakened the incentives 

for farmers to use polluting inputs, such as 

fertilizers and pesticides. Between 1991 and 

2006 fertilizer use decreased in most EU 

member countries, though it increased in new 

member countries (Eurostat 2011). Moreover, 

as agricultural transfers became decoupled 

from production, they became increasingly 

subject to environmental provisions.9

Aquaculture

In 2009, humans consumed 117 million tons 

of fi sh—almost half of which was produced 

on farms (FAO 2010b). By 2030, this fi gure 

is expected to rise to 140 million tons. Capture fi sheries are not expected to support the 

higher demand, leaving aquaculture to meet 

shortfalls in supply.

As in the livestock industry, competition, 

economies of scale, and economies of agglomeration have increased productivity but have 

pushed some systems into potentially damaging environmental practices. Farms tend to 

concentrate where there is expertise, good 

land, water resources, and marketing infrastructure. This crowding has sometimes led 

to overuse of ecosystems services, pollution, 

and massive fi sh kills. Agglomeration in the 

Norwegian salmon farming industry, for 

example, has reportedly improved the transfer of knowledge and increased the supply 

of specialized production factors, but it has 

also helped spread fi sh disease (Tveteras and 

Battese 2006).

There are two approaches to greening 

aquaculture. The first is zoning—that is, 

leaving adequate space between farms and 

interspersing a variety of aquaculture systems 

(including a mixture of species at the farm 

BOX 5.5 Producing a better backyard chicken in India

Kegg Farms in India has bred a robust and improved 

dual-purpose backyard chicken. The “Kuroiler” 

lays 100–150 eggs a year (many more than the 

40 eggs a year the Desi chicken lays) and grows to 

2.5 kilograms in about half the time a Desi chicken 

reaches 1 kilogram. The chickens typically command a premium of about Rs 60 per kilogram over 

other broiler chickens, because the meat is darker 

and more fl avorsome.

Kegg Farms produces about 16 million day-old 

chicks a year, which it sells to 1,500 small enterprises 

that raise the chicks for about two weeks before inoculating them and selling them to about 6,500 bicycle 

salespeople, who sell them to some 800,000 farmers, 

most of them women, many located in some of the 

remotest parts of the country. The turnover in sales 

of chicks is about $5 million a year, with another 

$5 million turnover by the thousands of small, rurally 

based businesses that grow and sell the chicks.

An independent assessment indicates that the 

average gross revenue generated per Kuroiler chick 

(as eggs and meat) is $3.10. With some 16 million 

chicks distributed annually, total output is about 

$50 million, with a net profi t of about $10 million. 

Profits from the Kuroiler are significantly higher 

than profi ts from the Desi bird. The Kuroiler birds 

contribute significantly to household cash flow. 

Women have maintained control over their chickengrowing enterprises as the business has become more 

commercial.

The success of Kegg Farms refl ects several factors. 

Its chickens are more robust than other chickens, are 

better able to scavenge food, and have higher food 

conversion ratios. The company’s business model 

features a devolved, rural-based distribution system 

with in-built incentives.

Source: Isenberg 2006.

WB_354_GG_CH05.indd 116 5/7/12 

2012-08-054_000000000000503
NATURAL CAPITAL 117

or watershed level) and water uses between 

major centers of production. This approach 

would hinder disease transmission, moderate negative impacts on wild fi sh populations, 

and reduce the contribution of aquaculture to 

water eutrophication.

The second approach is creating synergies 

with other economic activities in the watershed. The farming of aquatic plants (such 

as seaweed) and the filter feeding of detritivorous organisms (such as mussels, clams, 

and sea cucumbers, which together represent 

about 40 percent of total global aquaculture) 

reduce nutrient loading from livestock, agriculture, and other sources. Fish production in 

cages or culture-based fi sheries can be conducted in reservoirs and irrigation systems to 

amortize costs, improve water quality, reduce 

weeds, and replace wild catch where dams 

have destroyed indigenous fi sh stocks. Mixed 

fish and rice production systems are widespread in low-lying areas and fl ood plains, 

taking advantage of synergies between the 

water and land management approaches.

Although dispersing fi sh farms is good for 

the environment, it does raise costs, in part 

because of the losses from agglomeration. 

Thus, green growth strategies will require 

practical fi nancial and market incentives to 

support spatial dispersing, technical guidelines on green technology, and government 

policies that encourage investors to avoid the 

traditional practice of copying successful production/ market models and instead explore 

new partnerships at the watershed level.

Plantation forests

Afforestation—the planting of forests 

in areas that were not forested in recent 

times—is expected to meet an increasing 

share of the demand for wood and fi ber, possibly reducing pressure on primary and natural forests. In 2010, the global area under 

plantation forests (forested areas artifi cially 

created by planting or seeding) accounted for 

7 percent of total forest area and 40 percent 

of industrial timber production (FAO 2011). 

Plantation forests provide a growing share 

of industrial timber, both because the area 

under plantation forests has increased and 

because productivity has risen. Areas under 

bamboo and rubber plantation are also 

increasingly being used to provide timber 

products, providing an important source of 

income for rural households. Reforestation 

and restoration of degraded woodlands also 

play a role in plantation forestry.

Whether plantation forests help or hurt the 

environment depends on the land use systems 

they replace. In China, for example, bamboo 

plantations have helped control soil erosion 

by replacing agriculture on steep slopes. But 

in some provinces, where plantations have 

replaced natural forests in areas not well 

suited to bamboo, soil erosion has increased. 

The Chinese government has tried to address 

these negative environmental effects by establishing environmental regulations, but these 

regulations have been resisted in some cases 

(Ruiz-Perez and others 2001). More recently, 

China has supported programs with species 

better adapted to local ecosystems (World 

Bank 2010c).

Agroforestry systems, in which trees are 

incorporated into the broader production 

landscape, are widespread in some areas. 

They can yield the “triple wins” of climatesmart agriculture by enhancing productivity, 

resilience, and carbon sequestration, as they 

have in Kenya and the Sahel (Liniger and 

others 2011).

Nonprovisioning services: 

Creating knowledge and markets 

for economic valuation

In addition to ecosystems that provide food 

and water (“provisioning services”) are ecosystems that regulate, support, and offer 

cultural services (“nonprovisioning” services). This group includes nature-based tourism supported by biodiversity, watershed 

services, and climate-regulating services. 

The main challenge in this area is to create markets for these services so that they 

become part of the visible economy and are 

effi ciently provided.

Another challenge is coping with the timing of benefi ts. Although efforts to reduce the 

WB_354_GG_CH05.indd 117 5/7/12 

2012-08-054_000000000000504
118 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

loss of ecosystem services are likely to boost 

growth in the near term, efforts to restore 

these services take a long time and are unlikely 

to do so in the near term (Vincent 2012).

Biodiversity

Biodiversity refers to the degree of variation of life forms, including all animals, 

plants, habitats, and genes. It matters 

because genetic diversity provides the basis 

for new breeding programs, improved 

crops, enhanced agricultural production, 

and food security. When species become 

extinct or habitats are threatened, biodiversity is reduced; according to the International Union for Conservation of Nature, 

875 species went extinct (or extinct in the 

wild) in 2008. Ecosystem fragmentation 

can contribute to species loss, especially for 

large predators, leading to a cycle of habitat degradation.

Tropical, temperate, and boreal forests 

(forests in northerly latitudes) are home to 

the vast majority of the world’s terrestrial 

species. They play a major role in biodiversity and provide cultural, recreational, and 

other supporting services, such as soil and 

water conservation. For this reason, 12 percent of the world’s forests are designated 

for the conservation of biodiversity—an 

increase of more than 20 percent since the 

1990s (FAO 2010a).

A key reason why the world has experienced such a dramatic loss in biodiversity is 

the diffi culty of valuing it, given knowledge, 

time, and spatial asymmetries. Building a 

road around, rather than through, a fragile ecosystem increases its cost by a known 

amount, payable immediately; the benefit 

of protecting the ecosystem and its inherent 

biodiversity is much more diffi cult to value 

and accrues only over time. At the global 

level, many efforts are under way to protect 

biodiversity, dating back to the 1992 Convention on Biological Diversity. At the local 

level, the incentive could come in part from 

the economic returns that biodiversity can 

generate through nature-based tourism and 

bioprospecting.

Nature-based tourism. Nature-based 

tourism (or ecotourism) is defined by the 

International Ecotourism Society as “responsible travel to natural areas that conserves 

the environment and sustains the well-being 

of local people.” It is one of the fastestgrowing sectors in the tourism industry, 

with annual growth rates of 10–12 percent 

(TIES 2006). Nature-based tourism aims to 

combine stringent environmental provisions 

with the generation of local economic revenues, thus concurrently triggering positive 

development impacts and incentives to conserve natural capital.

Nature-based tourism can be a signifi cant source of employment, economic 

growth, and revenue (including foreign 

exchange) (Aylward and others 1996; 

Wunder 2000). A study of nature-based 

tourism in Zambia estimates that ecotourism generated 3.1 percent of GDP in 

2005 (agriculture contributed 6.5 percent, 

mining 8.6 percent, and manufacturing 

10.6 percent) (World Bank 2007d). Potential tradeoffs between rural livelihoods and 

nature-based tourism need to be managed 

by involving local communities. Indeed, the 

success of a nature-based tourism initiative 

is often linked to such involvement, which 

requires establishing incentives for local people to effectively protect their community’s 

natural capital (box 5.6). Tourism revenues 

are only a partial solution, however, as many 

important ecosystems have only limited 

appeal for tourists.

Bioprospecting. Bioprospecting is the 

search for genetic material from plants or 

animal species that can be used to develop 

valuable pharmaceutical (or other) products. 

It represents a second example of how the 

creation of a market can provide incentives 

to protect biodiversity, although in practice it 

is hard to achieve (Polasky and others 2005). 

Returns to bioprospecting are often too low 

to provide suffi cient incentives to conserve 

biodiversity, and disputes arise over the distribution of rents resulting from discoveries. 

The Access and Benefi t Sharing provisions of 

the Convention on Biological Diversity may 

help alleviate this problem.10

WB_354_GG_CH05.indd 118 5/7/12 

2012-08-054_000000000000505
NATURAL CAPITAL 119

Watershed services

Watersheds—that is, the area of land where 

all of the water that is under it or drains off it 

goes into the same place—provide a range of 

ecosystem services, supplying water and hydroelectric power, regulating water flows and 

fl oods,11 controlling soil erosion, and creating 

habitats for wildlife. Because of spatial tradeoffs—and in some cases open access regimes—

the market often underprovides these services, 

creating the need for public intervention. To 

correct this market failure, governments have 

been investing directly in the restoration and 

enhancement of watershed services through 

initiatives such as watershed development 

programs. Payments for such environmental 

services are a recent policy innovation to create markets and provide incentives to conserve 

or generate these services.

Support for investments in soil and water 

conservation. Investments in soil and water 

conservation normally include support for 

a mix of measures adapted to local conditions, including landscape restoration, erosion control, grazing management, water 

harvesting, and agricultural productivity 

support measures. At lower altitudes in irrigated landscapes, they often include support 

for improved irrigation water management, 

drainage, and salinity control. Such integrated programs have been supported to scale 

in a number of countries and include a mix of 

private and public investment measures.

In Turkey, better land management 

practices—promoted through investments 

in watershed rehabilitation and landscape 

restoration and reforestation programs, as 

well as profound changes in agricultural 

policy—have led to greening in the interior 

of the country, despite declining rainfall and 

increased temperatures in these areas. However, it is unclear whether this “regreening” 

also led to increases in rural incomes and 

employment.

In India, where several watershed development programs have been tried in semiarid 

rain-fed regions of the country, the verdict 

is still out. These programs seek to increase 

agricultural productivity by controlling 

soil erosion, preventing siltation of water 

BOX 5.6 Involving local communities in nature-based tourism in Indonesia

The Komodo National Park is a protected marine 

area in the Lesser Sunda Islands of Indonesia. This 

World Heritage Site was established in 1980 to protect the habitat of the Komodo dragon. Since then, 

its goals have expanded to include protection of 

the area’s many coral species and nearly 1,000 fi sh 

species.

In 2005, a nonprofi t joint venture, Putri Naga 

Komodo (PNK)—comprising The Nature Conservancy, a local tourism company, and the International Finance Corporation—was set up to run 

the area. The aim is to protect biodiversity and 

enable local communities to benefi t from the park 

in a sustainable way—through carefully managed 

nature-based tourism, alternative livelihoods for 

local people, and collaborative protection strategies, such as antipoaching patrols. All proceeds 

go toward stewarding biodiversity and developing 

alternative and sustainable livelihoods for the local 

communities.

PNK, which is the exclusive manager of the venture, has invested $1 million in helping people in the 

park develop new activities, such as woodcarving 

and textile weaving. It has also provided them with 

technical assistance to develop sustainable seaweed 

farms, as well as facilitate the breeding of high-value 

reef fi sh to substitute for threatened wild fi sh. These 

efforts notwithstanding, a recent evaluation report 

(Agardy and others 2011), while acknowledging the 

project’s positive impacts, raises concerns about the 

sustainability of the results, given the difficulties 

encountered in making this public-private partnership work.

Source: The Nature Conservancy website (http://www.nature.org/); Catherine 

Cruveillier-Cassagne (personal communication).

WB_354_GG_CH05.indd 119 5/7/12 

2012-08-054_000000000000506
120 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

bodies, and improving the reliability of water 

resources. They also hope to provide employment opportunities and improve the availability of drinking water, particularly during the 

summer. Between 1996 and 2004, the government of India spent more than $6 billion 

on watershed development (WRI 2005), but 

no systematic, large-scale assessment of the 

impact of these programs has been conducted 

(Joshi and others 2004).

There are nevertheless some positive 

results for integrated landscape approaches. 

In Kazakhstan, the Syr Darya/Northern Aral 

Sea Control program in the lower Syr Darya 

watershed supported innovations in water 

management, combining “soft” and “hard” 

infrastructure solutions and fl ood management, which helped restore river functions 

and the Northern Aral Sea, leading to recovery of grazing lands, ecosystems, and fi sheries (World Bank 2011b). In Rwanda, the land 

husbandry, water harvesting, and hillside 

irrigation programs have already increased 

yields and incomes and have reduced soil 

losses (World Bank 2011a).

Payments for ecosystem services. The 

Pago por Servicios Ambientales (PSA) program, implemented in Costa Rica in 1997, 

was one of the first schemes to pay people 

to provide ecosystem services. Under this 

program, private landowners and communities receive payments for conserving the forest and helping protect water quality downstream. Financing for the scheme comes from 

donor grants, earmarked taxes, and buyers 

of ecosystem services, including municipal 

utilities. Other examples of payments for 

ecosystem services include schemes established to eliminate or reduce animal waste 

and agricultural chemical residues to protect water reservoirs, payments to landowners to encourage conservation, and REDD+ 

schemes, under which payments will be made 

for carbon sequestration services and to provide an incentive to reduce deforestation and 

forest degradation.12

In some developing countries, policy makers have tried to design payment for ecosystem services programs to benefi t the poor, but 

the evidence on both the environmental and 

the poverty reduction effects of payment programs is thin (Pattanayak and others 2010). 

In China’s Sloping Land Conversion Program, average household incomes remained 

unchanged, although incomes increased for 

some households and decreased for others. In 

addition, increased availability of fodder to 

improve income from livestock rearing, and 

extension services to improve agricultural 

productivity have helped compensate households for the loss of agricultural incomes 

from the conversion to forests. In Ecuador, 

Costa Rica, and Mexico, large-scale payment 

for ecosystem services schemes (table 5.2) 

may have benefi ted the poor, although assessments remain to be done.

Whether the poor are helped will no 

doubt depend on the scheme’s design. Those 

based on land diversion (from current use 

to a use that is more oriented toward the 

provision of environmental services) are 

likely to benefi t the landed, some of whom 

are poor— although they could also hurt 

poor households, especially the landless, by 

reducing access to key natural resources. 

Those based on working lands are likely 

to increase the demand for labor and may 

thereby benefi t the poor. However, schemes 

expected to meet poverty reduction goals 

may be less effective in meeting environmental goals (Jack and others 2008). Where the 

poverty reduction impacts are likely to be 

small, it may be better to design schemes to 

be as effective as possible in achieving environmental goals and draw on other instruments to reduce poverty (Bond and Mayers 

2009; Wunder 2008).

Climate-regulating services

Natural capital—including the oceans, land, 

and their living organisms—plays a key role 

in climate regulation.13 However, the value 

of these key regulating services is not adequately captured through markets, and valuing them is diffi cult.

One of the most important services that forests, soils, and water provide is storing carbon. 

Indeed, out of the 9 gigatons (Gt), or billion 

tons, of CO2 emissions released in 2007, the 

WB_354_GG_CH05.indd 120 5/7/12 

2012-08-054_000000000000507
NATURAL CAPITAL 121

oceans absorbed about 2Gt and terrestrial 

ecosystems about 2.7Gt. The remaining half 

remained in the atmosphere, increasing the 

concentration of CO2 and contributing to global warming (World Bank 2010d). Maintaining and, where possible, increasing the sequestration capacity of terrestrial, coastal, and 

marine ecosystems thus plays an important 

role in mitigating climate change.

Healthy ecosystems that sequester 

carbon also function better in flood and 

erosion management, increasing the adaptive capacity of ecosystem services such as 

agriculture, forestry, and fisheries in the 

following ways:

• Coastal ecosystems (including mangroves 

and wetlands) reduce erosion and fl ooding and provide spawning grounds for 

marine species.

• Freshwater wetlands and floodplains 

maintain water fl ow and quality, acting 

as fl oodwater reservoirs and water storage facilities in times of drought; they 

also provide grazing land for livestock 

and aquatic habitats.

• Forests and vegetation stabilize slopes, 

control erosion and fl ash fl oods, and conserve soil fertility for agriculture.

• Integration of trees into agricultural production systems builds climate resilience.

However, ecosystem losses reduce their 

effectiveness as carbon sinks and their role 

in adaptation. Under current management 

regimes, land-based ecosystems in some countries contribute signifi cantly to greenhouse 

gas emissions: emissions from agriculture, 

land use change, and forestry (deforestation, 

degradation, and fi res) account for more than 

30 percent of greenhouse gas emissions (forests account for about 17 percent and agriculture another 14 percent) (UNFCCC 2007).

Overall, more progress has been made 

in recognizing the importance of terrestrial 

ecosystems in climate regulation than in 

marine ecosystems, and more progress has 

been made in recognizing the role of forests 

in climate mitigation than of soils (UNEP 

and others 2009). Total carbon stocks in 

vegetation and in the top meter of soils are 

estimated at 466Gt (vegetation) and 2,011Gt 

(soil) ( Ravindrah and Ostwald 2008; Watson 

and others 2000). The top meter of soil is 

important because annual crops depend on 

its quality and organic content for growth. 

For tropical forests, nearly half of the 428Gt 

of carbon stocks is from above-ground 

TABLE 5.2 Impacts of payment for ecosystem services schemes on poverty reduction

Country/study Scheme Seller characteristics/results Payment Impact on income

China/Bennett 

(2008)

Sloping land 

conversion 

program

Tens of millions of rural 

households; 9 million ha of 

marginal sloping lands converted 

from agriculture to forests, 

4.92 million ha of degraded 

lands reforested

Annual in-kind payment of grain 

(1,500–2,250 kg per ha), cash 

subsidy ($36 per ha), and free 

seedlings. Length of subsidy 

depends on type of forests. 

Income from forests and 

grasslands tax free 

Mixed results: in Gansu, 50% 

of participants lost 8% of 1999 

household net income; in 

Sichuan, 30% lost 11% of net 

income; in Shaanxi, 7% lost 

33% of net income; estimates 

do not include net present 

value of future income from 

trees and grasses

Costa Rica/

Pagiola (2008)

Payments for 

environmental 

services

Private landowners, indigenous 

communities; 270,000 ha 

enrolled in 2005

$64 per ha per year for forest 

conservation and $816 per ha for 

10 years for timber plantation 

(15% of which goes toward 

transactions fees)

Bulk of benefi ts goes to larger 

and better off farmers, but 

no assessment of impact on 

poverty reduction

Ecuador/Wunder 

and Albán (2008)

PROFAFOR 109 private landowners (50- ha 

minimum contract size), 

43 communities.

$100–$200 per ha to cover 

plantation costs; 70–100% value 

of harvested wood, 100% of 

nontimber forest products

Upfront payment of $60–$635 

per household (6–50% of 

household expenditure); 

income of $7–$2,481 per 

household from harvesting

WB_354_GG_CH05.indd 121 5/7/12 

2012-08-054_000000000000508
122 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

vegetation; in tropical savannahs, 80 percent 

of the 330Gt of carbon stocks is from soil.

Much work remains to be done to incorporate agricultural and grazing land and 

soils into climate change regimes. Only one 

pilot program in Africa, the Agricultural Soil 

Carbon Project, has benefited from financial support from carbon finance through 

the BioCarbon Fund.14 The project supports 

increased agricultural productivity, agroforestry, and sustainable land management 

practices on more than 65,000 hectares in 

western Kenya; farmers benefi t from selling 

carbon sequestered both in and above the 

soil as a result of improved farming practices 

(World Bank 2011a). The Clean Development Mechanism recognizes emissions from 

livestock and paddy rice as major sources of 

emission, especially in more intensive farming 

systems in East Asia and OECD countries.15

Lessons can be learned from the progress 

made on forests, including the work on 

REDD+. As countries prepare REDD+ strategies, they must address carbon monitoring, 

reporting, and verification as well as challenges regarding tenure rights to carbon stored 

or sequestered, potential tradeoffs between 

conservation and development, the rights of 

indigenous people and forest-dependent communities, and the tradeoffs between carbon 

sequestration and other ecosystem services, 

such as biodiversity.

Increasingly, countries are weighing 

co-benefi ts from adaptation and local income 

generation as they develop REDD+ strategies 

(box 5.7). However, given the modest development of international carbon markets, it is 

important to manage expectations regarding 

potential revenues from these sources over 

the next few years (FAO 2010a).

The role of marine ecosystems in adaptation and mitigation has received relatively 

little attention, partly because of their complexity, their status as an international common property resource, and the absence of 

robust mitigation metrics. Focusing first 

on coastal ecosystems in relatively shallow 

waters, where restoration approaches are well 

known, would be a low-risk, shorter-term 

strategy that could restore their capacity in 

oxygenating coastal waters, provide nurseries 

for fi sh stocks, and shelter coastal settlements 

BOX 5.7 Scoring a triple win in Ethiopia by restoring the landscape

The overexploitation of forest resources in Ethiopia 

has left less than 3 percent of the country’s native 

forests untouched. In Humbo, near Ethiopia’s Great 

Rift Valley, deforestation threatens groundwater 

reserves that provide 65,000 people with potable water. It has caused severe erosion, resulting 

in floods and mudslides. With a population that 

depends heavily on agriculture, exacerbation of 

droughts and fl oods creates poverty traps for many 

households, thwarting efforts to build up their assets 

and invest in a better future.

Under the Humbo Assisted Natural Regeneration 

Project (implemented with the help of World Vision), 

farmer-managed regeneration of the natural forest 

encourages new growth from felled tree stumps that 

are still living. The regeneration of nearly 3,000 hectares has resulted in increased production of wood 

and tree products, such as honey and fruit, which 

has increased household revenues. Improved land 

management has also stimulated grass growth, providing fodder for livestock that can be sold as an 

additional source of income. Regeneration of the 

native forest is expected to provide an important 

habitat for many local species and reduce soil erosion and fl ooding.

The forest now acts as a carbon sink, absorbing 

and storing nearly 0.9 million tons of CO2 over 

the project life. The project is the fi rst large-scale 

reforestation project in Africa to be registered 

with the United Nations Framework Convention 

on Climate Change. The operation is regarded 

as a model for scaling up under a broader green 

growth and landscape restoration strategy for 

Ethiopia.

Source: Brown and others 2011.

WB_354_GG_CH05.indd 122 5/7/12 

2012-08-054_000000000000509
NATURAL CAPITAL 123

from storms while additional scientifi c work 

is undertaken on assessing technical strategies for using oceans as potential carbon 

sinks (UNEP and others 2009).

Nonrenewable resources: 

Promoting rent recovery and 

reinvestment

Economic growth in countries with nonrenewable resources is a process of extracting resources efficiently and investing 

revenues from these resources in other forms 

of productive capital that can continue to 

produce income after the nonrenewable 

resources are depleted. Only in this way can 

these resources be used to promote sustainable development.

Some nonrenewable resources are essential for green growth. The generation of solar 

power uses silicon; devices that control vehicle exhaust and refi ning processes for cleaning fuels require precious metals to act as 

catalysts; wind turbines, semiconductors used 

in smart grids and other computer applications, and batteries for hybrid vehicles require 

rare earths; and almost all processes require 

steel, which is made from iron, carbon, and 

alloying elements. Natural gas is a relatively 

clean fuel; because it can readily generate 

power on demand, it complements solar and 

wind power well.

Avoiding the natural resource curse

One major problem for countries with 

abundant natural resources is what is 

known as the natural resource curse. This 

phenomenon refers to the economic observation that countries rich in natural assets— 

particularly oil, gas, and minerals—often 

fail to use these resources as a platform for 

sustainable growth and actually grow less 

rapidly than similar countries without such 

assets. These countries—such as the Democratic Republic of Congo, Guinea, Nigeria, 

and República Bolivariana de Venezuela—

fail to transform natural capital into other 

types of capital, such as human capital and 

infrastructure.

Early explanations of the resource curse 

focused on economic factors, such as the diffi culty of managing revenue volatility or the 

negative impact of exchange rate appreciation 

on the more technologically sophisticated 

manufacturing sector (Dutch disease). Such 

analysis left open the question of why some 

countries were able to overcome these economic hurdles.

The current consensus is that the resource 

curse is the result of weak governance (institutional capital) and human capital (Gelb and 

Grasmann 2010). Concentrated resources, 

coupled with very large investments, are easily 

subject to capture. Instead of directing their 

energies toward productive activities and the 

development of the institutions needed in a 

market-oriented economy, political and economic elites engage in “rent seeking,” using 

their proceeds to reward their supporters and 

stifl e dissent by potential reformers. During 

downturns, the government fi nds it diffi cult 

to adjust to lower levels of spending, because 

the survival of the regime may depend on 

rent allocation. In short, resource rents are 

used not to develop other forms of productive 

capital but to perpetuate the political regime 

and its inefficient economic policies. Once 

trapped in the resource curse, it is diffi cult to 

escape, because the elite have little incentive 

to do so. In the extreme case, the resource 

curse can lead to armed confl icts as a way to 

determine access to the rents.

Not all resource-rich countries get 

trapped by the resource curse. Some (like 

Australia, Botswana, Canada, Chile, and 

Kazakhstan) have managed to avoid it 

altogether. Others (like Ghana, Peru, and 

Zambia) suffered the resource curse earlier 

in their development but went on to enjoy 

steady growth in the past 10–15 years. 

Moreover, many of the fastest-growing 

countries in the world in the past decade 

have been mineral-rich countries, some of 

which were once victims of resource curse, 

although the sustainability of such growth 

has not been tested by a signifi cant drop in 

resource prices or production.

Given that most of the fastest-growing 

countries in Africa since 2000 have large 

WB_354_GG_CH05.indd 123 5/7/12 

2012-08-054_000000000000510
124 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

extractive industries—with major investments ongoing or planned—it is particularly 

important that these countries act now to 

avoid the resource curse. History shows 

that countries that have successfully managed concentrated natural resources for 

economic development have tended to have 

a cadre of strong technocrats, pointing to 

the importance of developing human capital. Countries that have recently become 

resource abundant, such as Mongolia and 

Mozambique, need to be as transparent 

with their rents as possible (through the 

Extractive Industries Transparency Initiative and other means); set up a means of 

smoothing volatile revenue, such as a fi scal stabilization fund; and focus on policies 

and programs to build human capital and 

competitive industries.

Even where growth has been rapid, the 

presence of nonrenewable resources can 

skew income distribution in undesirable 

ways. In Equatorial Guinea, for example, 

one of the richest and most resourcedependent countries in Africa, 77 percent 

of the population lives on less than $2 per 

day (Goldman 2011). Institutional innovations can help countries avoid this outcome. 

Botswana and Norway, which have strong 

institutional capacity, have managed their 

resource rents well. That even countries 

with a history of political instability—such 

as Chile, Indonesia, and Malaysia—have 

used resource rents effectively for economic 

development suggests what can be achieved 

(Gelb and Grasmann 2010).16

Managing resource revenues

How can policy makers promote effi cient 

production, rent recovery, and rent reinvestment in ways that support broader 

economic growth? First, they can adopt 

saving mechanisms, such as fiscal stabilization funds and saving funds, which 

help smooth expenditure and ensure that 

funds are used only when the country has 

the capacity to absorb the new investment. 

Second, they can use the nonrenewable 

resource rents to help overcome market 

failures or defi ciencies—such as inadequate 

skills, poor health and social protection, 

lack of infrastructure (especially electricity), and high business transactions costs. 

Third, they can avoid using these rents to 

promote industries in which their country 

has no or little comparative advantage.

The World Bank’s comprehensive wealth 

accounts—notably, its adjusted net savings (ANS) indicator—assess whether 

countries rich in subsoil assets are using 

their natural capital to support sustainable development through rent capture and 

reinvestment (World Bank 2005b, 2010b). 

These accounts can help countries assess 

whether they are on a sustainable development path. Unlike national accounts, which 

measure gross savings and depreciation of 

produced capital but do not record changes 

in the stocks of human and natural capital, 

ANS measures the change in a country’s 

national wealth. Since 2000, many lowincome, resource-rich countries have failed 

to leverage their nonrenewable resources 

for broader development. In fact, their 

ANS indicators were negative for several 

years and were relatively low when positive, suggesting that they may be running 

down their total wealth (fi gure 5.2). Highincome non-OECD countries are also 

exhausting their natural resource wealth. 

The Wealth and Valuation of Ecosystem 

Services Initiative is being used to pilot 

incorporation of natural resource depletion or restoration, including renewable 

natural resources, into national accounts 

in a number of OECD and developing 

countries.

Practicing sustainability in mining

The largest source of employment in nonrenewable industries comes from artisanal 

and small-scale mining. This sector contributes to livelihood development, creating 

tens of thousands of jobs in many countries 

and hundreds of thousands in several countries (including the Democratic Republic of 

WB_354_GG_CH05.indd 124 5/7/12 

2012-08-054_000000000000511
NATURAL CAPITAL 125

Congo and Ghana). But for the sector to be 

sustainable, there needs to be a long-term 

commitment by the government and strong 

local institutions.

Artisanal and small-scale mining is often 

a highly destructive industry that causes significant environmental damage, including 

mercury pollution and extensive riverbed 

destruction. The struggle to obtain control 

of the resources in remote, largely lawless 

areas also creates social tensions. Although 

continuation of the current mode of artisanal and small-scale mining is damaging, 

prohibiting it would immediately throw 

many miners and their families into poverty. 

For this reason, there is a consensus that the 

way forward is to recognize the role of this 

type of mining in development and to support improved management and livelihood 

development through formalization of the 

sector, registration of both miners and traders, adoption of technological good practice, 

strengthened health and safety standards 

and their enforcement, economic diversifi cation, and adequate protection for female and 

child labor.

For medium- and large-scale mining projects, foundations and financial 

sureties are increasingly being used to 

deliver sustainable benefits to communities. These two instruments help mining 

contribute to broader economic development while providing environmental protection (box 5.8).

Sustainable management of natural capital underlies green growth in other sectors, 

including agriculture and manufacturing. It is also key to resilience and welfare 

gains. Well-managed, nonrenewable natural capital can provide both jobs and revenues for investment in human capital 

and infrastructure. Well-managed, renewable natural capital protects people and key 

infrastructure from floods and drought, 

provides key productive and cultural 

services, and is the basis for important tourism-based activities. Innovation, effi ciency 

gains, and enhanced human and physical 

capital all play roles in achieving natural 

capital outcomes that are consistent with 

green growth. In turn, as the next chapter 

illustrates, the infrastructure agenda and 

investments in physical capital can support or undermine green growth, depending on management, policy, and investment 

choices.

low income

15

% gross national income

10

5

0

200020012002200320042005200620072008

–5

–10

–15

upper middle income high income: non-OECD high income: OECD

lower middle income

Source: World Bank 2010b.

Note: Adjusted net savings (ANS) measures the change in a country’s national wealth. A positive ANS indicates that the country is adding to its wealth; a 

negative ANS indicates that the country is running down its capital stocks.

FIGURE 5.2 Not enough wealth creation from natural capital

(adjusted net savings of resource-rich countries, by income group, 2000–08)

WB_354_GG_CH05.indd 125 5/7/12 

2012-08-054_000000000000512
126 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Notes

 1. By and large, natural capital is the form 

of capital that is not created by deliberate 

investment, although investments may be 

needed to restore it (by removing pollutants 

or reversing soil erosion, for example) or 

enhance it (by building water storage structures to enhance the water retention services 

of watersheds, for example). This chapter 

considers the role of natural capital as a factor of production. Its role as a sink and the 

relationship to growth is covered in other 

chapters.

 2. Following the Millenium Ecosystem Assessment (2003), ecosystem services can be classifi ed into “provisioning services” (services that 

produce goods and services, such as water, 

food, fuel, fi ber, and fodder) and “nonprovisioning services.” Nonprovisioning services 

include services that provide regulating services (such as watershed management and climate regulation), supporting services (such as 

nutrient cycling and soil formation), and cultural services (including services that embody 

recreational and spiritual values). The report 

states that biodiversity and ecosystems are 

closely related concepts. Biodiversity is the 

BOX 5.8 How the mining sector is investing in communities

Medium- and large-scale mining projects typically 

leave a large environmental footprint, resulting in 

the destruction of land, loss of natural habitats, 

damage to ecosystems, and the reduction of water 

and air quality. To reduce these negative externalities and produce sustainable benefi ts for the community, mining companies are increasingly establishing foundations—there are now more than 60 

worldwide—and fi nancial sureties (a sum of money 

or a guarantee by a third party that a fi nancial liability will be met).

Foundations

Mining companies often set up foundations for 

larger mining operations; a few countries, including Canada and South Africa, require that they be 

established. These entities increase the benefi ts of 

mining by developing skills (for mining-related jobs 

and alternative livelihoods) and providing funds that 

can provide a benefi t stream once a mine is closed. 

They are usually funded by one or more mining 

operations, which contribute 0.25–1.0 percent of 

their gross revenues. The funds are used to deliver 

community investment programs for companies, 

facilitate the use of government payments to local 

areas, and manage compensation funds. A critical condition for success is adaptation to the local 

context, which should be subject to extensive social 

assessment to defi ne the foundation’s vision, benefi ciaries, and project types. The foundation’s complexity should be proportionate to the funding and 

capacity of the operating environment, and its operations should be integrated with local and regional 

development plans.

Financial sureties

Over the past 20 years, it has become the norm for 

mining companies to be legally obligated to set up 

fi nancial sureties. These instruments reduce the negative externalities associated with mining by ensuring that there will be suffi cient funds to pay for site 

rehabilitation and postclosure monitoring and maintenance at any stage of a mining project, including 

early or temporary closure. Funding should be based 

on a cash accrual system or a fi nancial guarantee 

provided by a reputable fi nancial institution. Mine 

closure requirements should be reviewed annually 

and the closure funding arrangements adjusted to 

reflect any changes. Financial sureties should not 

be regarded as a surrogate for a company’s legal 

liability for clean-up but rather as a buffer against 

the public having to shoulder costs for which the 

operator is liable. Closure costs vary enormously but 

tend to range from $5–$15 million for medium-size 

open pit mines to more than $50 million for large 

operations. Some sureties include socioeconomic 

obligations, making their goals similar to those of 

foundations.

Source: Sassoon 2009; Wall and Pelon 2011.

WB_354_GG_CH05.indd 126 5/7/12 

2012-08-054_000000000000513
NATURAL CAPITAL 127

variability of living organisms from all types 

of ecosystems.

 3. Landscape approaches integrate management 

of land, agriculture, forests, fi sheries and 

water at local, watershed and regional scales 

to ensure that synergies are captured. 

 4. Exclusive economic zones—referred to in the 

preamble to the United Nations Convention 

on the Law of the Sea Treaty (1982)—are 

defi ned as waters that are 200 nautical miles 

or less from the coastline of a sovereign state. 

Within these areas, the state has exclusive 

economic rights concerning management of 

all natural resources. 

 5. Projections vary widely, depending on 

assumptions about recycling and the move 

from paper to electronic communication 

formats. 

 6. In the case of aquifers, in which the actual 

recharge rate is negligible, water can be considered as a nonrenewable resource. A study 

of China estimates the annual environmental cost of the depletion of nonrechargeable 

groundwater in deep freshwater aquifers to 

be on the order of 50 billion yuan (World 

Bank 2007b). 

 7. Dead zones are areas in which oxygen concentrations are less than 0.5 millimeters per liter 

of water. These conditions usually lead to 

mass mortality of sea organisms.

 8. Nethope is a Kenya-based organization that 

brings together 33 nongovernmental organizations, with the mission of improving connectivity and access to information. 

 9. EU farmers receiving direct payments must 

respect mandatory cross-compliance provisions, which require them to fulfi ll the 

requirements of 19 European legislative 

acts related to the environment, public and 

animal health, pesticides, and animal welfare. Farmers who do not comply face partial or total withdrawal of their Single Farm 

Payment. Benefi ciaries of direct payments 

must also keep their land in good agricultural 

and environmental condition.

10. The Nagoya Protocol on Access and Benefi tSharing is an international treaty that aims 

to develop greater legal certainty as well 

as transparency for providers and users of 

genetic resources. The protocol covers the 

use of genetic resources (covered by the 

Convention on Biological Diversity) and 

the traditional knowledge that is associated 

with it. Its objective is for both parties to 

acknowledge and respect their reciprocal 

obligations.

11. The evidence on the role of forests in regulating water fl ows and fl oods is mixed, as 

Vincent (2012) notes. The evidence that 

forests mitigate large fl oods is scant, and it 

appears that their effect on low fl ows can go 

in either direction, depending on the balance 

between infi ltration and evapo-transpiration. 

12. REDD stands for “reducing emissions from 

deforestation and forest degradation.” To 

this, REDD+ adds conservation, sustainable 

management of forests, and enhancement of 

forest carbon stocks.

13. This section does not address nonrenewable 

natural capital from subsoil assets (fossil fuels), 

which are dealt with in other chapters.

14. The BioCarbon Fund, housed within the 

World Bank’s Carbon Finance Unit, is a public-private initiative mobilizing resources for 

pioneering projects that sequester or conserve 

carbon in forest and agro-ecosystems, mitigating climate change and improving rural 

livelihoods.

15. The mechanism, defi ned in Article 12 of the 

Kyoto Protocol on Climate Change, allows a 

country with an emission-reduction or emission-limitation commitment under the 1997 

Kyoto Protocol (mostly high-income countries) to implement an emission-reduction 

project in developing countries. Such projects 

can earn saleable certifi ed emission reduction 

credits, each equivalent to one tonne of CO2, 

which can be counted toward meeting Kyoto 

targets.

16. Chile had the highest human development 

index of all South American countries in 

2010 (UNDP 2010).

References

Agardy, T., Hicks, F., and A. Hooten. 2011. 

“Komodo Collaborative Management 

Initiative.” Evaluation Report, International 

Finance Corporation, Washington, DC.

Ali, D. A., K. Deiniger, and M. Goldstein. 2011. 

“Environmental and Gender Impacts of 

Land Tenure Regularization in Africa: Pilot 

Evidence from Rwanda.” Policy Research 

Working Paper, World Bank, Washington, 

DC.

Aylward, B., K. Allen, J. Echeverria, and J. Tosi. 

1996. “Sustainable Nature-Based Tourism in 

WB_354_GG_CH05.indd 127 5/7/12 

2012-08-054_000000000000514
128 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Costa Rica: The Monteverde Cloud Forest 

Preserve.” Biodiversity and Conservation

5 (3): 315–44.

Bai, Z. G., D. L. Dent, L. Ollsen, and M. E. 

Schaffman. 2008. “Proxy Global Assessment 

of Land Degradation.” Journal of Soil Use 

and Management 24 (September): 223–34.

Belcher, B., M. Ruiz-Perez, and R. Achdiawan. 

2005. “Global Patterns and Trends in 

the Use and Management of Commercial 

NTFPs: Implications for Livelihoods and 

Conservation.” World Development 33 (9): 

1435–52.

Bennet, M. 2008. “China’s Sloping Land 

Conversion Program: Institutional Innovation 

or Business as Usual?” Ecological Economics

65 (4): 699–711.

Bond, I., and J. Mayers. 2009. “Fair Deals 

for Watershed Services: Lessons from a 

Multi-Country Action Learning Project.” 

Natural Resource Issues 13. London: 

International Institute for Environment and 

Development.

Bowler, D., L. Buyung-Ali, J. R. Healey, J. P. 

G.Jones, T. Knight, and A. S. Pullin. 2010. 

“The Evidence Base for Community Forest 

Management as a Mechanism for Supplying 

Global Environmental Benefi ts and Improving 

Local Welfare.” CEE Review 08-011 (SR48). 

Brown, D. P. Dettman, T. Rennado, H. Teferu, 

and A. Tofu. 2011. Poverty Alleviation and 

Environmental Restoration Using the CDM 

(Clean Development Mechanism): A Case 

Study from Humbo Ethiopia. Dakar: Africa 

Adapt World Vision.

Chinese National Census of Pollution. 2010. 

Ministry of Environmental Protection. 

Beijing.

Deininger, K., and G. Feder. 2001. “Land 

Institutions and Land Markets.” In Handbook 

of Agricultural Economics, ed. B. L. 

Gardner and G. C. Rausser, vol. 1, 287–331. 

Amsterdam: North-Holland.

Dobermann, A., C. Witt, and R. J. Buresh. 

2008. “Ecological Intensifi cation of Irrigated 

Rice Systems in Asia.” In Procedures of the 

5th International Crop Science Congress, Jeju 

(CD).

Eurostat. 2011. “Agri-Environment Indicators.” 

European Commission, Brussels.

Fang, X., T. L. Roe, and R. B. W. Smith. 2006. 

“Water Shortages, Water Allocation and 

Economic Growth: The Case of China.” 

Paper presented at the 10th Joint Conference 

on Food, Agriculture and the Environment, 

Duluth, MN, August 27–30.

FAO (Food and Agricultural Organization). 2001. 

Economics of Conservation Agriculture. 

Rome: FAO Natural Resource Management 

and Environment Department.

———. 2010a. “Global Forest Resources 

Assessment 2010.” Forestry Paper 163, FAO, 

Rome.

———. 2010b. The State of World Fisheries and 

Aquaculture. Rome: FAO.

———. 2011. State of the World’s Forests. Rome: 

FAO.

Foresight. 2011. “The Future of Food and 

Farming.” Final Project Report, Government 

Offi ce for Science, London.

Gelb, A., and S. Grasmann. 2010. “How Should 

Oil Exporters Spend Their Rents?” Center for 

Global Development, Washington, DC. http://

www.cgdev.org/files/1424356_file_Gelb_

Grasmann_Oil_Rents_FINAL.pdf.

Goldman, A. 2011. “Poverty and Pro-Governance 

in the Land of the Plenty: Assessing an Oil 

Dividend in Equatorial Guinea.” Background 

paper for the Oil-to-Cash Initiative, Center for 

Global Development, Washington, DC. http://

www.cgdev.org/doc/Initiatives/Oil2Cash/EG_

Goldman_Formatted_Version_Final.pdf.

Gómez, M. I., C. B. Barrett, L. E. Buck, H. De 

Groote, S. Ferris, H. O. Gao, E. McCullough, D. 

D. Miller, H. Outhred, A. N. Pell, T. Reardon, 

M. Retnanestri, R. Ruben, P. Struebi, 

J. Swinnen, M. A. Touesnard, K. Weinberger, 

J. D. H. Keatinge, M. B. Milstein, and 

R. Y. Yang. 2011. “Research Principles for 

Developing Country Food Value Chains.” 

Science 332 (6034): 1154–5.

Hausmann, R., B. Klinger, and R. Lawrence. 

2008. “Examining Beneficiation.” CID 

Working Paper 162, Center for International 

Development, Harvard University, Cambridge, 

MA.

Isenberg, D. 2006. “Keggfarms (India): Which 

Came First, the Kuroiler tm or the KEGGtm?” 

Harvard Business Review Case Study, Harvard 

University, Cambridge, MA.

Jack, B. K., Kousky, C., and Sims, K. R. E. 2008. 

“Designing Payments for Ecosystem Services: 

Lessons from Previous Experience with 

Incentive-Based Mechanisms.” Proceedings 

of the National Academies of Sciences 105 

(28): 9465–70.

Joshi, P. K., V. Pangare, B. Shiferaw, S. P. Wani, J. 

Bouma, and C. Scott. 2004. “Socioeconomic 

WB_354_GG_CH05.indd 128 5/7/12 

2012-08-054_000000000000515
NATURAL CAPITAL 129

and Policy Research on Watershed Management 

in India: Synthesis of Past Experiences and 

Needs for Future Research.” In Global Theme 

on Agroecosystems, Report 7, International 

Crops Research Institute for the Semi-Arid 

Tropics, Andhra Pradesh, India.

Khush, G. S., and P. S. Virk. 2005. IR Varieties 

and Their Impact. Manila: International Rice 

Research Institute.

Landers, John. 2005. Zero Tillage Development 

in Tropical Brazil. Wageningen, the 

Netherlands: Wageninen University.

Liniger, H. P., R. Mekdaschi Studer, C. Hauert, 

and M. Gurtner. 2011. Sustainable Land 

Management in Practice: Guidelines and 

Best Practices for Sub-Saharan Africa. Rome: 

TerrAfrica, World Overview of Conservation 

Approaches and Technologies (WOCAT), 

Berne, and Food and Agriculture Organization 

of the United Nations (FAO).

L óp e z , R . 2 0 02 . “T he E conom ic s of 

Agriculture in Developing Countries: The 

Role of the Environment.” In Handbook of 

Agricultural Economics, ed. B. Gardner and 

G. Rausser, vol. 2, 1213–47. Amsterdam: 

Elsevier.

———. 2012. “Sustainable Agriculture and 

Animal Production in Colombia.” Paper 

presented to the Ministry of Agriculture 

and Rural Development of Colombia during 

Sustainable Development Week, Bogota.

Millennium Ecosystem Assessment. 2003. 

Ecosystems and Human Well-Being: A 

Framework for Assessment. Washington, DC: 

Island Press.

Nkonya, E., N. Gerber, J. von Braun, and 

A. De Pinto. 2011. “Economics of Land 

Degradation: The Costs of Action versus 

Inaction.” IFPRI Issue Brief 68, International 

Food Policy Research Institute, Washington, 

DC.

OECD (Organization for Economic Co-operation 

and Development). 2008. Environmental 

Outlook to 2030. Paris: OECD.

———. 2011. Agricultural Policy Monitoring 

and Evaluation 2011. Paris: OECD.

Pagiola, S. 2008. “Payments for Environmental 

Services in Costa Rica.” Ecological Economics

65 (4): 712–72.

Pattanayak, S. K., S. Wunder, and P. J. Ferraro. 

2010. “Show Me the Money: Do Payments 

Supply Environmental Services in Developing 

Countries?” Review of Environmental 

Economics and Policy 4 (2): 254–74.

Pavan, W., C. W. Fraisse, and N. A. Peres. 2010. 

A Web-Based Decision Support Tool for 

Timing Fungicide Applications in Strawberry. 

Tallahassee: Florida State University 

Cooperative State Extension Program.

Polasky, S., C. Costello, and A. Solow. 2005. “The 

Economics of Biodiversity.” In Handbook 

of Environmental Economics, ed. K. G. 

Mäler and J. R. Vincent, vol. 3, 1517–60. 

Amsterdam: Elsevier.

Prince’s Charities’ International Sustainability 

Unit. 2011. “Towards Sustainable Agricultural 

Production Systems: What Price Resilience?” 

Clarence House, London. http://www.fcrn.org

.uk/sites/default/fi les/ISU_Resilience_report_

July11.pdf.

Ravindrah, N. H., and M. Ostwald. 2008. 

Carbon Inventory Methods Handbook 

for Greenhouse Gas Inventory, Carbon 

Mitigation and Roundwood Production 

Projects: Advances in Global Research. Berlin: 

Springer-Verlag.

Ruiz-Perez, M., M. Fu, X. Yang, and B. Belcher. 

2001. “Towards a More Environmentally 

Friendly Bamboo Forestry in China”. Journal 

of Forestry 99 (7): 14–20.

Sassoon, M. 2009. Financial Surety: Guidelines 

for the Implementation of Financial Surety 

for Mine Closure. Extractive Industries for 

Development Series 7. Washington, DC: World 

Bank.

Scheierling, S. M. 1996. “Overcoming 

Agricultural Water Pollution in the European 

Union.” Finance & Development 33(3): 

32–5.

Scherr, S. J., L. E. Buck, T. Majanen, J. C. 

Milder, and S. Shames. 2011. “Scaling-Up 

Landscape Investment Approaches in 

Africa: Where Do Private Market Incentives 

Converge with Landscape Restoration 

Goals?” Background paper for the Investment 

Forum on Mobilizing Investment in Trees 

and Landscape Restoration, EcoAgriculture 

Partners and Program on Forests (PROFOR), 

Washington, DC.

TIES (International Nature-Based Tourism 

Society). 2006. “TIES Global Nature-Based 

Tourism Fact Sheet.” TIES, Washington, DC.

Tveteras, R., and G. E . Battese. 2006. 

“Agglomeration Externalities, Productivity, 

and Technical Inefficiency.” Journal of 

Regional Science 46 (4): 605–25.

U N DP ( Un ite d Nat ion s D evelopment 

Programme). 2010. Human Development 

WB_354_GG_CH05.indd 129 5/7/12 

2012-08-054_000000000000516
130 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Report 2010. The Real Wealth of Nations:

Pathways to Human Development. New 

York: UNDP.

U N E P ( U n it e d N at ion s E nv i ron m e nt 

Programme), FAO (Food and Agriculture 

Organization), IOC (Intergovernmental 

Oceanographic Commission), and UNESCO 

(United Nations Educational, Scientifi c and 

Cultural Organization). 2009. Blue Carbon: 

The Role of Healthy Oceans in Binding 

Carbon. New York: UNEP.

U N FCCC (United Nations Framework 

Convention on Climate Change). 2007. 

“Climate Change 2007.” Fourth Assessment 

Report of the United Nations Intergovernmental 

Panel on Climate Change (IPCC), Bonn.

Vincent, J. R. 2012. “Ecosystem Services and 

Green Growth.” Paper presented at the Green 

Growth Knowledge Platform inaugural 

conference, Mexico City, January 12–13.

Wall, L., and R. Pelon. 2011. Sharing Mining 

Benefi ts in Developing Countries. Extractive 

Industries for Development Series 21. 

Washington, DC: World Bank.

Watson, R. T., I. R. Noble, N. H. Bert Bolin, 

D. J. V. Ravindranath, and D. J. Dokken, 

eds. 2000. Land Use, Land-Use Change, and 

Forestry. Report of the Intergovernmental 

Panel on Climate Change. Cambridge: 

Cambridge University Press.

Weitzman, M. 1974. “Free Access vs. Private 

Ownership as Alternative Systems for 

Managing Common Property.” Journal of 

Economic Theory 8 (2): 225–34.

World Bank. 2004. “Towards a Water-Secure 

Kenya: Water Resources Sector.” Memorandum, 

World Bank, Africa Region, Water and Urban I, 

Washington, DC.

———. 2005a. “Arab Republic of Egypt Country 

Environmental Analysis, 1992–2002.” Report 

31993–EG, World Bank, Washington, DC.

———. 2005b. Where Is the Wealth of Nations? 

Measuring Capital for the 21st Century. 

Washington, DC: World Bank.

———. 2006a. “Pakistan Country Environmental 

Analysis.” Report 36946–PK, World Bank, 

Washington, DC.

———. 2006b. “Republic of Colombia Mitigating 

Environmental Degradation to Foster Growth 

and Reduce Inequality.” Report 36345–CO, 

World Bank, Washington, DC.

———. 2007a. “Agriculture for Development.” In 

World Development Report 2008: Agriculture 

and Development. Washington, DC: World 

Bank.

———. 2007b. Cost of Pollution in China: 

Economic Estimates of Physical Damages. 

Conference ed. Washington, DC: World 

Bank.

———. 2007c. “Ghana Country Environmental 

Analysis.” Report 36985–GH, World Bank, 

Washington, DC.

———. 2007d. “Zambia Economic and Poverty

Impact of Nature-based Tourism.” Report 

43373-ZM, Africa Region, World Bank, 

Washington, DC.

———. 2008a. Hydromet Services in Eastern 

Europe and Central Asia Region. Washington 

DC: World Bank.

———. 2008b. “Tajikistan Country Environmental 

Analysis.” Report 43465-TJ, World Bank, 

Washington, DC.

———. 2010a. Central African Republic Country 

Environmental Analysis: Environmental 

Management for Sustainable Growth. 

Washington, DC: World Bank.

———. 2010b. The Changing Wealth of Nations: 

Measuring Sustainable Development in the 

New Millennium. Washington, DC: World 

Bank.

———. 2010c. China Forest Policy: Deepening 

the Transition. Washington, DC: World 

Bank.

———. 2010d. World Development Report 

2010: Development and Climate Change. 

Washington DC: World Bank.

———. 2011a. “Climate Smart Agriculture: 

A Call to Action.” In collaboration with the 

African Union, CCAFS (Climate Change, 

Agriculture and Food Security), Department 

of Agriculture, Forestry and Fisheries of 

South Africa, IFAD (International Fund 

for Agricultural Development, PROFOR 

(Program on Forests), UNEP (United Nations 

Environment Programme), WBI (World 

Bank Institute), FAO (Food and Agriculture 

Organization), WFP (World Food Programme), 

Washington DC.

———. 2011b. “Kazakhstan: Syr Darya Northern 

Aral Sea Control Project.” Implementation 

Completion Report, World Bank, Washington, 

DC.

———. 2012. “India National Dairy Support 

Program.” Project Appraisal Report, World 

Bank, Washington, DC.

World Bank and FAO(Food and Agriculture 

Organization). 2009. The Sunken Billions: The 

WB_354_GG_CH05.indd 130 5/7/12 

2012-08-054_000000000000517
NATURAL CAPITAL 131

Economic Justification for Fisheries Reform.

Washington, DC: World Bank; Rome: Food 

and Agricultural Organization.

WRI (World Resources Institute). 2005. 

M ille nnium E cosyste m A ssessm e nt: 

Ecosyste ms and Hum an Well- Being 

Biodiversity Synthesis. Washington, DC: 

WRI.

Wunder, S. 2000. “Nature-Based Tourism and 

Economic Incentives: An Empirical Approach.” 

Ecological Economics 32: 465–79.

Wunder, S., and M. Albán. 2008. “Decentralized 

Payments for Environmental Services: The 

Cases of Pimampiro and PROFAFOR in 

Ecuador.” Ecological Economics 65 (4): 

685–98.

WB_354_GG_CH05.indd 131 5/7/12 

2012-08-054_000000000000518
WB_354_GG_CH05.indd 132 5/7/12 

2012-08-054_000000000000519
6 Physical Capital: The Role of 

Infrastructure in Green Growth 

Strategies

Getting infrastructure “right” is at the 

heart of green growth. It is critical 

because infrastructure choices have 

long-lived and diffi cult-to-reverse impacts 

on the carbon, land, and water intensity 

of future patterns of development. Infrastructure also offers substantial co-benefi ts: 

many investments needed for growth and 

improved living conditions are also good for 

the environment.

The challenges and opportunities of 

greening infrastructure in developing countries must be understood in the context of 

the huge unsatisfi ed needs that remain: the 

fact that much remains to be built creates 

an opportunity to build right; the fact that 

needs are so large implies important tradeoffs between “building right” and “building more.” While the additional costs of 

building green are relatively modest, they 

occur in a context of frequently binding 

fi nancing and fi scal constraints. Complicating matters is the dramatic rise in population and growing urbanization. As such, 

a framework for green infrastructure needs 

to offer strategies to minimize the potential 

for regrets and maximize short-term local 

benefits; and it must build on efforts to 

 133

Key Messages

• Infrastructure policies are central to green 

growth strategies, because of the huge potential for regret (given the massive infrastructure investments required and the inertia 

they create) and substantial potential for 

co-benefi ts (given the current gap in infrastructure service provision).

• The infrastructure gap offers opportunities to 

“build right” and leapfrog; but huge unmet 

needs also can imply diffi cult trade-offs between 

“building right” and “building more,” particularly given fi nancing and fi scal constraints.

• A framework for green infrastructure must 

build on efforts to address overall constraints on infrastructure finance (including cost recovery issues) and must develop 

strategies to both minimize the potential for 

regrets and maximize short-term co-benefi ts 

to address social and political acceptability 

constraints.

GG_133-152.indd 133 5/8/12 

2012-08-054_000000000000520
134 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

address overall constraints on infrastructure fi nance.

This chapter focuses on long-lived infrastructure systems such as energy, water, sanitation and transport infrastructure, although 

it recognizes other infrastructure—for example, buildings—also play a key role in driving 

the demand for infrastructure services (irrigation is covered in chapter 5).

Infrastructure as the heart of 

green growth

Infrastructure policies are central to green 

growth strategies because of their unique 

characteristics, namely the large potential for regret (linked with the large inertia 

embodied in infrastructure investments) 

and the substantial potential for co-benefi ts 

(linked to the current gap in infrastructure 

service provision).

A massive potential for regret

Infrastructure decisions are long-lived (table 

6.1). They influence the purchase of consumer durables and the location choices of 

households and fi rms. As such, they create 

substantial inertia in socioeconomic systems. Because the economic system reorganizes itself around infrastructure, this inertia 

can even exceed the physical lifetime of specifi c infrastructure investments. A delay in 

greening investments may therefore prove 

extremely costly if it results in a lock-in into 

technologies that turn out to no longer be 

appropriate (because of their excessive carbon, land, or water intensity) or settlement 

patterns that prove vulnerable to changing climatic conditions. The infrastructure 

already in place now will raise global temperatures by 1.3°C–1.7°C unless it is retrofi tted or retired before the end of its useful 

life (Davis and others 2010; Guivarch and 

Hallegatte 2011).

Inertia is particularly evident in urban 

policies and the transport-related decisions 

that shape cities. The consequences of these 

decisions are illustrated by the contrast 

between Atlanta and Barcelona, two cities with roughly the same population and 

income but dramatically different densities 

and, hence, dramatically different options 

in terms of urban transportation and housing (fi gure 6.1). Once a city is developed, it 

is diffi cult to change its form. This irreversibility makes the idea of “growing dirty and 

cleaning up later” inapplicable in this domain 

(box 6.1).

The consequence of the inertia in infrastructure development is an enormous 

potential for regret if decisions are made 

without adequate consideration of how 

conditions—socioeconomic, environmental, 

and technological—will change over time. 

The potential for regret has always been a 

challenge for infrastructure policy; it is made 

much more complex by climate change, 

which introduces deep uncertainty about 

future climatic conditions, technologies, and 

environmental standards and prices.

Uncertainty about future climatic conditions. This complicates decision making, 

given the importance of weather and climate conditions for infrastructure design 

and performance (Hallegatte 2009). In 

the energy sector, weather directly affects 

demand (which varies with temperature) 

and supply. Water availability affects electricity production from hydropower and 

thermal plants (because of cooling needs), 

and wind and nebulosity determine wind 

and solar power. Electricity networks are 

also highly vulnerable to extreme events 

TABLE 6.1 Sectors in which inertia and sensitivity to climate 

conditions are great

Sector Example

Time scale 

(years)

Water Dams, reservoirs 30–200

Land-use planning New development in fl ood plain 

or coastal areas

>100

Coastal and fl ood defenses Dikes, sea walls >50

Building and housing Insulation, windows 30–150

Transportation Port infrastructure, bridge, roads, 

railways

30–200 

Urbanism Urban density, parks >100

Energy production Coal-fi re plants 20–70 

Source: Hallegatte 2009.

GG_133-152.indd 134 5/8/12 

2012-08-054_000000000000521
PHYSICAL CAPITAL 135

FIGURE 6.1 Urban densities determine cities’ options for greening

(built-up areas of Atlanta and Barcelona, represented at the same scale)

Source: Bertaud 2003.

(such as strong winds and snowstorms, as 

illustrated by the January 2008 snowstorm 

that left millions of people stranded across 

China or the repeated power outages caused 

by heavy snow in the United States). Transport infrastructure, which affects urban 

development and land use, including in 

flood-prone areas, must also account for 

long-term climate changes.

Uncertainty about how technologies 

evolve. This has a particularly important 

effect on cities. With current technologies, 

low-density single-home suburban developments lead to high carbon emissions. But they 

may become sustainable in terms of emissions 

(albeit maybe not in terms of water and land 

consumption) with effi cient electric vehicles, 

decarbonized electricity production and lowenergy-consumption houses (box 6.2). Uncertainty about the evolution of energy technology costs complicates the design of energy 

policy (Kalkuhl and others 2011). Anecdotal 

evidence suggests that uncertainty is also 

leading investors to postpone investments for 

fear of being stuck with an older and uncompetitive technology.

Uncertainty about environmental policies and prices for energy, oil, or carbon.

Energy-intensive development may create 

deep vulnerabilities and loss of competitiveness in a future with high carbon or energy 

prices (Rozenberg and others 2010; World 

Bank 2010). Dense cities are less vulnerable 

to shocks in energy—hence transportation—

prices (Gusdorf and Hallegatte 2007).

The combination of sensitivity to uncertain parameters and the high level of inertia 

creates a high risk of lock-ins into situations 

that will be undesirable in the future. Avoiding these lock-ins—and the corresponding 

regret or retrofi tting costs—should be a priority for decision making on infrastructure 

(see chapter 7).

The vast potential for co-benefi ts

The second reason why infrastructure will 

play a key role in green growth strategy is that 

GG_133-152.indd 135 5/8/12 

2012-08-054_000000000000522
136 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 6.1 The case for immediate action in the transport sector

Transport is a major contributor to CO2 emissions. It is also one of the fastest-growing sources of 

emissions. Not surprisingly given the 1 billion cars 

already on the road, road transport accounts for 

about two-thirds of total transport emissions.

Developing countries, which still face a huge 

transport infrastructure gap, have the opportunity 

to choose their transport development path: lowemission transport or car-dependent transport (box 

figure B6.1.1). Experience suggests that demand 

for car ownership increases dramatically at annual 

household incomes of $6,000–$8,000. If history 

repeats itself, an additional 2.3 billion cars will 

be added by 2050, mostly in developing countries, 

given expected economic growth and past patterns 

of motorization (Chamon and others 2008). Without policies to encourage high-density urbanization 

and public transport, high reliance on individual car 

transport will ensue.

If public transport is included as a major part 

of modal structure in urban transport, there is no 

conflict between a low emission transport sector 

and rapid growth or high income. In fact, economies 

with some of the lowest ratios of energy consumption to gross domestic product (GDP) in the world—

including Japan, Singapore, and Hong Kong SAR, 

China—have experienced extraordinary development over the past few decades.

FIGURE B6.1.1 As income rises, will countries choose low energy consumption in road transport?

(relationship between per capita income and energy consumption from the road sector)

Canada

Cuba

Hong Kong SAR, China

Iceland

Iran, Islamic

Rep.

Israel Japan Korea,Rep.

Norway

Qatar

Saudi Arabia

Singapore

Switzerland

United Arab Emirates

United States

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

GDP per capita ($2000)

kiloton of oil equivalent

Source: World Bank 2011d.

GG_133-152.indd 136 5/8/12 

2012-08-054_000000000000523
PHYSICAL CAPITAL 137

BOX 6.2 The impact of technologies on transport policies—not enough?

Given the signifi cance of emissions from road transport, the green growth path of transport depends on 

how rapidly vehicle technologies develop. If low- or 

zero-emission vehicles become available in the near 

future, relatively small changes in existing transport 

infrastructure stock would be required. People could 

continue relying on individual cars without harming 

the climate. But this may not be realistic.

Technical standards in transport can also help 

reduce emissions in the sector. Emissions per kilometer of new cars have historically been reduced 

through better gasoline and diesel internal combustion engines, better lighting and air conditioning, 

and better tires. The aviation fl eet has also reduced 

emissions in accord with international efficiency 

agreements. There is also an opportunity to reduce 

emissions levels through Intelligent Transport 

Systems—for instance, by allowing drivers to access 

timely traffic reports, identify available parking 

spots, and optimize routing.

But technical standards are unlikely to lead 

to massive reductions in emissions, so barring the 

rapid emergence and global adoption of low-carbon 

engine technologies, modal shifts will be needed. An 

average bus emits only half as much CO2 equivalent 

per passenger kilometer as a small car. For travel 

between distant cities, railways are even more ecofriendly than buses: emissions from light-rail transit 

can be as much as half of average bus emissions. But 

the effi ciency and feasibility of modal shifts depend 

on urban forms, with mass transit requiring minimum levels of density, and on tackling market structure and coordination failures.

Modal shifts will also imply addressing consumer preferences, and here the “nudging” and 

social marketing campaigns discussed in chapter 

2 are an important complement to price incentives 

and supply-side interventions. In a world in which 

major automobile companies spent some $21 billion 

worldwide on advertising in 2009—an increasing 

percentage of which is aimed at emerging markets—

public transport agencies across Africa, Europe, 

and North and South America are beginning to 

apply to public transportation the same marketing 

approaches used by the auto industry to bolster sales 

to shift demand for public transportation (Weber 

and others 2011).

infrastructure is a domain in which substantial 

synergies exist between economic growth and 

the environment. Infrastructure systems are 

indeed designed to provide welfare- improving 

and productivity-enhancing services, which 

are critical for development, but they also 

often provide environmental benefi ts.

Providing service to the unserved—

who usually pay a higher price for water 

and energy than connected households— 

provides both social and environmental benefi ts (box 6.3). Universal access to water and 

sanitation is good not only for welfare and 

economic growth—with impacts on health 

and human capital, especially for the poor—

but also for the environment. (For instance, 

providing sanitation services to the slums 

surrounding the Guarapiranga Lake helped 

slum dwellers but also preserved the water 

source of 25 percent of São Paulo’s 18 million 

inhabitants in the early 1990s.) This is also 

true for energy. When reliable network electricity is available, pollution is reduced and 

competitiveness increases, as fi rms no longer 

need to rely on expensive back-up diesel generators. Photovoltaic (PV) solar systems are 

optimal solutions for isolated, low-density 

areas; hydroelectricity is the cheapest and 

most reliable energy source for some countries (box 6.4). Better public urban transport 

reduces congestion and air pollution, with 

large economic and health impacts.1

An additional source of co-benefits is 

linked to distributional effects. Infrastructure 

consumption subsidies are both regressive and 

bad for the environment (Komives and others 2005). Subsidies not only distort demand, 

with financial and environmental consequences, they also often fail to reach the very 

poor they are supposed to help (see chapter 2). 

The poor do not own cars and often are not 

served by utilities; if they do, they consume 

GG_133-152.indd 137 5/8/12 

2012-08-054_000000000000524
138 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 6.3 Benefi ts from using photovoltaic electricity in rural areas

Power grids in Africa are available only in cities and 

high-density areas. In most rural areas, kerosene 

and candles are the main source of lighting, while 

dry cell batteries are used to power radios. All are 

expensive (1 liter of kerosene can cost more than 

$0.80 and provides about 20 hours of light). PV 

systems are superior solutions. For example, a solar 

home system may be sized to power a refrigerator 

and television (costing $1,000); a large television 

and three lamps (for $250); a small television, three 

lamps, and a radio (for $100); or a lamp, radio, and 

cell phone charger (for as low as $50—about the 

same cost as a cell phone).

Africa offers a huge market for modern, energyefficient lighting products. Although the market 

has a low profi t margin, its strength is in the high 

number of clients (if the right product for the right 

price can be offered). The GTZ-sponsored pico-PV 

program and the World Bank Group’s Lighting 

Africa are examples of two initiatives that aim to 

transform the lighting market from fuel-based products to clean, safe, and efficient modern lighting 

appliances.

Source: ESMAP 2009.

BOX 6.4 Hydropower as a green choice for lower-income countries

For lower-income countries, sustainable hydropower 

represents an important clean energy source—and 

one that will assume a larger share of the world’s 

energy production as these countries develop further. Africa is exploiting only 7 percent of its hydropower potential; if the region developed it to the 

same extent that Canada has, its electricity supply 

would be multiplied by a factor of 8.

The reality, however, is that hydropower projects 

are complex—with impacts on agriculture, water 

management, irrigation, food production, climate 

change, and the sustainability of communities. They 

require detailed planning and studies before a shovel 

breaks the ground. Social and environmental impacts 

have to be assessed and addressed, consultations 

must be held, and regulations need to be developed. 

In some cases, new institutions have to be created 

and made viable. None of this is easy or cheap, but it 

is essential, because well-managed hydro projects can 

generate an array of benefi ts, including fl ood control, 

drought management, provision of water supply, and 

environmental benefi ts.

Storage facilities for hydropower are essential to 

adapt to changes in the hydrological cycle that are 

expected to occur as a result of climate change. With 

increasing water scarcity in some regions, there is a 

need to develop multiyear storage that is economically, environmentally, and socially feasible. Where 

the intensity and frequency of floods increases, 

storage is required to manage fl ows. Multipurpose 

storage facilities can also provide water services to 

agriculture, water supply, and environmental fl ows.

Box text contributed by Diego Rodriguez.

small quantities of water and electricity or 

transport fuel. The lion’s share of consumption subsidies benefi ts wealthier segments of 

the population (Arze del Granado and others 

2010). The urban poor may enjoy some spillovers, but the rural poor seldom do.

There are also trade-offs between infrastructure development and the environment. 

A fi rst trade-off is related to infrastructure’s 

direct environmental footprint. Building the 

infrastructure that is needed for development will have detrimental impacts on natural areas, biodiversity, and the environment 

(Geneletti 2003). Another trade-off is linked 

to the fact that building better (cleaner, more 

resilient, or both) can be more expensive. This 

trade-off raises the fear that countries faced 

with severe fi nancing constraints may need 

GG_133-152.indd 138 5/8/12 

2012-08-054_000000000000525
PHYSICAL CAPITAL 139

to chose between “building right” (which 

may make both economic and environmental 

sense) and “building more” (which may be 

what is required socially).

But the additional cost of building greener 

infrastructure should not be overstated. In 

some sectors, green infrastructure is more 

expensive—where electricity grids are present, 

solar or wind energy is more expensive than 

electricity produced from coal, for example. 

But thanks to innovation and economies of 

scale, the difference in cost is narrowing rapidly, and green energies are now competitive in 

some contexts (where the hydropower endowment is large, where electricity is produced 

off-grid, or where carbon is priced). In the 

transport sector, providing public transport is 

more expensive than building roads, but public and individual transports are imperfect 

substitutes: in highly congested cities, public 

transportation becomes necessary for economic reasons, and the environmental benefi ts can be reaped with no or little additional 

cost. In the construction sector, the additional 

cost to build lower-energy buildings—thanks 

to better insulation and more effi cient heating 

systems—may not exceed 5 percent, and this 

additional investment cost is rapidly recouped 

by reduced energy bills.

One case in which additional costs may 

create trade-offs is the retrofi t of existing buildings. Indeed, retrofi tting the lowest-effi ciency 

buildings into average-efficiency buildings costs €500 per square meter in France 

(Giraudet and others 2011). However, energy 

savings can pay back upfront costs in many 

instances. The main constraint is thus one of 

access to capital rather than fi nancial or economic viability, as many green investments pay 

for themselves over the medium to long term.

Recognizing the need for 

effi ciency: Meeting large 

unsatisfi ed infrastructure needs 

within tight fi scal constraints

Developing countries are characterized by 

large unsatisfi ed needs, including needs met 

by infrastructure such as drinking water 

and reliable electricity (table 6.2). The scale 

of unmet needs is particularly great in SubSaharan Africa, where less than a third of 

households have access to electricity. Connectivity also remains low in the developing 

world, particularly in rural areas, where only 

70 percent of the population has access to 

an all-weather road (33 percent in Africa). 

Access to water has increased, but 780 million people still lack access to an improved 

water source (WHO-UNICEF 2012).

Globally, the challenge is greater for sanitation than for water supply. The percentage 

of the population with adequate access to 

potable water increased from 74 percent in 

1990 to 89 percent in 2010. Sanitation fi gures are much lower, having increased from 

44 percent in 1990 to just 63 percent in 2010 

(WHO-UNICEF 2012). The difference partly 

refl ects the greater “public good” and “externality” element of sanitation and sewerage—

that is, individuals feel the welfare impacts 

of inadequate access to water, whereas other 

sectors and members of society feel the effects 

of inadequate sanitation (through impacts 

on water quality and corresponding health 

and productivity impacts). Estimates of the 

costs of inadequate water and sanitation in 

the Middle East and North Africa are about 

1 percent of GDP in the Arab Republic of 

Egypt and 2.8 percent in the Islamic Republic of Iran (Hussein 2007). With 2.5 billion 

people lacking access to improved sanitation, 

the achievement of the Millennium Development Goal (MDG) on sanitation is unlikely.2

TABLE 6.2 Gaps in access to infrastructure in developing countries 

remain large, particularly in Africa

All developing 

countries Africa

Percentage of households with access to electricity 75 31

Improved water source 89 61

Improved sanitation facilities 63 31

Percentage of rural population with access to an 

all-weather road 70 33

Telecom: mobile and fi xed lines per 100 inhabitants 85 46

Source: Roberts and others 2006 for roads; World Bank 2011d for telecom; IEA 2011 for electricity; 

and WHO-UNICEF 2012.

Note: Road access data are for 2005 or the latest year available up to that date; telecoms, for 2010; 

water and sanitation data are for 2010. Averages are weighted by country population. The road 

access indicator measures the share of the rural population that lives within 2 kilometers of an 

all-season road.

GG_133-152.indd 139 5/8/12 

2012-08-054_000000000000526
140 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Filling the infrastructure gaps in developing countries—to address household needs 

and expanding infrastructure so that fi rms 

have access to the kind of energy and transport services they need to compete—will 

cost an estimated $1.0–$1.5 trillion a year, 

or 7 percent of developing-country GDP (Fay 

and others 2010).3 Developing countries are 

currently investing about half that amount, 

although the amount varies dramatically by 

region and income level. In Africa, infrastructure needs were projected to reach 15 percent 

of the region’s GDP in 2008, about twice 

the level actually spent (Foster and Briceño-Garmendia 2010). Moreover, given the 

constraints on poor households’ budgets, 

increases in infrastructure services need to be 

provided in a way that is affordable.

In the energy sector, the challenge is to 

provide all people with modern energy to 

meet their basic needs at affordable costs 

while ensuring the sustainable growth path 

of energy consumption (through conservation and greater energy effi ciency) and making energy sources more environmentally 

sustainable (box 6.5). Thus, the goals of the 

BOX 6.5 The energy challenge: Expanding access and increasing supply in an effi cient, 

clean, and cost-eff ective manner

How will countries meet the goal of the United 

Nations Sustainable Energy for All initiative of providing universal energy access at affordable costs 

while ensuring environmental sustainability through 

improved effi ciency and an increased role for renewables? The answer is through a portfolio of technologies (World Bank 2010).

To achieve universal access to electricity by 2030, 

countries need to develop not only grid systems 

but also off- and mini-grid power systems, at least 

as a transition solution. The International Energy 

Agency estimates that about 45 percent of electricity will come from national grids, 36 percent from 

mini-grid solutions, and the remaining 20 percent 

from isolated off-grid solutions serving remote and 

low-density areas. Off- and mini-grid technologies 

can be complemented by other solutions at the enduser level. For instance, the Lighting Africa initiative 

lowers entry barriers to the off-grid lighting market by establishing quality standards, developing a 

good investment climate, and supporting product 

development while educating consumers on the benefi ts of solar lighting products. In 2010, more than 

134,000 solar portable lamps that had passed Lighting Africa quality tests were sold in Africa, providing more than 672,000 people with cleaner, safer, 

better lighting and improved energy access.

Energy-effi ciency policies could potentially contribute a quarter to a third of averted greenhouse gas 

emissions by 2050 (World Bank 2010). Technologies 

that increase energy effi ciency are typically not costly 

or innovative: existing technologies alone could 

reduce energy consumption 30–40 percent across 

many sectors and countries. For instance, 70 percent 

of lighting (which consumes 20 percent of total global 

electricity consumption) can save 50 percent of energy 

use just by using current technologies alone. A problem is that the transaction costs for energy- effi ciency 

projects tend to be high, compared with their relatively small amount of investment. Relatively long 

pay-back periods may still be a considerable barrier to 

fi nancing these projects (World Bank forthcoming). 

Among renewable sources of energy, large-scale 

hydropower tends to be the least expensive. It can 

be competitive with conventional thermal generation. Geothermal energy can also be cost competitive, 

making it another suitable candidate. Both types of 

energy involve large upfront costs and long lead-times 

for development, however. At the opposite end of the 

spectrum, solar energy is more expensive, but it may 

still be the least-cost option in remote, isolated areas.

One challenge in developing renewables is the 

temporal variation in the availability of electricity. 

Demand for electricity varies continuously, with 

large fluctuations during the day and even larger 

variation from season to season. Rapid variability of 

some renewables can add to the challenge of maintaining a balance between supply and demand at all 

times. A proper mix of generation technologies with 

varied output control characteristics (for example, 

hydropower with storage and fast-responding gas 

units), well-developed transmission systems, and 

improved forecast and grid operations capacity will 

help cushion the effects of variability.

GG_133-152.indd 140 5/8/12 

2012-08-054_000000000000527
PHYSICAL CAPITAL 141

United Nations Sustainable Energy for All 

(UN SE4ALL) initiative are to achieve universal access to modern energy, doubling 

the global rate of improvement of energy 

effi ciency, and doubling the global share of 

renewable energy.

And providing modern energy services to 

all does not need to be done at the expense of 

the environment—in fact, the environmental 

impacts are likely to be modest to positive, 

even when using brown technologies. This is 

because the poor consume little even when 

they are connected to modern infrastructure 

services, particularly in comparison to the 

rich. For instance, the additional emissions 

produced by providing electricity using standard technologies to the 1.3 billion people 

who currently lack service could be offset 

by a switch of the U.S. vehicle fl eet to European standards (World Bank 2010). Greening, infrastructure does not need to come 

at the expense of universal access—in fact, 

universal access is likely to be good for the 

environment.

In the water sector, developing countries 

will need to invest an estimated $72 billion a 

year to reach the MDG targets on improved 

water supply and sanitation, 75 percent of 

which is needed just to maintain existing 

facilities (Hutton and Bartram 2008). 

Meeting infrastructure needs, 

protecting the environment

Even with significant synergies between 

infrastructure service development and 

environmental consideration, greening 

growth will increase investment needs in 

the infrastructure sector. As an illustration, 

an analysis of mitigation scenarios from 

four models suggests that the global energy 

investment needed to achieve a greenhouse 

gas concentration of 450 ppm CO2-eq (parts 

per million CO2 equivalent) could amount 

to $350 billion–$1.1 trillion a year by 2030 

(fi gure 6.2). A 550 ppm target appears much 

easier to achieve, requiring $50–$200 billion 

of additional annual investments. (These fi gures are gross investment costs; they do not 

take into account the benefi ts from higher 

energy efficiency and reduced operating 

costs.) These additional investment needs 

are significant, but they remain a small 

share of total world investments, at least for 

the 550 ppm target. They do not include the 

cost of adapting infrastructure to a changed 

climate, which could cost developing countries an additional $15–$30 billion a year by 

2050 (World Bank 2010).

Financing infrastructure: 

Effi ciency and cost recovery to 

improve access and sustainability

Investment in infrastructure in the developing world is inadequate partly because 

infrastructure is expensive and “lumpy”—

capacity can be increased only in large increments, not through a continuous process. In 

addition, when investments require public 

funding, the fi nancing gap is linked to limits 

to the borrowing capacity. Even when a project is economically benefi cial and will generate suffi cient tax revenues to pay back the 

upfront cost, it is diffi cult to mobilize private 

fi nance because of information asymmetry, 

long return on investments, and political 

risks. Doing so would require shifting the 

risk- adjusted return upward, by increasing 

returns or reducing risks, so that proposed 

projects can compete with other categories 

of investment.

Another reason for the insufficiency of 

investment in infrastructure is that economic 

and fiscal sustainability has long been a 

major challenge in the infrastructure sector. 

Full-cost pricing continues to be an elusive 

goal, and infrastructure often involves significant technical and nontechnical ineffi ciency. 

Colombia grappled with both issues successfully (box 6.6). In Africa, quasi-fi scal defi cits 

caused by underpricing, technical losses, and 

nonpayment amount to about 2 percent of 

GDP. Eliminating these problems could offset 

about a third of the fi nancing gap (BriceñoGarmendia and others 2008). In South Asia, 

more than 20 percent of electricity produced 

is lost because of technical and nontechnical reasons, including illegal connections 

(World Bank 2011d); 30–45 percent of water 

GG_133-152.indd 141 5/8/12 

2012-08-054_000000000000528
142 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

FIGURE 6.2 Upfront investment costs for energy supply and 

greater energy effi ciency could be substantial

(additional investment needs in the energy sector projected by four 

global models and for two climate objectives)

Source: Authors’ compilation based on following sources: MESSAGE: van Vliet and others 2012; 

REMIND: Luderer and others forthcoming; TIAM-World: Loulou and Labriet 2008; IEA: IEA 2011.

Note: The targets 450 ppm and 550 ppm are in CO2-eq (parts per million CO2 equivalent) which 

measures the concentration of all greenhouse gases using the functionally equivalent amount or 

concentration of CO2 as the reference; 450 ppm CO2-eq is the concentration is needed to maintain a 

50 percent chance of not exceeding global warming of more than 2°C above preindustrial temperatures. IEA 2011 does not provide estimates for a 550 ppm scenario.

1,200

1,000

800

600

400

additional annual investment in 2030 ($billion)

200

0

550 ppm 450 ppm 550 ppm 450 ppm 550 ppm 450 ppm 450 ppm

MESSAGE TIAM-WORLD REMIND IEA

is leaked from the network or not accounted 

for (IBNET 2011).

What can be done? Addressing these 

inefficiencies would help improve both 

infrastructure coverage and the greening of 

infrastructure. Strengthening cost recovery 

would not only contribute to the fi nancial 

sustainability of energy sector development, it would also encourage consumers 

to use energy wisely. Effi cient management 

of metering, billing, and collection would 

improve the fi nancial performance of service 

providers. New metering technologies based 

on information and communications technology are facilitating this activity in many 

places, including small, off-grid private service providers and large publicly owned distribution utilities. And more effi cient management of utilities would eliminate waste 

and reduce environmental impacts.

In addition, incentive mechanisms should 

be tightened at the utility and end-user levels. 

The biggest hurdles to doing so are accountability and enforceability in implementing 

tariff setting and collection. The cost of 

energy imports and power generation can 

be volatile; it needs to be passed on to consumer prices, although smoothing mechanisms may be required. Adjusting tariffs will 

greatly improve the fi nancial sustainability 

of utilities. But utilities will also have to take 

measures against illegal connections and 

nonpayers.

Chapter 2 discusses the difficulties in 

eliminating subsidies to infrastructure services. It suggests complementary actions to 

mitigate undesirable distributive impacts of 

these measures (such as connection subsidies 

or targeted cash transfers).

Another measure in the arsenal may 

be cross-country collaboration. Because 

infrastructure exhibits significant economies of scale and scope, cross-country 

collaboration—for instance, through regional 

power pools—is generally helpful, particularly for small countries.

In Africa, where many countries are too 

small to build national power plants at an 

efficient scale, $2 billion of energy investment could be saved if trade in power trade 

was fully exploited (Foster and BriceñoGarmendia 2010). Regional power pools 

(for example, in West and East Africa) can 

help capture benefi ts from economies of scale 

and smooth the intermittency of solar and 

wind energy. Trade and cross-country coordination also help countries manage natural 

resources (such as shared water resources) 

and improve reliability.

Hydro-meteorological services also benefi t 

from cross-country collaboration. An analysis of South Eastern Europe estimates that 

the fi nancing needed to strengthen national 

hydro-meteorological services in seven countries without regional cooperation and coordination would be about €90 million (ISDR 

and others 2011). With deeper cooperation, 

the cost would be 30 percent lower.

Managing demand

Improving the delivery of infrastructure services is critical. But in infrastructure, increased supply often translates into 

GG_133-152.indd 142 5/8/12 

2012-08-054_000000000000529
PHYSICAL CAPITAL 143

BOX 6.6 Pairing cost recovery with deregulation in Colombia

In 1964, only 50 percent of people in Bogota 

and other large cities had access to electricity, water, and sanitation. And coverage 

rates were even worse in smaller cities (about 

40 percent for water and electricity and 

20 percent for sanitation). Today, Colombia 

has almost universal access to basic services 

in cities of all sizes. But achieving convergence 

took more than 40 years (box fi gure B6.6.1).

How did Colombia achieve near universal coverage? The key was a series of 

policy reforms in the 1990s that brought 

tariffs toward cost recovery levels. In the 

water sector, average residential tariffs per 

cubic meter were increased from $0.33 in 

1990 to $0.78 in 2001 (World Bank 2004). 

With almost 90 percent of households having metered connections, the price increase 

triggered a decrease in household water 

consumption from 34 to 19 cubic meters 

per month over the same period—in the 

process reducing the need for major new 

infrastructure. But even with higher prices, 

water remains relatively affordable for the 

average household. The tariff structure 

allows the Colombian government to crosssubsidize the poorest consumers from richer 

households and industrial users. As a result, 

the average poor household spends less than 

5 percent of its income on utility services.

In the electricity sector, in the 1990s the 

rules on who gets to generate and sell electricity were changed. After two major blackout periods (1983 and 1992/93), the government grappled with increasing capacity or 

increasing effi ciency. Given severe fi nancial 

constraints, increasing capacity was not an 

option. Deregulation was therefore undertaken to improve the effi ciency of existing 

capacity (Larsen and others 2004). As part 

of the reforms, electricity was unbundled 

into generation, transmission, distribution, and commercialization. In the 1990s, 

the electricity sector represented a third of 

Colombia’s public debt stock. By 2004, 

this had fallen to less than 5 percent and 

Colombia had become a net exporter of 

electricity.

Box text contributed by Somik Lall.

FIGURE B6.6.1 Access to basic infrastructure services has 

risen dramatically in Colombia

(access to services, by city size, 1964–2005)

0

25

50

75

100

0

25

50

75

100

a. Access to electricity

b. Access to water

c. Access to sanitation

percent percent

Bogota

largest

smallest

Bogota

largest

city size smallest

city size

0

25

50

75

100

Bogota

largest

smallest

percent

city size

1964 1993 2005

Source: Based on data from the Colombia’s National Administrative 

 Department of Statistics (DANE) census 1964, 1993, and 2005.

GG_133-152.indd 143 5/8/12 

2012-08-054_000000000000530
144 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

increased demand, making a supply-side-only 

approach both costly and ineffective. For 

instance, building new roads is often ineffective in reducing congestion because it incentivizes the use of individual vehicles, leaving congestion unchanged. For this reason, 

action is also needed to manage demand. 

Policy makers can chose from an array of 

tools that includes price instruments, regulation, and integrated planning of supply and 

demand.

Prices: Important but hampered 

by low elasticity

Price elasticity—that is, the percentage change 

in quantity demanded in response to a change 

in price—is relatively low in the transportation sector, at least in the short term. This 

is, in part, because consumers may be slow 

in responding to price signals. But it is also 

because the real cost of transport (sometimes 

referred to as the generalized cost) includes 

both the monetary cost of transport and the 

cost of the time spent in transportation. And 

sometimes the cost of time is larger than the 

monetary cost of transportation. Elasticity is 

greater in the long run, because individuals 

can adjust their choice of where to live, means 

of transportation, or lifestyle. For instance, 

the price elasticity of automobile fuel demand 

ranges from –0.1 to –0.4 in the short run and 

–0.6 to –1.1 in the long run (Chamon and 

others 2008).

This low elasticity explains why the 

rebound effect (whereby people may increase 

their driving when the cost of car use 

decreases as a result of improved effi ciency) 

is relatively limited, even though it may be 

greater at lower income levels. Sorrel (2007) 

fi nds that this effect should remain below 30 

percent (that is, less than 30 percent of the 

gain in efficiency will be “taken back” by 

the increase in demand). Greene and others 

(1999) fi nd that the rebound effect for individual transport in the United States is about 

20 percent.

Various price instruments have proven effi -

cient. Singapore’s Area Licensing Scheme—

the first-ever comprehensive road pricing 

scheme in the world—required drivers to 

pay an area license fee of S$3 ($1.25) a day 

to enter the central business district during 

peak hours. The number of vehicles entering 

the restricted zone declined by 73 percent, 

and average speeds increased by an estimated 

10–20 percent (Federal Highway Administration 2008). Modal shift can improve the effi -

ciency of such price-based transport policies 

and help mitigate their negative consequences 

(such as the signifi cant spatial inequality they 

can create) (see Gusdorf and others 2008). 

But it requires investments in public transport 

multimodal coordination (such as creating 

parking lots next to train stations), and urban 

planning (to maximize access to public transit and ensure that passenger density is high 

enough to justify the required investments).

In the water sector, different uses have 

different elasticities. Residential use has a 

low price elasticity, estimated at about –0.1 

to –0.3 (Nauges and van den Berg 2009; 

Nieswiadomy and Molina 1989). Agricultural use has a higher elasticity, and subsidies 

(whether to water or to the electricity needed 

for pumping) in this sector can thus create 

distorted incentives, favoring activities with 

high water consumption. And disincentives 

to water conservation are greatest where the 

resource is scarcest (Frederick and Schwarz 

2000). Removing subsidies and raising prices 

can thus be effi cient in this sector.

Demand-side actions, standards,

and regulations: Critical 

complements to prices

Price-based instruments can be made more 

effi cient if complemented with appropriate 

demand-management actions. Large quantities of water can be saved in India through 

better irrigation technologies, obviating 

the need to exploit new raw water sources. 

In China, industrial water reuse systems 

can save water, reducing the need to build 

expensive water conveyance systems. Many 

of the technologies that can make a difference already exist and are in use in developed countries. Further application needs to 

be supported by institutions and promoted 

by sector leaders. India’s Total Sanitation 

campaign is a successful example of using 

GG_133-152.indd 144 5/8/12 

2012-08-054_000000000000531
PHYSICAL CAPITAL 145

noneconomic incentives to promote greener 

options (box 6.7).

Standards and regulations may also be 

useful where price elasticity is limited or the 

political economy of price reform is complex. 

Examples of such instruments include renewable portfolio standards, in which regulators 

require utilities to include a given percentage 

or an absolute quantity of renewable energy 

capacity in their energy mix.

In transport, fuel economy standards are 

common for new vehicles (see chapter 2). In 

1995, Japan introduced fuel economy standards to reduce new car fuel consumption 

by 19 percent, achieving the target by 2004. 

A new target, set in 2006, aims for another 

23.5 percent reduction (An and others 2007). 

In Europe, improvements in fuel economy 

occurred largely as a side effect of air pollutant regulations, although automobile 

manufacturers agreed with the European 

Commission on a voluntary fleet average 

emission target of 140 grams of CO2 per kilometer for new passenger cars. Governments 

can also create automobile restricted zones 

to limit passenger car traffi c in urban areas, 

as Denmark did in the city of Aalborg.

Promoting clean cooking and heating 

solutions is another case in which standards 

and public investments are likely to be more 

helpful than pricing instruments. Replacing traditional three-stone cooking fires 

with advanced stoves could significantly 

reduce emissions and health risks (World 

Bank 2011b). Without drastic interventions, 

2.7 billion people may still lack clean cooking facilities in 2030 (IEA 2011).

Integrated market development, including technology standards, is needed to promote the use of clean and effi cient solutions 

at the household level. The Global Alliance 

for Clean Cookstoves, launched in September 

2010, aims to enable 100 million households 

to adopt clean and effi cient stoves and fuels 

by 2020. The alliance works with public, private, and nonprofi t partners to help overcome 

the market barriers that impede the production, deployment, and use of clean cookstoves 

in the developing world.

Green infrastructure requires 

planning and strong institutions

Because infrastructure is lumpy, infrastructure systems cannot be grown incrementally and continuously, and they need to be 

planned in a holistic manner. A road or train 

line cannot be designed without considering 

other parts of the transport system, land use 

regulations, and urban planning.

Moreover, different infrastructure systems 

interact across sectors and cannot be designed 

in isolation. Water availability affects electricity generation, and electricity is critical in 

water management (for groundwater pumping, for example). Transportation and energy 

interact closely: energy production often 

requires transport infrastructure, and different transport modes have different energy 

needs (from liquid fuel transport to electricity 

grids for electrifi ed cars). Smart use of information and communication technologies can 

green the urban environment and improve 

the effi ciency of other infrastructure systems 

(box 6.8). Thus, much can be gained from 

BOX 6.7 Using noneconomic incentives to reduce the demand for water and sanitation

India’s Total Sanitation Campaign, launched in 

1999, focused on communication, education, community mobilization, and the provision of toilets in 

government schools, mother/child centers, and lowincome households (World Bank 2011c). There was 

little government contribution to the capital cost of 

sanitation facilities. Instead, the focus was on private investment and private behavior change.

Part of the effort involved the Clean Village 

Award Program—awards to local councils that 

achieved the status of “Open-Defecation Free and 

Fully Sanitized Uni.” The awards—inspired by a program initially introduced in Maharastra (the “Sant 

Gadge Baba”)—helped increase reported sanitation 

coverage from 21 percent in 2001 to 57 percent

 in 2008.

GG_133-152.indd 145 5/8/12 

2012-08-054_000000000000532
146 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

a planning system that can integrate various 

objectives and infrastructure systems at both 

the country and regional level to signifi cantly 

reduce infrastructure costs.

Developing cities: Managing rapid 

expansion to tap the potential for 

effi ciency gains

Rapid urbanization is both a driver and a 

feature of economic development, with serious consequences for infrastructure design 

(World Bank 2009). In many developing 

countries—particularly countries transitioning from low- to middle-income status—the 

next few decades will see a dramatic increase 

in the share of people living in cities. In 

fact, the number of people living in urban 

areas in developing countries is expected to 

double, from 2 billion to 4 billion, between 

2000 and 2030. And this massive increase is 

expected to triple the physical footprint of 

urbanized areas from 200,000 to 600,000 

square kilometers. The public policy and 

investment challenges of managing the 

social and environmental implications while 

promoting cities that are economic drivers 

of the economy are substantial. Fortunately, 

practical options exist to efficiently green 

the urbanization process.

The fi rst priority is designing policies and 

institutions that can help anticipate future 

urbanization. These policies should enable 

existing urban areas to be redeveloped and 

should prepare the peri-urban fringe to 

accommodate new settlements. For this to 

work, land markets need to be functional. 

Urban land markets mediate demand and 

supply and enable the effi cient use of land 

and optimal development of constructed 

fl oor area, both of which shape a city’s spatial structure. Developed countries typically 

rely on market data from transactions and 

property attributes to reveal land and property prices. In contrast, most developing 

countries lack the basic institutional machinery to value and price land.

Higher land prices routinely lead to 

higher density—which enhances productivity spillovers, potentially increases the supply 

of affordable housing, and helps manage the 

demand for transport. But this mechanism is 

sometimes impaired by land regulations—in 

many Indian cities the fl oor-space index is 

limited to 1 (as opposed to 5–15 in other 

Asian cities). As a result, high land prices 

coexist with low density and sprawl, creating both housing affordability and transportation issues.

Also, when “official” land prices do not 

refl ect demand and are depressed at the urban 

periphery, it is likely that sprawl or suburbanization will be excessive. How the periurban expansion is managed will be a critical determinant of whether cities can harness 

agglomeration economies and induce effi cient 

BOX 6.8 Harnessing smart information and communication technologies to shape a 

green future

The smart application of information and communication technologies can facilitate green growth, 

both by reducing emissions of greenhouse gases 

and by creating new market opportunities, such as 

smart grids and Intelligent Transport Systems (ITS). 

To date, most of these mitigation opportunities have 

been applied in high- and middle-income countries. 

But it is arguably in the megacities of the developing 

world where the impact could be greatest. Application of ITS in Bangkok or Manila, where there are 

few substitution opportunities for private road traffi c in the form of mass-transit system, would have a 

much more benefi cial impact than in, say Hong Kong 

SAR, China, or Singapore. Asian countries committed to introducing ITS—such as electronic fare and 

road-user charging systems, transport control centers, and real-time user information—in Goal 11 of 

the Bangkok Declaration on Sustainable Transport 

Goals for 2010–20.

GG_133-152.indd 146 5/8/12 

2012-08-054_000000000000533
PHYSICAL CAPITAL 147

resource allocation. The absence of a functioning land market creates a major urban 

governance challenge, as the scale at which 

urban and metropolitan economies now operate often does not coincide with their physical 

and administrative boundaries. The institutional arrangements that can enhance coordination across these entities is likely to be context specifi c, but signifi cant efforts are needed 

to make them emerge.

The second priority is redeveloping older, 

obsolescent areas to promote more effi cient 

development and achieve higher densities. 

Older areas typically share several common 

traits. Their network of streets and alleys is 

often irregular and highly granular—limiting 

the ability of developers to build modern 

high-rise buildings. An alternative is to redesign these areas to accommodate higher densities. Doing so typically requires assembling 

small plots into larger and more effi cient parcels and ensuring that the redeveloped area 

has adequate infrastructure (particularly 

transport, water, electricity, broadband Internet, and public services) to support higher 

population densities. These actions should 

be designed using consultations with the 

local population, to make sure they benefi t. 

For instance, rehabilitation projects need to 

account for the fact that slum dwellers often 

gain more from slum upgrading than from 

relocation (World Bank 2006).

The third priority is integrating land 

policy with urban mobility and transportation (Viguié and Hallegatte 2012). Options 

for urban transportation are closely tied to 

urban land development and can create both 

positive and negative externalities as cities 

grow. Problems arise when there are inconsistencies between new developments and mass 

transit investment—as in Hanoi, where new 

dense urban development projects are not 

being located near the planned transit network. This kind of planning creates a double risk of having too few users of a public 

transit system, threatening the fi nancial and 

social return on investment, and increasing 

the number of cars on the roads, with consequences on congestion and air pollution.

Urban transport is best addressed as 

part of integrated urban strategies that can 

address the interests of multiple user groups 

and anticipate long-term needs for which no 

one is yet advocating but that will become 

critical in the future. Although public transport tends to be more sustainable than personal motor vehicles, it is often unviable in 

low-density agglomerations (table 6.3).

Although planning and developing public 

transit is likely to generate co-benefi ts for economic integration and manage demand for 

private modes of motorized transport, these 

strategies should not come at the expense of 

allowing a wider range of transport options 

that can enhance the poor’s mobility. Surveys show that many people cannot afford 

public transport. In Sub-Saharan African 

cities, walking represents between 5 percent 

(in Kigali) and 80 percent (in Conakry) of all 

urban trips, with public transportation ranging from 10 percent to 90 percent (World 

Bank 2008). A signifi cant share of households 

TABLE 6.3 Eff ect of land use and density on use of public transport

Population density Typical region

Automobile use 

(km/person/yr)

Public 

transport 

use (trips/

person/yr)

Petrol consumption 

for transport 

(MJ/person/yr)

Motorized 

private

Public 

transport

Nonmotorized

Low (25 people per ha) North America 

and Australia

80 10 10 >10,000 <50 >55,000

Medium (50–100 

people per ha)

Europe 50 25 25 — — —

High (more than 

250 people per ha)

Asia 25 50 25 <5,000 >250 <15,000

Source: Gomez-Ibañez 2012.

Note: —=not available.

Modal model split (%)

GG_133-152.indd 147 5/8/12 

2012-08-054_000000000000534
148 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

reports no public transport expenditure, but 

the average share of income spent in public 

transport ranges from 3 percent (in Addis 

Ababa) to 14 percent (in Lagos), reaching 

about $12–$16 a month in most cities. This 

implies that at low-income levels, the wider 

availability of different service levels and 

modes at different prices is a necessary strategy for providing urban transport serv ices. In 

particular, improving sidewalks, streetlights, 

and other measures to protect pedestrian 

users should be parts of an urban transport 

strategy.

Urban transport also plays a key role in 

spatially integrating urban labor markets. As 

cities around the world expand their spatial 

footprints, the limited reach of walking trips 

may exacerbate slum formation, as many 

people trade off housing quality to be close 

to jobs. It can also severely limit labor market opportunities for people who live farther 

away from economic centers. Bovenberg and 

Goulder (1996) suggest that higher commuting costs can decrease labor supply. Graham 

(2005) fi nds that productive fi rms are located 

in accessible and densely populated places.

A fourth priority is integrating urban 

planning with natural risk management—

still rare, especially in low-income countries. 

In 2005, the global community adopted the 

Hyogo Framework for Action, a 10-year 

plan to make the world safe from natural 

disasters. To date, 70 percent of high-income 

countries are carrying out urban and landuse planning under the framework, but only 

about 15 percent of low-income countries are 

doing so (fi gure 6.3). This low participation 

matters because cities are increasingly vulnerable to natural hazards, including fl oods 

that are becoming more destructive in many 

parts of the world. And considering the 

limited protection offered by dikes and sea 

walls, only risk-sensitive land-use planning 

can mitigate fl ood losses over the long term 

(Hallegatte 2011).

Given the role of urbanization in development, a green policy able to develop cities 

without increasing risks and negative environmental outcomes would help maintain 

or increase cities’ attractiveness and produce economic benefi ts (World Bank 2009). 

It is an open question as to how cities can 

FIGURE 6.3 Too few countries are implementing plans to mitigate against natural disasters

(percentage of countries that implemented risk management policies under the 2005 

UN Hyogo Framework for Action)

Source: UN 2011.

80

40

50

60

70

percent

0

10

20

30

drainage infrastructure slope stabilization

in landslide

prone areas

masons training on

safe construction

provision of safe

land for low-income

households

urban and land-use

planning

high income upper-middle lower-middle low income

GG_133-152.indd 148 5/8/12 

2012-08-054_000000000000535
PHYSICAL CAPITAL 149

accommodate the huge increase in urban 

population that is expected in many regions 

without experiencing a hike in disaster losses 

(World Bank 2010). That said, a recent World 

Bank study uses Alexandria, Casablanca, 

Rabat, and Tunis to illustrate how flood 

risks and climate change can be integrated in 

urban planning (World Bank 2011a). Transportation infrastructure has a key role to play 

to make it possible for the population to live 

in safe locations while retaining access to jobs 

and services (Hallegatte 2011).

Infrastructure robustness and redundancy 

are critical to maintaining the functions of 

the economic system after disasters, especially 

in urban environments, where the failure of 

one component (such as electricity, transport, water, or sanitation) can paralyze activity. In many cases, indirect disaster impacts 

caused by the loss of lifeline and essential 

infrastructure services are of similar magnitude to direct disaster losses (Hallegatte 

2008; Tierney 1997). However, increasing 

robustness and redundancy is costly, creating trade-offs between the resilience of the 

economic system and its effi ciency in normal 

conditions (Henriet and others 2012).

Minimizing the potential for 

regrets and maximizing 

short-term benefi ts

Some infrastructure investments that are 

required from a development and economic 

perspective and useful from an environmental point of view cannot be implemented 

because of fi nancial, institutional, or planning constraints. Given these constraints, 

a green growth policy should seek to minimize the risk from regret and maximize 

short-term benefi ts.

To do so, one needs first to identify 

what investments made today can lead 

to irreversibility that will cause regret in 

the future. An example is urban planning 

and urban form, which are being decided 

on now in many countries and cannot be 

easily reversed in the future. Next, one 

needs to identify what policies (such as 

removing subsidies or imposing an environmental tax) or additional investments 

in infrastructure (such as sanitation systems) can yield large co-benefi ts and synergies between economic and environmental 

objectives. An example is the provision of 

urban public transport in crowded cities with high congestion and air pollution 

levels, where public transport can increase 

economic effi ciency and improve environmental conditions. Sometimes the synergy 

is between the environment and welfare, 

without being uniquely mediated by economic effi ciency (an example is sanitation 

infrastructure, which improves water quality and thus population health).

Previous chapters have shown that many 

actions and policies can green growth and 

capture synergies between environmental 

protection and development. Designing a 

green growth strategy requires policy makers to choose among these options, based on 

what is most important and urgent. The next 

chapter proposes a methodology to identify 

priority actions, as a function of the inertia and irreversibility they imply and of the 

trade-offs and synergies they create.

Notes

 1. Transport externalities in the United States are 

estimated at $0.11 per mile (Parry and others 

2007). Traffi c congestion not only increases 

emissions, it also increases local pollutants 

and noise.

 2. WHO-UNICEF (2012) projects that by 2015 

the share of people without improved water 

will have fallen to 8 percent, exceeding the target of 12 percent. In contrast, about 33 percent of the world’s population is projected to 

lack access to improved sanitation, far from 

the 23 percent target.

 3. Investment needs is a relative concept, as 

it depends on what the target level of coverage and quality is. No fi rm data exist on 

how much countries invest in infrastructure, 

although efforts have been made to collect 

information for Africa and for private investments in infrastructure (see Fay and others 

2010; MDB Working Group on Infrastructure 

2011).

GG_133-152.indd 149 5/8/12 

2012-08-054_000000000000536
150 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

References

An, F., D. Gordon, H. He, D. Kodjak, and 

D. Rutherford. 2007. Passenger Vehicle 

Greenhouse Gas and Fuel Economy, 

Standards: A Global Update. Washington, 

DC: International Council on Clean 

Transportation.

Arze del Granado, J. D. Coady, and R. 

Gillingham. 2010. “The Unequal Benefits 

of Fuel Subsidies: A Review of Evidence for 

Developing Countries.” IMF working paper 

WP/10/02, International Monetary Fund, 

Washington, DC.

Bertaud, A. 2003. “Clearing the Air in Atlanta: 

Transit and Smart Growth or Conventional 

Economics?” Journal of Urban Economics 54 

(3): 379–400.

Bovenberg, A. L., and L. H. Goulder. 1996. 

“Optimal Environmental Taxation in the 

Presence of Other Taxes: General Equilibrium 

Analysis.” American Economic Review 86 (4): 

985–1000.

Briceño-Garmendia, C., K. Smits, V. Foster. 

2008. “Financing Public Infrastructure in SubSaharan Africa: Patterns and Emerging Issues.” 

Background Paper 15. Africa Infrastructure 

Country Diagnostic, World Bank, Washington, 

DC.

Chamon, M., P. Mauro, and Y. Okawa. 2008. 

“Mass Car Ownership in the Emerging Market 

Giants.” Economic Policy 23 (54): 243–96.

Davis, S. J., K. Caldeira, and H. D. Matthews. 

2010. “Future CO2 Emissions and Climate 

Change from Existing Energy Infrastructure.” 

Science 329 (5997): 1330–3.

ESMAP (Energy Sector Assistance Management 

Program). 2009. “Offgrid Technology and 

Lighting Africa”. Session 6 of the Africa 

Electrification Initiative Workshop. Maputo, 

Mozambique, May 9–12. http://www.esmap.

org/esmap/sites/esmap.org/fi les/Rpt_Senegal_

Morocco_Ecuador_AEI6.pdf.

Fay, M., M. Toman, D. Benitez, and S. Csordas. 

2010. “Infrastructure and Sustainable 

Development.” In Postcrisis Growth and 

Development: A Development Agenda 

for the G20, ed. S. Fardoust, Y. Kim, and 

C. Sepulveda. Washington, DC: World Bank.

Federal Highway Administration. 2008. 

“Lessons Learned from International 

Experience in Congestion Pricing.” Publication 

FHWA-HOP–08–047. Federal Highway 

Administration, Washington, DC.

Foster, V., and C. Briceño-Garmendia. 

2010. Africa’s Infrastructure: A Time for 

Transformation. Paris: Agence Française 

de Dévelopment; Washington, DC: World 

Bank.

Frederick, K. D., and G. E. Schwarz. 2000. 

“Socioeconomic Impacts of Climate Variability 

and Change on U.S. Water Resources.” RFF 

Discussion Paper 00–21, Resources for the 

Future, Washington, DC.

Geneletti, D. 2003. “Biodiversity Impact 

Assessment of Roads: An Approach Based on 

Ecosystem Rarity.” Environmental Impact 

Assessment Review 23 (3): 343–65.

Giraudet, L.-G., C. Givarch, and P. Quirion. 

2011. “Exploring the Potential for Energy 

Conservation in French Households through 

Hybrid Modeling.” Energy Economics 34 (2): 

426–45.

Gomez-Ibañez, J. A. 2012. “Urban Transportation 

and Green Growth.” Paper prepared for the 

Green Growth Knowledge Platform inaugural 

conference, Mexico City, January 12–13.

Graham, D. 2005. “Wider Economic Benefits 

of Transport Improvements: Link between 

Agglomeration and Productivity”. Report to 

Department of Transport, London. 

Greene, D. L., J. R. Kahn, and R. C. Gibson. 

1999. “Fuel Economy Rebound Effect for US 

Household Vehicles.” Energy Journal 20 (3): 

1–31.

Guivarch C., and S. Hallegatte. 2011. “Existing 

Infrastructure and the 2°C Target.” Climatic 

Change Letters 109 (3): 801–5.

Gusdorf, F., and S. Hallegatte. 2007. “Compact or 

Spread-Out Cities: Urban Planning, Taxation, 

and the Vulnerability to Transportation 

Shocks.” Energy Policy 35 (10): 4826–38. 

doi:10.1016/j.enpol.2007.04.017.

Gusdorf, F., S. Hallegatte, and A. Lahellec. 

2008. “Time and Space Matter: How Urban 

Transitions Create Inequality.” Global 

Environment Change 18 (4): 708–19. 

doi:10.1016/j.gloenvcha.2008.06.005.

Hallegatte, S. 2008. “An Adaptive Regional 

Input-Output Model and Its Application to the 

Assessment of the Economic Cost of Katrina.” 

Risk Analysis 28 (3): 779–99.

———. 2009. “Strategies to Adapt to an Uncertain 

Climate Change.” Global Environmental 

Change 19 (2): 240–7.

———. 2011. “How Economic Growth and 

Rational Decisions Can Make Disaster Losses 

Grow Faster than Wealth.” Policy Research 

GG_133-152.indd 150 5/8/12 

2012-08-054_000000000000537
PHYSICAL CAPITAL 151

Working Paper 5617, World Bank, Washington, 

DC.

Henriet F., S. Hallegatte, and L. Tabourier. 2012. 

“Firm-Network Characteristics and Economic 

Robustness to Natural Disasters.” Journal 

of Economic Dynamics and Control 36 (1): 

150–67.

Hussein, M. A. 2007. “Cost of Environmental 

Degradation: An Analysis in the Middle East 

and North Africa Region.” Management of 

Environmental Quality 19 (3): 305–7.

Hutton, G., J. Bartram. 2008. “Global Costs of 

Attaining the Millennium Development Goal 

for Water Supply and Sanitation.” Bulletin of 

the World Health Organization 86 (1): 13–19.

IBNET. 2011. The IBNET Water Supply and 

Sanitation Performance Blue Book. Washington, 

DC: World Bank.

IEA (International Energy Agency). 2011. World 

Energy Outlook 2011. Paris: IEA.

ISDR (International Strategy for Disaster 

Reduction), World Bank, World Meteorological 

Organization, International Monetary Fund. 

2011. Strengthening the Hydro-Meteorological 

Services in South Eastern Europe. http://www

.unisdr.org/we/inform/publications/7650.

Kalkuhl, M., O. Edenhofer, and K. Lessmann. 2011. 

“Learning or Lock-In: Optimal Technology 

Policies to Support Mitigation.” Resource and 

Energy Economics 34 (1): 1–23.

Komives, K., V. Foster, J. Halpern, and Q. Wodon. 

2005. Water, Electricity, and the Poor: Who 

Benefi ts from Utility Subsidies? Washington, 

DC: World Bank.

Larsen, E. R., I. Dyner, L. Bedoya V, and C. J. 

Franco. 2004. “Lessons from Deregulation 

in Colombia: Successes, Failures and the Way 

Ahead.” Energy Policy 32 (15): 1767–80.

Loulou, R., and M. Labriet. 2008. “ETSAP-TIAM: 

The TIMES Integrated Assessment Model Part I: 

Model Structure.” Computational Management 

Science, Special Issue on Managing Energy and 

the Environment 5 (1): 7–40.

Luderer, G., R. Pietzcker, E. Kriegler, M. Haller, 

and N. Bauer. Forthcoming. “Asia’s Role in 

Mitigating Climate Change: A Technology and 

Sector Specific Analysis with ReMIND-R.” 

Preprint. 

MDB Working Group on Infrastructure. 2011. 

Infrastructure Action Plan, submission to the 

G20. 

Nauges, C., and C. Van Den Berg. 2009. “Demand 

for Piped and Non-Piped Water Supply 

Services: Evidence from Southwest Sri Lanka.” 

Environmental and Resource Economics

42 (4): 535–49.

Nieswiadomy, M. L., and D. J. Molina. 1989. 

“Comparing Residential Water Demand 

Estimates under Decreasing and Increasing 

Block Rates Using Household Data.” Land 

Economics 65 (3): 280–9.

Parry, I.W.H., M. Walls, W. Harrington. 2007. 

“Automobile Externalities and Policies.” 

Journal of Economic Literature 45: 373–399.

Roberts, P, K. C. Shyam, and C. Rastogi. 2006. 

“Rural Access Index: A Key Development 

Indicator.” Transport Sector Board Technical 

Paper 10, World Bank, Washington DC.

Rozenberg, J., S. Hallegatte, A. Vogt-Schilb, O. 

Sassi, C. Guivarch, H. Waisman, and J. C. 

Hourcade. 2010. “Climate Policies as a Hedge 

against the Uncertainty on Future Oil Supply.” 

Climatic Change 101 (3–4): 663–8.

Sorrel, S. 2007. The Rebound Effect: An Assessment 

of the Evidence for Economy-Wide Energy 

Savings from Improved Energy Efficiency. 

London, UK: UK Energy Research Centre.

Tierney, K. J. 1997. “Business Impacts of 

the Northridge Earthquake.” Journal of 

Contingencies and Crisis Management 5 (2): 

87–97.

UN (United Nations). 2011. United Nations 

Global Assessment Report on Disaster Risk 

Reduction. New York: United Nations.

van Vliet, O., V. Krey, D. McCollum, S. Pachauri, 

Y. Nagai, S. Rao, and K. Riahi. 2012. 

“Synergies in the Asian Energy System: Climate 

Change, Energy Security, Energy Access and 

Air Pollution.” Energy Economics.

Viguie, V., and S. Hallegatte. 2012. “Trade-Offs 

and Synergies in Urban Climate Policies.” 

Nature Climate Change 2:334–7. doi: 10.1038

/nclimate 1434. 

Weber, E., E. Arpi, A. Carrigan. 2011. “From 

Here to There: A Creative Guide to Make

Public Transport the Way to Go.” Embarq, the 

WRI Center for Sustainable Transport, World 

Resource Institute, Washington, DC. http://www

.embarq.org/sites/default/fi les/EMB2011_From_

Here_to_There_web.pdf.

WHO-UNICEF (World Health Organization; 

United Nations Children’s Fund) Joint 

Monitoring Programme for Water Supply and 

Sanitation. 2012. Progress on Drinking Water 

and Sanitation: 2012 Update. New York: 

UNICEF.

World Bank. 2004. Colombia: Recent Economic 

Developments in Infrastructure (REDI): 

GG_133-152.indd 151 5/8/12 

2012-08-054_000000000000538
152 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Balancing Social and Productive Needs for 

Infrastructure. Washington, DC: World Bank.

———. 2006. Morocco, Poverty and Social Impact 

Analysis of the National Slum Upgrading 

Program. Washington, DC: World Bank. 

———. 2008. Stuck in Traffi c: Urban Transport in 

Africa. Africa Infrastructure Country Diagnostic 

Report, World Bank, Washington, DC.

———. 2009. World Development Report 2009: 

Reshaping Economic Geography. Washington, 

DC: World Bank.

———. 2010. World Development Report 2010: 

Development and Climate Change. Washington, 

DC: World Bank.

———. 2011a. Climate Change Adaptation and 

Natural Disasters Preparedness in the Coastal 

Cities of North Africa. Washington DC: World 

Bank. 

———. 2011b. Household Cookstoves, 

Environment, Health, and Climate Change: A 

New Look at an Old Problem. Washington, 

DC: World Bank.

———. 2011c. The Political Economy of Sanitation: 

How Can We Increase Investment and Improve 

Service for the Poor? Washington, DC: World 

Bank.

———. 2011d. World Development Indicators.

Washington, DC: World Bank.

———. Forthcoming. Maximizing Leverage of 

Public Funds to Unlock Commercial Financing 

for Clean Energy in East Asia. Washington, 

DC: World Bank. 

GG_133-152.indd 152 5/8/12 

2012-08-054_000000000000539
7 Crafting a Green Growth 

Strategy

A good green growth strategy can 

increase welfare by providing both 

environmental and economic benefi ts. It is not a panacea to a country’s economic ills: if economic growth is insuffi cient 

because of institutional or policy problems, 

green growth will not boost it in the absence 

of other structural changes.

Many green policies impose economic 

costs in the short term, such as higher investment or operational costs. But over the longer term, they are designed to yield economic 

benefi ts and contribute to long-term sustainable growth. Even so, short-term costs can 

create trade-offs between environmental protection and short-term economic growth.

For this reason, political and social acceptability require that green growth policies be 

designed with the specifi c goals of mitigating 

trade-offs across both space and time and 

offsetting costs by maximizing synergies and 

short-term economic benefits (such as job 

creation, poverty alleviation, and increased 

effi ciency).

Traditional economic analysis of policies 

and projects can be complemented with a 

screening exercise that helps design policies 

that provide short-term economic benefits 

 153

Key Messages

• The design of green growth policies must 

balance predictability against fl exibility and 

relevance against enforceability.

• Step-by-step guidelines, including a checklist, 

can help analysts and decision makers structure 

the process of crafting green growth strategies.

• The suggested approach identifi es priorities 

along two dimensions: synergy (the existence 

of local and immediate co-benefits) and 

urgency (inertia and the risk of irreversibility and lock-in).

• A green growth strategy needs to be designed 

before individual projects are assessed and 

selected. Project assessments need to account 

for uncertainty and diverging world views.

WB_354_GG_CH07.indd 153 5/7/12 

2012-08-054_000000000000540
154 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

and are thus easier to implement. Not all 

green growth policies can yield such synergies, and trade-offs will be unavoidable. It 

is nevertheless useful to scrutinize policy 

designs for opportunities to achieve more cobenefi ts, if necessary by combining several 

policy interventions.

This chapter does not provide a one- sizefi ts-all green strategy, because the appropriate measures and policies are highly dependent on the context, especially on the most 

pressing environmental and economic issues. 

Countries at different income levels will necessarily have different priorities; the lowestincome countries are more likely to delay the 

implementation of environmental policies 

that imply trade-offs with short-term productivity. Instead, this chapter provides a stepby-step approach to designing a strategy that 

is appropriate in a given context.

The challenges of developing 

a green growth strategy

Much can be gained from framing environmental policies as national strategies with 

positive long-term goals. Doing so increases 

the acceptability of immediate costs by the 

population and the private sector. It also 

improves consistency among policies and 

fosters policy certainty—which creates a 

friendlier climate for investments, making 

it more likely that private resources will be 

invested in long-term projects. But building a national strategy creates some challenges of its own, including the need for 

interagency coordination, private sector 

engagement, and the defi nition of relevant 

long-term goals and indicators.

Balancing predictability and fl exibility

Promoting a transition toward a more 

environment-friendly growth pathway 

requires balancing the credibility and predictability of long-term objectives on the one 

hand and the fl exibility of the selected strategy on the other. Credible and predictable 

long-term objectives are necessary to help 

coordinate economic actors and promote 

investments: businesses will not invest heavily in research on low-energy or water-saving 

technologies if they cannot be sure that 

a market will exist over the long term for 

innovations in these domains. Their willingness to invest in green technologies and 

infrastructure depends on their trust in and 

projections of future environmental goals.

But environmental policies themselves 

need to evolve over time, in response to new 

information (such as technology or scientifi c facts) and to the actions undertaken by 

other countries or regions. Thus, the ability 

to adjust course is essential—even if it can 

occur only at the expense of predictability.

Getting around the commitment problem. What factors might reduce predictability? Certainly, changes in the political 

landscape, scientifi c uncertainty, and differences in interpretations of scientifi c results or 

future technological potentials will arise—as 

will questions about the government’s ability to commit (Dixit and Lambertini 2003; 

Kydland and Prescott 1977). The fact that 

governments lack the ability (or credibility) 

to make long-term commitments has led to 

the transfer of monetary policy to independent central banks in many countries. On 

the fi scal front, independent fi scal councils 

(such as the Offi ce of Management and Budget in the United States) have been created 

to monitor government policies and inform 

policy makers from a technical and nonpartisan perspective.

This commitment problem exists in the 

environmental domain as well. Innovative 

solutions will have to be found to combine 

political legitimacy with the ability to commit. A process needs to be established that 

allows long-term objectives to be monitored 

by a body other than the government in 

place at a given point in time. There may be 

a role for an “independent environmental 

council” that monitors environmental policies for consistency with agreed-upon longterm objectives.

Building consensus. How a national strategy is developed and implemented strongly 

infl uences its sustainability, credibility, and 

predictability. National strategies help bring 

WB_354_GG_CH07.indd 154 5/7/12 

2012-08-054_000000000000541
CRAFTING A GREEN GROW TH STRATEGY 155

together diverse groups of stakeholders (businesses, worker unions, and civil society) to 

build connections, exchange viewpoints, raise 

awareness, and build a sustained political 

commitment. This approach signals to society that signifi cant and durable efforts will be 

dedicated to environmental protection.

Local authorities play a vital role, given 

that it is at the local level that citizens experience the destructive impact of environmental 

degradation (such as atmospheric pollution) 

and government is often empowered to take 

corrective action (through land-use planning 

or the regulation of economic activity). Local 

authorities have proved to be willing innovators, offering opportunities to test policies 

and build consensus before scaling up.

Some countries, such as Brazil and France, 

have tried to build consensus through open 

and participatory approaches involving political parties and civil society. Ahead of the 

preparation of its National Plan on Climate 

Change, Brazil created the Brazilian Forum 

on Climate Change, which brought together 

representatives from government, civil society, 

business, universities, and nongovernmental 

organizations to mobilize society around a 

climate plan of action. Public participation 

took the form of a national conference on the 

environment and sector dialogues.

Approaches that feature iterative, multistakeholder involvement and extensive consultation with the private sector and civil 

society create the transparency and political buy-in to make commitments to green 

growth sustainable. Extensive consultation 

can also help address some of the governance 

risks inherent in climate change—which is 

characterized by complexity, uncertainty, 

and asymmetries in information. It is particularly important to ensure opportunities 

for the indigenous and poor communities to 

voice their concerns and priorities (Transparency International 2011).

Jointly setting economic and environmental goals. At the strategic level, integrating environmental concerns with broader 

government activity involves systematically 

evaluating government policies through 

an environmental lens and creating new 

coordinating mechanisms to ensure that 

environmental concerns are mainstreamed 

in government activity. Poverty reduction 

strategies, economic development plans, 

disaster risk reduction strategies, and climate strategies provide opportunities for 

this to happen.

Consider the case of climate strategies. 

One way for countries to balance climate 

policy and development objectives is through 

national climate plans and low-emission 

development strategies. Already, more than 

47 countries have low-emission development 

strategies supported by bilateral or multilateral bodies; many more have issued climate change–related strategies on their own 

(World Bank 2011b).

For instance, India’s National Action Plan 

on Climate Change defines eight national 

“missions,” including policy programs for 

energy effi ciency, a sustainable habitat, and 

sustainable agriculture. Bangladesh’s 2009 

Climate Change Strategy and Action Plan 

requires reviewing and revising existing government policies to ensure that they take climate change impacts into account. Climate 

change “focal points” within all line ministries are to work in coordination with a climate change unit housed within the Ministry 

of Environment and Forests (Government 

of Bangladesh 2009). Other country strategies outline a central interministerial body to 

coordinate climate activities, including with 

key economic ministries (table 7.1).

Another way to integrate economic and 

environmental goals is to require that the 

environment be brought into core government operations. A logical place for this to 

occur is through the budget, as the budget 

process is the central means of ensuring that 

expenditures are aligned with policy goals 

and that proper consideration is given to the 

trade-offs involved when climate-related concerns and growth objectives clash. For example, carbon pricing schemes, subsidy reform, 

and energy and infrastructure investment 

decisions all affect the fi scal balance (as discussed in chapter 2). As a result, fi nance ministries and other core government and development planning actors must be key players 

WB_354_GG_CH07.indd 155 5/7/12 

2012-08-054_000000000000542
156 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

in developing and implementing green policies. The Republic of Korea’s national green 

growth strategy (box 7.1) and many national 

climate strategies have already begun to 

refl ect this reality.

• The Indonesian Ministry of Finance has 

taken a leading role in national climate 

policy. In 2009, it issued a green paper 

outlining actions to support the country’s 

agenda on climate change (Government of 

Indonesia 2009). It was the lead national 

partner for a World Bank country study 

on low-carbon growth.

• Ministries of fi nance in Morocco and the 

Philippines, among others, are undertaking climate change public expenditure 

reviews to help align spending with climate change and development objectives.

• As part of Niger’s participation in the 

Pilot Program for Climate Resilience—

which provides assistance for integrating 

climate resilience into national development planning—the Ministry of Economy and Finance will house a strategic 

unit to coordinate actions taken under 

the country’s climate resilience program 

(PPCR 2010).

Balancing relevance and enforceability

Key dimensions of the needed balancing 

act between relevance and enforceability of 

environmental objectives include the choice 

of indicators with which to measure progress toward objectives; the time horizon over 

which environmental objectives should be 

selected; and the scale (national, local, or 

sectoral) at which environmental objectives 

are set.1

The choice of indicators. Potentially 

accurate indicators may be diffi cult to set or 

enforce, and easier-to-implement indicators 

may be less relevant. For climate change, a 

natural indicator for measuring mitigation 

is a “long-term carbon budget,” which measures global carbon emissions over the course 

of a given period of time, say, a century 

(Matthews and others 2009; Meinshausen 

and others 2009). But carbon budget commitments are diffi cult to introduce and enforce. 

Indeed, there is an incentive for decision makers to delay investments and efforts beyond 

their mandate.

Another possibility is to defi ne emission 

targets at one or several points in time—

such as the European objective of reducing 

TABLE 7.1 Inter-ministerial arrangements for coordinating on climate change strategy in selected countries

Country Arrangement

Bangladesh National Steering Committee on Climate Change headed by the Minister of Environment and Forests 

oversees the work of the Ministry of Environment and Forests’ climate change unit, which works with climate 

change focal points in each line ministry.

Brazil Inter-ministerial Commission on Climate Change is chaired by Ministry of Science and Technology and 

includes the Ministry of Planning, Budget, and Management, and the Ministry of Finance, among others.

India Advisory Council on Climate Change, led by the prime minister, oversees climate policy. Coordinating unit 

within the Ministry of Environment and Forests implements the National Action Plan on Climate Change. Ad 

hoc inter-ministerial commissions will address the eight national “missions” identifi ed in the National Action 

Plan.

Indonesia National Committee for Climate Change includes representatives of all departments with responsibilities 

related to mitigation or adaptation.

Mexico Inter-secretarial Commission on Climate Change, led by the Secretary of Environment and Natural Resources 

and including the Secretary of the Economy as well as other line ministries and agencies, is charged with 

promoting and coordinating the national plan and associated activities.

South Africa Inter-ministerial Committee on Climate Change coordinates government climate change actions and aligns 

climate policy with existing legislation and policy.

Vietnam National Steering Committee headed by the prime minister and representing all major line ministries 

oversees the work of a unit within the Ministry of Natural Resources and Environment that is to coordinate 

implementation of the National Target Program to Respond to Climate Change.

Source: Governments of Bangladesh 2009; Brazil 2010; India 2008; Indonesia 2009; Mexico 2009; South Africa 2010; and Vietnam 2008.

WB_354_GG_CH07.indd 156 5/7/12 

2012-08-054_000000000000543
CRAFTING A GREEN GROW TH STRATEGY 157

BOX 7.1 Implementing a green growth strategy in the Republic of Korea

Korea has moved assertively to become a leader in 

implementing green growth policies and defining 

a global green growth agenda. Its two-tier strategy focuses on a short-term response to the current 

global economic crisis and a long-term transition 

toward green growth through export-focused greentech research and development. In acting as a resolute fi rst mover, Korea has exposed itself to both 

risks and potentially high payoffs.

Policy makers in Korea are seeking transformation, not marginal adjustment, of the economy, 

seeking to move it away from its current heavy reliance on energy-intensive industries (which doubled 

its greenhouse gas emissions during the 1990s) and 

massive energy imports (which account for twothirds of imports). In pursuing green growth, they 

are combining three complementary and mutually 

reinforcing objectives: responding to the economic 

crisis, reducing the country’s energy dependency, 

and rebalancing the economy toward green sectors 

over the long term.

Korea’s $30.7 billion stimulus package, adopted in 

2009, was the greenest of any country, with 80 percent of all funds going toward environment-friendly 

projects (World Bank 2010). Investments initially 

targeted infrastructure as a short-term response to 

the crisis. Projects funded included the development 

of renewable energy sources, energy-effi cient buildings, and low-carbon vehicles; the expansion of railways; and the management of water and waste. Most 

of the green investment funded three initiatives: river 

restoration, expansion of mass transit and railroads, 

and energy conservation in villages and schools. 

Together, the three projects were projected to create 

500,000 jobs (World Bank 2010).

Source: http://www.greengrowth.go.kr.

greenhouse gas emissions by 20 percent 

by 2020. This type of objective is easier to 

enforce, but setting an objective for a particular point in time removes some fl exibility as to when and how to act, leading to 

higher costs.

The time horizon over which environmental objectives are set. Relevance would 

favor setting very long-term objectives, but 

doing so risks encouraging policy makers and economic actors to delay action. 

Shorter-term goals are needed to ensure that 

action is taken. Shorter-term milestones are 

also useful because there is less uncertainty 

surrounding technologies and economic conditions over the short term, making it easier 

to defi ne relevant targets. It thus makes sense 

to combine a long-term objective (such as 

limiting global warming to less than 2°C) 

with shorter-term objectives (such as reducing emissions by 20 percent by 2020).

Short-term goals complement rather than 

replace long-term goals. If a short-term 

goal is an end in itself, it may make sense to 

implement the least expensive solution. But 

in this case, there is a risk that the solutions 

selected to meet the short-term goal may lock 

in technology and infrastructure, making it 

impossible to reach longer-term objectives 

(Vogt-Shilb and Hallegatte 2011). To meet an 

ambitious long-term objective, a short-term 

target may need to be achieved by implementing options that have greater potential 

(or suffer from greater risks of lock-in or 

irreversibility). Urban policies such as land 

use planning or mass transportation may not 

be required to reach short-term targets (for 

instance, in terms of emissions by 2020). But 

considering the timescale of such policies, 

they need to be implemented without delay 

if longer-term (2050), more ambitious targets 

are to be met. 

The scale (national, local, or sectoral) 

at which environmental objectives are set.

Where objectives are economy wide (such as 

a carbon tax), the economic system has full 

flexibility to reach the objective by taking 

action where it is least expensive to do so. 

Given the information asymmetry between 

governments and economic agents, it makes 

sense to let market-based mechanisms determine where it is most cost-effective to act 

WB_354_GG_CH07.indd 157 5/7/12 

2012-08-054_000000000000544
158 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

(Laffont 1999). But the government cannot 

set credible and predictable signals over the 

very long term, and economic agents do not 

anticipate changes that occur over decades. 

As a result, there is underinvestment in 

land-use planning, resilient infrastructure, 

research, and other interventions critical to 

greening growth but whose benefits take 

time to materialize.

Given these constraints, action at the sector level may make sense in sectors with signifi cant potential for both lock-in and green 

impacts (Vogt-Schilb and Hallegatte 2011; 

chapter 3). Overlapping sectoral objectives—

such as the 20 percent renewable energy target in Europe, fuel-economy standards in the 

automobile industry, and changes in urban 

planning, building norms, and infrastructure 

design—may thus be part of an effi cient mitigation policy.

However, sectoral policies are vulnerable 

to regulation capture, rent seeking, and inefficient micromanagement (Laffont 1996; 

Rodrik 2005). Rent-seeking behavior is 

likely to affect policies even in countries with 

strong institutional capacity and appropriate checks and balances (Anthoff and Hahn 

2010; Helm 2010). Systematic appraisal of 

policies, using cost-benefit analysis where 

feasible, can mitigate these risks (see a discussion on such analysis below). It is also 

important for national authorities to ensure 

that sector policies are developed through a 

transparent process that provides opportunities for all stakeholders to contribute.

A step-by-step process 

for crafting a green growth 

strategy

How should policy makers design a green 

growth strategy that fi ts the country’s requirements? This section proposes a series of steps 

to follow. A key principle is that individual 

projects need to be assessed with respect 

to a strategy rather than in an abstract and 

isolated way. For instance, building coalpowered electricity plants can be a useful 

short-term component of a strategy to green 

electricity over the long term, if doing so helps 

reduce reliance on diesel generators and is 

combined with demand-side action and measures to transition to cleaner sources of energy. 

Similarly, building coastal dikes can be part 

of a long-term land-use strategy to manage 

risks—although if it is not combined with 

appropriate maintenance and land use regulations, it can increase vulnerability. Given 

these kinds of consequences, a green growth 

strategy needs to be designed before individual projects are evaluated and selected.

Step 1: Identify economic and social 

objectives and key obstacles

Step 1 is to identify the key economic and 

social objectives in terms of the growth and 

welfare channels noted in the green growth 

framework presented in chapter 1 (the fi rst 

three bullets relate to growth; the last two, 

to welfare):

• Increase production factors (human, 

natural, and physical capital).

• Enhance effi ciency, by correcting market 

failures to move closer to the production 

function (the maximum production level 

possible with the available technology, 

physical capital, labor, and environment, 

assuming maximum effi ciency).

• Push out the production frontier, by correcting innovation and dissemination 

market failures in order to be able to produce more with less.

• Increase economic resilience and reduce 

vulnerability to natural hazards and commodity price volatility.

• Increase the job content and poverty 

reduction of growth (that is, move toward 

“inclusive growth”).

In addition, policy makers need to take 

other important policy goals—such as maintaining a balance in regional and local development, which may also offer a potential 

source of synergy—into account.

Once the objectives have been identifi ed, 

the next step is to identify the market or 

institutional failures that retard growth and 

limit well-being (table 7.2). Hausmann and 

others (2008) claim that different countries 

WB_354_GG_CH07.indd 158 5/7/12 

2012-08-054_000000000000545
CRAFTING A GREEN GROW TH STRATEGY 159

face different obstacles to growth and that 

growth-enhancing policies need to be targeted 

to address the specifi c obstacles. A study by 

the Organisation for Economic Co-operation 

and Development (OECD 2011a) proposes 

that green growth strategies be developed by 

fi rst identifying specifi c obstacles to growth.

Step 2: Identify environmental 

objectives and lock-in risks

Step 2 is to identify (1) the environmental improvements that are most likely to 

increase welfare and (2) the risks of irreversibility in both the environmental and 

economic domains. The idea is to focus on 

welfare-improving environmental objectives 

that preclude a “grow dirty, clean up later” 

pathway. Examples include improving water 

quality, reducing air pollution and flood 

losses, protecting soils, and avoiding irreversible destruction of coral reefs. Here (as 

in Step 1), the analysis should combine scientifi c and economic information from reports, 

local knowledge, and widely agreed priorities. It should rely on broad consultations to 

ensure consistency with population goals, 

objectives, and preferences and to avoid confl icts between the green growth strategy and 

other planning initiatives.

Step 3: Consider six types of 

interventions and identify 

synergies

Step 3 is to determine which types of policy 

interventions would help a country reach its 

environmental goals while also improving 

economic growth and social welfare. This 

report singles out six types of interventions.

Pricing and fi scal policies: taxes, subsidies, or subsidy removal (chapter 2). Fiscal 

policies can be used to guide economic 

behavior and create environmental and economic benefi ts. Governments need to assess 

fiscal policies as a whole, taking account 

of the trade-offs between alternative ways 

to source and apply funds. Reallocating 

resources from fuel subsidies to spending on 

education, health, and infrastructure will 

help reach environmental objectives and 

increase economic growth. Reallocating 

these funds to services that are accessible to 

the poor will also help reduce poverty. Oil 

TABLE 7.2 Channels through which green policies could contribute to growth

Channel Questions Possible priorities

Increase in production factors 

(human, natural, and physical capital)

Which categories of capital (physical, natural, 

human) are important in limiting economic 

growth or in reducing population welfare?

Increasing transportation (and export) 

capacity, improving secondary education 

and population health

Enhanced effi ciency (correcting 

market failures to move closer to the 

production frontier)

What are the greatest ineffi ciencies in the 

economic systems?

Reducing urban congestion and energy 

costs, increasing energy supply reliability, 

increasing employment of young qualifi ed 

workers

Outward movement in the 

production frontier (correcting 

innovation and dissemination market 

failures to be able to produce more 

with less)

What are the obstacles to innovation and to 

innovation adaptation and dissemination?

Improving worker skills and property 

right protection, reducing entry costs for 

innovative fi rms, improving access to capital

Increases in economic resilience Is the economy particularly vulnerable to 

exogenous shocks such as commodity 

price volatility, natural disasters, 

or competitor innovations?

Diversifying the economy, reducing energy 

intensity and dependency on imported 

energy, reducing vulnerability to large-scale 

disasters, improving food security

Increases in the job content and 

poverty reduction of growth 

(moving toward “inclusive growth”)

What are the major problems in the labor 

market and poverty reduction, and 

why have they persisted up to now?

Reducing rural or urban poverty, mitigating 

ethnic segregation, fi ghting poverty traps, 

improving access to capital for the poor

WB_354_GG_CH07.indd 159 5/7/12 

2012-08-054_000000000000546
160 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

dependency, and thus vulnerability to oil 

price volatility, can be mitigated by imposing an energy tax, to favor energy-effi cient 

technologies and equipments. Such policies 

would provide environmental benefi ts and 

enhance economic resilience.

Political economy considerations will play 

an important part in determining the feasibility of a realignment of fi scal policies with 

green growth objectives. Interest groups will 

resist the withdrawal of subsidies and tax 

incentives. Nonetheless, as recent efforts by 

the Islamic Republic of Iran to reduce fuel 

subsidies illustrate, progress can be made. A 

phased approach supported by communication and complementary policies that reallocate resources to the poor can help build 

constituencies for reforms. In some cases, 

resources may need to be allocated temporarily to compensate losers, even if they are not 

the poor or needy. Building in sunset clauses 

to such compensatory programs may help 

prevent temporary relief becoming another 

permanent subsidy.

Institutions, norms and regulations, and 

behavior-based policies (chapter 2). Economic incentives can be usefully complemented with other types of instruments. For 

instance, where low building energy effi ciency 

contributes to high energy imports, introducing regulations or creating new mechanisms 

to make dwelling owners invest in insulation 

and effi cient appliances could yield a double 

dividend, strengthening the economy and 

protecting the environment.

Policy makers must consider how environmental policies affect businesses and individuals, taking into account their decision- making 

biases and the noneconomic incentives that 

affect behaviors. A strategy that takes these 

aspects into account—by, for instance, framing policy changes within a positive collective project and providing individuals with 

feedback on how they behave with respect 

to the project—will be more efficient than 

one based on an economic argument alone. 

Information disclosure programs that require 

fi rms to publish their level of pollutant emissions can be as efficient as and less costly 

than a norm.

Innovation and industrial policies 

(chapter 3). The greening of the economy 

requires growing new industries, along with 

developing and disseminating new technologies. This process can be eased with specifi c 

policies that target (1) the development and 

dissemination of technologies and innovations, by correcting the effect of a knowledge 

spillover, and (2) the development of new 

industries and sectors, by correcting the effect 

of nonenvironmental market failures (such 

as coordination failures and capital market 

imperfections).

Green industrial policies can help disseminate new technologies (especially when they 

have been tested and demonstrated in developed countries) and develop new competitive 

sectors. Examples of green industrial policies 

that have been used include feed-in tariffs for 

solar electricity, or subsidies to research and 

development (R&D) in renewable energy. 

Countries with a latent competitive advantage 

in renewable energy (such as North Africa with 

solar energy) may want to pursue this advantage with the hope of creating a viable and 

competitive industry. However, support must 

carefully balance market failures and government failures given the risks of policy capture 

and rent-seeking, especially where institutions 

and civil society are weak (chapter 3).

Education and labor markets policies 

(chapter 4). Green transitions are likely to 

involve structural change away from some 

industries and toward new ones. Experience 

with trade liberalization offers valuable lessons as to how to reduce the cost and length 

of such structural changes. In particular, 

policies that facilitate the movement of workers from one sector to another can accelerate 

the transition and reduce adjustment costs. 

Where such movement is impeded by skill 

issues, training programs can help—for 

example by training construction employees 

to effi ciently retrofi t buildings.

Natural capital, agriculture, and ecosystem services management (chapter 5). An 

excellent way of greening agricultural production is through conservation agriculture, 

which simultaneously yields environmental 

benefi ts (by reducing pollution of waterways 

WB_354_GG_CH07.indd 160 5/7/12 

2012-08-054_000000000000547
CRAFTING A GREEN GROW TH STRATEGY 161

from nutrients and increasing carbon sequestration in soils); increases the efficiency of 

production (by reducing the use of energy 

inputs); increases resilience (by frequently 

rotating crops); and increases agricultural 

productivity in the long run (by reducing erosion and enhancing soil structure).

But for this to work, there needs to be better information underlying decision making 

and better access to this information. For 

example, greater access to weather and climate information services for farmers can 

improve resilience in the agricultural system 

and the overall value chain, including production, post-harvesting, storage, and market 

access. It can also help innovations to succeed 

(such as in weather-based risk products).

Infrastructure, building, urbanism, transport, and energy (chapter 6). Green sectoral 

interventions can help increase factors of 

production, push out the production frontier, enhance effi ciency, improve resilience, 

create jobs, and reduce poverty. In some 

countries, urban congestion and the lack of 

efficient transportation reduce well-being 

and hold back economic growth, on top 

of causing negative environmental effects. 

Investments in public transit and changes 

in land-use plans to favor a more compact 

urban area could reduce air pollution and 

spur growth (thanks to the benefits from 

urbanization and concentration). Multiple 

benefi ts can also be reaped from multipurpose infrastructure such as water reservoirs that produce hydroelectricity, mitigate 

fl oods, and ensure minimum river fl ow during drought. And regional integration in 

infrastructure design and investments can 

improve the efficiency of the system, for 

instance by increasing the reliability of electricity generation and allowing for a greater 

penetration of renewable energy.

Step 4: Defi ne priorities

Policy makers face limitations in terms of the 

capacity and resources to design and implement reforms and the political and social 

capital to launch several reforms simultaneously. They therefore need to defi ne priorities based on urgency (to avoid lock-in and 

irreversibility) and synergies (the existence of 

local and immediate benefi ts that will help 

diminish political and social resistance). 

Priorities can be defi ned by examining the 

policy options identifi ed in step 3 through the 

lens of political and social acceptability and 

lock-in risk, as done in table 7.3. Columns 

TABLE 7.3 Some guiding principles for establishing green growth strategies

Local and immediate benefi ts

LOWER

(Trade-off s exist between short-and 

long-term or local and global benefi ts)

HIGHER

(Policies provide local 

and immediate benefi ts)

Inertia and/or risk of lock-in 

and irreversibility

LOWER

(action is less urgent) • Lower-carbon, higher-cost energy 

supply

• Carbon pricing

• Stricter wastewater regulation 

• Drinking water and sanitation, solid waste 

management

• Lower-carbon, lower-cost energy supply

• Loss reduction in electricity supply

• Energy demand management 

• Small-scale multipurpose water reservoirs

HIGHER

(action is urgent) • Reduced deforestation

• Coastal zone and natural area 

protection 

• Fisheries catch management

• Land use planning

• Public urban transport

• Family planning

• Sustainable intensifi cation in agriculture

• Large-scale multipurpose water reservoirs

WB_354_GG_CH07.indd 161 5/7/12 

2012-08-054_000000000000548
162 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

organize policies for the extent of local and 

immediate benefi ts they offer. Some policies 

provide immediate synergies between the 

economy and the environment (such as reducing leaks in water networks), whereas others 

involve trade-offs, at least in the short term 

(restricting development in coastal areas, for 

example). Rows classify interventions for the 

extent to which they prevent irreversibility 

and lock-in. Policies may need to be implemented more urgently even where they imply 

trade-offs, simply because acting later would 

be more costly or even impossible. Other policies can be postponed because they do not 

involve signifi cant inertia.

In designing a green growth strategy, priority should go to policies that are high in 

terms of local and immediate benefits and 

more urgent (such as public urban transport 

and sustainable intensifi cation in agriculture). 

Policies that provide local and immediate 

benefi ts, even if they are not urgent, can be 

implemented at any level of income.

It is more difficult to implement policies that are urgent but involve significant 

trade-offs (such as reduced deforestation). 

But these policies would be more costly—or 

even impossible—to implement later. For this 

reason, these policies require international 

cooperation, especially when they affect 

global challenges, such as climate change.

Developing countries (especially lowincome countries) should focus on environmental policies that have a negative or zero 

economic cost thanks to synergies with 

development (such as developing hydropower 

where appropriate, or implementing specifi c 

urban plans); have a positive economic cost 

but large direct welfare impacts, that is, when 

they target local environment goods such as 

local air pollution or natural risks; and whose 

cost can be offset with external resources 

(such as carbon trading).

Step 5: Conduct a systematic analysis of 

the policies and projects included in the 

green growth strategy

Step 5 is to thoroughly review each policy 

and project as a function of the selected 

priorities and strategic choices. Such a review 

should rely on a multicriteria analysis, given 

the limitations of cost-benefi t analysis.

The limitations of cost-benefi t analysis. 

The standard cost-benefi t analysis—which is 

commonly used to evaluate public policies or 

investment projects—is necessary but needs 

to be supplemented by other approaches for 

green growth policies. The reason is that 

cost-benefi t analysis encounters three major 

diffi culties when applied to environmental or 

green growth policies.

First, some of the benefits (or costs) are 

diffi cult to assess and measure. Environmental benefi ts are often problematic to quantify 

and value, beyond the assessment of health 

impacts. But some economic benefits, like 

innovation-related or resilience-related ones, 

are also diffi cult to assess and are thus often 

left out of the analysis. For instance, the 

innovation benefi t of a demonstration project 

cannot usually be quantifi ed. More generally, 

benefi t-cost ratios consider only one project 

at a time and often cannot take into account 

the integration within a broader, longer-term 

strategy and the consistency with priorities 

and strategic choices.

Second, different stakeholders often assign 

very different weights to different types of 

consequences, and differences in world views 

and priorities translate into different preferences for design and targets of policies. 

Cost-benefit analysis requires agreeing on 

values—something that can be very diffi cult 

to achieve.

Third, many of the tools and policies that 

can be part of a green growth strategy involve 

signifi cant uncertainties. For instance, reducing vulnerability to oil shocks is a clear economic benefi t, but is diffi cult to quantify in 

the absence of reliable probabilistic estimates 

of future oil volatility. This uncertainty arises 

from many sources, including technological 

change, climate change, and policy effi ciency 

and enforcement. Cost-benefi t analysis can 

capture uncertainty when it can be translated 

into probabilities for different outcomes. 

Where policies and projects involve deep 

uncertainty, however—as green growth policies often do—it is very diffi cult to estimate 

WB_354_GG_CH07.indd 162 5/7/12 

2012-08-054_000000000000549
CRAFTING A GREEN GROW TH STRATEGY 163

probabilities or reconcile different stakeholders’ world views.

Differing world views, diverging priorities, and the use of multicriteria analysis.

A green/wealth accounting system would 

allow the consequences of green policies 

to be aggregated and policies compared. 

However, as noted in chapter 2, aggregation is diffi cult, because many prices are 

missing; aggregation also raises ethical 

and philosophical issues on which there 

is little consensus. In the absence of such 

an accounting system, many policies 

will involve difficult trade-offs between 

improving the environment and traditionally measured growth.2 Thus, it is useful 

to complement the cost-benefit analysis 

with decision-making methods that facilitate capturing—if only qualitatively—the 

full costs and benefi ts and the corresponding uncertainty.

For these reasons, multicriteria analysis 

can be useful, at least as a fi rst screening tool. 

It does not provide an objective ranking of all 

possible actions, but it allows decision makers to include a full range of social, environmental, technical, and economic criteria and 

policy goals in a balanced manner—mainly 

by quantifying and highlighting trade-offs 

between confl icting objectives that are diffi -

cult to compare directly and agree on.

Multicriteria analysis is widely applied 

to environmental issues, including disaster 

risk reduction and climate change adaptation assessments. In the past several years, 

it has been applied to urban flood risk 

in France (Viguie and Hallegatte 2012) 

and Germany (Kubal and others 2009); 

to adaptation options for climate change 

in the Netherlands (Brouwer and van Ek 

2004; De Bruin and others 2009); to climate change–related health risks (Ebi and 

Burton 2008); and to adaptation planning 

in Canada (Qin and others 2008). Older 

examples include identifying vulnerability in the agricultural sector and assessing alternative crop options (Julius and 

Scheraga 2000), and prioritizing climate 

change adaptation options in Africa (Smith 

and Lenhart 1996).

In 2002, the United Nations Framework 

Convention on Climate Change developed 

guidelines for using the adaptation assessment process in low-income countries. 

The guidelines suggest using multicriteria 

analysis to prioritize adaptation measures 

(UNFCCC 2002).3 In 2011, the United 

Nations Environment Programme proposed 

a multicriteria decision-making tool for climate policies in its Multi-Criteria Analysis for Climate (MCA4Climate) project 

(box 7.2). The project lists the various benefits, co-benefits, costs, and co-costs of a 

set of environmental policies to ensure that 

coeffects are included.

This multicriteria approach is particularly appropriate for green growth, because 

it allows analysts to identify trade-offs and 

synergies and present decision makers with 

the information they need to capture the 

potential for co-benefits from green policies. A variety of indicators can be used to 

measure the potential benefits from green 

growth policies. Each of the channels shown 

in table 7.4 could be further broken down 

(for example, improved environment could 

be split into biodiversity, air pollution, and 

climate). Many institutions—including the 

OECD (2011b), World Bank (2011a), and 

the United Nations Statistical Division that 

created the System of Environmental and 

Economic Accounting—have proposed indicators for this purpose.

Applying such a process would ensure 

that the real motives for implementing a 

project are taken into account. For example, a demonstration of new technology 

that depends on economies of scale to be 

effi cient would not be expected to pass a 

cost-benefi t analysis (or to reach the classically required return on investment) that 

does not take this demonstrator status 

into account. These benefi ts can be made 

explicit by simply identifying the projects’ 

contribution to a set of policy objectives, 

as Morocco did for a solar power project 

(box 7.3).

Of course, no methodology provides 

a purely objective way of making decisions; it can communicate only trade-offs 

WB_354_GG_CH07.indd 163 5/7/12 

2012-08-054_000000000000550
164 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 7.2 MCA4Climate: A practical framework for planning pro-development climate 

policies

Climate change is a pervasive and complex problem, with uncertainty surrounding its multifaceted 

impacts. Setting priorities is hampered by the lack 

of a systematic and comprehensive description of 

the issues concerned, the links among them, and the 

trade-offs involved. Structured guidance is needed 

to underpin long-term policy planning in this area—

guidance that systematically considers the direct and 

indirect economic, social, environmental, and institutional costs and impacts.

The goal of the MCA4Climate initiative is to help 

fi ll this gap by developing practical guidance that 

enables governments to identify low-cost, environmentally effective, and pro-poor climate mitigation 

and adaptation policy choices. The multicriteria 

framework offers a useful planning tool for prioritizing and populating with concrete measures, including Nationally Appropriate Mitigation Actions, 

National Adaptation Programs of Action, and other 

broad, economy-wide climate strategies.

MCA4Climate rests on three main principles:

• Climate change policy has multidimensional 

implications for human societies and the environment, affecting multiple interests and a wide range 

of values and priorities.

• If formulated appropriately, policy responses to 

climate change can help meet country-specific 

development objectives.

• Nonmonetary values, uncertainty, and the longterm dynamics of environmental, socioeconomic, 

and technological systems are inherent to climate 

change. They should be considered in the development of any policy response to it.

Source: UNEP 2011.

TABLE 7.4 Framework for measuring potential benefi ts from green growth policies

Type of benefi t Channels Examples of indicators

Environmental Improved environment Indicators specifi cally developed for the domain in 

question (for example, reduction in greenhouse gas 

emissions, natural area protected from development, 

air or water quality)

Economic Increase in factors of production (physical capital, 

human capital, and natural capital)

Measured by the additional production from 

increased capital (potentially measured by the value 

of ecosystems or renewable resources), or by the 

value of additional capital

Accelerated innovation, through correction of 

market failures in knowledge

Measured by productivity indicators (for example, 

effi ciency of photovoltaic panels used to produce 

electricity) or dissemination indicators (for example, 

the fraction of the population with access to 

photovoltaic electricity)

Enhanced effi ciency, through correction of nonenvironmental market failuresMeasured by indicators for resource effi ciency 

(for example, the material or energy intensity of 

production, reduction in the value of time lost from 

congestion), or by additional production

Social Increased resilience to natural disasters, 

commodity price volatility, and economic crises

Measured by metrics related to the project, from 

avoided disaster losses (in monetary terms) or 

number of people at risk from fl oods to a measure of 

the vulnerability to oil price volatility

Job creation and poverty reduction Measured by the number of jobs created or an 

indicator of the impact on the poor (for example, 

reduction in the number of people without access to 

drinking water and sanitation)

WB_354_GG_CH07.indd 164 5/7/12 

2012-08-054_000000000000551
CRAFTING A GREEN GROW TH STRATEGY 165

to decision makers. For instance, a 

cost- benefi t analysis will provide different 

answers if different aggregation methods 

are used (how to aggregate losers and winners) or if different valuation methods are 

used (how to measure ecosystem losses in 

monetary terms).

Uncertainty and the need for 

robust decision making

Assessing the costs and benefi ts of a green 

growth strategy is extremely diffi cult, especially when the future is diffi cult to project 

or even describe using probabilities.4

BOX 7.3 Using a policy framework to analyze the benefi ts of Morocco’s Ouarzazate 

concentrated solar power project

Through a public-private partnership, the World 

Bank is helping fi nance the fi rst phase of a 500 megawatt Ouarzazate solar power plant in Morocco. 

The project’s goal is to increase power generation 

from solar power, along with mitigating greenhouse 

gas emissions and the deleterious effects of power 

production on the local environment.

The project illustrates the limits of a cost-benefi t 

analysis when a project has nonmonetary objectives and is part of a broader national strategy. Both 

cost-effectiveness analysis and cost-benefi t analysis 

indicate that the project is not economically justifi ed 

under prevailing economic conditions. However, a 

simple listing of policy objectives and the project’s 

contributions to these goals can help identify cobenefi ts that would otherwise be ignored.

• The project seeks to help develop a globally available noncarbon power generation technology and 

to reduce the cost of concentrated solar power 

worldwide (a global public goods benefi t).

• It will contribute to Morocco’s energy and climate change objectives of security of supply, 

energy diversification, and reductions in CO2

emissions, as well as other economic and social 

objectives, such as helping start a new green 

industry, developing interior regions of the country, and creating jobs.

• It will test the use of storage technology in concentrated solar plants, create a precedent for the 

use of the public-private partnership business 

model to develop concentrated solar power plants 

in Morocco and elsewhere, and contribute to 

regional integration of the electricity market in the 

Mediterranean.

These co-benefi ts can be identifi ed using the six 

rubrics shown in table B7.3.1. The multicriteria analysis is thus useful for decision makers, even though 

it should not replace the cost-benefi t analysis, which 

provides invaluable information.

TABLE B7.3.1 Co-benefi ts of the Ouarzazate concentrated solar power project

Type of benefi t Channels Examples of indicators

Environmental Climate change mitigation Reduced greenhouse gas emissions

Economic Increase in factors of production (physical capital, 

human capital, and natural capital)

Added electricity production capacity

Local learning on solar technologies

Accelerated innovation, through correction of 

market failures in knowledge

Demonstrate technology that has market potential in region, 

given likely latent competitive advantage and capacity to 

export solar resources to Europe

Institutional innovation through the development of PPP

Reduce cost of concentrated solar power globally

Enhanced effi ciency, through correction of nonenvironmental market failuresNone

Social Increased resilience to natural disasters, 

commodity price volatility, and economic crises

Diversifying energy in Morocco

Job creation and poverty reduction Creating jobs and new industries 

Spurring economic activity in interior regions of the country

Source: Based on the “Ouarzazate Concentrated Solar Power Project for Morocco” Project Appraisal Document.

WB_354_GG_CH07.indd 165 5/7/12 

2012-08-054_000000000000552
166 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Uncertainty surrounding green growth 

strategies stems from at least three sources:

• Many factors of success are not controlled 

by national decision makers. Such factors 

include the availability of technologies 

from abroad; the price of internationally 

traded goods such as oil, minerals, and 

food; economic growth and imports and 

exports from other countries; and green 

or trade policies in other countries.

• There are many implementation obstacles, 

and it is diffi cult to predict how effi cient 

innovation policies will be or how quickly 

production costs will fall when production volumes increase.

• Scientifi c uncertainty is high. No one can 

project future changes in local climates 

with certainty, complicating decisions 

about land-use planning, water management, and electricity production.

Green growth strategies need to be robust 

with respect to these uncertainties. Kalkulh 

and others (2012) highlight how the optimal 

policy in the presence of perfect knowledge 

on technology potentials and market failures 

differs from the optimal policy in the presence of deep uncertainty. Disregarding uncertainty and basing actions on the most likely 

scenario is dangerous and may lead to undesirable outcomes (box 7.4).

Cost-benefi t analyses can be extended to 

consider multiple states, each with a probability of occurrence. These probabilities are 

sometimes determined by a frequency-based 

method (How often did the event occur in 

the past?) or by belief-based analysis, such as 

BOX 7.4 Incorporating uncertainty in protecting Ho Chi Minh City

Ho Chi Minh City already experiences extensive 

routine fl ooding; increased precipitation and rising 

sea levels in the coming decades could permanently 

inundate a large portion of the city, placing the poor 

at particular risk and threatening new economic 

development in low-lying areas.

In response to these challenges, Ho Chi Minh 

City has developed plans for, and started implementing numerous infrastructure projects to mitigate 

fl ood risks. Over the years, its multibillion dollar 

investment plans in sewerage and drainage infrastructure have included 6,000 kilometers of canals 

and pipes covering 650 square kilometers in the 

city to upgrade the discharge capacity of the storm 

sewer system and address land up-fi lling; roughly 

172 kilometers of dikes and river barriers, mainly 

to control tides; and a tide control plan that uses at 

least 12 gates and 170 kilometers of dikes to create 

a polder system.

These plans were based on the best predictions 

of future climate and development available at the 

time they were made. Recent analysis suggests, however, that climate change and urbanization will be 

greater than expected. In fact, some variables already 

exceed the maximum values considered in the design 

phase. These surprises require significant revisions 

to the plans. The canals and pipes built principally 

to upgrade the discharge capacity of the storm sewer 

system and address land up-fi lling may not be able 

to handle increased fl ows. Increases in precipitation 

and tide levels observed over the past decade already 

exceed those projected and may top dikes and barriers. 

Future saline intrusion and rainfall intensity may be 

more severe than anticipated, potentially rendering the 

poldering plans obsolete before they are approved.

In addition, unforeseen effects may cause signifi -

cant harm and increase risk in Ho Chi Minh City. 

Since the plan was created, the city has experienced 

unprojected urbanization in low-density areas, perhaps because of the illusion of safety associated with 

the presence of fl ood prevention infrastructure there. 

The city’s Steering Committee for Flood Control is 

concerned that the insuffi ciency of the planned infrastructure may exacerbate fl ooding in some areas. If 

it does, the legacy of the intervention will have been 

to increase vulnerability.

The Steering Committee is now preparing an 

integrated fl ood management strategy to harmonize 

(continued next page)

WB_354_GG_CH07.indd 166 5/7/12 

2012-08-054_000000000000553
CRAFTING A GREEN GROW TH STRATEGY 167

Bayesian analysis (What are the odds of the 

event? How much do I trust my model?).

But as uncertainty grows, it becomes more 

diffi cult to characterize the probability of an 

event’s occurrence, particularly when multiple stakeholders with differing values and 

expectations are involved. In such a situation, 

the optimal solution may be designed for a 

world whose existence is uncertain; that solution may perform poorly in other plausible, 

yet unanalyzed, worlds. In such a context, 

solutions should be adopted that are more 

robust—often achieved by making them fl exible and allowing for adjustment over time, as 

new information becomes available. Learning and action are thus conducted in parallel, in an iterative process that includes learning and monitoring as a major component 

(fi gure 7.1). “Waiting for more information” 

is never an option: information has to be created, through experimentation, monitoring, 

and analysis. If information is not suffi cient 

to make an investment decision, a learning 

plan is required.

The robust decision-making approach 

helps design strategies able to cope with deep 

uncertainty (Lempert and others 2003). It 

starts with analyzing a candidate strategy 

to determine its vulnerability to surprise 

and uncertainty. It then tries to reduce this 

vulnerability, thereby increasing the overall 

resilience of the strategy. In practice, this 

is done through a stakeholder consultation 

process that identifi es the available strategies or “policy levers,” then determines the 

criteria for appraising these strategies and 

the range of uncertainties to consider. Next, 

decision makers proceed through an iterative process, identifying the vulnerabilities 

that different scenarios expose and how 

these can be addressed until the vulnerabilities are reduced to an appropriate level. 

This robust decision-making approach can 

be managed through a consultative process 

or supported by sophisticated modeling 

(box 7.5).

This approach is particularly relevant 

when multiple policy goals and world views 

coexist, because it allows for a fl exible defi -

nition of success and failure. A cost-benefi t 

analysis requires a consensual objective 

function that is able to rank all potential 

outcomes. In contrast, the robust decisionBOX 7.4 (continued)

the master plans for the storm sewer system, fl ood 

control system, and urban development. Aware of 

the consequences of underestimating uncertainty, 

they have chosen a robust approach to address concerns that their earlier approaches to planning consistently under- or misestimated uncertainties; that 

plans proved brittle to assumptions that proved 

inaccurate, leading to costly realignment; and that it 

was often diffi cult to reach consensus among diverse 

actors and agendas. Through an integrated, robust 

approach, the Steering Committee is accepting the 

role of persistent, deep uncertainties as a new component in its planning process.

Maximizing the robustness of strategies may 

require changes in decision-making approaches. Traditional decision-making processes address quantifi able uncertainty (risk) by predicting a future state and 

designing a plan or project for the conditions of that 

state. This approach produces optimal results for the 

intended future, but its application may be increasingly limited when faced with larger uncertainties.

Source: Hallegatte and others 2012.

learn act learn

revise

FIGURE 7.1 Schematic for crafting solutions in the presence of 

deep uncertainty

Source: Hallegatte and others 2012.

WB_354_GG_CH07.indd 167 5/7/12 

2012-08-054_000000000000554
168 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

BOX 7.5 Using robust decision making in water planning in southern California water

Planners have traditionally used historical stream 

flow data and weather patterns to develop seasonal water forecasts. But because climate change is 

expected to change weather patterns, air temperature, and precipitation patterns in an as yet unpredictable fashion at the local scale, planners are now 

seeking methods to incorporate the impacts of climate change into their planning processes.

In 2006, the RAND Corporation worked with the 

Inland Empire Utility Agency (IEUA), in Chino Hills, 

California, to test its robust decision-making framework. In 2005, IEUA released its Regional Urban 

Water Management Plan (UWMP), in response to 

a projected population increase of 800,000 to 1.2 

million people by 2030. The document outlined a 

plan to meet future water demands by improving 

water use effi ciency and developing local resources.

The robust decision-making analysis took the 

UWMP as its initial strategy, used climate information from the National Center for Atmospheric 

Research, and employed a planning system from the 

Stockholm Environment Institute to assess how different policy levers would perform under a variety of 

possible futures.

The fi rst run of the model evaluated the proposed 

management plan under four climate scenarios. Its 

fi ndings generally indicated that if the impacts of climate change were minimal, the UWMP would meet 

its supply goals for 2030. However, if climate change 

were to cause signifi cant warming and drying, the 

UWMP could perform poorly and miss many of its 

goals, causing economic losses.

Additional runs of the model, using more than 

200 scenarios and 8 additional management strategies, were then performed. In 120 of the scenarios, cost was 20 percent higher than expected. The 

analysis revealed that UWMP was particularly vulnerable when future conditions were drier, access 

to imported water more limited, and natural percolation of the groundwater basin lower. Strategies 

ranged from increasing water use effi ciency, recycling storm water to replenish groundwater, and 

developing the region’s water recycling program. In 

all cases, augmenting the UWMP with additional 

management strategies reduced both costs and 

vulnerability.

The analysis concluded that local solutions should 

not be overlooked when developing ways to mitigate 

the impacts of climate change. Local policies and 

management opportunities may be more cost effective, reliable, and feasible than other options.

Under the robust decision-making analysis, the 

best management plan was found to be adaptive 

and to include near-term implementation of more 

water use effi ciency techniques. Presented with these 

results, water managers expressed increased confi -

dence that they could plan for the effects of climate 

change despite the uncertainty of forecasts.

Source: For more information, see http://www.cakex.org/case-studies/1029. 

making approach makes it possible to combine different performance criteria. It is thus 

useful for the design of green growth policies, 

which are based largely on the identifi cation 

of synergies across policy goals.

Both robust and optimal techniques are 

necessary elements in a decision-making process involving signifi cant uncertainties. Analyses focused on optimality are vulnerable to 

overconfi dence bias. Robust approaches dwell 

on consequences and eschew risky behavior. 

Managed risk-taking, however, is an essential 

part of development and inseparable from 

innovation.

One critique of robust approaches is their 

sensitivity to the worst-case scenario. This 

tendency is not an artifact of the methodology; rather, it refl ects the reality of some 

choices; in other cases, decision makers 

can judge that hedging about a worst-case 

scenario is too expensive and not worth 

it. Robust processes deal with this issue 

through stakeholder participation and 

exchanges with experts. The choice of the 

worst-case scenario is thus a negotiated, 

participatory process that plays a key role in 

determining which policy options will eventually be implemented.

WB_354_GG_CH07.indd 168 5/7/12 

2012-08-054_000000000000555
CRAFTING A GREEN GROW TH STRATEGY 169

This type of approach is particularly 

appropriate in the context of green growth, 

because it allows analysts to identify the 

policies and measures that are necessary to 

avoid getting locked into patterns that will 

be extremely diffi cult to change in the future. 

Robust decision making thus helps identify 

measures that are needed over both the short 

and medium terms.

Moreover, the deep uncertainty surrounding environmental issues affects the type of 

solutions that need to be implemented. As 

any good solution must be context specifi c, 

the application of “best practices” is diffi cult. 

Two general rules can be proffered, however. 

First, solutions that allow greater flexibility should be favored over those that create 

lock-in; and where choices that could lead 

to irreversible consequences must be considered, they should be evaluated very carefully 

(Hallegatte 2009). Second, given the diffi culty in projecting the consequences of all 

policies, implementation should be based on 

experimentation, monitoring, and generalization of successful methods.

Developing green growth strategies 

and responding to climate change entail 

an investment in planning. One option is 

for governments to develop specifi c green 

growth strategies alongside their core planning instruments. An alternative—possibly 

more in line with the goals of integrating climate change, growth, and poverty reduction 

policy objectives—is to incorporate green 

growth strategies in core planning instruments (such as national development plans). 

This approach highlights the trade-offs that 

governments will have to weigh: between 

predictability and fl exibility, between relevance and enforceability, and among the 

various policy objectives. The step-by-step 

process proposed here helps them resolve 

these trade-offs, identify synergies and cobenefits, and formulate a comprehensive 

green growth strategy that incorporates 

the range of policies available, while taking into account the deep uncertainty that 

characterizes climate change. The process 

is equally applicable at the national, local, 

and sectoral levels.

Notes

 1. This section draws heavily on Vogt-Schilb 

and Hallegatte (2011).

 2. With widely accepted prices (and an agreed 

upon discount rate), all the components of 

future welfare can be summarized in a single 

number (which can be referred to as “wealth”). 

In this case, a policy is “good” (it increases 

wealth) or “bad” (it decreases wealth).

 3. For an example of standardized multicriteria 

analysis scoring for a variety of adaptation 

actions, see Republic of Burundi (2007).

 4. This section relies extensively on Hallegatte 

and others (2012). 

References

Anthoff, D., and R. W. Hahn. 2010. “Government 

Failure and Market Failure: On the Ineffi ciency 

of Environmental and Energy Policy.” Oxford 

Review of Economic Policy 26 (2): 197–224.

Brouwer, R., and R. van Ek. 2004. “Integrated 

Ecological, Economic and Social Impact 

Assessment of Alternative Flood Protection 

Measures in the Netherlands.” Ecological 

Economics 50 (1–2): 1–21.

De Bruin, K., R. Dellink, A. Ruijs, L. Bolwidt, 

A. Van Buuren, J. Graveland, R. De Groot, 

P. Kuikman, S. Reinhard, R. Roetter, 

V. C. Tassone, A. Verhagen, and E. C. 

van Ierland. 2009. “Adapting to Climate 

Change in the Netherlands: An Inventory of 

Climate Adaptation Options and Ranking of 

Alternatives.” Climatic Change 95: 23–45.

Dixit, A., and L. Lambertini. 2003. “Interactions 

of Commitment and Discretion in Monetary 

and Fiscal Policies.” American Economic 

Review 93 (5): 1522–42.

Ebi, K., and I. Burton. 2008. “Identifying 

Practical Adaptation Options: An Approach 

to Address Climate Change–Related Health 

Risks.” Environmental Science & Policy

11(4): 359–69.

Government of Bangladesh. 2009. Bangladesh 

Climate Change Strategy and Action Plan. 

Dhaka.

Government of Brazil. 2010. Second National 

Communication to the UNFCCC. Brasilia.

Government of India. 2008. National Action 

Plan on Climate Change. Delhi.

Government of Indonesia. 2009. Ministry 

of Finance Green Paper: Economic and 

Fiscal Policy Strategies for Climate Change 

WB_354_GG_CH07.indd 169 5/7/12 

2012-08-054_000000000000556
170 INCLUSIVE GREEN GROW TH: THE PATHWAY TO SUSTAINABLE DEVELOPMENT

Mitigation in Indonesia. Jakarta: Ministry of 

Finance and Australia-Indonesia Partnership.

Government of Mexico. 2009. Programa especial 

de cambio climático 2009–2012. Mexico City: 

Comisión Intersecretarial de Cambio Climático. 

http://dof.gob.mx/PDF/280809-VES.pdf.

Government of South Africa. 2010. National 

Climate Change Response Green Paper. 

Capetown: Department of Environmental 

Affairs.

Government of Vietnam. 2008. “Decisions on 

Approval of the National Target Program 

to Respond to Climate Change”. Document 

158/2008/QÐ-TTg, Ho Chi Minh City.

Hallegatte, S. 2009. “Strategies to Adapt to 

an Uncertain Climate Change.” Global 

Environmental Change 19 (2): 240–7.

Hallegatte, S., A. Shah, S. Gill, and R. Lempert. 

2012. “Investment Decision-Making under 

Deep Uncertainty.” Background paper 

prepared for this report. World Bank, 

Washington, DC.

Hausmann, R., D. Rodrik, and A. Velasco. 

2008. “Growth Diagnostics.” In The 

Washington Consensus Reconsidered: 

Towards a New Global Governance, ed. 

J. Stiglitz and N. Serra New York: Oxford 

University Press.

Helm, D. 2010. “Government Failure, RentSeeking, and Capture: The Design of Climate 

Change Policy.” Oxford Review of Economic 

Policy 26 (2): 182–96.

Julius, S. H., and J. D. Scheraga. 2000. “The 

TEAM Model for Evaluating Alternative 

Adaptation Strategies.” In Research and 

Practice in Multiple Criteria Decision 

Making, ed. Y. Y. Haimes and R. E. Steuer, 

319–30. New York: Springer-Verlag.

Kalkuhl, M., O. Edenhofer, and K. Lessmann. 

2012. “Learning or Lock-In: Optimal 

Technology Policies to Support Mitigation.” 

Resource and Energy Economics 34: 1–23.

Kubal, C., D. Haase, V. Meyer, and S. Scheuer. 

2009. “Integrated Urban Flood Risk 

Assessment: Adapting a Multicriteria Approach 

to a City.” Natural Hazards and Earth System 

Sciences 9 (6): 1881–95.

Kydland, F. E., and E. C. Prescott. 1977. “Rules 

Rather Than Discretion: The Inconsistency of 

Optimal Plans.” Journal of Political Economy

85 (3): 473–91.

Laffont, J.-J. 1996. “Industrial Policy and 

Politics.” International Journal of Industrial 

Organization 14 (1): 1–27.

———. 1999. “Political Economy, Information, 

and Incentives.” European Economic Review

43: 649–69.

Lempert, R. J., S. W. Popper, and S. C. Bankes. 

2003. Shaping the Next One Hundred Years: 

New Methods for Quantitative, Long-Term 

Policy Analysis. Santa Monica, CA: RAND 

Corporation.

Matthews, H. D., N. P. Gillett, P. A. Stott, and 

K. Zickfeld. 2009. “The Proportionality 

of Global Warming to Cumulative Carbon 

Emissions.” Nature 459 (7248): 829–32.

Meinshausen, M., N. Meinshausen, W. Hare, 

S. C. B. Raper, K. Frieler, R. Knutti, D. J. Frame, 

and M. R. Allen. 2009. “Greenhouse-Gas 

Emission Targets for Limiting Global Warming 

to 2C.” Nature 458 (7242): 1158–62.

OECD (Organisation for Economic Co-operation 

and Development). 2011a. Tools for Delivering 

on Green Growth. Paris: OECD.

———. 2011b. Towards Green Growth: 

Monitoring Progress: OECD Indicators. Paris: 

OECD.

PPCR (Pilot Program for Climate Resilience) 

Subcommittee. 2010. Strategic Program for 

Climate Resilience: Niger. Tunis: African 

Development Bank Group.

Qin, X. S., G. H. Huang, A. Chakma, X. H. 

Nie, and Q. G. Lin. 2008. “A MCDM–Based 

Expert System for Climate-Change Impact 

Assessment and Adaptation Planning: A 

Case Study for the Georgia Basin, Canada.”

Expert Systems with Applications 34 (3): 

2164–79.

Republic of Burundi. 2007. National Adaptation 

Plan of Action (NAPA), Ministry for Land 

Management, Tourism and Environment.

Rodrik, D.. 2005. “Growth Strategies.” In 

Handbook of Economic Growth. vol. 1, Part 

A, chapter 14, 967–1014. Elsevier. 

Smith, J. B., S. S. Lenhart. 1996. “Climate 

Change Adaptation Policy Options.” Climate 

Research 6: 193–201.

Transparency Transparency International. 2011. 

Global Corruption Report: Climate Change. 

London: Earthscan.

UNEP (United Nations Environment Programme). 

2011. “MC A4 C l i m ate: A P rac t ic a l 

Framework for Planning Pro-Development 

Climate Policies.” New York. http://www

.mca4climate.info/_assets/fi les/MCA4climate_

Summary.pdf.

U N FCCC (United Nations Framework 

Convention on Climate Change). 2002. 

WB_354_GG_CH07.indd 170 5/7/12 

2012-08-054_000000000000557
CRAFTING A GREEN GROW TH STRATEGY 171

Annotated Guidelines for the Preparation of 

National Adaptation Programmes of Action. 

Least Developed Countries Expert Group. 

http://unfccc.int/files/cooperation_and_

support/ldc/application/pdf/annguide.pdf.

Viguie, V., S. Hallegatte. 2012. “Trade-Offs and 

Synergies in Urban Climate Policies.” Nature 

Climate Change. doi:10.1038/nclimate1434.

Vogt-Schilb, A., and S. Hallegatte. 2011. 

“When Starting with the Most Expensive 

Option Makes Sense: Use and Misuse of 

Marginal Abatement Cost Curves.” Policy 

Research Working Paper 5803, World Bank, 

Washington, DC.

World Bank. 2010. World Development Report 

2010: Development and Climate Change. 

Washington, DC: World Bank.

———. 2011a. The Changing Wealth of the 

Nations. Washington, DC: World Bank.

———. 2011b. “International Support for LowEmissions Policy Implementation: Toward 

Greater Coherence.” Background Note for Low 

Emissions Development Policy Implementation 

Conference, Washington, DC, July 13.

WB_354_GG_CH07.indd 171 5/7/12 

2012-08-054_000000000000558
ECO-AUDIT

Environmental Benefits Statement

The World Bank is committed to preserving 

endangered forests and natural resources. 

The Office of the Publisher has chosen to 

print Inclusive Green Growth: The Pathway to Sustainable Development on recycled 

paper with 100 percent postconsumer fiber in 

accordance with the recommended standards 

for paper usage set by the Green Press Initiative, a nonprofit program supporting publishers in using fiber that is not sourced from 

endangered forests. For more information, 

visit www.greenpressinitiative.org.

Saved:

• 18 trees

• 7 million BTUs of 

total energy

• 1,876 pounds of net 

greenhouse gases

• 8,489 gallons of 

waste water

• 536 pounds of 

solid waste

WB_354_GG_CH07.indd 172 5/7/12 

2012-08-054_000000000000559
GG_i-xiv.indd ii 5/8/12 

2012-08-054_000000000000560
THE WORLD BANK

As the global population heads toward 9 billion by 2050, 

decisions made today will lock countries into growth patterns 

that may or may not be sustainable in the future. Care must be 

taken to ensure that cities and roads, factories and farms are 

designed, managed, and regulated as efficiently as possible 

to wisely use natural resources while supporting the robust 

growth developing countries still need. Economic development 

during the next two decades cannot mirror the previous two: 

poverty reduction remains urgent but growth and equity can 

be pursued without relying on policies and practices that foul 

the air, water, and land.

Inclusive Green Growth: The Pathway to Sustainable 

Development makes the case that greening growth is 

necessary, efficient, and affordable. Yet spurring growth 

without ensuring equity will thwart efforts to reduce poverty 

and improve access to health, education, and infrastructure 

services. Countries must make strategic investments and 

farsighted policy changes that acknowledge natural resource 

constraints and enable the world’s poorest and most vulnerable to benefit from efficient, clean, and resilient growth. Like 

other forms of capital, natural assets are limited and require 

accounting, investment, and maintenance in order to be 

properly harnessed and deployed. By maximizing co-benefits 

and avoiding lock-in, by promoting smarter decisions in 

industry and society, and by developing innovative financing 

tools for green investment, we can afford to do the things 

we must. 

ISBN 978-0-8213-9551-6

SKU 19551

2012-08-054_000000000000561
United Nations Environment Programme 

OVERVIEW OF THE REPUBLIC OF 

KOREA’S NATIONAL STRATEGY 

FOR GREEN GROWTH 

April 2010 

Prepared by the United Nations Environment Programme 

as part of its Green Economy Initiative 

2012-08-054_000000000000562
 Overview of the Republic of Korea’s National Strategy for Green Growth 2

CONTENTS 

Purpose of this report 4 

Acknowledgement 5 

Foreword 6 

Executive Summary 8 

1. Republic of Korea’s National Strategy for Green Growth 14 

1.1 Green Stimulus 15 

1.2 Five-Year Plan for Green Growth 16 

2. Key Aspects of the National Strategy and Five-Year Plan for Green Growth 18 

2.1 Climate Change 18 

2.1.1 Korean Green Growth plans and objectives 19 

2.1.2 Review 21 

2.2 Energy Efficiency 24 

2.2.1 Korean Green Growth plans and objectives 24 

2.2.2 Review 24 

2.3 Renewables and Nuclear Energy 26 

2.3.1 Korean Green Growth plans and objectives 26 

2.3.2 Review 28 

2.4 Transport, Cities and Fuel Efficiency 30 

2.4.1 Korean Green Growth plans and objectives 30 

2.4.2 Review 31 

2.5 Water and Ecological Infrastructure 32 

2.5.1 Korean Green Growth plans and objectives 33 

2.5.2 Review 35 

2.6 Green Technologies as Future Growth Engines 36 

2.6.1 Korean Green Growth plans and objectives 36 

2.6.2 Review 38 

3 Policy and Fiscal Reform 39 

3.1 Korean Green Growth plans and objectives 39 

3.2 Review 40 

4 Institutional Process and Participation 41 

4.1 Korean Green Growth plans and objectives 41 

4.2 Review 42 

5 Conclusion 43 

2012-08-054_000000000000563
UNEP April 2010 3

Endnotes 51 

Figures 

Figure 1: Republic of Korea’s green stimulus spending per sector 15 

Figure 2: GHG Emissions by Sector in 2005 (CO2, CH4, PFCs, HFCs, SF6, excl. land use change) 18 

Figure 3: CO2 intensity of economy, 1990-2005 (%) 19 

Figure 4: Projected growth in CO2 emissions under IEA reference and low-carbon scenarios (%) 21 

Figure 5: Energy Intensity in Republic of Korea and Selected IEA Countries, 1973 to 2010 25 

Figure 6: Share of total primary energy supply in the Republic of Korea in 2007 28 

Figure 7: Net hydroelectric power generation, 2006 (Billion Kw/h) 29 

Tables 

Table 1: Three strategies and 10 policy directions in Republic of Korea’s Five-Year Plan 17 

Table 2: Estimated economic effects of Republic of Korea’s Five-Year Plan 17 

Table 3: New and renewable energy (NRE) deployment in Korea: Status and projections 27 

Table 4: List of 27 core technologies in the Five-Year Plan 36 

Boxes 

Box 1: Republic of Korea’s 2020 midterm greenhouse gas (GHG) mitigation target 20 

Box 2: Carbon labelling system in the Republic of Korea 42 

Acronyms 49 

Annexes 

Annex 1: Investment in the Five-Year Plan 2009-2013 (US$ billion) 45 

Annex 2: Investment plan for the Four Major Rivers Restoration Project -Main Project (US$ bn) 45 

Annex 3: Investment plan for the Seomjin river and tributaries to the four major rivers (US$ bn) 46 

Annex 4: Issues to address in the assessment of the usefulness and feasibility of wetland 

restoration projects 46 

Annex 5: Other Ramsar Resolutions on the conservation of tidal flats and wetlands 47 

Annex 6: National and per capita CO2 emissions, 1990-2005 (excluding land use change) 48

2012-08-054_000000000000564
 Overview of the Republic of Korea’s National Strategy for Green Growth 4

Overview of the Republic of Korea’s National Strategy for Green Growth 

Purpose of this report 

This report is produced by the United Nations Environment Programme (UNEP) as part of 

its Green Economy Initiative. The purpose of this report is to present an overview of the 

Republic of Korea’s strategies and policy goals set under National Strategy for Green 

Growth announced in August 2008. The report also examines Korea’s Green New Deal 

launched in January 2009 along with the Five-Year Plan for Green Growth released in July 

2009. 

The objectives of the review are: 

1) to analyze the change in strategic thinking and economic policy in the Republic of 

Korea, towards green growth; 

2) to outline the plans that the Republic of Korea has put in place to achieve this vision; 

3) to discuss the general approach and elements of the Republic of Korea’s National 

Strategy for Green Growth relative to the issues outlined in UNEP’s publication “Global 

Green New Deal: A Policy Brief”, published in March 2009. 

2012-08-054_000000000000565
UNEP April 2010 5

Acknowledgement 

This report was prepared by the United Nations Environment Programme, as part of its Green 

Economy Initiative. The report benefited from consultations and communications with Korea 

Environment Institute; the Republic of Korea’s Presidential Committee on Green Growth; the 

Ministry of Environment; the Office of National River Restoration - Ministry of Land, Transport and 

Maritime Affairs; and the Republic of Korea Chamber of Commerce and Industry. 

Comments and suggestions were received from the Secretariat of the Organization for Economic 

Cooperation and Development (OECD), the Secretariat of the RAMSAR Convention on Wetlands, 

the International Labour Organization, and the Global Institute for Water, Environment and 

Health. 

We thank Professor Edward Barbier of Wyoming University and Professor Mike Young of the 

University of Adelaide for their review, comments, and suggestions. 

We are grateful to Nick Bertrand, John Christensen, Derek Eaton, Juhern Kim, Patricia Kim, Asad 

Naqvi, Mark Radka, Fulai Sheng, and Benjamin Simmons of UNEP for comments and suggestions. 

Jay Dowle and Lara Barbier provided an editorial review. 

Preparation of this report was directed by Pavan Sukhdev, Special Advisor and Head, UNEP Green 

Economy Initiative. Sylvie Lemmet, Director of UNEP’s Division for Technology, Industry and 

Economics; Khalida Bouzar, Deputy-Director, of UNEP’s Division for Technology, Industry and 

Economics, Steven Stone, Chief, Economics and Trade Branch and Young-Woo Park, Director, 

UNEP Regional Office for Asia and the Pacific provided guidance. The report was coordinated by 

Moustapha Kamal Gueye. Nidal Salim, Director, Global Institute for Water, Environment and 

Health contributed to the drafting. 

The views and opinions expressed in this report are the sole responsibility of the authors, and do 

not necessarily reflect those of the institutions and individuals indicated above. 

2012-08-054_000000000000566
 Overview of the Republic of Korea’s National Strategy for Green Growth 6

Foreword 

On 15 August 2008, at a national address on the 60th anniversary of the Republic of Korea, 

President Lee Myung-Bak announced a “low-carbon, green growth” strategy as a new vision to 

guide the nation’s long-term development. Six months later, in January 2009, the Government of 

the Republic of Korea responded to the deepening recession with an economic stimulus package 

equivalent to US$ 38.1 billion of which 80 per cent (the highest ratio among comparable packages 

from other G20 governments) was allocated to more efficient use of resources such as freshwater, waste, energy-efficient buildings, renewable energies, low-carbon vehicles, and the rail 

network. 

Meanwhile, in March 2009, UNEP released a Policy Brief on a Global Green New Deal, encouraging 

governments to use the opportunity presented by the massive fiscal response to the financial and 

economic crisis to direct public spending and private investment in green sectors such as energy 

efficient construction, renewable energies, low carbon transport, sustainable agriculture, and 

restoring ecological infrastructure, especially forests and freshwater bodies. The UNEP Policy Brief 

argued that an investment of 1 per cent of global GDP over the next two years could provide the 

critical mass of green investment needed to reduce carbon dependency and to seed a significant 

greening of the global economy. UNEP observed that the Republic of Korea’s Green New Deal 

stimulus package provided a model for its allocation of stimulus towards green infrastructure and 

lowering carbon dependency. 

More recently, on 6 July 2009, the Republic of Korea announced a Five-Year Plan for Green 

Growth to serve as a medium-term plan for implementing the National Strategy for Green Growth 

over the period 2009-2013. With total funding of US$ 83.6 billion, representing 2 per cent of GDP, 

this Five-Year Plan intends to turn the strategy into concrete and operational policy initiatives 

towards achieving green growth. Indeed, one of the interesting, but least reported, aspects of the 

current economic recovery efforts is that over two-thirds of global green stimulus has in fact been 

committed in Asia, led by China, the Republic of Korea, Japan, and Australia. 

By extending the Green New Deal into a full five-year development plan, the Republic of Korea has 

signalled that it believes that green growth is a strategy well beyond current economic recovery 

efforts, and that it wants to create a green economic future for the Republic of Korea. The 

Republic of Korea has committed itself to moving away from the traditional "brown economy" 

growth-at-any-cost model to a "green economy" model where long-term prosperity and 

sustainability are the key objectives. This commitment by the Republic of Korea has the potential 

of creating a domino effect on the other major Asian economies. 

This report shows that the Republic of Korea is more vulnerable than average to the effects of 

climate change, and more exposed than most to fossil fuel dependence. During 1912-2008, 

average surface temperatures in the Republic of Korea rose 1.74°C, which is above the world 

average. The Republic of Korea has shown the seriousness of its resolve on mitigation by 

announcing, unilaterally and, despite being a non-Annex I Party to the United Nations Framework 

Convention on Climate Change/Kyoto Protocol (i.e. not required to take on emissions reductions), 

a voluntary emission reduction targets. The Republic of Korea is 97 per cent dependent on fossilfuel imports out of their total energy demand, and thus highly exposed to oil price shocks, as well 

as any secular rise in oil prices due to the observed peaking of oil. In their new strategy, the share 

2012-08-054_000000000000567
UNEP April 2010 7

of renewable energy in total energy supply is planned to go up from 2.7 per cent (2009) to 3.78 

per cent (2013), and more than doubling to 6.08 per cent (2020). UNEP encourages an even more 

aggressive target to improve the Republic of Korea’s future energy security and to further support 

its strategy and plans for green growth. 

Freshwater scarcity has long been, and still is, a critical challenge facing Korea. With global 

warming likely to continue, the levels of flooding and drought are expected to worsen. The large 

investment (22.2 trillion Korean won (US$ 17.3 billion)) in the Four Major Rivers Restoration 

Project has, among its five key objectives, securing sufficient water resources against water 

scarcity, implementing comprehensive flood control measures, and improving water quality whilst 

restoring the river-basin ecosystems. UNEP encourages the stepping up of investment in 

ecological restoration, to address this key ecological scarcity as well as to prepare effective and 

cheap adaptation strategies for the onset of climate change reducing recurrent costs associated 

with periodic flooding. 

The overview presented in UNEP’s earlier “Interim Report” has been incorporated into this “Final 

Report” submitted by UNEP to the Government of the Republic of Korea. These reports were 

prepared to further UNEP’s strategy of supporting the Republic of Korea and other governments 

to engender deep change which targets a “Green Economy”: an economy of permanence, one 

which generates wealth and well-being, increases employment, reduces poverty and inequality, 

and does so without exhausting natural capital or creating ecological scarcities and climate risks. 

Pavan Sukhdev 

Special Advisor and Head UNEP Green Economy Initiative 

2012-08-054_000000000000568
 Overview of the Republic of Korea’s National Strategy for Green Growth 8

Executive Summary 

Transforming the global economy away from dependence on fossil fuels and unsustainable use of 

the Earth’s limited resources and achieving a transition towards a Green Economy1 is not an 

option; it is a fundamental requirement for the survival of our economic and social systems in the 

21st century. 

The Republic of Korea’s National Strategy and Five-Year Plan for Green Growth represent a major 

attempt to fundamentally transform the country’s growth paradigm from “quantitative growth” 

to low-carbon, “qualitative growth”. The green growth strategy contains encouraging policy goals 

and targets to tackle climate change and enhance energy security, create new engines of growth 

through investment in environmental sectors, and develop ecological infrastructure. The 

commitment to spend 2 per cent of gross domestic product (GDP) over the next five years, for 

investment in areas such as green technologies, resource and material efficiency, renewable 

energies, sustainable transport, green buildings, and ecosystem restoration, is a remarkable effort 

to reorient and refocus investment in the environment. 

The Republic of Korea responded to the economic crisis with a stimulus package that included a 

significant portion of green spending. In fact, it has been particularly efficient in the actual 

disbursement of its fiscal stimulus, with almost 20 per cent of funds disbursed at the end of the 

first half of 2009, compared to 3 per cent for most countries. 

Beyond its policies at the national level, the Republic of Korea is demonstrating engagement and 

leadership at the international level by boosting global efforts towards achieving a green 

economy. The Republic of Korea was instrumental in the adoption of a Declaration on Green 

Growth by the Ministerial Council Meeting of member countries of the Organisation for Economic 

Cooperation and Development (OECD) on 25 June 2009. It is also playing a key role in promoting 

an East Asia Climate Partnership. 

The bullet points below summarise the key action areas contained in the Korean Green Growth 

Strategy, the outcome of the review done by UNEP, and the main recommendations. 

Climate Change 

• Korean carbon emissions have been growing fast and are expected to grow much faster than 

the average for the OECD countries. Under the International Energy Agency’s (IEA) reference 

scenario, which assumes that the level of growth in carbon emissions continues from the 2002 

level, the Republic of Korea would increase its emissions by close to 35 per cent in 2025, 

compared to less than 15 per cent for the whole of the OECD countries. In the IEA’s lowemissions scenario, carbon emissions would grow by slightly less than 25 per cent in 2025, 

compared to 5 per cent for the whole of the OECD countries. 

• This makes is critical and urgent for the country to address the challenges posed by the level 

and pace of growth of carbon emissions and their consequences. Moreover, achieving a lowcarbon green growth will require an effort to reduce the carbon intensity of the Korean 

economy. 

2012-08-054_000000000000569
UNEP April 2010 9

• Given its status as a non-Annex I Party to the Kyoto Protocol to the United Nations Framework 

Convention on Climate Change (UNFCCC), the Republic of Korea’s announcement, in a 

voluntary and independent manner, of a national mid-term target to reduce its greenhouse 

gas (GHG) emissions by 30 per cent by 2020 from its otherwise projected growth is very 

encouraging. This is the highest reduction level that the IPCC has recommended for 

developing nations. 

• The creation of a carbon emission trading scheme in Korea can be an important step forward. 

But to be successful it should involve effective caps on emissions, a proper coverage of highemission sectors, and mechanisms for allocation of emission permits that encourage 

mitigation efforts. It is also important to design new systems to work in harmonious ways 

with the existing ones. 

• The Republic of Korea could enhance its capacity to respond and adapt to climate change 

impacts such as sea level rise, flooding, and heavy rains and reduced forest density by 

carefully assessing the capacity of measures proposed under the green growth plan to achieve 

such objectives. 

• In particular, UNEP encourages ecosystem-based adaptation strategies, including ecological 

restoration and riparian reforestation. Forests and wetlands that are prevalent in a large part 

of the Korean peninsula, if properly conserved and made more resilient, could play important 

roles in climate change adaptation, as natural defences against increasing hazards associated 

with climate change, such as storms, cyclones, flooding and sea-level rise, thereby alleviating 

future expenditures associated with disaster recovery. 

Energy Efficiency 

• Enhancing energy efficiency is particularly important given that manufacturing and energyintensive industries remain predominant in the Korean economy. With the world’s largest 

shipbuilding industry and the fifth largest steel production, industry in the Republic of Korea 

accounts for 27.9 per cent of GDP. This is well above the 17.4 per cent OECD average. 

• The 2006 OECD Environment Performance Review of Korea noted that “Korea is one of the few 

OECD countries which have not improved its energy intensity (energy use per unit of GDP) 

relative to 1990.” In its 2006 Energy Policy Review of Korea, the International Energy Agency 

(IEA) found Korea’s energy efficiency targets as not particularly ambitious. 

• The new targets set under the green growth plan to enhance efficiency from 0.290 TOE/US$’ 

000 in 2013 and to 0.233 TOE/US$’ 000 in 2020 appear to be an improvement on the targets 

in the General Energy Conservation and Efficiency Improvement Plan adopted in 2004. In 

comparative terms, however, energy intensity remains slightly above that of most IEA 

member countries. 

• The Republic of Korea could improve its position by seeking greater convergence with other 

OECD countries by gradually raising its energy efficiency targets, with a view to match at least 

the OECD average. 

2012-08-054_000000000000570
 Overview of the Republic of Korea’s National Strategy for Green Growth 10

• The Republic of Korea could improve compliance and results by monitoring voluntary 

agreements with industry, to ensure they achieve the expected targets, and consider 

alternative policies in case voluntary targets are not met. 

Renewables and Nuclear Energy 

• The Republic of Korea has daunting energy challenges. It is the world’s fifth largest importer of 

oil (2007) and the second largest importer of coal (2008). The green growth plan to increase 

the share of new and renewable energy in total energy supply from 2.7 per cent in 2009 to 

3.78 per cent in 2013, and 6.08 per cent in 2020 would double the share of renewables in 

energy supply. When renewable energy that will be generated from the 1 Million Green 

Homes Project is taken into consideration, the share of renewable energies in total energy 

supply would be 11 per cent in 2030. This will not only reduce the country’s carbon footprint 

but also dependence on volatile fuel imports. 

• In comparison with renewable energy targets adopted in many comparable countries, these 

Korean renewable energy targets appear to be relatively modest. However, the pace of 

change envisaged is remarkable considering that the country had increased its renewable 

energy supply only by 0.37 per cent in the past, from 2.06 per cent in 2005 to 2.43 per cent in 

2008. UNEP encourages an even more aggressive target to improve future energy security and 

to further efforts toward green growth. 

• Government will have to expand assistance for the national strategic technology development 

in such areas as solar and bio-energy technologies and pursue the target through various 

policy measures such as RPS, waste energy, and the 1 Million Green Homes Project. 

• UNEP recommends that the Republic of Korea ensure that further development of nuclear 

energy continues to remain in line with best international standards, and that transfer and 

export of nuclear energy technology contributes to enhancing the safety, stability, and 

economic viability of nuclear energy generation in other countries pursuing nuclear energy 

options. 

Transport, Cities and Fuel Efficiency 

• The transport sector accounts for 21 per cent of Korean energy consumption, with an annual 

average increase rate of 6.3 per cent. As the world’s fifth largest car manufacturer, the 

Republic of Korea has an important role to play in enabling greater efficiency in the 

automobile industry and significantly reducing emissions from the transport sector. 

• In the area of fuel economy, countries around the world, including OECD member countries 

and several other countries, have set fuel economy standards. While the targets and timelines 

vary, there is growing convergence towards a global average reduction of 50 per cent by 2050, 

which would be around 25km/litre. The Republic of Korea’s target of 15.1km/litre by 2016, 

from 11km/litre in 2009, is generally in that direction. 

• In promoting a technology and innovation-driven automobile industry, the Republic of Korea 

could formulate specific policies and measures to provide the physical and policy 

2012-08-054_000000000000571
UNEP April 2010 11

infrastructure in support of the development of a smart grid system by 2013 in order to 

encourage plug-in hybrid and electric vehicles. 

• The Republic of Korea could further promote a modal shift by ensuring that non-motorized 

transport modes are encouraged through the integration of cycling lanes within the larger 

transport infrastructure, especially public transport, both in urban and rural areas. 

• The Republic of Korea announced a GHG reduction target of 31 per cent by 2020 for the 

building sector, which is the highest level compared to any other country. The target includes 

strengthening energy standards by 30 percent by 2012, achieving passive level by 2017, and 

zero-energy housing by 2025. 

Water and Ecological Infrastructure 

• The Republic of Korea faces many water related challenges due to rapid economic growth and 

high population density. Reports indicate that current aqua-ecosystem protection 

mechanisms are insufficient. Climate change could exacerbate risks of water scarcity and 

increase the frequency and intensity of floods. 

• In response to these challenges, the Four Major Rivers Restoration as a part of the “Green 

New Deal” policy attempts to secure abundant water resources; create systems for flood 

control; improve water quality; restore ecosystems; and to create opportunities for rural 

development. These are important policy goals that could bring numerous positive effects to 

the national economy and people’s lives. 

• The attempt of ecological restoration of four rivers (Han, Nakdong, Geum and Yeongsan) and 

their tributaries is commendable, but its implementation needs to follow approaches that will 

result in effective “ecological restoration”, by making efforts to enhance the ecological 

integrity of river ecosystems, in order to achieve the important policy objectives pursued 

under this project. 

• UNEP recommends paying particular attention to compliance with the results of 

environmental impact assessments, and to ensuring the maintenance of key ecosystem 

functions, since the four major rivers are ecologically sensitive. 

Green Technologies 

• As seen, industry accounts for a large part of the Korean economy, in proportions that are 

much higher than in other OECD countries. A technological transformation that reduces the 

carbon intensity of industry, in particular in Korea’s manufacturing sector, is therefore a core 

component of a green growth strategy. 

• The Korean Green Growth Plan seeks to promote the development of 27 core green 

technologies that would provide future engines of growth to the Korean economy. UNEP 

encourages that the development of new green technologies goes hand-in-hand with the 

greening of the existing manufacturing sector by adopting specific policy goals and targets to 

reduce carbon intensity and energy intensity. 

2012-08-054_000000000000572
 Overview of the Republic of Korea’s National Strategy for Green Growth 12

• In addition, taking a more comprehensive reform of existing incentives and other support 

mechanisms in carbon and energy-intensive industries would complement and support efforts 

to spur green innovation. 

Policy and Fiscal Reforms 

• Carefully tailored, time-bound, and targeted fiscal and financial incentives are recognized as 

essential in facilitating the transition towards a green economy. 

• The Republic of Korea is taking important policy and fiscal measures with include a reform of 

energy pricing, the creation of a national carbon market, the adoption of tax reforms that 

lower the tax burden on consumption of low-carbon goods, and fiscal incentives to encourage 

investment in green sectors. 

• The creation of enabling conditions for low-carbon green growth must, however, be 

comprehensive. It is essential that harmful policies, including harmful subsidies in energy, 

transport, agriculture and fisheries that not only lead to economic and market distortions, but 

also undermine a proper accounting for natural capital, are reformed across the entire 

economy, or at least be part of a long-term plan. 

• In addition, fiscal and financial incentives need to be provided in ways that will not create 

further production and trade-related distortions at national and international level, so that 

new industries can be created on an economically and environmentally sustainable basis. 

Institutional Process and Participation 

• The inter-agency process led by the Presidential Committee on Green Growth is an innovative 

approach to planning that seeks better coordination of policy-making among ministries of 

finance, transport, energy, environment, land, and tourism, among others, so that investment 

decisions are guided by multi-sectoral processes. 

• The effort to clearly link the Korean Green Growth strategy with the design of the country’s 

mid-term target for reducing greenhouse gas emissions offers a strategically important 

opportunity to connect growth and development policy with measures to address climate 

change. If successful, this would prove that changes in economic systems can simultaneously 

deliver prosperity and respond adequately to the challenge of climate change. 

• At the same time, engaging the private sector and civil society as stakeholders and partners is 

fundamental. Civil society organizations in the Republic of Korea have been active participants 

in the debate on Green Growth; either by voicing their concerns or by contributing to 

analytical thinking with a view to making a contribution to the formulation and implementing 

of Green Growth policies. 

• The Republic of Korea should further promote a process of broad-based dialogue and 

consultation with a cross-section of all stakeholders in order to generate the necessary public 

support that could prove to be essential for the success of such transformational public 

policies. 

2012-08-054_000000000000573
UNEP April 2010 13

Learning for other Countries 

• Governments should carefully weigh up the economic, social, and environmental costs and 

benefits of different strategies and policy options, including “green investments” as a means 

of achieving a more green economy. This is particularly important in times of economic crisis, 

when jobs are under threat and industries are re-tooling. 

• Governments need to set clear and appropriate parameters and indicators in their pursuit of a 

green economic transformation, in order to ensure that their actions are guided by convincing 

sustainability goals and principles as well as environmental integrity. Such parameters and 

indicators should include, but are not limited to; measuring reduction in carbon dependency; 

reducing ecological scarcity; enhancing resource and material efficiency and decoupling 

growth and development from depletion of natural capital. Appropriate enhancements to the 

accounts of society may also be considered, in the form of adjustments to the System of 

National Accounts, to avoid over-dependence of accounting and reporting on the ubiquitous 

GDP yardstick which supports measurement of “quantitative” but not “qualitative” growth. 

• A significant increase in public and private investment in green sectors such as clean 

technologies, renewable sources of energy, sustainable agriculture, green construction, 

sustainable cities and transport, and ecological infrastructure is essential to jump start a 

significant process of change. 

• However, targeted investment alone, without concomitant domestic and international policy 

reforms will not lead to the enabling conditions needed for the emergence of a green 

economy. Governments should embrace a comprehensive portfolio of policy measures that 

remove harmful policies across their economies, including unsustainable subsidises and other 

incentives to resource extraction and pollution in areas such as energy, agriculture, fisheries, 

forestry, mining, and industry. 

• Developing countries and emerging economies face specific challenges of achieving 

sustainable economic growth, reducing poverty, and enhancing well-being, while moving their 

economies towards a green transformation. Balancing these equally important policy goals is 

at the core of the green economy. 

• Launching a process of transformative change that is able to re-orient resource allocation and 

set a long-term vision towards a green and sustainable path of growth and development 

requires bold leadership. 

• At the same time, building a solid foundation to such a process demands broad-based 

dialogue and effective participation and contribution by all relevant actors and stakeholders, 

in order to generate the necessary public support that can prove to be essential for the 

success of such bold and transformational public policies. 

2012-08-054_000000000000574
 Overview of the Republic of Korea’s National Strategy for Green Growth 14

1. The Republic of Korea’s National Strategy for Green Growth 

From 1962 up until the mid-1990s, the Republic of Korea implemented regular five-year economic 

development plans based on theories of a quantitative growth paradigm. These economic plans 

were developed on the premise that labour and capital were key factors of production in a 

quantitative growth paradigm. Extensive growth in labour and capital made extensive growth 

possible, but this often had the unintended consequence of fuelling the conflict between growth 

and quality of life, and led to increased pollution and environmental deterioration. 

Despite significant economic progress, the Republic of Korea is faced with numerous challenges 

and constraints that require reforms and innovative approaches in various areas of the economy 

and the environment. The Republic of Korea is the world’s sixth largest importer of petroleum and 

the second largest importer of liquefied natural gas (LNG). Overall it imports 97 per cent of its 

total energy requirements. Given its very high energy import dependence, the country is 

particularly vulnerable to fluctuations in energy prices and supplies. In 2008, when oil prices 

reached almost US$ 150 per barrel, Korea spent over US$ 140 billion on imports of energy. This 

represented over one-third of the country’s US$ 400 billion revenues from exports, making it 

critical for the Republic of Korea to explore other sources of energy supply. 

The rapid industrialization and urbanization has led to a significant pressure on the environment 

and natural resources such as forests and water resources, biodiversity and the urban 

environment. There is a need to alleviate such pressures on the environment by redefining growth 

strategies in ways that better integrate economic and environmental objectives. 

The Republic of Korea’s carbon emissions have increased significantly during the past 15 years, 

making Korea one of the countries with the fastest growth of carbon emissions. These causes and 

consequences of climate change require urgent responses both with regard to mitigation of, and 

adaptation to climate change, including by injecting supplementary investments to lessen the 

damage caused by climate change. 

In responding to these challenges, Korean leaders are focusing efforts on the development of 

environmentally-friendly industries and technologies in order to stimulate the economy through 

additional investment, innovation, and employment generation, while having minimal adverse 

effects on the environment. In this context, President Lee Myung-Bak announced a “low-carbon, 

green growth2

” strategy as a new vision to guide the nation’s long-term development on 15 

August 2008, during a national address on the 60th anniversary of the establishment of the 

Republic of Korea. The Korean government has presented its Green Growth Vision as an 

innovative development approach involving a fundamental shift in the country’s growth paradigm, 

from “quantitative growth” to “qualitative growth”. The new vision is based on a long-term 

strategy of green growth up to 2050, which is implemented through Five-Year Plans for Green 

Growth. 

Under the new paradigm of qualitative growth, the essential factors of production are new ideas, 

transformational innovations, and state-of-the-art technology. Economic growth based on these 

drivers is expected to generate substantially intensive, qualitative growth unlike the extensive 

quantitative growth of the past. This approach facilitates a mutually beneficial relationship 

2012-08-054_000000000000575
UNEP April 2010 15

between economic growth and the environment. The green growth strategy has three key 

objectives: 

1) Creating new engines of a higher and sustainable growth path by developing low-carbon, 

environmentally-friendly industries; 

2) Ensuring climatic and environmental sustainability; and 

3) Contributing to the international negotiations to fight climate change. 

This set of objectives provides the foundation for the green growth strategy which has been 

articulated through a substantial green stimulus package and a plan of action for the next five 

years. 

1.1 Green Stimulus 

The eruption of the financial and economic crisis in late 2008 resulted in a fall in the Republic of 

Korea’s growth rate below 4 per cent in the fourth quarter of 2008. This is a significant reduction 

when compared to an average rate of growth of between 7 to 8 per cent in the last ten years. 

Figure 1: Republic of Korea’s green stimulus spending per sector 

The Republic of Korea launched a 

“Green New Deal” on 6 January 2009 

as a means of stimulating job creation 

and revitalizing the economy. The 

stimulus package, which is comprised 

of a mix of financial, fiscal and 

taxation policies, amounted to a total 

of US$ 38.1 billion, the equivalent of 4 

per cent of Gross Domestic Product 

(GDP), to be implemented over the 

period 2009-2012. A total of US$ 30.7 

billion (about 80 per cent of the total 

stimulus package) was allocated to 

environmental themes such as renewable energies (US$ 1.80 billion), energy efficient buildings 

(US$ 6.19 billion), low carbon vehicles (US$ 1.80 billion), railways (US$ 7.01 billion) and water and 

waste management (US$ 13.89 billion)3

. 

A recent report noted that the Republic of Korea has been particularly efficient in the actual 

spending of its green stimulus, with almost 20 per cent of funds disbursed at the end of the first 

half of 2009, compared to only 3 per cent for most countries4

. 

In addition, the Korean Government introduced income and corporate tax cuts. Income tax was 

reduced by 2 per cent. The threshold of tax deductions was raised from 1 million to 1.5 million 

won (approx. US$ 1,284 – 1,784). Corporate tax will also be reduced from 25 per cent to 22 per 

cent in 2009 and to 20 per cent in 2010 for large companies and from 13 per cent to 11 per cent in 

2009 and to 10 per cent in 2010 for small and medium enterprises (SMEs)5. 

Republic of Korea's Green Stimulus Spending per 

Sector

20%

6%

23%

45%

6%

Renewable Energy Energy efficient buildings Low carbon vehicles

Railways Water and waste

Source: HSBC Global Research

2012-08-054_000000000000576
 Overview of the Republic of Korea’s National Strategy for Green Growth 16

These measures seem to have contributed to stimulating economic recovery. The Republic of 

Korea was one of the few member countries of the Organization for Economic Co-operation and 

Development (OECD) that registered a positive growth in the first quarter of 2009 (0.1 per cent). It 

recorded the highest growth rate in the second quarter (2.3 per cent)6

. 

The Korean Green New Deal represents a policy for creating jobs and revitalizing the economy. In 

the short-term, it aims to respond to the recent economic downturn, and in the mid- and longterm, to boost green growth7

. The Green New Deal will run through 2012, while the long-term 

strategy will continue to be pursued through five-year green growth plans; the first of which is 

implemented from 2009 to 2013. 

1.2 Five-Year Plan for Green Growth 

Beyond the green stimulus, the Republic of Korea appears to be making a major shift in orienting 

its economy towards a long-term strategy for green growth. In July 2009, the country adopted a 

Five-Year Plan for Green Growth (2009/2013) to serve as a medium-term plan for implementing a 

“low-carbon, green growth vision” announced a year earlier. 

The Five-Year Plan encompasses a number of projects that were previously announced as part of 

the Green New Deal. For instance, the Five-Year Plan integrates the Four Major Rivers Restoration 

Project previously designated as the main project in the Green New Deal, as well as the “Strategy 

for New Growth Engines”, announced by the Korean Government on 13 January 2009. As such, the 

Five-Year Plan is an amalgam of several existing and newly designed projects on green growth, 

articulated as part of a mid- to long-term strategy. In some respects, the Five-Year Plan has 

expanded the Korean Green New Deal in terms of overall government investment, the number of 

projects, and the set of policy and fiscal reforms envisaged. In other cases, it streamlined the 

number of existing projects thus focusing on projects the Korean Government deemed of primary 

importance, such as the promotion of green technologies. 

The plan represents a guide for national policy directions for the green growth vision, specifying 

future action plans on investments, target goals for each year, including the role of the various 

actors and stakeholders, such as ministries, along with other government agencies in pursuing the 

green growth strategy. Under the plan, US$ 83.6 billion, representing 2 per cent of GDP, will be 

spent in the area of climate change and energy, sustainable transportation and the development 

of green technologies (for details on the investment plan, see Annex 1). 

The Five-Year Plan outlines a set of three strategies, ten policy directions, and 50 core projects. 

The three strategies comprise measures for addressing climate change and securing energy 

independence; the creation of new growth engines; and the improvement of the quality of life. 

Legislators in Korea have been considering a “Basic Law for Green Growth”, which will provide the 

legal basis for Korea’s green growth strategy. On December 29, 2009, the Korean National 

Assembly adopted the Basic Law, which President Lee Myung-Bak signed into law on January 13, 

2010. 

2012-08-054_000000000000577
UNEP April 2010 17

Table 1: Three strategies and 10 policy directions in Korea’s 5-year green growth plan

Strategies Policy directions 

Reduce carbon emissions 

Decrease energy dependence and enhance energy self-sufficiency Measures for climate change and 

securing energy independence 

Support adaptation to climate change impacts 

Develop green technologies as future growth engines 

Greening of industry 

Develop cutting-edge industries 

Creation of new growth engines 

Set up policy infrastructure for green growth 

Green city and green transport 

Green revolution in lifestyle 

Improving quality of life and 

strengthening the status of the 

Country Enhance global cooperation on green growth 

Spending on the green growth plan is expected to stimulate production worth 182 to 206 trillion 

won (US$ 141.1 billion to US$ 160.4 billion) during 2009-2013 with a yearly average production 

inducement of 36.3 to 41.2 trillion won. This production inducement corresponds to 3.5 to 4.0 per 

cent of estimated 2009 GDP. The value-added inducement is calculated at 75.0 to 94.9 trillion won 

58.4 billion to US$ 73.9 billion) over the five years, with a yearly average of 15.0 to 19.0 trillion 

won (US$ 11.7 billion to US$14.8 billion). These estimates are based on two scenarios developed 

by the Presidential Committee on Green Growth, using input-output tables8

 to calculate the 

expected macro-economic gains from the country’s five-year green growth plan. 

Through the implementation of the Five-Year Plan, the Korean government expects to create jobs 

in green industries for 1.18 to 1.47 million people during the five years. In the design of the 50 

projects included in the Five-Year Plan, there appears to be a strategy focusing first on large 

infrastructural projects such as the Four Major Rivers Restoration Project. It is planned that 

investment will then be directed into the high-technology sectors (the 27 core technologies), 

which should provide future engines of growth for the country, making use of its highly-educated 

work force. 

Table 2: Estimated economic effects of Korea’s Five-Year Plan for Green Growth

Economic gains 

Production 

inducement 

(US$ Billion) 

Value-Added 

inducement 

(US$ Billion) 

Job creation 

(thousand people) Indicator/period 

Case 1 Case 2 Case 1 Case 2 Case 1 Case 2 

2009-2013 141.1 160.4 58.4 73.9 1,561 1,805 

Yearly average 28.3 32.1 11.7 14.8 312 362 

Ratio of Yearly Average 

to GDP (%) ** 3.5*

 4.0* 1.5*1.8*34.4** 39.8**

* Estimated 2009 GDP = 1,029.5 trillion won (= US$801.0 Billion) 

** Number of unemployed in 1st quarter 2009 (908,000) 

2012-08-054_000000000000578
 Overview of the Republic of Korea’s National Strategy for Green Growth 18

2. Key Aspects of the National Strategy and Five-Year Plan for 

Green Growth 

2.1. Climate Change 

Achieving an effective mitigation of greenhouse gas emissions and strengthening the capacity to 

adapt to climate change are two key aspects of the Republic of Korea’s strategy for green growth. 

Throughout 1912-2008, the average surface temperature in Korea rose by 1.74°C, which is above 

the world average. Moreover, for the last 40 years, the sea level around Korea (Jeju Island) rose by 

22 cm, which is three times higher than the global average sea level rise9. 

Korea’s carbon emissions 

both in total and per capita 

doubled between 1990 and 

2005, making it the fastest 

growing source of emissions 

in the OECD (see Annex 5). 

This has given raise to 

concerns about the climate 

change impacts of the 

country’s rapid pace of 

growth and industrialisation. 

On a sectoral basis, the 

Republic of Korea’s 

greenhouse gas emissions are 

concentrated in electricity 

and heat, manufacturing, 

transportation, and industrial 

processes. Energy-related 

emissions from all sectors 

cumulating to 456.6 Mt CO2e 

in 2005, account for the bulk of GHG emissions (see Figure 2). 

The Korean Presidential Committee on Green Growth estimates that under a business-as-usual 

scenario, the Republic of Korea’s carbon emissions are estimated to increase by 30 per cent by 

2020. 

Figure 2: GHG Emissions by Sector in 2005 (CO2, CH4, PFCs, 

HFCs, SF6, excludes land use change). 

Industrial Processes

10.5%

Transportation

15.8%

Electricity & Heat

36.4%

Manufacturing & 

Construction

17.1%

Other Fuel 

Combustion

13%

Fugitive Emissions* 

0.9%

Agriculture

3.3% Waste

3%

Source: Based on data from Climate Analysis Indicators Tool 

(CAIT) Version 6.0. World Resources Institute, 2009.

2012-08-054_000000000000579
UNEP April 2010 19

The carbon-intensity of the 

Korean economy has declined 

noticeably since 1997 (Figure 

3), but remains relatively high 

in comparison with other 

OECD member countries. 

In fact, compared to the IEA 

average, in 2004 Korea’s 

energy-related CO2 emissions 

per unit of GDP (a measure of 

CO2 intensity) was over 40 

per cent higher than Japan, 

nearly 23 per cent higher 

than the IEA Pacific average 

(Australia, Japan, Korea and 

New Zealand), and 15 per 

cent above the total IEA 

average10

. 

The Republic of Korea is a non-Annex I country, and as such is not bound by mandatory 

greenhouse gas reduction obligations under the Kyoto Protocol. However, as a growing economy 

and a member of the OECD, Korea is increasingly regarded as having an important role to play in 

the global effort to mitigate climate change. 

The OECD 2006 Environmental Performance Review of Korea stressed that the Republic of Korea’s 

carbon dioxide (CO2) emissions as well as its use of energy, pesticides, and fertilizers are among 

the highest in the OECD relative to GDP or area11. The Review recommended that the Republic of 

Korea set out in the next national plan on climate change “specific objectives and precise 

measures to be taken over the next few years to reduce the rate of growth of greenhouse gas 

emissions in order to participate actively in the UNFCCC process.” 

2.1.1. Korean Green Growth plans and objectives 

At the G-8 extended summit held in Toyako, Hokkaido, Japan in July 2008, President Lee Myungbak indicated that Korea would announce its mid-term emissions reduction goal in 2009. Korea 

announced on 4 August 2009 that it would voluntarily reduce its carbon emissions by 2020, from 

the 2005 level, using a target from three options. Under these scenarios, the country’s emissions 

would be reduced by 21, 27, and 30 per cent, compared to projected growth in 202012

. 

Figure 3: CO2 intensity of economy, 1990-2005 (%)

Source: World Resources Institute. The Climate Analysis 

Indicators Tool (CAIT).

2012-08-054_000000000000580
 Overview of the Republic of Korea’s National Strategy for Green Growth 20

Box 1: Korea’s 2020 midterm greenhouse gas (GHG) mitigation target 

Scenario 1: 21 per cent reduction from BAU (8 per cent increase from 2005 level) 

 Achieved through implementation of measures with short-term cost but potential 

long-term benefits. 

Scenario 2: 27 per cent reduction from BAU (Return to 2005 level) 

 Implementation of additional measures from scenario 1, which have a mitigation cost 

of less than 50,000 WON (approx. US$ 28) per ton of CO2. 

Scenario 3: 30 per cent reduction from BAU (4 per cent reduction from 2005 level) 

 Implementation of aggressive measures with high mitigation cost. 

Notes: 

 Korea’s 2005 GHG emission = 594 MtCO2e 

BAU = Business as Usual 

Not including offsets from forest management 

On 17 November 2009, the Presidential Committee on Green Growth announced a decision taken 

at a cabinet meeting presided over by President Lee Myung-bak to adopt the most ambitious of 

the three options considered, that is a 30 per cent reduction of future emissions. 

Along with a mid-term mitigation goal, climate change initiatives laid out in the five-year green 

growth plan include the adoption of a legal and regulatory framework, carbon emissions trading, 

the creation by 2010 of a national GHG inventory report system, in addition to raising public 

awareness. Other measures announced include the adoption of new auto emission standards, a 

waste-to-energy programme to reduce GHG emissions from waste materials, promoting lowcarbon transportation, the introduction of light-emitting diodes (LEDs); stricter heat insulation 

standards for buildings, and development of carbon capture and storage (CCS) technologies. A 

Basic Law on Low-carbon and Green Growth, which was adopted by the Korean National Assemble 

in December 2009, provides the basic legislation for Korea’s green growth strategy, including 

countermeasures on climate change. 

The carbon market is projected to be a major policy tool for GHG reductions in Korean Plan. It is 

further expected that the growing carbon market will create an innovative business environment 

for domestic and international industries. Although details of the carbon market, including the 

auctioning and/or pricing of carbon emission permits, and industries to be covered under the 

scheme, are yet to be defined, Korea is positioned to capitalize on this market. 

Forests cover more than two-thirds of the Korean land surface. The potential for reducing 

emissions from the forest sector is expected to be enhanced from 1.452 billion CO2 ton to 1.613 

billion CO2 ton in 2013. The Five-Year Plan also incorporates provisions for aid for forest projects in 

the Democratic People's Republic of Korea. 

2012-08-054_000000000000581
UNEP April 2010 21

Additionally, the establishment of a “Carbon Point System” will reward achievement at reducing 

carbon emissions or the purchase of low-carbon products with “carbon points”, which can be 

exchanged for discounts at public facilities. In October 2008, the Korean Ministry of Environment 

kicked off a public awareness campaign entitled “Green Start Movement”. The initial participants 

in the programme were officials from governmental agencies, local administrations, and civic 

groups. The Ministry seeks to expand the movement among the general public. 

The Five-Year Plan includes measures to undertake climate change risk assessment and to develop 

action plans to prepare for the likely impacts of climate change on infrastructure, health, water 

management, agriculture, biodiversity and housing, and options for dealing with them. Efforts will 

focus on improving the validity of climate change forecasting. 

Securing water resources is a critical dimension of climate change adaptation objectives. In that 

respect, around 1.3 billion cubic meters will be secured by 2012, as part of the Four Major Rivers 

Restoration Project (see discussion below). Ecological defence systems will be developed through 

the setting up of forest protection and forest ecosystem management programmes. The Republic 

of Korea aims to increase the capacity of national forest resources from 862 million cubic meters 

to 953 million cubic meters by enhancing forest protection and forest ecosystem management 

programmes. 

2.1.2. Review 

Given its status as a non-Annex I country to the Kyoto Protocol to the UNFCCC, the Republic of 

Korea’s announcement of a national mid-term climate change mitigation target is a voluntary step 

that is very encouraging. The Korean Government made it explicit that its carbon emissions 

reduction target was not conditional to the outcome of the United Nations Climate Change 

Conference in December 2009. It is a “unilateral and voluntary mitigation action to be undertaken 

without any foreign support.”13

 

Although the nature and 

level of the emissions 

reduction that Korea may 

have to undertake under 

the framework of global 

climate change 

negotiations are yet to be 

defined, it appears clearly 

that achieving the 

objectives of a low-carbon 

green growth will require 

an effort to reduce the 

carbon intensity of the 

Korean economy and the 

pace of growth of carbon 

emissions. 

Figure 4: Projected growth in CO2 emissions under reference and 

low-carbon scenarios of the IEA (%) 

Source: World Resources Institute. The Climate Analysis 

Indicators Tool (CAIT).

2012-08-054_000000000000582
 Overview of the Republic of Korea’s National Strategy for Green Growth 22

In 2004, Korea recorded a 105 per cent increase in its carbon dioxide emissions compared to the 

level of the 1990s; a rate second only to China's. Future emissions are expected to keep growing 

fast. Both in the reference scenario and low-emission-scenario, projections by the International 

Energy Agency indicate that the growth of carbon emissions in Korea will remain well above that 

of the average in the OECD countries. Under the reference scenario, which assumes that the level 

of growth in carbon emissions continues from the 2002 level, Korea would increase its emissions 

by close to 35 per cent in 2025, compared to less than 15 per cent for the whole of the OECD 

countries. In the low-emissions scenario, the Republic of Korea’s carbon emissions would grow by 

slightly less than 25 per cent in 2025, compared to 5 per cent for the whole of the OECD countries 

(see Figure 4). This makes it even more urgent and challenging to reduce GHG emissions, in order 

to achieve convergence with other OECD countries. 

There is growing convergence of views that achieving a global reduction target that would limit 

the global temperature increase since pre-industrial times below 2°C – the threshold beyond 

which irreversible and possibly catastrophic changes become far more likely – is essential. Parties 

to the UNFCCC and the Kyoto Protocol have announced emission reduction targets that are being 

considered as negotiations proceed. The EU has announced reducing its overall emissions to at 

least 20 per cent below 1990 levels by 2020, and expressed readiness to scale up this reduction to 

as much as 30 per cent under a new global climate change agreement if other developed 

countries make comparable efforts. 

The global effort to tackle climate change is guided, among others, by the principle of common 

but differentiated responsibilities and respective capabilities. As a result, the same level of 

emission reduction undertaken by Annex I Parties may not be demanded of countries such as the 

Republic of Korea. Nonetheless, it is clear that the more ambitious the target, the greater the 

contribution will be in responding to the urgency of action on climate change. Climate change 

poses serious challenges to Korea’s own future development, prosperity, and security against 

natural disasters and other climate risks that warrant the utmost attention to reduce greenhouse 

gas emissions. 

The Korean Government has stated that its 30 per cent GHG emissions reduction goal represents 

the highest reduction target recommended by the Inter-governmental Panel on Climate Change 

(IPCC) for developing countries. Nonetheless, the Korean Government recognizes that indicators 

such as economic growth, population growth, and assumptions on oil prices used to project future 

emissions under a reference scenario by 2020 may need to be adjusted to reflect changes in actual 

conditions by 2020. It is accordingly putting in place an inventory of emissions to ensure accuracy 

of data. 

On 29 December 2009, the National Assembly passed the Framework Act on Low-carbon Green 

Growth. On 6 April 2010, the government adopted the Enforcement Decree of the Framework Act 

on Low Carbon during the 15th Cabinet meeting. Both the law and its enforcement decree are due 

to come into effect on 14 April 2010. The Law includes a system of mandatory reporting of carbon 

emissions by all carbon and energy-intensive industries. It provides a basis for the creation of a 

carbon trading system. The Basic Law mandates a cap on emissions, but leaves out the operational 

structure, the method of allocation of emissions permits, the sectoral coverage, and other details 

for implementing laws to decide. 

2012-08-054_000000000000583
UNEP April 2010 23

The creation of a carbon emissions trading scheme is an important step forward. But its 

effectiveness will depend on the actual cap on emissions, the mechanism for allocation of 

emissions permits, and the sectoral coverage. In particular, whether the power generation sector, 

the steel and automobile industries and other high-emission sectors are covered or not, and 

modalities of granting them emission allowances, are likely to be determinant. For example, the 

potential that an increased share of renewable energy will lead to lower CO2 emissions can easily 

be diffused by a carbon trading scheme that allows power plants to receive free allowances or to 

operate under a very loose “cap” on emissions. 

As a non-Annex I Party to the Kyoto Protocol Korea is not bound by mandatory annual reporting 

and annual review of GHG emissions under the Kyoto Protocol national greenhouse gas inventory 

system. However, as for all non-Annex I Parties to the Kyoto Protocol, Korea is compelled to 

produce periodical reporting as part of national communications. A further step forward to the 

creation of a national GHG inventory system would be to consider articulating it on a measurable, 

reportable, and verifiable basis under existing or future global reporting schemes of the UNFCCC 

and Kyoto Protocol. 

The Five-Year Plan identifies adaptation to climate change as a key priority for Korea. A significant 

portion of the funds set for adaptation to climate change will be used as part of the Four Major 

Rivers Restoration Project (discussed below). For Korea and other countries in Asia, sea-level rise 

and associated flooding are among the most serious risks posed by climate change. The fourth 

assessment report by the IPCC indicates that for one metre sea-level rise with high tide and storm 

surge, an estimated 2,643 km2 or about 1.2 per cent of the total area of the Korean Peninsula 

could face inundation. Measures to respond to sea-level rise could take the form of protection, 

accommodation, and retreat. As substantial socio-economic activities and populations are 

currently highly concentrated in the coastal zones, protection should remain a key focus area in 

Asia. The IPCC reports suggest that coastal protection constructions in Asia for 5-year to 1,000-

year storm-surge elevations need to be considered. 

A number of measures proposed under the Four Major Rivers Restoration Project are meant to 

provide such defences. At the same time, forests and wetlands that are prevalent in a large part of 

the Korean peninsula, if properly conserved and made more resilient, could play important 

infrastructural functions, and provide natural defences against increasing hazards associated with 

climate change, such as storms, cyclones, flooding and sea-level rise. However, as a result of 

global warming, the coverage of broad-leaved Korean pine forests is projected to decrease by 20 

to 35 per cent, which may affect the capacity of forests to remain as effective natural defences 

against future climate impacts. This makes it critical that protection of forests be strengthened as 

expected effects of climate change will reduce forest density in parts of the country. 

The implementation of ecological restoration, through reforestation, including riparian 

reforestation, can significantly enhance resilience. The review of a large number of restoration 

projects under the UNEP-led study on The Economics of Ecosystems and Biodiversity (TEEB) 

suggests that through ecological restoration, resilience improvements can be found in three 

significant areas of adaptation: (1) freshwater security; (2) food security (both artisanal fisheries 

and small farms productivity); and (3) natural hazard risk management (cyclones, storms, floods, 

droughts)14

. 

2012-08-054_000000000000584
 Overview of the Republic of Korea’s National Strategy for Green Growth 24

2.2. Energy Efficiency 

A successful execution of the green growth strategy, such that it delivers low-carbon growth 

entails a decoupling of economic growth from carbon emissions and intensive-energy use. This, in 

turn, requires significant reductions in the carbon-intensity and the energy-intensity of growth. 

Korea faces challenges in that regard, given that despite important progress in the past several 

years, energy-intensity remains high in comparison with other OECD countries. The 2006 OECD 

Review noted that “Korea is one of the few OECD countries, which has not improved its energy 

intensity (energy use per unit of GDP) relative to 1990”. 

2.2.1. Korean Green Growth plans and objectives 

The Five-Year Plan involves measures targeting high-emission industries, through a “negotiated 

agreement” between the government and large energy-consuming companies in order to reduce 

energy consumption. The “negotiated agreement” will be applied to companies with an annual 

energy consumption over 500 thousand TOE in 2010, over 50 thousand TOE in 2011, and over 20 

thousand TOE in 2012. In the transport sector, there will be new standards to increase the fuel 

efficiency for automobiles and institute a reporting system on transport companies with highenergy consumption (further discussed in section 2.4 below). A ban on incandescent lights, which 

are considered to have a low energy performance, will be introduced by 2013 in order to promote 

the diffusion of light emitting diode bulbs (LEDs) with 3 to 5 times higher energy-efficiency. 

The electricity pricing system will be changed into a cost-based electricity pricing system. It is 

expected that the change in pricing will give a strong signal to corporate and household energy 

users which may translate in important behavioural change and energy savings. At the same time, 

there appears to be an attempt to minimize the effects of energy pricing on lower-income 

households, with an objective of reducing the number of households whose energy expenditure is 

worth 10 per cent of their total revenue from 7.3 per cent of total households in 2009 to 5.0 per 

cent in 2013. 

Overall, this set of measures for the development and dissemination of hybrid electric vehicles, 

the adoption of stringent standards on fuel efficiency, energy conservation and green buildings, 

and the promotion of investment in energy conservation facilities should increase total energy 

efficiency from 0.317 ton of oil equivalent TOE/US$’ 000 in 2009 to 0.290 TOE/ US$’ 000 in 2013 

and to 0.233 TOE/ US$’ 000 in 2020. 

2.2.2. Review 

Enhancing energy efficiency is particularly important given that manufacturing and energyintensive industries remain predominant in the Korean economy. With the world’s largest 

shipbuilding industry and the fifth largest steel production, industry in Korea accounts for 27.9 per 

cent of GDP which is well above the 17.4 per cent OECD average. 

In 2004, the Korean Government adopted a General Energy Conservation and Efficiency 

Improvement Plan, which set the objective of enhancing energy efficiency so that Korea’s energy 

intensity is reduced from 0.359 TOE/US$’ 000 in 2004 to 0.328 in 2007, and then to 0.294 by 

2012. In its 2006 Energy Policy Review of Korea, the International Energy Agency noted that 

2012-08-054_000000000000585
UNEP April 2010 25

Korea’s current energy efficiency targets were not high at that time and could be improved. The 

new targets set under the Five-Year Plan to enhance efficiency from 0.290 TOE/US$’ 000 in 2013 

and to 0.233 TOE/US$’ 000 in 2020 appear to be an improvement on the targets in the General 

Energy Conservation and Efficiency Improvement Plan. In comparative terms, however, energyintensity will remain slightly above that of most IEA countries (see Figure 5). 

The banning of inefficient light bulbs is in line with policies that are being implemented in a 

number of countries around the world. Measures to phase out incandescent lights have already 

been announced in countries such as Australia (by 2010), the Philippines (by 2010), and the 

member countries of the European Union (by 2012). In Denmark, the ban became operational as 

of October 2009. 

The focus of the effort to 

reduce energy intensity in 

the industrial sector will 

depend of the 

effectiveness of 

implementing voluntary 

agreements with 

industry. Whereas such 

an approach is not new in 

Korea, having been 

practiced in the past, 

more stringent 

monitoring may be 

required as Korea is in the 

process of setting 

measurable carbon 

reduction goals at the 

international level. 

This will make it 

necessary for the country 

to ensure that objectives 

and targets are met 

within the timeframe 

indicated, and that measures to reward compliance or otherwise sanction non-compliance are 

also part of the policy approach. 

The experience with collective voluntary approaches in the OECD countries suggests that failing 

such a stringent approach, “negotiated agreements” may lead to significant problems of freeriding, as firms manage to avoid the imposition of mandatory targets while maintaining a status 

quo on their emissions and energy-intensity. Therefore, it is critical that voluntary agreements 

with industry are monitored to ensure that they achieve the expected targets, and that alternative 

policies are considered in case voluntary targets are not met. The Korean Government’s newly 

announced “negotiated agreements” with measuring, reporting, and monitoring (MRV) processes 

will help in this regard. 

Figure 5: Energy Intensity in Korea and other Selected IEA 

Countries, 1973 to 2010 (TOE/US$’ 000 at 2000 prices and 

purchasing power parities) 

*excluding Luxembourg and Norway throughout the series, as 

forecast data are not available for these countries. 

Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2006; 

National Accounts of OECD Countries, OECD Paris, 2006; and 

country submissions (IEA, Energy Policies of IEA Countries: The 

Republic of Korea, 2006, Figure 8). 

2012-08-054_000000000000586
 Overview of the Republic of Korea’s National Strategy for Green Growth 26

Reforming energy prices so that they reflect true market costs is a natural complement to setting 

standards and targets on energy efficiency. The energy pricing reform discussed below will 

therefore play an important part in advancing the effort on efficiency improvement. 

2.3. Renewables and Nuclear Energy 

Korea has daunting energy challenges. It is the world’s fifth largest importer of oil (118 Mt of 

imports in 2007 and second largest importer of coal (100 Mt of hard coal imports in 2008)15. Given 

its high energy import dependence, Korea is seeking to expand its renewable energy generation 

through target setting and regulator measures. 

2.3.1. Korean Green Growth plans and objectives 

Under the Five-Year Plan, the share of new and renewable energy in total energy supply is 

expected to increase from 2.7 per cent in 2009 to 3.78 per cent in 2013, and 6.08 per cent in 2020. 

Renewable energy generation from the “1 Million Green Homes” project would increase this share 

to 11 per cent in 2030. 

In 2006 the amount of waste generated daily in Korea was approximately 320 thousand tons. 

Currently, energy generated from waste accounts for 76 per cent of the renewable energy in 

Korea. To develop such a potential, the Korean Government plans to implement measures for 

waste resources and biomass energy by utilizing waste energy, agricultural and marine biomass, 

forest biomass, and building low carbon and green villages. To generate energy from 3.86 million 

tons per year of combustible and organic waste resources, 48 environmental energy facilities will 

be installed by 2013. In addition, in order to recollect and reuse the heat from incinerators, 17 

remaining heat collecting facilities are planned to be built, and to recollect and reuse the landfill 

gas from landfill sites all over the country, 25 landfill gas recollecting facilities are planed to be 

built. A comprehensive system for treatment of waste resources from the industrial sector will be 

prepared by 2011. Technologies that are currently employed in the chemical industry will also be 

deployed to promote the development of renewable energy. To efficiently produce and utilize 

waste energy, integration and broad-banding of energy plants will be pursued by 2020. 

Nuclear energy has been an important source of energy supply in Korea. Under the green growth 

strategy, Korea seeks to further develop its nuclear technology. The country will gradually increase 

the proportion of nuclear energy in power generation from 24 per cent in 2009, to 27 per cent in 

2013, and to 32 per cent in 2020. 

The development of tidal power is a notable change in the country’s energy matrix. Starting 

virtually from nil in 2008, tidal power generation will expand to 0.9 per cent of total renewable 

energy generation in 2010 and 5.2 per cent in 2020, representing a 50 per cent annual increase. 

Hydropower generation is also expected to increase, with the construction of new dams and 42 

hydroelectric plants that would generate 278,471 MWh per year. Nonetheless, the share of 

hydropower in the total renewable energy supply will decrease, as a result of larger increases in 

the other renewable resources such as bioenergy, wind, tidal power, and solar PV and solar 

thermal. 

2012-08-054_000000000000587
UNEP April 2010 27

Other targets include building fourteen “Environment Energy Towns” in eight areas nationwide by 

2020. Such towns will employ efficient use of waste resources, green power, and biomass. In small 

regional communities, a total of 600 low-carbon green villages are expected to be built. The 

government plans to build one million energy-saving green homes by 2020 and to refurbish one 

million existing houses using new and renewable energy. 

Table 3: New and renewable energy (NRE) deployment in Korea: Status and projections (Unit: 

Thou. TOE, %) 

 2008 2010 2015 2020 2030 

Annual 

increase 

(%) 

Solar thermal 33 

(0.5) 

40 

(0.5) 

63 

(0.5) 

342 

(2.0) 

1,882 

(5.7) 20.2 

PV 59 

(0.9) 

138 

(1.8) 

313 

(2.7) 

552 

(3.2) 

1,364 

(4.1) 15.3 

Wind 106 (1.7) 220 

(2.9) 

1,084 

(9.2) 

2,035 

(11.6) 

4,155 

(12.6) 18.1 

Bioenergy 518 (8.1) 987 

(13.0) 

2,210 

(18.8) 

4,211 

(24.0) 

10,357 

(31.4) 14.6 

Hydro 946 

(14.9) 

972 

(12.8) 

1,071 

(9.1) 

1,165 

(6.6) 

1,447 

(4.4) 1.9 

Geothermal 9 

(0.1) 

43 

(0.6) 

280 

(2.4) 

544 

(3.1) 

1,261 

(3.8) 25.5 

Marine 0 

(0.0) 

70 

(0.9) 

393 

(3.3) 

907 

(5.2) 

1,540 

(4.7) 49.6 

Waste 4,688 

(73.7) 

5,097 

(67.4) 

6,316 

(53.8) 

7,764 

(44.3) 

11,021 

(33.4) 4.0 

Total 6,360 7,566 11,731 17,520 33,027 7.8 

Primary Energy 

(M TOE) 247 253 270 287 300 0.9 

Share (%) 2.58% 2.98% 4.33% 6.08% 11.0% 

Source: Korea Energy Management Corporation, April 2010. 

2012-08-054_000000000000588
 Overview of the Republic of Korea’s National Strategy for Green Growth 28

Apart from these technological options and targets, measures are being considered to create 

economic incentives and regulatory standards that will create a market for demand and supply of 

renewables. These include economic incentives to increase the use of solar energy in homes and 

small buildings. To increase the distribution of new and renewable energy, measures such as 

Renewable Portfolio Standard (RPS) and Renewable Fuel Standard (RFS) will be adopted from 

2012. The RPS will require large-scale energy plants to supply new and renewable energy, and the 

required supply share will be increased annually up to 10 per cent by 2022. 

By 2030, a smart grid system will be established comprising a network of electric power suppliers 

that incorporates advanced control and communication systems to efficiently manage power 

production and distribution. The information technology-based network would lead to more 

efficient overall energy production and consumption. Furthermore, it would allow renewable energy 

sources with variable production rates like solar and wind energy to be better utilized and make a larger 

contribution to energy supply. This system is expected to drastically reduce CO2 emissions and contribute to 

enhancing energy security. 

2.3.2. Review 

The Korean energy matrix is largely dominated by fossil fuels, accounting for over 80 per cent of 

total primary energy supply, the remaining consisting of nuclear energy mainly, and a little 

fraction of renewables (see Figure 6). As such, the new targets for renewable energy generation 

in the Republic of Korea are an important step forward in reducing the country’s reliance on fossil 

energy and energy import-dependence. Increased use of clean energies will also be critical in 

order to reduce carbon emissions in the industrial and residential sectors. 

Measures to improve energy 

and material efficiency, by 

converting waste into energy 

and expanding the potential 

in energy generated from 

biomass appear to be 

encouraging, given that these 

two sources of energy have 

shown a potential to increase 

energy generation from 

renewable sources. Together 

with hydroelectricity, they 

made up the bulk of 

renewable energy 

generation, accounting for 95 

per cent in the share of 

renewable energy in 2005. 

However, despite the importance of hydroelectricity in the Republic of Korea’s renewable energy 

supply, the volume of hydro-electricity generation remains relatively low when compared with the 

installed capacity in many other developed and developing countries (see Figure 7). In its search 

Figure 6: Share of total primary energy supply in the Republic 

of Korea in 2007 (excl. electricity trade) 

Source: IEA Energy Statistics, 2009.

2012-08-054_000000000000589
UNEP April 2010 29

for new and cleaner sources of energy, the Republic of Korea could further expand its potential to 

generate electricity from hydropower. 

There appears to be efforts in 

that direction. As part of the 

Four Major Rivers Restoration 

project, there are plans to 

construct 42 hydroelectricity 

generating plans. These 42 

hydroelectric plants with a 

total cost of around US$ 163 

millions are expected to 

generate 278,471 MWh per 

year. In addition to expanding 

the share of hydropower in 

total energy use, this will 

contribute to reducing about 

150 thousand tons of CO2 and 

replace 470 thousand barrels 

of oil for power generation 

per year. 

To respond to the increasing energy demand, Korean authorities plan to expand nuclear energy 

supply and also improve infrastructure and continuous development of capacities in accordance 

with the results of regular safety assessments. The Republic of Korea is the world’s sixth largest 

generator of nuclear electricity, accounting for 4.8 per cent of global generation16 

. 

In its 2006 Energy Policy Review of the Republic of Korea, the International Energy Agency 

concluded that Korea’s nuclear energy industry is a model for other countries. The report noted 

that the nuclear energy regulatory framework implemented by Korea is comprehensive and in line 

with best international practices17

. 

Overall, there appears to be an increased interest in nuclear power generation in OECD countries, 

in large part as a result of policies to address climate change. The IEA projects in its 450 ppm 

scenario that nuclear power along with renewable energies will have increased shares in the total 

global energy mix by 203018

. 

Typically, a number of environmental and social concerns arise with respect to the development 

of nuclear energy. They range from safe storage and long-term disposal of nuclear waste to risk of 

proliferation of nuclear weapons. The specific procedures for further developing nuclear energy 

should carefully consider these issues and devise ways to address them in a manner compatible 

with agreed international norms. Cautious and diverse measures to strengthen public trust on 

nuclear energy should also be considered. In addition, it is important to ensure that further 

development of nuclear energy continues to remain in line with best international standards, and 

that transfer and export of nuclear energy technology contributes to enhancing the safety, 

stability, and economic viability of nuclear power generation in other countries pursuing nuclear 

power options. 

Figure 7: Net hydroelectric power generation, 2006 (Bn Kw/h) 

Russia, 173.65

China, 431.43

Czech Republic, 

2.53

Korea, South, 3.43 Greece, 5.81

Poland, 2.02 Portugal, 10.89

Spain, 25.31

Turkey, 43.80

Japan, 84.90

India, 112.46

Source: Energy Information Administration, International 

Energy Annual 2006. 

2012-08-054_000000000000590
 Overview of the Republic of Korea’s National Strategy for Green Growth 30

The rapid expansion in tidal power will add to the country’s renewable energy supply. In addition 

to tidal power plants that are operating in Shiwa Lake, new plants are being proposed at 

Incheon/Ganghwa Bay and Garorim Bay. These proposed sites have large tidal ranges, up to 9 

meters, with extensive areas of intertidal mudflats that are of high ecological value, especially for 

waterbirds, in addition to their importance as fishery grounds. The tidal-flats around 

Incheon/Ganghwa include nationally designated protected areas such as the Republic of Korea’s 

Natural Monument No. 419 under the title of “Ganghwa tidal flat and Black-faced Spoonbill 

Breeding Sites.” The Republic of Korea has recognized the importance of natural resources such as 

tidal flats and bays in its 4th National Report under the Convention on Biological Diversity19. In 

pursuing efforts of conservation of such valuable ecosystems, the construction of the tidal power 

plants demand a careful assessment of its possible negative effects and ways to mitigate them. 

In 2002, the Republic of Korea adopted a fixed minimum price for renewable energy, which 

contributed to increase renewable energy use. New measures to regulate energy pricing and offer 

incentives for clean energy generation are important steps in creating an environment conducive 

to behaviour change and investment in clean energy. The launching of a RPS with attracting 

private investment and market based mechanism is an innovative trial. The experience in other 

countries could provide useful insights for the Republic of Korea’s efforts in this direction. 

Overall, the target of achieving 3.78 per cent share of renewable energies in 2013; 6.08 per cent in 

2020, and 11 per cent in 2030 appear to be modest in comparison with targets that exist in many 

comparable developed countries. However, the pace of change that is envisaged is remarkable 

considering that the country had increased its renewable energy supply only by 0.37 per cent in 

the past, from 2.06 per cent in 2005 to 2.43 per cent in 2008. 

In order to achieve the target of 11 per cent of renewable energy supply by 2030, the 

implementation of policies and measures set in the Five-Year Plan will be essential. In addition, to 

expand renewables in mid- and long-terms, new renewable technology development and 

fostering the industry are very critical. In this sense, national strategic technology development 

assistants in solar, wind, fuel cell, bio energy sectors should be increased further. 

2.4. Transport, Cities and Fuel Efficiency 

The Intergovernmental Panel on Climate Change (IPCC) has indicated that the global vehicle fleet’s 

fuel economy needs to improve by 50 per cent by 2050 to stabilize emissions from road 

transport20. The Global Fuel Economy Initiative (GFEI) launched by UNEP, together with the 

International Energy Agency, FIA Foundation (Fédération Internationale de l'Automobile), and the 

International Transport Forum, seeks to double the fuel economy, in line with IPCC and G8 

recommendations. As the world’s fifth largest car manufacturer, the Republic of Korea has an 

important role to play in enabling greater efficiency in the automobile industry and significantly 

reducing emissions from the transport sector. 

2.4.1. Korean Green Growth plans and objectives 

The Five-Year Plan sets regulatory standards on fuel efficiency and GHG emissions from the 

transport sector that will require a redesign of cars to either drive 17 kilometres per litre or cut 

greenhouse gas emissions below 140 grams per kilometre between 2012 and 2015. New fuel 

efficiency and emission rules will be applied to 30 per cent of automobiles sold in 2012, rising to 

100 per cent by 2015. 

2012-08-054_000000000000591
UNEP April 2010 31

Efforts are being made to develop renewable transport fuels. In this regard Korea plans to adopt a 

renewable fuel standard (RFS), which will make it mandatory for transport fuel suppliers to 

provide bio-diesel, bio-ethanol, and bio-gas for automobiles. Fuel suppliers will have to supply 3 

per cent of their transportation fuel from bio-diesel sources by 2012, and 7 per cent in 2020. 

An investment of 25.3 trillion won (US$ 19.7 billion) in green cities and further development of 

railway and other means of mass transport are expected to increase the role of public 

transportation to 55 per cent of total transport use by 2013. The passenger transport load of 

trains is set to increase from 19 per cent in 2009 to 30 per cent in 2013. 

Bicycle use will be promoted with the construction of 3,114 km of additional bicycle lanes 

nationwide between 2009 and 2018. About 1,700 km of bicycle lanes will be constructed along the 

waterfront pavements of the four major rivers. It is anticipated that this would increase the use of 

bicycles from 1.5 per cent in 2009 to 5 per cent of the modal split in 2013. 

2.4.2. Review 

The transport sector accounts for 21 per cent of energy consumption in Korea, with an average 

annual increase rate of 6.3 per cent. The number of vehicles is at 17 million, and increases by 13 

per cent a year21. Policies and measures to enhance sustainability in the transport sector are 

therefore critical to promoting green growth. 

In July 2006, the Korean government set long-term sectoral energy consumption reduction goals 

of reducing emissions by 7 per cent in the transport sector and by 6 per cent in the building sector 

by 2020, as compared with projected emissions22. The Five-Year Plan seeks to expand that effort 

with additional strategies and standards in the transport and construction sectors. 

The effort by the Korean Government to orient its car industry into technology, rather than costdriven, competition is considered to be an important strategic direction. As a leading car 

manufacturer, expanding investment in the development of low-carbon vehicles such as hybrid 

cars and electric vehicles deserve to be a high priority in Korea. Around US$1.80 billion was 

allocated to the promotion of low carbon vehicles in the Korean stimulus plan. In order to realize 

the full potential of greening the automobile industry, specific policies and measures will need to 

be defined, including the development of a smart grid system by 2013 as well as specific policies 

and measures to encourage plug-in hybrid and electric vehicles. 

There appears to be an effort in modal shift towards non-motorized transport systems with the 

construction of over 3000 km worth of cycling lanes. Experience suggests that to be effective, nonmotorized transport facilities such as cycling lanes need to be integrated into a larger network of 

non-motorized transport, public transport, and private vehicle. The creation of a long segment of 

bicycle lanes along the waterfront pavements of the four major rivers can promote sustainable 

forms of transportation in recreational activities. However, the larger potential, in particular for 

mitigating climate change, lies in a cycling network that allows users to use bicycles instead of 

personal cars for commuting for work, schooling and other urban mobility uses. Without the 

integrated planning of cycling lanes within the larger transport infrastructure, the full potential of 

promoting low-carbon transportation may not be realized. 

2012-08-054_000000000000592
 Overview of the Republic of Korea’s National Strategy for Green Growth 32

In the building sector, the retrofitting of the existing buildings stock has proved to be an effective 

way of reducing energy consumption in the residential sector and improve material efficiency. 

There are also important opportunities for new employment. In Germany, for instance, a 

programme on retrofitting the existing housing stock to improve energy efficiency has succeeded 

in retrofitting over 200,000 apartments, creating 25,000 new jobs and sustaining 116,000 existing 

jobs23. In its stimulus package, Korea has allocated US$ 6.19 billion to improving energy efficiency 

in buildings. The development of green buildings is also part of the 27 priority green technologies 

(discussed below). 

Currently available advanced building technologies can reduce residential energy use by 80 per 

cent compared to traditional designs24, while simple adoption of common technologies such as 

insulation can reduce energy with an estimated 30 per cent at a net negative life cycle cost. 

Experience from around the world indicates that, due to the fragmentation of the building sector, 

economic incentives are comparatively ineffective as compared to “command and control” 

measures such as green building standards and utility-demand control programmes. The Republic 

of Korea announced a GHG reduction target of 31 per cent by 2020 for the building sector. There 

are encouraging targets of strengthening energy standards by 30 percent till 2012, achieving 

passive level by 2017, and reaching zero-energy housing by 2025. 

2.5. Water and Ecological Infrastructure 

Amid rapid economic growth and high population densities, Korea continues to face challenging 

water-related issues. A 2006 Environmental Performance Review of Korea undertaken by the 

OECD25 concluded that much work must still be undertaken to reach the country’s water quality 

objectives for rivers and reservoirs. Biochemical oxygen demand remains the primary focus of 

these management efforts, while heavy metals and persistent contaminants have not so far 

received much attention. Moreover, the protection of aquatic species and biodiversity requires 

proactive management. 

Water scarcity is another challenge facing the Republic of Korea. Water scarcity becomes most 

acute when one considers demand and supply in the context of future socio-economic and natural 

changes that may occur. The socio-economic factor with the greatest potential impact is 

population growth; the natural factor of greatest concern is climate change. 

With global warming likely to continue, levels of flooding and drought are expected to worsen. In 

Korea, it is expected that the level of precipitation during the summer months will increase with 

almost no change of level in the winter. As temperatures are also projected to rise with global 

warming, more severe droughts may occur in the winter. 

The recurrence of flooding has significant costs to the Korean economy, some of which could have 

been saved by investing in disaster prevention measures. The annual flood damage was estimated 

at 170 billion won (US$ 132.3 million) in the 1970s. It reached 2.7 trillion won (US$ 2.1 billion) 

since the 2000s. The Republic of Korea currently spends an average of 5.3 trillion won (US$ 4.3 

billion) as annual investment in flood prevention and recovery expenses.26 In order to weather 

expected climate irregularities, additional water control policies will likely be necessary. 

2012-08-054_000000000000593
UNEP April 2010 33

2.5.1. Korean Green Growth plans and objectives 

In response to these challenges, the Five-Year Plan includes a project on the restoration of the 

Republic of Korea’s four major rivers. The Four Major Rivers Restoration Project was first 

announced as part of the “Green New Deal” policy launched in January 2009. It was later included 

in the Five-Year Plan released in July 2009. Its funding, a total of 22.2 trillion won (US$ 17.3 

billion), is reflected in the Five-Year Plan total investment27. 

The Four Major Rivers Restoration Project concerns not only the four main rivers – Han, Nakdong, 

Geum and Yeongsan – but also a number of related projects on tributaries. The overall project 

consists of three sets of projects: 1) the main project – the Han, Nakdong, Geum and Yeongsan 

rivers restoration projects; 2) projects on the 14 tributaries of the four major rivers; and 3) 

maintenance of local rivers and other small rivers that directly inflow into the four major rivers. 

These projects have five key objectives: 1) securing abundant water resources against water 

scarcity; 2) preparing well-coordinated measures for flood control; 3) improving water quality and 

restoring ecosystems; 4) creating multipurpose spaces for local residents; and 5) promoting 

regional development centred on rivers. 

 

The Four Major Rivers Restoration Project will aim at securing sufficient water volume by building 

16 weirs. These 16 weirs are expected to secure 800 million cubic meters of water. The project will 

increase peak water levels of 96 agricultural reservoirs so as to secure 250 million cubic meters of 

water. Additionally, the construction of 3 small and medium size multipurpose dams is expected 

to yield another 250 million cubic meters of water. 

Flood control measures involve an expansion of the water gates of tributaries, which would allow 

a quick water level decline and fast draining of flood. In addition, 2 flood-control areas and 3 

underflow areas of river sides will together expand the flood control capacity up to 920 million 

cubic meters of water. 

Additionally, the project seeks to ensure that, by 2012, 86 per cent of river reaches should 

maintain water quality (BOD less than 3ppm) by expanding sewage treatment facilities and 

establishing green algae reduction facilities. In terms of adaptation strategies to climate change 

and sea level rise, federal and local governments are bound to maintain an adequate level of 

salinity concentration to protect drinking water supply and other water usages. In order to 

monitor water quality, Korea’s Ministry of Environment has expanded the existing TeleMonitoring System (TMS) to 586 sewerage and waste water treatment facilities by the end of 

2009. This includes 323 sewerage facilities, 58 waste water treatment facilities, and 205 operating 

sites. 

On ecosystem restoration, an Eco-river Restoration Programme (ERP) initiated in 2008 is being 

implemented in the context of the Four Major Rivers Restoration Project. One of the ultimate 

goals of the programme is to restore indigenous and endangered aquatic species and maintain the 

quality of water and ecosystems. The other national programme to restore freshwater ecosystems 

is to develop an aquatic ecosystem-monitoring network. Since 2007, preliminary field surveys 

have been conducted at more than 540 locations. More than 929 km of national streams will be 

restored as part of the Four Major Rivers Restoration Project. A follow-up project will be planned 

by 2010 to restore about 120 local streams. More than 84 riparian wetlands will also be 

2012-08-054_000000000000594
 Overview of the Republic of Korea’s National Strategy for Green Growth 34

reconstructed. Riparian areas will be afforested or reforested, and will also be used for biomass 

production. 

Finally, the project seeks to support regional economic development. This is pursued through the 

creation of multipurpose spaces for cultural and touristic activities near rivers which are expected 

to contribute to job creation and local economic revitalization. Overall, it is expected that the 

project will create 340,000 jobs and generate an estimated 40 trillion won (US$ 31.1 billion) of 

positive economic effects. 

The implementation of the project follows three phases. In phase 1, approximately 16.9 trillion 

won (US$ 13.1 billion) will be spent on the “main project” dredging operations, and building weirs, 

small dams and embanking reservoirs on the four major rivers. Most of the main projects are 

planned to be completed by 2011; projects for small dams and reservoirs for storing water will be 

completed by 2012. In phase 2, another 5.3 trillion won (US$ 4.1 billion) will be invested on 

improving water flow and sewage systems of tributaries. Projects for the development of Seomjin 

River and other tributaries to the four rivers would be completed by 2012. Phase 3, includes 

restoring local and small rivers, and developing cultural and tourism attractions around the four 

major rivers. The Ministry of Culture, Sports and Tourism is involved in this phase. 

The Office of National River Restoration under the Ministry of Land, Transport, and Maritime 

Affairs is the lead agency for the project. In the implementation of the project, the office will 

operate in cooperation with the Ministry of Culture, Sports and Tourism, the Ministry for Food, 

Agriculture, Forestry and Fisheries, the Ministry of Environment and the Ministry of Land, 

Transport and Maritime Affairs. 

The Korean government conducted an environmental impact assessment (EIA) of the Four Major 

Rivers Restoration Project in order to assess the potential effects of the project and to devise 

response measures. The results of the EIA were announced on November 6, 200928

. 

On ecosystems, the assessment identified around 68 legally designated protected species and 

natural treasures that may be affected by the Four Major Rivers Restoration Project. The 

assessment concluded that direct impacts would be minimal if mitigation measures are 

implemented. Measures planned include an adjustment and reduction of the intensity of the 

construction work during the winter time when migratory birds arrive. Small size habitats such as 

small rivers corridors and food places will be created to provide sanctuaries and places for laying 

eggs. In addition, green belts will be constructed to provide additional habitats for animals to live 

in a natural environment. 

With regard to the natural environment, the assessment mainly addressed potential risks to 

wetlands that surround the four rivers. It was found that out of 100 wetland sites located in the 

project area, 54 wetlands may be directly or indirectly affected by the project. These 100 wetlands 

cover 12.5 per cent of the total area which will be affected by the project. Considering ecological 

functions of the wetlands, the Korean Ministry of Environment decided to conserve wetlands that 

have high ecosystem value. Parts of the wetland areas that are likely to be affected are 

compensated for through the construction of man-made wetlands. As a result, after the four 

major rivers projects, in total 84 alternative or new wetlands are expected to be created and 

ecological and environmental functions of the rivers are expected to be improved. In addition, 

2012-08-054_000000000000595
UNEP April 2010 35

lower river ways will be created with mild slopes of 1.5 ratio so as to lead to a natural creation of 

wetland areas after the completion of the projects. 

Regarding water quality, Korea’s National Institute of Environmental Research, which was 

entrusted with an assessment of water quality, concluded that water quality will generally be 

improved as a result of the project. It has been estimated that pollution from mud that may occur 

during the construction phase will not lead to weighted density (by standard of dry season) of 

more than 10 mg/litre. In the case that floating matters exceed 15 mg/litre, it is planned that the 

construction period and intensity will be adjusted and that additional pollution reduction facilities 

will be installed. As 570 million of cubic meters of dredged materials will result from the dredging 

of the rivers, there is plan to create a sedimentation basin and a diversion waterway will be 

installed at the storage yards of the dredged material in order to prevent secondary water 

pollution. The Korean government is considering options for a differentiated use of the dredged 

material according to the grain size and the level of contamination. 

The Korean Ministry of Environment has the responsibility to ensure follow-up and 

implementation of the conclusions of the IEA. In that process, the existing Environment Evaluation 

Board will be transformed into a Post-management Investigation Commission after a recomposition of its membership. The future Post-management Investigation Commission will be 

entrusted with monthly investigation, monitoring and inspection of the implementation of 

measures to mitigate identified environmental effects. 

2.5.2. Review 

Challenges facing Korea in relation to climate change and its impact on rainfall, flooding and water 

are indeed serious. The Four Major Rivers Restoration Project seeks to respond to these 

challenges. It is expected to bring numerous positive effects by providing significant ecological 

infrastructures for the national economy and people’s lives. However, a prudent ecological 

approach is necessary given the significant scale of the project, and the fact that the four major 

rivers are sensitive ecosystems. 

In line with the significance of the challenges that it seeks to address, the Four Major Rivers 

Restoration Project is a large project involving among others the building of 16 new weirs on the 

main streams of the four rivers and 2 new dams on their tributaries; the renovation of two 

estuarine barrages; the embankment of 87 existing irrigation dams; the strengthening of 377 km 

of river bank; and the dredging of 570 million cubic meters of sand and gravel from a total 691 km 

of the rivers. These imply major infrastructural work in the implementation of the project. 

Therefore, the attempt of ecological restoration of the four main rivers and their tributaries is 

commendable, but its implementation needs to follow approaches that will result in effective 

“ecological restoration” by making efforts to enhance the ecological integrity of river in order to 

achieve the important policy objectives pursued under this project. The study on The Economics 

of Ecosystems and Biodiversity’s (TEEB) review of a large number of restoration projects suggests 

that resilience improvements can be found in three significant areas of adaptation: (1) freshwater 

security; (2) food security (both artisanal fisheries and small farms productivity); and (3) natural 

hazard risk management (cyclones, storms, floods, droughts). An ecosystem-based adaptation 

could yield many of these benefits in the context of the Korean river restoration. 

2012-08-054_000000000000596
 Overview of the Republic of Korea’s National Strategy for Green Growth 36

The Republic of Korea showed commitment to international efforts to protect and conserve 

wetlands by hosting the 10th Meeting of the Conference of the Contracting Parties to the Ramsar 

Convention on Wetlands in 2008. Many of the resolutions and other outcomes of that conference, 

including Resolution X.19 “Wetlands and river basin management: consolidated scientific and 

technical guidance”29 and Resolution X.24 on “Climate change and wetlands,” are relevant 

instruments to consider30

. 

The follow-up and implementation of the conclusions and recommendations of the EIA done by 

the Ministry of Environment are also critical to ensure environmental integrity of the project. In 

addition, it is important that communication with relevant stakeholders continue to be 

strengthened in order to achieve an effective implementation of measures identified through the 

EIA and to develop appropriate measures for unexpected environmental impacts. 

2.6. Green Technologies as Future Growth Engines 

Technology is a crucial factor in promoting green growth. In the Korean green growth strategy, the 

development of green technologies is conceived as the pillar of the country’s economic 

transformation in the medium and long-term, after a first phase of investment in large 

infrastructure projects as part of the Green New Deal. 

2.6.1. Korean Green Growth plans and objectives 

The technology component of the green growth plan was derived from a “Strategy for New 

Growth Engines” announced by the Korean Government on 13 January 2009. The “Strategy for 

New Growth Engines” was reclassified as a part of the five-year green growth plan, focusing on 27 

core technologies. These 27 technologies are considered to have a potential to provide new 

engines for growth to the Korean economy. They are divided into four categories: (1) technologies 

for short-term intensive investment, (2) technologies for mid-term intensive investment, (3) 

technologies for long-term intensive investment, and (4) technologies for long-term gradual 

investment (see Table 4). 

To achieve this technological transformation, a substantial investment plan has been put in place, 

covering phases from research and development, deployment to commercialization of the 

technologies. A total investment of more than 2.8 trillion won (US$2.2 billion) is earmarked to 

fund research and development up to 2013. 

Projects in the area of information technology (IT) will contribute to enhancing the use of IT in the 

economy and society. Investment in such projects will amount to about 4.2 trillion won (US$ 3.3 

billion) by 2013. The Presidential Committee on Green Growth estimated that the projects would 

generate 7.5 trillion won (US$ 5.8 billion) in production, create 52,000 jobs during 2009-2013, and 

reduce 18 million tons of carbon emissions in 2013. 

The “greening” of key industries in the Korean economy is another important aspect of the 

envisaged technological shift. This involves a transformation of production processes in the steel, 

fibre and textile, petro-chemistry, and the shipbuilding industries to increase resource and energy 

efficiency. The Korean Government is focusing its efforts in this regard on investment in research 

and development and facility upgrades. 

2012-08-054_000000000000597
UNEP April 2010 37

Table 4: List of 27 core technologies in Korea green growth national plan 

Sector 27 Core Technologies 

1. Monitoring and modelling for climate change (4) Climate change 

2. Climate change assessment and adaptation (4) 

3. Silicon-based solar cells (1) 

4. Non silicon-based solar cells (4) 

5. Bio-energy (4) 

6. Light water reactor (1) 

7. Next-generation fast reactor (3) 

8. Nuclear fusion energy (3) 

9. Hydrogen energy R&D (3) 

Energy source 

technology 

10. High-efficiency fuel cell (3) 

11. Plant growth promoting technology (3) 

12. Integrated gasification combined cycle (3) 

13. Green cars (2) 

14. Intelligent infrastructure for transportation and logistics (4) 

15. Green city and urban renaissance (3) 

16. Green building (3) 

17. Green process technology (2) 

18. High-efficiency light-emitting diodes / Green IT (1) 

19. IT-combined electric machines (3) 

Efficiency improvement 

technologies 

20. Secondary batteries (2) 

21. CO2 capture, storage and processing (3) 

22. Non- CO2 processing (2) 

23. Assessment of water quality and management (2) 

24. Alternative water resources (2) 

25. Waste recycling (2) 

End-of-pipe technology 

26. R&D in monitoring and processing of hazardous substances (3) 

R&D in Virtual Reality 27. Virtual reality (2) 

(1) Technologies for short-term intensive investment; 

(2) Technologies for mid-term intensive investment; 

(3) Technologies for long-term intensive investment; and 

(4) Technologies for long-term gradual investment. 

By 2013, the government plans to build “Green Industry Complexes,” which will mainly use waste 

resources, green power, biomass, and other new and renewable energy sources. Finally, the 

government will encourage green partnerships between large and small and medium-sized 

companies. It is envisaged that this green partnership between the large companies and SMEs will 

help accelerate the development of advanced technologies for fuel efficiency and emissions 

reduction. 

There is an effort to develop a set of cutting-edge technologies, which have the potential to 

promote growth in service industries and minimize impact on environment and natural resources. 

2012-08-054_000000000000598
 Overview of the Republic of Korea’s National Strategy for Green Growth 38

These include robotics, Advanced Nano Products (ANP), IT-convergence high-tech products, 

biomedicines, and the telecommunications and information technologies and broadcasting 

services. Over the next five years, a total of 10.9 trillion won (US$ 8.5 billion) will be invested to 

cultivate development of these industries. In the area of telecommunication and broadcasting 

services, the Korean Government expects to increase the amount of exports by more than twofold from US$ 52 billion in 2008 to US$ 123.7 billion in 2013. 

2.6.2. Review 

Industry accounts for a large part of the Korean economy, in proportions that are much higher 

than in other OECD countries. A technological transformation that reduces the carbon intensity of 

industry, in particular in Korea’s manufacturing sector, must be a core component of a green 

growth strategy. There appears to be an approach relying on quick-return technologies, including 

those able to deliver end-of-the-pipe solutions to pollution and carbon emissions. At least 10 out 

of 27 core technologies identified are energy, material, and process efficiency improvement 

technologies. Many of these are specific to the automobile sector, including investment in the 

development of electric cars and intelligent infrastructure for transportation and logistics. 

In the development of new and renewable energy technologies that are dearly needed to reduce 

the country’s reliance on fossil energy, the Republic of Korea appears to be putting a clear 

emphasis on nuclear, solar photovoltaic and bioenergy technologies. Questions have been raised 

about the effectiveness of government support to specific industries and technologies, as opposed 

to promoting innovation based on competition among various possible technologies depending on 

their technical potential and economic costs and benefits. For example, silicon-based solar cells 

and non-silicon based solar cells figure among those technologies that will receive support for 

further development. In its 2006 review of Korea’s energy policies31, the International Energy 

Agency remarked that support provided for the development of solar photovoltaic through a feedin-tariff was more than six times that of wind. In this sense, the government is keen on gradually 

reducing such feed-in-tariffs in certain sectors and is planning to introduce RPS (Renewable energy 

Portfolio Standard) by 2012. The RPS is expected to generate better competition among the 

various renewable energy technologies without “picking winners”. 

It is not self-evident to what extent some of the technologies included in the list of 27 core 

technologies quality as “green technologies”, when referring to parameters such as climate 

change or carbon and energy-intensity. Certain technologies, including information technologies, 

virtual reality, and the development of a medicinal service industry, have therefore be considered 

in the context of a broader policy objective of promoting desirable qualitative growth and further 

diversification of the Korean economy into a knowledge and service economy. 

A clear linkage between investment in the development of green technologies, and the phasing 

out of support and subsidies to fossil-based and energy-intensive technologies may need to be 

considered to ensure a consistent approach to technological transformation. To that effect, fiscal 

reforms that previous reports by UNEP and other institutions have called for need to be 

reaffirmed (see section on fiscal and policy measure below). 

Overall, the development of green technologies is expected to generate 481,000 jobs by 2012 and 

1.18 million jobs by 2020. Green technologies are projected to reduce 130 million tons of carbon 

2012-08-054_000000000000599
UNEP April 2010 39

dioxide emissions by 2020, which corresponds to around a quarter of the country’s’ total GHG 

emission of 594 MtCO2e in 2005. 

3. Policy and Fiscal Reforms 

In March 2009, UNEP released a report on the “Global Green New Deal”32, which benefited from 

contributions from several intergovernmental and civil society organizations and experts. The 

report underscored the central importance of reform in the international and domestic policy 

architecture, in order to provide the enabling conditions for the emergence of a green economy. It 

recommended domestic policy reforms to substantially reduce carbon-inducing or regressive 

subsidies (e.g. fossil fuels) and instead to create positive fiscal and other incentives and 

appropriate taxes to encourage a greener economy. Domestic reforms were also discussed in 

order to deal with some common issues in land use and urban policy, public transport, and the 

pricing of carbon. 

The Global Green New Deal report encouraged governments and other decision makers to 

capitalize on the historic opportunity presented by the financial and economic crisis by refocusing 

public spending and private investment in green economic sectors, such as green construction, 

renewable energies, sustainable transport, and water management. The report argued that an 

investment of 1 per cent of global GDP (i.e. approximately US$ 750 billion) over the next two years 

could provide the critical mass of green infrastructure needed to reduce carbon dependency and 

to generate a significant greening of the global economy. 

3.1. Korean Green Growth plans and objectives 

The Republic of Korea’s green growth strategy includes a range of measures towards policy, 

regulatory and fiscal reforms aimed at supporting a transition to a green economy. The Five Year 

Plan attempts to provide policy signals on the effective control of carbon emissions. It contains 

measures to enhance energy and resource efficiency and to address ecosystem degradation. 

Climate change mitigation and adaptation, energy security, resource efficiency and waste 

management, water supply and water quality, flood control, and green technological innovation 

would be some of the measurable outcomes, were the plan to be successfully implemented. 

The Korean Government has committed to injecting into the greening of its economy a total of 

107.4 trillion won (US$ 83.6 billion) between 2009 and 2013. This represents 2 per cent of the 

Korean GDP and is twice the amount of investment suggested in the UNEP report. 

The investment plan for Green Growth projects was developed in close collaboration with relevant 

government agencies, in particular the Korean Ministry of Strategy and Finance. The Ministry of 

Ministry of Strategy and Finance has given assurance that funding for green growth projects will 

be given priority over other funding, in order to enable a swift implementation33

. 

Carefully tailored, time-bound, and targeted fiscal and financial incentives are recognized as 

essential in facilitating the transition towards a green economy. A range of incentives are to be 

offered for private sector investments. These include tax benefits to individual investors, the 

issuance of long-term and low-interest green bonds and savings, and the creation of a green fund 

aimed at facilitating access to credit by small and medium-sized enterprises. Individual investors 

2012-08-054_000000000000600
 Overview of the Republic of Korea’s National Strategy for Green Growth 40

will also be given tax exemptions on their interest income from “green bonds” and other financial 

products to be issued by banks. Credit guarantees for green projects will increase from 2.8 trillion 

won (US$ 1.9 billion) in 2009 to 7 trillion won (US$ 5.4 billion) in 2013. In addition, the 

government seeks to mobilize investment from pension schemes and to launch a green private 

equity fund. 

3.2. Review 

The OECD’s 2006 Environmental Performance Review of Korea noted that environmental 

expenditure in Korea – covering expenditure for pollution abatement and control, public water 

supply and nature protection – reached over 2 per cent of GDP, “a relatively high level by OECD 

standards”. The 2 per cent of GDP announced for the green growth plan represents a good 

indication of an effort to mobilize a sizable amount of resources for investment in green sectors 

and a significant re-orientation of resource allocation. 

There are preliminary indicators that the Korean private sector is supportive of these initiatives. A 

survey of 300 Korean companies undertaken by the Federation of Korean Industries revealed that 

70 per cent of the companies supported the green growth strategy and expected the strategy to 

improve the economy. Moreover, 41.4 per cent of the surveyed firms expressed a willingness to 

make investments in green growth projects. Similarly, the Korean Chamber of Commerce and 

Industry (KCCI) has, in general, expressed support for the government’s road map34

. 

The fiscal measures and incentives designed in the Korean Green Growth plan are instrumental in 

mobilizing green investments and can be expected to yield environmental benefits that would 

contribute to addressing national and global environmental challenges, while enhancing the 

quality of life and well-being of the Korean people. The Korean Presidential Committee on Green 

Growth estimates that spending US$ 83.6 billion on the Green Growth plan would stimulate 

production worth between US$ 141.1 billion and US$ 160.4 billion during 2009-2013 and create 

between 1.18 and 1.47 million jobs. 

Policy and fiscal measures contained in the green growth plan are encouraging, but they need to 

be complemented with further reforms, particularly in sectors that consume natural capital and 

contribute to ecological scarcity (e.g. resource extraction and polluting activities). The Republic of 

Korea’s indicators of carbon and energy intensity remain among the highest in the OECD. While 

important efforts are being made and more action is announced to enhance energy efficiency, 

these need to be complemented with further reforms of energy pricing, subsidies, and taxation. 

The Green Growth plan envisions a reform of energy pricing to reflect full cost, which represents a 

step forward. However, there does not appear to be a major attempt at reforming energy 

subsidies that keep distorting energy markets. A UNEP report that examined Korea’s energy 

pricing and taxation policy concluded that reforming energy subsidies and the system of energy 

taxation could yield environmental gains with minimal potential adverse social and economic 

effects35

.

 Following a trend common in most OECD countries, the share of agriculture in the Korean 

economy decreased from 9 per cent of GDP in 1986-88 to below 3 per cent of GDP in 2006-2008. 

However, the Republic of Korea remains among the countries with the highest rate of producer 

support as a percentage of GDP within the OECD (nearly three times the average percentage of 

2012-08-054_000000000000601
UNEP April 2010 41

support in the OECD)36. Korea’s CO2 emissions and use of energy relative to its GDP and land area 

are among the highest, while its use of pesticides and chemical fertilizers are the highest among 

OECD countries. Agricultural subsidies not carefully targeted may continue to support 

unsustainable forms of production and run counter to the social, economic, and environmental 

policy goals of the Green Growth strategy. 

Subsidies in the fishery sector continue to be a matter of concern. The 2006 Review by the OECD 

noted that the doubling of budgetary transfers to fishery policies since 2000 was mainly to 

preserve the marine environment. A recent Review of Fisheries in OECD Countries Policies found 

that half of transfers in 2004 (US$ 562 million) were used for fisheries infrastructure, such as the 

improvement of fishing ports; 10 per cent for resource enhancement; 10 per cent for the 

improvement of fish farms; and 10 per cent for the modernisation of fish markets37. However, it is 

also understood that in certain cases, fisheries subsidies meant for environmental conservation 

purposes may directly or indirectly contribute to over-capacity and over-fishing and should 

therefore be designed and implemented with caution. 

In addition, where countries have succeeded in establishing effective fishery management regimes 

at the domestic level, distant fishing, in which Korea is involved through fishery access 

arrangements, presents a risk that excess capacity is transferred to other fishing grounds that 

often lack effective management regimes. The net effect is growing pressure on global fishing 

stocks that inhibit efforts to achieve a sustainable level of fishing at the global level. 

4. Institutional Process and Participation 

The Republic of Korea formulated its green growth strategy by relying on an institutional approach 

that leverages on existing as well as new structures within government. There is an ongoing effort 

to involve other actors in the private sector, academia and civil society; as well as measures aimed 

at fostering education, awareness and behavioural change among the general public. 

4.1. Korean Green Growth plans and objectives 

The planning and formulation of the Republic of Korea’s Green Growth strategy and its five-year 

plan has brought about an inter-agency process that involves all government ministries. The 

Presidential Committee on Green Growth, established in 2009, is a fundamental pillar of this 

institutional set-up. With representatives from all government ministries, the private sector, 

academia, and civil society, the Committee has met four times since its creation and before the 

release of the Five-Year Plan for Green Growth. 

At each ministry, a Chief Green Officer, generally at Director-General level, is the designated focal 

point for interacting with the Committee. Korea Environment Institute, Korea Institute for 

Industrial Economics and Trade, Korea Institute of Public Finance, and scholars from economics 

and environment circles participated in the formulation of Korea’s Green Growth strategy. 

Korean policy makers have sought to foster understanding and awareness of the objectives of the 

Green Growth strategy among the general public and to induce public action to support those 

objectives. Educational programmes have been developed, that focus on providing information 

2012-08-054_000000000000602
 Overview of the Republic of Korea’s National Strategy for Green Growth 42

and raising awareness to encourage behavioural change in daily consumption patterns. Measures 

in this area include the expansion of a “carbon labelling system” started in January 2009 and the 

launching of a new “green lifestyle index”. 

Box 2: Carbon labelling system in Korea 

Since July 2008, the Korean Ministry of Environment has conducted a pilot project of carbon 

labelling on ten categories of products in order to promote low-carbon consumption. The 

carbon-labelling scheme was fully launched in January 2009. The purpose of the scheme is to 

show the overall amount of carbon dioxide and other greenhouse gases associated with the 

life-cycle of a product including production, distribution, use and disposal. Korea’s EcoProduct Institute under the Ministry of Environment is in charge of the certification of lowcarbon products. Manufacturers apply for the certification on a voluntary basis.

Changes in consumption patterns are also being promoted within government and the private 

sector. The Republic of Korea has adopted a green procurement law (the Green Consumption 

Enhancement Act) to increase the consumption of environmentally-friendly products by central 

and local government agencies. Private consumption of eco-friendly products is promoted 

through a “Carbon Cash-back System”, which grants “carbon points” to consumers purchasing 

low-carbon products. Carbon points can then be exchanged for concessions at public facilities. 

Additionally, a Carbon Point System is promoted to encourage households to save energy, water, 

and gas. About 400,000 households were participating in this program as of October 2009. There 

is an effort to stimulate the production of environmentally-friendly goods so as to supply products 

that respond to changing consumers choices. In that regard the Korean government plans to 

double the share of its eco-friendly agricultural products from 4.5 per cent in 2009 to 10 per cent 

in 2013. 

4.2. Review 

In the follow-up to the United Nations Conference on Environment and Development, held in Rio 

de Janeiro, Brazil, in 1992, and the adoption of Agenda 21, Korea established a Presidential 

Committee on Sustainable Development. The Committee included representatives of government, 

the private sector, academia, and civil society. It was seen as an innovative approach to promote 

multistakeholder involvement in the formulation and implementation of environment and 

sustainable development policies and was heralded by the United Nations in its review of the 

implementation of Agenda 21. 

The new Presidential Committee on Green Growth established as an institutional mechanism for 

the Green Growth Strategy is structured following a relatively similar model. There is an indication 

that this policy and institutional process has contributed to streamlining government action. 

Green growth related projects that were planned under the different ministries were integrated in 

ways that would enable focused policy direction and provision of financial and fiscal support in a 

more effective manner. For example, the Korean Ministry of Strategy and Finance reported that in 

2008, 267 Green Growth-related projects were submitted by 20 ministries and offices, with a total 

2012-08-054_000000000000603
UNEP April 2010 43

budget of 148 trillion won. The green growth planning process resulted in packaging these 

projects into nine core projects and 27 related industries that form the Green Growth plan. 

There appears to be an effort to link the Green Growth strategy with the formulation of a longterm strategy to address climate change. If successful, this would prove that changes in economic 

systems can simultaneously deliver prosperity and respond adequately to the challenge of climate 

change. 

Beyond central government agencies, there appears to an effort to promote green growth at the 

local level. Local governments in the Republic of Korea are developing their respective five-year 

plans on Green Growth, which would translate the national plan into local implementation. It is 

expected that through such plans, local authorities will be able to tailor green growth projects to 

the needs and priorities of their constituencies38

. 

A series of presentations and public hearings were undertaken to introduce the green growth 

strategy to the Korean public. The general public and consumers can be significant drivers of 

change and should be actively engaged in the implementation of the green growth strategy. 

Further promoting a process of broad-based dialogue and consultation with a cross-section of all 

stakeholders could prove to be essential for the success of such transformational public policies. 

5. Conclusion 

Despite remarkable economic progress, the Republic of Korea is still faced with numerous 

sustainable development challenges that require reforms and innovative approaches in various 

areas of the economy. The country’s energy challenges are enormous, as it imports 97 per cent of 

its total energy requirements. The rapid industrialization and urbanization have resulted in a 

significant pressure on the environment and natural resources such as forests and water 

resources, biodiversity and the urban environment. Freshwater scarcity remains a critical 

challenge facing Korea. 

The Republic of Korea’s carbon emissions have increased significantly during the past 15 years, 

making Korea one of the countries with the fastest growth of carbon emissions. Climate change 

presents risks of higher levels of flooding and drought, which are already costing the country 

billions of dollars in damage. Urgent measures are needed to address climate change both with 

respect to mitigation and adaptation. 

In responding to these challenges, the Republic of Korea has embarked onto a major attempt to 

fundamentally transform the country’s growth paradigm from “quantitative growth” to lowcarbon, “qualitative growth”; from an economy that is based on extensive growth in labour and 

capital to an economy driven by investment in natural capital assets, transformational innovations 

and state-of-the-art technology. 

The Republic of Korea responded to the financial and economic crisis in January 2009 with an 

economic stimulus package equivalent to US$ 38.1 billion of which 80 per cent was allocated to 

more efficient use of resources such as freshwater, waste, energy-efficient buildings, renewable 

energies, low-carbon vehicles, and development of the rail network. Beyond this immediate 

response to the crisis, the Korean Government has initiated a new plan to achieve transformative 

2012-08-054_000000000000604
 Overview of the Republic of Korea’s National Strategy for Green Growth 44

change through a Five-Year Plan for Green Growth. The Korean National Strategy for Green 

Growth has set ambitious goals for addressing climate change, enhancing energy and material 

efficiency, developing renewable sources of energy, promoting sustainable forms of 

transportation, investing in water and ecological infrastructure, and promoting a new set of green 

technologies as future engines of growth. It is significant in size, mobilising over US$ 83 billions or 

2 per cent of GDP over five years. 

The Republic of Korea is equally taking important steps in the area of policy and pricing reforms by 

creating a new carbon market, reviewing energy pricing, and expanding incentives for 

environmentally-friendly businesses and consumer behaviour. The country’s unilateral decision to 

set a national GHG emissions reduction target is an indication of the seriousness of its resolve to 

respond to the challenge of climate change and to contribute to the global effort to address this 

challenge. 

This report shows that these measures are encouraging steps in creating a policy architecture that 

could stimulate green investment and contribute to making such investment economically viable. 

UNEP encourages the stepping up of investment in addressing the key ecological scarcities facing 

the Korean society and economy, and to fuel a new dynamism that reorients the economy 

towards a green path of growth and development. To that effect, as outlined in the previous 

sections of this report, UNEP encourages further policy, regulatory and fiscal reform in order to 

remove existing policy and market distortions in areas such as energy, agriculture, and fisheries. 

UNEP also encourages a careful assessment of the economic, social, and environmental costs and 

benefits of different strategies, policy options, or choice of projects so as to minimise potentially 

negative effects and maximise sustainable development gains. In that regard, effective use of 

environmental and sustainability assessment is warranted, given the scale and nature of certain 

green growth projects relating to highly sensitive ecosystems. 

Achieving the fundamental changes pursued in the Korean green growth strategy requires a 

strong government commitment, but equally necessitates positive engagement of the private 

sector and civil society as stakeholders and partners. UNEP encourages a process of broad-based 

dialogue and consultation with a cross-section of all stakeholders in order to generate the 

necessary public support that could prove to be essential for the success of such transformational 

public policies. 

2012-08-054_000000000000605
UNEP April 2010 45

6. Annexes 

Annex 1: Investment in the Five-Year Plan (2009 – 2013) in billion US$ 

Amount of investment 

Total 2009 2010-11 2012-13 Category of action plan and policy direction 

83.6 13.6 37.6 32.4 

[1] Measures for climate change and securing 

energy independence 44.3 6.7 22.7 14.9 

1. Reduce carbon emissions 4.4 0.8 1.7 1.9 

2. Decrease energy dependence on oil 

and enhance energy self-sufficiency 11.6 2.2 4.4 5.1 

3. Support adaptation to climate change 

impacts 28.3 3.7 16.7 7.9 

[2] Creation of new growth engines 22.3 3.7 8.3 10.2 

4. Develop green technologies as future 

growth engine 8.8 1.6 3.3 3.9 

5. Greening of industry 3.6 0.6 1.4 1.6 

6. Develop cutting-edge industries 8.5 1.2 3.0 4.2 

7. Set up policy infrastructure for green 

growth 1.4 0.2 0.5 0.6 

[3] Improving quality of life and 

strengthening the status of the country 21.7 4.0 8.2 9.5 

8. Green city and green transport 19.7 3.7 7.4 8.6 

9. Green revolution in lifestyle 1.5 0.3 0.6 0.6 

10. Enhance national status as a global 

leader in green growth 0.5 0.1 0.2 0.2 

Note: Currency rate (= Korean Won / U.S. Dollar) = 1284.7 (June 30, 2009) 

Annex 2: Investment plan for the Four Major Rivers Restoration Project “Main project” (US$ 

billion) 

Investment 

Lead ministry 

Total 2009 2010 2011 2012*

Ministry of Land, Transport and Maritime Affairs 10.6 0.6 4.8 4.7 0.4 

Ministry of Food, Agriculture, Forestry and Fisheries 2.2 0.1 0.4 0.8 0.9 

Ministry of Environment 0.4 - 0.2 0.2 

Total 13.1 0.7 5.4 5.7 1.3 

(Note) Most of the main projects are planned to be completed by 2011. 

*

 Building small dams and embanking reservoirs for increasing water storage capacity will be 

completed by 2012. 

2012-08-054_000000000000606
 Overview of the Republic of Korea’s National Strategy for Green Growth 46

Annex 3: Investment plan for the Seomjin river and the tributaries to the four major rivers (US$ 

billion) 

Investment 

Lead ministry 

Total 2009 2010 2011 2012 

Ministry of Land, Transport and 

Maritime Affairs 1.3 - 0.4 0.5 0.4 

Ministry of Food, Agriculture, 

Forestry and Fisheries 0.2 - - 0.1 0.1 

Ministry of Environment 2.6 0.8 0.9 0.5 0.5 

Total 4.1 0.8 1.2 1.2 0.9 

Note: These projects are planned to be completed by 2012. 

Annex 4: Issues to address in the assessment of the usefulness and feasibility of wetland 

restoration projects 

Assessments for the selection of appropriate wetland restoration projects should include the 

following questions (adapted from the Annex to Resolution VII.17): 

a. Will there be environmental benefits (for example, improved water quantity and quality, 

reduced eutrophication, preservation of freshwater resources, biodiversity conservation, 

improved management of "wet resources", flood control)? 

b. What is the cost-effectiveness of the proposed project? Investments and changes should in the 

longer term be sustainable, not yielding only temporary results. Aim for appropriate costs in the 

construction phase and appropriate running costs for future maintenance. 

c. What options, advantages or disadvantages will the restored area provide for local people and 

the region? These may include health conditions, essential food and water resources, increased 

possibilities for recreation and ecotourism, improved scenic values, educational opportunities, 

conservation of cultural heritage (historic or religious sites), etc. 

d. What is the ecological potential of the project? What is the present status of the area in terms 

of habitats and biological values, and in particular will any current features of wetland 

conservation or biodiversity importance be lost or damaged? How is the area expected to develop 

with respect to hydrology, geomorphology, water quality, plant and animal communities, etc? 

e. What is the status of the area in terms of present land use? The situation will differ widely 

between developed countries, countries with economies in transition, and developing countries, 

and within such countries depending on local circumstances, with respect to the objectives of 

restoration and rehabilitation. In particular, marginal lands yielding few benefits in the present 

situation can often be improved. 

f. What are the main socio-economic constraints? Is there a positive regional and local interest in 

realising the project? 

g. What are the main technical constraints? 

2012-08-054_000000000000607
UNEP April 2010 47

Source: Principles and guidelines for wetland restoration (Resolution VIII.16). "Wetlands: water, 

life, and culture" 8th Meeting of the Conference of the Contracting Parties to the Convention on 

Wetlands (Ramsar, Iran, 1971) Valencia, Spain, 18-26 November 2002. Box 2. Issues to address in 

the assessment of the usefulness and feasibility of wetland restoration projects 

Annex 5: Other Ramsar Resolutions on the conservation of tidal flats and wetlands 

Res VII.21 “Enhancing the conservation and wise use of intertidal wetlands” 

http://www.ramsar.org/pdf/res/key_res_vii.21e.pdf 

Para. 11: CALLS upon Contracting Parties to document the extent of loss of intertidal wetlands 

that has occurred in the past and to inventory those intertidal wetlands which remain, 

and their conservation status; 

Para. 14: FURTHER URGES Contracting Parties to identify and designate as Wetlands of 

International Importance a greater number and area of intertidal wetlands, especially 

tidal flats, giving priority to those sites which are important to indigenous people and 

local communities, and those holding globally threatened wetland species, as 

encouraged by Resolution VII.11; and 

Res X.22 “Promoting international cooperation for the conservation of waterbird flyways” 

http://www.ramsar.org/pdf/res/key_res_x_22_e.pdf 

Para. 22: WELCOMES the statement by the Republic of Korea to the 35th meeting of Ramsar’s 

Standing Committee that intertidal mudflats should be preserved and that no large-scale 

reclamation projects are now being approved in the Republic of Korea, and 

ENCOURAGES all Contracting Parties in their efforts to protect such habitats in future 

and to monitor them and mitigate any past development impacts on or losses to them. 

Res VIII.4 “Principles and guidelines for incorporating wetland issues into Integrated Coastal 

Zone Management (ICZM)” 

http://www.ramsar.org/pdf/res/key_res_viii_04_e.pdf

Para. 14: Urges Contracting Parties to ensure that coastal wetlands and their values and functions 

for human well-being, including their role in mitigating the impacts of climate change 

and sea-level rise and their importance for the conservation of biological diversity are 

fully recognized in planning and decision-making in the coastal zone, including through 

ICZM initiatives. 

2012-08-054_000000000000608
 Overview of the Republic of Korea’s National Strategy for Green Growth 48

Annex 6: National and per capita CO2 emissions, 1990-2005 (excluding land use change) 

 

Source: World Resources Institute. The Climate Analysis Indicators Tool (CAIT).

2012-08-054_000000000000609
UNEP April 2010 49

ACRONYMS 

ANP Advanced Nano Products 

BOD Biological Oxygen Demand 

CAIT Climate Analysis Indicators Tool 

CCS Carbon Capture and Storage 

CH4 Methane

CO2 Carbon dioxide 

GDP Gross Domestic Product 

EPI Environmental Performance Index 

ERP The Eco-river Restoration Programme 

FIA Fédération Internationale de l'Automobile 

GFEI The Global Fuel Economy Initiative 

GHG Greenhouse Gas 

GND Green New Deal 

H2 Hydrogen 

HFCs HFCs 

IEA International Energy Agency 

ILO International Labour Organization 

IOE International Organisation of Employers 

IPCC The Intergovernmental Panel on Climate Change 

ITUC International Trade Union Confederation

Kwh kilowatt hour 

LED Light Emitting Diode 

LNG Liquefied Natural Gas 

MLTM Ministry of Land, Transport and Maritime Affairs 

MOCT Ministry of Culture, Sports and Tourism 

MOFAFF Ministry of Food, Agriculture, Forestry and Fisheries 

ODA Official Development Assistance 

OECD Organization for Economic Co-operation Development’s 

PFCs Perfluorocarbons 

PPM parts per million

RFS Renewable Fuel Standard 

2012-08-054_000000000000610
 Overview of the Republic of Korea’s National Strategy for Green Growth 50

RPS Renewable Portfolio Standard 

R&D Research and Development 

SF6 Sulfur Hexafluoride 

SMEs Small and Medium Enterprises 

TMS Tele-Monitoring System 

TEEB The Economics of Ecosystems and Biodiversity 

TOE Ton of oil equivalent 

UNEP United Nations Environment Programme 

UNESCAP United Nations Economic and Social Commission for Asia and the Pacific 

UNFCCC United Nations Framework Convention on Climate Change 

2012-08-054_000000000000611
UNEP April 2010 51

Endnotes 

 

1

 Green Economy: For UNEP, a “green economy” can be defined as a system of economic activities 

related to the production, distribution, and consumption of goods and services that result in 

improved human well-being over the long term, while not exposing future generations to 

significant environmental risks and ecological scarcities. A green economy is characterized by 

substantially increased investments in green sectors, supported by enabling policy reforms. These 

investments, both public and private, provide the mechanism for the reconfiguration of 

businesses, infrastructure and institutions, and the adoption of sustainable consumption and 

production processes. Such reconfiguration will lead to a higher share of green sectors in the 

economy, more green and decent jobs, reduced energy and material intensities in production 

processes, less waste and pollution, and significantly reduced greenhouse gas emissions. While it 

will be necessary to measure progress towards a green economy, it is counter-productive to 

develop generic green economy indicators applicable to all countries given differences in natural, 

human, and economic resources. Rather, focusing on the process of transitioning to a green 

economy acknowledges that countries will take many different paths in achieving this objective, 

and recognizes that a green economy in one country may look quite different than a green 

economy in another country. 

Green Jobs: Green jobs reduce the environmental impact of enterprises and economic sectors, 

ultimately to levels that are sustainable. Green jobs can include work in agriculture, industry, 

services and administration that contributes to preserving or restoring the quality of the 

environment. Green jobs are found in many sectors of the economy from energy supply to 

recycling and from agriculture and construction to transportation. They help to cut the 

consumption of energy, raw materials and water through high-efficiency strategies, to decarbonize the economy and reduce greenhouse‐gas emissions, to minimize or avoid altogether all 

forms of waste and pollution, to protect and restore ecosystems and biodiversity. Green jobs play 

a crucial role in reducing the environmental footprint of economic activity. This reduction is 

gradual and the different jobs contribute to different degrees. Workers manufacturing fuelefficient or hybrid cars, for example, contribute less to reducing emissions from transport than 

those working in public transport systems. Moreover, what is considered fuel-efficient today will 

no longer qualify in ten years’ time. The notion of a green job is thus not absolute, but there are 

“shades” of green and the notion will evolve over time (see UNEP, ILO, IOE, and ITUC (2008). 

Green Jobs: Towards decent work in a sustainable, low-carbon world. September, United Nations 

Environment Programme, accessible at: 

http://www.unep.org/greeneconomy/GreenJobs/tabid/1377/language/en-US/Default.aspx 

2

 The concept of “Green Growth” was first adopted at the “Ministerial Conference on Environment 

and Development” jointly hosted by the Ministry of Environment of the Republic of Korea and the 

United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) in 2005. It was 

initiated by Republic of Korea, the host country, and included in the outcome of the Conference, 

“Seoul Initiative Network on Green Growth”. Source: Korea Ministry of Environment. 

3 Robins, N., Clover, R. and C. Singh (2009). Building a Green Recovery. May. HSBC Global Research, 

New York.

4 Robins, N., Clover, R. and C. Singh (2009). A Global Green Recovery ? Yes, but in 2010. August. 

HSBC Global Research, London.

5 The Republic of Korea Ministry of Strategy and Finance. Briefing on the Green New Deal.

2012-08-054_000000000000612
 Overview of the Republic of Korea’s National Strategy for Green Growth 52

 

6

 OECD.Stat.Extracts. Key Short-Term Economic Indicators: Quarterly National Accounts (GDP 

Constant Prices). Data extracted on 9 September 2009 at 

http://stats.oecd.org/Index.aspx?DatasetCode=SNA_TABLE1 

7

 The Republic of Korea Ministry of Strategy and Finance. Briefing on the Green New Deal.

8

 2005 input-output tables, the most up-to-date input-output tables as of 2009, were used in the 

calculation. 

9

 National Emergency Management Agency, Republic of Korea. Accessible at: 

http://eng.greatkorea.go.kr/1/1-1.asp 

10 IEA (2006) Energy Policies of IEA Countries: The Republic of Korea. 2006 Review. Paris: 

International Energy Agency. http://www.iea.org/textbase/nppdf/free/2006/korea2006.pdf 

11 OECD (2006) Environment Performance Review of Korea. Paris: OECD. 

12 Korea.net, Seoul maps out plans to cut greenhouse gas emissions. 5 August 2009. 

http://www.korea.net/. 

13 Presidential Committee on Green Growth, Republic of Korea, “Republic of Korea sets its midterm greenhouse gas reduction goal for 2020”. Press Release, 17 November 2009. 

14 The Economics of Ecosystems and Biodiversity: http://www.teebweb.org/ 

15 IEA (2009). Key World Energy Statistics 2009. Paris; International Energy Agency. 

16 International Atomic Energy Agency, April 2010. 

17 IEA, 2006. Op. cit. 

18 IEA (2009). World Energy Outlook 2009. Executive Summary. Paris: International Energy Agency. 

http://www.iea.org/Textbase/npsum/weo2009sum.pdf 

19 Republic of Korea Fourth National Report to the Convention of Biological Diversity, May 2009, 

accessible at: http://www.cbd.int/doc/world/kr/kr-nr-04-en.pdf 

20 FIA Foundation. 50 By 50 – Global Fuel Economy Initiative. Available at: 

http://www.fiafoundation.org/Documents/Environment/50by50_leaflet_lr.pdf 

21 Korea Ministry of Land, Transport and Maritime Affairs, http://www.uncrd.or.jp/env/4thregional-est-forum/Presentations/07_BS2_Korea.pdf 

22 IEA, 2006. Op. cit. 

23 UNEP (2009). Global Green New Deal: A Policy Brief. 

http://www.unep.org/pdf/A_Global_Green_New_Deal_Policy_Brief.pdf 

24 UNEP, ILO, IOE and ITUC, 2008. Op. Cit. 

25 OECD (2006) Environment Performance Review of Korea. Paris: OECD. 

26 South Korea Ministry of Land, Transport and Maritime Affairs and the Ministry of Environment, 

2009 

27 The initial budget of 16.9 trillion won (US$ 13.1 billion) announced in January 2009 was 

increased to 22 trillion Won (US$ 17.3 billion) when the Five Year Plan was released in July 2009. 

Korean officials have explained this increase in the total funding of the project by its expansion 

beyond the four main rivers and the inclusion of the estuaries to the four rivers. 

28 The Environmental Impact Statement (EIS) was prepared by the Regional Construction 

Management Administration after collecting opinions from various stakeholders. The EIS includes 

the anticipated and assessed environmental impacts. The draft was shared with the local residents, 

environmental organizations, and relevant experts to gather diverse opinions for 20 days. The EIS 

was then submitted to the Regional Basic Environmental Offices, under the authority of the 

Ministry of Environment. To verify feasibilities of the EIS, Korea Environment Institute (KEI) and 

the Environmental Assessment Team comprised of independent experts were entrusted for 

review of the EIS. The final EIS agreement was set after the opinions of KEI were considered. The 

final EIS, agreed by the Regional Basic Environmental Offices and the Regional Construction 

2012-08-054_000000000000613
UNEP April 2010 53

 

Management Administration, covers four categories (ecosystem, natural environment, water 

quality, and others) in short. 

29 Res X.19 “Wetlands and river basin management: consolidated scientific and technical 

guidance”, includes under its Guidelines Box N the following: 

N3. Carry out Environmental Impact Assessment (EIA) and Cost Benefit Analysis (CBA) studies for 

land use or water development projects which may have significant impacts on rivers and 

wetlands, using independent multidisciplinary teams and in consultation with all stakeholders, and 

consider alternative proposals including the no-development option; and 

N4. Disseminate the findings of any EIA and CBA in a form that can be readily understood by all 

stakeholders. 

30 This Resolution recognizes the services that wetlands provide to climate change mitigation (Res 

X.24; para. 1), especially in acting as carbon stores (Res X.24; para. 8). 

31 IEA, 2006. Op. cit. 

32 Barbier, E.B. (2009). A Global Green New Deal. Report prepared for the Economics and Trade 

Branch, Division of Technology, Industry and Economics, United Nations Environment Programme. 

Geneva, April. Available at http://www.unep.org/greeneconomy/docs/GGND-ReportApril2009.pdf, UNEP (2009). Global Green New Deal: A Policy Brief. 

http://www.unep.org/pdf/A_Global_Green_New_Deal_Policy_Brief.pdf

33 Communication from a meeting with representatives of the Presidential Committee on Green 

Growth, 29 July 2009. 

34 Communication from a meeting with representatives of the Korean Chamber of Commerce and 

Industry, Business Institute for Sustainable Development on 30 July 2009. 

35 UNEP and United Nations Foundation (2004). Energy Subsidies: Lessons Learned in Assessing 

their Impact and Designing Policy Responses. 

http://www.unep.ch/etb/publications/energySubsidies/Energysubreport.pdf 

36 OECD (2009). Agricultural Policies in OECD Countries: Monitoring and Evaluation. Highlights. 

http://www.oecd.org/dataoecd/37/16/43239979.pdf 

37 OECD (2009), Review of Fisheries in OECD Countries Policies and Summary Statistics 2008. Paris: 

OECD. 

38 In a bid to familiarize central and local government officials with the concept of green growth, 

the Korean Prime Minister has led a series of 19 lectures on green growth to government officials. 

Five such lectures were directed at central government officials and 14 to local government 

officials. Altogether, over 5,000 central and local government officials attended those sessions. 

2012-08-054_000000000000614
 Overview of the Republic of Korea’s National Strategy for Green Growth 54

 

United Nations Environment Programme 

For further information 

Contact: 

UNEP DTIE 

 Economics and Trade Branch 

International Environment House 

11-13 Chemin des Anémones 

CH-1219 Châtelaine 

Geneva, Switzerland 

Tel: +41 22 917 8243 

Fax: + 41 11 917 8076 

E-mail: etb@unep.ch

www.unep.ch/etb 

2012-08-054_000000000000615
Please cite this paper as:

Jones, R. S. and B. Yoo (2011), “Korea's Green Growth

Strategy: Mitigating Climate Change and Developing New

Growth Engines”, OECD Economics Department Working

Papers, No. 798, OECD Publishing.

http://dx.doi.org/10.1787/5kmbhk4gh1ns-en

OECD Economics Department

Working Papers No. 798

Korea's Green Growth

Strategy

MITIGATING CLIMATE CHANGE AND

DEVELOPING NEW GROWTH ENGINES

Randall S. Jones, Byungseo Yoo

JEL Classification: Q, Q28, Q48, Q54, Q56, Q58

2012-08-054_000000000000616
Unclassified ECO/WKP(2010)54

Organisation de Coopération et de Développement Économiques 

Organisation for Economic Co-operation and Development 29-Aug-2011 

___________________________________________________________________________________________

English - Or. English 

ECONOMICS DEPARTMENT 

 

KOREA'S GREEN GROWTH STRATEGY: MITIGATING CLIMATE CHANGE AND DEVELOPING 

NEW GROWTH ENGINES 

ECONOMICS DEPARTMENT WORKING PAPERS No. 798 

by Randall S. Jones and Byungseo Yoo 

All Economics Department Working Papers are available through the OECD internet website at 

www.oecd.org/workingpapers 

JT03306199 

Document complet disponible sur OLIS dans son format d'origine 

Complete document available on OLIS in its original format 

Unclassified ECO/WKP(2010)54 English - Or. English

Cancels & replaces the same document of 28 July 2010 

2012-08-054_000000000000617
ECO/WKP(2010)54 

 2

ABSTRACT/RÉSUMÉ 

Korea’s green growth strategy: mitigating climate change and developing new growth engines 

Korea’s greenhouse gas emissions almost doubled between 1990 and 2005, the highest growth rate in 

the OECD area. Korea recently set a target of reducing emissions by 30% by 2020 relative to a “business 

as usual” baseline, implying a 4% cut from the 2005 level. Achieving this objective in a cost-effective 

manner requires moving from a strategy based on voluntary commitments by firms to market-based 

instruments. The priority is to establish a comprehensive cap-and-trade scheme, supplemented, if 

necessary, by carbon taxes in areas not covered by trading. Achieving a significant cut in emissions 

requires a shift from energy-intensive industries to low-carbon ones. Korea is strongly committed to 

promoting green growth through its Five-Year Plan, which envisages spending 2% of GDP per year 

through 2013. One challenge is to ensure that these expenditures are efficiently targeted so as to develop 

green technologies, while avoiding the risks inherent in industrial policy. 

This Working Paper relates to the 2010 OECD Economic Survey of Korea 

(www.oecd.org/eco/surveys/korea) 

JEL classification: Q28, Q48, Q54, Q56, Q58

Keywords: Korean economy; climate change; greenhouse gas emissions; Kyoto protocol; green growth; 

emissions trading system; environmental taxes; energy subsidies; renewable energy; Clean Development 

Mechanism; carbon tax; energy efficiency; R&D; green certificates; National Strategy for Green Growth. 

Stratégie de croissance verte pour la Corée : lutter contre le changement climatique 

et tirer parti des nouvelles sources de croissance 

Les émissions de gaz à effet de serre ont pratiquement doublé en Corée entre 1990 et 2005, soit la 

progression la plus forte dans la zone de l’OCDE. La Corée s’est récemment fixé un objectif de réduction 

des émissions de 30 % en 2020 par rapport au statu quo, ce qui représente une baisse de 4 % par rapport au 

niveau de 2005. Pour réaliser cet objectif avec le meilleur rapport coût/efficacité possible, il faut passer 

d’une stratégie reposant sur des engagements volontaires des entreprises à la mise en place d’instruments 

de marché. La priorité est d’établir un dispositif complet de plafonnement et transfert, complété, si 

nécessaire, par une taxe sur le carbone dans les secteurs qui ne sont pas couverts par des permis 

d’émission. Réduire sensiblement les émissions implique de privilégier les industries sobres en carbone par 

rapport à celles à forte intensité énergétique. La Corée est déterminée à promouvoir la croissance verte via 

son plan quinquennal, qui prévoit de dépenser à cet effet 2 % du PIB par an jusqu’en 2013. L’un des 

principaux enjeux est de veiller à ce que ces dépenses soient efficacement ciblées sur le développement des 

technologies vertes tout en évitant les risques que présente toute politique industrielle. 

Ce Document de travail a trait à l’Étude économique de l’OCDE de la Corée, 2010 

(www.oecd.org/eco/etudes/coree). 

Classification JEL: Q28, Q48, Q54, Q56, Q58

Mots clés: économie coréenne ; changement climatique ; émissions de gaz à effet de serre ; Protocole de 

Kyoto ; croissance verte ; système d'échange de permis d'émission ; taxes environnementales ; subventions 

d'énergie ; énergies renouvelables ; Mécanisme pour un développement propre ; taxes carbone ; efficacité 

énergétique ; R-D; certificats verts ; Stratégie nationale pour la croissance verte. 

© OECD 2010 

Application for permission to reproduce or translate all, or part of, this material should be made to: 

Head of Publications Service, OECD, 2 rue André-Pascal, 75775 Paris Cedex 16, France. 

2012-08-054_000000000000618
ECO/WKP(2010)54 

 3

TABLE OF CONTENTS 

KOREA’S GREEN GROWTH STRATEGY: MITIGATING CLIMATE CHANGE AND DEVELOPING 

NEW GROWTH ENGINES ........................................................................................................................... 5

Mitigating climate change ........................................................................................................................... 5

Overview of energy use and greenhouse gas emission trends in Korea .................................................. 7

Korea’s policy measures to address climate change ................................................................................ 9

Environmental taxes .............................................................................................................................. 12

Creating a new policy framework: getting the price right through market-based instruments .............. 13

Removing environmentally harmful energy subsidies .......................................................................... 15

Creating new growth engines for the future .............................................................................................. 16

The Five-Year Plan for Green Growth, 2009-13 ................................................................................... 17

R&D in green technologies ................................................................................................................... 19

Developing renewable energy sources .................................................................................................. 21

Promoting green industries .................................................................................................................... 23

Improving the quality of life through better air quality ............................................................................. 24

Conclusion ................................................................................................................................................. 26

Bibliography .............................................................................................................................................. 28

Tables 

1. Trends in final energy consumption in Korea ................................................................................. 8

2. Decomposition of greenhouse gas emission trends ....................................................................... 10

3. Share of taxes in energy prices ...................................................................................................... 13

4. Coal production and briquette price subsidy ................................................................................. 16

5. Recovery rate of electricity price by sector in 2007 ...................................................................... 16

6. The Five-Year Plan for Green Growth (2009-13) ......................................................................... 18

7. Core green technologies ................................................................................................................ 21

8. Per capita energy use by sector in major OECD countries ............................................................ 24

Figures 

1. The mid-term target for reducing greenhouse gas emissions in Korea ........................................... 7

2. Korea has become one of the most energy-intensive economies in the OECD area ....................... 8

3. International comparison of greenhouse gas emissions .................................................................. 9

4. Revenues from environmental taxes ............................................................................................. 12

5. Government energy RD&D budget as a share of GDP ................................................................. 20

6. Energy sources in the OECD area in 2007 .................................................................................... 22

7. Share of energy-intensive industries and the service sector across OECD countries .................... 25

8. International comparison of emissions of NOx and SOx in 2007 ................................................... 26

2012-08-054_000000000000619
ECO/WKP(2010)54 

 4

Boxes 

Box 1. The National Strategy for Green Growth (announced in July 2009) ............................................... 6

Box 2. The main characteristics of a cap-and-trade emissions trading system ......................................... 14

Box 3. Summary of recommendations for Korea’s green growth strategy ............................................... 27

2012-08-054_000000000000620
ECO/WKP(2010)54 

 5

KOREA’S GREEN GROWTH STRATEGY: MITIGATING CLIMATE CHANGE AND 

DEVELOPING NEW GROWTH ENGINES 

Randall S. Jones and Byungseo Yoo1

Korea is strongly committed to promoting green growth. On the 60th anniversary of the founding of 

the Republic of Korea in August 2008, the President proclaimed “Low Carbon/Green Growth” as the 

nation’s vision to guide development during the next 50 years.2

 In order to implement this vision, the 

government announced in July 2009 the “National Strategy for Green Growth” up to 2050, which includes 

mitigating climate change, creating new engines for economic growth and improving the quality of life 

(Box 1).3

 This paper analyses policies to implement these strategies. Policy recommendations are 

summarised in Box 3 at the end of the paper. 

Mitigating climate change 

Climate change is one of the key challenges facing the world in the 21st century with serious 

environmental and economic implications. While there are significant uncertainties about the cost of 

inaction, it would undoubtedly be immense as sea levels rise, agricultural yields decline and infectious 

diseases become more prevalent.4

 Climate change risks unpredictable and irreversible damage worldwide. 

In August 2009, the government presented the options of cutting GHG emissions by 21%, 27% or 

30% relative to the projected level in 2020, which is based on a “business-as-usual” (BAU) scenario of a 

36.9% rise in emissions between 2005 and 2020 (Figure 1).5

 Relative to 2005, the three options imply an 

8% increase in emissions, no change or a 4% cut, respectively. After analysing the scenarios on the basis of 

 

1. Randall S. Jones is head of the Korea/Japan Desk in the Economics Department of the OECD and 

Byungseo Yoo is a senior economist on that desk. This paper initially appeared as a chapter in the OECD 

Economic Survey of Korea published in June 2010 under the responsibility of the Economic and 

Development Review Committee. The authors would like to thank Anne Carblanc, Andrew Dean, Alain de 

Serres, Jane Ellis, Robert Ford, Brendan Gillespie, Vincent Koen, Dirk Pilat and Masahiko Tsutsumi for 

comments on earlier drafts. Special thanks go to Lutécia Daniel for technical assistance and Nadine Dufour 

and Pascal Halim for editorial assistance. 

2. Korea also pushed for green growth to feature prominently on the agenda of international organisations. In 

2005, the “Seoul Initiative Network on Green Growth” was adopted at the Ministerial Conference of the 

United Nations Economic and Social Commission for Asia and the Pacific. In addition, Korea chaired the 

2009 OECD Ministerial Council Meeting that adopted the “Green Growth Declaration”. 

3. The government set a target of reducing energy intensity by one-third from the 2006 level by 2020, 

reaching the OECD average. This paper will not explicitly discuss increasing energy independence as it 

will be a natural consequence of mitigating climate change and shifting to a low-carbon economy. 

4. Recent assessments show a permanent 14% loss in average world consumption per capita from both market 

and non-market impacts (Stern, 2007). 

5. The BAU baseline makes assumptions on oil prices (from the Energy Information Agency), population 

(official projection) and economic growth (Korea Development Institute). 

2012-08-054_000000000000621
ECO/WKP(2010)54 

 6

Korea’s capacity to make reductions and the subsequent macroeconomic impact, the Cabinet selected the 

most ambitious option of a 30% reduction by 2020 relative to the BAU baseline, despite the industrial 

sector’s concern about the possible negative impact on their international competitiveness. The 2020 

targets for Japan, the United States and the EU are for still larger emission reductions of approximately 

30%, 17% and 13%, respectively, relative to 2005. Korea’s mid-term target is thus positioned between the 

advanced countries and developing countries. Mexico also pledged to reduce emissions by up to 30% 

relative to its BAU baseline by 2020, on the condition of adequate financial and technology transfer 

mechanisms from developed countries. In contrast, Korea’s target is not conditional on international 

agreements and support. Although not legally binding, the target should help guide Korea’s climate change 

policy framework. After examining the level of energy use and greenhouse gas (GHG) emissions, this 

section looks at Korea’s current policy framework and then proposes new measures to achieve the midterm target. 

Box 1. The National Strategy for Green Growth (announced in July 2009) 

Three objectives: 

1. Promote a synergistic relationship between economic growth and environmental protection. 

2. Improve people’s quality of life and promote a green revolution in their lifestyles. 

3. Contribute to international efforts to fight climate change and other environmental threats. 

Three strategies: 

1. Mitigating climate change and promoting energy independence. 

2. Creating new engines for economic growth. 

3. Improving the quality of life and enhancing Korea’s international standing. 

Ten policy agendas to achieve the three strategies: 

1. Effective mitigation of greenhouse gas emissions: the government will pursue mitigation strategies for 

buildings, transport and industry, require reporting on emissions and promote forestation. 

2. Reduction in the use of fossil fuels and the enhancement of energy independence: Korea will reduce energy 

intensity to the OECD average, increase the use of renewable energy and expand nuclear power capacity. 

3. Strengthening the capacity to adapt to climate change: Korea will launch the “Four Major Rivers Restoration 

Project” and increase the share of “environmentally friendly” agricultural products to 18% by 2020. 

4. Development of green technologies: The government will pursue the development of important green 

technologies, boosting its world market share in the relevant sectors to 8% within five years. 

5. The “greening” of existing industries and promotion of green industries: Exports of green goods in the major 

industries will rise from 10% in 2009 to 22% in 2020 and the government will help small and medium-sized 

enterprises (SMEs) green their business. 

6. Advancement of the industrial structure to increase the role of services: the government will develop health 

care, education, finance, contents industry, software and tourism as the core of high value-added services. 

7. Engineering a structural basis for the green economy: The government will gradually introduce an emissions 

trading system, make the tax system greener and extend public credit guarantees to green industry. 

8. Greening land and water and building the green transport infrastructure: The share of passenger travel by rail 

will rise from 18% in 2009 to 26% in 2020, and metropolitan mass transit from 50% to 65% over the same 

period. 

9. Bringing the green revolution into our daily lives: Carbon footprint labeling will be enacted, the government will 

increase mandatory procurement of green goods and education on green growth will be expanded. 

10. Becoming a role-model for the international community as a green growth leader: Korea will actively engage 

in international climate-change negotiations and increase the share of green ODA from 11% to 30% in 2020. 

2012-08-054_000000000000622
ECO/WKP(2010)54 

 7

Overview of energy use and greenhouse gas emission trends in Korea 

Korea’s energy intensity was a quarter above the OECD average in 2008 and the fourth highest in the 

OECD area (Figure 2).6

 During the period of rapid economic growth between 1971 and 1997, energy use 

increased at an 8.8% annual rate, led by the commercial and transport sectors (Table 1). Energy intensity, 

which was 42% below the OECD average in 1971, peaked during the 1997 crisis. The crisis proved to be a 

turning point for energy consumption growth, which decelerated to a 3.3% pace during the following 

decade, leading to a marked fall in energy intensity. Moreover, the main drivers of energy consumption 

shifted to the residential sector, reflecting higher living standards, and the industrial sector, as exports 

recorded double-digit growth rates. By 2007, the industrial sector accounted for about half of energy use in 

Korea, followed by the transport, residential and commercial sectors. 

Figure 1. The mid-term target scenario for reducing greenhouse gas emissions in Korea 

0

100

200

300

400

500

600

700

800

900

1000

 Mn tonnes of CO

 

0

100

200

300

400

500

600

700

800

900

1000

Mn tonnes of CO 

 2 2

298

594

813

642

594

569

-21% -27% -30%

0%

+36.9%

+8%

-4%

1990 2005 2020 projection Mid-term target proposals for 20202

(BAU)1

 Cut 

relative

to 2020

projection

Change

relative

to 2005

O123 O O

↑ ↑

↓ ↓ ↓

↓

1. Business-as-usual scenario based on assumptions about population, oil prices and economic growth. 

2. The three options were introduced in August 2009 and option three was chosen in November. 

Source: Presidential Committee on Green Growth (2009a). 

Korea’s GHG emissions accounted for 1.3% of the world total in 2005, making it the 15th-largest 

emitter in the world and ninth in the OECD area (Figure 3). While Korea’s emissions almost doubled 

between 1990 and 2005, 83% of the increase occurred by 2000. On a per capita basis, Korea’s emissions 

rose by 71.6% over the period 1990 to 2005, far outstripping the OECD average of 2.1% (Table 2, 

Panel A). The growth in GHG emissions per capita can be explained by changes in per capita income, 

energy intensity and GHG emissions per unit of energy. The large increase in GHG emissions per capita 

was primarily a result of rapid economic growth, which doubled per capita income (second column). 

Moreover, the 2.3% decline in energy intensity (third column) was much less than the OECD average of 

 

6. Energy intensity – total primary energy supply (TPES) divided by GDP – is affected by many non-energy 

factors such as climate, geography, travel distance, home size and manufacturing structure. 

2012-08-054_000000000000623
ECO/WKP(2010)54 

 8

15.3%. These factors were partially offset by a relatively large fall of 12.7% in GHG emissions per unit of 

energy (fourth column), reflecting greater use of natural gas and nuclear power.7

Figure 2. Korea has become one of the most energy-intensive economies in the OECD area 

Tonnes of energy per unit of GDP in thousand 2000 US$ using PPP exchange rates 

1975 1980 1985 1990 1995 2000 2005

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

 Toe per unit of GDP

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

Toe per unit of GDP 

United States

Korea

Japan

OECD area

OECD Europe

1971 2008

Source: IEA/OECD (2009a), Energy Balances of OECD Countries 2009, IEA/OECD, Paris. 

Despite the rapid increase, the level of per capita GHG emissions in Korea in 2005 was more than 

one-fifth below the OECD average (Panel B, first column). This is explained by Korea’s relatively low 

level of GDP per capita (second column) and GHG emissions per unit of energy (fourth column), which 

more than offset the impact of above-average energy intensity (third column). These figures point to the 

conclusion that cutting energy intensity, notably by reducing the weight of energy-intensive industries in 

the economy, is key to slowing the growth of GHG emissions in Korea and keeping the level below the 

OECD average. The greening of existing industries – where there is significant scope to do so – may also 

help. 

Table 1. Trends in final energy consumption in Korea 

 Average annual growth rate (per cent) Composition (per cent) Percentage-point 

change 1997-

1971-97 1998-2007 1971-2007 1971 1997 2007 2007 

Industry 8.9 4.0 7.3 43.9 45.0 51.7 6.7 

Transport 10.6 2.2 7.7 15.6 23.7 20.6 -3.1 

Residential 3.2 6.9 3.8 35.3 9.0 12.6 3.5 

Commercial 15.1 0.9 10.2 4.1 17.6 12.5 -5.1 

Other 14.8 -1.9 9.3 1.2 4.7 2.7 -2.0 

Total 8.8 3.3 6.8 100.0 100.0 100.0 0.0 

Source: IEA/OECD (2009a),Energy Balances of OECD Countries 2009, IEA/OECD, Paris. 

 

7. The shares of natural gas and nuclear energy in TPES increased by 10 percentage points (3% to 13%) and 

3 percentage points (15% to 18%), respectively, between 1990 and 2005. CO2 emissions from natural gas 

are less than a quarter of that from oil. 

2012-08-054_000000000000624
ECO/WKP(2010)54 

 9

Figure 3. International comparison of greenhouse gas emissions 

0 2 4 6 8 10 12 14 16 18

Per cent

A. Share of global greenhouse gas

emissions in 2005

-40 -20 0 20 40 60 80 100

China 

United States 

India 

 Russian Federation

Brazil 

Japan 

Germany 

Indonesia 

Canada 

Mexico 

United Kingdom 

Australia 

Iran 

Italy 

Korea 

France 

Per cent

B. Growth in greenhouse gas emissions

 between 1990 and 2005

Source: OECD Environmental Database. 

Korea’s policy measures to address climate change 

Korea ratified the Kyoto Protocol to the UN Framework Convention on Climate Change in 2002 as a 

non-Annex I country, meaning that it had no obligation to set a specific GHG reduction target for 2008 to 

2012. Nevertheless, as required by all parties under the Framework Convention, Korea has implemented 

polices to combat climate change since the establishment of its Committee on Climate Change Response in 

1999. The key measures are discussed below. 

Voluntary and negotiated agreement systems 

The National Committee on Saving Energy launched a voluntary agreement system in 1998 to 

encourage energy efficiency in the business sector. Firms that participate in the programme sign 

agreements with the government specifying their voluntary energy conservation and GHG emissions 

reduction targets, as well as their timelines and strategies, which are monitored by the government. In 

return, the firms are eligible for low interest-rate loans on energy-saving facilities, tax benefits and 

technical support. By 2008, a cumulative total of 19 million tonnes of energy (toe) had been saved, 

equivalent to a 58 million tonne reduction in CO2 emissions (around 10% of annual emissions). Cost 

savings during the decade amounted to 0.6% of GDP for the participating firms, which increased from 46 

in 1998 to 1 323 in 2008. Although voluntary approaches are not cost-effective in addressing 

environmental externalities, they can reveal information about abatement costs and environmental damage 

at an early stage (de Serres et al., 2010). 

2012-08-054_000000000000625
ECO/WKP(2010)54 

 10

Table 2. Decomposition of greenhouse gas emission trends1

A. Percentage change between 1990 and 2005 

GHG 

emissions/population2 GDP/population3 Energy/GDP4 GHG 

emissions/energy5

Canada 8.2 29.7 -15.6 -1.2 

France -4.7 22.1 -9.2 -14.0 

Germany -19.0 21.9 -19.8 -17.2 

Italy 9.6 17.3 3.0 -9.3 

Japan 11.8 16.7 -4.0 -0.2 

Korea 71.6 101.1 -2.3 -12.7 

United Kingdom -10.6 36.5 -22.1 -15.9 

United States -0.9 30.8 -21.4 -3.5 

OECD average 2.1 28.9 -15.3 -6.5 

B. Level in 2005 

GHG 

emissions/population2 GDP/population3 Energy/GDP4 GHG 

emissions/energy5

Canada 23.1 30.6 0.206 3.7 

France 8.6 26.5 0.105 3.1 

Germany 12.0 26.6 0.114 4.0 

Italy 9.7 25.7 0.096 3.9 

Japan 11.2 27.1 0.102 4.0 

Korea 11.6 20.1 0.149 3.1 

United Kingdom 11.1 28.2 0.095 4.1 

United States 25.0 36.9 0.145 4.7 

OECD average 14.4 25.8 0.127 4.4 

1. GHG emissions/population = (GDP/population) * (Energy/GDP)* (GHG emissions/energy). 

2. In tCO2 eq per head. 

3. In thousand 2000 US$ using PPP exchange rates. 

4. For total final energy consumption in ktoe/ billion 2000 US$ using PPP exchange rates. 

5. For total final energy consumption in Mt CO2eq / ktoe. 

Source: IEA and OECD calculations. 

The government launched a pilot project of mandatory negotiated agreements on energy use in 2010. 

It includes 38 firms, covering 41% of total energy consumption in the industrial sector. The negotiations 

resulted in agreements to reduce energy use by 3.7% (relative to the average of 2007-09) between 2010 

and 2012, which is greater than the 3% cut that they originally proposed. This system will be replaced by 

the GHG and Energy Target Management System. Under this approach, companies in power generation, 

manufacturing, construction, waste management and transport will negotiate targets with the government, 

subject to penalties in case of failure to meet the targets. 

Energy-efficiency programmes 

Korea has introduced three energy-efficiency programmes for electronics and appliances: 

• Mandatory energy-efficiency standards and labelling (1992): 23 items are currently subject to 

energy-efficiency standards, including refrigerators, air conditioners, washing machines and 

dishwashers, which require them to achieve at least a minimum level of efficiency in order to be 

sold. Energy-efficiency ratings are attached to products to encourage consumers to choose 

energy-efficient products and firms to manufacture or import them. 

2012-08-054_000000000000626
ECO/WKP(2010)54 

 11

• The high-efficiency appliance certification (1996): the government awards labels to products with 

energy-efficiency levels that are higher than those required by law. A total of 46 items are subject 

to certification, including converters, LED lighting systems and oil-fired hot-water heaters. 

• Standby electricity reduction programme (1999): manufacturers are encouraged to make products 

that automatically switch to power-saving mode when not in use in order to minimise standby 

electricity consumption. The government grants labels for 20 home electronic and office 

equipment products, such as televisions, microwaves, computers and printers, which meet the 

official standard. Warning labels are applied to products that fail to meet the standard. 

In order to save fuel and reduce GHG emissions by cars, the government launched the Average Fuel 

Economy (AFE) regulation in January 2006, patterned on the US Corporate Average Fuel Economy 

(CAFE) system. Under Korea’s regulation, the average fuel economy of all cars sold by a manufacturer 

over one year must meet the standards, which depend on engine capacity. This system boosted average fuel 

economy by 6.6% (10.8 to 11.5 km/litre) between 2006 and 2008 and reduced CO2 emissions by 7.3%. 

Clean Development Mechanism and the carbon market 

The Clean Development Mechanism (CDM) is one of three programmes introduced by the Kyoto 

Protocol, which together with emissions trading and Joint Implementation (JI),8

 constitute the official 

international carbon market.9

 The CDM, which was launched in 2001, allows emission-reduction projects 

in developing countries to earn certified emission reduction (CER) credits, each equivalent to one tonne of 

CO2. CERs can be traded and used by Annex I countries to meet a part of their emission reduction targets 

under the Kyoto Protocol.10 Korea, as a non-Annex I country, has been actively involved in the CDM since 

unilateral projects – those funded by developing countries’ own money and not by Annex-1 countries – 

were allowed in 2005. Korean investment companies own the CERs and can sell them to any Annex-1 

country in the market. Korea has 35 projects registered, with renewable energy projects accounting for a 

third of them.11 Another 47 projects are in the process of registration. As of February 2010, the UNFCCC 

expected Korea’s registered projects to reduce CO2 equivalent by an average of 15 million tonnes per year, 

accounting for 4.4% of the total, ranking Korea fourth behind China (59%), India (12%) and Brazil (6%). 

Since 2005, the government has been operating a voluntary carbon market called Korea Certified 

Emissions Reductions (KCERs), which is open to firms that that have reduced CO2 emissions by more than 

500 tonnes a year through improved energy efficiency and production processes and investment in 

renewable energy development. Companies receive KCERs for their voluntary GHG reduction projects, 

which can be traded in the market or purchased for around 5 000 won (about $4.50) per tonne. In practice, 

there are few buyers given the lack of a domestic reduction obligation, so the government buys most 

KCERs to promote and compensate measures to reduce GHG emissions. As of the end of 2009, 

 

8. Like the CDM, JI is a project-based mechanism that feeds the carbon market by enabling industrialised 

countries to carry out joint implementation projects with other developed countries. 

9. The global carbon market doubled from $63 billion in 2007 to $126 billion in 2008. The allowance market 

occupied three-quarters while the project market, including CDM, accounted for the remaining quarter. 

10. The projects are registered with the UNFCCC and pass through a rigorous process designed to ensure real 

and measurable emission reductions that are additional to what would have occurred without the project. 

11. As of February 2010, a total of 2 209 projects has been registered, with anticipated annual CERs 

amounting to 342 million tonnes of CO2 equivalent. 

2012-08-054_000000000000627
ECO/WKP(2010)54 

 12

287 projects had generated 5.6 million KCERs, out of which 4.7 million had been purchased by the 

government for 23 billion won ($20 million). The government also launched a carbon fund of 105 billion 

won with the participation of private money in 2007 to invest in CDM projects and purchase CERs or 

allowances. 

Environmental taxes 

Revenue from environmental taxes in Korea increased from 2% of GDP in 1994 to 2.5% in 2008, thus 

surpassing the OECD average, which actually decreased slightly over the same period (Figure 4). Given 

Korea’s low overall tax burden, environmental taxes accounted for 9.5% of total tax revenue, well above 

the OECD average of 5.4%. The rising share in Korea reflects tax reforms to encourage energy 

conservation and protect the environment. Between 2001 and 2007, the government raised the tax on diesel 

by 2.4 times in real terms and the tax on LPG butane by 6.8 times. Heavy oil for industrial uses, which had 

been tax-exempt in order to support industry despite its highly polluting effect on the environment, became 

subject to taxation in 2001. By 2009, the tax had been raised five-fold in real terms, but still amounted to 

only about 3% of the price. 

Figure 4. Revenues from environmental taxes 

Per cent of GDP 

-2

-1

0

1

2

3

4

5

 Per cent

-2

-1

0

1

2

3

4

5

Per cent 

MEX

USA

CHL

CAN

NZL

JPN

ESP

FRA

AUS

POL

BEL

SVK

ISL

CHE

GRC

DEU

GBR

IRL

AUT

NOR

LUX

ITA

KOR

SWE

PRT

CZE

FIN

HUN

TUR

DNK

 1 NLD

20082

1994

1. In Mexico, consumer prices on motor vehicle fuels are held more or less constant, in spite of large variations in world market 

prices. In years when world market prices are high, the excise tax on fuels turns into a subsidy – equalling 1.8% of GDP in 

2008. 

2. Arithmetic average. The weighted average was 1.6%. 

Source: OECD/EEA Database on instruments used for environmental policy. 

The share of taxes in energy prices in Korea is relatively high compared to North America and Japan, 

although less than in Europe (Table 3). Overall prices for diesel, gasoline and light fuel for households and 

industry in Korea are significantly higher than the OECD average, regardless of whether purchasing power 

parity or market exchange rates are used. For example, the price of gasoline is 2.8 times higher than the 

OECD average using the former and 72% higher using the latter. The higher prices have helped to slow the 

growth of Korea’s energy consumption and GHG emissions during the past decade. However, 80% of the 

revenue from the transport-energy-environment tax, which covers gasoline and diesel, is earmarked for 

transport infrastructure, primarily roads, thus undermining the effectiveness of energy taxation. Investment 

in railroads, a more energy-efficient mode of transport, is limited to one-fifth of total earmarked revenue. 

Energy taxation should be improved by removing earmarking to allow a more efficient allocation of the 

budget, particularly in the context of the need for fiscal consolidation. 

2012-08-054_000000000000628
ECO/WKP(2010)54 

 13

Table 3. Share of taxes in energy prices 

Per cent of total price 

Asia North America Europe OECD 

average 

Korea Japan USA Mexico France Germany UK 

A. Share of taxes (in per cent) in 20091

 Diesel 46.7 36.3 21.0 15.1 59.1 59.0 65.4 -- 

 Unleaded gasoline 56.2 51.2 20.6 16.3 65.1 65.9 64.5 -- 

 Light fuel oil for households 19.3 7.8 4.7 n.a. 26.2 27.7 28.5 -- 

 Light fuel oil for industry 19.3 9.1 4.9 n.a. 13.0 14.0 25.2 -- 

B. Price per litre using PPP exchange rates (US$) in 2009 

 Diesel 1.79 0.90 0.65 0.94 1.09 n.a. 1.57 1.06 

 Unleaded gasoline2 2.05 1.05 0.62 0.93 1.36 n.a. 1.60 0.73 

Light fuel oil for households3 1 250 580 665 n.a. 627 n.a. 665 699 

 Light fuel oil for industry3 1 247 411 435 580 477 n.a. n.a. 492 

C. Price per litre using market exchange rates (US$) in 20091

 Diesel 1.09 1.11 0.65 0.57 1.39 1.56 1.62 1.07 

 Unleaded gasoline2 1.24 1.28 0.62 0.57 1.73 1.88 1.65 0.72 

Light fuel oil for households3 758 713 665 n.a. 798 745 686 769 

 Light fuel oil for industry3 757 505 436 353 607 626 687 519 

1. The third quarter of 2009 for Germany. 

2. Premium unleaded (95 RON) gasoline prices are used for France and the United Kingdom. 

3. Per 1 000 litres. 

Source: IEA/OECD (2010). 

Creating a new policy framework: getting the price right through market-based instruments

Although these policies have helped to slow the increase in GHG emissions since 2000, emissions 

almost doubled between 1990 and 2005, as noted above. Achieving the emission reduction that has been 

included in the mid-term plan at a low economic cost will therefore require a policy strategy based on a 

more effective mix of instruments. The key is to rely on pricing instruments to a much larger extent so as 

to put a global price on greenhouse gases. Pricing GHG has several advantages. In the short run, it 

minimises the cost of reducing emissions by equalising the marginal abatement cost across all individual 

emitters for any reduction objective. Over the long run, market instruments provide incentives for firms to 

develop new technologies that will help lower future abatement costs. From the perspective of investors, a 

clear and credible price for carbon is needed as early as possible to make appropriate investment decisions 

for the future. New technologies that are still at an early stage of development, such as carbon capture and 

storage, may never be developed and deployed on a large scale without such a price signal. A market 

approach also reduces the costly burden of gathering the information necessary for regulation. In 

particular, under an emissions trading system (ETS), the authorities only need to specify the appropriate 

level of emissions and then rely on price signals to achieve it (Goodstein, 2007). In sum, a market-based 

approach that sets a clear price is clearly superior to voluntary measures, negotiated agreements or a sectorspecific approach that calculates energy efficiency by sector and adds up the reductions that can be 

achieved. 

Emissions trading systems (ETS) and carbon taxes: the pros and cons 

Environmental taxes, such as the carbon tax already in place in a few countries and an ETS based on 

emission permits, are the main instruments for putting a price on GHG emissions. Both meet the efficiency 

criteria, as they encourage emitters to adopt abatement solutions that cost less than the level of the tax or 

permit price, thereby ensuring that the least-expensive abatement options are fully exhausted. Both also 

reduce the current demand for energy and make the price of renewable energy sources more competitive. 

2012-08-054_000000000000629
ECO/WKP(2010)54 

 14

Furthermore, the two instruments give strong incentives for monitoring and enforcement by the authorities 

and, assuming that the permits are auctioned, generate revenues that can be used to reduce labour taxation, 

thereby increasing efficiency. 

Although a carbon tax cannot set a fixed emission cap for the whole country, an advantage of an ETS 

(Box 2), it also provides a clear price signal that promotes private-sector investment in energy-saving 

technology. Moreover, a carbon tax has some advantages, as it is easy to adopt from a technical standpoint, 

has lower transaction costs and guarantees the maximum and minimum cost, although the optimal carbon 

tax rate can change over time. 

In comparison, an ETS is generally more costly to implement, owing mainly to its more complex 

design. But once start-up costs are overcome, it has a number of clear advantages. First, an ETS can secure 

a more targeted level of emission reduction than a carbon tax. Indeed, there is less certainty as regards the 

amount of emission reductions associated with a certain level of tax, and thus it may require several 

iterations to achieve the desired level of emission cuts. Second, it facilitates linkages with foreign carbon 

markets, which could lower the cost of reducing emissions for Korea. Third, the participation of firms in 

the market for permits creates a constituency for maintaining the system.12 Fourth, unlike a carbon tax, a 

trading scheme does not need to be adjusted for inflation or growth. 

Box 2. The main characteristics of a cap-and-trade emissions trading system 

A mandatory ETS based on cap and trade allows holders of permits the right to emit a certain amount of GHG. The 

total amount of permits is set at the overall desired level of future emissions by the covered sources. Emitters can 

trade permits among themselves in an open market, as those who emit less than their target can sell permits to those 

who exceed it. The price of traded permits depends, in part, on the total amount of permits. One key question is how to 

allocate the permits. A grandfathering approach – granting permits for free based on past emissions – is politically 

attractive and is used in some countries to gain the support of incumbent firms. However, if emitters expect that such 

an approach will continue, the incentives to reduce emissions would be weakened. Moreover, giving away permits to 

existing firms would act as an entry barrier, as new firms face higher costs than existing firms, and it may encourage 

non-viable firms to remain in business solely to receive free emission permits. A better approach is to sell permits 

through an auction scheme, similar to the plans for allocating frequency spectrum for mobile telephony. Although 

auctioning permits is more costly for firms, it would provide revenues for the government, thus allowing reductions in 

other taxes and their associated distortions. If policy makers instead choose a grandfathering approach, they should at 

least announce that it will be phased out, thereby strengthening incentives to reduce emissions. 

Firms face considerable risk and uncertainty about prices in an ETS, which can be volatile. One remedy is to allow 

firms to save or bank permits that are not used in the trading period in which they are issued. Such an approach 

increases efficiency by allowing firms to adjust their emissions reduction schedule to their investment programme. A 

recent study found that banking cuts abatement costs, while increasing the amount of GHG emission reductions even 

in the short term (Bosetti et al., 2008). The borrowing of permits has a similar effect, although there is a need for 

caution as firms do go bankrupt. Allowing firms to smooth their emission profiles through the business cycle by banking 

and borrowing permits also helps to limit price volatility (Philibert and Reinaud, 2004).1

 Banking and borrowing, 

however, require adequate compliance mechanisms and long-term targets to be effective. Another option to manage 

risk would be to set emission targets based on intensity (e.g. emissions per unit of output), rather than on the absolute 

amount, thereby allowing the automatic adjustment of emission objectives to unexpected shocks to output growth and 

marginal abatement costs (Ellis and Tirpak, 2006). However, intensity targets would complicate international links with 

ETS that are based on absolute amounts. 

_____ 

1. In the European ETS, for example, the spot price fell from over € 30 per ton of CO2 to under € 1 between the spring of 2006 and 

the spring of 2007 in the absence of banking provisions, which were avoided in the pilot stage as they would have caused 

serious environmental damage. 

 

12. An ETS that gives away permits for free is less costly for firms than a carbon tax. As noted below, 

however, such an approach is less efficient than auctioning permits. 

2012-08-054_000000000000630
ECO/WKP(2010)54 

 15

A comprehensive cap-and-trade ETS appears to be the best option 

On balance, the case for using an ETS as the main instrument to control carbon emissions in Korea is 

compelling, in spite of the initial start-up costs. However, given that an ETS works best at the level of 

relatively large emitters, even a fairly comprehensive ETS may exclude certain sectors, notably households 

and offices. Taxation, on the other hand, is the instrument of choice for small and diffuse sources such as 

households, farmers and small businesses, thus leaving scope for a carbon tax to co-exist with an ETS. It is 

important, though, to minimise overlap and complicated interactions between an ETS and a carbon tax that 

would raise uncertainty about the overall outcome (OECD, 2006). In particular, the two instruments should 

be set to minimise differences in the explicit and implicit carbon prices across sectors (de Serres et al., 

2010). 

The government will submit legislation in 2010 to establish a framework for an ETS under a cap-andtrade scheme and set the starting date.13 Given the ability of a well-designed system to reduce GHG 

emissions in a cost-effective manner, Korea should quickly introduce an ETS with wide coverage, ideally 

by auctioning the initial permits, in order to achieve its 2020 target.14 The scheme should include banking 

and possibly borrowing of permits to limit risk, uncertainty and volatility. In addition, Korea’s ETS should 

be as comprehensive as possible in its coverage. As for a carbon tax, the government is considering such 

an approach as well. If the ETS is not comprehensive, a carbon tax would be an effective policy to cope 

with excluded sectors, while limiting overlap and complicated interactions. 

A key obstacle to the implementation of an ETS and/or a carbon tax in many countries is concern 

about their impact on the international competitiveness of domestic industries.15 An effective climate 

change policy requires that some firms do not survive, either because demand for their products falls or 

because more GHG-efficient firms – domestic or foreign – increase their market share. However, OECD 

analysis has found that the effects of climate policies on competitiveness are likely to be small and limited 

to only a few energy-intensive industries, particularly if an ETS has broad international coverage 

(OECD, 2009c). This illustrates the importance of wide coverage in the post-Kyoto framework. Otherwise, 

the emission cuts in some countries with an ETS and/or carbon tax would be partly offset by increases 

elsewhere, a phenomenon referred to as carbon leakage. However, recent OECD research found that unless 

only very few countries take action against climate change, leakage rates will be relatively small 

(OECD, 2009d). 

Removing environmentally harmful energy subsidies 

Another priority is to remove subsidies16 to fossil fuel-based energy production and consumption, 

which boost GHG emissions. A recent OECD study found that closing the gap between domestic and 

international fossil fuel prices could cut GHG emissions in the subsidising countries by as much as 30% 

relative to BAU levels by 2050, and by 10% globally (Burniaux et al., 2009). Moreover, eliminating 

subsidies would increase efficiency and save fiscal resources that could be used more productively. 

 

13. ETS are already in place or are about to be implemented in the European Union, Australia, Canada, New 

Zealand, Norway and some states in the north-eastern part of the United States. A growing number of other 

countries, including Japan, are considering introducing an ETS (Burniaux et al., 2008). 

14. Korea’s introduction of an emission cap-and-trade programme in 2008 covering NOx, SOx and Total 

Suspended Particles (TSP) in the capital region is giving it experience in operating an ETS. 

15. Another concern is a possible adverse impact of a carbon tax on income distribution, reflecting its 

regressive nature. This can be addressed, at least in principle, via the tax-benefit system (Duval, 2008). 

16. The definition of subsidies in OECD analysis of the energy sector includes grants or soft loans to producers 

or consumers of energy, market price support and differential tax rates on different fuels (OECD, 2005a). 

2012-08-054_000000000000631
ECO/WKP(2010)54 

 16

Korea has few explicit subsidies for fossil fuels and they do not protect any important domestic 

industries. The main subsidy is for the production of coal and its use in the form of charcoal briquettes by 

low-income households. In 2008, domestic coal production amounted to only 2.8% of Korea’s coal imports 

(Table 4). Nevertheless, this subsidy distorts resource allocation and encourages excessive consumption of 

coal, which has more harmful emissions than other fossil fuels. Despite the gradual decline in the subsidy, 

it still amounted to 267 billion won in 2009, equivalent to around 5% of total environment-related spending 

by the central government. The government should eliminate this subsidy in favour of more 

environmentally friendly measures to support low-income groups. 

Another, more indirect, subsidy is the sale of electricity at prices below costs. Overall, the recovery 

rate – the unit price as a share of the total unit cost – was 93.8% in 2007, but it varies widely among sectors 

(Table 5). In particular, the recovery rate in the residential sector was high at 99.2% compared to 90.5% in 

industry and only 39.2% in agriculture. Without the subsidy, the electricity price for industry would be 

around the OECD average.17 The subsidy for industry widens the price gap with services (most of which 

are included in the general category in Table 5) to 34%, much larger than the 21% gap in unit costs. There 

are also cross-subsidies in natural gas (Moltke et al., 2004). The 2008 National Energy Master Plan 

through the year 2030 stated that Korea should abolish cross-sector subsidies, thereby allowing prices to 

match unit costs in each sector. 

Table 4. Coal production and briquette price subsidy 

 1989 1999 2007 2008 2009 

Coal production (million tonnes) 20.8 4.2 2.9 2.8 2.5 

Total subsidy (billion won)1 46 323 339 297 267 

1. The subsidy covers subsidies for briquette manufacturers, industrial accident insurance premiums, and school expenses for 

children of mine workers. 

Source: Ministry of Knowledge Economy. 

Table 5. Recovery rate of electricity price by sector in 2007 

 Average General Residential Industrial Educational Agricultural 

Unit price (won/kWh) 77.9 97.7 114.3 64.6 77.2 42.5 

Total unit cost1 (won/kWh) 83.0 90.1 115.3 71.4 87.1 108.2 

Recovery rate (%) 93.8 108.4 99.2 90.5 88.7 39.2 

1. Unit cost is all production and sales cost, plus the cost of capital. 

Source: Government of Korea (2008), The National Energy Master Plan 2008-2030, Seoul. 

Creating new growth engines for the future 

Achieving large reductions in GHG gases requires shifting the economic structure away from the 

energy-intensive industries that have driven Korea’s rapid development thus far. However, fighting climate 

change need not hinder economic growth, as moving to a more sustainable growth path brings new 

opportunities to increase output and employment, provided that action is taken early so that GHG 

emissions can be reduced progressively. While the shift to a low-carbon society will reduce jobs and 

activities in some sectors, this will be offset by the creation of new jobs and the expansion of other sectors. 

 

17. In 2008, Korea’s electricity prices for industry and households were $0.087/kWh and $0.128/kWh (using 

purchasing power parity exchange rates), while the OECD averages were $0.108/kWh and $0.141/kWh, 

respectively (IEA/OECD, 2010). 

2012-08-054_000000000000632
ECO/WKP(2010)54 

 17

Environmental policies can act as a catalyst for eco-innovation, in particular by creating new markets for 

low-carbon technologies and equipment. The net impact of environmental policies on employment could 

be positive insofar as green jobs tend to be concentrated in more labour-intensive sectors, such as 

renewable energy, recycling, public transport and construction. According to one estimate, boosting 

investment in renewable energy to $630 billion by 2030 would create at least 20 million additional jobs 

worldwide, making it a much larger source of employment than today’s fossil energy industry, which 

includes mining, petroleum extraction, refining and fossil power generation (UNEP, 2008). 

The Five-Year Plan for Green Growth, 2009-13 

To implement the National Strategy for Green Growth, which covers the years up to 2050 (Box 1), the 

government announced in July 2009 the Five-Year Plan for Green Growth. This initiative revives the 

practice of five-year plans, which were used between 1962 and the mid-1990s. While the government 

recognises that the “effectiveness of five-year plans dwindled as the Korean economy more broadly 

embraced market economy principles”, it believes that they are useful for national consensus building and 

to incorporate green growth spending in the national budget (Presidential Committee on Green Growth, 

2009b). The Five-Year Plan absorbed the Green New Deal for 2009-12, which was announced in 

January 2009 to tackle the financial crisis through job creation and to secure new growth engines by 

transforming Korea into a green economy.18

The Five-Year Plan calls for spending 2% of GDP per year over the period 2009-13, completely 

financed by the central government budget except for 8.5 trillion won (0.8% of GDP) in spending by two 

public enterprises.19 The government estimates that the plan will induce production worth 182-206 trillion 

won (around 20% of 2009 GDP) and create 1.6 to 1.8 million jobs (a 10% rise in employment) by 2013, 

suggesting a relatively high fiscal multiplier of around two. 

The high level of spending in the Five-Year Plan is due in part to the inclusion of large construction 

projects among the 600 projects (Table 6). Two of the ten spending categories, which are mainly focused 

on public construction, account for 61 trillion won – more than half of total expenditures. First, “Greening 

the land, water and building the green transport infrastructure” (category 8) includes ongoing railway 

projects as part of the government’s plan to boost the share of passenger transport by rail from 18% in 

2009 to 26% in 2020. This will be achieved by further expanding the high-speed train system, Korea Train 

eXpress (KTX), which started in 2004 and already accounted for a little more than one-half of longdistance rail passengers in 2008.20 Second, “Strengthening the capacity to adapt to climate change” 

(category 3) includes water management, such as river restoration and sewage facility projects. The Korean 

peninsula experiences droughts in the spring and heavy monsoon rains in the summer and climate change 

is exacerbating this pattern. A large share of this spending (15.4 trillion won) is for the “Four Major Rivers 

Restoration Project”, which notably includes the construction of 16 new weirs (dams that allow water to 

flow over the top) on the four major rivers, two new dams on their tributaries and heightening the banks of 

96 existing agricultural reservoirs. The Project has five aims: i) securing abundant water resources; 

ii) implementing comprehensive flood control; iii) improving water quality and restoring the ecosystem; 

 

18. The Green New Deal included 36 projects, such as the Four Major Rivers Restoration Project and railroad 

construction. Spending is divided between water and waste management (13 trillion won), railroad 

construction (11 trillion won), energy-efficient buildings (10 trillion won), low-carbon vehicles (3 trillion 

won) and renewable energy (3 trillion won). The government expects this programme to create 0.9 million 

jobs. 

19. Local governments are developing their own five-year plans to implement the national plan. 

20. The line connecting Daegu and Busan is to be completed by the end of 2010, while a line connecting Seoul 

to Mokpo in the southwest is to be completed by 2014. This spending would not be included in the 

OECD’s definition of environmental expenditure. 

2012-08-054_000000000000633
ECO/WKP(2010)54 

 18

iv) creating multipurpose spaces for local residents; and v) promoting regional development centred on 

rivers, leading to the creation of 340 thousand jobs (Government of Korea, 2009). In contrast to the large 

share of infrastructure construction, spending on R&D accounts for 12% of the Five-Year Plan. 

Table 6. The Five-Year Plan for Green Growth (2009-13) 

Trillion won1

 Total 2009 2010 2011 2012 2013 

Total 107.4 17.4 24.2 25.7 20.6 19.4

Central government budget 98.9 17.4 20.5 21.9 19.6 19.4 

Public enterprises’ investment 8.5 - 3.7 3.8 1.0 - 

 Memorandum item: total green technology R&D investment in all 

categories (13.0) (1.9) (2.2) (2.5) (2.8) (3.5) 

1. Adapting to climate change & enhancing energy 

 independence 57.5 8.5 15.5 16.0 9.8 7.7 

1. Effective mitigation of greenhouse gas emissions 5.4 1.0 0.9 1.0 1.1 1.3 

2. Reduction of the use of fossil fuels and the enhancement 

of energy independence 15.4 2.8 3.8 2.9 3.0 2.8 

3. Strengthening the capacity to adapt to climate change 36.7 4.7 10.9 12.0 5.6 3.6 

(Four Major Rivers Restoration Project) (15.4) (0.8) (6.4) (7.1) (1.1) (-) 

2. Securing new growth engines 23.5 3.9 4.1 4.7 5.3 5.6

4. Development of green technologies 7.6 1.5 1.4 1.5 1.5 1.6 

5. The “greening” of existing industries and promotion of 

green industries 4.5 0.7 0.9 0.9 1.0 1.0 

6. Advancement of industrial structure to increase services 9.7 1.4 1.5 2.0 2.4 2.5 

7. Engineering a structural basis for the green economy 1.8 0.3 0.2 0.3 0.4 0.5 

3. Improving living standards & enhancing national status 26.4 5.0 4.6 5.1 5.6 6.1

8. Greening the land and water and building the green 

transport infrastructure 23.9 4.6 4.2 4.6 5.0 5.5 

9. Bringing the green revolution to daily lives 1.8 0.3 0.3 0.3 0.4 0.4 

10. Becoming a role-model for the international community 

as a green growth leader 0.7 0.1 0.1 0.1 0.1 0.1 

1. Actual budgets for 2009-10 and projections for 2011-13. 

Source: Ministry of Strategy and Finance and Presidential Committee on Green Growth. 

The October 2009 mid-term fiscal plan (2010 OECD Economic Survey of Korea) incorporated the 

expenditures contained in the Five-Year Plan for Green Growth announced in July. Nevertheless, the total 

amount of spending for the years 2011-12 did not increase compared to the 2008 mid-term fiscal plan. This 

could be explained by two factors. First, outlays in some non-green growth categories may have been cut. 

Second, some previously planned expenditures may have been re-categorised as green growth. To the 

extent that it is the latter, the role of the green growth plan in shifting spending priorities appears less 

important. Nevertheless, the plan is likely to affect public expenditure decisions going forward. 

Given the large size of the Five-Year Plan, it is crucial that spending be implemented in a transparent 

and effective manner, in line with the OECD’s recommendations on good practices for managing public 

environmental expenditures (OECD, 2008d). Green growth infrastructure projects should be subject to the 

same ex ante cost-benefit analysis as other public investment. In Korea, the Public and Private Investment 

Management Centre (PIMAC) was established as an independent organisation in 1999 to conduct ex ante

evaluations of large-scale public investment projects. During its first five years, it rejected about 80% of 

the proposed projects, resulting in significant cost savings (OECD, 2005b). Moreover, the performance of 

each green growth project should be carefully monitored and regularly reviewed as part of the budget 

2012-08-054_000000000000634
ECO/WKP(2010)54 

 19

process to ensure that it achieves the desired policy goals. In an era of fiscal consolidation, choosing costeffective policy measures is especially important. The Five-Year Plan should therefore rely on policies 

with well-designed incentive schemes that activate market forces. For example, R&D tax credits are likely 

to lead to a more efficient allocation of resources than direct subsidies for specific projects (de Serres et al., 

2010). 

R&D in green technologies 

Technological change is the key to minimising the cost of addressing the climate change problem 

(OECD, 2010e). To encourage innovation in green technologies, the first priority is to put a credible price 

on carbon, preferably through emissions trading, as noted above. Market forces would then provide a 

powerful incentive for the development of new low-carbon technologies and would guide resources to the 

best technologies, making them more cost-competitive.21 However, price signals alone cannot ensure 

adequate R&D and innovation given market failures, such as those related to learning-by-doing and market 

size, as well as the inability of innovators to fully capture the gains from their innovation. While such 

problems are common to all types of R&D, it is magnified in the area of climate change by policy 

uncertainty and weak protection of intellectual property rights (IPR).22 Given these market failures, public 

investment in R&D is needed to “kick-start” the innovation process. The government should focus on basic 

R&D to share the risk of developing new technologies with the private sector, particularly in large-scale 

projects.23 To promote the use of new technologies, the government can provide other measures, such as 

commercialisation support and information services (OECD, 2010a). 

Government spending on energy research, development and demonstration (RD&D)24 fell as a share 

of GDP in many OECD countries between the early 1980s and the 1990s (Figure 5), reflecting the 

difficulties in the nuclear industry and the drop in oil prices from 1985 to 2002 (IEA/OECD, 2008a). To 

combat climate change and promote green growth, more public investment in RD&D worldwide appears to 

be needed. Korea’s RD&D budget in energy-related areas rose from 0.02% of GDP in 2002 to 0.07% in 

2008, the second highest in the OECD area. In terms of the absolute amount, Korea ranks fourth after the 

United States, Japan and France. However, the share of green technology patents originating from R&D in 

the environment or energy is rather small, suggesting that innovation is very multi-disciplinary (OECD, 

2010b). Therefore, the authorities should be careful in emphasising R&D in a particular area. 

 

21. This is illustrated by the introduction of an emission cap-and-trade programme in 2008 covering NOx, SOx 

and TSP in the capital region in 2008, which led to a large increase in the number of patents on technology 

to reduce emissions (Kim and Kang, 2009). 

22. Weak protection of IPR is likely to be particularly problematic in R&D related to climate change for two 

reasons. First, developing countries may consider access to the most efficient abatement technologies to be 

an important condition for their participation in emission abatement efforts. This weakens the credibility of 

IPR and thus reduces firms’ incentive to innovate. Second, the value of R&D in climate change depends on 

the credibility of governments’ abatement policies. If firms are uncertain whether governments will follow 

through on their intended policies, their incentives to invest in such R&D are weakened (OECD, 2008b). 

23. Breakthrough technologies, such as fuel cells, advanced biofuels or advanced nuclear technologies, are 

estimated to require large investment in R&D at the initial stage (de Serres et al., 2010). 

24. In the area of energy R&D, “demonstration” – projects to show that new technology is feasible, for 

example in renewable energy sources – is an important compliment to R&D. Korean official statistics do 

not include outlays for demonstration. Instead, their target is for R&D alone. 

2012-08-054_000000000000635
ECO/WKP(2010)54 

 20

Figure 5. Government energy RD&D budget as a share of GDP 

1975 1980 1985 1990 1995 2000 2005

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

 Per cent

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

Per cent 

United States

Korea

Japan

Canada

United Kingdom

2008

Source: IEA/OECD Energy Database. 

In the Five-Year Plan, the government plans to expand its R&D investment in green technologies 

from 2 trillion won in 2009 to 3.5 trillion won by 2013, making a cumulative amount of 13 trillion won. 

This would boost green R&D from 16% of the government’s total R&D spending in 2009 to 20% by 

2012.25 R&D will focus on 27 core technologies (Table 7) that were announced in January 2009 as new 

growth engines for Korea. These strategies were chosen following consultation with various experts and 

later incorporated into the Green Growth Strategy. The decision whether to include a technology in the list 

was based on its potential contribution to economic growth and environmental sustainability and its 

strategic importance. In order to co-ordinate R&D policy, the National Science and Technology Council 

will be closely linked to the Green Growth Committee. The “Key Green Technology Development and 

Commercialisation Strategies” was announced in May 2009 as a roadmap to develop these technologies. In 

addition to public R&D, the Five-Year Plan includes fiscal support for green R&D by SMEs. 

Public R&D and public funding of private R&D have a role to play, although they may not meet the 

cost-effectiveness criterion, as they have no mechanism to ensure that the target is achieved at the least 

cost (de Serres et al., 2010). The success of public R&D depends on two factors. First, it is necessary to 

establish a clear and credible price for carbon beforehand to make public R&D effective in redirecting 

technological change towards green technologies (Bosetti et al., 2009). This would suggest accelerating the 

introduction of an ETS and a carbon tax. Second, it is important to upgrade the general innovative capacity, 

which is a key determinant of innovation in environmental technology (Hascic and Johnstone, 2010). 

Despite its high level of R&D intensity and the improvement in its innovation framework, Korea still 

has weaknesses in fundamental research and system linkages (OECD, 2009b). To promote Korea’s 

convergence to high-income countries, the government has focused on immediate and tangible returns 

from its R&D investments, focusing on “experimental development”. Technological progress and the 

growing maturity of the Korean economy require expanding basic research from its current 15% share of 

total R&D and developing more sophisticated infrastructure, particularly for green technologies. The 

government should promote these goals by further increasing the share of basic research in public R&D 

spending to support private-sector innovation. For large-scale R&D projects, it is important to share the 

risk with private firms by investing public money in related basic research. In particular, Korea needs to 

bolster its capacity for basic research in universities, which employ around 70% of all doctorates but 

account for just 10% of total R&D spending. Moreover, a lack of co-operation between government 

research institutes (GRIs) and universities hinders development of closer and mutually beneficial linkages. 

 

25. In addition, the government will double the share of its basic R&D in green technology to 35% by 2012. 

2012-08-054_000000000000636
ECO/WKP(2010)54 

 21

The government needs to encourage closer co-operation between GRIs, universities and the private sector 

by facilitating joint projects, enhancing the mobility of researchers, tackling the mismatch between human 

resources and research spending in universities and expanding access to GRIs’ research infrastructure. 

Table 7. Core green technologies 

Sector 27 core green technologies Timing1 

Climate change 1. Monitoring and modelling for climate change Long term* 

2. Climate change assessment and adaptation Long term* 

Energy source technology 

3. Silicon-based solar cells Short term 

4. Non-silicon based solar cells Long term* 

5. Bio-energy Long term* 

6. Light water reactors Short term 

7. Next-generation fast reactors Long term 

8. Nuclear fusion energy Long term 

9. Hydrogen energy R&D Long term 

10. High-efficiency fuel cells Long term 

Technologies to improve 

efficiency 

11. Plant growth-promoting technology Long term 

12. Integrated gasification combined cycle Long term 

13. Green cars Medium term 

14. Intelligent infrastructure for transport and logistics Long term* 

15. Green city and urban renaissance Long term 

16. Green buildings Long term 

17. Green process technology Medium term 

18. High-efficiency light-emitting diodes/green IT Short term 

19. IT-combined electric machines Long term 

20. Secondary batteries Medium term 

End-of-pipe technology 

21. CO2 capture, storage and processing Long term 

22. Non-CO2 processing Medium term 

23. Assessment of water quality and management Medium term 

24. Alternative water resources Medium term 

25. Waste recycling Medium term 

26. R&D in monitoring and processing for hazardous substances Long term 

R&D in virtual reality 27. Virtual reality Medium term 

1. Projects are divided between intensive investment in the short, medium and long run. Long-run projects marked with an asterisk 

are to have gradual, rather than intensive, increases in investment. 

Source: Presidential Committee on Green Growth (2009a). 

Developing renewable energy sources 

The development and deployment of renewables is one of the key priorities to achieve a low-carbon 

society. Although worldwide investment in renewable energy reached $155 billion in 2008, a seven-fold 

increase from 2002, it has been estimated that this investment must more than triple for global carbon 

emissions to peak by 2020 (UNEP, 2009a). The share of renewable energy in the total primary energy 

supply (TPES) in Korea was only 0.6% in 2007, far less than the OECD average of 6.5% (Figure 6) and 

the lowest in the OECD area.26 Moreover, its share declined from 1.1% in 1990, while the share in the 

OECD area increased from 5.8% over the same period. There appears to be considerable scope to develop 

renewable energy sources in Korea; the additional realisable potential contribution of renewables in 2020 

 

26. The Korean government’s data on the share of renewable energy in TPES were higher at 2.4% in 2007 

because they include industrial waste and non-renewable municipal waste as renewable energy sources. 

Under IEA methodology, such waste is excluded from the definition of renewable energy sources on the 

grounds that they are not biodegradable (IEA/OECD, 2009b). 

2012-08-054_000000000000637
ECO/WKP(2010)54 

 22

has been estimated to amount to 43.2 TWh, equivalent to 12% of total electricity generated in 2005 

(IEA/OECD, 2008b). This would be a large increase from less than 1% in 2007. In particular, Korea has a 

relatively large potential in solar photovoltaics (10.4 TWh) and offshore wind (9.0 TWh). 

Figure 6. Energy sources in the OECD area in 20071

14.0%

Natural gas

Non-renewable

16.8% Nuclear

25.3%

Coal

42.5%

Oil

 Renewables: 

waste: 0.8%

Korea

Hydro 0.1% 

Renewable

combustibles

and waste

0.4%

Other2 0.1%

0.6%



22.9%

Natural gas

10.8%

Nuclear

6.5%

21.0%

Coal

38.4%

Oil

Renewables:

Non-renewable

waste: 0.3%

OECD average

Hydro 2.0% 

6.5%

Renewable

combustibles

and waste

3.7% Other2 0.8%

1. As a share of total primary energy supply. 

2. Geothermal, wind, solar and tide. 

Source: IEA/OECD (2009a) and IEA/OECD (2009b). 

The National Strategy for Green Growth established a target of increasing the share of renewable 

sources in TPES from 2.4% (according to Korea’s definition of renewables) to 6% in 2020,27 11% in 2030 

and 30% by 2050. The government estimates that this objective requires 111.4 trillion won of investment 

by 2030, including R&D of 11.5 trillion won. The public sector will provide 32 trillion won of this amount. 

Moreover, a Renewable Portfolio Standard (RPS)28 will be introduced in 2012 to accelerate the diffusion of 

renewables. In addition, the government plans to increase the use of nuclear power, which is the least 

expensive means to generate electricity and produces almost zero GHG. Nuclear energy’s share of 

electricity generation capacity is targeted to increase from 26% in 2007 to 41% in 2030. 

In sum, Korea is still at an early stage in the development and utilisation of renewables. Achieving its 

6% target by 2020 requires an effective and efficient policy framework based on the following principles 

(IEA/OECD, 2008b): 

• Remove non-economic barriers, such as administrative hurdles, obstacles to grid access, poor 

electricity market design, lack of information and training, and social acceptance issues. 

• Establish a predictable and transparent support framework to attract investment. 

• Introduce transitional incentives that decrease over time to foster and monitor technological 

innovation and move technologies quickly towards market competitiveness. 

• Develop and implement appropriate incentives that guarantee a specific level of support to 

different technologies based on their degree of technological maturity, in order to exploit the 

significant potential of the many options for renewable energy technologies over time. 

 

27. This objective is relatively modest compared to the EU and China, which both set targets of 20% for 2020. 

28. A RPS is a regulation that requires the increased production of energy from renewable sources. It generally 

places an obligation on electricity companies to produce a specified fraction of their electricity from 

renewable sources. 

2012-08-054_000000000000638
ECO/WKP(2010)54 

 23

• Consider the impact of large-scale penetration of renewable energy technologies on the energy 

system in terms of cost efficiency and system reliability. 

As noted above, the government should develop a flexible framework that increasingly applies market 

principles as a renewable energy technology matures and its deployment advances. Moreover, as 

technology evolution is hard to predict, picking winners by subsidising specific projects is risky as it may 

lock in technologies that will not be economically efficient. For example, the high cost of biofuels suggests 

some caution in promoting this energy source. Indeed, the cost of support to biofuels is estimated at 

between $960 and $1 700 per tonne of CO2 saved (OECD, 2008a), compared to the price of $15 to $30 

price per tonne in the European ETS. 

Promoting green industries 

The Five-Year Plan includes 23.5 trillion won (2.2% of 2009 GDP) to secure new growth engines, in 

part by greening existing industries and promoting new industries. For example, among the 17 new growth 

engines announced in January 2009, there were six in green technology industry; new renewable energy, 

low carbon energy, water technology, LED application, green transport system and high-tech green city 

(2010 OECD Economic Survey of Korea). The government has launched a number of initiatives to provide 

financial resources to green industry. First, it introduced tax incentives in 2010 for financial instruments 

that invest in green technology and industry. Dividends and interest from bonds, deposits and investment 

funds that invest at least 60% of their capital in firms and projects with green certificates (see below) are 

tax-exempt up to certain ceilings. Second, as part of the Five-Year Plan, government lending for green 

firms and projects will be expanded. Third, public credit guarantees for green firms will be increased from 

2.8 trillion won in 2009 to 7 trillion won in 2013, and provided under more favourable conditions. Fourth, 

the government plans to launch a green private equity fund (UNEP, 2009b). These green finance measures 

will fund firms, projects and technologies that are granted “green certificates”, under a new programme 

that was introduced in April 2010. The certificates will be given by public institutes based on technologic 

impact, feasibility, the degree of greening and environmental impact. Green firms are defined as those for 

which certified green technology accounts for more than 30% of sales. 

It is important to avoid the risk that granting green certificates to certain firms and projects might 

result in a bubble. Such a risk is demonstrated by the experience with the measures to jump-start the 

venture business sector in the late 1990s. Firms that met one of three criteria were designated as a venture 

business and received a number of financial benefits.29 The end result was a bubble in KOSDAQ, the 

second-tier stock exchange. Moreover, the qualifying conditions were sufficiently vague that it reduced the 

credibility of the venture business sector. After the introduction of tighter criteria in 2002, the KOSDAQ 

price index fell 90% from its 1999 peak (2005 OECD Economic Survey of Korea). In establishing green 

certificates, the government should plan an exit strategy in order to avoid another disruptive bubble. 

Direct government support for green industries raises a number of policy challenges, such as choosing 

which sectors should receive support, the appropriate timing of assistance and the suitable policy 

instrument. These decisions entail inherent risks, as illustrated by the mixed results of past government 

efforts to identify growth engines (OECD, 2004). Efforts to “pick winners” are inherently risky given the 

pace of innovative change and the possibility of being locked into the wrong technology. Moreover, there 

is a risk of losing significant amounts of public funds. To avoid government failure, policies to promote 

 

29. A firm could be certified as a venture business by the Small and Medium Business Administration if it met 

one of three criteria: i) it received equity investment from venture capitalists amounting to more than 10% 

of its capital; ii) the amount (over 50 million won) and intensity of its R&D spending was high; and iii) it 

used new technologies. As of 2004, only 5% and 18% of venture businesses qualified under the first 

two criteria, while 77% were approved under the less stringent third criterion. 

2012-08-054_000000000000639
ECO/WKP(2010)54 

 24

green industries should be as neutral as possible, focusing on basic and long-term R&D in technologies 

that are still too far from commercial viability to attract private investment. In sum, measures to promote 

green growth should not revert to traditional industrial policies. 

The priority should be to establish a framework that will promote the transformation to a low-carbon 

economy at a low cost. First, as noted above, it is essential to establish a price for carbon through an ETS 

and a carbon tax. Second, fossil fuel subsidies should be phased out. Third, the shift towards a low-carbon 

economy requires the reallocation of labour and capital resources across sectors. For workers, labour 

market flexibility to promote the redeployment of workers and effective training are required (OECD, 

2010c). Fourth, strong competition, including openness to imports and foreign direct investment, is needed 

to stimulate the adoption of new technology. In particular, it is important to facilitate the entry of new 

firms, which account for a large share of radical innovations in some fields, and the exit of firms in 

declining industries. In addition, the government should reduce barriers to imports of products important 

for climate change technology. A recent OECD study found that Korea’s trade barriers in this regard are 

high compared to those in the EU, Japan and the United States (Steenblik and Kim, 2009). 

A well-designed framework and appropriate government policies will facilitate the shift to a lowcarbon economy. In 2008, energy-intensive industries, such as steel, petro-chemicals and cement, 

accounted for 12% of total value-added in Korea, the highest in the OECD area and well above the OECD 

average of 8% (Figure 7). The role of the industrial sector is also evident in a decomposition of final 

energy consumption by sector (Table 8). While per capita energy use in the transport, residential and 

commercial sectors was below the OECD average, it was almost 50% above the OECD average in 

industry. In contrast to the high share of energy-intensive industry in GDP, the share of the service sector 

in Korea is one of the lowest at 60% of value added. Energy intensity in services in Korea is less than onethird of that of manufacturing. One of the benefits of developing the service sector would be to reduce 

energy-intensity.30 Such an approach would help achieve the government’s target of reducing energy 

intensity by one-third from the 2006 level by 2020, reaching the OECD average (Figure 2). 

Table 8. Per capita energy use by sector in major OECD countries 

Toe per capita in 2007 

 Total primary 

energy supply 

Total final consumption per capita 

 Total Industry Transport Residential Commercial 

Canada 8.13 6.19 2.43 1.75 0.97 0.92 

United States 7.67 5.20 1.48 2.08 0.88 0.67 

Korea 4.57 3.02 1.56 0.62 0.38 0.38 

France 4.12 2.58 0.73 0.71 0.65 0.33 

Japan 4.03 2.68 1.11 0.65 0.39 0.50 

Germany 4.02 2.83 1.01 0.67 0.70 0.26 

United Kingdom 3.46 2.34 0.64 0.73 0.66 0.26 

Italy 3.02 2.36 0.80 0.70 0.47 0.24 

OECD Total 4.61 3.17 1.06 1.04 0.58 0.39 

Source: IEA/OECD (2009a). 

Improving the quality of life through better air quality 

One of the benefits from cutting GHG emissions is the accompanying reduction in air pollutants, 

which have negative effects on human health, water quality and crop yields. Recent studies have found that 

 

30. Indeed, a long-term econometric model estimates that reductions in GHG emissions would cause a 

significant expansion of the service sector (de Serres et al., 2010). 

2012-08-054_000000000000640
ECO/WKP(2010)54 

 25

climate change and air quality are closely interrelated with respect to the sources, atmospheric processes 

and environmental effects, reflecting the fact that fossil fuel combustion is a major source of both air 

pollution and GHG. One study found that cutting CO2 emissions by 10-20% compared to a BAU baseline 

would reduce sulphur dioxides (SO2) by the same amount and nitrogen oxides (NOx) by 5% to 10% over 

the next 10 to 20 years (IPCC, 2007). The benefit, in terms of premature deaths avoided thanks to reduced 

air pollution, is estimated to be up to $50 per tonne of CO2 equivalent removed (Burniaux et al., 2008). 

Improving air quality is a priority in Korea, given that in the capital region (Seoul, Incheon and parts 

of Gyeonggi province), it is one of the worst among OECD countries (Kim and Kang, 2009). Although the 

level of emissions relative to GDP is below the OECD average (Figure 8), the concentration of emissions 

in the capital region, which accounts for one-half of the population, is problematic. Moreover, the increase 

in emissions of NOx between 1990 and 2007 was the third highest in the OECD area (Panel C). The 

government’s objective is to improve air quality in the capital region to the average OECD level by 2014. 

Figure 7. Share of energy-intensive industries and the service sector across OECD countries 

Relative to total value added in 2008 or latest year1

0

2

4

6

8

10

12

 Per cent

50

55

60

65

70

75

80

85

90

Per cent 

Korea

Ireland

Slovak Republic

Czech Republic

Finland

Germany

BelgiumSweden

Hungary

Switzerland

AustriaPoland

Japan

Italy

Canada

Spain

Netherlands

United States

Portugal

Iceland

Luxembourg

United Kingdom

Australia

Denmark

France

New Zealand

Greece

Norway

 Share of energy-intensive industries2 (left scale)

 Share of service sector (right scale)

1. The data are for 2007 for Germany, Hungary, Poland, Sweden, Switzerland, United Kingdom and the United States, 2006 for 

Japan, New Zealand and Portugal, and 2005 for Australia and Canada, 

2. Energy-intensive industries are defined as ISIC 21-28. 

Source: OECD STAN Database. 

To that end, an emission cap-and-trade programme was introduced in 2008 covering NOx, SOx and 

Total Suspended Particles (TSP) in the capital region. The system began with large-scale emitters and was 

extended to mid-size emitters in January 2010, targeting 136 factories in the capital region. It thus covers 

84% of NOx, 78% of SOx and 57% of TSP emissions in the capital region. The emission levels of the 

three pollutants are allocated to each source within the overall total limit. Emitters with excess pollution 

are able to purchase emission permits from those with surplus emission allowances. In case emitters 

exceed their allocated amount, they have to pay a penalty charge and their permissible emission level is 

reduced for the following year. While the trading system applies to fixed sources of emissions, vehicles are 

a major pollution source in the capital region, accounting for around half of NOx emissions. Although the 

AFE regulations introduced in 2006 have increased fuel efficiency, the standards remain well below those 

in EU countries and Japan. 

2012-08-054_000000000000641
ECO/WKP(2010)54 

 26

Figure 8. International comparison of emissions of NOx and SOx in 2007 

01234

Canada

Mexico

United States

Japan

Korea

Australia

New Zealand

Austria

Belgium

Czech Republic

Denmark

Finland

France

Germany

Greece

Hungary

Iceland

Ireland

Italy

Luxembourg

Netherlands

Norway

Poland

Portugal

Slovak Republic

Spain

Sweden

Switzerland

Turkey

United Kingdom

SOx per unit of GDP 

 (Gg/1000 USD) 

OECD average

SOx NOx

01234

NOx per unit of GDP 

 (Gg/1000 USD) 

OECD average

-100 -50 0 50 100

 Total emissions

 Percentage change since 1990

Source: OECD (2010d), OECD Environmental Data: Compendium 2009-10, OECD, Paris. 

Conclusion 

To achieve its target of reducing GHG emissions, Korea should remove fossil fuel subsidies and 

introduce an emissions trading system based on cap and trade, supplemented by a carbon tax in areas not 

covered by trading. Such a market approach would minimise the overall economic cost of emission 

reductions by equalising marginal abatement costs across all emission sources. In addition, it would 

establish a credible price for carbon that would encourage innovation to reduce emissions. The 

government’s Five-Year Plan should be carefully designed and implemented to promote such innovation 

and encourage the transition from energy-intensive industry to a low-carbon economy. The large-scale 

expenditures should be used efficiently while limiting the risk of government failure resulting from 

policies to “pick winners”. Specific policy recommendations to improve Korea’s climate change and green 

growth policy are provided in Box 3. 

2012-08-054_000000000000642
ECO/WKP(2010)54 

 27

Box 3. Summary of recommendations for Korea’s green growth strategy 

Mitigating climate change 

• Introduce market-based instruments as soon as possible to achieve the 2020 GHG emission reduction 

target in a cost-effective way by ensuring that abatement costs are equal at the margin across all options. 

• Put a price on carbon emissions by creating a mandatory and comprehensive cap-and-trade ETS, thereby 

providing a clear price signal that enables market participants to make appropriate investment decisions. 

• Auction ETS permits and allow them to be banked for the future and, perhaps, borrowed. 

• Introduce a carbon tax in areas not covered by the ETS and use the revenue, together with that from 

auctioning permits for the ETS, to reduce the need for higher taxes and their associated distortions. 

• Accelerate the phasing out of environmentally-harmful energy subsidies and ensure that energy prices in 

each sector reflect the cost of production and distribution. 

• Stop earmarking environmental taxes for transport construction, especially roads. 

Creating new engines for growth 

• Ensure good framework conditions, including openness to foreign investment and a strong competition 

framework, to facilitate entry of new firms and the exit of firms in declining industries. 

• Enhance flexibility in the labour market and ensure adequate training of workers to facilitate the transition 

toward a greener economy. 

• Ensure that the spending in the Five-Year Plan for Green Growth – 2% of annual GDP over 2009-13 – is 

implemented in a transparent and effective manner to address market failures, while avoiding outlays 

designed to boost specific industries. 

• Promote innovation in green technologies by increasing its share in public R&D, focusing on basic research, 

particularly in areas related to large-scale projects by the private sector and in technologies still too far from 

commercial viability to attract private investment. 

• Improve the overall innovation framework by spending more on basic research, closely linking government 

research institutes, universities and industry and reducing the mismatch between human resources and 

research spending in universities. 

• Encourage the development of renewable energy resources by removing non-economic barriers and 

establishing a predictable and transparent support framework with incentives that decrease over time. 

• Design the green certificate programme and the green finance initiatives carefully to limit the risk of bubbles. 

Improving the quality of life through a better environment 

• Gradually reduce the level of emissions allowed under the cap-and-trade programme covering NOx, SOx 

and TSP in the capital region to improve air quality to the level in advanced OECD countries. 

• Increase the Average Fuel Efficiency standards to reduce NOx emissions, notably in the capital region. 

2012-08-054_000000000000643
ECO/WKP(2010)54 

 28

Bibliography 

Bosetti, V., C. Carraro and E. Massetti (2008), “Banking Permits: Economic Efficiency and Distributional 

Effects”, CESifo Working Paper Series, No. 2214, Munich. 

Bosetti, V., C. Carraro, R. Duval, A. Sgobbi and M. Tavoni (2009), “The Role of R&D and Technology 

Diffusion in Climate Change Mitigation: New Perspectives Using the WITCH Model”, OECD 

Economics Department Working Papers, No. 664, OECD, Paris. 

Burniaux, J., J. Chateau, R. Duval and S. Jamet (2008), “The Economics of Climate Change Mitigation: 

Policies and Options for the Future”, OECD Economics Department Working Papers, No. 658, 

OECD, Paris. 

Burniaux, J., J. Chateau, R. Dellink, R. Duval and S. Jamet (2009), “The Economics of Climate Change 

Mitigation: How to Build the Necessary Global Action in a Cost-Effective Manner?”, OECD 

Economics Department Working Papers, No. 701, OECD, Paris. 

de Serres, A., F. Murtin and G. Nicoletti (2010), “A Framework for Assessing Green Growth Policies”, 

OECD Economics Department Working Papers, No. 774, OECD, Paris. 

Duval, R. (2008), “A Taxonomy of Instruments to Reduce Greenhouse Gas Emissions and their 

Interactions”, OECD Economics Department Working Papers, No. 636, OECD, Paris. 

Ellis, J. and D. Tirpak (2006), Linking GHG Emission Trading Systems and Markets, OECD/IEA, Paris. 

Goodstein, E. (2007), Economics and the Environment, John Wiley & Sons, Chichester, U.K. 

Government of Korea (2008), The National Energy Master Plan 2008-2030, Seoul. 

Government of Korea (2009), Restoration of Four Rivers, Seoul. 

Hascic, I and N. Johnstone (2010), “The Invention and Transfer of Climate Change Mitigation 

Technologies: Evidence Based on Patent Data”, (www.oecd.org/environment/innvoation). 

IEA/OECD (2006), Energy Policies of IEA Countries: Korea, IEA/OECD, Paris. 

IEA/OECD (2008a), Energy Technology Perspectives, Scenarios & Strategies to 2050, IEA/OECD, Paris. 

IEA/OECD (2008b), Deploying Renewables: Principles for Effective Policies, IEA/OECD, Paris. 

IEA/OECD (2009a), Energy Balances of OECD countries, IEA/OECD, Paris. 

IEA/OECD (2009b), Renewables Information, IEA/OECD, Paris. 

IEA/OECD (2010), Energy Prices and Taxes, 1st Quarter, IEA/OECD, Paris. 

Intergovernmental Panel on Climate Change (IPCC) (2007), Fourth Assessment Report, Climate Change 

2007, Paris. 

Kim, J. and K. Kang (2009), “A Case Study of the Innovation Impacts of the Korean Emission Trading 

System for NOx and SOx Emissions”, prepared as a contribution to OECD (2010e). 

Moltke, A., C. McKee and T. Morgan (2004), Energy Subsidies: Lessons Learned in Assessing their 

Impact and Designing Policy Reforms, United Nations Environment Programme. 

OECD (2004), OECD Economic Survey of Korea, OECD, Paris. 

OECD (2005a), Environmentally Harmful Subsidies: Challenges for Reform, OECD, Paris. 

2012-08-054_000000000000644
ECO/WKP(2010)54 

 29

OECD (2005b), OECD Economic Survey of Korea, OECD, Paris. 

OECD (2006), Political Economy of Environmentally Related Taxes, OECD, Paris. 

OECD (2008a), Biofuel Support Policies: An Economic Assessment, OECD, Paris. 

OECD (2008b), Climate Change Mitigation; What Do We Do?, OECD, Paris. 

OECD (2008c), OECD Economic Survey of Korea, OECD, Paris. 

OECD (2008d), Recommendation of the Council on Good Practices for Public Environmental Expenditure 

Management, (www.oecd.org/dataoecd/10/46/38787377.pdf), OECD, Paris. 

OECD (2009a), OECD Economic Survey of Japan, OECD, Paris. 

OECD (2009b), OECD Reviews of Innovation Policy: Korea, OECD, Paris. 

OECD (2009c), OECD’s Strategic Response to the Financial and Economic Crisis, OECD, Paris. 

OECD (2009d), “Progress Report on Climate Change”, (www.oecd.org/document 

/6/0,3343,en_21571361_42445076_42572486_1_1_1_1,00.html), OECD, Paris. 

OECD (2010a), Eco-Innovation in Industry: Enabling Green Growth, OECD, Paris. 

OECD (2010b), Measuring Innovation: A new Perspective, OECD, Paris (forthcoming). 

OECD (2010c), OECD Economic Survey of Korea, OECD, Paris. 

OECD (2010d), OECD Environmental Data: Compendium 2009-10, OECD, Paris (forthcoming). 

OECD (2010e), Taxation, Innovation and Environment, OECD, Paris (forthcoming). 

Philibert, C. and J. Reinaud (2004), “Emissions Trading: Taking Stock and Looking Forward”, 

http://www.oecd.org/dataoecd/58/59/32140134.pdf, OECD/IEA, Paris. 

Presidential Committee on Green Growth (2009a), National Strategy for Green Growth and Five-Year 

Plan, Seoul (in Korean). 

Presidential Committee on Green Growth (2009b), Road to our Future: Green Growth, Seoul. 

Steenblik, R. and J. Kim (2009), “Facilitating Trade in Selected Climate Change Mitigation Technologies 

in the Energy Supply, Buildings, and Industry Sectors”, OECD Trade and Environmental Working 

Papers, 2009/2, OECD, Paris. 

Stern, N. (2007), The Economics of Climate Change: The Stern Review, Cambridge University Press. 

UNEP (2008), Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World, September, 

UNEP, New York. 

UNEP (2009a), Global Trends in Sustainable Energy Investment 2009, UNEP, New York. 

UNEP (2009b), Overview of the Republic of Korea’s Green Growth National Vision: An Interim Report,

UNEP, New York. 

2012-08-054_000000000000645
ECO/WKP(2010)54 

 30

WORKING PAPERS 

The full series of Economics Department Working Papers can be consulted at www.oecd.org/eco/workingpapers/

797. Health-care reform in Korea

 (July 2010) by Randall S. Jones 

796. The Korean financial system: overcoming the global financial crisis and addressing remaining 

problems

 (July 2010) by Masahiko Tsutsumi, Randall S. Jones and Thomas F. Cargill 

795. Are global imbalances sustainable? Post-crisis scenarios

 (July 2010) by Luiz de Mello and Pier Carlo Padoan 

794. Is there a case for carbon-based border tax adjustment? An applied general equilibrium analysis

 (July 2010) by Jean-Marc Burniaux, Jean Chateau and Romain Duval 

793. Promoting potential growth: The role of structural reform

 (July 2010) by Luiz de Mello and Pier Carlo Padoan 

792. Catching-up and inflation in Europe: Balassa-Samuelson, Engel’s law and other culprits 

 (July 2010) by Balázs Égert 

791. Do product market regulations in upstream sectors curb productivity growth? Panel data evidence 

for OECD countries 

(July 2010) by Renaud Bourlès, Gilbert Cette, Jimmy Lopez, Jacques Mairesse, Giuseppe Nicoletti 

790. Preparing for Euro adoption in Poland

 (July 2010) by Rafal Kierzenkowski 

789. Gauging the impact of higher capital and oil costs on potential output 

 (June 2010) by Boris Cournède 

788. The German banking system: lessons from the financial crisis 

 (June 2010) by Felix Hüfner 

787. Measuring competition in Slovenian industries - estimation of mark-ups 

 (June 2010) by Margit Molnar 

786. Enhancing financial stability through better regulation in Hungary 

 (June 2010) by Margit Molnar 

785. Chile: Boosting productivity growth by strengthening competition, entrepreneurship and innovation 

 (June 2010) by Cyrille Schwellnus 

784. Chile: Climbing on giants’ shoulders: better schools for all Chilean children 

 (June 2010) by Nicola Brandt 

783. Israel: Monetary and fiscal policy 

 (June 2010) by Charlotte Moeser 

2012-08-054_000000000000646
ECO/WKP(2010)54 

 31

782. Policy options for reducing poverty and raising employment rates in Israel 

 (June 2010) by Philip Hemmings 

781. Israeli education policy: How to move ahead in reform 

 (June 2010) by Philip Hemmings 

780. Germany’s growth potential, structural reforms and global imbalances 

(June 2010) by Isabell Koske and Andreas Wörgötter 

779 Energy policy and the transition to a low-carbon economy

 (June 2010) by Jeremy Lawson 

778 Making the Luxembourg labour market work better

 (June 2010) by Jeremy Lawson 

777 Coping with the job crisis and preparing for ageing: the case of Finland

 (June 2010) by Henrik Braconier 

776. The political economy of fiscal consolidation 

(June 2010) by Robert Price 

775. Structural and cyclical factors behind current-account balances 

 (May 2010) by Calista Cheung, Davide Furceri and Elena Rusticelli 

774. A framework for assessing green growth policies 

 (May 2010) by Alain de Serres, Fabrice Murtin and Giusepppe Nicoletti 

773. Modeling institutions, start-ups and productivity during the transition

 (May 2010) by Zuzana Brixiova and Balázs Égert 

772. Can emerging asset price bubbles be detected? 

 (June 2010) by Jesús Crespo Cuaresma 

771. The nature of financial and real business cycles 

 (2010) by Balázs Égert 

770. The effects of fiscal policy on output: A DSGE analysis

 (May 2010) by Davide Furceri and Annabelle Mourougane 

769. Health care systems: efficiency and institutions 

 (May 2010) by Isabelle Joumard, Christophe André and Chantal Nicq 

768. The OECD’s new global model 

(May 2010) by Karine Hervé, Nigel Pain, Pete Richardson, Franck Sédillot and Pierre-Olivier Beffy 

767. Assessing the impact of the financial crisis on structural unemployment in OECD countries 

(May 2010) by Stéphanie Guichard and Elena Rusticelli 

2012-08-054_000000000000647
San Giorgio Group Case Study:

Ouarzazate I CSP

CPI Report

Climate Policy Initiative

Angela Falconer

Gianleo Frisari

August 2012

2012-08-054_000000000000648
About CPI

Climate Policy Initiative (CPI) is a policy effectiveness analysis and advisory 

organization whose mission is to assess, diagnose, and support the efforts 

of key governments around the world to achieve low-carbon growth. 

CPI is headquartered in San Francisco and has offices around the world, 

which are affiliated with distinguished research institutions. Offices 

include: CPI Beijing, affiliated with the School of Public Policy and Management at Tsinghua University; CPI Berlin, affiliated with the Department for 

Energy, Transportation, and the Environment at DIW Berlin; CPI Rio, affiliated with Pontifical Catholic University of Rio (PUC-Rio); and CPI Venice, 

affiliated with Fondazione Eni Enrico Mattei (FEEM). CPI is an independent, not-for-profit organization that receives long-term funding from 

George Soros.

Descriptors

Sector Multilateral Climate Finance

Region Global

Keywords Climate finance, concentrated solar 

power, Morocco, Clean Technology Fund

Related CPI reports The San Giorgio Group Inaugural Meeting: Expanding Green, Low-Emissions 

Finance

Contact Angela Falconer, Venice Office

angela.falconer@cpivenice.org

Gianleo Frisari, Venice Office

gianleo.frisari@cpivenice.org

Copyright © 2012 Climate Policy Initiative www.climatepolicyinitiative.org

All rights reserved. CPI welcomes the use of its material for noncommercial purposes, such as 

policy discussions or educational activities, under a Create Commons Attribution-NonCommercialShareAlike 3.0 Uported License. For commercial use, please contact admin@cpisf.org.

2012-08-054_000000000000649
A CPI Report c

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Acknowledgements

The authors thank the following organizations and professionals for 

their collaboration and input: Mafalda Duarte and Bertrand Belben 

of the African Development Bank, Paolo Martini of Archimede Solar 

Energy, Robert Lorentz of the European Commission Directorate 

General for Energy, Wolf Muth and Christoph Twerenbold of KfW, 

Mustapha Bakkoury, Saimi Nabil and Dayae Oudghiri of MASEN, 

Smita Nakhooda of ODI, Jan Corfee-Morlot of the OECD, and Jane 

Ebinger and Silvia Pariente-David of the World Bank Group. 

Finally the authors would like to acknowledge inputs, comments 

and internal review from CPI staff: Ruby Barcklay, Tom Heller, David 

Nelson, Morgan Hervé-Mignucci, Kate O’Reilly-Jones, Elysha RomPovolo, Uday Varadarajan and Tim Varga. In particular, we’d like 

to thank Brendan Pierpont for his help on the financial modeling, 

Jane Wilkinson and Barbara K. Buchner for continuous advice and 

guidance. 

San Giorgio Group Case Study Overview 

This paper is one of a series – prepared by Climate Policy Initiative 

for the San Giorgio Group – examining the use of public money 

to catalyze and incentivize private investment into low carbon 

technologies and drawing lessons for scaling up green, lowemissions funding. The San Giorgio Group case studies seek to 

provide real-world examples of what works and what does not 

in using public money to spur low-carbon growth. Through these 

case studies CPI describes and analyzes the types of mechanisms 

employed by the public sector to deal with the risks and barriers that 

impede investment, establish supporting policy and institutional 

development, and address capacity constraints. 

Disclaimer

This report is based on publicly available information and interviews 

with selected key stakeholders. Detailed information on the financing 

and contracting of the project was not available at the time of writing 

due to the ongoing bidding procedure.

2012-08-054_000000000000650
A CPI Report I

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Executive summary

Concentrated Solar Power (CSP) technology has 

enormous unexploited potential1 as a reliable source of 

renewable energy. This is especially true in the Middle 

East and North Africa (MENA) region, which has abundant solar resources and good proximity to EU energy 

demand.

However, despite its long history of projects and trials, 

CSP remains in its early stages of development and is 

still not commercially viable. The resulting competitiveness gap between CSP and less expensive carbonintensive energy alternatives is particularly evident 

in markets - such as those in MENA - where heavy 

fossil-fuel subsidies distort energy prices. At the same 

time, policies that would incentivize renewable energy 

sources are not in place. 

This case study analyzes how the Government of 

Morocco, a group of development banks, and privatesector developers came together to develop the first 

phase of a 500 MW Concentrated Solar Power facility: 

the 160MW Ouarzazate I CSP plant. The plant is in the 

final stage of the tendering process and is scheduled 

to move into the construction phase before the end of 

2012.

Challenges facing CSP development

Ouarzazate I’s stakeholders understand that the project 

only makes economic sense as the first in a series of 

CSP installations leading to a large-scale portfolio2 of 

CSP plants in Morocco and the MENA region. 

Building a CSP portfolio represents a ‘chicken or the 

egg’ dilemma: in order to scale up, CSP projects need 

to become increasingly commercially viable — through 

economies of scale or through exports to Europe — 

to attract investment over and above finite public 

resources. But achieving commercial viability first 

requires the development of early projects which need 

higher levels of investment not just for capital costs, but 

also for capacity building and associated grid infrastructures (such as transmission lines and interconnectors). 

The challenges facing the development of a CSP 

portfolio are financial, technical, and political. They 

include: attracting enough public and private financing; 

1 The International Energy Agency (IEA) estimates that CSP could provide up 

to 11.3 percent of global electricity by 2050 (IEA 2010).

2 Portfolio here means a series of projects sharing a similar technology and 

linked by a common framework (e.g.: the Morocco Solar Plan, the Mediterranean Solar Plan, the CTF CSP Investment Plan).

successfully deploying early-stage technology; building 

local manufacturing facilities; bringing technology costs 

down; brokering agreements for exports to the E.U.; and 

addressing competitiveness issues when subsidies for 

dirtier technologies create an uneven playing field.

By addressing these issues, the first publicly-supported 

large-scale CSP projects, such as Ouarzazate I, play 

a crucial role in bridging the development of a more 

commercially-sustainable regional CSP market.

Specifically, the Ouarzazate I project had two overarching objectives:

1. To install CSP at a scale that sufficiently tests and 

demonstrates the storage technology component, 

triggers important cost reductions, and fosters 

associated economic benefits, such as local 

manufacturing industries, improved energy security, 

and a shift away from fossil fuels; and

2. To test a business model that could attract and 

increase private-sector backing and enhance the 

availability of capital and ‘know-how’ to support the 

development of a CSP portfolio.

The project is still in an early stage, hence this report 

cannot assess whether Ouarzazate I has been successful in meeting the first objective. However, our examination reveals that, so far, Ouarzazate I has succeeded 

in attracting sufficient financing in its startup phase, 

through a public-private partnership model. This model 

can efficiently allocate risks among key stakeholders in 

the project and may be useful in the development of an 

expanded CSP portfolio.

Key stakeholders in the Ouarzazate I project include:

•	 The Government of Morocco and the Moroccan 

Agency for Solar Energy (MASEN) which are 

expected to contribute approximately USD 883 

million over the life of the plant,3

 mostly in the 

form of operational subsidies. Their objectives 

are to support local economic development 

by creating expertise in the solar power sector 

and to improve the country’s energy balance by 

shifting from expensive fossil-fuel imports.

•	 International Finance Institution (IFI) donors 

which have committed in excess of USD 1 billion 

for the construction of the facility in order to 

complete the first key phase of a CSP portfolio 

designed for the MENA region.

3 Including changes in subsidy costs and tax revenues compared to the 

counterfactual.

2012-08-054_000000000000651
A CPI Report II

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

•	 A consortium of private developers which will 

contribute USD 190 million of equity capital and 

expertise for an estimated 14 percent after-tax 

rate of return. 

Who Issue Ouarzazate I Responses and Effects

Government of

Morocc

CSP technology is expensive. Concessional finance lowered the cost for project developers and the 

Government of Morocco. 

Public resources are limited. 

Building Ouarzazate I is part of a greater strategic plan to replace 

public financial resources for CSP with E.U. export revenues. The 

public-private partnership model has tapped private-sector capital, 

technical expertise, and managerial efficiency.

Infrastructure investments are 

institutionally complex and 

involve high transaction costs.

MASEN has successfully coordinated private and public stakeholder involvement, with support from multilateral development 

banks. MASEN had to work closely with all concessional lenders 

to coordinate their loan requirements in order to reduce transaction and compliance costs. Loan syndication could further improve 

efficiency of this process. 

International Donors

Agenc

Size of the investment required 

in Ouarzazate I exceeds the 

available resources of a single 

institution.

Seven lenders were brought on board to provide concessional 

financing. 

CSP technology is still far from 

commercial viability.

Ouarzazate I is the initial phase of a regional investment plan to drive 

costs down and develop capabilities for CSP through deployment 

and learning.

Consortium of Priv

Developer

High capital costs, compared 

to alternative power sources, 

make the project financially 

unattractive. 

Support from the Government of Morocco and IFIs make the project 

viable.

Ouarzazate I’s economics are 

overly dependent on support 

from the Government of 

Morocco.

IFIs’ participation provides investor security in the event that the 

Moroccan Government faces budget difficulties. 

Key elements in the design and development of the 

project

This case study identifies five building blocks that were 

essential to get the Ouarzazate I project off the ground. 

1. Strong public support and the close alignment of 

key public partners: The Government of Morocco 

established a favorable regulatory and renewable 

policy framework to encourage private-sector 

engagement. In particular, it established a specialized entity tasked with realizing CSP projects 

(MASEN) and financially supports this entity’s 

work to implement the ambitious Moroccan Solar 

Plan. For the Ouarzazate I project, the government 

earmarked funds (of an estimated USD 60 million 

per year) to cover the expected difference between 

the prices at which MASEN will purchase power 

from the generator and sell it onto the grid. A 

comprehensive reform of the fossil-fuel subsidization system is also underway but it’s too early to 

comment on its effects.

2. Significant financial and technical contributions from IFIs: CSP technology is still far from 

commercial viability and together with the very high 

capital costs this meant the project was not viable 

without high levels of international support. International donors and lenders provided around USD 1 

billion of early concessional financing, driving down 

The following table summarizes how Ouarzazate 

I addressed the specific concerns of each of these 

stakeholders.

2012-08-054_000000000000652
A CPI Report III

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

levelized costs by an estimated 25-30 percent.4 In 

addition, IFIs provided necessary institutional and 

specialized technical support. Their engagement 

helped to further mitigate private investors’ 

perceived risks.

3. Strong engagement and coordination of donors: 

Early coordination and agreements with donors 

allowed MASEN to clearly indicate the terms 

and costs at which capital would be offered. This 

transparency appears to have supported competition among private investors, resulting in required 

rate of returns that are in line with other, less risky 

renewable energy projects in the country. It also 

appears to have supported bids in line with or below 

projected levels. However, donor coordination and 

alignment of conditions, safeguards, and reporting 

rules was time-consuming and challenging.

4. A carefully designed public-private partnership model: The public-private partnership model 

allows the optimal alignment of risk between public 

and private players. For example, in Ouarzazate 

I, the private developer bears construction and 

operational risk while the Government of Morocco 

bears electricity market risk (revenue risk). 

MASEN’s role in the public-private partnership is 

innovative: It acts as both equity investor and power 

purchaser (off-taker) and thus has the ability to 

align public and private objectives. Ouarzazate’s 

development and operation will show whether this 

alignment will be realized.

5. A project design built on past lessons learned:

Ouarzazate I benefited from exchanges with other 

large-scale CSP projects that are in development 

in India and South Africa, as well as experience 

gained from a CSP project supported by the Global 

Environment Facility. Learning from the design and 

implementation of other CSP projects helps reduce 

project costs and increase efficiencies. This in turn 

will support Morocco and the MENA region to 

develop a CSP portfolio.

Scaling up the CSP portfolio in Morocco 

and the MENA region 

These five building blocks provide useful experience 

for future projects but the Ouarzazate I model will only 

go so far in establishing a large-scale portfolio of CSP 

projects in Morocco and the MENA region. To reach 

4 Financial elaboration based on initial projections. The exact impact will 

be known only when the winning bid is selected and the amount of each 

concessional loan is confirmed.

the scale desired by the Moroccan and Mediterranean 

Plans, the CSP portfolio will require a significant amount 

of additional capital. Given the scarcity of public and 

international funds, more commercially-oriented financing models will be necessary. These commercially-oriented financing models will most likely require:

1. Reduced technology/project costs through 

economies of scale; and

2. Higher market revenues, such as E.U. export 

revenues.

By 2020, economies of scale are expected to reduce 

technology costs, but not to the level required to reach 

grid parity in Morocco and the MENA region. Were 

the Government of Morocco to succeed in phasing out 

fossil-fuel subsidies, this would further reduce—though 

not eliminate—the competitiveness gap between CSP 

and high-carbon alternatives.

It is rather feasible that renewable power exports to 

European markets could fill the remaining gap in the 

medium- to long-term. However, considerable political 

support will be crucial to secure E.U. Member States’ 

demand and to broker specific agreements that make 

the exports a reality. Interestingly, the possibility of 

exporting power presents a trade-off between financial viability on the one hand, and domestic energy 

and environmental effects on the other. While power 

exports significantly lighten the financial burden of 

Ouarzazate I on the Moroccan national budget, they 

also reduce the amount of fossil-fuel electricity displaced in the country, and therefore, the energy security and environmental benefits associated with CSP. 

Instead, Morocco would gain export revenues and 

economic development.

Scaling up a CSP portfolio in the MENA region and elsewhere in the world will be challenging, given the high 

costs of developing early projects and the necessary 

infrastructure to support them. The Ouarzazate case 

indicates that financing specific projects is possible with 

the close alignment of public, international, and private 

stakeholders, and careful design and coordination. Such 

an achievement, however, may not be enough to scale 

up a national or regional portfolio. This greater goal may 

be met only if projects are commercially viable, through 

a reduction in costs and access to higher market revenues, both of which will require considerable political 

support from national and international players.

2012-08-054_000000000000653
A CPI Report IV

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Contents

Introduction 1

An overview of Ouarzazate I 2

Project background 2

Project details 4

Project timeline 4

Project stakeholders 4

Investment, return, and profitability of Ouarzazate I 8

Project costs and sources of return 8

Returns to individual project contributors 1 1

Has Ouarzazate I been effective? 1 4

Risk allocation in Ouarzazate I 1 6

Risk identification and assessment 1 6

Risk analysis and mitigation instruments 1 8

Risk allocation framework 19

The Ouarzazate I risk-sharing model 2 1

The public-private partnership model 2 1

International financial institution engagement and coordination 2 2

Is Ouarzazate I replicable and scalable? 24

What is working in Ouarzazate I? 24

Scaling up the CSP portfolio 26

Conclusions 3 0

Index of Acronyms 3 1

References 32

Annex A: Full risk matrix 3 5

Annex B: Ouarzazate I sensitivities tests 3 6

Annex C: Lessons from GEF-supported CSP projects 3 7

2012-08-054_000000000000654
A CPI Report 1

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Introduction

In October 2011, Climate Policy Initiative (CPI) and the 

World Bank Group, in collaboration with China Light 

& Power (CLP) and the Organisation for Economic 

Co-operation and Development (OECD), launched the 

San Giorgio Group, a new working group of key financial intermediaries and institutions actively engaged in 

providing green, low-emissions finance.5

The San Giorgio Group recognizes that a major barrier 

to scaling up climate investment flows is the limited 

availability and understanding of empirical evidence 

or ‘on-the-ground’ examples of financial practices, 

environmental policies, and political signals that drive 

green investment. The goal of the San Giorgio Group 

is to fill this gap by drawing on the experience of its 

members to track and analyze the life cycle of existing 

projects, programs, and portfolios, and assess results 

and mechanisms that affect financial and environmental 

performance of these investments. Through this, we 

aim to distill lessons about evolving financing practices, 

provide insights on how to scale up climate finance, and 

spend resources more wisely. 

Our analysis is framed by four overarching questions:

•	 What is the role of public finance?

•	 How can public money be best delivered 

(instruments and institutional channels)?

•	 How do we ensure the alignment of international and national public investment flows with 

private investment flows?

•	 How can we ensure effective investment and 

continued learning?

5 For additional information see CPI website, http://climatepolicyinitiative.org/

event/inaugural-meeting-of-the-san-giorgio-group/.

The San Giorgio Group case studies share a systematic 

analytical framework. They explore in depth the role 

of project stakeholders, the sources of return for the 

various stakeholders, the risks involved and arrangements to deal with them, and case-specific developments and lessons in replicating and scaling up best 

practices. 

We explore the questions above through the 

Ouarzazate I Concentrated Solar Power (CSP) project in 

Morocco. This project is an example of how a public-private partnership (PPP) model can support risk sharing 

between the public and private sectors, given that CSP 

is an expensive early development stage technology and 

the ambitions to develop a much larger portfolio of CSP 

in Morocco and the region. 

Section 2 introduces Ouarzazate I and its key stakeholders, providing an overview of the context in which the 

project has developed. Section 3 examines the project 

economics, looking at the costs and benefits of the 

project as a whole and from each key stakeholder’s 

perspective. In Section 4, we review the risks involved 

in the project and explore the tools and design aspects 

that have mitigated or transferred those risks. Section 

5 focuses on the public-private partnership model 

employed by the project, looking at how risks have been 

shared between the key parties involved in the project 

that include the Government of Morocco, international 

donors, and a private-sector consortium. Section 5 also 

considers the role of international donors and describes 

the process involved in engaging those international 

donors in the project. Section 6 draws out key lessons 

from Ouarzazate I that could be applied to similar largescale CSP projects in the region and considers whether 

Ouarzazate is replicable and scalable.

2012-08-054_000000000000655
A CPI Report 2

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

An overview of Ouarzazate I

Project background

To meet fast growing demand for electricity, Morocco 

needs to double its power generation capacity by 2020. 

This substantial challenge is compounded by Morocco’s 

high reliance on energy imports that currently account 

for 97 percent of total supply. To address the twin 

challenges of improving energy security and promoting 

sustainable development, the Government of Morocco 

announced a new energy strategy in 20106 and established the Moroccan Agency for Solar Energy (MASEN). 

The strategy established a set of overarching goals to: 

•	 reduce reliance on oil to 40 percent of energy 

consumption by 2030; 

•	 increase energy efficiency, inducing energy 

savings of 15 percent by 2020 and 25 percent 

by 2030; and

•	 increase renewable power generating capacity 

to 42 percent of installed power generating 

capacity by 2020, through the commissioning 

of an additional 6000 MW of wind, solar and 

hydro. 

Also in 2009, the Government of Morocco launched the 

Morocco Solar Plan and set a goal to install 2000 MW 

of solar power capacity by 2020 through five concentrated solar power projects. The government committed 

to finance the cost of the Plan and set up MASEN to 

develop the projects, starting with the first phase of the 

Ouarzazate 500 MW concentrated solar power (CSP) 

plant, Ouarzazate I, in Morocco. 

Unlike many other developing countries, private producers already generate more than 50 percent of the country’s total electricity needs (CDER, 2009).7

 Building on 

this, the government aims to make private production 

6 The government of Morocco promulgated both the 13-09 Renewable 

Energy Law and the 57-09 MASEN Law in March 2010 (see Figure 1 for more 

details).

7 Three contracts of concessions with guarantee of purchase signed directly 

by each independent producer (IPP) with ONE have been in operation for 

several years: Jorf Lasfar Energy Company (Coal), Compagnie Wind of the 

Strait (Wind) and Electric Power of Tahaddart (Natural Gas) (ENPI, 2011).

the cornerstone of its two ambitious renewable energy 

installation programs: (1) the 1000 MW Integrated 

Wind Energy Program; and (2) the 2000 MW Morocco 

Solar Plan. Both investment programs will be developed 

using a public-private partnership model to gradually 

attract private capital into the country’s fledgling renewable energy market. If successful, Ouarzazate could 

become a business model for future CSP projects, both 

in Morocco and the Mediterranean region. 

CSP technology is a potentially reliable source of 

renewable power in regions with high ‘Direct Normal 

Radiance’ (DNI), or solar incidence, particularly if 

storage can extend supply to cover peak evening 

demand periods. CSP components are not intrinsically expensive and as experience builds, costs are 

expected to fall (WB, 2011a). However CSP is still at the 

commercial-demonstration stage—the basic technology is proven but critical energy-storage components 

require further demonstration.8

 As a result, CSP costs 

remain high and uncertain compared to other forms of 

power generation and producers and investors are not 

yet ready to develop projects without substantial public 

support.

Currently, several Middle East and North African 

(MENA) countries,9

 South Africa, Australia,10 China11

and India are all developing CSP projects, in many 

cases with the support of International Financial 

Intermediaries (IFIs) (Kulichenko and Wirth, 2011). 

However, to date, Spain and the United States have the 

most significant experience with CSP.12

8 Abengoa of Spain is currently developing a large-scale 280 MW CSP plant 

in Arizona that will feature a six-hours molten salt storage component—the 

plant will begin operation in 2013 (Abengoa, 2012). In the case of Ouarzazate I, there is a high risk associated with the freezing of molten salt which 

will be used as the heat transfer and storage fluid (WB, 2011a).

9 Including three combined gas-solar thermal plants with 20MW of solar 

power: Ain Beni Mathar in Morocco supported by a USD 43 million Global 

Environment Facility (GEF) grant; Hassi-R’mel in Algeria financed by the 

Government of Algeria; Al Kuraymat in Egypt, with support from GEF and 

the Japan International Cooperation Agency (JICA).

10 Australian Solar Flagships Program.

11 In January 2011, Chinese authorities selected a developer to build a 50 MW 

CSP plant in Inner Mongolia.

12 Kulichenko and Wirth (2011) estimate that 1000 MWe of parabolic trough 

•	 Ouarzazate I is the first step in an ambitious plan to create a portfolio of CSP investments in Morocco and the 

MENA region. 

•	 An attractive mix of policy incentives and international concessional finance under a public-private partnership 

model has been designed to attract private investors/developers.

2012-08-054_000000000000656
A CPI Report 3

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Morocco and the MENA region have high CSP potential. 

With high solar incidence and proximity to E.U. markets, 

ambitious plans to export energy to E.U. markets are 

already in development. Country-led and/or regional 

plans in place or under development include: the E.U. 

funded Mediterranean Solar Plan to install 20GW of 

capacity on the south shore of the Mediterranean; the 

Desertec Industrial Initiative (DII) which aims to create 

a market for renewable power from the MENA region; 

Medgrid which aims to develop interconnections to 

deliver up to 5GW of Saharan solar energy to Europe by 

2020; and the World Bank Arab World Initiative which 

aims for greater regional cooperation between Arab 

countries. Complementing these, the Clean Technology 

Fund’s (CTF)13 “Investment Plan for Concentrated Solar 

Power for the MENA Region” led by the World Bank and 

the African Development Bank has catalytic potential with plans to install 1.2 GW across Algeria, Egypt, 

Jordan, Morocco and Tunisia.14

CSP was operational in 2012. They report much lower installed capacities 

of other CSP technologies (10 MWe or lower of each of the other main CSP 

technologies including Fresnel Trough, Molten Salt Solar Tower, Water Steam 

Solar Team and Parabolic Dish). Of the parabolic trough projects, the United 

States appears to be hosting the greatest installed capacity (354 MWe in 

the famous SEGS plant in the Mohave Desert and 324 MWe in recently built 

plants), followed by Spain (550 MWe across three sites, mostly already 

commissioned), and the UAE (100 MWe on one site). One further project in 

the pipeline in the United States would however add a further 1000 MWe.

13 The Clean Technology Fund (CTF) is one of two multi-donor Trust Funds 

within the Climate Investment Funds (CIFs). It promotes scaled-up financing 

for demonstration, deployment and transfer of low-carbon technologies 

with significant potential for long-term greenhouse-gas emissions savings. Funds are channelled through the African Development Bank, Asian 

Development Bank, European Bank for Reconstruction and Development, 

Inter-American Development Bank, and World Bank Group. The CTF finances 

12 country programs (called Investment Plans) and one regional program 

(the MENA CSP Investment Plan). The World Bank is the Trustee and Administrating Unit of the CTF Trust Fund (ODI/Heinrich Böll Foundation, 2012).

14 The Investment Plan represents approximately 15 percent of the projected 

global pipeline of CSP projects and, if realized, would almost double the 

current global installed capacity of CSP.

The long-term vision of these initiatives is to promote 

the development of an economically sound CSP market 

that could foster associated social benefits. The steps 

along the way constitute a critical series of building 

blocks. To lay the foundations of such a market, the 

Government of Morocco and a selection of IFIs have 

committed substantial concessional finance to develop 

early CSP projects such as Ouarzazate I. However, 

a functioning market may still be some years away. 

Moving from a fragmented approach toward a portfolio 

approach would speed up achievement of this vision in 

the region. 

Along with other large-scale CSP projects the primary 

higher-level objective of the institutions backing 

Ouarzazate I is to install CSP at a scale that sufficiently tests and demonstrates the storage technology 

component, and triggers important CSP cost reductions. Other factors will also help reduce costs including 

building up experience with the public-private partnership model, achieving economies of scale, and improving technology (WB, 2011a). 

Other higher-level objectives include promoting green 

growth and local economic development by building 

up Morocco’s renewable energy industry, improving 

Morocco’s energy security, shifting subsidies and the 

Moroccan energy system away from fossil fuels and 

reducing Morocco’s trade deficit. In addition to building 

CSP capacity, interconnections and development of a 

sizeable regional electricity market, with the possibility 

to export power to more lucrative E.U. markets, will be 

important to spur the development of a local industry at 

scale.

The Moroccan Government is an early mover and 

hopes to benefit from its contribution to the development of the CSP market in the region. To do so, it will 

be crucial to learn early lessons from projects being 

developed and to keep an eye on the long-term objectives of the portfolio. 

Ouarzazate I is concentrated solar power project financed by the Clean Technology Fund, 

International Finance Institutions, and the Government of Morocco. The project will be developed through a public-private partnership by a Special Purpose Vehicle—a consortium of private 

developers and the Moroccan Agency for Solar Energy (MASEN). The project is made possible 

through a substantial subsidy from the Government of Morocco, in the form of a power purchase 

agreement covering the expected 25-year lifetime of the project. The plant will have a capacity 

of between 125 and 160 MW and will use the most mature CSP technology currently available—

parabolic trough—with three hours of molten salt thermal energy storage capacity. Construction 

of the plant is expected to start before the end of 2012.

2012-08-054_000000000000657
A CPI Report 4

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Project details

A public-private partnership has been designed to 

manage and finance Ouarzazate I, drawing together 

private developers and/or investors and IFIs. The 

partnership incorporates Power Purchase Agreements 

(PPAs), and sets the terms for a large amount of 

concessional finance provided by the Government of 

Morocco and IFIs, some of which has been distributed 

via the Clean Technology Fund (CTF). This model allows 

the government to share costs and risks with international and private financiers and project developers. It 

also helps to drive overall costs down. 

MASEN, the solar energy agency established by the 

Moroccan Government, plays a key role linking the 

project company and the governmental support for 

the project. It is currently offering private partners/

consortia to take a 75 percent equity stake against its 

25 percent equity stake in the Solar Power Company 

(SPC) special purpose vehicle, which will develop the 

project. The SPC/PPP partners are expected to take 

a total equity stake of approximately USD 253 million.15 Under the first of two 25-year PPAs, MASEN will 

purchase power from the SPC at the cost of the power 

generated. Under the second PPA,16 the Office National 

de l’Electricité of Morocco (ONE)17 will buy all power 

from MASEN, at the grid price, and dispatch it from the 

plant.18

The Government of Morocco has agreed to finance the 

costs of the Moroccan Solar Plan through a convention 

which guarantees the financial stability of MASEN. A 

project specific convention specifies the support to be 

provided for Ouarzazate I to compensate MASEN for 

the price difference between the two PPAs. This represents the incremental cost of the CSP technology for the 

Moroccan market—and initial projections estimate this 

subsidy to reach around USD 60 million per year (WB, 

2011a).

15 The SPC/public-private partnership is estimated to earmark USD 253 million 

as equity for construction and (MASEN only) USD 126 million to build associated facilities (WB, 2011a).

16 In the rest of the document, this second PPA is referred as Power Sale 

Agreement (PSA).

17 Following the merger with the Office National de l’Eau Potable (ONEP) in 

April 2012 ONE has been renamed Office National de l’Eau et de l’Electricite 

(ONEE)..

18 Morocco has a relatively stable political and regulatory environment and the 

PPA model goes even further to lower risks for potential private investors 

(Norton Rose, 2010).

To date, IFIs have pledged over USD 1 billion in concessional loans to support construction costs and a further 

USD 200 million loan which provides the Government 

of Morocco with a safety net should it be unable to 

financially support the subsidy to MASEN.19

Importantly, without the Government of Morocco’s 

agreement to fund the substantial viability gap and concessional financing terms provided by IFIs, the project 

would not be a viable investment prospect.

Project timeline

Figure 1 charts key project milestones and the roles 

of individual stakeholders. Commitments from IFIs to 

provide concessional finance20 and agreements specifying support from the Government of Morocco to 

meet the viability gap and for the Office National de 

l’Electricité of Morocco (ONE) to purchase power were 

all laid out well in advance of the release of the request 

for proposals for a private development partner. Three 

full proposals from private-partner consortia are currently under consideration.

Project stakeholders

A broad group of international, national, government 

and non-government stakeholders are involved in 

Ouarzazate I. Based on publicly available sources of 

information, Figure 2 categorizes and maps the financial links between the stakeholders involved in the 

Ouarzazate I project. This case study identifies three 

main groups of stakeholders involved in the project: 

the Government of Morocco and governmental bodies 

(including MASEN and ONE), SPC equity providers/the 

private consortium, and IFIs providing grants and loans. 

Table 1 lists in detail the stakeholders that have contributed to the project, focusing on their financing role.

19 In addition, the German Ministry of Environment (BMU), has pledged a 

grant of USD 19 million and European Commission Neighbourhood Investment Facility (EC NIF) a grant of USD 37 million. 

20 Announcement dates for commitments to the project by IFIs are not shown 

in the timeline due to lack of available data. Instead commitments are plotted according to official approval dates.

2012-08-054_000000000000658
A CPI Report 5

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Figure 1: Ouarzazate I Concentrated Solar Power project timeline GOVERNMENT OF MOROCCO AND MASEN CLEAN TECH FUND MULTILATERAL DEVELOPMENT BANKS PRIVATE DEVELOPERS

MOROCCO SOLAR PLAN (2009 - 2020)

LAW 57-09

LAW 16-09

LAW 13-09

Convention between GoM-MASEN to financially 

support MASEN

Feasibility and Impact studies

creating Moroccan Agency For Solar Energy

creating the National Agency for the Development of Renewable Energies and Energy Efficiency

MASEN-ONE, MASEN-SPC

CSP MENA Investment Plan

on Renewable Energy

CSP MENA Investment Plan - update

CTF $197m loan

IBRD $ 200m loan

World Bank $ 97m CTF investment

EIB EUR 250m loan

AFD EUR 100m loan

KfW/BMU EUR 15m grant

EC-NIF EUR 30m grant

KfW/BMZ EUR 100m loan

AfDB $ 100m investment

AfDB EUR 200m loan

Expression of Interest (200 responses)

Prequalification phase (19 parties responded)

Request for Proposals (4 prequalified parties)

Technical bid submissions

Final RFP

Financial bid submissions

Winning bidder announcement

Infrastructure work

Construction work

Plant operation

Ouarzazate I land mobilization and site qualification

2009 2010 2011 2012 2020 2030 2040 2050

DURATION OF FINANCIAL SUPPORT

FINANCIAL 

SUPPORT 

APPROVAL

2012-08-054_000000000000659
A CPI Report 6

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Stakeholder Description and role Financing role Government of Morocco 

Moroccan

state

• Shareholder in MASEN

Subsidizes difference between two 

PPAs present in the project through 

the State Budget

Ministry of

Interio

• Manages special community fund N/A

M

• Moroccan Agency for Solar Energy 

• Limited liability company (LLC) with the Moroccan State, ONE, Fonds Hassan II 

and the Société d’Investissements Energétique (SIE) as equal shareholders

• Responsible for managing bidding process and selection of private consortium

• Monitor SPC

• Ownership of the CSP plant upon commissioning

• Semi-annual financial reports, independent annual audit and progress reporting 

to donors (financial statements, physical progress and procurement)

• Support R&D, training and technical innovation

• Implementation of the FESMP1

• Finance and manage the 

Associated Facilities (for water 

supply, grid connections and land)

• 25 percent equity stake in the SPC

• Onward lends IFI debt and 

manages reporting to IFIs

• Office National de l’Eau et de l’Electricité incorporating Office National de 

L’Electricité and Office National de l’Eau Potable

• Construction of the transmission lines and water supply infrastructures

• Power dispatch, transmission, and distribution

• Environmental Management Plan for transmission lines and water supply

• Shareholder in MASEN

Required to purchase all power generated by the plant from MASEN

Private

Private

consortiu

• Project implementation including design, construction and performance 

optimization of the plant

• Preparation and implementation of project specific ESIA and ESMP,2 financial 

reporting

• Project Implementing Entity

75 percent equity stake in the SPC

International donors

AfDB • African Development Ban

• Channel CTF financing

• Provide additional concessional 

financing towards construction

WBG/IBRD • World Bank Group and International Bank for Reconstruction and Developme

• Support to MASEN and Government of Morocco to initiate the project

• Channel CTF financing

• Provide additional concessional 

financing to support Government’s 

PPA subsidy

EIB • European Investment Ba

• Coordinates European donors Concessional finance provider

AFD, Kf

BMZ

• L’Agence Française de Développement, German Development Bank and German 

Development Cooperation Co-lenders linked to EC NIF grant

BMU,C NIF • German Ministry of Environment, European Commission Neighbou

Investment Facility Grant providers

1

 The Framework Environmental and Social Management Plan (FESMP) includes institutional settings, general mitigation measures and a monitoring plan for the 

potential impacts expected from project activities during construction and operation stages (WB, 2011a).

2

 Environmental and Social Impact Assessment (ESIA) is to be carried out by the SPC and include a detailed Environmental and Social Management Plan (ESMP) 

(WB, 2011a).

Sources: various.

Table 1 Stakeholders description and role 

2012-08-054_000000000000660
A CPI Report 7

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco Figure 2: Ouarzazate I Stakeholder Mapping blocked out at present due to lack of available information. Source: CPI compiled this information from various sources. Carbon finance and technology are 

2012-08-054_000000000000661
A CPI Report 8

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Investment, return, and 

profitability of Ouarzazate I

This section addresses two main San Giorgio Group 

questions: What are the public and private financial inputs 

and what are the main outcomes of Ouarzazate I? To 

assess the return profile of the Ouarzazate I project, we 

first consider the total project costs broken down across 

equity and debt contributors and across project phases. 

Then, we estimate returns and profitability at the overall 

project level and those accruing to each project contributor. Finally, in order to assess if money has been 

invested wisely, we apply CPI’s emerging Effectiveness 

Framework to identify causal relationships between 

inputs (for example policy incentives and financing) 

and relevant outcomes. To the extent possible, given 

available data, we attempt to quantify impacts that will 

derive from the investment.

We have performed all our analyses on the basis of 

initial projections and estimates of the project sponsors 

and concessional financiers. In the past few months, 

project developers have submitted bids but, at the time 

of writing (August 2012), a winning bid had yet to be 

announced and the exact content of individual bids 

remained uncertain. Hence, we have relied on initial 

financial metrics, projections and charts to inform our 

overarching analysis. For a limited number of metrics 

(i.e. capital expenses, levelized cost of energy [LCOE], 

governmental subsidies), we have calculated results 

implied by the estimates of the lowest bid.

Project costs and sources of return

Project costs

Expected project development and operational costs 

are presented in Figure 3 below.21 Project development 

21 This case study’s estimated value is based on the initial projections. As with 

most of the financial estimates, the final amounts will be known only once 

costs include around USD 3 million22 for land and USD 

126 million for associated facilities (water connections, 

transmission lines, and other infrastructure requirements such as access roads).23

Ouarzazate capital expenses (CAPEX) were originally 

estimated at between USD 960 million and USD 1,304 

million.24 However, the lowest bid received during the 

tender process indicates a much lower figure: between 

USD 700 and USD 800 million.25 The component 

contributions to CAPEX were initially estimated at 

62 percent for the solar system (field and heat transfer fluid), 21 percent for the power block, 13 percent 

for storage, and 4 percent for site preparation. The 

expected equity to debt ratio for the project is 20:80. 

MASEN estimates that operating expenses (OPEX) 

will amount to approximately 11 percent of gross annual 

revenues, which we assume includes costs for lease of 

water, land, and road infrastructures and should amount 

to approximately USD 26/MWh.26

the winning bid is selected.

22 Land was purchased by MASEN via ONE from the community and will 

subsequently be leased to the SPC. 

23 Funded by the Government of Morocco via MASEN, then leased to the SPC.

24 Original estimated investment cost was USD 6000/kW (WB, 2011a, p.95), 

resulting in USD 960 million for 160 MW installed. Sum of contributions 

for construction components, as reported in various sources, is USD 1,304 

million, building in some room for contingency. 

25 In April 2012, Project Finance Magazine reported: “The Acwapower/Aries/

TSK consortium submitted a bid of USD 0.189711/kWh – around 30 percent 

below the other two bidders. The Enel Green Power/ACS Cobra consortium 

bid USD 0.244235/kWh and Abengoa/Taqa/Mitsui bid USD 0.244271/

kWh, while the Solar Millenium/Orascom consortium did not bid” (Project 

Finance, 2012). Inserting the lowest bid in our financial model provides an 

estimated investment cost between 3,500 and 4,000 USD/kW(almost 40 

percent lower than projected), a new LCOE of USD 194/MWh, and a governmental subsidy required of USD 40 million per year. Our estimate of the 

subsidy required is based on strong assumptions regarding likely wholesale 

electricity prices in Morocco (see footnote 30 for further information).

26 Based on initial projections (WB, 2011a). .

• The Government of Morocco provides a subsidy that will cover the difference between the price at 

which MASEN buys, and then sells power. This subsidy is essential for the project’s viability. Without it, 

CSP technology is still too expensive for the local market as the price of power generated is substantially 

higher than local grid prices. 

• The Solar Power Company’s revenue stream is heavily subsidized by the Government of Morocco and by 

IFIs’ concessional finance. 

• The Government of Morocco and IFIs are betting on the project’s contribution to the development of a 

CSP market in the region that will bring longer term and broader economic benefits.

2012-08-054_000000000000662
A CPI Report 9

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

At the time of writing (August 2012), financing costs

for the SPC were unknown; they will be determined by 

the extent to which MASEN passes on the terms of IFI 

concessional loans. Based on lenders’ indications, our 

financial modeling estimates a blended interest rate 

for the overall IFI concessional financing of approximately 3.1 percent.27 Figure 4, below, compares this to a 

commercial interest rate of 9 percent (Kulichenko and 

Wirth, 2011) and highlights the impact of this cheaper 

debt provided by IFIs on the project cash flow stream 

(the aqua-colored area).

Expected generation and levelized cost of 

energy (LCOE)28 calculations

Ouarzazate I is expected to produce an average 370 

27 This case study assumes that all concessional financing from IFIs is passed 

on directly from MASEN to the SPC. At the time of writing, the preannounced terms were as follows (AfDB, 2012b): Clean Technology Fund’s 

‘softer’ concessional: 0.25 percent service charge and an embedded grant 

element of 75 percent; AFD: 4 percent interest rate, 17 years maturity with 

4 years grace; AfDB: 4 percent interest rate, 20 years maturity with 5 years 

grace; EIB: 4 percent interest rate, 23 years maturity with 3 years grace; KfW: 

2.5 percent interest rate, 15 years maturity with 3 years grace.

28 By a levelized cost, it is meant the (present value of) total project costs for 

each kWh of energy generated by the CSP. This provides a single, aggregated measure of costs associated with energy production that can be 

compared across technologies (Varadarajan et al., 2011). The LCOE method 

calculates the levelized cost of energy to the final user by actualizing all cash 

flows related to a specific energy source. Consistent with previous CPI reGWh of power per year for 25 years, following three 

years of construction. We estimate levelized cost of 

energy (LCOE) using the initial projections for capital 

expenses, the estimated value of the PPA and Power 

Sales Agreement (PSA), together with assumptions 

about the timing of cash flows and a blended rate of 3.1 

percent for financing. Based on these factors, the LCOE 

is calculated at approximately USD 245/MWh.29 Capital 

expenses account for 90 percent of costs, and operating expenses for 10 percent.

International donors and concessional lenders clearly 

have a substantial impact on the project’s LCOE by 

providing up-front lower-cost financing. For example, if 

we replaced all concessional financing with commercial 

capital at a blended rate of 9 percent (Kulichenko and 

Wirth, 2011) the resulting LCOE would be approximately 

30 percent higher, or USD 320/MWh. 

Given national grid prices of approximately USD 81/

MWh, without concessional financing and continuous 

revenue support from MASEN, it would be impossible 

ports, the calculation has been based on the expected after-tax internal rate 

of return of the project, based on anticipated cost and revenue estimates.

29 This LCOE estimation appears consistent with the our estimation for PPA 

price indicated by the project financiers (WB, 2011a), as well as estimates 

from the European Investment Bank (EIB) for CSP technology in MENA (EIB, 

2010) and the projections from European Solar Thermal Electricity Association, Estela (ATKearney, 2010).

Source Finance Type Project Costs

Solar 

incremental cost 

component

$1,392

Subsidy

$1,192

Loans

$1,195

Equity

$253

Construction 

of the Plant

$1,304

Associated Facilities $126

Notes: Total burden on the Government of Morocco does not include fuel subsidies saved and tax revenues (netted figure estimated around USD883 million). Commitments in original currency (where not USD) are: EIB €250 million, AfDB €200 million, AFD €100 million, BMU €15 million, EC-NIF €30 million. Sources: World 

Bank (2011a), CIF (2011a), and AfDB (2012b).

CTF(IBRD) $97

CTF(AfDB) $100

GoM

$1,192

IBRD $200

AFD

$123

KfW/

BMZ

$123

AfDB

$245

EIB

$307

EC/NIF

$37

KfW/BMU

$19MASEN/GoM $126

PPP

$253

Grants

$182

Figure 3: Attribution of project costs by source, financing type, and cost component (amounts in millions of USD)

2012-08-054_000000000000663
A CPI Report 10

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

for CSP to compete with lower-cost alternatives. Even 

if high government fossil-fuel subsidies were removed 

and national grid prices rose to USD 113/MWh, the cost 

differentials would still be difficult to overcome. (Please 

see Box 1 for a more detailed discussion of fossil-fuel 

subsidies.) 

Project sources of return

The SPC’s main source of return will be from electricity sales to MASEN via the PPA. We estimate the price 

for this at approximately USD 244/MWh. While the 

terms and the projections of the PPA between the SPC 

and MASEN are confidential, we estimate its value by 

adding MASEN’s projection of the government subsidy 

(USD 60 million per year for the duration of the project) 

to our estimate of the PSA between MASEN and ONE. 

This case study assumes that the PSA will be linked to 

the Moroccan market’s prevailing power price and, in 

practice, will be driven by coal generation prices. It has 

not been disclosed whether the PSA price will be fixed 

for 25 years or if it will be indexed to the grid price over 

time. Taking current industrial electricity tariffs in the 

country as a benchmark, we estimate the PSA will be 

set at a price of $81/MWh. This assumes that ONE 

does not place any margin on power purchased from 

MASEN before selling it.30

30 This assumption derives from considering that both ONE and MASEN are 

public entities owned by the state and that any margin charged by ONE onto 

electricity sold to MASEN would have to be compensated by the government itself via the convention with MASEN. Given limited availability of data 

on wholesale electricitytariffs in Morocco or on the likely rate of the PSA 

Overall Project Return

Assuming 25 years of operation, a degradation factor31

of 0.5 percent per year, an annual escalation factor for 

both operation expenditures and PPA of 2.6 percent,32

and a corporate tax rate of 30 percent, we estimate the 

pre-tax internal rate of return (IRR) at 9 percent and the 

after-tax, levered IRR for the SPC at 13.6 percent (taking 

into consideration the 80:20 leverage factor at project 

level). This figure compares closely with reported IRR 

benchmarks for renewable energy generation under 

another concessional scheme for wind energy in 

Morocco (Attijari, 2010).33

The cash flow profile over the lifetime of the project, 

based on the assumed project costs and revenues, 

is illustrated in Figure 4. The lower half of the graph 

shows the high upfront capital costs of the project in 

the first three years, as financed by debt, equity and, 

to a lesser extent, grants. Other costs, spread over the 

duration of the project are also shown, including operating and financing costs. In terms of sources of project 

revenue (on the upper half), the figure shows the crucial 

between ONE and MASEN, we assume a PSA of 81 USD/MWh, based on 

electricity tariff data published online by the Moroccan Investment Development Agency (MIDA, 2012).

31 The degradation factor is the annual power generation loss due to continuous aging and fatigue of the equipment. 

32 Inflation rate forecast from IMF.

33 Attijari Finance Corp reported benchmarks vary according to the chosen 

business model, from the less risky generation under a concessional scheme 

with ONE (10-12 percent IRR), to the generation directly from ONE (11-12 

percent), to self production (greater than 12 percent).

200

100

0

-100

-200

-300

-400

-500

2012

Millions of USD

2015

Revenue Support from GoM

Morocco Grid Price

Debt

Equity

Grant

Concessional Finance Impact

Finex

Opex

2020 2025 2030 2035 2040

Figure 4: Project Cash Flows

 Source: CPI Elaborations

2012-08-054_000000000000664
A CPI Report 11

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

support provided by 

the Government of 

Morocco to make 

the project profitable 

by filling the viability 

gap between highcost CSP power and 

the marginal costs of 

power production, and 

also shows the income 

flowing from ONE to 

MASEN for the sale of 

power to the grid. The 

figure also illustrates 

savings for the SPC as 

a result of the concessional financing terms 

- actual financing 

expenses (FINEX) - as 

compared to counterfactual commercial financing terms 

(aqua). 

Returns to 

individual project 

contributors

The expansion of CSP technology in Morocco is geared 

toward meeting multiple objectives and delivering 

multiple benefits. Table 2 summarizes both direct and 

indirect (portfolio-related) returns to project contributors followed by a discussion of these returns.

Government of Morocco

The Government of Morocco is investing heavily in 

the Ouarzazate I project through an annual subsidy 

(estimated at around USD 60 million per year), channeled through MASEN. The purpose of this ongoing 

subsidy is to fund the viability gap between the price 

MASEN pays to purchase power from the SPC, and the 

price at which it sells power to ONE. The Government 

of Morocco is betting that long-term economic benefits 

or higher-level objectives, that would be triggered with 

a move towards a CSP market in the region, will more 

than compensate for its early investment.

The Government of Morocco is also set to receive 

some revenue streams through its equity holding in 

MASEN, as well as tax revenues associated with the 

SPC, new industries and/or jobs. Figure 5 illustrates 

this balance of costs and benefits. The top half of the 

graph shows sources of revenue and budget savings 

for the Government of Morocco, including tax receipts, 

return on investment (as a stakeholder in MASEN) and 

savings derived from fossil-fuel subsidies displaced by 

Ouarzazate I. We assume that under a business-asusual scenario, fossil fuel subsidies will be halved by 

2020 and phased out entirely by 2025. The bottom half 

of Figure 5 shows costs incurred by the government, 

including through its contribution to the capital cost and 

the incremental-cost subsidy.

One of the Government of Morocco’s primary higherlevel objectives is to capitalize on its early mover 

advantage by becoming a hub for the CSP manufacturing and generation industry which could be a driver 

for long-term economic development. Evidence of the 

Government of Morocco’s effort to embed longer-term 

goals in the project design includes MASEN’s request 

for private developers to include local content valued 

at 30 percent of the plant capital costs in their bids.34

Bidders are free to choose how to fulfil this request but 

MASEN suggests the following options: (1) indirect 

investment in a renewable energy manufacturing, operations and maintenance, engineering or R&D facility; (2) 

direct local procurement of goods and services; or (3) a 

combination or both. 

34 WB, 2011a

Gov’t of

Morocco

MASEN SPC 

holdersa 

General

publ

Financial 

returns / 

benefits

Income from S

Generation (PPA) √ 

Concessional pub

finance √ √ √ √

Viability

b subsidy √

Carbon market revenues

Avoided subsi

import costs √

Taxes 

Nonfinancial 

returns / 

benefits

Greenhouse-gas savings √

Technology-co

reduction √ √ √ √ 

Learning √ √ √

Green growth √ √ √

Green jobs √ √ √ √ 

Energy security √ √

a

 Private consortium plus MASEN.

b

 Viability gap is defined as the difference between the PPA price paid from MASEN to the SPC and the PSA price paid from 

ONE to MASEN multiplied by the annual power generated.

Table 2: Stakeholder benefits

2012-08-054_000000000000665
A CPI Report 12

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

The CTF’s impact indicators project that Ouarzazate I 

will have little if any discernible impact on local industry development, employment, and CSP cost reduction (WB, 2011a). However, combined with its second 

and third phases, Ouarzazate is expected to initiate 

local industrial development activities and to generate 

some local servicing and maintenance jobs. Moreover, 

Morocco’s Solar Plan as a whole is expected to create 

significant local and national industrial benefits. A 

World Bank-commissioned study on the potential to 

manufacture CSP components locally in the MENA 

region35 makes the following projections based on an 

assumed level of installed capacity of 2GW of CSP by 

2020 and local content of about 30 percent in 2015, 50 

percent in 2020 and 60 percent in 2025:

•	 creation of USD 4.6 billion of cumulated value 

add by 2020;

•	 creation of up to 11,000 full-time equivalent jobs 

in construction, manufacturing and operations 

and maintenance by 2020; and

•	 more than USD 3 billion of cumulated export 

revenues by 2020.

35 Gazzo et al. (2011) 

The project will also help to shift subsidies, and the 

overall Moroccan energy system, away from fossil 

fuels. ONE’s analysis estimates the government will 

save approximately USD 64 million in subsidies over 

the lifetime of the project.36 In the first few years of 

the project, this corresponds to approximately USD 

8.5 million/year saved, compared to the Government 

of Morocco’s total annual fossil-fuel subsidies cost 

of between USD 1 and 4.3 billion (2009-2011). Most 

of the value of the fossil-fuel subsidy savings derives 

from Ouarzazate I’s storage technology, which allows 

Ouarzazate I to displace (imported and expensive) oilbased generation used to fulfill peak demand.

The Government of Morocco will also benefit from 

expected CO2

 savings of around 240 kt per year (valued 

between USD 1.2 and 3 million per year).37 The eco36 Amounts of fossil fuel displaced (in the baseline scenario) have been 

estimated by ONE and valued at the following prices and quantities: Coal: 

32,000 tons at 150 USD/ton; Natural Gas: 354,000 mbtu at 10 USD/mbtu; 

Fuel Oil: 67,000 tons at 450 USD/ton. The estimate assumes that the 

Government of Morocco follows through on its subsidies phasing-out policy.

37 This assumes a displacement of the average electricity fuel mix (18 percent 

coal, 15 percent natural gas, and 67 percent fuel oil) although it is hoped that 

the use of storage technology will enable the plant to also displace peak 

20

40

0

-20

-60

2012

Millions of USD

2015 2020 2030 2040

-40 Solar subsidy

Taxes - SPC and new industry

Revenue on investment

CAPEX

Foregone 

taxes on 

imported 

fuels

FF subsidy saving

Figure 5: Government of Morocco’s Cash Flows

Source: CPI financial modeling (based on World Bank 2011a).

Box 1: Fossil-Fuel Subsidies in Morocco

Moroccan electricity generation largely relies on heavily subsidized, imported fossil fuels. Both fossil fuels 

and electricity are sold to the consumer below the cost of supply through a compensation system financed 

directly and indirectly (through the state utility) by the state. Over the past three years (2009-2011), the total 

burden of these subsidies on the government budget has ranged between USD 1 and 4.3 billion, or around 

2012-08-054_000000000000666
A CPI Report 13

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

nomic value of environmental cobenefits in terms of 

avoided local pollution (for SO2, NOx, PM)38 are estimated at USD 2.3 million over the life of the plant, and 

increase to USD 7.2 million for the complete Ouarzazate 

portfolio and USD 28.8 million for Morocco’s Solar Plan 

as a whole.

Ouarzazate I’s impact on Morocco’s energy security

is minimal due to its relatively small scale. In the long 

run, however, a larger portfolio of CSP in the country 

and development of a regional electricity market39 could 

improve Morocco’s energy security, reduce dependency 

on energy imports,40 diversify energy sources towards 

renewable energy, and create new generating capacity 

load which is currently met by fuel oil.

38 Sulfur Dioxide (SO2) valued at 5,220 USD/ton; Nitrogen Oxide (NOx) valued 

at: 5,165 USD/ton; (PM) valued at 20,823 USD/ton (ExternE).

39 Double 400-kV interconnections with Algeria and Spain already exist. 

The latter provides access to the Spanish and Portuguese markets and will 

provide access to the French market when the FR-ES interconnection is 

upgraded, which is expected to be completed in 2013.

40Currently 97 percent of energy consumption (WB, 2011a).

to help meet high electricity demand growth.41 Indeed, 

the CTF’s impact indicators show that Ouarzazate I 

will reduce electricity imports only by a small amount 

(lifting renewable energy sources’ share of power generating capacity to 2 percent), but that more significant 

reductions would follow realisation of the complete 

Ouarzazate portfolio (to 8 percent) and the Morocco 

Solar Plan (42 percent). Noting that increasing world oil 

prices have caused Morocco’s trade deficit to balloon 

in recent years (by 21 percent in 2010-2011), decreasing energy imports will enhance Morocco’s balance of 

trade and improve overall economic security. Improved 

energy security and import savings will, however, 

ultimately depend on the share of the CSP generated 

power that is kept for the local market and not exported 

into Europe.

41 An average 6 percent per year growth in domestic electricity demand necessitates 700-800 MW per year in new generating capacity (WB, 2011a).

1-4.3 percent of the country’s GDP.1 Besides representing a heavy drain on public resources and incentivizing 

over-consumption of carbon-intensive energy, fuel subsidies also widen the competitiveness gap of renewable 

energies by lowering the average grid price by roughly 30 percent.2

The Government of Morocco is currently working to reform the existing subsidization system which is thought 

to favor wealthy citizens and failing to improve energy access for the poorest Moroccans.3 The government 

has announced that fuel subsidies will be replaced gradually by targeted cash grants for families in need. 

Indeed, IFI appraisals of Ouarzazate I economics already factor in the halving of current subsidies by 2020 

and a complete phase out by 2025. However, these changes have already sparked strikes and threats of social 

unrest (Achy, 2012), confirming that a direct reduction or complete removal of fossil-fuel subsidies remains a 

challenging political hurdle.

Increasing the deployment of renewable energy sources is a way to reduce demand for imported fossil fuels 

and, indirectly, the subsidies required to maintain them. However, at today’s technology costs, CSP power is 

still too expensive for Morocco and requires high levels of public support that outweighs those savings. In the 

case of Ouarzazate I, the plant requires an estimated USD 60 million of direct subsidies to achieve viability, 

but only displaces USD 12 million of fossil subsidies per year. 

Though certainly helpful, the removal of fossil-fuel subsidies alone would not be sufficient to make CSP power 

more competitive and sustainable. From this perspective, achieving the technology cost reductions targeted 

by the Morocco Solar Plan and by the CTF Investment Plan will be the cornerstone to making CSP power 

competitive.

1 WB, 2011a.

2 We have inferred an average level of subsidization of 30 percent from the overall value of fossil-fuel imports for 2010 (8.3 billion USD) and the 

cost of the fuel subsidies for the same year (2.5 billion USD).

3 In 2008, a study by Morocco’s High Commissioner for Planning concluded that 20 percent of wealthy households receive three-quarters of the 

government-allocated support for diesel and gasoline while 40 percent of needy families receive only 5 percent (Achy, 2012).

2012-08-054_000000000000667
A CPI Report 14

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

MASEN

MASEN has multiple interests in the Ouarzazate I 

project and stands to receive multiple benefits.

As the project developer, MASEN will benefit from 

international concessional finance and the Government 

of Morocco subsidy. MASEN’s cash flow profile is 

determined by the guaranteed revenue stream from 

the Power Sale Agreements with ONE (estimated at 

between USD 30 and 35 million a year) and the fees it 

receives from the Solar Power Company (SPC) under 

the lease to use MASEN-owned site infrastructure, 

‘associated facilities’ (water, transmission lines, and 

road access), and the CSP infrastructure itself. On the 

negative side, MASEN is impacted by the costs of the 

PPA signed with the SPC (around USD 97-100 million 

a year) but this is compensated through a convention 

with the government to subsidize the costs of paying the 

Power Purchase Agreement with the SPC.

Other benefits may include profit on margins it generates through repackaging concessional debt, grants 

from IFIs, dividends as an equity holder of the project 

company, and sales of CO2

 emission rights under 

the Clean Development Mechanism.

42 The latter 

could amount to between USD 1.2 and 3 million per 

year (based on a USD5/t and USD13/t carbon price 

respectively).43

SPC equity providers

A consortium of private equity providers (including 

MASEN) stand to benefit from a guaranteed revenue 

stream through MASEN’s PPA. This will cover SPC 

costs after concessional finance is factored in, plus an 

acceptable margin that we estimate at 13.63 percent 

on a levered basis. There could also be a return from 

patents that are generated as a result of this project. 

The cash flow profile of the SPC equity holders is 

integrated in Figure 4 and highlights both revenues and 

costs.

The private consortium will also develop considerable 

experience from their involvement in Ouarzazate. This 

42 MASEN’s right to carbon finance revenues will be specified in the PPA 

between SPC and MASEN. The Ouarzazate Solar Plant Phase 1 was submitted to the CDM registry on 28 September 2011 and is currently listed at the 

“Prior Consideration” stage.

43 We estimate a price range of USD 5 to 13/ton as the lowest reported cost for 

primary CERs by Gorina (2009) and the highest paid for “pioneering primary 

credits” according to ICIS (2011). The amount of CO2 emissions saved has 

been estimated by WB (2011a) but will have to be validated and approved 

by the CDM Executive Board.

will put them in a good position to invest in similar projects throughout the region.

Over time, some of the benefits will include those that 

stem from scalability. These include reduced technology 

costs, a ready workforce, and access to a wider electricity market along with other regional developers.

IFI grantors and lenders

IFI grantors and lenders provide funding to the project 

on the basis of its contribution to the higher-level environmental and development objectives. Lenders also 

aim to recoup the capital lent with a minimal return on 

the investment. (We estimate a blended concessional 

rate of 3.1 percent). As discussed, the standalone contribution of Ouarzazate I is insufficient to meet higherlevel objectives. However, as the first stage of a new 

portfolio, it is almost inevitable that Ouarzazate I will 

bear some early-development costs (or “vintage costs”) 

to which future projects will not therefore be subject. 

IFIs will most likely remain involved in the subsequent 

phases of Ouarzazate and will continue to pursue those 

same objectives.

General public

The general public stands to benefit from local economic development opportunities (jobs and training) 

that result from the project during construction and 

operation, improved energy security, and from the, 

eventual, technology-cost reductions that the Morocco 

Solar Plan will achieve. At the local level, the income 

(USD 3 million) from the sale of the land for the plant 

to ONE/MASEN is being used to fund the Ait Oukrour 

Toundout community’s local social development plan. 

MASEN and other public stakeholders will also contribute to this fund on a voluntary basis.

Has Ouarzazate I been effective?

The San Giorgio Group aims to facilitate an overall 

assessment of whether money is being spent effectively. 

To do this, we map out the policy steps and financial 

inputs that support implementation activities, through 

outputs and eventually, to final outcomes, in order to 

clearly identify the causal links between policies, investments, and final impacts (see Table 3).

Based on this analysis, we identify the main factors that 

determined the performance of the individual intervention, and good practices which could be scaled up and 

replicated in other sectors, technologies, and geographies. We use a common set of appropriate criteria to 

systematically measure indicators such as total amount 

2012-08-054_000000000000668
A CPI Report 15

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

INPUT OUTPUT INTERIM OUTCOME PROJECTED FINAL OUTCOME

•	 Private capital: 

USD 253 million

•	 Concessional 

public finance 

(grants, belowmarket loans): 

USD 1 billion

•	 Market-like 

incentives 

(Government 

of Morocco 

subsidy): 

USD 1.19 billion

•	 Installed CSP 

capacity: 

160MW

•	 LCOE driven 

down by 25-30 

percent

•	 Local content 

valued at 30 

percent of plant 

capital costs

•	 Thousands 

full-time 

equivalent construction jobs 

•	 Displaced fossil 

generation: 370 

GWh p.a.

•	 Solar Power 

Company IRR: 13.63 

percent (after tax)

•	 Government 

revenues (carbon 

market, taxes USD 

380 million, infrastructure lease 

payments)

•	 Reduced imports or 

additional capacity 

to meet rising 

demand

•	 Hundreds of 

operations and 

maintenance jobs

•	 Avoided fossil-fuel subsidies: 

USD 64 million 

•	 CO2

 avoided: 240 ktCO2 p.a.

•	 Lessons for replication and 

scale up of CSP in the MENA 

region and beyond

•	 Contribution to Moroccan 

Solar Plan eventual expected 

benefits: 

» Local economic development:1

 USD 4.6 billion value 

added and 11,000 full-time 

equivalent jobs 

» Shifting energy system away 

from fossil fuels

» Improved energy security 

» Technology cost reduction

» Development of a regional 

electricity market / exports 

to EU: USD 3 billion export 

revenues

Table 3: Summary of the effectiveness of the Ouarzazate intervention

1

 Local manufacturing, R&D, industrial cluster development.

Note: All figures, unless specified, refer to the whole project life time. Government of Morocco subsidy of USD 1.19 billion is gross and does not account for subsidies 

saved on imported fuels and additional tax revenues. Total net cost to Moroccan budget estimated at USD 883 million (WB, 2011a). 

Source: data extracted from WB (2011a); AfDB (2012b)

invested and leveraged and the performance of financing practices in relation to green investment objectives. As we build up a larger collection of case studies, 

we will compare results across different settings and 

attempt to draw lessons about what makes climate 

finance more or less effective.

In the context of Ouarzazate, we assess final outcomes 

against Ouarzazate’s expected 25 year life-cycle and 

associated projections.

We present the effectiveness framework as applied 

to Ouarzazate 1 in Table 3, which defines inputs as 

financial resources, outputs as direct results from the 

investment of those resources, interim outcomes as 

second order results derived from project outputs, and 

projected final outcomes as the cumulative benefits 

delivered over the lifetime of the project.

This map of interim and final outcomes highlights 

the expectation that Ouarzazate will yield significant 

environmental and economic benefits over its lifetime. 

The lessons generated will take Morocco and the region 

a step closer to the realization of a large-scale CSP 

portfolio.

2012-08-054_000000000000669
A CPI Report 16

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Risk allocation in Ouarzazate I

To understand how risks are allocated among stakeholders, we have applied a three step risk management 

framework to the Ouarzazate I project. We:

1. identify and assess individual risks;

2. analyze the impacts and the mitigation instruments 

adopted to address critical risks; 

3. Depict the overall final risk allocation framework 

in Ouarzazate I, highlighting the instruments and 

arrangements used to shift risk between entities.

In the following chapter, we explore how the Ouarzazate 

I risk-sharing model reallocated risks between the 

private and public sectors. We also review the role of 

IFIs in relieving both sides of some financial risks.

• The public-private partnership model shares project management risks between the public and 

the private stakeholders. In running the plant, stakeholders’ joint responsibilities help to align their 

interests.

• A combination of PPA contracts shifts revenue risks from the private developer (the SPC) to MASEN 

and the Government of Morocco, which are backed by international aid. This helps to reduce the 

required rate of return from the private investor and makes the project viable.

• Pre-emptive financing from international donors and multilateral banks greatly reduces the financial 

risks of the project while diversifying sources of capital.

Risk identification and assessment

We first categorized risks in the Ouarzazate project 

along three major dimensions:44

•	 Development risks refer to risks associated 

with the design and implementation phase of 

the project including procurement (equipment/

technology), construction, and financing risks;

•	 Operations risks include all risks associated 

with running the project, i.e. production and 

availability risks, operating costs (notably 

operations and maintenence risks), and 

revenues (power generation sale as affected by 

the power sales agreement and subsidy).

•	 Outcome risks refer to risks more specific 

to high-level public-policy objectives such as 

failure to meet environmental and local development targets, risk of overpaying on subsidies, 

risk of not impacting technology costs or 

providing suitable demonstration effects to 

stimulate replication and scale up.

Next, we systematically classify the identified risks 

according to two criteria: their probability/frequency of 

occurrence (from very low to very high) and their grade 

of impact on the project’s financial and non-financial 

objectives (from very low to very high).

44 This approach builds upon the typical project risk breakdown along development stages by adding the ‘outcome’ dimension, which is dedicated to the 

overarching results of the program. Acknowledging the degree of subjectivity embedded in this approach, and that some risks are interrelated and 

may involve more than one dimension, the San Giorgio Group strives to 

systematically capture these three dimensions across case studies.

2012-08-054_000000000000670
A CPI Report 17

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco Probability

Impact

Probability

Impact

Probability

Impact

LOW-RISK EVENTS

Risk events with low probability of occurrence and low to-medium impact: 

•	 Project development risk: The early-stage technology and the diverse interests of 

domestic and international actors make early termination a possible risk but with 

low impacts due to the disbursement of relatively little capital.

•	 Electricity Price Risk: This risk is borne by the Government of Morocco and international backers and is caused by low fossil-fuel prices driving wholesale prices 

below the benchmark set in the PPA between MASEN and ONE. This risk has low 

probability given the upward trend in international fuel prices (IEA, 2011).

MODERATE-RISK EVENTS

Risk events with moderate probability of occurrence, but medium-high impacts:

•	 Safeguards: The risk of non-fulfillment of social and environmental safeguards 

has high to medium impact as IFIs’ initial assessments of the project indicate the 

potential for substantial environmental and social impacts.

HIGH-RISK EVENTS

Risk events with high to very high impact whatever the probability of occurrence:

•	 Equipment failure: Reduced production, increased costs, or delays could all 

negatively impact the financial performance of the project.45 Plant developers bear 

this risk.

•	 Reduced solar irradiation levels: Reduced solar irradiation levels on a given site 

would result in lower than projected production output. Similar to equipment 

failure, the developer bears this risk, however, the Government of Morocco 

indirectly bears this risk since it impacts the amount of fossil fuels displaced.

•	 Storage technology failure: Failure to effectively embed the thermal storage—the 

least proven component of CSP technology—would render the plant unable to 

supply peak-load power, currently provided by expensive imported oil. This in turn 

would seriously undermine both the economics of the project (a risk the developer 

bears) and the achievement of fossil-fuel subsidy savings (a risk the Government 

of Morocco bears).46

•	 Cost overruns and delays: The project is large and applies a relatively new business model—a public-private partnership—for the country’s energy sector. This makes unforeseen delays and cost overruns highly 

possible. As a result of EPC contractual provisions, the developers bear this risk and its costs.

•	 PPA termination risk: Should the project developers fail to deliver the project on time, MASEN could 

terminate the PPA and exercise the put-option in the Shareholder Agreement.47 This is a low-probability 

event as MASEN is a shareholder of the SPC, however, it would have a disastrous impact on the project’s 

financial viability.

•	 Risk of insufficient funds to cover the viability gap: Should the Government of Morocco fail to continue 

paying a subsidy to MASEN, the agency would be forced to default on the PPA commitment. This would 

make the project unviable. 

•	 Risk of non-achievement of project objectives and higher-level objectives: The Government of Morocco 

bears this risk because Ouarzazate I is the first part of a portfolio approach that is complex, new, and in 

large part, contingent on the eventual export of energy to E.U. markets.

45 Norton Rose (2010) believes that solar thermal technology is now more on the proven than prototype side. Parabolic trough projects are already in place in 

numerous locations throughout the world and a 20 MW plant is already operational in Morocco. 

46 Refer to the “Investment, Return and Profitability” section.

47 By exercising the put-option in the Shareholder Agreement, MASEN can “walk away” from the SPC by selling its shares to the other partners at a pre-determined 

price (Norton Rose, 2010 – WB, 2011a).

2012-08-054_000000000000671
A CPI Report 18

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Risk analysis and mitigation instruments

Out of the high-risk events outlined above, we focus on 

the drivers and impacts of those that we deem the most 

important risks to the project fulfilling its objectives,48

namely:

•	 Operating performance risk and specifically 

under-production as a result of equipment 

failure (during construction or operation) or 

lower than expected solar irradiation;

•	 cost overruns (CAPEX, OPEX, financing); and

•	 failure of the government to fully cover the 

viability gap.

The risk of non-achievement of project objectives 

and higher-level objectives is crucial from the point of 

view of public stakeholders and ultimately linked to the 

success of delivering the broader CSP portfolio to which 

Ouarzazate I belongs. A detailed analysis of this risk and 

of the available mitigation measures (“the five building 

blocks to replication”) is presented in Section 6.

1. Operating performance risk

Equipment failure and uncertainty of solar irradiation levels represent risks for the ability of the plant to 

maintain expected energy generation levels. Equipment 

failure could result from operational stress of the 

generation processes and aging, corrosion, and fatigue 

of the materials. Irradiation levels can diverge from longterm forecasts due to adverse weather events, such as 

sandstorms, and as a result of uncertainty in original 

site-specific irradiation measurements.

We estimate the risk of under-production as moderately likely and quantify its impact by altering both 

the equipment’s degradation factor from the project’s 

initial projections, to account for equipment failure, and 

the forecasted level of production, to account for solar 

irradiance’s uncertainty49 (see Appendix B for more 

details). 

The following factors mitigate the impacts of 

48 Consistent with UNEP-SEFI (2008), we consider four typical risk responses: 

(1) risk avoidance, which eliminates the risk or protects the project from 

the risk by changing the project scope or adding resources to the project 

such as finances, time, and/or headcount, (2) risk transfer, which transfers 

the financial impact of the risk by contracting out part of the work to a most 

able party, (3) risk mitigation, which reduces the probability or impact of 

the risk to an acceptable level, and (4) risk acceptance, which addresses the 

risk should it occur.

49 Fitchtner Solar (2009)

operating performance risk on the Ouarzazate project 

considerably:

•	 Technology reliability: Parabolic trough 

technology is the most mature of currently 

available CSP technologies and has been 

successfully implemented in several projects 

across the world and in similar contexts (such 

as Andasol in Spain, which includes storage 

technology), albeit at much smaller scales;

•	 Expertise and advisors: To minimize the risk of 

picking the wrong technology for the wrong site, 

MASEN has employed an experienced technical 

advisor and will select a capable private 

consortium SPC partner. To mitigate construction and operation risks, the pre-qualification 

phase of the tender process required bidders to 

have successfully50 developed, operated, and 

managed large-scale thermal power plants and 

at least one solar power plant.

2. Cost overruns

The combination of new storage technology, the size of 

the power plant, and the relatively new public-private 

partnership financing approach make it moderately 

likely that project costs will go over estimates. To assess 

their impact, we increased both the estimated construction costs and the expected operations and maintenance charges. As expected, given the high-capital 

intensity of the technology, construction cost overruns 

have the greatest impact on levelized costs of electricity 

and project returns as, we assume, the project would 

have to raise emergency funding at more expensive 

commercial rates51 (see Table 2 in Appendix B).

Specific procedures and contracts between project 

developers and service providers will transfer and, from 

the project company point of view, mitigate specific 

risks:

•	 MASEN has undertaken to select a reputable 

private consortium with a successful trackrecord delivering a project of similar scale and 

technology.

•	 Engineering, Procurement and Construction 

(EPC) and Operations and Management 

(O&M) contractual specifications, to be defined 

50 Successfully was defined such that the applicant had not been liable for penalties or liquidated damages in excess of 5 percent of contract value (Norton 

Rose, 2010).

51 Commercial lending rate estimated at 9 percent (Kulichenko and Wirth, 

2011). 

2012-08-054_000000000000672
A CPI Report 19

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

during the bidding process, will 

determine the amount of cost 

overruns that will fall on the 

project developer and sponsors 

and those to be absorbed by the 

service providers;

We anticipate the public budget will be 

shielded from the risk of cost overruns by the expected provisions in the 

PPA and the Shareholder Agreement52

(please see the following chapter on 

“The Ouarzazate I risk-sharing model”). 

Furthermore, the tender process will 

guarantee that the PPA price agreed 

on between MASEN and the SPC is 

based on a competitive projection of 

construction and operation costs (with 

the incentive for the bidders to quote 

a lower price, but one they can deliver). By design, the 

PPA price will not be impacted by subsequent cost 

increases.

3. Support shortfalls

The ability of the Government of Morocco to support 

MASEN’s long-term financial stability is outside the 

scope of this study. However, the net impact of the solar 

subsidy (which is key to the viability of the project) on 

the government budget is significant53 and depends on 

the value of the fossil-fuel subsidies displaced54 by the 

power that the CSP project generates. Figure 6 shows 

the amount of fossil-fuel subsidies that the Government 

of Morocco would have to pay in the absence of the 

Ouarzazate I project (red) and the additional solar 

subsidy (green) needed to meet the incremental cost 

of the CSP plant. As, historically, electricity tariffs for 

industrial usages have not shown much sensitivity to 

oil price fluctuations,55 we assume that fossil-fuel price 

variations would not be transferred directly onto the 

grid price but absorbed mostly through the level of 

subsidization. The figure then shows that a significant 

decrease in fossil-fuel prices would imply a greater 

52 We acknowledge that the contents of the final documents eventually signed 

by MASEN and the SPC may differ significantly from these expectations.

53 The solar subsidy represents approximately 0.22 percent of the total annual 

budget expenditures (source US Department of State, 2012).

54 Please see Box 1 in Section 3 for more details. Amounts of fossil fuel 

displaced (in the baseline scenario) have been estimated by ONE and valued 

at the following prices and quantities: Coal: 32,000 tons at 150 USD/ton; 

Natural Gas: 354,000 mbtu at 10 USD/mbtu; Fuel Oil: 67,000 tons at 450 

USD/ton.

55 Eurelectric Electricity Tariffs (2005-2007).

additional cost to the government budget compared to 

a scenario in which the same power is generated with 

conventional sources.

However, this risk is less probable given current expectations that world oil prices will continue to grow.

Risk allocation framework

In Ouarzazate I, financial engineering and policies have 

been designed to alter the share of the project development, operations, and outcome risks allocated to 

various parties. The dynamic risk allocation matrix in 

Figure 756 illustrates how risk is allocated to each major 

project stakeholder, on one hand, and how the overall 

risk profile shifts through the use of risk transfer instruments, on the other. Risk is categorized according to the 

estimated ‘magnitude of risk’ multiplied by the ‘likelihood of risk’:57 ‘very high’ in dark red, ‘high’ in orange, 

‘moderate’ in light orange and ‘low’ in yellow.

•	 As the following chapter will show in detail, in 

contrast to an independent power producer 

model (in which the private producer alone 

specifies the project’s design and implementation), the public-private partnership model 

shares the management of the project risks 

between the public (Government and MASEN) 

and the private stakeholders. 

•	 The amount of construction and operation 

risk that the plant developer will be able to 

offload to sub-contractors depends on the 

56 A more detailed risk allocation matrix is to be found in Annex A.

57 Given the lack of contract-level data available on this project, this weighting 

system is subjective.

Figure 6: Impact of fossil fuel price changes on Ouarzazate I incremental cost

10 0 10 20 30 40 50 60

Base 

Case

∆ -20%

∆ -30%

Source: CPI Elaborations

Millions of USD

GoM FF 

subsidy 

savings

Additional solar subsidy 

over counterfactual

2012-08-054_000000000000673
A CPI Report 20

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

availability of counterparties willing to sign 

engineering, procurement, and construction 

(EPC) and operations and management (O&M) 

agreements.58

•	 The provision of IFIs’ concessional financing 

before the project is initiated (pre-emptive 

financing) reduces the project developer’s 

risk of capital shortages during construction 

(CAPEX risk). In turn, this significantly reduces 

the overall financial risk of the project including 

the cost of capital and required rate of return. At 

the same time, the explicit backing of multiple 

IFIs greatly improves investors’ confidence.

•	 As a shareholder in the public-private partnership model, MASEN shares the plant 

economics, mitigating the risk perceived by 

the developer of an unfavorable change of 

renewable energy policies in the country (policy 

risk).

•	 During the operation phase, MASEN and the 

project company sign a PPA which shifts both 

electricity price and quantity risk (revenue risk) 

from the project developer to the public sector. 

58 The availability of counterparties willing to bear full construction and 

operation risks is often linked with the maturity of the technology and the 

development of the industrial sector—hence it is usually lower for newer 

technologies. 

The PSA between MASEN and ONE guarantees 

the full dispatch to the grid of the electricity 

bought from the project; while the convention 

between the Government of Morocco and 

MASEN (“SICS”) provides the agency with 

funds to meet the gap between the two power 

prices. Should any public budget difficulties 

arise (shortfall risk), a loan facility from the 

IBRD supports the Government of Morocco. 

•	 The presence and backing of international 

donors partially relieves local authorities of 

the project implementation burden, mitigating 

the risk of the project failing to meet higherlevel objectives (outcome risk).59 However, the 

conditions placed on the loans and the IFI’s right 

to object to all significant decisions increase 

MASEN’s (and the Government of Morocco’s) 

risk in managing the project. The following 

chapter provides more in-depth analysis of 

the public-private partnership model and the 

role of IFIs in Ouarzazate I, drawing lessons 

about how the project is being structured and 

implemented.

59 The involvement of European donors and the European Commission may 

also help to mitigate the risk that subsequent phases of the Ouarzazate 

project would fail to access the European electricity market through power 

export arrangements.

O&M

Production Risk

IFIs Go MASEN Plant Developer Sub-co

Developmen

Design failure

Operati

Outcom

CTF and IFIs 

reputation

Figure 7: Dynamic Risk Matrix

Construction 

Risk EPC

IBRD Loan

SICS Financial 

Risk

PPA

Revenue Risk

Morocco Solar 

Plan credibility

PPP Policy Risk

Capex Risk Concessional Loans

Source CPI Elaborations

Production Risk

O&M

IFIs 

Backing

Relative amount of risk 

taken on by stakeholders

Low High

Shortfall 

Risk

2012-08-054_000000000000674
A CPI Report 21

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

The Ouarzazate I risk-sharing 

model

This section analyzes in detail the business model 

deployed in Ouarzazate I:

•	 the public-private partnership model, its 

principles of risk allocation and expected 

impacts on the project’s probability of success; 

and

•	 the role and mode of engagement of international donors, their coordination and risk 

sharing arrangements.

The public-private partnership model

The commercial immaturity and the very high capital 

costs of CSP in Morocco mean that high levels of 

national and international support are necessary for the 

project to proceed. However, for future phases of the 

project, the high levels of concessional support present 

in Ouarzazate will not be sustainable. For this reason, 

the Government of Morocco designed a public-private 

partnership that, through a tendering process, taps 

financial resources, managerial capacity, and pursuit of 

technological innovation from the private sector, while 

retaining control over the quality and the quantity of the 

output (Burger, 2008; Teichmann, 2011).

Typical public-private partnership structures60 align the 

objectives of public and private partners by transferring operational delivery risk to the private partners. 

60There is a lack of consensus around the structure of a “typical” publicprivate partnership and its definition. In this work we refer to the definition 

advanced by the OECD: “A public-private partnership is defined as an agreement between the government and one or more private partners (which 

may include the operators and the financiers) according to which the private 

partners deliver the service in such a manner that the service delivery 

objectives of the government are aligned with the profit objectives of the 

private partners and where the effectiveness of the alignment depends on a 

sufficient transfer of risk to the private partners” (OECD, 2008).

These structures aim to balance the amount of both 

exogenous and endogenous risks61 the public agent 

(MASEN in this case) transfers to the private actor, with 

the higher-risk premiums required by the latter. The 

optimal risk allocation rests on the proper identification 

of the nature of the risks and of the stakeholders best 

suited to bear them at the lowest costs. In most cases, 

endogenous risks (those directly related to the project, 

such as construction and performance risks) are best 

allocated to the private partner, giving them the incentive to execute the project as efficiently as possible; 

while exogenous risks (those external to the project, 

such as policy and regulation risks) are more effectively 

allocated to the public partner (Teichmann, 2011).

Interestingly, in Ouarzazate I, the public partner is 

on both the supply and demand side of the publicprivate partnership: MASEN is both the purchaser of the 

service and a shareholder of the company operating the 

plant. This feature theoretically shifts the risk burden 

more towards the public entity than it would with other 

concessions/privatizations. This in turn should incentivize bidders to lower their required rate of return 

(OECD, 2008).62 At the same time, it also allows 

MASEN greater control and active participation on 

the production side of the service. The joint responsibility for running the plant improves the alignment of 

stakeholders’ interests and mitigates the risk that the 

private project developer might inflate costs and/or 

operate the plant inefficiently once revenues have been 

granted.

61 Endogenous risks are the ones in which the project developer/sponsor has 

control to a certain extent and can directly manage in order to influence the 

actual outcome (e.g. technology, management of financial resources, counterparty). Exogenous risks are those onto which the project developer has 

neither control, nor ability to mitigate (e.g. political risks, adverse changes in 

national policies, currency devaluation). (OECD, 2008).

62 However, the perceived risk of dealing with the public entity as shareholder 

could offset this risk reduction. Given the early stage of the tendering 

process, this instance has not been verified.

• The public-private partnership model with competitive tendering and the two Power Price Agreements 

(PPAs) efficiently allocate policy risks to the public sector and project-related performance risks to 

the private sector. Early results from the bidding process show project costs in line with, if not below, 

projections.

• The process of coordinating concessional financing from lenders has been time consuming and resource 

intensive but has lowered transaction costs, boosted investor confidence and improved the project’s 

economics.

2012-08-054_000000000000675
A CPI Report 22

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

In Ouarzazate I, the majority of risks are allocated 

between parties via two contracts:

•	 the Shareholder Agreement between MASEN 

and the private consortium (yet to be selected);

•	 the PPA between MASEN and the SPC.

63

The Shareholder Agreement defines the allocation 

of shares, profits, and voting rights under the publicprivate partnership. It regulates the representation of 

minority shareholders on the Board and establishes 

quorum rules for management decisions. Finally, it 

defines liabilities and allocates the company’s management risks between parties. In particular, to shield 

MASEN from construction risks, the agreement grants 

the agency a put-option, that is, the right to sell back 

its shares to the Consortium at a pre-defined price in 

the event that MASEN decides to terminate the PPA as 

a consequence of the private partner defaulting on its 

obligations (WB, 2011a).

The PPA obliges MASEN to purchase all of the power 

generated by the plant during its expected 25 years of 

operation at a pre-determined price set through the 

competitive tender. This guarantees the required rate 

of return requested by the private investor during the 

tender and shields the private partner from exogenous 

risks affecting the value of the electricity generated. 

These exogenous risks include oil-price spikes, government policy on fossil-fuel subsidies that would affect 

the electricity price on the national grid, and changes of 

the government policy towards renewable energy.

The PPA also requires the consortium to pay financial 

lump-sum penalties to MASEN in case of construction delays or failure to deliver the contracted capacity. 

It grants MASEN the right to terminate its purchasing commitment if the plant’s performance and/or its 

consortium management fail to meet pre-determined 

requirements (WB, 2011a). In contrast to other examples of PPAs in the region, this PPA grants the emission 

credit rights that may eventually be assigned to the 

plant under the Clean Development mechanism to the 

power off-taker MASEN (Norton Rose, 2010).

At this stage of the project, the public-private partnership design seems to follow the principles of optimal 

risk sharing, allocating endogenous risks to the private 

partner and exogenous ones to the public agency. 

However, it is too early to draw conclusions on whether 

this has meaningfully reduced the private sector’s 

63 The exact terms of these documents are still confidential and most likely 

subject to changes before the tender and/or contract process is complete.

perceived risk and required return. More evidence 

is needed to establish if the lower-than-anticipated 

private-sector bids can be attributed to the public-private partnership design or if they are caused by lowerthan-expected project cost. Early bids under the tender 

process suggest that levelized costs (LCOE) per unit of 

power are projected in line with, if not below, the LCOE 

estimated at the beginning of the project.64 If the lower 

bid of USD189.7/MWh prevails, it would imply a lower 

unit cost of approximately USD 4700/kW (20 percent 

reduction over the projected figure) for the plant. 

Importantly, this would reduce the amount of incremental public subsidy required to compensate for the price 

difference between the PPA and PSA, from USD 60 

million to USD 40 million per year.65

International financial institution 

engagement and coordination

Concessional financing drives down the levelized cost 

of energy generated by Ouarzazate I by around 30 

percent66 by reducing the cost of capital and the uncertainty about its availability. The International Bank for 

Reconstruction and Development’s (IBRD) provision of 

a facility to partially guarantee the government subsidy 

also adds to investors’ comfort, visibility of long-term 

revenues, and the credit worthiness of the PPA counterparty. Furthermore, the donors and multilateral 

development banks bring their project design, implementation experience, and political clout, reducing the 

likelihood of project failure. 

In this section, we focus on the specific arrangements 

and coordination efforts that have facilitated the 

engagement of several donors and banks, helping to 

achieve affordable finance at scale in a relatively short 

time-period.

Concessional financiers in Ouarzazate I are organized 

around three lead-financiers: the AfDB, the WB, and 

the EIB (representing European donors), with the WB 

and AfDB channeling CTF funds. MASEN is the sole 

borrower of the concessional loans as well as the sole 

direct beneficiary. MASEN negotiated directly with IFIs 

and functions as a lender of funds to the SPC through 

a unified package that blends together the terms of the 

different loans. Interestingly, financing has not been 

pooled or syndicated67 as is typical with the involve64 See note 25 in Section 3.

65See Section 3 for details on the estimation of the PSA and PPA reference 

prices.

66 See Section 3 for more details.

67 “A syndicated loan is one that is provided by a group of lenders and is 

2012-08-054_000000000000676
A CPI Report 23

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

ment of commercial banks. Instead, each IFI agreed to 

its own terms and conditions for the loan with MASEN 

and, more importantly, will sign a “no-objection” letter 

to approve all major decisions in the project. MASEN’s 

efforts to coordinate and harmonize donors’ requirements and procedures was crucial to move the process 

forward quickly. However, the process remains cumbersome and further improvements are needed to streamline financing arrangements and minimize transaction 

costs.

One key risk that requires management going forward 

is the likely coexistence of different interest charges, 

loan tenders and collateral guarantees across the loan 

portfolio. European donors (EIB, KfW and AFD) avoided 

this complication by choosing not to syndicate their 

contributions, but rather to contribute through a joint 

financing package with synchronized loans. The EIB 

coordinated two umbrella agreements laying down the 

provisions for donors’ coordination:

•	 The Pari-Passu Implementation Agreement

ensures that the disbursement of funds towards 

the project is conducted in a ‘fair way’ (paripassu) across financers, that is, simultaneously 

on a pro-rata basis.

structured, arranged, and administered by one or several commercial or 

investment banks known as arrangers” – source: Standard & Poor’s (2010).

•	 The Cross-Collateralization Agreement 

stipulates that the same asset acts as collateral 

for all the loans included in the agreement.

To minimize the compliance burden on the borrower, all 

lenders developed a common set of procedures (covering procurement rules and social and environmental 

standards), and agreed to adopt the World Bank’s 

procurement rules and standards for all the loans. This 

process has been relatively time and resource intensive 

but should allow a smooth ongoing operation of the 

financing arrangement and timely monitoring of the 

investment.

Importantly, early coordination and agreement with 

donors has allowed MASEN to provide clear guidelines on the terms and costs at which capital would 

be offered to private investors who are bidding for the 

project. This transparency appears to have incentivized 

competition among investors, resulting in required rate 

of returns in line with other, less risky renewable energy 

projects in the country (Attijari, 2010), and in bids in 

line with or below the projected levels.

2012-08-054_000000000000677
A CPI Report 24

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Is Ouarzazate I replicable and 

scalable?

Ouarzazate’s stakeholders understand that it is 

one of the first in a series of CSP installations that 

should lead to a large-scale portfolio of CSP plants in 

Morocco and the MENA region. Indeed, Ouarzazate I 

only makes economic sense in the context of a portfolio 

of CSP projects which, through technology cost reductions and the development of an integrated, regional 

CSP market, delivers significant net economic benefits.

Herein lies a ‘chicken or the egg’ dilemma: In order 

to scale up a CSP portfolio, given limited public 

resources, projects must become increasingly commercially viable. Costs must come down through 

economies of scale and revenues must be enhanced 

through exports to Europe. But achieving commercial 

viability requires experience, capacity, and associated 

infrastructures (such as transmission lines and interconnectors). Because commercial viability and the development of a portfolio of projects are interdependent, there 

is no ‘low-cost’ first step.

Therefore, the first publicly-supported large scale CSP 

projects play a crucial role bridging the development of 

a more commercially-sustainable, regional CSP market. 

These first projects should reduce uncertainties about 

costs and risks for investors, including commercial 

banks. They will do this by demonstrating that the technology can deliver, that the project can be realized on 

time and within a budget, and that contractual arrangements allow for reliable revenue streams.

The Clean Technology Fund CSP Investment Plan alone 

contains USD 550 million of concessional finance 

for CSP projects in the MENA region over and above 

Ouarzazate I. IFIs that will channel this finance have 

expressed willingness to co-fund these projects with 

their own resources (CTF, 2012).

We now explore which elements have worked well so 

far in Ouarzazate I, and consider whether replicating 

elements would be sufficient to support the next round 

of large-scale CSP projects in the region.

What is working in Ouarzazate I?

The Ouarzazate I project is in the late stages of design 

specification. It is therefore premature to assess 

whether its implementation has been successful. 

However, early indicators—such as significant support 

from international development banks and interest from 

private-sector bidders—suggest that the project has 

potential to progress towards the final stages of development and, subsequently, operation.

As other similar large-scale CSP projects begin to get 

off the ground in the region, it is valuable to draw out 

lessons from Ouarzazate I that could be replicated by 

future projects. In doing so, we recognize the significant diversity among countries in the MENA region 

and acknowledge that new challenges could arise in 

each case. These could include variations in electricity 

market structures, as well as economic, political, and 

policy contexts that differ from those in Ouarzazate I.

This aside, we identify five decisive building blocks 

in the Ouarzazate I project which could potentially 

• Five key building blocks underpin Ouarzazate’s progress to date. These include: (1) strong public support 

and the close alignment of key public partners, (2) financial and technical support from international 

financial institutions, (3) strong donor engagement and coordination, (4) a carefully designed business 

model and tendering procedure, and (5) a project design that is built on past lessons learned. These 

building blocks could be replicated by other large scale CSP projects in the region, given the right 

economic, political, and policy contexts. 

• Given the finite nature of public resources, more commercially-oriented financing models will need to 

emerge. These financing models will most likely be supported by lower technology costs, lower project 

costs, and higher market revenues (e.g. E.U. export revenues). 

• By 2020, technology costs are expected to come down but not to the level that is required to reach grid 

parity in domestic MENA markets (even accounting for phase out of fossil-fuel subsidies). 

• It’s feasible that renewable power exports to European markets could fill the remaining viability gap in 

the medium- to long-term. However, considerable political support will be crucial to secure EU Member 

States’ demand and to broker specific agreements that make this a reality.

2012-08-054_000000000000678
A CPI Report 25

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

be replicated in other large-scale CSP projects in the 

region.

1. Strong public support and close alignment of key 

public partners 

The Government of Morocco and MASEN have 

played a crucial role in designing and implementing an 

appropriate framework to support Ouarzazate I. The 

Government of Morocco established a favorable regulatory framework for private-sector engagement in the 

electricity market and a strong renewable policy framework. In particular, the government has set clear and 

ambitious development targets for renewable energy 

sources (both wind and solar);68 it has established a 

specialized professional entity tasked with realizing 

CSP projects (MASEN) and is financially supporting 

MASEN’s work to implement the Moroccan Solar Plan. 

The further opening of Morocco’s electricity system 

to the private sector will itself help to attract financing, expertise, management skills, and entrepreneurial 

efficiency.69

Legal agreements ensure alignment between key 

government players. The agreement between the 

Government and MASEN provides certainty that the 

viability gap will be covered while a second agreement 

between MASEN and ONE guarantees connection to 

the grid and full dispatch of electricity.

MASEN has led the Ouarzazate project to date and 

plays a critical role within the public-private partnership 

structure. It sought expert advice to develop a project 

design that promotes efficient risk sharing between 

public and private partners. Importantly, it successfully 

secured substantial amounts of concessional finance 

from a range of international donors, whose early commitments attracted potential private-sector partners.

2. Significant financial and technical contributions 

from IFIs 

IFIs have provided both financial and specialized, 

technical support to the project. A high level of early 

and sustained IFIs engagement has fostered the project’s credibility and helped to mitigate risks perceived 

by private-sector investors. For example, the African 

Development Bank and the World Bank worked 

closely with MASEN on project design and all donors 

68 Namely the 1000 MW Wind Integrated Energy Plan, the 2000 MW Morocco Solar Plan, and the 13-09 Renewable Energy Law.

69 Here we echo recent work of the OECD in indentifying, beyond financial 

support and policies, clear national goals, competitive and transparent processes, and private sector engagement as critical elements of a regulatory 

framework that supports climate-resilient investments (OECD, 2012). 

committed significant resources to make the project 

work, in some cases making compromises on loan 

requirements to reduce the burden for MASEN. This 

commitment to the project’s success could be replicated in future interventions.

3. Strong engagement and coordination of donors 

Considerable effort and strong coordination between 

IFIs and Moroccan stakeholders has been essential to 

get such a large and complex project off the ground. 

Donor coordination to harmonize conditions, safeguards, procurement, and no-objection and reporting 

rules was time consuming and challenging. However, it 

established a valuable model for subsequent projects. In 

the future, the syndication of loans, for example, could 

help reduce the project developers’ burden to deal with 

multiple lenders and their separate loan rates, conditions, and procedures.

As subsequent projects are designed, including 

Ouarzazate Phase II, it will be important to promote the 

participation of commercial banks and capital markets, 

thereby increasing the leverage ratio of concessional 

finance. While this will be essential in order to increase 

the amount of capital for the technology, it will also 

introduce new challenges for coordination and risk 

sharing between parties. As Ouarzazate I has demonstrated, there may be significant benefits in dealing with 

these issues preemptively and transparently.

The eventual phase out of IFI support will be both 

unavoidable, given finite resources, and necessary, 

to avoid crowding-out the private finance that is core 

to realizing the scale of investments required (OECD, 

2012).

4. A carefully designed public-private partnership and 

competitive tendering procedure to attract the right 

expertise and efficiently allocate risk 

The public-private partnership model allows the optimal 

alignment of risk between public and private players, 

according to their expertise. For example, the private 

developer takes on construction and operational risk 

while the government takes on electricity market risk 

(revenue risk). MASEN’s role in the public-private partnership is innovative: It acts as both equity investor and 

purchaser of the power (off-taker) and it has the ability 

to align public and private objectives. Ouarzazate’s 

development and operation will show whether this 

alignment will be realized. Through MASEN’s role as 

an equity shareholder and a conduit for concessional 

finance, the Government of Morocco shows it has skin 

in the game. This allows the government to exercise 

2012-08-054_000000000000679
A CPI Report 26

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

greater control over the project and share in the projects’ successes or failures.

In addition, MASEN has led a transparent and wellmanaged two-stage competitive tendering process 

that has attracted considerable private-sector interest. 

The invitation to tender expressed clear guidelines for 

the terms and modalities of public sector support. The 

SPC’s ability to access sufficient concessional financing provided potential bidders with more certainty over 

financing costs and lowered their required rates of 

return. 

Early indications suggest that MASEN is functioning 

well as a professional agency and is actively forging a 

conducive investment model in which it participates 

actively. The experience points to the benefits of 

setting up a new, specialized government agency to 

drive forward implementation of ambitious renewables 

objectives.

5. A project design built on past lessons learned

Prior to the Ouarzazate I project, the Global 

Environment Facility (GEF) provided support to a 

program that developed several CSP projects in Mexico, 

Morocco, and Egypt (see Annex C). All of these 

encountered numerous challenges and delays, including 

untested technology, a lack of opportunities to build up 

economies of scale, and unsuitable business models, 

which contributed to project failures.

The Ouarzazate I project benefited from exchanges with 

other large-scale CSP projects that are in development 

in India and South Africa, as well as experience gained 

from the above-mentioned GEF project (WB, 2011a). As 

such, Ouarzazate I was designed at a scale large enough 

to contribute significantly to building a portfolio that will 

drive technology-cost reductions. Partners selected a 

business model, the public-private partnership, which 

provides explicit measures to align the objectives and 

expectations of host governments (creating local opportunities), donors (building the experience of the public 

and private sectors which can be applied to future 

projects) and the private sector (providing investment 

security and opportunity). Finally, numerous studies 

were carried out to choose an appropriate technological 

mix.

Sharing lessons from the design and implementation of 

CSP projects will help reduce project costs and increase 

efficiencies that will help Morocco and the MENA 

region develop a CSP portfolio. The Government of 

Morocco is actively engaged in a number of knowledge 

platforms e.g. through the Climate Investment Fund, 

the Mediterranean Solar Plan, Medgrid, the Desertec 

Industry Initiative, etc.

Scaling up the CSP portfolio 

Replicating the Ouarzazate I financing model will not 

be sufficient in and of itself to support the development of a large-scale portfolio of CSP projects. To reach 

the scale desired by the Moroccan and Mediterranean 

Plans, significant sums of additional capital will be 

needed. Given the scarcity of public and international 

support, more commercially-oriented financing models 

will need to emerge. These commercially-oriented 

financing models will most likely require:

1. Reduced technology/project costs, and

2. Higher market revenues (e.g. E.U. export revenues).

In addition, to support and stimulate the development 

of an active CSP market, predictable and stable policies will be required to generate positive incentives for 

private investors. For example, Morocco has renewable 

energy and solar targets in place but supports projects on a project-by-project basis instead of applying 

standardized policy support measures across sectors 

or directed toward particular technologies (e.g. feedin-tariffs / premia, tax incentives, tradable certificates 

or renewable portfolio standards, carbon taxation or 

trading). Such a piece-meal approach could limit the 

potential for scale-up and replicability and ultimately 

slows the speed of development of CSP in the region. 

The presence of conflicting policies that support fossilfuel consumption also make it difficult for renewable 

technologies to compete, drain financial resources away 

from low-carbon investments, and weaken the perception of the country’s commitment on its climate targets.70 On a positive note, the Government of Morocco’s 

desire to embrace private energy producers,71 the transparency of the Ouarzazate I competitive tender, and the 

commitment of public resources (through MASEN) to 

improve the project’s viability provide important incentives that should attract private investors to the country 

and lower the perception of regulatory and policy risk.72

70 Other investment barriers reported for Morocco include: inadequate institutional structures, insufficient coherence and cooperation between Ministries, 

insufficient strategic guidance, insufficient information made available to 

investors, a lack of experience in the administration, and a lack of financial 

incentives (EU, 2010).

71 ONE can issue competitive tenders for IPPs to supply capacity greater than 

10MW and auto-producers can sell power surplus to ONE up to 50MW with 

tariffs including a 20 percent uplift compared to ONE’s normal tariffs.

72 As a comparison, despite similar policy targets, Tunisia is struggling to attract the same interest from international private investors because there is 

2012-08-054_000000000000680
A CPI Report 27

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

We now briefly consider progress toward reducing technology costs and realising renewable exports.

1. A critical mass of publicly supported CSP projects 

will help to drive faster reductions in technology 

costs; combined with the removal of fossil-fuel 

subsidies, this will help move CSP towards grid 

parity.

Capital costs of CSP plants remain very high. Initial 

estimates of capital investment costs for Ouarzazate 

I stood at USD 6000/kW73—or about three times 

the initial investment costs for an average coal power 

plant.74

Costs are gradually coming down and have the potential 

to come down much further. Hinkley et al. (2011) estimate that CSP costs have decreased by 15 percent with 

each doubling of cumulative deployment over the past 

twenty years. Meanwhile, Kulichenko and Wirth (2011) 

estimate that CSP levelized costs have the potential to 

fall from USD 0.21 – 0.26 /kWh in 2010 to USD 0.17 

– 0.18 /kWh (19 percent) by 2020.75 Figures availa perception of lower commitment from the government and a higher level 

of political and regulatory instability.

73 Not yet publicly disclosed bids indicate lower capital costs. See Section 3 

and note 25 for more details.

74 Hypothetical coal plant investment costs reported in the Tanger Wind Park 

CDM PDD are approximately USD 1,800/KW (ONE, 2007).

75 The lower end estimates are based on projections of cost reduction 

potentials for parabolic trough components while the higher end estimates 

consider a range of CSP technologies and the effect of performance data. 

able in initial proposal documentation for Ouarzazate I 

indicated LCOE of approximately USD 0.25/kWh while 

bids reportedly range from USD 0.19/kWh - USD 0.25/

kWh (see footnote 28 in Section 3). These initial projections and the high end bid suggest that CSP costs might 

remain high, in line with 2010 estimates presented 

above. Further examination of the USD 0.19/kWh bid 

may shed light on whether technology cost reductions 

were a significant factor in driving down this consortium’s price.

Nonetheless, even the lowest Ouarzazate I bid is still 

far from grid parity. Achieving parity would in fact 

require an LCOE of around USD 0.08 /kWh—a further 

cost reduction of 11 cents per kWh. We estimate that 

removal of fossil-fuel subsidies would increase grid 

prices to approximately USD 0.11 /kWh, which would 

necessitate less steep reductions of 8 cents per kWh.76

The current increase in the scale and number of CSP 

projects should help to facilitate faster technology cost 

reductions by building economies of scale in manufacturing, learning curve effects, and technical innovation. 

A critical mass of publicly supported large-scale early 

projects could help to drive cost reductions at a faster 

rate than has been witnessed to date, in turn paving 

the way for more commercial players to come into the 

market and complete the regional CSP portfolio.

The estimates were produced by modeling reference plants (location not 

specified) and do not include costs related to transmission connection, land 

or water. 

76 Please see Box 1 for a more detailed treatment of the impact of fossil-fuel 

subsidies on the project.

Box 2 Preconditions for the export of renewable power to E.U. markets

• Bilateral and Multilateral Agreements: The E.U. Renewables Directive (2009/28/EC) (EU, 2009), Article 

9, provides the legal basis for E.U. Member States to meet part of their renewable energy targets for 

2020 by importing renewable power from neighboring countries. However, the electricity needs to 

be imported physically and to be consumed in an E.U. Member State.1

 Trade conditions have to be 

established in the form of bilateral or multilateral agreements. Morocco has already signed cooperation 

agreements with France and Germany and expects to sign further agreements with Spain and Italy in the 

near future.2

1 There is a limited possibility to rely on statistical transfers (i.e. the electricity is consumed domestically, but is counted toward the renewable 

energy share of a supporting E.U. Member State for compliance purposes under the Renewable Energy Directive) if an interconnector is under 

construction before 2016 to enable physical imports into the E.U.

2 In May 2011, the Desertec Industrial Initiative and MASEN also signed a Memorandum of Understanding to develop a 500MW solar Reference 

Project to demonstrate the feasibility of exporting solar power from Morocco to Spain, with exports expected to commence between 2014 and 

2016. Source: http://www.dii-eumena.com/country-focus/morocco.html

2012-08-054_000000000000681
A CPI Report 28

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

2. Exports to E.U. markets could make CSP production 

in the MENA region viable.

One objective of the Moroccan and Mediterranean 

solar plans is to sell electricity to the European 

Union markets, given that current MENA domestic 

grid prices are significantly lower than current CSP 

generation costs. Higher power prices and existing 

support schemes for renewable power available in 

some European countries could already be sufficient 

to exceed the costs of CSP generation in the MENA 

region, thus opening the potential to achieve mutual 

economic benefits. MASEN’s financial model simulated 

the expected revenues from power sales to E.U. export 

markets at a 30 percent premium above generation 

costs. 

Based on the Ouarzazate I financial model and the list of 

plants to be developed under the Moroccan Solar Plan, 

MASEN could reach financial equilibrium thanks to 

increasing exports, from zero percent in 2015 to seven 

percent in 2016 and 46 percent from 2019 onward 

(WB, 2011a). However, there are several preconditions

that need to be resolved before exports to E.U. markets 

from the MENA region can be realised (see Box 2). 

• Removal of Subsidies: The E.U. Renewables Directive outlaws domestic operational support (such 

as a FiT) for electricity that is exported, to avoid double subsidization.3

 However, upfront support 

(concessional finance, investment grants, etc.) is permitted. The presence of a heavily subsidized PPA 

rules out the ability to export power generated by Ouarzazate I. Furthermore, it implies that to achieve 

export potential, electricity generated in following phases of the project will not be able to rely on 

operational support secured by the Government of Morocco.

• Physical Investments: Interconnector capacity needs to be available to export renewable power to 

Europe. Spare capacity seems to be available on the existing 700MW interconnection between Morocco 

and Spain,4 which, for the time being would primarily allow access to Spanish and Portuguese markets,5

although an additional interconnection to Spain is planned. An interconnection exists between Algeria 

and Morocco with a maximum transmission capacity of 700 MW each way, which could provide 

alternative routes to Europe in the future as part of an integrated E.U.-MENA market. In order to attract 

project developers, Office National De L’Electricité (ONE) and the Government of Morocco will need to 

provide clear signals regarding export revenue potential.

• Demand from E.U. Member States: The final major precondition for exports to E.U. Member States is the 

willingness of the states themselves to purchase renewable power from the MENA region. The European 

Commission’s assessment of Member State National Renewable Action Plans (NREAP) indicated that 

the 27 E.U. Member States expected to exceed the 2020 20 percent renewable energy target in the 

“additional energy efficiency scenario” (20.6 percent) and only slightly miss it in the reference scenario 

(19 percent) (EC, 2012). This suggests there may not be much demand from E.U. countries. There are 

two exceptions: Luxembourg and Italy. Italy, according to its NREAP, requires a substantial amount 

of renewable electricity to fulfil its target under the Renewable Energy Directive and is seeking costeffective means to achieve its obligations. At the same time, some Member States, such as Germany, 

have policy objectives that go beyond those of the E.U. renewable directive, and promote adoption of a 

post-2020 view that acknowledges the need for imports.6

3 In order to avoid the possibility that costs could be subsidized through E.U. concessional loans or domestic public finance, and then again through 

subsidized power purchase prices.

4 http://tdworld.com/underground_transmission_distribution/power_bridge_two_continents/ 

5 As the interconnector to France is currently congested until the planned upgrade in 2013, further physical export to France and beyond is not possible. Additional electricity from North Africa would have to be consumed in the Iberian Peninsula.

6 For example, Germany’s energy concept foresees imports from North Africa by 2050 to meet its ambitious targets for GHG reduction of 80 percent by 2050 (on 1990 levels) and for the amount of renewable energy as a proportion of gross final energy consumption of 18 percent by 2020, 

30 percent by 2030, 45 percent by 2040, and 60 percent by 2050.

2012-08-054_000000000000682
A CPI Report 29

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Of note, the possibility to export power from Morocco’s 

CSP plants into European markets presents a trade-off 

between financial viability on one hand, and domestic 

energy and environmental effects on the other. On one 

hand, ‘diverting’ power away from the Moroccan market 

through sales to Europe would significantly lighten the 

pressure on the national budget of covering the cost 

of subsidies. On the other hand, diverting renewable 

power away from the domestic market reduces the 

potential to displace fossil-fuel electricity (and hence 

reduces the savings that could be achieved through 

decreased imports and subsidies). Diverting power 

to E.U. markets also limits Morocco’s opportunity to 

improve domestic energy security.

In summary, exports of renewable power to European 

markets are a feasible means of filling the financial 

viability gap, in the medium- to long-term. However, 

considerable political support will be crucial to secure 

demand from E.U. Member States and to broker specific 

agreements that will make exports a reality.

Scaling up a CSP portfolio in the MENA region and elsewhere in the world will be challenging, given the high 

costs of developing early projects and the necessary 

infrastructure to support them. The Ouarzazate case 

indicates that financing specific projects is possible with 

the close alignment of public, international, and private 

stakeholders, and careful design and coordination. Such 

an achievement, however, may not be enough to scale 

up a national or regional portfolio. This greater goal may 

be met only if projects are commercially viable, through 

a reduction in costs and access to higher market revenues, both of which will require considerable political 

support from national and international players.

2012-08-054_000000000000683
A CPI Report 30

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Conclusions

CSP technology has enormous unexploited potential, 

particularly in the MENA region, but is still not commercially viable. This is particularly evident in markets, such 

as those in MENA, where energy prices are distorted by 

heavy fossil-fuel subsidies. It is still too early to know if 

Ouarzazate I will be large enough to prove the commercial maturity of its storage component technology and to meaningfully drive the technology costs 

down. However, meeting early milestones will be crucial 

to maintain financial backing from both the Moroccan 

Government and international lenders, whose early 

support is essential to deliver the whole portfolio of 

projects contained in the Moroccan Solar Plan and the 

MENA CSP Investment Plan. 

The early signs are encouraging. In the case of 

Ouarzazate, public resources have played a decisive 

role in getting the project up and running. Significant 

up-front international concessional finance has 

covered early-development costs and will help the 

technology develop until its level of profitability is sufficient to attract unsubsidized private capital. At the 

same time, international lenders need to improve the 

coordination and harmonization of lending packages 

to avoid excessive transaction costs, lengthy procedures, and unbearable compliance requirements.

The Moroccan Government has provided generous 

domestic backing for the project, covering the significant price differential between power bought from 

generators and sold onto the grid. This has made the 

project viable for public and private entities. Together 

with the support to renewable energies, the government 

is also committed to phase out fossil-fuel subsidies and 

is currently reducing its compensation system. While 

this alone would be insufficient to make CSP power 

commercially viable, it is a necessary step towards the 

development of a policy framework that truly supports 

low-carbon investments.

MASEN’s innovative design for the governing publicprivate partnership seems to have effectively allocated risk between private and public stakeholders.77

Giving early notice of financing terms and costs allowed 

prospective investors to factor savings into their bids, 

attracted their interest early, and resulted in levelized 

cost estimates in line with, and for some bids lower, 

than what was projected. The public-private partnership allocated risks to the stakeholders who were best 

equipped to manage those risks. Construction and operating risks were assigned to private developers while 

political and policy risks rested within the public sphere.

In the future, CSP power will remain expensive in the 

Moroccan market even with fossil-fuel subsidy phase 

outs and technology costs reductions. Public support 

alone will not assure the financial viability of the 

Ouarzazate project (including phases II and III). 

Favorable economics will only be achieved if Morocco 

and/or MENA succeed in establishing an export 

market with the E.U. However, this will require further 

investments in physical assets (for example, transmission lines) and a strong commitment from E.U. 

Member States to go beyond their existing renewable 

targets. At the end of the day, this will be a question of 

political will, as likely as not subjected to the prevailing winds of international progress toward a post-2020 

international outcome.

77 This point will be proved once the winning bid is selected and its content 

is made public. However, initial indications available at the time of writing 

support our assumption.

2012-08-054_000000000000684
A CPI Report 31

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Index of Acronyms

AFDB African Development Bank

AFD Agence Française de Développement

CAPEX Captial Expenditures

CO2 Carbon Dioxide

CPS Country Partnership Strategy (World Bank-Morocco)

CTF Clean Technology Fund

CSP Concentrated Solar Power

EIB European Investment Bank

EPC Engineering, Procurement, and Construction

ESIA Environmental and Social Impact Assessment

FDE Fond de Developpement de l’Energie

FESMP Framework Environmental and Social Management Plan

GOM Government of Morocco

HASSAN II Moroccan Hassan II Fund for Economic and Social Development

IFI International Financial Institution

IP Investment Plan

IPP Independent Power Producer

KFW Kreditanstalt fur Wiederaufbau

LCOE Levelized Cost of Energy

MENA Middle East and North Africa

ONE Office National ede l’Electricité

ONEE Office National de l’Eau et de l’Electricité

ONEP Office National de l’ Eau Potable

OPEX Operating Expenditures

PAD Project appraisal document

PPA Power Purchase Agreement

PPP Public-Private Partnership

PSA Power Sale Agreement

SEEE Secrétariat d’Etat chargé de l’Eau et de l’Environnement

SICS Solar Incremental Cost Support

SIE Moroccan Energy Investment Company

SPC Solar Power Company

UGE Unité de Gestion de l‟Environnement

WB World Bank

2012-08-054_000000000000685
A CPI Report 32

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

References

Abengoa (2012), Solana, the largest solar power 

plant in the world, Abengoa website. Available 

at http://www.abengoasolar.com/corp/web/

en/nuestras_plantas/plantas_en_construccion/

estados_unidos/.

Achy, L. (2012), Are Rising Fuel Prices in Morocco True 

Reform, or Just Tinkering?, Al-Monitor June 12th, 

2012. Available at http://www.al-monitor.com/

pulse/business/2012/06/rise-of-fuel-prices-inmorocco-r.html.

AfDB (2012a), “Summary of the Environmental and 

Social Impact Assessment”, African Development 

Bank, 2012. 

AfDB, (2012b), Presentation at Infrastructure Consortium for Africa 8th Annual Meeting “Ouarzazate 

Solar Complex Phase 1: Up to 160MW CSP 

Trough”, 13th June 2012.

Attijari (2011), Benchmark of power plants in Morocco 

– Annex to Tanger Wind Park PDD, Attijari Finance 

Corp, 2011.

AT Kearney (2010), CSP 2025: Clean Electricity on 

demand – stabilizing energy production with an 

attractive price. Industry roadmap report. Commissioned by ESTELA, March 2010.

Burgeap-Phenixa (2011a), Etude d’impact environnementale et sociale cadre du projet de complexe solaire d’Ouarzazate, July 2011.

Burgeap-Phenixa (2011b), Framework Environmental and Social Impact Assessment, Executive 

Summary (English), April 2011.

Burger P. (2008), Public-Private Partnerships: In Pursuit 

Of Risk Sharing and Value For Money, OECD 

Workshop, Ammam 2008.

CIF (2009), Clean Technology Fund Investment Plan for 

Concentrated Solar Power in the Middle East and 

North Africa region, November 2009.

CIF (2010), Update on the CSP-MNA Investment Plan, 

October 2010.

CIF (2011a), Joint AfDB-WB Submission Document, 

Morocco: Ouarzazate I Concentrated Solar Power 

Project (Project Proposal), June 2011.

CIF (2011b), Investment Plan Concentrated Solar Power 

in the Middle East and North Africa, Fact Sheet, 

September 2011.

CIF (2011c), Summary of the Co-Chairs Joint Meeting 

of the CTF and SCF Trust Fund Committees Cape 

Town, South Africa, June 27, 2011 

CIF (2011d), Summary of the Co-Chairs Meeting of the 

Trust Fund Committee for the CTF, June 2011.

CIF (2011e), CTF Investment Plan For India, Climate 

Investment Funds. Available at: http://www.

climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/CTF_India_investment_plan_101411.pdf.

CIF (2012), Clean Technology Fund Pipeline and Approved Projects Summary as of January 2012.

CMS Legal (2010), The new legal framework of the 

Morocco’s renewable energies sector, CMS Legal. 

Available at http://www.cmslegal.com/newsmedia/newsletters/newsletterdetail/pages/default.

aspx?PublicationGuid=3b75c3eb-bdc7-4cdbaec0-002f81373b59.

EIB (2010), Study on the Financing of Renewable Energy 

Investment in the Southern and Eastern Mediterranean Region, European Investment Bank, October 

2010. Available at http://www.eib.org/attachments/country/study_msp_en.pdf.

ENPI (2011), Paving the Way for the Mediterranean 

Solar Plan: Country Report Morocco, European 

Neighborhood and Partnership Instrument, November 2011, Brussels, 2011. Available at http://

www.pavingtheway-msp.eu/fileadmin/paving-theway/Country_report_-_Morocco_-_activity_1_4-1.

pdf.

EU (2009), Directive 2009/28/EC of The European 

Parliament and of The Council, of 23 April 2009. 

Available at http://eur-lex.europa.eu/LexUriServ/

LexUriServ.do?uri=OJ:L:2009:140:0016:01:EN:HT

ML.

European Commission (2012), Assessment of National 

Renewable Energy Action Plans, Commission Staff 

Working Document. Available at http://ec.europa.

eu/energy/renewables/doc/communication/2012/

staff_working.pdf.

Eurelectric (2007), Electricity Tariffs as of 1 January 

2007 (Published Tariffs). Available at http://

www.eurelectric.org/Download/Download.

aspx?DocumentFileID=48532.

Fichtner Solar (2009), Economic Analysis – Annex of 

Abu Dhabi solar thermal power project (Masdar) 

PDD, UNFCCC. Available at cdm.unfccc.int/Projects/DB/SGS-UKL1240326340.92/view.

2012-08-054_000000000000686
A CPI Report 33

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Gazzo A., Gousseland P., Verdier J., Kost C., Morin G., 

Engelken M., Schrof J., Nitz P., Selt J., Platzer W., 

Ragwitz M., Boie I., Hauptstock D., Eichhammer 

W., (2011) “MENA Assessment of the Local 

Manufacturing Potential for Concentrated Solar 

Power Projects”, Ernst & Young, Fraunhofer ISI and 

Fraunhofer ISE for the World Bank and ESMAP, 

January 2011.

Gorina, N. (2009), Carbon Prices: pre and post 2012, 

Essent Trading. Presented at: Expert meeting on 

trade and climate change: trade and investment 

opportunities and challenges under the CDM 

organized by UNCTAD, Geneva 2009. Available at 

http://archive.unctad.org/sections/wcmu/docs/

c1em1p08_en.pdf.

Hinkley J., Curtin B., Hayward J., Wonhas A., Boyd R., 

Grima C., Tadros A., Hall R., Naicker K., Mikhail 

A., (2011), Concentrating solar power – drivers 

and opportunities for cost-competitive electricity. 

Available at www.csiro.au. 

IBRD (2010), Phase II: The Challenge of Low-Carbon 

Development, IEG study series.

ICIS (2011), CER prices crash towards primary market 

costs. Available at www.icis.com/heren/

articles/2011/08/01/9481559/cer-prices-crashtowards-primary-market-costs.html. 

IEA (2010), Energy Technology Perspectives 2010, 

International Energy Agency, 2010.

IFC/W (2012), Doing Business: Paying Taxes in 

Morocco, IFC. Available at www.doingbusiness.

org/data/exploreeconomies/morocco/payingtaxes/.

Kingdom of Morocco (2011), Land Acquisition Plan 

Executive Summary, Morocco 2011 (Part of the 

Board Report available on WB database)

Kulichenko and Wirth (2011), Regulatory and Financial 

Incentives for Scaling Up Concentrating Solar 

Power in Developing Countries, Energy and Mining 

Sector Board Discussion Paper No.24, June 2011, 

IBRD/World Bank. 

MASEN (2011), Plan D’Acquisition de terrain, Morocco 

2011.

Moroccan Investment Development Agency (2012), 

Electriciy Tariffs, accessed August 2012. Available at: http://www.invest.gov.ma/index.

php?id=34503&lang=en.

Nabil, S. (2011), MASEN presentation at San Giorgio 

Group Inaugural Meeting, Venice 2011.

Nakhooda, S. (2011), CTF Observer Notes from the 

22nd June Meeting of the Trust Fund Committee

Norton Rose (2010), Moroccan plan for solar energy. 

Briefing, 2010.

ODI/Heinrich Böll Foundation, (2012), Climate Funds 

Update website, available at http://www.climatefundsupdate.org/. 

OECD (2008), Public-Private Partnerships: In Pursuit of 

Risk Sharing and Value for Money, 37th Session of 

the Public Governance Committee, Paris 2008.

OECD (2012), Towards A Green Investment Policy 

Framework: the Case of Low-Carbon, ClimateResilient Infrastructure. OECD, Paris, July 2012.

ONE (2007), Tanger Wind Power project. Clean Development Mechanism Project Design Document 

(PDD). UNFCCC. Available at http://cdm.unfccc.

int/. 

Pariente-David, Silvia (2011), WB presentation at San 

Giorgio Group Inaugural Meeting, Venice 2011.

Project Finance (2012), Ouarzazate Solar Progresses, 

Project Finance Magazine, April 2012. Available 

at http://www.projectfinancemagazine.com/

Article/3016591/Ouarzazate-solar-progresses.

html.

Standard & Poor’s (2010), A Guide to the European 

Loan Market, Standard & Poor’s, 2010. Available 

at https://www.lcdcomps.com/d/pdf/European_

Loan_Primer.pdf.

UNEP (2008), Investing in a Climate for Change. Engaging the Finance Sector. UNEP, Paris, France. Available at http://www.unep.fr/shared/publications/ 

pdf/WEBx0140xPA-InvestClimateChange.pdf

Varadarajan U., Nelson D., Hervé-Mignucci M., Pierpoint 

B. (2011), The Impacts of Policy on the Financing of 

Renewable Projects: A Case Study Analysis - CPI 

Report. San Francisco: Climate Policy Initiative. 

Available at http://climatepolicyinitiative.org/publication/the-impacts-of-policy-on-the-financingof-renewable-projects-a-case-study-analysis/.

World Bank Group - WB (2010), Integrated Safeguards 

Data Sheet, September 2010.

WB (2011a), Project Appraisal Document on a proposed 

loan in the amount of US $200 million and a proposed Clean Technology Fund loan in the amount 

of US $97 million to the Moroccan Agency for 

Solar Energy (MASEN) with the guarantee of the 

Kingdom of Morocco for the Ouarzazate I Con2012-08-054_000000000000687
A CPI Report 34

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

centrated Solar Power plant project, Report No: 

64663-MA, October 13, 2011. Available at http://

www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/11/18/0004064

84_20111118174227/Rendered/PDF/09725281.pdf. 

WB (2011b), Summary of Discussion: Meeting of the 

Executive Directors, November 17, 2011, Report 

number 65682. Available at http://www-wds.

worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/11/20/000333038_201111

20220651/Rendered/PDF/656820SD0P12200Off

icial0Use0Only090.pdf. 

WB (2011c), Project Information Document (PID) 

Concept Stage, Report No.: AB5921, Sept 2010.

WB (2011d), Project Information Document (PID) Appraisal Stage, Report No.: AB6230, April 2011.

WB (2011e), Integrated Safeguards Data Sheet, July 

2011.

WB (2011f), Project Database, MA-Ouarzazate Concentrated Solar Power, Project ID: P122028. Available 

at http://web.worldbank.org/external/projects/ma

in?pagePK=64283627&piPK=73230&theSitePK=

40941&menuPK=228424&Projectid=P122028.

2012-08-054_000000000000688
Annex A: Full risk matrix

GO

Consorti

WB Other IFI

Contractor Treatment/Mitigation Measure

DE

Program devlopment 

their rules and various stakeholders, avoid CoI etc.bring the project together, coordinate donors and Early stage failure, capacity of MASEN and PPP to MASEN staffing, external advisors. WB effectiveness conditions. 

2-stages Bidding Procedure. Risk Management Framework

Equipm

• CSP component failure / defect

MASEN’s technical advisor. Experienced private partner. Contracts for Supplier’s warranty for a limited period.construction, financing to fulfill the obligations it undertakes in the PPP. 

Construction cos

• Cost overrun / delays

EPC contracts. Experienced advisor to MASEN during selection process. Finalization of key documents subject to WB No Objection. Construction manager is also majority shareholder, hence risk alignment.

Financin

• Failure to secure necessary Capex also secured a lending facility from IBRD to cover incremental costs.

Concessional Capital secured preemptively before bidding process. GoM 

Safegua

• Fiduciary, environmental, and social

Support and checks by donors. Compliance with IFI rules will be contractually mandated. WB will monitor and evaluate implementation 

effectiveness.

OP

Regulatory r

• Change in GoM support Competitive tendering process on LCOE. Possibility for additional conces

Project Specific Convention (MASEN-GoM), IBRD loan facility.

-

sional funding. Work to realise EU export potential.

Production / availabilit

• Failure of technology, extreme weather events

Selection of technically capable private partner. Bonding requirements and liquidated damage. EPC contract will pass risk to the suppliers. Supplier’s warranty for a limited period.

&

M cost ri

• Cost overrun / delays

Selection of experienced private development partner. Contractual specifications.

Power price 

• Lower than expected grid prices

Use of IBRD support facility. GoM shareholding in ONE allows control over generation capacity additions (natural hedge).

Project objective

• 

avoided GHG, local development targets

Risk of not meeting electricity production, 

Selection of experienced private development partner. Contractual specifications in the bidding process.

Higher level object

• 

demonstrating a successful project model

Risk of not realizing technology cost reduction or 

Coordination with teams working on other CSP programs.

Loss of committed 

resources deployed

Loss of financial 

resources deployed

Direct impact 

on returns

Non or partial 

payment

Insufficient resources to 

complete project

Non payment of support if 

IFI safeguards not met Safeguards not met withdraw If lenders 

Risk of full / 

partial default

Risk of incomplete hedge 

by GoM

Risk of 

on subsidy

overpaying 

Direct impact 

on returns

Risk of full / 

partial default

Non or partial 

payment

MASEN 

default on 

PPA

Risk of 

incomplete 

hedge by 

GoM

+ guarantee + reduces 

Increased CSP subsidy 

FF subsidy savings

Solar Plan, Mediterranean 

scale up (e.g. Moroccan 

Undermines replication / 

Solar Plan, EU Exports)

Undermines 

CTF transobjectives formational 

and ability 

to crowd in 

additional 

donor 

contributions

Undermines 

IFI support 

MENA/RES/

to Morocco/

solar

Relative amount of risk 

Low

taken on by stakeholders

High

2012-08-054_000000000000689
A CPI Report 36

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Annex B: Ouarzazate I sensitivy tests

Table 1: Production Variance

Source: CPI Elaborations

Production variance -10% BASE 

Annual Production (GWh) 333 370 

IRR 6.2% 7.2% 8.

LCOE 302 276

Degradation Factor 1.0% 0.5% 

IRR 6.8% 7.2% 7.

LCOE 287 276

i) Operating Performance

Table 1 depicts the sensitivity of the project IRR and 

of the Levelized Cost of Energy to deviations of annual 

production from forecasts due to uncertainty on the 

level of solar irradiance and/or to higher (or lower) than 

expected degradation factor.

ii) Cost Overruns

Table 2 illustrates the effect on the project economics 

of cost overruns due to higher (or lower) than expected 

capital investments or for higher requirements to 

operate and maintain the plant. Given the capital intensity of the CSP plant, it’s not surprising that the investment metrics are more sensitive to deviations on capital 

costs than on operations and management charges.

Table 2: Construction and Operations Costs overruns

Construction cost overruns ∆+20% ∆ +10% BA

Capex ($ million) 1200 1100 

IRR after tax, levered 10.1% 11.8% 13

LCOE 282 260

OPEX cost overruns ∆ +20% ∆ +10% B

OPEX % of revenues 13% 12% 

IRR after tax, levered 12.9% 13.1% 13

LCOE 245 242

Source: CPI Elaborations

iii) Support Shortfall

The impact of Ouarzazate I on the government’s budget 

depends both on the solar subsidy and on the value of 

the fossil-fuel subsidies displaced by solar power that, in 

turn, depends on the fuel prices. Table 3 quantifies the 

effect on the budget of a hypothetical variation on the 

base prices used in the initial project planning (150$/

ton for coal, 450$/ton for fuel oil and 10$/mbtu for 

natural gas).

Table 3: Fuel Price Variance on 370 GWh of displaced FF electricity

Source: CPI Elaborations

Fuel Price Variance ∆-30% ∆-20% 

Government F Sub

Savings (M$) 0 

Additional Sola

over Counterfactual (M$) 60 56 

2012-08-054_000000000000690
A CPI Report 37

August 2012 San Giorgio Group Case Study: Ouarzazate I Morocco

Annex C: Lessons from GEFsupported CSP projects 

Ouarzazate is the latest in a list of only moderately 

successful CSP projects in the MENA region. A study 

by the WB’s Independent Evaluation Group (IBRD, 

2010) explains why Global Environment Facility (GEF)-

supported CSP projects in Egypt, Mexico, and Morocco 

have been slow to come to fruition—after 13 years, 

two of the projects are still under construction, one is 

out to tender while another, to be located in India, was 

dropped due to technical difficulties. 

The GEF portfolio was intended to drive technology 

costs down but the planned capacity (120 MW) and the 

realized capacity (later downsized) plus its distribution 

over three countries made the realization of any economies of scale unfeasible. The spread across countries 

also undermined the creation of a local value chain.

A hybrid technology approach was chosen to alleviate 

concerns about power availability, combining conventional gas plants with solar technology. However, the 

hybrid technology was novel and further complicated 

project design and procurement, as several providers 

had to be integrated to provide different components. 

In some cases the scarcity of bidders required adjustments to procurement rules and caused subsequent 

delays.

Scarce information on technology costs, cumbersome 

procedures, and reduced numbers of bidders resulted 

in bids implying costs well above initial estimates. As 

the amount of the GEF grant was fixed in absolute value, 

the CSP plants had to be reduced in size, necessitating 

renegotiation and further delays, again reducing the 

expected effectiveness of public funds.

Finally, project sponsors required that plants would be 

operated under an IPP model, aiming to achieve a higher 

level of efficiency in the plant management compared 

to its operation by the state utility. Unfortunately, this 

management structure was not yet present in the host 

countries and was unappealing for state utilities, creating further institutional barriers in addition to the aforementioned technological ones. ESMAP (2011) indicates 

that, ultimately, the IPP/PPA schemes did not work and 

had to be restructured into public projects, at the cost 

of contract renegotiation and significant construction 

delays.

This whole experience has most probably informed the 

decision by the CTF to concentrate investments in fewer 

projects of a significant scale such as Ouarzazate and to 

work closely with local institutions in the host country 

(i.e. MASEN for the case of Morocco) in order to choose 

a business model that aligns the objectives and expectations of host governments (creating local opportunities), donors (building the experience of the public and 

private sectors which can be applied to future projects) and the private sector (investment security and 

opportunity).

2012-08-054_000000000000691
 March 2012 

1 

OVERVIEW OF THE CLIMATE INVESTMENT FUNDS

Background 

In less than three years, the Climate Investment Funds (CIFs) have moved from design to investment 

planning and disbursement phase. Since the design of the CIF was agreed in 2008, a great deal has been 

accomplished. The CIFs are now playing a key role in meeting international climate change objectives 

with activities in 46 countries through 39 country and regional pilots. The CIFs have allocated all of the 

initial pledges of $6.5 billion to pilot programs and the partnering multilateral development banks have 

begun to ramp up disbursements. The CIFs’ progress is attributable to partner countries’ full 

commitment to strong climate action. The current portfolio of CIF pilot countries by region is 38% 

Africa, 27% Latin America and the Caribbean, 26% Asia, and 9% East and Central Asia.

It is expected that by May 2012, the CIF governing bodies will have endorsed: 

• 13 investment plans for $4.5 billion in CIF funding as well as an additional 3 CTF investment 

plans for which funding needs to be mobilized ($1.2 billion) under the Clean Technology Fund 

• 19 Strategic Programs for Climate Resilience for $958.8 million in funding from the Pilot 

Program for Climate Resilience 

• 7 investment plans for $370 million in funding from the Forest Investment Program

• 6 investment plans for $240 million in funding from the Program for Scaling Up Renewable 

Energy in Low-Income Countries

CIF governing bodies have approved the following projects and CIF funding: 

• 26 CTF projects for $1.9 billion 

• 38 PPCR grants for preparation of investment plans and projects for $25.4 million 

• 7 PPCR projects for $120.9 million 

• 12 FIP grants for preparation of investment plans and projects for $3.8 million

• 1 FIP project for $42.0 million 

• 4 SREP grants for preparation of investment plans for $1.3 million 

• 2 SREP projects for $25.0 million 

The Global Role of the MDBs and CIFs 

The MDBs are a substantial source of funding for low-emission, climate resilient development. 

The MDBs are moving forward with innovative financing for climate change utilizing concessional 

funding available through the Climate Investment Funds—no other institutions do more climate 

finance.

• Through the MDBs, the CIFs are demonstrating what can be done for adaptation and mitigation 

at large-scale with significant sums of money. MDBs significantly leverage concessional funding 

available through the CIF with their normal lending and with funding from governments, other 

development partners and the private sector. Leveraging in the CTF is 1:8.5. 

• Under the CIF, valuable lessons are being learned: on equitable governance, on financing 

products that work for developing countries, on planning and implementation of climate-smart 

2012-08-054_000000000000692
 March 2012 

2 

development, and on the importance of involving a range of stakeholders, including indigenous 

peoples and local communities. 

• The CIFs’ governing bodies include equal representation of developed and developing countries. 

In these bodies, developing and developed countries discuss funding for low-carbon growth and 

climate resilient strategies in a program-based, nonpolitical setting. 

• CIF funding supports transformational change at the policy, institutional, and market levels.

Demand for Additional Funding

Developing countries are queuing up to participate. Without additional pledges, we will be 

constrained in programming for new recipients. 

• Under the Clean Technology Fund, investment plans for Nigeria and India have been endorsed 

but additional funds must be mobilized. The Trust Fund Committee has also agreed to consider 

an investment plan for Chile. Together, the three plans are requesting $1.225 billion. 

• Under the Program for Scaling Up Renewable Energy in Low Income Countries, the SubCommittee has authorized the preparation of investment plans in six additional pilots. If these 

pilots were to be funded at the same level as the first six, an additional $240 million would be 

required. 

• 37 additional countries have expressed an interest in accessing the Forest Investment Program

and existing pilot countries have expressed interest in receiving additional resources. 

• 13 additional countries and the Nile Basin countries have expressed an interest in accessing

resources under the Pilot Program for Climate Resilience and existing pilot countries have 

expressed interest in receiving additional resources. 

Avoiding a gap in climate financing 

It's critical that we avoid a financing gap during the 3-5 years it will take the Green Fund to 

become operational. 

• Decision of Durban on long-term finance affirmed the importance of continuing to provide 

ongoing support beyond 2012. 

• The CIFs are a "ready-made" vehicle to receive additional funding and promote programming at 

scale to advance low emission, climate resilient development and can play a significant role in 

ensuring that funding for climate action continues moving forward. 

• All CIF funds have been allocated and an upturn in commitments and disbursements is 

anticipated as we move into implementation phase with more of the participating countries. 

2012-08-054_000000000000693
Philippines CTF Update – Comments Matrix (December 2011)

Question / comment Response

1. CTF costeffectiveness and 

eligibility

The proposed changes will result in projects which are more cost-effective than the original 

net metering program. See calculations in Tables 5, 9, and 10 and discussion at 

paragraphs 38, 49, and 50.

CTF eligibility is placed in context in Section III (paragraphs 17-32 and Figures 1-5). 

Detailed discussion of eligibility is delineated in Table 5 and paragraphs 36-44, which 

clearly indicate that the proposed changes will enhance the CTF Investment Plan. 

CTF guidelines note that cost effectiveness is cost per ton CO2 equivalent avoided over the 

lifetime of the project, not cost per ton per year. This guidance has been followed by other 

CTF investment plans and projects, although there is not 100% consistency. i.e., some 

investment plans have presented cost effectiveness on $/ton/year basis; some have shown 

cost/ton over project lifetime; and some have not shown any explicit calculation of costeffectiveness (e.g., India). The cost effectiveness of the Energy Efficient Electric Vehicles 

(EEEVs) and EE appliances projects is better than the originally-proposed solar net 

metering project and compares favorably to other proposed CTF projects (see table at end 

of this document).

2. What other 

options have been 

considered as 

alternatives to electric 

vehicles (e.g., CNG, 

LPG)? 

All options have been and continue to be considered; see discussion at paragraph 51. 

CNG and LPG must be imported; switching from gasoline to these fuels results in minimal 

GHG reductions and does not enhance energy security. Switching from diesel to CNG 

may achieve 20% GHG reduction in best case scenario, but the energy efficiency gain 

would still be lower than that achieved via EEEVs. CNG and LPG may be practical for 

cars, light trucks, and heavy-duty vehicles, but these fuels do not present an opportunity for 

conversion of motorcycles and trikes, which are at the bottom of the public transport 

pyramid. See discussion at paragraphs 26-32 and 51. 

The originally proposed BRT investments led by World Bank Group are still being pursued.

3. What is the role 

of private sector [in the 

EEEVs project], which 

was noted in the 

original CIP?

The private sector is actively engaged in RE development, as discussed at paragraphs 17 

and 18. Electricity generation in the Philippines is now 100% private sector. As discussed 

in paragraphs 17-19, concessional finance is not obviously needed for the net metering 

program. Public sector financing for RE projects in the near-term would crowd out private 

sector investment, which would be contrary to GoP overall objectives for the power sector.

Private sector entities have not developed any credible investment projects for EEEVs or 

more efficient appliances, and GoP is therefore taking the lead in affecting change. Private 

sector entities will be engaged in implementation via service, supply, and maintenance 

contracts, and will be expected to lead replication and scale up via vehicle production, 

distribution, and operations and maintenance (see paragraph 39). However; total private 

sector investment has yet to be quantified and therefore is not shown in Table 4. 

Introduction of EEEVs presents classic first-mover risk: globally, new vehicle technologies 

and systems are being developed, but “technology push” is not sufficient to begin fleetwide fleet conversion. “Policy pull” is required and GoP is developing an electric vehicle 

policy, as noted in Appendix 1, paragraph 6. 

4. Grid connection: 

is there sufficient 

generation capacity? 

I.e., will more endusers overstress the 

grid? How will electric 

vehicles impact 

generation mix?

The proposed EEEVs project is expected to add 60 MW of incremental demand to the grid, 

which will be offset by 110 MW in savings from the EE appliances project and 138.5 MW in 

new RE generation capacity. 

Incremental demand of 60 MW is 0.37% of installed generation capacity; annual 

incremental energy consumption of 150 GWh is 0.22% of generation output in 2010 (see 

Appendix 1, Table A1.3). See discussion at paragraph 45, Table 8, and Appendix 1. Grid 

expansion scenarios with respect to GHG implications are presented in Appendix 1.

Table 8 shows that the EEEVs project would not have a negative impact on grid-supplied 

power at the retail consumer level. Considering that an additional 1200 MW of coal-fired 

2012-08-054_000000000000694
capacity is being developed (see Appendix 1, Table A1.2), grid-supplied electricity would 

not be “stressed” until replication and scale-up of 20:1 is achieved, i.e., deployment of 2 

million e-trikes. 

Calculations presented in Appendix 1 indicate that GHG reductions will still be achieved if 

the grid-supplied power is 100% coal-fired: Appendix 1 shows clearly that ICE engines 

running on gasoline with 25% thermodynamic efficiency are more carbon-intensive than etrikes powered with 100% coal-fired electricity. 

Clean energy accounts for about 66% of power generation and about 39% of total primary 

energy as shown in Figure 6. Figure 6 indicates that oil dominates the transport sector, 

presenting a tremendous opportunity for end-use efficiency gains via electric vehicles.

Additional RE capacity is being developed in line with Philippines Energy Road Map, 

including the IBRD and IFC programs supported by CTF. 

5. How to dispose 

of lithium ion batteries?

Li-ion batteries are classified as non-hazardous waste by US EPA and Philippines 

Department of Environment and Natural Resources. Batteries will be reused to the 

maximum extent possible and can be disposed to sanitary landfills at end of useful lifetime. 

See discussion at paragraph 48 and footnotes 20-22.

6. Explain further 

energy efficiency is a 

case of market failure. 

For energy efficiency, 

what will be underlying 

transformation? What 

about other options, 

e.g., standards and 

labeling?

The energy and electricity markets and regulatory framework are discussed extensively in 

the original CIP and for the sake of brevity these details are not repeated in the draft IP 

Update. 

Clearly, with retail electricity prices averaging around $0.20 per kWh – the highest in the 

region – private sector investors and commercial banks should be racing each other to 

implement RE and EE projects. Since this is not happening there is an obvious market 

failure, which is not uncommon globally: standards and labeling are not sufficient to change 

consumer behavior. See discussion in paragraph 52 and Appendix 2.

As noted in the original CIP, Table 4, the Philippines has yet to approve an energy 

conservation law (as has been done in other Asian countries), which limits application of 

policy instruments to address market limitations. In the absence of a comprehensive 

energy conservation law, CTF is an attractive prospect to catalyze innovative EE 

investments.

7. For the EEEVs 

project, what are 

additional costs and 

what is expected 

operating lifetime of the 

e-trikes? Have 

“learned rates” been 

considered in the 

context of replication 

and scale up. 

The additional cost of an e-trike vs. conventional trike is at least $1000 (see paragraph 43, 

and Appendix 1 paragraph 3). Operating lifetime is assumed to be 10 years as noted in 

paragraph 50 and Table 5. At present there is no mechanism to monetize the life-cycle 

fuel savings and bring those benefits as up-front project cofinancing.

The pilot project conducted in Mandaluyong City has provided valuable experience, and 

the proposed EEEVs project has been designed based on that learning curve. Replication 

and scale-up potential is more than 20:1 nationwide, but the GHG reduction and costeffectiveness estimates assume 10:1 replication and scale-up. Additional “learning rates” 

would result in replication and scale-up greater than 10:1.

8. What is the 

proposed 

transformational 

delivery mechanism for 

EE appliances?

The EE appliances project is at an early definitional stage. Preliminary market analysis is

discussed in Appendix 2. GoP and ADB are considering different options for delivery 

mechanism based on the experience of converting from conventional incandescent lighting 

to CFLs (gained through the Philippines Energy Efficiency Project). 

Additional details will be presented in the draft Board documents when the project reaches 

the appraisal stage (after the IP Update is endorsed).

9. For EEEVs, are 

the GHG reductions 

calculated on life-cycle 

basis? Need to show 

that CTF conditions for 

Plug-in vehicles are 

GHG reductions are based on a life-cycle basis (“well to wheels”). Estimates are consistent 

with that for electric vehicles in other countries. See discussion in paragraph 47 and 

Appendix 1. 

Grid expansion scenarios with respect to GHG implications are presented in Appendix 1. 

Net GHG reductions would be realized even if the grid was providing 100% coal-fired 

2012-08-054_000000000000695
met. power.

Appendix 1, Table A1.1 presents the GHG reduction estimates prepared by ADB’s carbon 

finance team in anticipation of Clean Development Mechanism registration. These 

estimates are consistent with calculations made independently by the ADB project team. 

ADB and GoP believe that the GHG reduction estimates presented are conservative and 

robust. 

10. For the EEEVs 

project, “rebound 

effects” should be 

considered.

CTF guidance does not require consideration of rebound effects. Rebound effects have 

not been mentioned in any other CTF Investment Plans and no questions have been raised 

about rebound effects in review of IPs and specific project proposals.

A recent report prepared by the European Commission discusses various studies on 

rebound effects in considerable detail (Maxwell, D., Owen, P., McAndrew. L, Muehmel, K., 

Neubauer, A., Addressing the Rebound Effect, a report for the European Commission DG 

Environment, 26 April 2011). The report by Maxwell et al covers various sectors including 

energy and transport, and notes that the rebound effects are real but are difficult to quantify 

[which is consistent with the fact that CTF guidance does not require consideration of 

rebound effects]. Section 4.1, page 30 of Maxwell et al notes: 

Generally, rebound effects are difficult to quantify and their significance in different circumstances 

is debated. For example, some of the theories controversially claim that the rebound effect can be 

responsible for up to 50% of increased consumption, while in others, that rebound can negate the 

environmental gains 100% - a so called “backfire” (Jevons, 1865; Khazzoom, 1980; Brookes,1990 

and 2000). In practice, the magnitude of the rebound effect is dependent on individual 

circumstances e.g. sectors, technologies and income and is linked with a range of factors impacting 

consumption and economic growth. Understanding these factors and their role in direct, indirect 

and economy wide rebound effect is key to understanding the significance of the rebound effect 

associated with different interventions.

Clearly, this indicates that a comparison such as improved fuel efficiency in heavy duty 

trucks in the EU zone versus the proposed EEEVs in the Philippines would be a case of 

“apples and oranges.” 

In the report by Matthews et al, the only study referenced for hybrid and electric vehicles 

covers hybrid vehicles in Switzerland. The Switzerland study concluded that there were no 

rebound effects (direct or indirect) associated with introduction of the more energy efficient 

vehicles (see Matthews et al, Table 1.2., page 20 and Case Example on page 76).

Given the complexity of quantifying potential rebound effects, such consideration is not 

required by guidance of CTF, ADB, other MDBs, nor Clean Development Mechanism. 

As suggested by the UK, Table 9 includes a scenario discounting GHG reductions by 30% 

for potential rebound effects. This scenario will result in greater emissions reductions, 

which are more cost-effective, than the originally proposed net metering project. The 

calculations in Table 9 are consistent with GHG reduction estimates presented in Tables 5 

and 10, and Appendix 1.

11. Why is DOE the 

executing agency for 

the EEEVs projects 

rather than the DOTC?

DOE is the designated agency for EE activities as well as alternative fuels including electric 

vehicles (see paragraph 42). 

12. EEEVs fuel 

consumption is noted 

as 5 L/day in main text 

but 20 L/day in 

appendix. 

The correct amount is 5 L/day; this has been corrected. Other errors and inconsistencies 

have been corrected. 

2012-08-054_000000000000696
Cost-effectiveness: Comparison of Various CTF Proposals

Program / Project CTF Amount 

($ million)

Cost-effectiveness of 

Direct Reductions

Cost-effectiveness with 

Replication and Scale-up

Egypt Urban Transport $100 $66.67 / ton / year $3.3 / ton

Morocco Wind & Pumped Storage a $125 $73.53 / ton / year $3.7 / ton

Philippines: IFC Renewable 

Energy Accelerator Program 19 $6.67 / ton $1.33 / ton

Vietnam: IFC Energy Efficiency 

Program 28 $59 / ton / year $4.2 – 6.5 / ton 

(15-year program lifetime)

Republic of South Africa (RSA): 

AfDB and IFC Energy Efficiency 

Program

$15 $5.56 / ton $4.55 / ton

RSA Solar Water Heating Program $50 $20 / ton $4.35 / ton

RSA Sustainable Energy 

Accelerator Program (solar, wind, 

& cogeneration)

$83 $3.22 / ton $0.65 / ton

Thailand: IFC Sustainable Energy 

Finance Program $30 $4.44 / ton n/a

Thailand: IFC Renewable Energy 

Accelerator Program $40 $16.67 / ton $1.67 / ton

Philippines: ADB EEEVs project 

(proposed) $101 $37.41 / ton $3.74 / ton

Source: project funding proposals approved by CTF Trust Fund Committee (except for Philippines EEEVs project)

Note: a Emissions reductions are for the entire program of 450 MW wind power + 520 MW hydro-pumped storage, 

with total investment of about $2.1 Billion. 

2012-08-054_000000000000697
Philippines Revised CTF IP June 2012 

CLEAN TECHNOLOGY FUND 

REVISED INVESTMENT PLAN FOR THE PHILIPPINES 

June 2012 

2012-08-054_000000000000698
i 

Philippines Revised CTF IP June 2012 

ABBREVIATIONS AND ACRONYMS 

ADB Asian Development Bank 

BRT Bus Rapid Transit 

CIP CTF Country Investment Plan 

CIP-R Revised CTF Country Investment Plan 

CTF Clean Technology Fund 

EE Energy Efficiency 

EEEVs Energy Efficient Electric Vehicles 

FIT Feed-in Tariff 

GHG Greenhouse Gas 

GoP Government of the Philippines 

IBRD International Bank for Reconstruction and Development 

ICE Internal Combustion Engine 

IFC International Finance Corporation 

MtCO2e Million tons of carbon dioxide equivalent 

PV Photovoltaic 

RE Renewable Energy 

RPS Renewable Portfolio Standard 

SCS Solar charging station 

WBG World Bank Group 

2012-08-054_000000000000699
ii

Philippines Revised CTF IP June 2012 

TABLE OF CONTENTS

 

Section Page

I. Introduction 1

II. Status of Original Investment Plan Implementation 1

III. Circumstances and Rationale for Investment Plan Revision 4

IV. Proposed Changes to the Investment Plan 13

V. Potential Impacts of Proposed Changes on Investment Plan Objectives 14

VI. Additional Considerations of the Proposed Projects 19

Appendix 1: Summary of Stakeholder Consultations During IP Revision 24

Appendix 2: Market Transformation with Energy Efficient Electric Vehicles 38

Appendix 3: Solar Energy Development 47

2012-08-054_000000000000700
Philippines Revised CTF IP June 2012 

EXECUTIVE SUMMARY 

The Government of the Philippines (GoP) is pleased to provide a revised Clean Technology 

Fund (CTF) Country Investment Plan (CIP) which has been updated from the version which was 

endorsed by the Trust Fund Committee (TFC) in December 2009. This document has been 

revised pursuant to discussions with the CTF Trust Fund Committee held in Washington, DC on 

4 November 2011, and it also takes account of subsequent comments received and additional 

stakeholder consultations, superceding the revised CIP submitted in January 2012. 

The revisions reflect recent adjustments and refinements to relevant national policies and 

priorities, including the establishment of a National Framework Strategy on Climate Change in 

April 2010 and an accompanying National Climate Change Action Plan, which was approved in 

April 2011 after extensive inter-departmental and stakeholder consultations. The Philippine 

Energy Reform Agenda has also been agreed, with three pillars: (i) ensuring energy security, (ii) 

achieving optimal energy prices, and (iii) developing sustainable energy systems. 

The overall context and objectives of the CIP remain unchanged. No changes have been 

proposed to the CTF allocation for the projects and programs to be implemented in partnership 

with the World Bank Group. However, the proposed change will reallocate funds for public 

sector investments to be implemented in partnership with the Asian Development Bank (ADB), 

originally proposed to support an Energy Efficient Appliances Project and a Rooftop Solar 

Development Project, to cleaner and more energy efficient transport under an Energy Efficient 

Electric Vehicles (EEEVs) Project and a revised approach to renewable energy promotion 

through a Solar Energy Development Project. The funding request for the Energy Efficient 

Appliances Project is withdrawn, though the Government plans to pursue this idea in modified 

form, subject to the availability of alternative financing. Table ES1 summarizes the indicative 

financing plan as endorsed by the CTF Trust Fund Committee in December 2009. Table ES2 

presents the indicative financing plan after the proposed reallocations. 

The Government’s proposed investment in the EEEVs Project stems from its strategy to 

emphasize investment in end-use energy efficiency in public transport systems via public-led 

investment as a high priority for market transformation. As a net importer of energy, the shift in 

priority for CTF funding to electric vehicles will simultaneously reduce greenhouse gas 

emissions, contribute to better urban air quality and associated health benefits, and improve 

energy security. 

With respect to the proposed Solar Energy Development Project, it must be noted that 

Philippine consumers pay some of the highest electricity tariffs in the world. As there are no 

subsidies for the generation sector, consumers and policy makers are rightfully concerned about 

further electricity price increases that may result from feed-in tariffs which are higher than 

average retail electricity tariffs. At the same time, a solar feed-in tariff proposed by the electricity 

regulator has created large interest from the private sector for new investment, but the proposed 

feed-in tariff for solar will apply only to an additional 50 megawatts (MW) of ground-mounted 

installations. Private sector developers have indicated interest in installing up to 300 MW of 

capacity. In this context, the government has decided not to “crowd out” this significant private 

sector interest, which is why the net metering solar rooftop expansion project proposed in the 

original CIP will not be pursued. However, the proposed Solar Energy Development Project can 

help to transform that segment of the solar rooftop market outside of the proposed solar feed-in 

tariff (and 50 MW cap) while supporting the development of net metering in the country. 

2012-08-054_000000000000701
2 

Philippines Revised CTF IP June 2012 

Table ES1: Indicative Financing Plan Endorsed in December 2009 ($ million) 

Financing Source Renewable Energy 

(WBG)

Urban Transport 

(WBG)

RE and EE 

(ADB)

Total

CTF 75 50 125 250

GoP / DBP 180 50 50 280

IBRD Loans 250 250 0 500

IFC Loans 250 0 0 250

ADB Loans 0 0 400 400

Private sector 750 0 350 1,100

Total 1,505 350 925 2,780

Source: CTF Investment Plan for Philippines 2009 

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, RE=renewable energy, WBG=World Bank Group 

Table ES2: Indicative Financing Plan After Reallocation ($ million) 

Financing Source

Renewable 

Energy 

(WBG)

Urban 

Transport 

(WBG)

Energy Efficient 

Electric Vehicles 

(ADB)

Solar Energy 

Development

(ADB)

Total

CTF 75 50 105a20a250

GoP / DBP 180 50 99 20 349

IBRD Loans 250 260 0 0 510

IFC Loans 250 0 0 0 250

ADB Loans 0 0 300 80 380

Private sector 750 0 (tbd) b(tbd) b750

Other cofinancing

(AFD loans) 0 245 0 0 245

Total 1,505 605 504 120 2,734

Source: MDB teams

ADB=Asian Development Bank, AFD=Agence Franciaise de Developpement, CTF=Clean Technology Fund, 

DBP=Development Bank of the Philippines, EE=energy efficiency, GoP=Government of the Philippines, 

IBRD=International Bank for Reconstruction and Development, IFC=International Finance Corporation, 

RE=renewable energy, (tbd)=to be determined, WBG=World Bank Group 

Notes: 

a For the EEEVs project, a CTF grant of $1 million is requested for fine-tuning of technology options, technology 

transfer, local industry support and capacity building (implementation support, including monitoring and evaluation 

activities will be financed by the ADB loan). For the Solar Charging Systems component a CTF grant of $4 million is 

requested to ensure its technical viability and whether solar charging could be implemented within the current tariff of 

about $0.20/kWh; see discussion in main text and concept paper in Appendix 2 for further details. 

b

 Private sector entities will participate in project implementation via supply of goods and services. For the EEEVs 

project, private sector investment is expected during replication and scale-up, and as such no private sector 

cofinancing is shown in Table 4. Private sector cofinancing for the Solar Energy Development project has yet to be 

determined. 

During stakeholder consultations with non-government and civil society organizations (NGOs, 

CSOs) conducted in Manila in May 2012, a number of key issues were highlighted, with 

subsequent adjustments made to the CIP: 

(i) a range of issues and alternatives were put forward regarding design of the EEEVs 

Project, including those relating to the funds flow model, where civil society 

organizations emphasized the need for transparency, especially in light of the upcoming 

local elections, and it was clarified that manufacturers would receive direct funding;

(ii) participant contributions also influenced the proposed EEEVs Project design with 

respect to warranty issues, disposal options, and the e-trike design;

(iii) it was noted that there have been significant price reductions in the cost of solar power, 

especially in the last year, so a solar rooftop project with net metering could be 

2012-08-054_000000000000702
3 

Philippines Revised CTF IP June 2012 

developed without the subsidies provided by way of the feed-in tariff – and this was 

incorporated into the revised CIP, albeit at a more modest scale than conceived in 2009; 

(iv) civil society and renewable energy representatives expressed strong interest in 

promoting the use of solar energy to charge electric vehicles, without imposing any 

additional financial burden to the drivers and end users, and a proposal for such a pilot 

project was incorporated into the CIP that is meant to encourage private investors to 

provide such services and broaden support for electric vehicles with the lowest possible 

carbon footprint. 

The adjustments to the CIP are based on broad stakeholder engagement covering CSOs, 

NGOs, local government units, industry representatives, and public transport owners and 

operators. The proposed CIP revisions will achieve a better balance between supply-side and 

demand-side investments, without crowding out private sector investment in renewable energy 

while fully supporting the Philippines energy reform objectives to promote affordable and 

sustainable energy security. The proposed projects will result in greater and more cost-effective 

GHG emissions than proposed in the original CIP, with enhanced development impacts. 

As the EEEVs Project has reached the appraisal stage, it is presented simultaneously to the 

CTF Committee for funding approval alongside the requested endorsement of the revised CIP. 

Additional project-specific considerations relating to the Solar Energy Development Project will 

be addressed when that project reaches the appraisal stage and is presented for funding 

approval to the Trust Fund Committee. 

2012-08-054_000000000000703
1 

Philippines Revised CTF IP June 2012 

I. INTRODUCTION 

1. The Philippines Clean Technology Fund (CTF) Country Investment Plan (CIP) was 

endorsed by the Trust Fund Committee (TFC) in December 2009, with an envelope of $250 

million in CTF cofinancing. The original CIP comprised clean energy and transport sector 

investments in both the public and private sector. 

2. The proposed change will reallocate funds for public sector investments led by Asian 

Development Bank (ADB) from the original net metering with solar power generation concept to 

investments in energy efficient electric vehicles (EEEVs) including a solar-powered charging 

stations (SCS) component. The scope of the project proposed in the original CIP -- net metering 

with rooftop solar -- will be reduced and the project will be formulated in the context of the 

Philippines evolving renewable energy framework. This change in investments is consistent with 

the long-term objectives of the original CIP. The overall context and objectives of the CIP are 

the same as the original CIP. The revised CIP (CIP-R) is a business plan owned by the 

Government of the Philippines (GoP), and is a dynamic document with the flexibility to consider 

changing circumstances and new opportunities. 

3. No changes have been proposed to the CTF allocations for the International Bank for 

Reconstruction and Development (IBRD) and International Finance Corporation (IFC). 

Therefore, this document primarily covers the proposed changes and program to be 

implemented by the Asian Development Bank (ADB), and is organized as follows: 

 Section I – Introduction to the Philippines revised CTF CIP; 

 Section II -- Review of the status of implementation of the original investment plan; 

 Section III -- Explanation of the circumstances and rationale for revising the 

investment plan and making changes to the projects or programs included; 

 Section IV -- Description of the proposed changes, i.e., proposed reallocation of 

funds as requested by the GoP; 

 Section V -- Assessment of the potential impact of the proposed changes on 

achieving the objectives and targets of the original investment plan; 

 Appendix 1 – Summarizes the GoP decision-making process and stakeholder 

consultations relating to the proposed changes to the CIP; and 

 Appendix 2 and 3 – Concept papers for the proposed investments to be supported 

with CTF cofinancing. 

II. STATUS OF ORIGINAL INVESTMENT PLAN IMPLEMENTATION 

4. The status of program and project development and approvals is presented in Table 1 

and discussed below.

Table 1: Processing Status of IBRD and IFC Investment Programs and Projects

Project TFC Approval 

Date

CTF Amount

($ million)

Leveraged 

Funding

($ million)

IFC Renewable Energy Accelerator Program September 2010 20 330

IFC Sustainable Energy Finance Program February 2011 10 209

IBRD Renewable Energy/Energy Efficiency Project December 2012 45 200

IBRD Urban Transport (BRT) Project (Cebu) September 2012 25 170

IBRD Urban Transport (BRT) Project (Manila) September 2013 25 385

Total IBRD, IFC and Leveraged Investments 125 1,294

Source: MDB project teams. 

2012-08-054_000000000000704
2 

Philippines Revised CTF IP June 2012 

IBRD Renewable Energy Program 

5. The IBRD/CTF operation would support investments in renewable energy (RE) 

generation and in utility-level energy efficiency (EE). The operation would build on IBRD

projects that are active in these sub-sectors. In RE, the focus will be on leveraging private 

sector investment in the context of the emerging policy and regulatory framework for 

renewables, and ensuring that CTF is used strategically to leverage as much private investment 

as possible. In EE, the goal is to scale-up the efforts of electric cooperatives (ECs) to continue 

to reduce losses, as one key input for enhancing the financial strength of these service 

providers. Stronger ECs will be better able to expand their customer bases, contributing to 

critical access objectives, and to serve those new customers with an increasing proportion of 

clean energy.

6. While the Philippines has an advanced framework for private participation and for 

attraction of private financing, there are significant barriers to the scale-up of RE and utility-led

EE. For example, for administrative ease, the country has opted for a single, national feed-in 

tariff (FIT) rate per technology; but supply chain and other costs vary widely in the country, so 

some economically beneficial projects will not be financially viable under the FIT mechanism. 

Specific FIT rules are still to be finalized and made effective. The FIT regime will also not extend 

to certain renewable technologies (e.g., geothermal), nor will it cover off-grid generation. CTF 

will be used to provide critical additionality and leverage such that more, good projects will be 

financed, especially in regions of the country that might not otherwise see much activity. In the 

EC sector, there are 119 service providers but only about half are currently rated credit-worthy, 

and investment flows are falling well short of requirements even for the credit-worthy. CTF is 

targeted at both the supply side – by leveraging the flow of private credit to support investments 

– and at the demand side, by establishing programmatic eligibility criteria that will help 

incentivize more ECs to become credit-worthy. 

7. GoP has made its formal request for project preparation funds from the CTF, and project 

preparation work is set to accelerate. Project appraisal is upcoming, and presentation to the 

IBRD Board is scheduled in mid-2013.

IBRD Urban Transport Program 

8. The Program comprises investment and advisory services components to support the 

implementation of Bus Rapid Transit (BRT) projects in Cebu and Manila. The advisory services 

component includes support for implementation of the National Environmentally Sustainable 

Transport Strategy (NESTS). Since the Philippines CIP was prepared in December 2009, there 

have been a few minor changes made to the scope and design of the urban transport 

component. These adjustments are outlined below. 

9. Through project preparation work undertaken since the initial CTF investment proposal, 

it has become evident that to ensure successful implementation of a BRT system in the 

Philippines, substantial capacity and institution building work will be necessary. To this end, it 

has been agreed with the counterparts that the BRT program would be undertaken in two 

phases, beginning with a Phase I demonstration project in Cebu City, from which lessons 

learned and institutional structures derived would be applied to Phase II, the development of a 

BRT in Manila. Given the substantive social and political hurdles involved in the Manila phase, 

the counterparts agreed that a successful demonstration in Cebu would facilitate more rapid 

implementation in Manila. 

2012-08-054_000000000000705
3 

Philippines Revised CTF IP June 2012 

10. Also, for Phase I, to maximize greenhouse gas emissions mitigation benefits, as well as 

safety, gender, and poverty impacts, the program scope has been slightly expanded to also 

include upgrading the existing SCATS area traffic control system to better manage traffic and 

non-motorized transport (NMT) flows, not only on BRT corridors, but for the entire transport 

network. Further, Phase I will include significant training and capacity building work not just for 

the local government, but also relevant stakeholders, such as the jeepney operators. 

11. Finally, since the initial CTF proposal, a parallel Sustainable Urban Energy Program 

(P125401) has been undertaken by the IBRD in Cebu City, through which it was determined 

that the greenhouse gas emissions from the transportation sector were 721,000 tons CO2e in 

2010, about 40 percent of Cebu’s total greenhouse gas emissions. While this figure will be 

verified and refined during the CTF project preparation, the estimate provides a basis upon 

which to develop preliminary greenhouse gas emissions reduction targets that may be 

attributable to Phase I in Cebu, versus Phase II in Manila. Through the expanded project scope, 

a range of 100,000 to 150,000 tons CO2e emissions reductions per year may be a reasonable 

estimate for Phase I, with more substantive emissions reductions to be expected in Manila, 

which is many times the size of Cebu City and has a much higher motorization rate. The 

success of Phase I is critical to expanding the scope to Phase II. However, in addition to CO2e 

emissions reductions, it is expected that the Phase I demonstration project would have 

considerable impact on improving access to the poor, providing safer and more effective 

transport services to all residents, and influencing changes in land use design with a long-term 

impact on the city’s ability to address climate change related issues.

12. Since the program will be undertaken in two phases, rather than one, funding allocations 

have been adjusted accordingly, as shown in Table 2. Further, additional financing and 

technical assistance funding has been secured from the Agence Française de Développement 

(AfD), which is also reflected in the revised figures. The CTF funds will continue to be needed to 

cover part of the additional costs of BRT systems compared to conventional bus networks. 

Table 2: Revised Financing Plan for IBRD Urban Transport Program (US$ million) 

Funding Source

December 2009

Original Proposed 

Contribution

October 2011

Revised Proposed Contribution

Phase I Phase II

Government of the Philippines 50 15 35

IBRD 250 110 150

Clean Technology Fund 50 25 25

Agence Française de Développement 0 45 200

Total 350 195 410

Source: IBRD. 

Notes: * To be confirmed during preparation. 

13. Overall progress is shown above in Table 1. Project preparation work is proceeding well 

and 4 missions have been undertaken since April 2011. The Government has made a formal 

request for project preparation funds from the CTF. QER for the project is set for 3 July 2012, 

and appraisal is targeted for September/October 2012, with presentation to the Bank’s Board in 

March 2013.

2012-08-054_000000000000706
4 

Philippines Revised CTF IP June 2012 

IFC Programs 

14. As of October 2011, two private sector program proposals have proceeded: $20 million 

was approved in September 2010 for the IFC Renewable Energy Accelerator program, and $10 

million was approved in February 2011 for the IFC Sustainable Energy Finance program. 

IFC Renewable Energy Accelerator Program (REAP)

15. IFC would provide appropriate incentives for qualified solar, wind, and biomass 

developers to accelerate the implementation of RE projects. These projects would provide 

immediate GHG reduction impact and provide valuable information on the types and amounts of 

incentives required to catalyze RE development in the country. IFC will continue to develop 

projects with CTF support in close coordination with the GoP and the policies that govern 

private sector growth. The rationale is the same as envisioned in the original CIP. IFC continues 

to work with project developers and refining financial structures in the development of projects. 

Overall progress is shown above in Table 1.

IFC Sustainable Energy Financing Program (SEFP)

16. The program supports the scale up of sustainable energy finance projects in Philippines. 

It aims to contribute to increasing private sector involvement, support captive and grid-tied RE 

development, EE market transformation, and enhance energy savings. The CTF funds will 

continue to be needed to incentivize local financial institutions to undertake financing in lower 

carbon emitting technologies. The rationale is the same as envisioned in the original CIP. IFC 

continues to work with various stakeholders in developing projects under the program. IFC has 

a pipeline of projects that are at various stages of development that would fully utilize IFC's CTF 

allocation.

III. CIRCUMSTANCES AND RATIONALE FOR INVESTMENT PLAN REVISION 

17. The overall rationale for CTF intervention in the energy and transport sectors remains 

unchanged. The revisions reflect recent adjustments and refinements to relevant national 

policies and priorities, including the establishment of a National Framework Strategy on Climate 

Change in April 2010 and an accompanying National Climate Change Action Plan, approved in 

April 2011 after extensive inter-departmental and stakeholder consultations. The Philippine 

Energy Reform Agenda has also been agreed, with three pillars: (i) ensuring energy security, (ii) 

achieving optimal energy prices, and (iii) developing sustainable energy systems. The GoP is 

requesting that the ADB allocation be revised to accommodate an Energy Efficient Electric 

Vehicles (EEEVs) Project and a Solar Energy Development Project. Major changes in 

circumstances since 2009 that have contributed to this adjustment include: 

(i) The specific rules for the Renewable Portfolio Standard (RPS), feed-in tariffs (FIT), 

and net metering have yet to be finalized and become fully effective, though GoP 

remains fully committed to the RPS, FIT, and net metering programs. Finalization of 

the implementing rules is expected within the next 2 years, but there is no fixed 

deadline for completion. 

(ii) The Philippines Department of Energy has proposed that the RPS for solar power 

apply to installation of 50 MW over a 3-year period, limited to ground-mounted 

2012-08-054_000000000000707
5 

Philippines Revised CTF IP June 2012 

installations.1 The proposed feed-in tariff has attracted initial private sector interest 

for several times this capacity. This private sector interest, combined with rapid 

decreases in solar photovoltaic system costs, obviates the need for concessional 

financing for projects which will avail of the solar FIT. However, RE development 

still entails higher initial capital costs, the retail market for solar power is nonexistent, and concessional financing is needed during the foreseeable future to 

accelerate RE market transformation with the long-term objective of achieving grid 

parity. There is strong stakeholder support for continued public sector investment in 

RE development.2

 

(iii) Increases in fossil fuel prices since 2009 point to the need for additional 

investments in energy end-use efficiency, including the transport sector. 

(iv) A successful pilot test of EEEVs,3 conducted with ADB support, is ready for scale 

up. This project has support from the highest levels of the Government of the 

Philippines. 

18. Based on circumstances (i) and (ii), the net metering project using distributed solar

power proposed in the original CIP may still be relevant, but the project concept needs to be 

reformulated considering the evolving regulatory framework and market realities. In particular, 

given the private sector interest to develop solar projects under the proposed FIT and RPS 

(which will be limited to 50 MW of ground-mounted installations), and current installed costs for 

solar PV systems, FIT-supported investments in solar power will not require concessional 

financing. However, outside of the FIT envelope, concessional financing will be needed in the 

near term to accelerate solar market development and to establish a new use of solar power: 

off-grid solar charging for electric vehicles. Therefore, the original rooftop solar concept is being 

retained with a reduced scope, and the details will be developed by early 2013. 

19. Taking account of circumstances (iii) and (iv), GoP believes that the bulk of concessional 

financing offered from CTF could be better utilized in the near term to begin converting the 

public vehicle fleet to EEEVs. Introduction of electric and hybrid vehicles is being complemented 

by other alternative and cleaner fuel development, including domestic production of renewable 

diesel and ethanol to meet mandated blending requirements, as well as other transport 

initiatives including public transport projects supported by IBRD (discussed in Section II).4

20. Given the need for convergence between climate change and energy security 

objectives, GoP proposes to shift part of the original $125 million of CTF resources slated for

the solar net metering concept, and re-direct $105 million to the EEEVs project including a $4 

million grant for demonstrating solar charging stations and a $1 million grant for project 

implementation support (fine-tuning of technology options, technology transfer, local industry 

support and capacity building). The balance of $20 million is proposed to support financing of a 

Solar Energy Development Project centered on rooftop PV applications as discussed above. 

The prospective investments are appropriate for CTF support given their transformational nature 

and the replication and scale-up potential. The shift of some CTF resources to demand-side 

 

1

 Philippines Department of Energy, Resolution dated 28 June 2011. 

2

 Presentations from key stakeholder consultations are available at the following links: 

https://www.dropbox.com/sh/5q2tobxqsovqp1l/xJkQYjJj90 

http://www2.adb.org/Projects/eTrike/events.asp 

3

 The vehicles are motorcycles with side cars which provide taxi services, known locally as “tricycles”; this tricycle 

design is somewhat unique to the Philippines. The pilot-tested EEEVs are also referred to as “e-trikes.” The transport 

services provided by tricycles are similar to auto-rickshaws utilized in other Asian countries including Bangladesh 

India, Indonesia, and Thailand. Hence the potential for replication and scale-up is regional in scope. 

4

For the sake of brevity, an exhaustive discussion of transport sector interventions including demand management

and other “avoid and shift” prospects is not included here. A detailed discussion is presented in the original CIP.

2012-08-054_000000000000708
6 

Philippines Revised CTF IP June 2012 

investments is fully consistent with GoP energy and transport policies as outlined in the original 

CIP. A summary of stakeholder engagement during preparation of the revised CIP is presented 

in Appendix 1. The proposed projects are discussed below and in Appendices 2 and 3. 

21. The changes in the proposed projects to be implemented in partnership with ADB are 

based on broad stakeholder engagement, including with government agencies, civil society 

organizations (CSOs), non-government organizations (NGOs), local government units (LGUs), 

industry representatives, and public transport owners and operators. The engagement process, 

including recent consultations, provided for discussions on a range of ideas and suggestions 

about the CIP, the proposed EEEVs project, and RE development. Participants at the 

stakeholder consultations raised a range of issues and provided alternatives for ADB and DOE 

to consider, and these are reflected in the updated program and EEEVs project design, 

including the funds flow model. Civil society representatives advocated for a more transparent 

funds flow model – especially in light of the upcoming local elections – and were pleased to see 

that the project would be funding manufacturers directly. Other aspects where participant 

contributions influenced the CIP-R and proposed project design include warranty issues, 

disposal options, and design of the e-trike itself. The consultation process also led to the 

decision to retain the rooftop solar concept proposed in the original CIP, albeit with a more 

modest budget (and specific components still to be determined). 

 

22. GoP is committed to reducing energy intensity and greenhouse gas (GHG) reductions 

through a comprehensive policy framework as described in the original CIP. Figure 1 illustrates 

trends in total primary energy supply, indicating that coal and natural gas have displaced oil for 

power generation, while the share of renewables has not increased substantially during the past 

several years. The trend of increasing coal use is of particular concern with respect to energy 

security and GHG emissions objectives. The IBRD and IFC programs (noted above in Section 

II) will focus on RE and EE investments intended to reduce demand, add clean energy 

generation capacity, and replace what might otherwise be power capacity additions through 

fossil fuels.

23. In 2010, the Philippines spent approximately $8.78 billion5on imported oil – 39% more 

than in 2009, about 66% of which was used by the transport sector. Under a business as usual 

scenario, with growing population and urbanization, the cost of fuel imports is likely to increase 

by multiple times over the next 10-15 years. GoP plans to improve energy security – a national 

priority alongside low-carbon development objectives – through RE, EEEVs, and other EE 

investments. 

24. Based on the McKinsey marginal CO2 abatement cost curve (Figure 2) and a study by 

ADB (Figure 3), GoP developed the investment strategy for the energy sector as shown in 

Figure 4, including $250 million in CTF financing. Energy efficient vehicles (including EEEVs), 

although a GoP priority, were not part of the original CIP prepared in 2009, as no project or 

program had been formulated at that time. The GoP now proposes to adjust its priorities 

considering changed circumstances in relation to increased private investor interest in RE 

generation projects, consumers’ concern over potential impacts of the feed-in tariff, and 

prospects of higher electricity tariffs. 

 

5

 Source: Department of Energy, available at: http://www.doe.gov.ph/DO/Report2010.htm

2012-08-054_000000000000709
7 

Philippines Revised CTF IP June 2012 

Figure 1: Trends in Total Energy Supply 

Source: IEA, accessed on 11 August 2011 from: http://www.iea.org/stats/pdf_graphs/PHTPES.pdf

Figure 2: McKinsey Marginal CO2 Abatement Cost Curve 

2012-08-054_000000000000710
8 

Philippines Revised CTF IP June 2012 

$30 million

Scale up project

Figure 3: Philippines Marginal CO2 Abatement Cost Curve 

Figure 4: Investment Strategy and Priority CTF Projects (December 2009) 

2012-08-054_000000000000711
9 

Philippines Revised CTF IP June 2012 

25. The government’s high priority projects are illustrated Figures 4 and 5, with the former 

representing the originally proposed use of CTF resources, and the latter representing the 

updated CTF Country Investment Plan. The outer circle represents overall potential investment 

in various clean energy interventions, including private sector investments, superposed on the 

McKinsey curve for the Philippines. The small ellipse at the lower left represents investment 

potential in more efficient lighting, which has been partly addressed through public sector 

investment with ADB financial support. The larger ellipse represents the bulk of potential clean 

energy investment, toward which the original CIP directed $250 million in CTF cofinancing. Of 

this $250 million, $125 million was proposed to cofinance the startup of the net metering 

program with solar photovoltaic (PV) systems. 

Figure 5: Investment Strategy and Priority CTF Projects (June 2012) 

2012-08-054_000000000000712
10

Philippines Revised CTF IP June 2012 

Investment Strategy and Roadmap

Cumulative tonnes of carbon reduction potential

Cost of abatement $/ton

Lighting, 

CFLs

Energy Efficient 

Electric Vehicles)

Efficient 

Appliances 

Hybrid generation 

for off-grid

Solar with net 

metering and feed-in 

tariffs

Wind

energy

ESCOs and 

Loss Reduction

$30 million Loan

Public financing over

7-10 year

First order targets 

Industrial 

Efficiency, 

Office Buildings 

Leveraged Funding over

7-10 year $20 million 

$105 million 

$250 million CTF

(ADB: $125 million)

26. The GoP remains fully committed to its development policy framework for energy 

security, climate change, environmental management, and public health. The general 

approach and overall objectives for low-carbon development presented in the original CIP 

remain the same. GoP is committed to reducing energy intensity and greenhouse gas (GHG) 

reductions through a comprehensive policy framework as described in the original CIP. The 

energy and transport policy frameworks discussed in the original CIP remain in effect. The GoP 

remains fully committed to its development policy framework for energy security, climate 

change, environmental management, and public health. The general approach and overall 

objectives for low-carbon development presented in the original CIP remain the same.

27. The strategic rationale for CTF intervention in the energy and transport sectors

remains unchanged. Comparison of Figures 4 and 5 clearly shows consistency in the 

underlying clean energy and cleaner transport strategies. The transport sector, power 

generation, and other energy end-use are highly dependent on imported fuels, which render the 

country vulnerable to energy supply disruptions and global price fluctuations. The Philippines

has a variety of RE resources – biomass/biogas, geothermal, small hydropower, solar and wind 

– with estimated total potential of more than 15,000 MW, of which about 35% has been 

developed. In the near term, biomass, geothermal, hydropower, and wind are expected to 

account for most of the new RE capacity additions. Additional potential from solar and waste-toenergy is high but commercial development of these resources has high start-up costs; solar 

and waste-to-energy are not expected to contribute at the gigawatt (GW) scale in the immediate

future. However, as noted, the landscape for solar power is changing rapidly as hardware costs 

continue to decrease, and near-term MW-scale development of solar PV systems is envisioned 

as an interim step to future GW-scale capacity. Therefore, investments in more energy efficient 

transport systems and complementary development of solar rooftop systems with net metering 

are critical in the near to medium term. Figure 5 illustrates the proposed partial reallocation of 

CTF funding to support the introduction of EEEVs and demonstration of solar charging, 

discussed in more detail below. 

2012-08-054_000000000000713
11

Philippines Revised CTF IP June 2012 

Status of Renewable Energy and Energy Efficiency Development 

28. The Philippines RE potential is high, but new investment has been limited during the last 

several years relative to the potential. Table 3 shows the installed capacity as of 2010, and 

projected additions as outlined in the National Renewable Energy Program (NREP), which was 

formulated under DOE’s leadership. Actual RE potential may prove to be higher, as prices for 

RE power generation technology fall and new systems are commercialized. Therefore, the 

NREP is a dynamic document, and the proposed capacity additions are not “cut in stone.” For 

example, Table 3 shows a solar power objective of 285 MW by 2030, but a long-term 

aspirational target of 1,528 MW of solar potential is noted in the NREP, and commercial 

potential may be even higher.6

Table 3: Installed Renewable Energy Capacity and Projected Additions (MW) 

Resource

Installed 

Capacity in 

2010

Targeted Capacity Additions Total Capacity 

Addition 

2011 – 2030

Total Installed 

2015 2020 2025 2030 Capacity by 2030

Geothermal 1,966 220 1,100 95 80 1,495 3,461

Hydropower 3,400 341.3 3,161 1,891 0 5,394 8,724.1

Biomass 39 276.7 0 0 0 276.7 315.7

Wind 33 1,048 855 442 0 2,345 2,378

Solar 1 269 5 5 5 284 285

Ocean 0 0 35.5 35 0 70.5 70.5

TOTAL 5,438 2,155 5,156.5 2,468.8 85 9,865.3 15,304.3

Source: Philippines Department of Energy 

29. To catalyze investment in RE, the Renewable Energy Law (R.A. 9513) became effective 

in 2009. The Renewable Energy Law mandates a universal charge on all customers to finance 

the proposed incentives for RE, especially the proposed FITs.7 The Philippines already has the 

region’s highest retail electricity tariffs. The potential increase in retail electricity price from this 

tariff could potentially further harm the broader economic development and investment climate. 

Although high electricity prices in the Philippines make clean energy projects financially 

attractive, without broad market transformation the desired objectives of the Renewable Energy 

Law will be difficult to achieve. The desired transformation requires adoption of new clean 

energy systems at scale, more responsive regulation, and consumer acceptance.

30. The already high retail electricity tariffs should make the Philippines one of the most 

attractive places for investments in EE. While high prices provide excellent incentives to 

undertake EE projects, very few EE projects have been implemented to date. The main barriers 

are considered to be lack of flagship projects to lead the way and generally weak awareness of 

EE opportunities by end users. The government has addressed the issue of lighting and building 

inefficiencies through the Philippine Energy Efficiency Project (PEEP), which is being 

implemented with ADB support. The PEEP is financing development of energy service 

companies (ESCOs) and implementation of a large-scale program to switch from use of 

incandescent to compact fluorescent lamps (CFLs). The PEEP is providing valuable learning 

experience to inform project design for EEEVs, solar lighting systems,8

and energy efficient 

appliances.

 

6

 The low-carbon scenario outlined in the original CIP (Figure 8 and Table 2) includes development of 2000 MW by 

year 2030. 

7

 The incentives include a renewable energy certification scheme, feed-in tariffs, renewable energy portfolio 

standards, net metering schemes, priority dispatch options, and support for renewable energy host communities.

8

For example, ADB recently provided technical and financial assistance for installation of solar lighting systems in the 

Boni Tunnel in the Metro Manila area. This installation offers a technical and business model for utilization of solar 

2012-08-054_000000000000714
12

Philippines Revised CTF IP June 2012 

 

Priority Introduction of Energy Efficient Electric Vehicles 

31. Transport sector energy consumption is expected to grow at an average annual rate of 

3.2%, with road transport accounting for 90% of energy demand for transport by 2030. The 

public transport sector, mainly tricycles, jeepneys, and buses, contributes a large portion of the 

country’s CO2 emissions: 3.5 million registered motorcycles and tricycles release 10 million tons 

of CO2 into the atmosphere each year and consume close to $3 billion worth of fuel. Introducing 

new technology is the best immediate option to mitigate transport emissions. Electric vehicles 

are 3–5 times more efficient than internal combustion engine (ICE) vehicles, whether fueled by 

gasoline, compressed natural gas (CNG), or liquefied petroleum gas (LPG).9 The public 

transport sector can thus save a significant portion of imported energy and reduce CO2

emissions by switching to energy-efficient electric vehicles (EEEVs). 

32. EEEVs represent a new and rapidly advancing technology with the promise to transform 

the way energy is used compared to today’s ICE vehicles. For net energy importing countries 

such as the Philippines, EEEVs can dramatically reduce the country’s oil dependency and 

improve long-term energy security. EEEVs generate no harmful local air and noise pollution and 

can be powered by indigenous RE. The envisioned fleet conversion will contribute to making the 

transport sector’s energy use sustainable, by introducing new technology that eventually will 

allow domestic hydropower, geothermal, solar, and wind power to be used as a fuel source for 

the transport sector, replacing the largely imported fossil fuels used today.

10

33. GoP’s preliminary modeling shows that a 7% electric vehicle penetration by 2015 and 

15% by 2030 can reduce fuel imports by approximately 6% in 2015, 13% in 2020, and more 

than 40% by 2030 with concomitant reductions in GHG emissions and other air pollution. The 

proposed electric vehicle policy11 directly supports electric vehicle related businesses and will 

exempt importation of all electric vehicles (plug in and hybrid) from taxes for nine years. The 

proposed EEEVs project will support the Department of Energy’s Fueling Sustainable Transport 

Program and the Alternative Fuel Vehicles Incentives Act of 2011. This move to begin 

electrification of the vehicle fleet is fully consistent with the National Environmentally 

Sustainable Transport Strategy (NESTS) described in the original CIP. 

34. The transport sector accounted for about one-third of national GHG emissions in 2009 

(excluding emissions from land use change and forestry). Transport sector emissions have 

increased by about 6-10% per year since 1990, from about 10 million tons per year CO2e in 

1990 to about 29 million tons CO2e per year in 2007.12 Vehicles are one of the dominant 

sources of urban pollution that threatens both people’s health and economic activity. In the 

Philippines, motorcycles and tricycles comprise more than 52% of the vehicle population, and 

these vehicles are the bottom of the transport sector “pyramid.” Compared to other vehicles, 

motorcycles and tricycles are less expensive (and therefore more affordable), they are very 

visible in most cities of the country, and they play an important role in the transport market,

particularly as a key short-distance transport mode for “last-mile” connectivity. However, the use 

 

resources for EEEV charging systems. A brief description of the Boni Tunnel installation is available online at: 

http://www.adb.org/news/adb-support-brightens-dark-highway-tunnel-solar-powered-lights

9 Greenhouse gas calculations are presented in the Appendices.

10 Today, fossil fuels are trucked to the remotest consumption points from thousands of kilometers away. Domestic 

hydrocarbon production is dominated by natural gas, predominantly in offshore basins. 

11 Senate Committee Report No. 44 on Senate Bill No. 285–Electric, Hybrid and Other Alternative Fuel Vehicles 

Incentives Act of 2011. 

12 CTF Investment Plan for the Philippines, endorsed in December 2009; paragraph 8 and Figure 3.

2012-08-054_000000000000715
13

Philippines Revised CTF IP June 2012 

of these vehicles contributes to the already declining state of the environment, particularly urban 

air quality. In an ADB study, transport sector emissions accounted for 30% of air pollution in the 

Philippines and about 80% of air pollution in Metro Manila. 

35. In order to improve urban transportation systems, control pollution from fossil fuels, 

enhance energy security, and mitigate long-term GHG impacts, the GoP has embarked on an 

ambitious program to introduce electric and compressed natural gas (CNG) vehicles into the 

public transportation fleet.13 ADB is supporting a demonstration project14 for introduction of etrikes in Mandaluyong City (part of the Metro Manila core urban area). The initial results have 

been positive,

15 and GoP has requested ADB to provide financial support for the commercial 

deployment of 100,000 e-trikes by 2016.

16 The proposed EEEVs project will create an earlyadopter opportunity to innovate in establishing sustainable local e-trike manufacturing capacity,

battery and vehicle leasing schemes, and associated services for vehicle operation and 

maintenance, including prototype solar charging stations (SCS): the project is being designed 

to deliver an end-to-end infrastructure solution for cleaner transport which is consistent with 

GoP’s overall energy security, economic development, and climate change objectives. 

36. The private sector has indicated interest in EEEV development, including building and 

operating solar charging stations (SCS) for electric vehicles, but investors face a chicken-andegg dilemma: until a commitment is made for large-scale deployment of EEEVs, private 

investors are unwilling to finance development of a charging network.17 Therefore, the EEEVs 

project will include a prototype SCS component. The stations will utilize rooftop arrays at public 

transport stations, selling electricity at the same price as grid-supplied electricity so that EEEV 

operators can achieve the cost savings accruing from using electricity as transport fuel, while 

demonstrating the technological viability of the solar charging systems. The long-term objective 

is to facilitate scale-up of solar charging systems and achieve grid-parity (see further discussion 

in Appendix 2). 

Renewable Energy Development 

37. In keeping with the long-term objectives for energy security and economic development, 

GoP is committed to developing indigenous RE resources in a manner which protects consumer 

interests. RE development typically entails higher up-front capital costs, but lower operating and 

maintenance costs, and in most cases zero fuel costs.18 The incremental upfront costs may be 

thought of as advance payments for renewable “fuel”, which are amortized and depreciated over 

the lifetime of RE systems – the fuel may be free, but the conversion to useful energy is not. 

Policy support via FITs is designed to eliminate the upfront cost barrier, but in the absence of an 

operational FIT and RPS, as noted above, there is a need for concessional financing to support 

RE development. 

 

13 CNG is used in some other countries (e.g., South Asia) for autorickshaws, and conceivably could be used for 

tricycles. However, GoP’s emphasis on energy security and reduction of petroleum product imports points toward 

electrification as the preferred option.

14

 Financed by RETA 6441: Efficiency Improvement and Connectivity Strengthening in Southeast Asia. Manila. 

15 A summary of the initial results of the pilot and project concept can be found at: 

http://www.adb.org/projects/etrike/etrike-industry-presentation.pdf

16

 ADB. 2010. Technical Assistance to the Republic of the Philippines for Mitigation of Climate Change through 

Increased Energy Efficiency and the Use of Clean Energy. Manila. (TA 7754-PHI). 

17 This situation is further compounded by a lack of proven business models in other countries which would apply to 

“bottom of the pyramid” transport networks. Charging networks under development in countries such as Israel and 

the US cater to high-end 4-wheel private vehicles, i.e., the top of the transport pyramid.

18 Exceptions are biomass power, where feedstock is normally not free, and geothermal, where steam production 

may be segregated and sold to generation units.

2012-08-054_000000000000716
14

Philippines Revised CTF IP June 2012 

38. While the FIT and RPS remain in regulatory suspense, ADB has supported 2 noteworthy 

solar energy demonstration projects. In June 2012, ADB commissioned a 570 kW rooftop solar 

PV system at its Manila headquarters, which is the first of its kind in the Philippines and the 

largest rooftop PV project in Southeast Asia. The installed cost is well below that noted in the 

CIP in 2009, suggesting that there is scope for rooftop solar PV development outside the 

envelope of the FIT (which is limited to ground-mounted installations). As noted above, earlier in 

2012, ADB also supported the Boni Tunnel lighting project to demonstrate the feasibility of solar 

PV and lithium-ion battery technology for large-scale street lighting applications. This project 

comprises 59 square meters of solar panels which provide power to 94 light-emitting diodes 

(LEDs) with 22-watt capacity each. This project provides about 19% of the tunnel power 

demand, but achieves a 51% energy savings compared to the old lighting system.

39. As noted above, the rooftop solar concept presented in the original CIP is being retained 

in the CIP-R, albeit with a modified scope. GoP is requesting to reduce the original allocation to 

$20 million of CTF cofinancing to support total investment of $120 million to finance at least 40 

MW of new solar PV capacity outside the envelope of the proposed solar FIT (see further 

discussion in Appendix 3). 

IV. PROPOSED CHANGES TO THE INVESTMENT PLAN 

40. The original CIP identified several prospective interventions in EE, RE, and urban 

transport. The indicative financing plan endorsed in December 2009 is summarized in Table 4.

Table 4: Indicative Financing Plan Endorsed in December 2009 ($ million) 

Financing Source Renewable Energy (WBG) Urban Transport (WBG) RE and EE (ADB) Total

CTF 75 50 125 250

GoP / DBP 180 50 50 280

IBRD Loans 250 250 0 500

IFC Loans 250 0 0 250

ADB Loans 0 0 400 400

Private sector 750 0 350 1,100

Total 1,505 350 925 2,780

Source: CTF Investment Plan for Philippines 2009 

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, RE=renewable energy, WBG=World Bank Group 

41. The major change proposed is to restructure CTF funding implemented in 

partnership with ADB to focus on an Energy Efficient Electric Vehicles project and a 

revised Solar Energy Development project. In particular, EEEVs promise to transform the 

way energy is used by light-duty public vehicles. For net energy importing countries such as the 

Philippines, electric vehicles can dramatically reduce the country’s dependence on imported 

energy resources, which in turn should reduce short term price volatility and increase long-term 

energy security. Electric vehicle technology presents the opportunity to transition from 

conventional fossil-fueled vehicles to vehicles which do not directly generate harmful local air 

and noise pollution and can be powered by indigenous RE resources such as solar, hydropower 

or geothermal. The complementary investments in solar energy development will provide part of 

the increased power demand from EEEVs. 

2012-08-054_000000000000717
15

Philippines Revised CTF IP June 2012 

42. These prospective investments are appropriate for CTF support given the 

transformational nature of the projects and the replication and scale-up potential.19 It is 

proposed that $105 million be allocated to the ADB EEEVs project and $20 million to the solar 

energy development project, as shown in Table 5. Concept papers for the candidate 

investments are presented in Appendices 2 and 3.

Table 5: Indicative Financing Plan After Reallocation ($ million) 

Financing Source Renewable 

Energy (WBG)

Urban 

Transport 

(WBG)

Energy Efficient 

Electric Vehicles 

(ADB)

Solar Energy 

Development

(ADB)

Total

CTF 75 50 105 a20 a250

GoP / DBP 180 50 99 20 349

IBRD Loans 250 180 0 0 430

IFC Loans 250 0 0 0 250

ADB Loans 0 0 300 80 380

Private sector 750 0 (tbd) b(tbd) b750

Other cofinancing 0 20 0 0 20

Total 1,505 300 504 120 2,429

Source: MDB teams 

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, (tbd)=to be determined, WBG=World Bank Group 

Notes to Table 5: 

a For the EEEVs project, a CTF grant of $1 million is requested for fine-tuning of technology options, technology 

transfer, local industry support and capacity building (implementation support, including monitoring and evaluation 

activities will be financed by the ADB loan). For the Solar Charging Stations component a CTF grant of $4 million is 

requested; see discussion in main text and concept paper in Appendix 2 for further details.b Private sector entities will 

participate in project implementation via supply of goods and services. For the EEEVs project, private sector 

investment is expected during replication and scale-up, and as such no private sector cofinancing is shown in Table 

5. Private sector cofinancing for the solar energy development project has yet to be determined. 

V. POTENTIAL IMPLICATIONS OF PROPOSED CHANGES FOR ACHIEVEMENT 

OF INVESTMENT PLAN OBJECTIVES 

43. The proposed changes will enhance both the RE and cleaner transport programs by 

using CTF resources to accelerate investment in advanced electric vehicle systems, and will 

contribute directly to the near-term strategic RE investment program. An assessment of 

potential implications of the proposed changes for the achievement of objectives and targets of 

the original CIP is summarized in Table 6 and discussed below. 

44. Transformational impact will be enhanced. The scope of RE and cleaner transport 

sector interventions will be expanded relative to the original CIP, bringing additional value by 

opening a new “window” for deploying EEEVs in sustainable transport systems. More efficient 

battery technologies are providing a cleaner alternative to pollution-emitting ICE-powered 

vehicles. In some cases, conventional motorcycles emit more pollution per unit than large sport 

utility vehicles, because the former are not equipped with equivalent emissions-control 

technology.20 Electric motorcycles and tricycles can immediately eliminate tailpipe emissions, 

significantly reducing urban air pollution. Commercial success of e-trikes can be replicated in 

other types of vehicles, including jeepneys and buses (although technical complexity increases 

with larger vehicles). The SCS component will demonstrate the technological viability of RE-

 

19 Pakistan, Indonesia, Malaysia, Bangladesh and Thailand have expressed interest in exploring options for 

implementing similar projects. 

20 The Technology Review, published by MIT, 2007, available at: http://www.technologyreview.com/energy/19069/

2012-08-054_000000000000718
16

Philippines Revised CTF IP June 2012 

based charging systems for e-vehicles and a business model which can be replicated and 

scaled up with private sector investment. The RE development project will support the GoP 

long-term objectives for energy security and economic development, taking into account rapid 

advances and cost reductions in photovoltaic solar power technology. 

Table 6: Summary Assessment of Proposed Adjustments to the Philippines CTF IP

CTF Investment 

Criteria

Original Investment Plan: 

Net Metering with Solar PV

Updated Investment Plan: 

Energy Efficiency Electric Vehicles and Solar 

Energy Development Projects

Potential for 

GHG Emissions 

Savings

Direct reductions would be 

relatively modest but replication 

and scale-up potential is quite 

high as the investments would 

promote GHG reductions through 

RE and EE.

ADB program will target end-use efficiency 

improvements in the transport sector which represent 

permanent energy savings via avoided fuel imports.

The solar charging stations will demonstrate the 

feasibility of fueling EEEVs with 100% renewable 

energy. The solar energy development project will 

complement the FIT and RPS objectives. Replication 

and scale-up potential is high for electric vehicles, solar 

charging stations, and solar energy development 

Costeffectiveness

Initial direct reductions of 

100,000 tCO2e per year with 

10:1 replication and scale-up 

potential

Cost effectiveness: 

CTF$125 / 1 MtCO2e / year with 

replication and scale-up 

EEEVs project: 100,000 vehicles will deliver net 

reduction of 270,000 tCO2e per year; with 10-year 

vehicle lifetime total GHG reductions are 2.7 MtCO2e. 

Replication and scale-up potential is at least 20 to 1.

Cost effectiveness: CTF$105 million / 2.7 million tCO2e 

= CTF$38 / tCO2e, declining to CTF$3.89 / tCO2e with 

replication and scale-up of 10 to 1. 

[See additional notes in Table 10 and Appendix 2.]

Solar energy development project: At least 40 MW of 

rooftop solar PV operating at 15% load factor will 

deliver net reduction of about 0.03 million tCO2e per 

year assuming grid emissions factor of 0.52

tCO2e/MWh. With 15 year lifetime total GHG reductions 

are about 0.4 million tCO2e. Replication and scale-up

potential is at least 10 to 1. 

Cost effectiveness: CTF$20 million / 0.4 tCO2e = 

CTF$49 / tCO2e, declining to CTF$4.87 / tCO2e with 

replication and scale-up of 10 to 1. 

Demonstration 

Potential at 

Scale

Transformation potentialaof at 

least 10 

Transformation potential is estimated to be

> 20 for EEEVs and >10 for solar energy development

Development 

Impact

The proposed investment would 

demonstrate viability of the net 

metering system (and business 

model) and accelerate 

development of the solar PV 

industry in the Philippines

The EEEVs and solar energy development projects will 

accelerate growth of the respective industries in the 

Philippines by demonstrating new technology / systems 

and business models. 

Impacts with respect to energy security and 

environmental benefits will be higher than the original 

CIP. Impacts on employment also may be higher than 

the original CIP given the potential benefits accruing to 

e-trike owner/operators and private sector firms 

involved in supply of hardware and after-market 

services for EEEVs, solar charging stations, and rooftop 

PV systems.

Implementation 

Potential

As the implementing rules and 

feed-in tariff for net metering 

have not been finalized, the 

originally proposed project is not 

The EEEVs project has been developed based on a 

successful pilot project in the Metro Manila region and 

is at an advanced stage of preparedness. The solar 

energy development project is in the identification 

2012-08-054_000000000000719
17

Philippines Revised CTF IP June 2012 

CTF Investment 

Criteria

Original Investment Plan: 

Net Metering with Solar PV

Updated Investment Plan: 

Energy Efficiency Electric Vehicles and Solar 

Energy Development Projects

ready for implementation. stage, building on the Boni Tunnel Lighting project and 

ADB headquarters rooftop solar PV experience, and is 

tentatively scheduled for ADB Board consideration in 

2013. See Table 8 for discussion of implementation 

risks and mitigation.

Additional 

Costs and Risk 

Premium

The additional costs of the solar 

PV systems and first-mover risk 

associated with net metering 

clearly justified the use of CTF 

resources.

The proposed projects will focus on using CTF for 

covering additional costs associated with introduction of 

electric vehicle systems and for covering additional 

costs and first-mover risks in solar energy systems 

investments (see Appendices 2 and 3).

a Transformation potential is defined in paragraphs 15 - 17 of the CTF Investment Criteria for Public Sector 

Operations dated 9 February 2009. 

CIP=CTF Country Investment Plan, CTF=Clean Technology Fund, EE=energy efficiency or energy efficient, 

EEEVs=energy efficient electric vehicles, GHG=greenhouse gas, PV=photovoltaic, RE=renewable energy, 

tCO2e=tons carbon dioxide equivalent 

45. Emissions reductions from the EEEVs and solar energy investments will be higher 

than in the original investment plan, with higher replication and scale-up potential. The 

direct investments in the EEEVs and solar energy development projects will result in net 

avoided fossil fuel emissions estimated to be at least 0.3 million tCO2e per year: about 0.27

million tCO2e per year for the proposed EEEVs project and about 0.03 million tCO2e per year for 

the solar energy development project (emissions reductions estimates are discussed in 

Appendix 2). Cost-effectiveness will be better and replication and scale-up potential is equal to 

or higher than the original CIP as shown above in Table 6 (also see Table 10). In addition to the 

substantial energy security benefits, the EEEVs project will bring environmental and public 

health co-benefits equal to or greater than that which would have been realized under the 

original Investment Plan. The solar energy development project also will support expansion of 

the GoP clean energy infrastructure beyond that envisioned under the proposed FIT and RPS 

framework.

46. Replication and scale-up potential will be higher than originally planned.

Commercial deployment of EEEVs will expand the urban transport program beyond the original 

CIP. The replication potential for e-trikes and motorbikes alone is at least 20 to 1 based on the 

current vehicle fleet size; however, replication and scale-up is conservatively assumed to be 10 

to 1 for purposes of calculating total emissions reductions and indirect cost-effectiveness. 

Replication potential for investment in solar energy systems is well over 10 to 1. Using CTF to 

cofinance investment on these types of pioneer projects will eliminate first-mover risk and help 

mobilize future commercial investment for replication and scale-up. Private sector firms will be 

actively engaged in project implementation via service, supply, and maintenance contracts; the 

private sector is expected to take a prominent role in replication and scale-up.

47. Development impacts and co-benefits will be maintained or enhanced. New 

investment in EEEVs and solar energy systems will improve energy security, reduce GHG 

emissions, and reduce local pollutant emissions with substantial public health benefits. Using 

CTF to cofinance these types of pioneering projects will help mobilize future commercial 

investments (mainly by private sector entities) for replication and scale-up, which will stimulate 

economic growth and facilitate the long-term transition to low-carbon development. A 

comparison of proposed results indicators is presented in Table 7 (additional results indicators 

will be developed for project proposals in accordance with CTF guidance).

2012-08-054_000000000000720
18

Philippines Revised CTF IP June 2012 

Table 7: Results Indicators 

Results Indicator Baseline

Expected 

Program Results 

in Original CIP: 

Net Metering with 

Solar PV

Expected Program Results For 

EEEVs and Solar Energy 

Projects

Cost of solar power 

units 

$18,000 with 9.8 year 

payback

$10,000 with 2.5 

year payback a

[To be determined during project 

identification and preparation.] 

Number of 

commercial buildings 

with solar panels and 

net metering

Limited 30,000 buildings a [To be determined during project 

identification and preparation.] 

Number of e-trikes 

and support 

infrastructure in 

commercial operation 

20 (with lithium ion batteries, 

post-pilot test) and about 

200 using conventional lead 

acid batteries and less 

efficient motors.

n/a

100,000 e-trikes operating by 

2016. 

Public charging infrastructure and 

battery leasing established in 

respective regions. 

Number of Solar 

Charging Stations and 

Rated Capacity 

n/a n/a

Standardized design prototype 

solar powered charging stations. 

5 x 200 kW solar-powered 

charging stations operating by 

2015.

RE capacity and 

output

570 kW rooftop solar with 

15% load factor n/a

Standardized designs for rooftop 

solar PV

40 MW of rooftop solar PV by 

2016, b

Energy output of 52,560 MW-h per 

year at 15% load factor 

Notes: a Indicators are from Table 1 of Executive Summary of the original CIP. 

b

 Assumes $3 per watt installed system cost. 

Source: October 2011 Joint Mission 

48. Implementation potential for the EEEVs and solar energy projects is high. The

EEEVs project is scheduled for presentation to ADB’s Board of Directors in August 2012. This 

project has strong support at the highest levels of the GoP. For this reason, the project is being 

submitted to the CTF Committee for consideration of funding approval simultaneously with the 

requested endorsement of the updated Investment Plan. The solar energy project is at the 

identification stage, and is expected to be prepared and presented for ADB Board consideration 

in 2013. Risks and mitigation measures are summarized in Table 8. 

49. The Philippines Department of Energy (DOE) will be the executing agency for these 

proposed projects, as DOE is the designated agency for RE development, energy efficiency, 

electric vehicles, and alternative fuels. The scope and implementation arrangements of the 

proposed projects have benefited from a substantial learning curve from the Philippines Energy 

Efficiency Project (PEEP, supported by ADB financial and technical assistance), the EEEVs 

pilot projects in Mandaluyong and Taguig Cities, the Boni Tunnel Lighting installation, and the 

rooftop solar installation at ADB headquarters. A key lesson learned from the EEEVs pilot 

projects is that for transformational impact to be realized, the investments must include the 

complete spectrum of stakeholders including vehicle owner/operators, equipment suppliers, and 

after-market service providers, i.e., the project must facilitate “end-to-end” infrastructure 

development including the development of a credible battery industry with new technology (i.e., 

the full supply chain must be developed). 

2012-08-054_000000000000721
19

Philippines Revised CTF IP June 2012 

Table 8: Risks and Mitigation Measures 

Risk Mitigation Measure Residual 

Risk

Policy and regulatory framework: 

Clarity of policies related to EE and 

cleaner transport and RE 

 High energy prices and price volatility provide macroeconomic support to end-use efficiency investments

 Application of innovative financing to cover part of frontend capital costs and to reduce first-mover risks

L

Implementation Capacity: Readiness 

of owner-operators to procure and 

operate electric vehicles

 Technical assistance to transfer know-how on project 

planning, financing, risk management, especially for 

pioneering projects

L/M

Technology: Limited know-how for 

after-market service of electric 

vehicles

 Technical assistance and know-how transfer for newlyintroduced electric vehicles will be provided based on 

experience from pilot project M/H

Finance: financial benefits of EEEVs 

need to be monetized

 E-trike operators are expected to improve net income 

by 50%; a rent-to-own approach will ensure affordability 

of vehicle ownership 

 Carbon finance will be mobilized to the maximum extent 

possible, including prospective post-2012 carbon 

revenue.

L/M

Environmental Management: 

Management and disposal of used 

appliances and batteries

 Battery leasing and recycling programs are integrated 

into the e-trikes projects.

 Rigorous application of GoP regulatory framework and 

ADB safeguards for environmental and social impact. 

L

Development Impact: Mobilization 

of investment for replication and 

scale-up; potential disruption of

access to energy to “last mile” 

consumers

 Work closely with vehicle owners, business 

associations, and domestic financial institutions to raise 

awareness and promote future investment in electric 

vehicles and solar charging stations.

 Electricity demand from the EEEVs project will be offset 

by 1338 MW of new grid-connected capacity, more than 

compensating for incremental EEEV demand (see 

Appendix 2) 

L

Carbon finance delivery risk: 

Verification bottlenecks are currently 

delaying annual payments and 

affecting the financing structure of 

large scale transactions.

 Coordinate with ADB Future Carbon Fund to identify

opportunities to maximize potential carbon revenues, 

and reduce or eliminate delays in methodology and 

verification processes

 Consider voluntary transaction in secondary carbon 

markets

M/H

Procurement : Limited number of 

global suppliers for electric vehicle 

technologies may limit competition in 

some instances

 Competitive bidding will be utilized in accordance with 

MDB and GoP requirements. 

M/H

Overall risk after mitigation Moderate

50. Additional costs and risk premiums justify use of CTF. The EEEVs and solar 

energy development projects are both first-of-a-kind in the Philippines. The EEEVs project will 

be the largest effort in the Asia region to begin electrification of the public vehicle fleet. These 

pioneer projects face first-mover risk, and present higher-than-normal end-user costs with 

respect to purchase of new vehicles and appliances (e.g., the e-trikes cost at least $1000 more 

per unit than conventional gasoline-powered tricycles). Lower operating costs will offset the 

initial purchase costs, but at present there is no mechanism to monetize the life-cycle savings to 

assist end-users in the initial purchase. 

51. Carbon finance is facing constraints due to post-2012 market uncertainties. Carbon 

finance opportunities will be pursued, but any revenue is expected to be “on delivery” and will 

not be sufficient to catalyze up-front investment. Also, any CDM funds are uncertain until 

2012-08-054_000000000000722
20

Philippines Revised CTF IP June 2012 

registration with the UN, which typically occurs after the projects’ financial close. Moreover, 

projects from the Philippines not registered by December 2012 will not be eligible for carbon 

financing under the European Emissions Trading System. 

VI. ADDITIONAL CONSIDERATIONS OF THE PROPOSED PROJECTS 

Net Impact on the Electricity Grid and GHG Reductions 

52. Conversion from ICE to EEEVs will save energy, as the energy losses in ICE vehicles 

are typically 70–80% versus 5–15% in EEEVs. Additional electricity required for the EEEVs 

project will depend on the relative contribution of public charging stations used during peak time 

(6 MW of grid-connected charging stations, plus 1 MW of solar charging stations), and overnight 

home-based chargers (60 MW, off-peak). As both modes of charging will be implemented, and 

considering that overnight charging will provide night-time “valley filling” benefits, the 

incremental demand presented by the EEEVs project is expected to be less than 60 MW. A 

“maximum demand” case of 60 MW represents incremental power demand of about 0.37% of 

total installed generating capacity of 16,359 MW.21 Total incremental energy demand due to the 

project is estimated at 150 GWh per year (assuming e-trike consumption of 5 kWh per day, 300 

days per year operation, and fleet of 100,000 vehicles), which represents incremental 

consumption of about 0.22% of reported generation output in 2010 and about 18.8 MW of 

equivalent baseload generation capacity. This additional demand on grid-supplied electricity is 

considered to be negligible.22 Table 9 presents estimated changes in energy balance assuming 

the EEEVs and solar energy development projects are both implemented, along with other 

committed near-term RE development. 

Table 9: Capacity Balance for Vehicle Charging, Megawatts (MW) 

Capacity Additions MW

Solar Charging Systems (5 x 200 kW stations ) 1

New Rooftop PV and/or other solar energy installations 40

Near-term RE Power Additions (see Appendix 2, Table A2.2) 138.5

Subtotal 179.5

Maximum Demand from EEEVs Project 60

Net Capacity Additions 119.5

 Source: ADB staff estimates 

53. In the case of the Philippines, with a large share of RE in the generation mix, the GHG 

reductions and overall end-use EE gains will be quite significant. As shown in Figure 6, clean 

energy accounts for about 66% of power generation and about 39% of total primary energy.23

The GoP plans to establish solar charging stations wherever area and site access constraints 

do not exist, which will make the carbon footprint of these vehicles close to zero. Assuming 

consumption of 5 kWh per day and 300 days per year operation, an electric tricycle will use 

about 1.5 MWh of electricity per year, resulting in 780 kg CO2e per year using a grid emission 

 

21 Installed capacity is spread across 3 regional grids, as illustrated in the original CIP, Figure 11. 

22 Considering that 1200 MW of coal-fired capacity is being developed in addition to the 138.5 MW of RE noted in 

Table 9, grid-supplied electricity would not be stressed even if replication and scale-up of 20:1 is achieved: 

deployment of 2 million e-trikes would result in electricity consumption of 3000 GWh per year, which would require 

about 375 MW of equivalent baseload capacity. Baseload capacity assumes 8000 hours per year generation output. 

See additional details in Appendix 2.

23 Figure 6 reflects the current situation with oil dominating the transport sector, which presents a tremendous 

opportunity for end-use efficiency gains via electric vehicles. 

2012-08-054_000000000000723
21

Philippines Revised CTF IP June 2012 

factor of 0.52 tCO2e/MWh,24 versus an equivalent ICE tricycle, which produces about 3.5 tons of 

CO2 each for the same service delivery – more than a 70% GHG emissions reduction. This 

estimated GHG reduction is consistent with a recent study by MIT, which stated that accounting 

for the total energy consumed from well to wheel,25 electric vehicles can reduce energy 

consumption by up to 50% and greenhouse gas emissions by up to 60% compared to ICE 

vehicles. The savings is in even more in congested urban areas, as the average speed is low 

(no electricity is used while stranded in traffic jams and these vehicles will not use any air 

conditioning). The energy losses in electric motors are less than ICE vehicles, and transmission 

and distribution of electricity is more efficient and cost effective than transportation of liquid fuels 

to the end user (additional calculations are presented in Appendix 2). 

Figure 6: Primary Energy and Power Generation Mix (2010) 

 

24 The grid emissions factor of 0.52 tCO2e/MWh is consistent with 2010 generation output and various CDM projects, 

and is lower than equivalent emissions from gasoline-powered vehicles which would be 0.807 tCO2e/MWh for an ICE 

with 30% thermodynamic efficiency (see additional calculations and discussion in Appendix 2).

25

 Energy consumed and green house gases (GHGs) emitted from the time a vehicle’s energy source leaves the well

 to the time it is consumed by the vehicle, details available at: http://web.mit.edu/evt/summary_wtw.pdf 

2012-08-054_000000000000724
22

Philippines Revised CTF IP June 2012 

Choice of Battery Technology and Disposal Implications 

54. ADB’s publication on electric bikes26 identified lead (Pb) pollution as an inherent problem 

with electric vehicles and, as long as electric vehicles use lead acid batteries, the overall 

pollution loads will be several times higher than ICE. According to the United States 

Environmental Protection Agency, Li-ion batteries are not an environmental hazard27, and are 

safe for disposal in the normal municipal waste stream.28 While other types of batteries include 

toxic metals such as cadmium, the metals in Lithium-ion batteries–cobalt, copper, nickel and 

iron–are considered safe for landfills or incinerators. Therefore, the e-Trikes will use Li-ion 

batteries at the outset; the battery leasing business model will allow for more advanced batteries 

to be supplied in the future. 

Cost Effectiveness of the Proposed EEEVs Project 

55. Tables 10 and 11 show additional calculations of the cost effectiveness and 

transformative impacts of the EEEVs project assuming a conservative replication and scale-up 

factor of 10 to 1. Table 10 indicates that cost effectiveness is well within expectations as 

presented in CTF investment guidance, even in a pessimistic scenario discounted by 30% for 

potential “rebound effects.” The pessimistic scenario shown in Table 10 shows that the 

proposed EEEVs project would be more cost-effective than the net metering project proposed in 

the original CIP. 

 

26

 ADB. 2009. Electric bikes in the PRC: Impact on the Environment and Prospects for Growth. Manila. 

27

 http://www.ehso.com/ehshome/batteries.php 

28

 http://www.epa.gov/osw/hazard/wastetypes/universal/batteries.htm

2012-08-054_000000000000725
23

Philippines Revised CTF IP June 2012 

Table 10: CTF Cost-effectiveness of EEEVs Project vs. Original Net Metering Project

Net GHG 

Reductions 

(MtCO2e/year)

Cost Effectiveness 

(CTF$/tCO2e/year)

Cost Effectiveness

(CTF $/tCO2e) a Scenario / Assumptions

0.33 306.06 30.06 National electricity and heat emissions 

factor of 0.6 tCO2e/MWh b

0.27 374.07 37.41 ADB base case with grid emissions 

factor of 0.52 tCO2e/MWh c

0.231 437.23 43.72 0.33 MtCO2e/year discounted 30% for 

“rebound effect”

d

2.31 43.72 4.37 Replication and scale-up of 10:1 on case

assuming “rebound effect”

0.1 1250 50 Original CIP: net metering with solar PV; 

25-year project lifetime e

1 125 5

Original CIP: net metering with solar PV;

replication and scale-up of 10:1 e

Source: ADB Estimates. 

Notes: 

a

 Clean Technology Fund, Investment Criteria for Public Sector Operations, 9 February 2009; paragraph 11 notes 

that “...CTF co-financing will ordinarily not be available for investments in which the marginal cost of reducing a ton of 

CO2-equivalent exceeds US$200....“ 

b

 Emissions factor calculated for Philippines electricity and heat consumption by UK Defra. 

c

 Additional discussion of emissions factors is presented in Appendix 2. 

d

 Consideration of potential rebound effects is not required by CTF guidance. 

e

 Adapted from Original CIP, Annex 2.

56. Table 11 illustrates how the cost of avoided CO2 drops significantly with larger 

transformation brought about by the CTF investment.29 In the small, medium, and large project 

scenarios, CTF cost-effectiveness is well below the upper limit guidance of $200 per ton. 

Assuming a full transformation and scale-up with replication of 10-to-1, the lifecycle CO2 cost 

will be well below the $5 per ton estimated for the net metering project proposed in the original 

CIP. E-trikes also will generate significant fuel savings and other social co-benefits: about 

$10,000 over the 10 year life, the overall cost of avoided CO2 being about “-$200 per ton” – not 

uncommon for end-use EE projects, which is also reflected in the McKinsey abatement cost 

curve for “Fuel efficiency in vehicles” (Figure 2, above) of about “-€50 per ton” or “-$63 per ton” 

(based on 8 June 2012 exchange rate). 

Table 11: EEEVs Project Cost-Effectiveness vs. Investment Scale 

CTF Allocation and

Scale Effects

Small isolated 

grids/ no CTF

Small 

Project

Medium 

Project Large Project

Transformational Impact Zero Minimum Partial 

transformation

Full 

transformation

Net Avoided CO2e (t/y/vehicle) 2.5 2.6 2.6 2.7

Number of EEEVs 5,000 20,000 50,000 100,000

EEEV Cost ($/unit) 5,000 4,700 4,500 4,000

Total Cost ($ Million) 25 94 225 400

CTF Amount ($ Million) 0 30 70 101

CTF Cost-effectiveness ($/t/y) n/a 576.92 538.46 374.07

CTF Lifecycle Cost-effectiveness ($/t) n/a 57.69 53.85 37.41

Cost-effectiveness with 10x Replication 

and Scale-up ($/t) n/a 5.77 5.38 3.74

 $ = US dollars, CO2e = carbon dioxide equivalent, t = ton carbon dioxide equivalent, y = year 

 Source: ADB staff estimates 

 

29 Table 10 assumes a replication and scale-up factor of only 10 to 1 versus the 20 to 1 factor used in Table 5. 

2012-08-054_000000000000726
24

Philippines Revised CTF IP June 2012 

Technology Options for Cleaner Transport 

57. A recent ADB study concluded that to make tricycles more energy-efficient and green, 

two technology options were available: (a) retrofit of existing units using conversion kits to LPG 

and CNG fuels; or (b) replace the propulsion system with either hybrid or purely batteryoperated, or with more efficient internal combustion engine (ICE). Only the battery operated 

option can reduce the country’s reliance on fossil fuels. Battery operated electric vehicles can 

also be “zero-emission vehicles”, because the electricity can be generated from 100% 

renewable sources, and these vehicles have no tail-pipe emissions. The electric option also 

represents a one-step solution, while retrofitting from gas to LPG entails a two-step solution 

(that may merely postpone an inevitable shift to electric). More importantly, e-trikes offer the 

highest net income potentials for tricycle operators and drivers. The annual operating cost is 

nearly 50% lower than a conventional gasoline-fueled trike. 

2012-08-054_000000000000727
25

Philippines Revised CTF IP June 2012 

Appendix 1: Summary of Stakeholder Engagement During Investment Plan Revision 

A. Background 

1. During development of the original CIP, the MDBs worked closely with the Department 

of Energy (DOE), Department of Finance (DOF), and the National Economic and Development 

Authority (NEDA). These agencies agreed that the $125 million in CTF financing to be 

administered by ADB would be earmarked for the energy sector. Since the EEEV project is 

fundamentally seen as an energy project, and falls within the mandate of the DoE–led Fueling 

Sustainable Transport Program, project ownership rests with the DOE, with the DOF as the key 

counterpart for all MDB-financed projects, including those with CIF funding. DOE communicated 

this to the Department of Transport and Communication (DOTC) and the Department of 

Environment and Natural Resources (DENR), explaining DOE’s interest in reallocating CTF 

resources from the previously planned renewable energy (rooftop solar development) and 

energy efficiency (energy efficient appliances) projects to the proposed the EEEVs project. 

NEDA also was kept informed of these developments, and it approved inclusion of the EEEVs 

project in the GoP’s foreign assistance program (Attachment 1a). The President of the 

Philippines serves as Chair of the National Climate Change Commission (CCC), and has 

supported the e-trikes pilot project and development of the EEEVs project. Given this tacit 

endorsement, DOE did not solicit further official comment from the CCC.30

 

2. Subsequent to presentation and discussion of the CIP-R in November 2011, a group of 

local and international civil society organizations (CSOs) raised concerns about a perceived lack 

of consultation on the proposed reallocation of CTF funds from supporting the promotion of 

renewable energy to sustainable transport. ADB responded in writing, clarifying that the EEEVs 

project was still under development, and therefore, wide discussions and consultations would 

address the vehicle design, safety, disposal, post-sale issues, and other concerns raised by 

various stakeholders. A specific set of consultations was subsequently organized and held on 

21-23 May 2012, covering both the allocation of CTF resources and design of the EEEVs 

project. These consultations are summarized below in Section C. 

3. The EEEVs project team and the Government have been actively engaging on project 

design with a range of stakeholders – tricycle drivers, suppliers, manufacturers, government 

officials, lawmakers, and academic institutions – for more than one year. Since July 2011, ADB 

has hosted, on behalf of DOE, 7 informal industry meetings to foster improved communications 

and potential cooperation among international investors and members of the local tricycle 

manufacturing community. ADB has shared at these meetings, among others, findings from the 

pilot project in Mandaluyong, technical details of e-trike specifications, charging options, and 

bidding processes. These and more formal meetings and workshops have provided venues for 

professional networking within this nascent industry. 

4. The DOE also undertook a nationwide e-trike design competition and selected 3 top 

designs from 180 entries. An internationally reputed car designer is working on a design that 

meets international safety and comfort standards taking into account ideas from the 3 winning 

designs and the feedback of the drivers on the pilot units. 

5. The EEEVs project concept is thus the result of extensive and extended engagement 

with a range of stakeholders, and the proposed solar energy development project concept has 

also benefited from an active dialogue amongst stakeholders dating back to the original CTF 

 

30 It should be noted that inter-governmental consultation is primarily the responsibility of the government.

2012-08-054_000000000000728
26

Philippines Revised CTF IP June 2012 

Investment Plan’s development. A solar energy development project is now being retained as 

part of the proposed CTF investment, based on stakeholder feedback, with the project concept 

to be further refined. The history of stakeholder engagement feeding into this Update is 

summarized below. 

B. Informal Industry Meetings 

6. Beginning in July 2011, the EEEVs project team began hosting informal industry 

meetings to foster communication and cooperation amongst industry players and to ensure local 

buy-in throughout the project preparatory process. Seven informal meetings were held to 

encourage representatives of the local tricycle manufacturing community to ask questions about 

e-trike specifications, design and bidding processes, and to maintain open communication with 

the project team. These well attended meetings took place on the following dates (a list of 

organizations represented is given in Attachment 1b): 

 July 12, 2011 at the Asian Development Bank; 

 July 26, 2011 at the Serendipity Lounge, Discovery Suites; 

 August 9, 2011 at the Serendipity Lounge, Discovery Suites; 

 August 23, 2011 at the Serendipity Lounge, Discovery Suites; 

 September 6, 2011 at the Savannah Function Room, Discovery Suites; 

 September 20, 2011 at the Savannah Function Room, Discovery Suites; and 

 October 25, 2011 at the Savannah Function Room, Discovery Suites. 

7. Company representatives were encouraged to submit presentations regarding e-trike 

design and business practices. Working groups comprising project team members and industry 

representatives were established to explore different aspects of the scale-up of a local e-trike 

manufacturing, assembly, and battery supply business model. The topics examined include (i) 

the best possible set of criteria for companies to participate in the project and how to best 

structure a local industry, (ii) registration and franchising challenges and potential solutions; and 

(iii) developing a set of options and best practices for e-trike disposal and recycling. 

8. Through the informal meeting process, the project design team gained valuable insight 

into the challenges and concerns facing local manufacturers regarding the scale-up planned as 

part of the e-trike project. Primary concerns include production capacity, government support 

(taxes, duties and fees), the ADB bidding process, and e-trike design specification. 

C. More Formal Meetings and Workshops 

9. The project team has also organized more formal engagement with those interested in 

the EEEVs project design over the past year. Stakeholders have ranged from international 

electric vehicle experts, representatives of local governments, representatives from the 

Philippine Department of Energy (DOE) and other government agencies, representatives from 

Congress, and international battery manufacturers. Meetings such as these will continue 

throughout the project preparatory process and will transition to building community awareness 

and addressing industry, community and driver concerns as project implementation moves 

forward. 

2012-08-054_000000000000729
27

Philippines Revised CTF IP June 2012 

1. Energy Efficient Electric Vehicles Forum, April 28, 2011 

10. The Energy Efficient Electric Vehicles Forum at ADB served as an important venue for 

project concept introduction on behalf of government and industry representatives. The 

proposed project was introduced by the ADB and DOE, and international consultants discussed 

best practices for electric vehicles around the globe. The Forum emphasized the role of 

government support and incentives in creating a successful electric vehicles program, the role 

of the private sector in achieving successful economies of scale, and the importance of 

technology transfer to achieve the economic and environmental goals of the project. 

2. Boracay Consultation Workshop, August 14-15, 2011 

11. Members of the project team traveled to Boracay Island to assess the existing 

conventional tricycle market and how to successfully work with local government officials and 

tricycle drivers to implement a full transfer to ADB sponsored e-trikes beginning in early 2012. 

Team members noted the concerns of local tricycle drivers, such as hilly conditions and 

passenger preferences geared towards promoting tourism (where to store luggage, seats facing 

out, etc.). Following the meetings and follow-up from project team members, the Municipal 

Council of Malay, which includes Boracay, passed a resolution on September 20, 2011 to shift 

to e-trikes in 2012. The resolution expresses the Council’s support for the project not only on the 

Island of Boracay, but throughout the Philippines. 

3. Meetings with Battery Manufacturers (Various Dates) 

12. The project team has met with various international battery manufacturers – Toshiba, 

Samsung, LG, Kokam, etc. These meetings have enforced the team’s commitment to lithium ion 

battery technology, helped to evaluate various power capacity options and cost concerns, and 

have helped to determine how to structure the e-trike leasing program to maximize benefits to 

end users. The project team is working with battery manufacturers to achieve a cost-effective, 

lightweight, and environmentally sound battery solution that can sustain the industry on a longterm basis. 

4. Workshop with Japanese Battery Manufacturers, November 23, 2011 

13. The DOE and ADB hosted a workshop for industry representatives and interested 

parties featuring presentations by Japanese manufacturers. Presenters included 

PriceWaterhouse Coopers Aarata, PUES Corporation, Yamaha Motor Co., Ltd., Prostaff Co., 

Ltd., Tokyo R&D Co., Ltd., Toyota Industries Corporation, Nissan Motor Co., Ltd., and SIM Drive 

Corporation. A question and answer session followed.

5. Workshop in Tokyo, November 28, 2011 

14. A workshop was hosted at the Asian Development Bank Institute in Tokyo with 

representatives from the Philippine Embassy to Japan and ADB. Participants were invited to 

tour the Nissan factory and to see the electric vehicle model, the Leaf, in production. 

Participants included PwC, ITS Network, PUES Corporation, Tokyo R&D Co., Ltd., 

Assemblepoint Co., Ltd., Nissan Motor Co., Ltd., Toyota Industries Corporation, Toshiba 

Corporation, Prostaff Co., Ltd., E-Minimo Co., Ltd., MK & Associates, and Ibrida Cell Co., Ltd. 

2012-08-054_000000000000730
28

Philippines Revised CTF IP June 2012 

6. Electric Vehicle Summit in Shanghai, November 29-30, 2011 

15. Representatives from DOE, ADB, and the Philippine e-trike industry attended the 

Electric Vehicle Infrastructure Summit in Shanghai from November 29-30, 2011. Features of the 

summit included the following: 

 Outlook of the People’s Republic of China (PRC) EV industry and infrastructure 

development in next 5 years from a regulatory perspective; 

 Develop effective business models to ensure the commercial success of EV 

infrastructure in the PRC; 

 Standardization: EV roadmap in the PRC; 

 Cutting-edge EV, battery and charging technologies showcase; 

 How to work with governments and regulators to ensure future proof policy 

development in PRC;

 Future business models for auto manufacturers in PRC and how to maintain; 

 Profitability with new industry landscape; 

 Technical innovations for future EVs and how it could benefit auto OEMs; 

 Collaborating to accelerate development of vehicle-grid connectivity standards; and 

 World pioneering EV pilot project case studies and implications. 

16. Participants included the Department of Energy, the Department of Environment and 

Natural Resources, the Department of Finance, the Department of Interior and Government, the 

Department of Science and Technology, the Department of Trade and Industry, the Department 

of Transportation and Communications, Land Transportation Franchising and Regulatory Board, 

Land Transportation Office, Mandaluyong Tricycle Regulations Office, Metropolitan Manila 

Development Authority, National Economic Development Authority, Office of Senator Ralph 

Recto, Fabella Sto. Rosario Tricycle Operators and Drivers Association, Golden eBike 

Philippines Inc., eSave Transport System, Green Vector Ventures, Inc., GerWeiss Motors 

Corporation, Partnership for Clean Air, FilOil, North 68 Corporation, MD Juan Enterprises, Mto 

Seiki Mtg. Corp., and PHUV Inc. 

7. Workshop with Korean Battery Manufacturers, December 13, 2011 

17. On December 13, 2011 a workshop was held with representatives from the e-trike 

manufacturing industry, the project team, and Korean battery manufacturers. Presentations 

were given by Eco One and LG Chem Company, ETH Co., Ltd., and Power Logics. A question 

and answer session followed. 

8. Presentation by Dr. Alastair Bacon, January 10, 2012 

18. The ADB hosted representatives from the industry and from the DOE to hear a 

presentation by Dr. Alastair Bacon, the Vice President for Driveline and Transmission Systems 

for Ricardo, a global multi-industry consultancy for engineering, technology, project innovation 

and strategy. A question and answer session followed. 

9. Consultation with Civil Society Organizations, February 9, 2012 

19. ADB, DOE and 9 civil society representatives based in Washington, DC discussed the 

proposed reallocation of $125 million of CTF funding from the renewable energy (solar power 

generation and net metering) concept included in the original CIP to an energy efficient (EE) 

2012-08-054_000000000000731
29

Philippines Revised CTF IP June 2012 

appliances project and EEEVs project. During the meeting, discussion initially covered process 

issues, including the need for consultation and inter-agency support for the CIP-R. Discussion 

then shifted to address several substantive issues, beginning with alternatives considered for 

inclusion in the CIP-R, potential for emissions reductions and cost effectiveness, and closing 

with clarifications about additional costs and risk premiums. As the CSOs had shared their 

concerns in advance of the meeting, ADB and DOE explained their positions on each issue, and 

agreed to follow up the issue of GHG reductions highlighted in a recent report by the UNDP 

Risoe Center report (which is noted in Appendix 2). 

10. Industry Meeting, March 30, 2012 

20. On March 30, 2012, an industry meeting was held at ADB headquarters for DOE project 

updates and an open forum question and answer session. Over 60 people were in attendance 

from organizations and companies such as Meralco, Dow Chemical, Venture Japan K.K., 

Golden e-Bike Phils., Toyota Tsusho, Pricewaterhouse Coopers, Motolite, Itochu Corporation, 

Terra Motors Japan, Metchem, Gerweiss Motors, etc. Discussion largely surrounded the flow of 

funds, the bidding process, and the requirements and qualifications of the supplier. 

C. May 2012 CTF Stakeholder Consultations 

21. A range of CSOs, NGOs, private sector, and other interested stakeholders were invited 

to participate in public consultations regarding the revised CTF Country Investment Plan, 

including the proposed EEEVs project on 21-23 May 2012. A steering committee with 

representatives from various interested CSOs/NGOs began meeting in February 2012 to 

develop agenda items and identify participants. The 3-day consultations began with discussions 

on the use of CTF resources for renewable energy versus sustainable transport investments. 

They then turned to issues surrounding design of the EEEVs project and CTF support for the 

renewable energy sector. 

22. Day 1 of the consultations was entitled “Why Not Renewable Energy for the Clean 

Technology Fund?,” and its objectives included: 

1. To present the CTF and the original Country Investment Plan (CIP) with its original 

components; 

2. To understand the current state of RE in the Philippines and why a shift was being 

proposed to sustainable transport for the CTF; 

3. To present the revised CIP and rationale for deviating from the original; and 

4. To engage in a discussion on the use of the CTF for a transformational strategy in the 

energy sector to address growing demand. 

23. Based on advice from the consultations steering committee, over 160 invitations were 

issued by email together with a web-based notice opening them to the public,31 and nearly 100 

participants attended to hear speakers and discuss related topics. Presentations included 

“Philippine Policy Framework for Renewable Energy”, “Harnessing RE Resources: Potential, 

 

31 There was good agreement among steering committee members on a range of issues, but full consensus could not 

be reached on all aspects of timing and approach prior to their conduct. DOE requested ADB to move ahead based 

on directions received from the steering committee, and a neutral facilitator was engaged to moderate discussions. 

Many of the relevant documents had been posted on the web some time in advance of the meetings, while others 

were distributed the week prior to the events. Every effort was made to send invitations more than a week in advance 

of the meetings (and many organizations were aware of the impending consultations), but some received invitations 

later. Adjustments were made to the announced agendas based on the availability of speakers and resource persons. 

2012-08-054_000000000000732
30

Philippines Revised CTF IP June 2012 

Benefits and Challenges”, “Is there Financing for RE Projects?”, “CTF Philippine Investment 

Plan Update”, and “Why the Shift?”. Participants discussed progress made in net metering, new 

climate funds becoming available for renewable energy, the DOE and the ADB’s collective 

commitment to renewable energy, and why the revised CIP reflected a higher priority for 

sustainable transport and energy efficiency initiatives – including e-trikes. 

24. Day 2 of the consultations, entitled “Electrification of Public Transport: Why E-trikes?”, 

was organized by the Clean Air Initiative for Asian Cities (CAI-Asia), the Partnership for Clean 

Air (PCA) and DOTC in cooperation with DOE and ADB. The consultation was designed to 

clarify and discuss the rationale for electrification of tricycles using CTF resources. 

Presentations led by CAI-Asia and PCA included “The Role of Tricycles on Urban Transport in 

the Philippines”, “Plans and Programs of DOTC on Alternative Vehicles (including Electric)”, and 

discussion of the pilot e-trike programs in Mandaluyong and Boracay. Participants discussed the 

hierarchy of public transportation and the role tricycles play within that hierarchy, lessons from 

the pilot programs, and electrification and alternative fuel policies being pursued by the DOTC. 

The DOE also reconfirmed the Government’s commitment to the EEEVs project. A 

brainstorming at the end of the day centered on which project elements seemed most ready to 

proceed versus those needing further attention to design issues or implementation 

arrangements. 

25. Day 3 of the consultations was hosted by the DOE and the ADB and addressed the 

subject of “Alternative Fuel Vehicles & Finance and Project Design” to address specific aspects 

of EEEVs project design and to understand and seek inputs on the proposed financing scheme. 

The discussion was also used to revisit the question of CTF resources being allocated to 

renewable energy development versus sustainable transport. Presentations and discussions on 

the concluding day of the consultations centered on the EEEVs project design, the proposed 

flow of funds, as well as the DOE implementation plan. A large part of the day was devoted to 

an open forum question and answer session. 

26. Minutes were prepared for each of the 3 days of consultations, and these were 

distributed to participants for their review prior to finalization. To accommodate additional inputs 

on documentation discussed during the consultations, a commentary period of one month was 

provided (no further comments were received). Furthermore, at the request of civil society 

representatives, interested stakeholders who were not able to attend the consultations were 

able to submit comments to be included in the consultation minutes through the ADB website 

(again, none were received). The agendas, participant lists, presentations and minutes of these 

stakeholder consultations are available at the following links: 

https://www.dropbox.com/sh/5q2tobxqsovqp1l/xJkQYjJj90 

http://www2.adb.org/Projects/eTrike/events.asp 

27. In follow-up to the consultations, it was agreed that there would be further discussions 

with renewable energy sector and other stakeholders. These were held in a spirit of compromise 

and problem solving on 28 May and 6 June, ending with a positive note of support for the 

EEEVs project and a revised proposal for CTF investment in the renewables sector. Dialogue 

continues with trike drivers and other stakeholder groups, based on the outcomes of these 

consultations. Five working groups were established, covering the topics of: payment options, 

driver selection, boundary collection, disposal of old tricycles, and sustainable charging options. 

2012-08-054_000000000000733
31

Philippines Revised CTF IP June 2012 

28. Based on more than a year of stakeholder engagement, and as a direct outcome of the 

consultations held on 21-23 May 2012 and subsequent discussions, a revised Investment Plan 

for the CTF allocation to be implemented in partnership with ADB, with the outcomes 

summarized in the table below. 

 Summary Outcomes Following CTF Stakeholder Consultations 

Pre-consultations Post-consultations

Proposed CTF allocation in partnership 

with ADB of $125 million as follows:

 $101 million for EEEV’s project, 

including $100 million investment and 

$1 million capacity building grant to 

support technology transfer 

 $24 million for Energy Efficient 

Appliances Project

Proposed CTF allocation in partnership with 

ADB of $125 million as follows:

 $105 million for EEEV’s project, including 

$100 million investment, $1 million grant 

capacity building grant to support technology 

transfer, and $4 million grant to support 

prototype e-vehicles solar charging stations 

 $20 million for Solar Energy Development 

Project 

Proposed EEEV Project parameters:

 Project financing scheme: direct 

payment to suppliers, funds collected 

from drivers through LGUs

 E-Trikes assumed to be charged from 

the electricity grid

 Selection criteria for LGUs and drivers 

within LGUs to be decided during 

implementation 

 Vehicle design and safety: new e-trike 

designs were to be made public during 

bidding 

 Post-sale: discussions on warranty 

limited to battery and key parts 

 Procurement: pre-qualification 

documents to be obtained at the DOE 

 Tricycle disposal plan to be completed 

during implementation 

Proposed EEEV project parameters:

 Project financing scheme: clarified direct 

payment to suppliers, E-Trike 

implementation office to be established in 

each independent LGU, and collection from 

drivers may be outsourced, where possible 

 Solar charging of e-trikes to be piloted and 

actively promoted as public, private, or 

public-private-partnership venture 

(demonstration proposed with $4m grant)

 Criteria for both selection of LGUs and 

drivers within selected LGUs finalized, an 

application for e-Trike developed, to be 

finalized after detailed consultation with 

drivers in each LGU

 Vehicle design and safety: competitionbased designs confirmed for project support; 

new e-trike design was made public during 

the 3-day consultation 

 Post-sale: Minimum 3-year warranty covers 

all spare parts and overall performance of 

the vehicle, with small stand-by fleet to 

ensure drivers do not lose income in case of 

vehicle break-down

 Procurement: Pre-qualification documents 

have been posted on both ADB and DOE 

websites 

 Material recovery plan complete, taking note 

of stakeholder concerns; vehicle disposal 

options broadened, with the ultimate goal of 

100% scrapping

2012-08-054_000000000000734
32

Philippines Revised CTF IP June 2012 

Project implementation support 

arrangements:

 Industry working groups

 ADB project team

 DOE project team

Project implementation support arrangements:

 Industry and other stakeholder working 

groups established, covering:

o payment options, 

o driver selection, 

o boundary collection, 

o disposal of old tricycles, and 

o sustainable charging options. 

 ADB and DOE project teams

 ADB Advisory Group (representative experts 

from transport, energy, environment, and 

urban development communities of practice) 

Proposed Solar Energy Development 

Project parameters:

 Withdrawn from original CIP due to 

concerns over enabling conditions and 

markets trends: (i) delay in feed-in 

tariff, (ii) lack of net metering, (iii) cap 

of 50 MW for solar tied to FIT imposed 

by DOE; (iv) significant price impact to 

end consumers from adding higher 

cost solar power in the energy mix, 

and (iv) already strong private sector 

industry and interest in solar power.

 Since 200-300 MW solar rooftop power 

could not be implemented in the next 3 

years, no CTF support was proposed

Proposed Solar Energy Development Project 

parameters:

 Proposed $20 million CTF support for 

project (assuming an $80 million ADB loan, 

and $20 million GoP counterpart funding)

based on: (i) DOE convinced solar panel 

prices have decreased sufficiently since 

2009 to allow for a 60-70MW project to be 

designed and implemented without any 

subsidies through feed-in-tariff, (ii) means 

investment will be outside the DOE 50 MW 

policy cap

 Solar charging for e-Trikes to be piloted at 5 

sites (through proposed $4 million grant), 

each of 200 kW capacity, or 1 MW total, 

which may be able to provide charging to 

about 1000 e-trikes. 

2012-08-054_000000000000735
33

Philippines Revised CTF IP June 2012 

Attachment 1a: NEDA Board Approval of the EEEVs Project 

2012-08-054_000000000000736
34

Philippines Revised CTF IP June 2012 

Attachment 1b: List of Organizations Represented During Informal Discussions on 

Design of the EEEVs Project 

1 3C Distributors International Inc

2 Aboitiz Power

3 AETI

4 Aksyon Klima

5 ALCapone Incorporated

6 Almozora Motors Corporation

7 Alternative Energy Trailblazers Inc

8 AMA Group of Companies

9 Amara Chivalry Contractors Inc

10 AMCA SMART Solutions Inc

11 AMEO Makati

12 APPEND

13 Archdiocese of Manila Ministry on Ecology

14 Asian Institute of Management

15 ASSCOM Multi Purpose Cooperative

16 Ateneo School of Government

17 Atin To Development Services

18 Batangas Laguna Autocenter Inc

19 Battery Doctors Phils.

20 Board of Investments

21 Cenro San Juan City

22 Center for Clean and Renewable Energy Development (C-CRED)

23 Center for Community Transformation

24 Chamber of Automotive Manufacturers of the Philippines, Inc.(CAMPI)

25 City Government of Makati

26 Clean Air Initiative-Asia Center

27 Clean Engines Phils. Inc.

28 Clean N Green Energy Solutions

29 Clean Rock Renewable Energy Resources Corp.

30 Climate Change Commission

31 Continental Sales, Inc (CSI)/LGK Grp of Co's

32 Corinthian Trucking

33 Cosmos Cars and Services, Inc. (on behalf of the North 68 group)

34 Cyber Cycling Inc

35 DBP Leasing Corporation

36 De La Salle University

37 Department of Energy

38 Department of Transportation and Communication

39 Design Upholstery

40 Deutsche Gesellschaft fur Internationale Zusammenarbeit (GIZ)

2012-08-054_000000000000737
35

Philippines Revised CTF IP June 2012 

41 Development Academy of the Philippines

42 Don Bosco College

43 Dow Chemical Pacific Limited 

44 Earth Institute Asia Inc.

45 ECOS Foundation

46 Edward Marcs Philippines Inc

47 eJeepney Transport Corporation

48 Elaia Green Vehicles Corp.

49 Electric Vehicle Association Of the Phils.

50 Energy Logics Philippines

51 Energy Regulatory Commission (ERC)

52 Environmental Transportation Solutions (ETS)

53 Enzolutions Inc

54

E-Save Transport Systems, Inc

55 EV Motor Systems

56 Exponential Growth Realty

57 Fabricator Phils Inc

58 Fairways and Bluewater

59 Far Eastern University

60 FDC

-PWG

61 FilOil Gas Inc

62 FRAU Electric Vehicles

63 Fundline Finance Corporation

64 GerWeiss Motors Corporation

65 Global Content & Research Ltd

66 Goldbell Philippines Inc

67 Golden eBike Phils Inc

68 Great Treasures Alliances International

69 Green Convergence

70 Green Frog Zero Emission Transport

71 Green Tech EcoCenter (GTE)

72 Green Vector Ventures Inc.

73 Greenpeace Southeast Asia

74 GSD C&T CO., LTD

75 Honda Philippines

76 INAFI

77 Institute for Climate and Sustainable Cities

78 Institutional Sales Engineer

-Industrial Battery

79 International Cyber

-Cycle Inc.

80 Itochu Corporation

81 JLBTC

82 June A. Yasol Alternative and Renewable Energy Consultancy 

83 Korea Trade Center (KOTRA) Manila

2012-08-054_000000000000738
36

Philippines Revised CTF IP June 2012 

84 Kymco Philippines

85 Land Bank of the Philippines

86 LAPOCOF

87 Lucky Garvonbill Trading/Yanhao Partnering China

88 Manila Electric Company

89 Mapua Institute of Technology

90 MCX Motor Phils.

91 MDPPA

92 MERALCO

93 Meralco Energy Corporation

94 METCHEM Business Solutions Inc

95 MH ADXPression Inc

96 Motolite 

97 Motor Vehicle Parts Manufacturers Association of the Philippines Inc (MVPMAP)

98 Moving Ecology

99 National Anti-Poverty and Corruption

100 National Anti-Poverty Commission

101 National Renewable Energy Board 

102 NCTS

103 NewJec Inc. International Operations

104 NGO Forum on ADB

105 Nito Seiki Manufacturing Corporation

106 North 68 Corporation

107 Oriental and Motolite Mktg. Corp

108 Partnership for Clean Air (PCA) Inc.

109 Philippine Chamber of Commerce and Industry (PCCI)

110 PEMC

111 Phil ETRO EV Inc

112 Philippine Electricity Market Corp.

113 Philippine Social Enterprise Network, Inc.

114 Philippine Solar Power Alliance (PSPA)

115 Philippines Vehicle Utility Inc (PHUV)

116 Pinno Technologies

117 PNOC Renewables Corp.

118 PricewaterhouseCoopers

119 Ramcar Technology

120 REAP

121 Renewable Energy Technology Center

122 Robert Bosch Inc

123 Skysea Energy

124 Solar Electric Company Inc

125 Southern Luzon State University

126 Sustainable Energy and Technology Solutions

127 Technostrat Corporation

2012-08-054_000000000000739
37

Philippines Revised CTF IP June 2012 

128 Terra Motors Japan

129 Torrex Consulting

130 Toyota Tsusho Philippines Corporation

131 Unionbank

132 United Nations Development Programme

133 UP Electrical and Electronics Engineering Institute

134 UP SAVER

135 Venture Japan K.K.

136 Vita Verde

137 WINACE Holding Philippines

138 WWF Philippines

139 Yamaha Motors Phils.

140 Yiho Corporation

2012-08-054_000000000000740
38

Philippines Revised CTF IP June 2012 

Appendix 2: Market Transformation with Energy Efficient Electric Vehicles (ADB) 

Problem Statement 

1. The Philippines transport sector accounted for about one-third of total GHG emissions in 

2009 (excluding emissions from land use change and forestry); transport sector emissions have 

increased by about 6-10% per year since 1990, from about 10 million tons per year carbon 

dioxide equivalent (MtCO2e/y) in 1990 to about 29 MtCO2e/y in 2007.32 Vehicles are one of the 

dominant sources of urban pollution that threatens both people’s health and economic activity. 

In the Philippines, motorcycles and tricycles comprise more than 52% of vehicle population. 

Compared to other vehicles, motorcycles and tricycles are less expensive. They are very visible 

in most cities of the country and play an important role in the transport market particularly used 

as alternative mode transport for short distances. However, the use of these vehicles 

contributes to the already declining state of the environment, particularly air quality in urban 

areas. In an ADB study, transport sector emissions accounted for 30% of air pollution in the 

Philippines and about 80% of air pollution in Metro Manila. 

2. Accounting for the total energy consumed from well to wheel33, electric vehicles can 

reduce energy consumption by up to 50% and greenhouse gas emissions by up to 60% 

compared to internal combustion engine (ICE) vehicles. Electric vehicles will also reduce 

greenhouse gases and other harmful emissions because: (i) electric vehicles use no electricity 

while stranded in traffic jams (no air conditioning), (ii) electric motors have higher efficiencies 

than internal combustion engines, and (iii) transmission and distribution of electricity is more 

efficient and cost effective than transportation of liquid fuels to the end user. 

3. In the Philippines, a typical tricycle driver uses about $5 worth (5 liters) of gasoline to 

drive 100 km in a day and can save about $4 a day by switching to an electric tricycle: for 100 

km, an electric tricycle will consume about 5 kWh of power costing about $1.34 With large-scale 

adoption, these individual savings would accumulate to a significant national savings. 

Replacement of 100,000 gasoline tricycles with electric tricycles at a cost of about $450 million, 

for example, can generate about $150 million each year from avoided fuel costs (assuming 300 

days per year operation). As noted in the main text (paragraph 52), e-trikes are expected to cost 

at least $1000 more than conventional trikes, but this cost will be more than recovered through 

reduced operating costs over a nominal 10-year lifetime. Although the daily and life-cycle cost 

savings favor electric tricycles, there is no ready mechanism to monetize these savings for 

acquisition and deployment of electric vehicles at fleet scale. 

4. The private sector has indicated interest in building and operating solar charging stations 

for electric vehicles, but investors face a chicken-and-egg dilemma; until a commitment is made 

for large-scale deployment of EEEVs, private investors will not finance development of a 

charging network. This first mover barrier can be overcome by including a component for 

prototype solar charging stations in the EEEVs project, for which CTF grant support is 

requested. 

 

32 CTF Investment Plan for the Philippines, 2009; paragraph 8 and Figure 3.

33

 Energy consumed and green house gases (GHGs) emitted from the time a vehicle’s energy source leaves the well 

to the time it is consumed by the vehicle, details available at: http://web.mit.edu/evt/summary_wtw.pdf

34

 Assuming cost of electricity of $0.20 / kWh in the Philippines. As noted above, in the Mandaluyong City pilot 

project, e-trikes were driven about 55 km per day.

2012-08-054_000000000000741
39

Philippines Revised CTF IP June 2012 

Proposed Transformation 

5. CTF cofinancing will be utilized to overcome the first-mover risks and cost barriers 

associated with introducing electric 3-wheelers (“e-trikes”) as a first step in electrification of the 

public vehicle fleet: the proposed project will facilitate deployment of 100,000 e-trikes. This will 

be the largest known project of this scope implemented in the Asia-Pacific region.35 The 

physical investments (project outputs) include: (i) e-trike procurement, (ii) battery leasing, (iii) 

efficient electric motor supply chain, (iv) public charging stations, (iv) recycling and disposal, and 

(vi) communication, social mobilization, and technology transfer. CTF funds will be used 

alongside ADB’s loan to amortize up-front capital costs over a longer period than otherwise 

possible. GoP’s strategy is notable in that fleet electrification is to be initiated at the bottom of 

the transport pyramid, addressing the needs of poorer consumers including last-mile 

connectivity. Globally, most electric vehicle development is targeting the upper end of the 

private car market, with vehicles such as the Nissan Leaf which retails for around $30,000. 

6. Successful demonstration of the electric vehicles at this scale will facilitate replication 

and scale up of e-trikes and other public vehicles including jeepneys and buses. Further, 

development of local battery suppliers and maintenance/service industries will be fostered. 

7. The SCS component will deploy rooftop PV arrays [with battery storage] at public 

transport stations. The electricity produced will be sold at the same price as grid-supplied 

electricity so that EEEV operators can achieve the cost savings accruing from using electricity 

as transport fuel, while demonstrating the technological viability of the solar charging systems. 

The long-term objective is to facilitate scale up of solar charging systems and achieve grid 

parity, but this requires demonstrate at commercial scale: the stations must support several 

hundred EEEVs to demonstrate the technology and the business model. In the Mandaluyong 

pilot test, actual driving of about 55 km per EEEV per day was documented, with consumption 

of about 3 kWh of energy. Assuming 3-4 hours of generation per day (15% load factor), 1 MW 

of solar capacity will generate about 3.5 MWh of electricity per day, which is sufficient to support 

1000 EEEVs. The solar charging stations are proposed to be initially deployed in Boracay and 

Puerto Princesa, where the stations can support the majority of EEEVs deployed in the first 

phase of project implementation. 

8. The cost of solar PV has rapidly declined in the last 3 years, and is now at parity with 

petroleum-fired electricity generation. However, the total cost of the stations will include the 

solar PV array, battery storage, controllers, etc., and the initial cost of electricity will be higher 

than current grid-supplied electricity. Concessional financing is needed in order to sell the 

electricity to EEEV operators at grid parity. In the longer term, as PV costs continue to decline, 

the electricity is expected to reach grid parity. 

Implementation Readiness 

9. The E-trikes project is at the appraisal stage and is scheduled for presentation to ADB’s 

Board of Directors in August 2012. The GoP is working on an electric vehicle policy36, which 

among others will exempt importation of all electric vehicles and components free of taxes for 9 

 

35 A detailed presentation on the proposed project is available online at: 

https://www.dropbox.com/s/g56m7lnjgdr1m6m/SH%20Presentation%20-%20Meralco%20EV%20summit.pdf

36

 Senate Committee Report No. 44 on Senate Bill No. 285–Electric, Hybrid and Other Alternative Fuel Vehicles 

Incentives Act of 2011.

2012-08-054_000000000000742
40

Philippines Revised CTF IP June 2012 

years. In addition there will be other incentives to set up electric vehicle businesses in the 

Philippines. 

Rationale for CTF Financing 

10. Electric vehicle deployment is both constrained and favored by several factors: 

 Commercial development and deployment of electric vehicles will increase Philippines’s 

energy security, save foreign exchange, and protect against global price fluctuations by 

using non-tradable domestic energy sources, including renewable electricity. 

 Fleet-scale electric vehicle projects are at the pioneer stage and face additional costs 

and risks which are not being covered by conventional project financing. Creative 

financing approaches, including the use of concessional funds, are needed overcome 

first-mover risks and mainstream large-scale vehicle fleet financing. 

 Carbon finance can provide some financial support, but is not sufficient to overcome the 

cost and risk barriers noted above. 

 In order to realize the fuel cost savings expected for EEEVs, the SCS component will 

require grant support so that the electricity can be sold at grid parity at the outset. 

 CTF can provide a catalytic role in reducing or eliminating first mover risk for fleet-scale 

projects, and foster accelerated replication and scale-up in the near term. 

 The replication potential for e-trikes alone is more than 20 to 1. A substantial learning 

curve has already been overcome during the pilot project. 

 GHG reductions and cost-effectiveness are comparable to or better than the original CIP 

(as discussed in the main text). 

Financing Plan 

Source Amount (US $ million)

GoP 99

ADB 300

CTF (loan) 100

CTF (grant) a5

Total 504

Carbon Finance b0

a A CTF grant of $1 million is requested for fine-tuning of technology options, technology transfer, local industry 

support and capacity building (implementation support, including monitoring and evaluation activities will be financed 

by the ADB loan).

b

 No provision has been made for the carbon finance risks associated with post-2012 uncertainties. Carbon finance 

is not expected to contribute to upfront project co-financing. 

Project Preparation Timetable 

Milestone Date

ADB Project Identification May 2011

Appraisal / Negotiations June 2012

ADB Board Consideration (Approval) August 2012 

Project Completion August 2016

2012-08-054_000000000000743
41

Philippines Revised CTF IP June 2012 

Additional Notes on GHG Calculations and Electric Vehicle Eligibility for CTF 

GHG Reduction Estimates 

11. ADB’s carbon fund team has reviewed the proposed EEEVs project for potential CDM 

registration (independently of the ADB project team). As the pilot-tested EEEVs have reduced 

energy consumption as well as higher passenger capacity than conventional trikes, potential 

GHG reductions have been estimated on a per vehicle basis as well as a per passengerkilometer basis. The range of estimates and assumptions are shown below in Table A2.1. As 

noted in the main text, the base case with reductions on a per vehicle basis applied to 100,000 

vehicles yields estimated GHG reductions of 0.27 million tCO2e per year. Table A2.1 also shows 

estimated reductions based on the 2010 generation output (“grid mix”), with an emissions factor 

of 0.52 tCO2e/MWh, and scenarios of 100% RE-based electricity and 100% coal-based 

electricity: net reductions are achieved in all scenarios. The grid emissions factor of 0.52 

tCO2e/MWh is at the mid-range of emissions factors used for several recently registered Clean 

Development Mechanism (CDM) projects in the Philippines.37

Table A2.1: Emissions Reduction Estimates (tCO2e/year) 

Case Reduction on Per 

Vehicle basis

Total 

Reductions

Reduction on Per 

Passenger Basis

Total 

Reductions

Grid Mix

Optimistic 3.634 363,400 6.361 636,100 100% RE

Base 2.698 269,800 5.425 542,500 Current mix

Worst case 1.834 183,400 4.561 456,100 100% coal

Source: ADB carbon fund team 

Assumptions: 

Vehicle operation / day 80 km / day

Passengers in the conventional vehicle 4

Passengers in Etrike 7

Vehicle milage 15 km / lit 

Vehicle operation 300 days / year

Etrike electricity consumption 6 kWh / day 

Emission factor of grid 0.52 tCO2e / MWh

Emission factor of petrol 2.271793 kg CO2e / lit

12. The grid mix scenarios shown in Table A2.1 are consistent with other analyses 

illustrated in Figure A2.1 below which shows the potential reductions of electric depending on 

the fuel used for grid-supplied electricity. [Note that Figure A2.1 is based on analysis of 4-wheel 

vehicles (cars and buses) and does not represent the local conditions in the Philippines.] 

Obviously, 100% RE-based vehicle charging provides the largest GHG reductions, and as noted 

above, the EEEVs project includes a component for prototype solar charging stations to 

demonstrate the technological viability and commercial potential of RE-based charging. In 2010, 

grid supplied electricity output was about 27% from geothermal, hydropower and other RE, and 

 

37 E.g., see Project Design Document for “ANAEROBIC DIGESTION SWINE WASTEWATER TREATMENT WITH 

ON-SITE POWER PROJECT (ADSW RP2024),” registered on 7 January 2011. The Project Design Document was 

accessed online on 14 November 2011 at: 

http://cdm.unfccc.int/filestorage/S/2/Z/S2ZGB9RM5FO7D6W0E4PL3INVQCK8TH/2010.pdf?t=RFR8bHVvMXd5fDDh

1GRICO3d4xwrYQ2HbisL

2012-08-054_000000000000744
42

Philippines Revised CTF IP June 2012 

gas-fired power accounted for another 29% of output: the effective “all Philippines” grid 

emissions factor for 2010 is estimated to be 0.517 tCO2e/MWh, which is roughly equivalent to 

natural gas-fired electricity. According to the analysis shown in Figure A2.1, if “brown coal @ 

27% efficiency” is used to provide the incremental power needed to charge the EEEVs, there 

would be no GHG reductions. However, Figure A2.1 is relevant for cars and buses in Europe, 

but does not provide an “apples to apples” comparison with local conditions in the Philippines. 

The existing 3-wheel vehicles in the Philippines have much higher emissions than that for cars 

and buses referenced in Figure A2.1. Also, emissions from EEEV charging are based on the 

Philippines grid mix because it is not possible to know precisely the source of incremental 

electricity used for battery charging. Because charging times will vary and the marginal capacity 

on the grid changes with season and time of day, and also because the additional amount of 

electric generation required for the proposed EEEVs fleet is minimal (only 0.22% of 2010 

generation output), using the average grid emission factor is the best approximation. 

Figure A2.1: Relative Greenhouse Gas Emissions for Petroleum vs. Electric Vehicles 

Source: United Nations Environment Programme, Risoe Centre, 2011. Technologies for Climate Change Mitigation, 

Transport Sector. TNA Guidebook Series. March 2011. Available online at: 

http://tech-action.org/Guidebooks/TNA_Guidebook_MitigationTransport.pdf

Emissions are calculated using vehicle data cited for the Renault Fluence Z.E. and Tindo electric bus combined with 

fuel carbon intensities published in the Australian National Greenhouse Factors, July 2010, available at: 

http://www.climatechange.gov.au/publications/greenhouse-acctg/national-greenhouse-factors.aspx

Projected Changes in Grid Emissions Factors 

13. The Philippines Department of Energy Power Development Plan 2009-2030 reports that 

near-term generation expansion comprises 1338 MW of committed capacity, of which 1200 MW 

is coal-fired, 70 MW is geothermal, 51 MW is hydropower, and 17.5 MW is biomass (see Table 

2012-08-054_000000000000745
43

Philippines Revised CTF IP June 2012 

A2.2, below). Projecting beyond the current commitments is difficult, as the generation mix will 

be affected by the renewable portfolio standard and feed-in tariffs discussed in the main text. 

Table A2.3 presents grid emission factors for three expansion scenarios assuming (i) generation 

output for 2010 and (ii) current commitments shown in Table A2.2, (iii) a doubling of coal-fired 

capacity on top of 2010 generation output, and (iv) a 10-fold increase in coal-fired capacity on 

top of 2010 generation output. Of these 3 expansion scenarios, the first is considered to be firm, 

the second is considered to be plausible, and the third is considered to be unlikely. As noted in 

the main text, the incremental demand posed by 100,000 EEEVs is 0.22% of 2010 generation 

output. Replication and scale up to 2 million EEEVs would represent 4.4% of 2010 generation 

output, but the actual share of future grid output would be lower given the programmed capacity 

additions. 

14. The third scenario presented in Table A2.3 presents a grid emissions factor which is well 

below the calculated emissions factor for the current fleet of gasoline-powered tricycles (see 

further discussion below at paragraphs 15-19). Alternatively stated, with expansion of coal-fired 

power 10 times beyond current level, with no additional RE capacity additions, the grid supplied 

power would still be less carbon-intensive than the gasoline-fired ICE vehicles being replaced. 

This conclusion is consistent with independent estimates prepared by ADB’s carbon fund team 

shown above in Table A2.1. 

Table A2.2: Near-term Generation Expansion 

Source: Philippines Department of Energy, Power Development Plan 2009-2030; Table 4. 

2012-08-054_000000000000746
44

Philippines Revised CTF IP June 2012 

Table A2.3: Grid Emissions Factor Scenarios 

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Base Case: generation output in 2010

Oil-based 7101 10% 0.6 4260600

Hydro 7803 12% 0 0

Geothermal 9929 15% 0 0

Other RE 90 0% 0 0

Coal 23301 34% 0.9 20970900

Natural gas 19518 29% 0.5 9759000

Total 67742 100% 0.517 34990500

Expansion Scenario 1: Current Generation Expansion shown in Table A1.2; no other renewable 

energy is added. Grid factor increases to 0.553 tCO2e/MWh.

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Oil-based 7101 9% 0.6 4260600

Hydro 8026 10% 0 0

Geothermal 10420 14% 0 0

Other RE 213 0.3% 0 0

Coal 31711 41% 0.9 28539900

Natural gas 19518 25% 0.5 9759000

Total 76989 100% 0.553 42559500

Expansion Scenario 2: Coal output expanded by 2x; all others fixed at 2010 output. Grid emissions 

factor would be slightly higher than gasoline emissions factor @ 40% thermodynamic efficiency of 

0.605 tCO2e/MWh.

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Oil-based 7101 8% 0.6 4260600

Hydro 7803 9% 0 0

Geothermal 9929 11% 0 0

Other RE 90 0% 0 0

Coal 46602 51% 0.9 41941800

Natural gas 19518 21% 0.5 9759000

Total 91043 100% 0.615 55961400

Expansion Scenario 3: Coal output expanded by 10x; all others fixed at 2010 output. Grid emissions 

factor would approximately equal gasoline emissions factor @ 30% thermodynamic efficiency of 

0.807 tCO2e/MWh.

Source Output in GWH % of grid mix Emissions Factor (t/MWh) Total Emissions (t/y)

Oil-based 7101 3% 0.6 4260600

Hydro 7803 3% 0 0

Geothermal 9929 4% 0 0

Other RE 90 0% 0 0

Coal 233010 84% 0.9 209709000

Natural gas 19518 7% 0.5 9759000

Total 277451 100% 0.806 223728600

Source: ADB staff estimates, based on Philippine Power Statistics, 2010. 

Note: Estimates of generation output assume that the additional biomass, coal, and geothermal run at 80% output; 

and that additional hydropower runs at 50% output. 

2012-08-054_000000000000747
45

Philippines Revised CTF IP June 2012 

Comparison of ICE Emissions vs. Grid Emissions Factors 

15. As noted in the main text, conversion from ICE to EEEVs will save energy, as the energy 

losses in ICE vehicles are typically 70–80% versus 5–15% in EEEVs. A brief discussion follows 

to illustrate how current ICE efficiencies compare to the emissions scenarios presented in Table 

A2.3, and whether improvements in ICE efficiencies and sustainable renewable fuels could 

achieve the same GHG reductions envisioned in the proposed EEEVs project. 

16. The energy and CO2 content of gasoline expressed in terms of carbon intensity, 

analogous to a grid emissions factor, is calculated as follows: 

Gross energy content of gasoline: 34.2 Megajoule (MJ) / liter (L) 

Converted to kWh: 34.2 MJ / L x (1 kWh / 3.6 MJ) = 9.5 kWh / L 

Theoretical Carbon intensity: (2.3 kg CO2e / L) / (9.5 kWh / L) = 0.2421 kg CO2e / kWh 

17. This theoretical carbon intensity of gasoline, which assumes 100% thermodynamic 

efficiency, is much lower than the grid emissions factor estimated for 2010 generation output 

(the Base Case shown in Table A2.2 and Table A2.3). In practice, thermodynamic efficiencies of 

motorcycle/tricycle engines are probably on the order of 20%. Automobiles with internal 

combustion engines have typical efficiencies of about 25%. The Toyota Prius equipped with an 

Atkinson cycle engine has efficiency of 34% at peak power output of 52 kW.38 Table A2.4 shows 

these efficiencies in terms of carbon intensity, compared with the emissions scenarios shown in 

Table A2.3. 

Table A2.4: ICE Efficiencies vs. Grid Emissions Scenarios 

Vehicle / ICE Efficiency Carbon Intensity Comparison to Emissions Scenarios in 

Table A1.3

3- and 2-wheelers / 20%

(0.2421 kg CO2e / kWh) / 0.2 =

1.21 kg CO2e / kWh

More than 2.3 times as “dirty” as current grid 

mix and about 50% “dirtier” than Scenario 3.

Light duty vehicle / 25%

(0.2421 kg CO2e / kWh) / 0.25 =

0.97 kg CO2e / kWh

“Dirtier” than Scenario 3. Roughly equivalent to 

100% coal-fired electricity.

Toyota Prius / 34%

(0.2421 kg CO2e / kWh) / 0.34 =

0.712 kg CO2e / kWh

The Prius engine is “dirtier” than the 2010 grid 

mix and Scenarios 1 and 2, but cleaner than 

Scenario 3.

Source: ADB staff estimates 

18. An ICE would need to achieve 47% efficiency to have an emissions factor equivalent to 

the 2010 grid mix, calculated as follows: 

 (0.2421 kg CO2e / kWh) / (0.517 kg CO2 e / kWh) = 47% 

 

38 Source: David J.C. MacKay. 2009. Sustainable Energy Without the Hot Air;” page 262. Available on line at: 

www.withouthotair.com. 

2012-08-054_000000000000748
46

Philippines Revised CTF IP June 2012 

19. This calculation shows that the current trikes would require upgrading to or replacement 

with ICEs with 47% efficiency to achieve the same emissions reductions expected from the 

proposed EEEVs project. However, after more than 100 years of ICE technology 

development, there is no engine on the market with 47% efficiency that could be 

deployed at scale. Further, the current push by the world’s major automobile manufacturers 

towards EEEVs suggests that there is no expectation of such an efficiency breakthrough in the 

near future. If such a breakthrough does occur, a converted fleet would need to be powered by 

sustainable renewable fuels in order to achieve the GHG reductions and the non-climate 

benefits associated with EEEVs. 

Electric Vehicle Eligibility

20. CTF guidance acknowledges the realities of building 100% RE-based charging 

infrastructure in advance of electric vehicle (EV) deployment: EVs are being marketed 

worldwide in advance of RE-based charging networks, and there is no country pursuing a 100% 

RE-based charging objective at present. Therefore, CTF guidance does not require that EVs 

be powered with RE. The CTF Investment Criteria for Public Sector Operations, 9 February 

2009; footnote 6 to paragraph 6 (b) (iv) states: 

“Plug-in electric vehicles would be considered only when the energy systems from which 

they draw the power are less carbon intensive than the emissions from a stand-alone 

electric hybrid.” 

21. In this case, the pilot-tested e-trikes are considered to be “plug-in electric vehicles.” 

However, to the best of ADB and GoP knowledge, “stand-alone electric hybrid” trikes or 

motorcycles have not been marketed and pilot-tested, so an “apples-to-apples” comparison is 

not possible. The calculations presented above are intended to demonstrate that the EEEVs 

project meets the CTF eligibility criteria. Until a stand-alone electric hybrid 3-wheeler appears 

on the market so that an apples-to-apples comparison can be made, the foregoing calculations 

and discussions indicate that the proposed EEEVs project meets the CTF eligibility requirement. 

 

2012-08-054_000000000000749
47

Philippines Revised CTF IP June 2012 

Appendix 3: Solar Energy Development (ADB) 

1. The rooftop solar project concept presented in the original CIP is being retained, but 

given the rapidly changing landscape for solar PV development, the detailed scope remains to 

be identified and developed. GoP is requesting to reallocate $20 million of CTF cofinancing to 

support total investment of $120 million, which would finance an estimated 40 MW of new solar 

PV and/or other RE capacity. 

Problem Statement 

2. In keeping with the long-term objectives for energy security and economic development, 

GoP is committed to developing indigenous RE resources in a manner which protects consumer 

interests. RE development typically entails higher up-front capital costs, but lower operating and 

maintenance costs, and in most cases zero fuel costs (which is the case for solar power).39 The 

incremental upfront costs may be thought of as advance payments for renewable “fuel”, which 

are amortized and depreciated over the lifetime of RE systems [alternatively stated, the fuel may 

be free, but the conversion to useful energy is not]. Policy support via FITs is designed to 

eliminate the upfront cost barrier, but in the absence of an operational FIT and RPS, there is a 

need for concessional financing to support RE development. 

3. New RE development is being constrained because feed-in tariffs (FITs) and other 

regulations pursuant to the Renewable Energy Act of 2008 have not been finalized, and may not 

be in place for another 2 years (as noted in the main text). Private sector developers are keen to 

take advantage of the FIT regime, but new investment is in suspense because the FIT 

regulatory framework is not final. This uncertainty is compounded by consumer concerns that 

that the cost of the FITs will ultimately result in higher retail electricity tariffs, which average 

around US$0.20 / kWh -- the highest in Asia. This is of specific concern to public transport 

operators who are being encouraged to adopt EEEVs to replace conventional ICE vehicles. At 

the macro-economic level, the cost of the FIT program will be offset by avoided costs of 

imported fuels for power generation, but the economic benefits cannot be readily monetized and 

passed on directly to consumers. 

4. The proposed FIT support will be limited to only 50 MW of ground-mounted solar 

installations, but the potential envisioned in the low-carbon development scenario is 2000 MW40. 

Solar PV systems have good load-following generation output, which reduces stress on the grid 

during afternoon demand peak. Space for ground-mounted solar power plants in Manila and 

other cities is limited or non-existent; the obvious prospect for urban area solar PV development 

is in rooftop installations. 

5. Rapidly declining costs for solar PV systems suggest that policy support may not be 

necessary for commercial development. However, the market reality is that private investors 

are reluctant to move forward on new investments until the RE regulatory framework is finalized, 

especially the RPS and net metering provisions. In the absence of this policy support, purely 

voluntary solar PV investment will require concessional financing. 

6. Against this policy and regulatory backdrop, ADB has supported 2 noteworthy solar 

energy projects. In June 2012, ADB commissioned a 570 kW rooftop solar PV system at its 

Manila headquarters which is the largest PV project in the Philippines to date. The installed 

 

39 An exception is biomass power, where feedstock is normally not free.

40 See original CIP, Figure 8 and Table 2.

2012-08-054_000000000000750
48

Philippines Revised CTF IP June 2012 

cost is well below that noted in the CIP in 2009, suggesting that there is scope for rooftop solar 

PV development outside the envelope of the FIT (which is limited to ground-mounted 

installations). [This rooftop solar project has been implemented in parallel with an expansion of 

ADB headquarters, which has been designed to achieve state-of-the-art green building 

certification.] Earlier in 2012, ADB supported the Boni Tunnel lighting project to demonstrate 

the feasibility of solar PV and lithium-ion battery technology for large-scale street lighting 

applications. This project comprises 59 square meters of solar panels which provide power to 

94 light-emitting diodes (LEDs) with 22-watt capacity each. This project provides about 19% of 

the tunnel power demand, but achieves 51% energy savings compared to the old lighting 

system. These projects are demonstrating the technological viability of solar PV and aiding in 

price discovery. 

7. The technical benefits of rooftop solar PV are substantial: (i) the system generates 

power at the point of consumption, reducing the need for centralized generation and avoiding 

the transmission losses associated with centralized generating plants; (ii) solar PV has 

reasonably good load-following characteristics, generating maximum power output at times of 

peak demand in buildings (mainly for space cooling); and (iii) with eventual implementation of 

net metering, building owners will be motivated to implement EE measures to maximum net 

electricity sales to the grid. In theory, carbon finance and/or a FIT could monetize these 

technical benefits, but the proposed solar FIT will be limited to ground-mounted installations, 

and carbon finance is not readily delivered as upfront project cofinancing. In the current 

regulatory environment, the financial viability of rooftop solar will be dependent on savings 

associated with avoided costs of grid-supplied power, rather than revenue from sale of 

electricity. Therefore, some other form of concessional finance is needed to facilitate investment 

at the scale required for market transformation. [A key lesson learned from the ADB rooftop and 

Boni Tunnel projects is that for large buildings and facilities like the Boni Tunnel, the space 

available for solar arrays results in solar power output below the total demand of the building or 

facility. For these types of installations it is not clear that net metering will provide a meaningful 

contribution to financial viability (although the economic benefits via avoided fossil fuel 

consumption are obvious). Net metering should provide a more meaningful incentive for private 

residential buildings, where available rooftop area may be sufficient to cover most of the 

demand (from lighting, refrigeration, TVs, and space cooling).] 

Proposed Transformation 

8. The legal framework and the economic incentives provided by high energy cost have 

not been sufficient for adoption of clean energy and energy efficiency by ordinary citizens and 

businesses. The proposed project will incorporate lessons learned the Philippine Energy 

Efficiency Project and other initiatives, in particular: (i) economy of scale through bulk 

procurement of at least 40 MW of new solar PV systems; and (ii) improve technology credibility 

through actual operations of rooftop systems at ADB headquarters and the Boni Tunnel lighting 

system. 

9. The Philippines Renewable Energy Law with its RPS and Feed-in Tariffs with net 

metering41 is a pioneering framework for the entire ASEAN region. This Law also provides for 

establishing a voluntary market for Renewable Energy Certificates. These provisions will not 

bring any fruit without appropriate investments in the sector. ADB will support this market 

 

41

 “Net Metering” refers to a system, appropriate for distributed generation, in which a distribution grid user has a 

two-way connection to the grid and is only charged for his net electricity consumption and is credited for any overall 

contribution to the electricity grid; (Source: Section 4 (gg), Philippine Renewable Energy Act of 2008 )

2012-08-054_000000000000751
49

Philippines Revised CTF IP June 2012 

creation opportunity with a Government-led project that will quantify the benefits of solar 

technology to consumers, establish product quality benchmarks in the market and develop 

secondary supply and maintenance chains. Currently the specialized electronic meters (that can 

record electricity flow in both directions) and solar panel are not readily available in the retail 

market in the Philippines, and are controlled by a small number of technology vendors and 

service providers. A large scale project will bring in more players and choices to the market and 

improve sector efficiency. 

10. CTF resources are proposed to enhance the investment project design as follows: 

 CTF investments will bring down the cost of these technically proven projects through 

bulk procurement and public awareness “packaging” (described above) to be financially 

and technically viable in the Philippines, reduce pay-back period for the customers, and 

increase credibility of the technology by maintaining (or improving) standards and 

providing direct incentives to try the new technology 

 CTF resources will cover part of the additional up-front costs of solar PV [details to be 

determined]. Financing instruments such as partial credit guarantees, contingent 

financing, and other output-based assistance will be evaluated during project design to 

determine an optimum use of CTF cofinancing. Different business models will also be 

considered, e.g., rent-to-own and other supplier credit approaches, and virtual rooftop 

projects where poorer communities build a common ground-mounted PV facility to avoid 

rooftop load structural limitations of residential buildings. 

 CTF resources will improve the “depth” of the ADB project by increasing the economies 

of scale and scope for high-cost investments, which will shorten the pay-back period and 

increase the financial rates of return. 

 The proposed market transformation initiative would cover at least 40 MW of new 

capacity installed at commercial, government offices, and/or large residences. It will 

encourage other building owners and electricity customers to switch, as the market 

transforms and the prices fall. The replication potential is at least 10 to 1, which is quite 

conservative considering the low-carbon development scenario of 2000 MW solar 

capacity by 2030. 

Implementation Readiness 

11. The implementation of the project will be led by DOE in partnership with other 

stakeholders including private sector investors, and local government units as appropriate. DOE 

has sufficient expertise to manage the ADB investment project, and project management 

support will be included in the scope, including capacity building for participating financial 

institutions and service companies. The project is at the identification stage and is expected to 

be prepared and presented for ADB Board consideration in 2013. 

Rationale for CTF Financing 

12. Solar energy development is constrained by several factors: 

 Accelerated introduction of solar energy systems will increase Philippines’s energy 

security, save foreign exchange, and protect against global price fluctuations by using 

non-tradable domestic energy sources, but these economic advantages cannot be 

readily monetized to support investment in solar energy projects. 

2012-08-054_000000000000752
50

Philippines Revised CTF IP June 2012 

 Although the installed cost of solar PV systems has rapidly declined in the past 2-3 

years, and is projected to continue declining, the capital cost of rooftop PV remains a 

barrier in the absence of net metering or other policy support. Creative financing 

approaches, including the use of concessional funds, are needed to cover additional upfront capital costs to consumers. 

 Management and technical expertise to identify and implement rooftop solar 

opportunities is limited in the Philippines. 

 Perceived financial risk, i.e., payback periods on large capital investments may be in the 

range of 7-8 years or longer versus less than 3 years desired by building and plant 

owners. 

 Commercial financing for candidate investments is not readily available, and as such 

private developers are unable to finance solar energy projcets. 

 The investment project to be supported by CTF is replicable and scale-able without longterm concessional financing. As the more building owners’ enterprises gain comparative 

advantage, intra-sector competition will help drive replication. Commercial financing of 

solar energy will also increase as banks and other financial institutions gain experience 

on the CTF-supported project, and as government-sponsored RE funds are replenished 

through taxation mechanisms. 

13. At least 40 MW of rooftop solar PV operating at 15% load factor will deliver net reduction 

of about 0.03 million tCO2e per year assuming grid emissions factor of 0.52 tCO2e/MWh. With 

15 year lifetime total GHG reductions are about 0.4 million tCO2e. Replication and scale-up 

potential is at least 10 to 1. The cost-effectiveness is calculated as follows: CTF$20 million / 0.4 

tCO2e = CTF$49 / tCO2e, declining to CTF$4.87 / tCO2e with replication and scale-up of 10 to 1. 

14. The indicative financing plan and preparation timeline are shown below. 

Financing Plan 

Source Amount (US $ million)

GoP 20

ADB 80

CTF 20

Total 120

Carbon Financean/a

a Carbon finance estimate is not expected to provide upfront project cofinancing. 

Project Preparation Timetable 

Milestone Date

ADB Project Identification Q3 / 2012

Appraisal / Negotiations Q2 / 2013

ADB Board Consideration (Approval) Q3 / 2013

Project Completion Q3 / 2016

Q2=second quarter, Q3=third quarter 

2012-08-054_000000000000753
Supplemental Appendix: Use of CTF Resources to Support Philippines EEEVs Project 

A. Background 

1. The 2005 Gleneagles G-8 Summit in July 2005 stimulated a concerted effort by the 

development community to broaden and accelerate support to developing countries relating to 

energy access and climate change through the Clean Energy Investment Framework (CEIF).1

 

The CEIF provides the basis for definition of a range of possible initiatives to be developed 

within each multilateral development bank (MDB). Pursuant to the CEIF, in 2008 the donor 

community committed approximately $6.1 billion to the new Climate Investment Funds (CIFs) to 

be invested through the MDBs.2 About $5.2 billion equivalent was pledged to the Clean 

Technology Fund (CTF) for climate change mitigation in developing countries.3 ADB’s Board of 

Directors approved the use of CTF resources on 5 November 2009.4 The partnership 

agreement was approved on 18 March 2010.

2. The joint MDB mission for Philippines was conducted in July 2009; the CTF Country 

Investment Plan (CIP) was endorsed in December 2009. The CIP was revised in 2011 and 

2012 to include the proposed EEEVs project; the revised CIP was requested to be endorsed by 

the CTF Trust Fund Committee in June 2012.

5 Project and loan documentation includes a 

separate cofinancing agreement for the CTF funds, similar to that for other official cofinancing.6

 

3. The design of the CTF acknowledges some of the operational problems and limitations 

of the Clean Development Mechanism (CDM) and the Global Environment Facility (GEF), and it 

specifically seeks to leverage donor financing with commercial bank financing and private 

sector-led investments.7 CTF generally targets energy efficiency (EE), renewable energy (RE), 

and cleaner transport opportunities, and includes consideration for non-climate benefits and 

development impacts. CTF is “technology-agnostic.” Newly commercialized technologies may 

be supported, but CTF is not intended to be a substitute for venture capital to support new 

technology development.

4. The CTF principles and objectives are fully consistent with the ADB Strategy 2020

emphasis on inclusive and environmentally sustainable growth; private sector development and 

operations; and investment focus on infrastructure, environment (including climate change), and 

financial sector development. CTF is also fully consistent with the ADB Energy Policy 2009

focus on clean energy development, in particular the emphasis on energy efficiency and 

 

1

ADB’s Energy Efficiency Initiative was launched at approximately the same time.

2

 The participating MDBs are the World Bank Group (including its private sector window the International Finance 

Corporation [IFC]), the African Development Bank, the Asian Development Bank, the European Bank for 

Reconstruction and Development, and the Inter-American Development Bank. World Bank is the trustee of the CIFs.

3

 Details can be found at www.worldbank.org/cifs

4

 ADB Board Paper R215-09, November 2009.

5

 The revised CIP and the proposed EEEVs project were submitted to the Trust Fund Committee for consideration at 

the same time.

6

The detailed mechanics of funds transfer are covered in the “Financial Procedures Agreement between Asian 

Development Bank and the International Bank for Reconstruction and Development as Trustee of the Trust Fund for 

the Clean Technology Fund,” dated 18 March 2010.

7

 CDM has been somewhat successful for industrial energy efficiency projects, but has a very poor record of utility 

grid improvement and demand-side management projects; collectively, these categories comprise less than 10% of 

registered projects. As of 18 October 2011, only 9 transport sector projects have been registered out of 3,534 

projects, representing 0.22% of total projects. Energy supply projects, including RE, comprise just over 67% of total 

registered projects. Project information accessed on 18 October 2011 at: 

http://cdm.unfccc.int/Statistics/Registration/RegisteredProjByScopePieChart.html

2012-08-054_000000000000754
renewable energy; access to energy for all; and energy sector reforms, capacity building, and 

governance. 

B. Project Eligibility 

5. The Philippines CIP will cofinance renewable energy (RE), energy efficiency (EE), and 

cleaner transport investments in both the public and private sector. The Investment Plan has 

been updated at the request of the Government of the Philippines (GoP); the revised financing 

plan is summarized in Table SA31.1. The proposed project to support energy efficient electric

vehicle (EEEVs) deployment is fully consistent with the context and objectives of the CIP.

Table SA31.1: Philippines Revised CTF Financing Plan 2012($million) 

Financing Source

Renewable 

Energy 

(WBG)

Urban 

Transport 

(WBG)

Energy Efficient 

Electric Vehicles 

(ADB)

Solar Energy 

Development

(ADB)

Total

CTF 75 50 105a

20a250

GoP / DBP 180 50 99 20 349

IBRD Loans 250 180 0 0 430

IFC Loans 250 0 0 0 250

ADB Loans 0 0 300 80 380

Private sector 750 0 (tbd) b

(tbd) b750

Other cofinancing 0 20 0 0 20

Total 1,505 300 504 120 2,429

Source: MDB teams

ADB=Asian Development Bank, CTF=Clean Technology Fund, DBP=Development Bank of the Philippines, 

EE=energy efficiency, GoP=Government of the Philippines, IBRD=International Bank for Reconstruction and 

Development, IFC=International Finance Corporation, RE=renewable energy, (tbd)=to be determined, WBG=World 

Bank Group 

Notes: 

a For the EEEVs project, a CTF grant of $1 million is requested for fine-tuning of technology options, technology 

transfer, local industry support and capacity building (implementation support, including monitoring and evaluation 

activities will be financed by the ADB loan). For the Solar Charging Systems component a CTF grant of $4 million is 

requested to ensure its technical viability and whether solar charging could be implemented within the current tariff of 

about $0.20/kWh; see discussion in main text and concept paper in Appendix 2 for further details. 

b

 Private sector entities will participate in project implementation via supply of goods and services. For the EEEVs 

project, private sector investment is expected during replication and scale-up, and as such no private sector 

cofinancing is shown. Private sector cofinancing for the Solar Energy Development project has yet to be determined. 

6. The proposed project meets the CTF eligibility criteria, as discussed below and as 

summarized in Table SA31.2.8

 

8

 Further discussion is included in the revised CIP.

2012-08-054_000000000000755
7. The proposed Project is consistent with the scope of transport sector intervention 

outlined in the CIP, bringing additional value by opening a new “window” for deploying 

sustainable transport systems beyond bus rapid transit lines. More efficient battery technologies 

are providing a cleaner alternative to pollution-emitting internal combustion engines. In many 

cases, conventional motorcycles emit more pollution than large SUVs because they are not 

equipped with equivalent emissions-control technology.9 Electric motorcycles and tricycles can 

immediately eliminate tailpipe emissions, significantly reducing urban air pollution. Commercial 

success of EEEVs can be replicated in other types of vehicles, including jeepneys and buses. 

8. The EEEVs Project will result in avoided fossil fuel emissions of about 0.27 million 

tCO2e/y. With a minimum vehicle lifetime of 10 years, the project will generate 2.7 million tCO2e

total reductions. Cost-effectiveness is estimated as: CTF$105 million / 2.7 million tCO2e = 

CTF$ 38/ tCO2e, declining to CTF$3.89/ tCO2e with replication and scale-up. The EEEVs

project will bring environmental and public health co-benefits equal to or greater than that which 

would be realized under the original CIP. The non-climate benefits are much greater than what 

could be achieved through other RE and EE investments.

9. Commercial deployment of EEEVs will expand the urban transport program beyond the 

original CIP. The replication potential for EEEVs is at least 10 to 1, and is expected to be as 

high as 20 to 1. CTF cofinancing on this type of pioneer project will eliminate first-mover risk and 

will help mobilize future commercial investment for replication and scale up. 

Table SA31.2: Summary Assessment of CTF Eligibility 

CTF Investment 

Criteria Proposed EEEVs Project Eligibility

Potential for 

GHG Emissions 

Savings

ADB program will target end-use efficiency improvements which represent permanent 

energy savings via vehicle fleet conversion and avoided fuel imports. Replication and 

scale-up potential is high for electric vehicles.

Costeffectiveness

100,000 vehicles will deliver net reduction of 270,000 tCO2e per year; with 10-year vehicle 

lifetime total GHG reductions are 2.7 MtCO2e. Replication and scale-up potential is at least 

10 to 1 and may be as high as 20 to 1.

Cost effectiveness: CTF$105 million / 2.7 million tCO2e = CTF$38 / tCO2e, declining to 

CTF$3.89 / tCO2e with replication and scale-up of 10 to 1. 

Demonstration 

Potential at 

Scale

Transformation potential is estimated to be more than 20 for EEEVs (e-trikes) a

Development 

Impact

The EEEVs project will accelerate growth of the electric vehicle industry in the Philippines 

by demonstrating new technology / systems and business models. 

Impacts with respect to energy security and environmental benefits are consistent with the 

CIP. Impacts on employment are significant given the potential benefits accruing to e-trike 

owner/operators.

Implementation 

Potential

The EEEVs project has been developed based on a successful pilot project in the Metro 

Manila region and is at an advanced stage of preparedness. See Table 8 of revised CIP for 

discussion of implementation risks and mitigation.

Additional 

Costs and Risk 

Premium

The proposed project will focus on using CTF for covering additional costs associated with 

introduction of electric vehicle systems and related new business model for vehicle 

ownership and operations.

a Transformation potential is defined in paragraphs 15 - 17 of the CTF Investment Criteria for Public Sector 

Operations dated 9 February 2009. 

 

9

 The Technology Review, published by MIT, 2007, available at: http://www.technologyreview.com/energy/19069/

2012-08-054_000000000000756
10. New investment in electric vehicles will improve energy security, reduce GHG emissions, 

and reduce conventional pollutant emissions with substantial public health benefits. CTF 

cofinancing for this type of pioneering project will help mobilize future commercial investments 

for replication and scale up, which will stimulate economic growth and facilitate the long-term 

transition to low-carbon development.

11. The EEEVs Project is scheduled for presentation to ADB’s Board of Directors in August 

2012. The Project enjoys broad stakeholder support due to the success of the pilot project, 

including consumers, vehicle owners and operators, local, and national government. The

President of the Philippines has enthusiastically supported project development and requested 

that ADB expedite process and approvals. Risks and mitigation measures are outlined in the 

main text of the RRP as well as in the in revised CIP.

12. Additional costs and risk premiums justify use of CTF. The EEEVs Project is first-of-akind in the Philippines, and will be the largest effort in the Asia region to begin electrification of 

the public vehicle fleet. The cost of new EEEVs with lithium-ion batteries is about $4500, versus 

about $2000 for conventional trikes with internal combustion engines. This up-front capital cost 

is offset by lifecycle operating costs of about $2000 for 200,000 kilometers, versus about 

$10,000 for conventional trikes. The Project presents first-mover risk (mitigated in part by the 

successful pilot project), and presents higher-than-normal end-user costs with respect to 

purchase of new vehicles. Although lower operating costs will offset the initial purchase costs, at 

present there is no mechanism to monetize the life-cycle savings to assist end-users in the 

initial purchase. 

13. Carbon finance is increasingly at risk due to post-2012 market uncertainties. Carbon 

finance opportunities will be pursued but any revenue is expected to be “on delivery” and will not 

be sufficient to catalyze up-front investment. ADB expects that the project could qualify for 

Clean Development Mechanism (CDM) registration, but any carbon revenue would be “on 

delivery” and would not make a contribution as up-front cofinancing. Potential revenue from sale 

of emissions reductions is uncertain until registration with the UN, which typically occurs after 

the project’s financial close. 

14. Additional discussion about CTF eligibility has been presented in the revised CIP and for 

brevity’s sake is not repeated here. A third party technical review, required by CTF procedures, 

concluded that the Project meets the CTF eligibility requirements.

C. Pricing and Loan Terms of CTF projects 

15. As noted above, at the project or investment program level, the CTF is used to cover the 

additional costs and/or risks associated with low-carbon investments. For example, fleet-wide 

conversion to electric vehicles presents an upfront cost barrier in the form of new vehicle 

procurement. The additional cost can be readily estimated as the difference between capital 

costs for traditional trikes with internal combustion engine versus the new EEEVs equipped with 

lithium-ion batteries.10 The additional risk is presented by introducing a new business model for 

vehicle ownership and operations, including battery leasing, for the new EEEVs. 

16. The loan terms for CTF financing are presented in Table SA31.3. These are the “base” 

terms for public sector projects. The harder pricing terms and conditions are requested for the 

proposed EEEVs Project.

 

10 The new EEEVs are estimated to cost $4500 per vehicle.

2012-08-054_000000000000757
Table SA31.3: Proposed CTF Loan Terms

CTF Loans Maturity Grace 

Period

Principal 

Repayments

Year 11-20

Principal 

Repayments

Years 20-40

FY09-10

MDB Fee b/

FY09-10 

Interest 

Rate c/

Grant 

Element d/

Harder 

Concessional 20 10 10% N/A 0.18% 0.75% ~45%

Softer 

Concessional 40 10 2% 4% 0.18% 0.25% ~72%

Source: Climate Investment Funds. Clean Technology Fund Financing Products, Terms, And Review Procedures 

For Public Sector Operations, (Revised Document) 15 December 2011. 

Notes: 

a - CTF Loans May Include An Acceleration Clause, Providing For Doubling Of Principal Payments. 

b - The MDB fee will be a variable charge set annually within a range of 0.1%-0.5% of the undisbursed balance of the 

loan, to be retained by the MDB. 

c - The interest is charged on the disbursed and outstanding loan balance. Principal and interest payments accrue 

semi-annually to the CTF trust fund. 

d - Grant element is calculated using the IDA methodology (assumptions: 6.33% discount rate for harder loans; 

6.43% discount rate for softer loans; semi-annual repayments; 8-year disbursement period) 

2012-08-054_000000000000758
 ADB Private Sector RE Program / Review / 2 April 2012

Page | 1 

Review of the ADB Clean Technology Fund (CTF) Private Sector Proposal: 

Thailand Renewable Energy Program 

1. Endorsement 

I have reviewed the ADB Clean Technology Fund proposal for the Thailand Renewable Energy program.. 

On the basis of this review, I strongly support and endorse this CTF proposal for the reasons summarized 

below. 

2. Overall Strategy and Consistency with CTF Goals. 

The original and updated versions of the CTF Country Investment Plan (CIP) for Thailand integrate the 

socio-economic and environmental objectives instituted by the Government of Thailand (GoT) within a 

coherent framework, providing mechanisms to reduce greenhouse gas (GHG) emissions, decrease 

energy intensity, and enhance energy security. Considerable focus has been given to the utilization of 

large-scale renewable energy (RE) resources and technologies, particularly in power generation projects 

initiated by the private sector, as a means to increase energy production and diversify the primary 

energy mix while minimizing negative impacts to the environment. The proposed Thailand RE Program 

will contribute significantly to the objectives contained in the sustainable development agenda of 

Thailand by deploying individual projects expected to generate an additional aggregate capacity 

amounting to approximately 520MW with a reduction in GHG emissions amounting approximately 

843.15 tons carbon dioxide for each megawatt-hour of energy generated. 

However, while interest in implementing utility-scale RE projects has increased over the recent years, 

the local RE market remains in an early development stage. Projects continue to face significant 

financial and market barriers due in part to perceived risks associated with pioneering projects and 

the lack of experience with RE project financing amongst local financial institutions. As such, the use 

of CTF for the direct financing or as guarantees along with support from ADB will address the gap 

between perceived and actual risks associated in project implementation and provide support to 

pioneering private sector utility-scale projects. The implementation strategy proposed for the 

Program, where individual utility-scale RE power development projects will be financed on a nonrecourse basis with minimal concessionality, coupled with the possibility of utilizing supplementary 

regulatory support (feed-in tariffs/tariff adders), standard power purchase agreements with the 

Electricity Generating Authority of Thailand (EGAT) and the Provincial Electricity Authority (PEA), and 

potential financing from carbon trading, is expected to demonstrate a replicable project financing 

method that will assist in building the capacity of project developers and local financial institutions 

towards RE project development and implementation. 

The significant demonstration value and replication potential geared towards the development of RE 

projects and the acceleration of local RE market development is consistent with the CIP for Thailand 

and with the objectives the CTF in general. 

3. Program Design and Market Development 

2012-08-054_000000000000759
 ADB Private Sector RE Program / Review / 2 April 2012

Page | 2 

The Program focuses on the deployment of private sector RE-based generating facilities amounting to an 

additional aggregate capacity of approximately 520MW, particularly targeting the development of 

utility-scale solar, wind, and WTE technologies. More broadly, the Program has been designed to 

establish a track record of completed private sector initiated RE development projects and investments 

that will minimize perceived risks and further facilitate the participation of the private sector, thus 

moving the development and transformation of the local RE sector forward to a more mature stage. 

The Program will build on the extensive experience of the ADB Private Sector Operations Department 

(PSOD) in market development and provision of financial support by catalyzing the replication and scale-up 

of private sector investments. The PSOD combines the use of flexible finance products and structures 

adapted to the target market and incorporated with other essential support services for marketing and 

implementation through the entire project cycle for individual projects included in the Program pipeline. 

As such, the Program will be expected to provide technical assistance, advisory, capacity building, 

marketing/promotion, and other project development services as necessary on a project-by-project basis, 

to ensure increased private sector and local financial institution participation and investments founded on 

market transformation. 

4. Readiness of the Market 

Given the abundance of RE resources in Thailand, amounting to a total estimated potential of 

57,000MW, and the wealth of experience of the GoT in the implementation of demonstration projects 

and programs focused primarily on small-scale RE power generation, the local RE market continues to be 

in a nascent stage of development, emerging but failing to make the transition from demonstration to 

commercially viable projects, particularly with regard to the deployment of utility-scale power 

generation systems. The primary market barrier lies in the recognition of the dichotomy between 

perceived risks and actual risks involved in RE power development project implementation, resulting to 

a lack of access to long-term financing, higher upfront transaction costs associated with first movers in a 

relatively young market, and additional risk premiums. The application of CTF support for this Program 

will provide a critical impetus to assist in the reduction of market and financial barriers. 

With the GoT committed to sustainable development policy targets, the high availability of RE resources, 

the availability of CTF co-financing, and the increasing public recognition of climate change impacts in 

Thailand, the components for accelerating the growth of the local RE market in Thailand appear to be in 

place. 

5. Investment Structure and CTF Fund Utilization 

The Program allows CTF funds to be structured primarily as loans or guarantees alongside additional 

financing support from ADB. The Program provides for the possibility of other investment modalities 

coming into play depending on the requirements of each project, ensuring additional flexibility in the 

investment structure and the use of CTF funds. 

Direct lending is justified due to the large size of the Program and is expected to provide an incentive to 

participating financial institutions towards encouraging the expansion of loan provision to local project 

2012-08-054_000000000000760
 ADB Private Sector RE Program / Review / 2 April 2012

Page | 3 

developers, reducing the upfront transaction costs. In addition, the risk sharing facility to be provided 

by the Program and adapted to the local market conditions will significantly minimize perceived and 

actual risks, enhancing the access of project developers to financial support. 

6. Risks and Conclusions 

The components for successfully implementing the Program appear to be in place. The Program will 

provide significant demonstration impacts and has a high potential for scale-up and replication within 

the surrounding region, since it will pioneer the utilization of non-recourse financing for individual 

projects comprising the Program, which is consistent with the goals of CTF. 

The main risks in this program are associated with the capacity of project sponsors, reliability of RE 

technology, project implementation, and the intermittency of RE resources. These risks appear to be 

manageable and may be addressed through policy assistance from the GoT. 

Signed, 

Peter du Pont, Ph.D. 

Vice-President, Clean Energy-Asia 

Nexant Asia Ltd. 

22nd Floor, Rasa Tower 1 

555 Phahonyothin Road 

Chatuchak, Bangkok 10900, Thailand 

Tel: +66 2793 4642 

pdupont@nexant.com

2012-08-054_000000000000761
1 

United States ‒ Progress Report on Fossil Fuel Subsidies

Part 1: Identification and Analysis of Fossil Fuel Provisions

There are a number of tax preferences, described below, available in the United States to producers of 

fossil fuels. The preferences below are all permanent provisions in the tax code. The annual revenue 

costs estimated for each provision are taken from the General Explanation of the Administration’s 

Revenue Proposal, sometimes referred to as the Treasury Green Book, which is available here:

http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx

Tax 

Provision Description Analysis Expiration

Annual 

Revenue Cost

(millions of $)1

Percentage 

depletion for 

oil and gas

Depletion is available to any 

person having an economic 

interest in a producing oil and 

gas property. There are 

generally two types of 

depletion--cost and 

percentage depletion. Cost 

depletion is limited to the 

taxpayer’s basis in the 

property, whereas percentage 

depletion is not limited by 

the basis, but is subject to 

limitations based on net 

income derived from the 

property and taxable income.

Percentage depletion for 

producing oil and gas 

property (15 percent rate) is 

available only to independent 

producers and royalty 

owners. For marginal 

properties, the taxable 

income limitation is 

suspended for taxable years 

ending before January 1, 

2012. 

Percentage depletion effectively 

provides a lower rate of tax with 

respect to a favored source of 

income. Cost depletion computed by 

reference to the taxpayer’s basis in 

the property would place oil and gas 

producers on a cost recovery system 

similar to that employed by other 

industries and reduce economic 

distortions. The lower rate of tax 

provided by percentage depletion, 

like other oil and gas preferences the 

Administration proposes to repeal, 

distorts markets by encouraging more 

investment in the oil and gas industry 

than would occur under a neutral tax 

system. This market distortion is 

detrimental to long-term energy 

security and is also inconsistent with 

the Administration’s policy of

supporting a clean energy economy, 

reducing our reliance on oil, and 

cutting carbon pollution. Moreover, 

the tax subsidy for oil and gas must 

ultimately be financed with taxes that 

result in underinvestment in other, 

potentially more productive, areas of 

the economy.

None

Suspension 

of taxable 

income 

limitation 

for marginal 

properties 

expired

December 

31,

2011.

$1,147 

2012-08-054_000000000000762
2 

Tax 

Provision Description Analysis Expiration

Annual 

Revenue Cost

(millions of $)1

Expensing of 

intangible 

drilling costs 

Taxpayers may elect to 

currently deduct intangible 

drilling costs (IDCs) paid or 

incurred with respect to the 

development of an oil or gas 

property located in the 

United States. For an 

integrated oil company that 

has elected to expense IDCs, 

30 percent of the IDCs on 

productive wells must be 

capitalized and amortized 

over a 60-month period.

The expensing of IDCs provides a 

tax preference to the oil and gas 

industry. Capitalization of IDCs 

would place the oil and gas industry 

on a cost recovery system similar to 

that employed by other industries and 

reduces economic distortions. See 

percentage depletion for oil and gas 

for further analysis of the effects of 

fossil fuel tax preferences.

None $1,390 

Geological & 

geophysical

expenditures 

Geological and geophysical 

expenditures incurred by 

independent producers and 

smaller integrated oil 

companies in connection with 

domestic oil and gas 

exploration may be amortized 

over 2 years compared to 7 

years for major integrated oil 

companies.

The accelerated amortization of 

geological and geophysical 

expenditures incurred by independent 

producers provides a tax preference 

to the oil and gas industry. 

Increasing the amortization period 

for geological and geophysical 

expenditures incurred by independent 

oil and gas producers from two years 

to seven years would provide a more 

accurate reflection of their income 

and more consistent tax treatment for 

all oil and gas producers. See 

percentage depletion for oil and gas 

for further analysis of the effects of 

fossil fuel tax preferences.

None $140 

2012-08-054_000000000000763
3 

Tax 

Provision Description Analysis Expiration

Annual 

Revenue Cost

(millions of $)1

Percentage 

depletion for 

hard mineral 

fossil fuels

Percentage depletion is 

available for coal and lignite 

(10 percent rate) and oil shale 

(15 percent rate). The 

percentage depletion 

deduction is generally subject 

to the alternative minimum 

tax at a 20 percent rate to the 

extent it exceeds the adjusted 

basis of the property.

The deduction may not 

exceed 50 percent of the net 

income from the mineral 

property in any year (the 

“net-income limitation").

Percentage depletion effectively 

provides a lower rate of tax with 

respect to a favored source of 

income. Cost depletion computed by 

reference to the taxpayer’s basis in 

the property would place these fossil 

fuel industries on a cost recovery 

system similar to that employed by 

other industries and reduce economic 

distortions. The lower rate of tax 

provided by percentage depletion 

distorts markets by encouraging more 

investment in the fossil-fuel industry 

than would occur under a neutral tax 

system. This market distortion is 

inconsistent with the 

Administration’s policy of 

supporting a clean energy economy 

and cutting carbon pollution. 

Moreover, the tax subsidy for coal 

and other hard-mineral fossil fuels 

must ultimately be financed with 

taxes that result in underinvestment 

in other, potentially more productive, 

areas of the economy.

None $174 

2012-08-054_000000000000764
4 

Tax 

Provision Description Analysis Expiration

Annual 

Revenue Cost

(millions of $)1

Royalty 

taxation of 

coal

Royalties received on the 

disposition of coal generally 

qualify for treatment as longterm capital gain and the 

royalty owner does not 

qualify for percentage 

depletion with respect to the 

coal. This treatment does not 

apply unless the taxpayer has 

been the owner of the mineral 

in place for at least one year 

before it is mined. The 

treatment also does not apply 

to income realized as a coadventurer, partner, or 

principal in the mining of the 

mineral or to certain related 

party transactions. 

The capital gain treatment of coal 

and lignite royalties provides a tax 

preference to these fossil fuel 

industries. Treating royalties as 

ordinary income would place 

taxpayers in that industry on a cost 

recovery system similar to that 

employed by other industries and 

reduce economic distortions. See 

percentage depletion for hard mineral 

fossil fuels for further analysis of the 

effects of fossil fuel tax preferences.

None $42 

Expensing of 

exploration 

and 

development 

costs for 

hard mineral 

fuels. 

Mining companies may elect 

to deduct 70 percent of 

domestic exploration and 

development costs. The 30 

percent of expenses that 

cannot be deducted must be 

capitalized and amortized 

over a 60-month period. 

Taxpayers may also elect to 

capitalize mine exploration 

and development expenses 

and amortize them over a 10-

year period. If this election is 

made, the expenses will not 

be tax preference items under 

the alternative minimum tax.

The expensing of exploration and 

development costs relating to coal 

and other hard mineral fossil fuels 

provides a tax preference to the these 

fossil fuel industries Capitalization of 

exploration and development costs 

relating to coal and other hard 

mineral fossil fuels would place 

taxpayers in that industry on a cost 

recovery system similar to that 

employed by other industries and 

reduce economic distortions. See 

percentage depletion for hard mineral 

fossil fuels for further analysis of the 

effects of fossil fuel tax preferences.

None $44 

2012-08-054_000000000000765
5 

Tax 

Provision Description Analysis Expiration

Annual 

Revenue Cost

(millions of $)1

Passive loss 

exception for 

working 

interests in 

oil and gas 

properties

The passive loss rules limit 

deductions and credits from 

passive trade or business 

activities. Deductions 

attributable to passive 

activities, to the extent they 

exceed income from passive 

activities, generally may not

be deducted against other 

income, such as wages, 

portfolio income, or business 

income that is not derived 

from a passive activity. A 

similar rule applies to credits. 

Suspended deductions and 

credits are carried forward 

and treated as deductions and 

credits from passive activities 

in the next year. 

An exception is provided, 

however, for any working 

interest in an oil or gas 

property that the taxpayer 

holds directly or through an 

entity that does not limit the 

liability of the taxpayer with 

respect to the interest.

The special tax treatment of working 

interests in oil and gas properties 

provides a tax preference to the oil 

and gas industries. Eliminating the 

working interest exception would 

subject oil and gas properties to the 

same limitations as other activities 

and reduce economic distortions. 

See percentage depletion for oil and 

gas for further analysis of the effects 

of fossil fuel tax preferences.

None $8 

Deduction 

for tertiary 

injectants

Taxpayers engaged in 

petroleum extraction 

activities may generally 

deduct qualified tertiary 

injectant expenses incurred

while applying a tertiary 

recovery method.

The deduction for tertiary injectants 

provides a tax preference to the oil 

and gas industries. Capitalization of 

tertiary injectants would place the oil 

and gas industry on a cost recovery 

system similar to that employed by 

other industries and reduces 

economic distortions. See 

percentage depletion for oil and gas 

for further analysis of the effects of 

fossil fuel tax preferences.

None $10 

2012-08-054_000000000000766
6 

Tax 

Provision Description Analysis Expiration

Annual 

Revenue Cost

(millions of $)1

Enhanced oil 

recovery

(EOR) credit 

Provides a 15 percent credit 

for expenses associated with 

an EOR project. 

Currently phased out due to 

high oil prices. 

An EOR project is generally 

a project that involves the use 

of one or more tertiary 

recovery methods to increase 

the amount of recoverable 

domestic crude oil. 

The credit provides a tax preference 

to the oil and gas industries. See 

percentage depletion for oil and gas 

for further analysis of the effects of 

fossil fuel tax preferences. 

None $0

Marginal 

wells credit 

Production credit ($3-perbarrel of oil or $0.50-per1,000-cubic-feet adjusted for 

inflation from 2004) for 

marginal wells or wells that 

have an average daily 

production of not more than 

25 barrels per day. 

Currently phased out due to 

high oil prices. 

The credit provides a tax preference 

to the oil and gas industries. See 

percentage depletion for oil and gas 

for further analysis of the effects of 

fossil fuel tax preferences. 

None $0

Domestic 

manufacturing 

deduction 

for fossil 

fuels 

A deduction is allowed with 

respect to income attributable 

to domestic manufacturing

and production activities. 

This deduction is widely 

available and not targeted at 

fossil fuel industries. The 

manufacturing deduction is 

equal to 6 percent of the

lesser of qualified production 

activities, limited to 50-

percent of the W-2 wages of 

the taxpayer. For taxable 

years beginning after 2009, 

the deduction is computed at 

a 9 percent rate, except that 

the deduction for income 

from oil and gas production 

activities is computed at a 6 

percent rate.

The manufacturing deduction, which 

is widely available, effectively 

provides a lower rate of tax for 

income from certain activities, 

including the production of fossil 

fuels. This lower rate of tax distorts 

markets by encouraging more 

investment in the fossil fuel 

industries than would occur under a 

neutral tax system. This market 

distortion is detrimental to long-term 

energy security and is also 

inconsistent with the 

Administration’s policy of 

supporting a clean energy economy, 

reducing our reliance on oil, and 

cutting carbon pollution. The 

manufacturing deduction must 

ultimately be financed with taxes that 

result in underinvestment in other 

potentially productive areas of the 

economy.

None $1,188 

1 Nominal annual average figure based on the U.S. FY2013 Budget 10-year revenue estimate.

2012-08-054_000000000000767
7 

There is one consumption subsidy that is funded by the federal government in the United States. It is 

targeted at low-income households, and benefits are typically dispersed as a lump sum credit on a 

household’s utility bill. Because the program is a targeted transfer that helps low-income households 

obtain essential energy services and does not encourage wasteful consumption, this program is not 

proposed for phase-out. Further information about the program can be obtained at: 

www.acf.hhs.gov/programs/liheap and http://liheap.ncat.org/

Consumption 

Subsidy Description Analysis Expiration Annual Cost

Low Income 

Home Energy 

Assistance 

Program 

(LIHEAP)

A discretionary block grant 

awarded to States, territories, and 

tribes and tribal organizations to 

provide home heating and cooling1

energy assistance to low-income 

households. 

Grantees may use a portion of their 

LIHEAP funds for low-cost 

residential weatherization services 

and for program administration.

Federal guidelines limit eligibility 

to households with incomes up to 

150% of poverty or 60% of State 

median income2

. 

The program typically reaches a 

small share (less than 20%) of 

eligible households and offsets a 

portion of participants’ home 

heating and cooling expenses.

In FY 2008, the average LIHEAP 

heating benefit (heating and winter 

crisis benefits combined) was 

$363, representing 43% of average

home heating expenditures for 

LIHEAP households..

3

LIHEAP assistance is targeted 

to vulnerable households (those 

with elderly, disabled or young 

children) and to the poorest 

(those with the highest energy 

burdens relative to their 

income). These households are 

targeted as they may face 

serious health and safety risks if 

they do not have adequate 

heating and cooling in their 

homes. Health risks can 

include death from hypothermia 

or hyperthermia and increased 

susceptibility to strokes and 

heart attacks. Safety risks may 

include the use of makeshift or 

faulty heating and cooling 

sources that can lead to indoor 

fires, sickness, or 

asphyxiation.4

 

In FY 2008, 32% of LIHEAP 

households had an elderly 

member, 32% included a 

disabled member, and 21% had 

a child under 5 years old.3

 The 

average energy burden among 

LIHEAP recipient households 

was 17%, compared to 14% 

among all low-income 

households.5

 

Authorization 

expired at the 

end of FY 2007. 

Congress 

continues to 

provide annual 

appropriations. 

$3,472

million for 

FY 2012 

 

1 Home heating and cooling accounts for about 42 percent of residential energy expenditures among low-income households. 

Source: LIHEAP Home Energy Notebook for Fiscal Year 2009, page ii. 2 States have the flexibility to set lower income limits, define “income,” and adopt other eligibility criteria within Federal 

guidelines (e.g. asset tests, living in non-subsidized housing, elderly, young child in household, utility disconnection notice). 3 From LIHEAP Report to Congress for Fiscal Year 2008: Executive Summary, page vi. FY 2008 figures are from the most 

recent publically available report to Congress on LIHEAP. 4 From LIHEAP Report to Congress for Fiscal Year 2006: Appendix E, page 86.

5 From LIHEAP Report to Congress for Fiscal Year 2008, page 20.

2012-08-054_000000000000768
8 

Part 2: Implementation Strategies and Timeframes For Phase-Out of 

Fossil Fuel Tax Provisions 

Tax Provision Strategy and Timeframe Implementation

Percentage 

depletion for oil 

and gas

The Administration’s Fiscal Year 2013 Budget proposal would not allow 

percentage depletion with respect to oil and gas wells. Taxpayers would be 

permitted to claim cost depletion on their adjusted basis, if any, in oil and 

gas wells. The proposal would be effective for taxable years beginning after 

December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Expensing of 

intangible 

drilling costs 

The Administration’s Fiscal Year 2013 Budget proposal would not allow 

expensing of intangible drilling costs and 60-month amortization of 

capitalized intangible drilling costs would not be allowed. Intangible 

drilling costs would be capitalized as depreciable or depletable property, 

depending on the nature of the cost incurred, in accordance with the 

generally applicable rules. The proposal would be effective for costs paid or 

incurred after December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Geological & 

geophysical

expenditures 

The Administration’s Fiscal Year 2013 Budget proposal would increase the 

amortization period from two to seven years for geological and geophysical 

expenditures incurred by independent producers in connection with all oil 

and gas exploration in the United States. The proposal would be effective 

for amounts paid or incurred after December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Percentage 

depletion for 

hard mineral 

fossil fuels

The Administration’s Fiscal Year 2013 Budget proposal would not allow 

percentage depletion with respect to coal and other hard mineral fossil fuels. 

Taxpayers would be permitted to claim cost depletion on their adjusted 

basis, if any, in coal and other hard mineral fossil fuel properties. The 

proposal would be effective for taxable years beginning after December 31, 

2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Royalty taxation

of coal

The Administration’s Fiscal Year 2013 Budget proposal would repeal capital 

gain treatment of coal and lignite royalties and the royalties would be taxed

as ordinary income. The proposal would be effective for amounts realized in 

taxable years beginning after December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Expensing of 

exploration and 

development 

costs for hard 

mineral fuels. 

The Administration’s Fiscal Year 2013 Budget proposal would not allow 

expensing and 60-month amortization of exploration and development costs 

relating to coal and other hard mineral fossil fuels. The costs would be 

capitalized as depreciable or depletable property, depending on the nature of 

the cost incurred, in accordance with the generally applicable rules. The 

proposal would be effective for costs paid or incurred after December 31, 

2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

2012-08-054_000000000000769
9 

Tax Provision Strategy and Timeframe Implementation

Passive loss 

exception for 

working 

interests in oil 

and gas 

properties

The Administration’s Fiscal Year 2013 Budget proposal would repeal the 

exception from the passive loss rules for working interests in oil and gas 

properties. Deductions attributable to passive activities in oil and gas 

properties, to the extent that they exceed income from passive activities, 

generally could not be deducted against other income. The proposal would 

be effective for taxable years beginning after December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Deduction for 

tertiary 

injectants

The Administration’s Fiscal Year 2013 Budget proposal would not allow the 

deduction for qualified tertiary injectant expenses. These costs would be 

capitalized as depreciable or depletable property, depending on the nature of 

the cost incurred, in accordance with the generally applicable rules. The 

proposal would be effective for amounts paid or incurred after December 31, 

2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Enhanced oil 

recovery

(EOR) credit 

The Administration’s Fiscal Year 2013 Budget proposal would repeal the 

investment tax credit for enhanced oil recovery projects beginning after 

December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Marginal wells 

credit 

The Administration’s Fiscal Year 2013 Budget proposal would repeal the 

production tax credit for oil and gas from marginal wells in taxable years 

beginning after December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

Domestic 

manufacturing 

deduction for oil 

fossil fuels 

The Administration’s Fiscal Year 2013 Budget proposal would exclude from 

the definition of domestic production gross receipts all gross receipts derived 

from the sale, exchange or other disposition of oil, natural gas or a primary 

product thereof and of coal, other hard mineral fossil fuels, or a primary 

product thereof for taxable years beginning after December 31, 2012. 

The U.S. Congress must 

pass enabling legislation 

for this proposal to 

become law.

2012-08-054_000000000000770
10 

Part 3: Current Status of Phase-Out Strategies

Tax Provision Actions Implemented to 

Date

Remaining Actions to Fully Implement 

Phase-Out

Percentage depletion for oil and gas None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Expensing of intangible drilling costs

 

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Geological & geophysical

expenditures 

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Percentage depletion for hard 

mineral fossil fuels

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Royalty taxation of coal None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Expensing of exploration and 

development costs for hard mineral 

fuels

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Passive loss exception for working 

interests in oil and gas properties

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Deduction for tertiary injectants None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Enhanced oil recovery

(EOR) credit 

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Marginal wells credit None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

Domestic manufacturing deduction 

for fossil fuels

None The U.S. Congress must pass enabling 

legislation for this proposal to become law.

2012-08-054_000000000000771