Toolkit of Measures for Managing Environmental Externalities in Urban Areas Promoting green urban development in Africa: enhancing the relationship between urbanization, environmental assets and ecosystem services THIS PAGE INTENTIONALLY LEFT BLANK Toolkit of Measures for Managing Environmental Externalities in Urban Areas Promoting green urban development in Africa: enhancing the relationship between urbanization, environmental assets and ecosystem services Authors Petrina Rowcroft and Jennifer Black Prepared for The World Bank Prepared by AECOM 3101 Wilson Blvd. Suite 900 Arlington, VA 22201 2017 COPYRIGHT © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect 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. May 2016 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 this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Publishing and Knowledge Division, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Page iv TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS PREFACE AND ACKNOWLEDGEMENTS This study forms one component of the case studies of a larger study on Promoting Green Urban Development in Africa commissioned by the World Bank and led by AECOM. The study was led by Petrina Rowcroft and Jennifer Black of AECOM with inputs gathered from city-level stakeholders through a series of workshops and meetings in Durban and Kampala. We are grateful to Roland White, Chyi-Yun Huang and Anna Gueorguieva of the World Bank, Diane Dale, Brian Goldberg, Vineet Diwadkar, Robert Merrill and John Bachmann of AECOM for guidance and discussions during the course of compiling the toolkit and for helpful comments on the drafts. We would also like to extend our thanks to the staff at Kampala Central City Administration (KCCA) and eThekwini Municipality who so generously gave up their time to participate in workshops and meetings. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page v THIS PAGE INTENTIONALLY LEFT BLANK Page vi TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS EXECUTIVE SUMMARY Background Cities depend on a healthy natural environment that continuously provides a range of services or benefits to society and the economy. Managing the urban environment is, however, a complex task. Many urban cities in Africa are struggling to meet their infrastructure needs; maintain or provide adequate service delivery; and upgrade city systems to keep pace with the rate of change, urbanization, and population growth. Identifying what investment is required in urban areas to enable economic activity, and to create livable and vibrant cities in an environmentally sustainable way is the key challenge for decision makers, but also presents significant opportunities. By investing in natural capital, cities can lower such, the instruments that are included have been their operating costs and support local economic specifically selected because they address some of development. Recent studies have shown, for example, the most pressing environmental challenges faced by that investing in ecological infrastructure in cities, rapidly growing African cities while at the same time and the ecological restoration and rehabilitation of contributing to the achievement of wider sustainable ecosystems such as rivers, lakes, wetlands and forests development goals. occurring in and around urban areas, may not only be ecologically and socially desirable, but also quite often, The toolkit complements a wide range of other guidelines economically advantageous. For example, investments and manuals covering integrated urban environmental in restoring or enhancing urban ecosystems may play a planning, green city development and mainstreaming crucial role in increasing the adaptive capacity of cities ecosystem services into municipal functioning. These to deal with climate change whilst also simultaneously are valuable volumes in themselves and the reader is generating a number of other services (e.g. spaces encouraged to use these alongside this toolkit. for recreation or habitat for wildlife) that enhance human well-being. Other potential co-benefits include job creation, capacity building, poverty alleviation, Policy Instruments and Measures improved health, enhanced resilience and longer-term It is important to note at the outset that none of the sustainability through revenue raising and attracting instruments presented in this toolkit provides a one- inward investment. size-fits-all solution to managing urban environmental externalities. The most appropriate measures and In this light, urban planners and environmental strategies to manage these externalities depends highly managers globally are increasingly recognizing the need on the local context and will depend on, amongst to adopt more integrated approaches that strengthen other things, the most pressing environmental, social synergies between economic, social and environmental and economic issues, the resources at hand and the objectives and promote green urban development. political economy. To be effective and sustainable, the instruments described here are best situated within a package of complementary measures that lie within Aims of This Toolkit a much broader, yet integrated urban environmental The purpose of this toolkit is to provide an overview planning and management framework. In particular, of a selected sample of generic policy measures and the successful implementation of measures requires instruments that specifically address the challenges a supportive regulatory and policy framework that raised by ‘greening’ urban development. It focuses on is accompanied by information and awareness- instruments that may be able to help leverage finance raising, capacity building and ongoing monitoring and (from private sector, national government and donors) evaluation. Stakeholder participation during the design to address the range of environmental problems faced and implementation of measures is likely to be key to by cities in developing countries, including low quality their acceptability and sustainability. And last, but not housing, poor access to services, pollution and safety least, consideration needs to be given to the finance hazards, and to support the implementation of green necessary to support the design and operation of urban development measures. instruments and measures. Appendix 1 sets out some of the funds that may be accessed to support green urban The toolkit is intended primarily as a resource for development activities. urban managers and planners in African cities. As TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 1 The instruments included in this toolkit were identified following a broad review of the literature and were selected according to a number of criteria and following discussions with relevant stakeholders around the nature and significance of the urban environmental issues that they face and their priorities for addressing these. Each of the instruments described in this toolkit may be used to address one or more environmental externalities. The user is therefore encouraged to first consider the nature of the externality to be addressed (i.e. what is the problem) and the drivers of change or causes of environmental degradation (i.e. what are the root causes of that problem). This will in turn help identify where efforts to reverse, or prevent further degradation, need to be targeted. The range of environmental issues that may be addressed by each instrument is identified through a series of icons. Each of the instruments is then described in terms of: • The key environmental challenges or urban externalities it seeks to address • The concepts and principles underlying each instrument (or how the instrument works in theory) • How the instrument works in practice, including reference to the wider policy, regulatory, legislative and operational considerations • Where it has been applied in practice and the key lessons learnt, drawing on examples from African cities wherever possible Links to further information, including relevant examples, are also provided. A summary overview of each of the instruments covered by this toolkit is provided in the table overleaf. Page 2 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Instrument Key environmental issue addressed Objectives Level of application Co-Benefits Examples • To reduce waste at source Manufacturers/retailers/ Widely applied; specific examples include South Africa Plastic Bag Levy Plastic waste Flood alleviation • To reduce litter consumers and Botswana Health, aquatic ecology, reduced South African Wastewater Discharge Charge. Wastewater Discharge Charge Water quality • To discourage discharges to water Industry water treatment costs Similar in Colombia and Dar Es Salaam Pollution Charge – Emissions Chinese Levy System – penalties applied to industry for Air quality • To discourage harmful emissions to air Industry Health, productivity to Air emissions; also Mexico and Colombia Widely applied. Woodfuel users, Tax Exemptions on Alternative Health, biodiversity, water Air quality, forest degradation • To discourage harmful emissions to air manufacturers / retailers / Fuels attenuation, climate regulation Uganda, Senegal, Botswana and India all have zero VAT vehicle users on LPG. Thailand, Taiwan Woodfuel users, • To discourage pollution / harmful Thailand introduced a differential tax system which Fuel Levy/Differential Tax Air quality, forest degradation Manufacturers/retailers/ Health, climate regulation emissions to air offered unleaded fuel at discount relative to leaded vehicle users fuel. The discount was subsidized by a surcharge on leaded fuel. Korea, South Africa, Kenya, Uganda (Kampala), Sri • To encourage recycling / reduce the Lanka, Venezuela, China, Mexico. E.g. A mandatory amount of waste sent to landfill Manufacturers/retailers / Employment/poverty alleviation deposit refund systems is in place in Mexico; new car Deposit Refund System Solid waste • Can be linked to livelihoods support consumers Resource efficiency battery can only be sold with the return of an old one programs as batteries are considered highly hazardous waste and are difficult to dispose of. Municipality (on Payments For Ecosystem behalf of citizens) or • To restore / maintain the provision of Climate regulation, habitat Numerous examples in Latin America, Asia and east Services, Including Fiscal Transfer Water quality, water supply, flood beneficiary businesses ecosystem services to downstream for biodiversity, employment/ and southern Africa, including the South African Mechanisms and Other Results- attenuation or intergovernmental (in beneficiaries poverty alleviation, cost savings Working for Water Program Based Finance Schemes case of fiscal transfers) or project-based • To provide long-term stable funding for Can be used to generate funds to projects that focus on environmental Multiple scales – projects South African Working for Water Numerous examples in Africa, Latin America and Environmental Funds address numerous environmental conservation or enhancement activities and programs Program SE Asia externalities that would not otherwise be funded by the governmental or private sector. • To re-establish / encourage local knowledge and traditional land use Climate regulation, habitat for Community-Based Natural Forest degradation, wetland practices to restore degraded landscapes Municipality / project biodiversity, employment, cost Tanzania, Zimbabwe, Botswana Resource Management degradation and improve the livelihoods of indigenous savings, indigenous knowledge people. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 3 THIS PAGE INTENTIONALLY LEFT BLANK Page 4 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS ACRONYMS AND ABBREVIATIONS CBD Central Business District NGOs Non-Governmental Organizations BMZ Bundesministerium Für Wirtschaftliche NOx Nitrogen Oxides Zusammenarbeit (German Federal Ministry NRM Natural Resource Management for Economic Development Cooperation) OECD Organisation for Economic Co-operation and BWP Botswana Pula Development CAMPFIRE Communal Areas Management PES Payments for Ecosystem Services Programme for Indigenous Resources PLMC Plastics Levy Management Committee CBFM Community Based Forest Management P-PP Public – Private Partnership CBNRM Community Based Natural Resource PPP Polluter Pays Principle Management REDD+ Reducing Emissions from Deforestation and CMAs Catchment Management Agencies Degradation CSR Corporate Social Responsibility REDISA Recycling and Economic Development DEA South African Department of Environmental Initiative of South Africa Affairs RedLAC Red de Fondos Ambientales de DRS Deposit Refund Scheme Latinoamérica y el Caribe DWA South African Department of Water Affairs SEI Sussex European Institute EERF Energy Efficiency Technology TEEB The Economics of Ecosystems and EF Environmental Funds Biodiversity ENCON Energy Conservation UNDP United Nations Development Programme GDP Gross Domestic Product UNEP United Nations Environment Programme GEF Global Environment Facility USA United States of America GRF Green Revolving Funds VAT Value-Added Tax IFC International Finance Corporation WD Levy Waste Discharge Levy KCCA Kampala Capital City Authority WDCS South African Wastewater Discharge Charge KIP Laotian Kip System LAWMA Lagos Waste Management Authority WMC Waste Mitigation Charge LPG Liquefied Petroleum Gas WWF World Wide Fund for Nature MBIs Market-Based Instruments ZAR South African Rand TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 5 TABLE OF CONTENTS I. INTRODUCTION 11 1.1 This Toolkit.......................................................................................................................................................................... 11 1.2 Why is the Toolkit Needed?............................................................................................................................................... 11 1.3 What is Included in this Toolkit?........................................................................................................................................ 12 1.4 How the Toolkit is Structured............................................................................................................................................. 14 1.5 How to Use This Toolkit...................................................................................................................................................... 14 II. PLASTIC BAG LEVY 17 2.1 Overview...............................................................................................................................................................................17 2.2 How the Instrument Works ............................................................................................................................................... 18 2.3 How It Works in Practice.................................................................................................................................................... 19 2.3.1 Financial .................................................................................................................................................................. 19 2.3.2 Co-benefits................................................................................................................................................................ 19 2.3.3 Challenges................................................................................................................................................................ 19 2.4 Case Studies....................................................................................................................................................................... 19 2.5 Links to Further Information.............................................................................................................................................. 21 III. POLLUTION CHARGES 23 3.2 How the Instrument Works ............................................................................................................................................... 23 3.3 How It Works in Practice.................................................................................................................................................... 25 3.3.1 Financial................................................................................................................................................................... 25 3.3.2 Co-benefits................................................................................................................................................................ 25 3.3.3 Challenges................................................................................................................................................................ 25 3.4 Case Studies....................................................................................................................................................................... 26 3.4.1 Wastewater Discharge Charge – An Application of a Pollution Charge................................................................ 27 3.5 Links to Further Information.............................................................................................................................................. 28 IV. TAX EXEMPTIONS ON ALTERNATIVE FUELS 31 4.2 How the Instrument Works................................................................................................................................................ 32 4.3 How It Works in Practice.................................................................................................................................................... 32 4.3.1 Financial................................................................................................................................................................... 32 4.3.2 Co-benefits................................................................................................................................................................ 32 4.3.3 Challenges................................................................................................................................................................ 32 4.4 Case Studies....................................................................................................................................................................... 33 4.5 Links to Further Information.............................................................................................................................................. 34 Page 6 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS V. DEPOSIT-REFUND SCHEMES 35 5.2 How the Instrument Works................................................................................................................................................ 36 5.3 How It Works in Practice.................................................................................................................................................... 37 5.3.1 Financial................................................................................................................................................................... 37 5.3.2 Co-benefits................................................................................................................................................................ 37 5.3.3 Challenges................................................................................................................................................................ 37 5.3.4 Establishing a DRS................................................................................................................................................... 38 5.4 Case Studies....................................................................................................................................................................... 38 5.5 Links to Further Information.............................................................................................................................................. 39 VI. ENVIRONMENTAL FUNDS 37 6.2 How the Instrument Works ............................................................................................................................................... 38 6.3 How It Works in Practice ................................................................................................................................................... 38 6.3.1 Legal and Governance Arrangements.................................................................................................................... 38 6.3.2 Planning .................................................................................................................................................................. 39 6.3.3 Funding .................................................................................................................................................................... 39 6.3.4 Financial .................................................................................................................................................................. 39 6.3.5 Co-benefits................................................................................................................................................................ 39 6.3.6 Challenges................................................................................................................................................................ 39 6.4 Case Studies....................................................................................................................................................................... 40 VII. PAYMENTS FOR ECOSYSTEM SERVICES 43 7.1 Overview.............................................................................................................................................................................. 43 7.2 How the Instrument Works................................................................................................................................................ 44 7.2.1 � Opportunities for PES............................................................................................................................................... 45 7.2.2 � Types of PES Scheme ............................................................................................................................................. 46 7.2.3 � Scale of PES Schemes ............................................................................................................................................ 46 7.3 How PES Works in Practice............................................................................................................................................... 46 7.3.4 � The Actors Involved in PES Schemes ..................................................................................................................... 49 7.3.5 � Key Aspects of Scheme Design .............................................................................................................................. 50 7.3.6 � Potential Sources of Funding.................................................................................................................................. 50 7.3.7 � Technical Issues........................................................................................................................................................51 7.4 Case Studies....................................................................................................................................................................... 52 7.5 Links to Further Information.............................................................................................................................................. 55 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 7 VIII. COMMUNITY-BASED NATURAL RESOURCE MANAGEMENT 57 8.1 Overview.............................................................................................................................................................................. 57 8.2 How the Instrument Works ............................................................................................................................................... 58 8.2.1 CBNRM in Urban Areas............................................................................................................................................ 58 8.3 How CBNRM Works in Practice ........................................................................................................................................ 58 8.3.1 Risks ......................................................................................................................................................................... 59 8.3.2 Challenges ............................................................................................................................................................... 59 8.4 Case Studies....................................................................................................................................................................... 59 8.5 Links to Further Information.............................................................................................................................................. 60 IX. APPENDICES 61 Page 8 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS LIST OF BOXES Box 1: Natural Capital and Ecosystem Services....................................................................................................................................................................11 Box 2: Green Infrastructure...................................................................................................................................................................................................12 Box 3: Green Urban Growth..................................................................................................................................................................................................12 Box 4: Sources of Finance......................................................................................................................................................................................................13 Box 5: Plastic Bag Levy in Kenya............................................................................................................................................................................................19 Box 6: Plastic Bag Levy in Botswana .....................................................................................................................................................................................20 Box 7: The Plastic Bag Levy in South Africa . ........................................................................................................................................................................20 Box 8: The Swedish Charge on NOx Emissions.....................................................................................................................................................................24 Box 9: Institutional Requirements for Establishing and Operating Pollution Charges/Conditions for Success...................................................................... 25 Box 10: Risks in Establishing and Operating Pollution Charges .......................................................................................................................................... 26 Box 11: Emission Fees in China .............................................................................................................................................................................................26 Box 12: South African Wastewater Discharge Scheme........................................................................................................................................................ 27 Box 13: Case Study of Tax Exemptions on Alternative Fuels, Uganda.................................................................................................................................33 Box 14: Case Study of Tax Exemptions on Alternative Fuels, Senegal.................................................................................................................................34 Box 15: Case Study of Deposit Refund System in South Africa: Rubber Tire Recycling.....................................................................................................38 Box 16: Eastern Arc Mountains Conservation Endowment Fund, Tanzania ......................................................................................................................40 Box 17: Clean Water State Revolving Fund, USA..................................................................................................................................................................40 Box 18: Fund for the Protection of Water (FONAG), Ecuador..............................................................................................................................................40 Box 19: Case Study of Thai Energy Conservation Promotion Fund.....................................................................................................................................41 Box 20: Ecosystem Services...................................................................................................................................................................................................43 Box 21: Ecological Fiscal Transfers........................................................................................................................................................................................47 Box 22: Exploring the Role of Microfinance in Promoting Activities to Enhance Ecosystem Service Provision...............................................................50 Box 23: Equitable Payments for Watershed Services (EPWS) in the Uluguru Mountains, Tanzania.................................................................................53 Box 24: Heredia Public Service Enterprise PES Scheme, Costa Rica....................................................................................................................................53 Box 25: Washington, D.C. Stormwater Retention Credit Trading Program.........................................................................................................................54 Box 26: CBNRM in Botswana.................................................................................................................................................................................................58 ...............................................................................................................................................................................59 Box 27: CAMPFIRE Program, Zimbabwe. Box 28: Kam’mwamba Community Integrated Natural Resource Management and Use Project, Malawi......................................................................59 LIST OF FIGURES Figure 1.1 Measures for Addressing Environmental Externalities.................................................................................................................................13 Figure 7.1 The PES Concept (© Conservation International)* ..................................................................................................................................... 44 Figure 7.2 The Logic of Payments for Ecosystem Services.............................................................................................................................................49 LIST OF TABLES Table 1.1 More Detailed Guidance on Policy Measures and Instruments for Urban Environmental Management and Planning...........................15 Table 7.1 ......................................................................................................................................................................................48 Types of PES Scheme. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 9 THIS PAGE INTENTIONALLY LEFT BLANK Page 10 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS I. INTRODUCTION Box 1: Natural Capital and Ecosystem Services This Toolkit Natural Capital can be defined as the world’s stocks of natural assets which include geology, soil, air, The purpose of this toolkit is to provide an overview water and all living things. It is from this natural of a selected sample of generic policy measures and capital that humans derive a wide range of services, instruments that specifically address the challenges often called ecosystem services, which make human raised by ‘greening’ urban development. It focuses on life possible*. instruments that may be able to help leverage finance (from private sector, national government and donors) Examples of ecosystem services include products to advance the ‘brown agenda’1 and support the such as food and water, regulation of floods, soil implementation of green urban development measures. erosion and disease outbreaks, and non-material benefits such as recreational and spiritual benefits in The toolkit is intended primarily as a resource for natural areas. Some ecosystem services involve the urban managers and planners in African cities. As direct provision of material and non-material goods such, the instruments that are presented have been to people and depend on the presence of particular specifically selected because they address some of species of plants and animals, for example, food, the most pressing environmental challenges faced by timber, and medicines. Other ecosystem services rapidly growing African cities while at the same time arise directly or indirectly from the functioning of contributing to the achievement of wider sustainable ecosystem processes. For example, the service of development goals. formation of soils and soil fertility that sustains crop It is important to note at the outset that none of the and livestock production depends on the ecosystem instruments presented in this toolkit provides a one- processes of decomposition and nutrient cycling by size-fits-all solution to managing urban environmental soil micro-organisms. externalities. The most appropriate measures and The concepts of natural capital and ecosystem strategies to manage these externalities depends highly services help us recognize the many benefits that on the local context and will depend on, amongst other nature provides**. From an economic point of view, things, the most pressing environmental, social and the flows of ecosystem services can be seen as economic issues, the resources at hand and the political the ‘dividend’ that society receives from natural economy. capital. Maintaining stocks of natural capital allow the sustained provision of future flows of ecosystem services, and thereby help to promote enduring Why is the Toolkit Needed? human well-being. Cities depend on a healthy natural environment that continuously provides a range of benefits, known as There is growing evidence that many ecosystems ecosystem services (see Box 1). Some examples of have been degraded to such an extent that they are ecosystem services include drinking water, clean air, nearing critical thresholds or tipping points, beyond healthy food, and protection against floods. Healthy which their capacity to provide useful services ecosystems are the foundation for sustainable cities, may be drastically reduced. Nowhere is this more influencing and affecting human well-being and most prescient than in rapidly growing cities where the economic activity. pace of growth and development often outstrips the capacity of local administrations to plan or to Many urban cities in Africa are struggling to meet their protect. Lack of information, understanding and infrastructure needs; maintain or provide adequate planning about the effects of decisions on the service delivery; and upgrade city systems to keep pace environment can lead to the loss of essential and with the rate of change, urbanization, and population beneficial ecosystem services.*** From an economic growth. The benefits of growth over the last decade point of view, this means the sub-optimal use or so have been uneven and the gap between rich and of this ‘natural capital’, resulting in unnecessary poor is widening in several parts of the continent2. In losses in local welfare, city budgets and business opportunities.*** The Brown Agenda typically refers to the range of environmental problems 1 faced by cities in developing countries. These include the traditional issues * The World Forum on Natural Capital: http://naturalcapitalforum.com/about/ of poor quality housing and poor access to services, as well as the pollution **  TEEB (2010) The Economics of Ecosystems and Biodiversity: Mainstreaming and safety hazards associated with rapid industrialization. Both lead to poor the Economics of Nature: A synthesis of the approach, conclusions and environmental health. recommendations of TEEB. African Development Bank, OECD Development Centre and United Nations 2  EEB (2011) The Economics of Ecosystems and Biodiversity Manual for *** T Development Programme (2013-2016) African Development Outlook [online] Cities: Ecosystem Services in Urban Management. available at http://www.africaneconomicoutlook.org/en TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 11 addition, limitations in human and financial capital, cost-effective development that enhances rather than technical expertise, and limited community awareness degrades the value of ecosystems. More specifically, by of environmental issues all contribute to the challenge ‘greening’ urban development we mean: that city leaders face in implementing initiatives to develop or upgrade urban infrastructure. Compounding • addressing environmental issues, and particularly these challenges, increasingly scarce natural resources the unintended impacts of development (or and degraded ecosystems within and around urban negative externalities); areas often means that the required investments are • providing incentives for uptake of more starting from a low base, increasing the potential up- environmentally sensitive practices or more front costs and often requiring significant justification to sustainable consumption and production; and gain the necessary support to proceed. The degradation • taking advantage of opportunities to realize the of natural assets and the consequent erosion of the value of the services that nature provides through, value of the ecosystem services they provide is further for example, investing in green infrastructure that aggravated by climate change and climate-induced can improve public health and bring recreational extreme weather events. use benefits Evidence suggests that, by investing in natural capital, • Integrated urban planning that can foster higher cities can lower their operating costs and support local economic growth through an improved urban economic development. Recent studies have shown, for form and lower agglomeration externalities, higher example, that investing in ecological infrastructure in innovation, better sectoral growth for tourism cities, and the ecological restoration and rehabilitation of ecosystems such as rivers, lakes, wetlands and Box 3: Green Urban Growth woodlands occurring in and around urban areas, may not only be ecologically and socially desirable, but also The OECD defines an urban green growth approach quite often, economically advantageous3. For example, as one that seeks to foster economic growth and investments in restoring or enhancing urban ecosystems development through urban activities that reduce (‘green and blue infrastructure’ – see Box 2) may play a environmental impact. These may include activities crucial role in increasing the adaptive capacity of cities that emit fewer pollutants and greenhouse gas to deal with climate change whilst also simultaneously emissions, reduce consumption of natural resources, generating a number of other services (e.g. spaces including water, energy and undeveloped land; and for recreation or habitat for wildlife) that enhance protect ecological functions. human well-being. Other potential co-benefits include job creation, capacity building, poverty alleviation, Source:  OECD (2013) Green Growth in Cities. OECD Publishing [online] available at http://www.oecd-ilibrary.org/urban-rural-and-regional- improved health, enhanced resilience and longer-term development/green-growth-in-cities_9789264195325-en sustainability through revenue raising and attracting inward investment. What is Included in this Toolkit? Box 2: Green Infrastructure This toolkit therefore presents a suite of generic policy and other instruments that public agencies Urban green infrastructure is a network of green within African cities may consider for both mitigating spaces, water and other natural features within urban the negative environmental externalities deriving areas. ‘Green infrastructure’, includes parks, playing from urbanization and for enhancing green urban fields, gardens, green roofs and walls, and cemeteries. development. As noted above, none of the instruments The term refers to ecological processes rather than described in this toolkit offers a ‘silver bullet’. For color, so includes sustainable urban drainage systems, any of them to be effective and enduring, they need wetlands, rivers and canals, which are also sometimes to sit within a package of complementary measures referred to as ‘blue’ infrastructure. that lie within a much broader, yet integrated urban environmental planning and management framework. In particular, the successful implementation of measures In this light, urban planners and environmental managers requires a supporting regulatory and policy framework globally are increasingly recognizing the need to adopt and needs to be accompanied by information and more integrated approaches that strengthen synergies awareness-raising, capacity building and ongoing between economic, social and environmental objectives monitoring and evaluation. Stakeholder participation and promote green urban development. Green urban during the design and implementation of measures is development (see Box 3) is understood here to mean likely to be key to their acceptability and sustainability. And last, but not least, consideration needs to be given Elmqvist, T. et al (2015) Benefits of restoring ecosystem services in urban 3 to the finance (see Box 4) necessary to support the areas. Current Opinion in Environmental Sustainability, Volume 14, June design and operation of instruments and measures. 2015, Pages 101–108. Page 12 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Box 4: Sources of Finance Apart from conventional sources of finance, there is a range of other green financing mechanisms that may be considered to support activities that promote green and climate-resilient urban development. These include: • The Global Environment Facility • The Green Climate Fund • The Clean Development Mechanism • Climate Investment Funds Further information on each of these funds can be found in Appendix 1. In addition to these funds that may provide the necessary start-up capital, this toolkit also describes a number of financing mechanisms implementable at a local level that may support the longer-term sustainability of measures. These include: • Taxes or charges levied on the consumers of polluting products or users of natural resources • Payments for ecosystem services • Developer contributions • Revolving funds • Fiscal transfers The toolkit is also not exhaustive. It focuses predominantly on policy instruments, i.e. instruments that provide guiding principles for urban decision-makers. In practice, these are likely to be accompanied by a combination of process, management and urban management measures4 as illustrated in the figure below. Figure 1.1 Measures for Addressing Environmental Externalities For detailed descriptions and examples of these measures see The Cities Alliance (2007) Liveable Cities: The Benefits of Urban Environmental Planning. 4 A Cities Alliance Study on Good Practices and Useful Tools. Available online at http://www.unep.org/urban_environment/PDFs/LiveableCities.pdf TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 13 The instruments included in this toolkit were identified • The key environmental challenges or urban following a broad review of the literature and were externalities it seeks to address selected according to a number of criteria and following • The concepts and principles underlying each discussions with relevant stakeholders. The selection instrument (or how the instrument works in theory) criteria covered: • How the instrument works in practice, including • Environmental effectiveness – is the instrument reference to the wider policy, regulatory, legislative considered effective from the viewpoint of and operational considerations environmental management? • Where it has been applied in practice and the key • Economic efficiency – the degree to which the lessons learnt, drawing on examples from African instrument could achieve a given environmental cities wherever possible objective can be achieved with a specific • Links to further information. instrument; how cost-effectively can that instrument change behavior. Must minimize the cost to authorities to ensuring standards are How to Use This Toolkit enforced and not place excessive burdens on At the outset, it is important to understand the nature private enterprise. and significance of the environmental externality to • Administrative feasibility and cost – considering be addressed. Perhaps even more importantly, it is issues such as capital implications for new necessary to have an understanding of the key drivers investments that may be required, legal of change or the causes of environmental degradation implications, technical implications, capacity as this will help identify where efforts to reverse, or implications, expertise that will be needed or any prevent further degradation, need to be targeted. new institutional capacities that may have to be created. Each of the instruments presented in this toolkit may apply to one or more environmental issues. To aid the • Acceptability – amongst the general public, user, we have used icons throughout the toolkit to environmentally-oriented public, government, identify the key issues to which each of the instruments politicians, affected sectors of industry. can most readily be applied. These are as follows: • Micro-financial impact – impacts on households who may have to bear a new cost; affected industries whose production cost structures may change; impacts on city authorities in terms of Water Quality and Wastewater potential for new revenue streams. • Macro-economic impact – impacts on employment, contribution to GDP • Equity – to what extent might the instrument result Solid waste in unacceptable (disproportional) impacts on the poor or private enterprise? • Innovation – priority was given to emerging instruments that address urban environmental challenges using an innovative approach Land Degradation The toolkit complements a wide range of other guidelines and manuals covering integrated urban environmental planning, green city development and mainstreaming ecosystem services into municipal Air quality functioning – see Table 1.1. These are valuable volumes in themselves and the reader is encouraged to use these alongside this toolkit. Flooding How the Toolkit is Structured The remainder of the toolkit presents each of the instruments in turn. Each instrument has been structured to include details of: Deforestation Page 14 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Table 1.1 More Detailed Guidance on Policy Measures and Instruments for Urban Environmental Management and Planning Resource Description Hyperlink TEEB - The Economics of Highlights how a focus on ecosystem http://www.teebweb.org/wp- Ecosystems and Biodiversity services and their valuation can content/uploads/Study%20 (2011) TEEB Manual for create direct benefits for urban areas and%20Reports/Additional%20 Cities: Ecosystem Services in and can be performed even with Reports/Manual%20for%20 Urban Management. limited resources. Provides an easily Cities/TEEB%20Manual%20 understandable introduction to the for%20Cities_English.pdf subject of ecosystem services; how to determine their value; and, how to incorporate a consideration of ecosystem services into municipal functioning as a long-term investment to enhance existing municipal management. The Cities Alliance (2007) Describes how cities may employ http://www.unep.org/urban_ Livable Cities: The Benefits different instruments to integrate environment/PDFs/LiveableCities. of Urban Environmental the environment into urban planning pdf Planning. A Cities Alliance and management approaches: policy Study on Good Practices and instruments, process instruments, Useful Tools planning instruments and management instruments. The report investigates how these instruments are applied in several well-established approaches to integrated urban planning. Dodman, D., McGranahan, An update to the Cities Alliance report http://www.citiesalliance.org/ G. and Dalal-Clayton, B. listed above that examines how the sites/citiesalliance.org/files/ (2013) Integrating the various tools identified in that report publications/integrating_the_ Environment in Urban have been applied by cities, specifically environment.pdf Planning and Management. how effective they have been in Key Principles and incorporating environmental issues Approaches for Cities in the into city planning processes. 21st Century. UNEP Introduces the key concepts of Green City development and includes a summary of relevant urban sectors, highlighting crosscutting themes and benefits of actions. Sets out a framework http://www. Asian Development for undertaking assessments of urban greengrowthknowledge.org/sites/ Bank (2015) Green City areas and determining green and default/files/learning-resources/ Development Toolkit sustainable development responses. It materials/GreenCityDevToolKit_ also provides an inventory of current ADB.pdf and existing resources that complement and support the design and preparation of green and sustainable development actions. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 15 THIS PAGE INTENTIONALLY LEFT BLANK Page 16 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS A summary overview of each of the instruments covered by this toolkit is provided in the table overleaf. Instrument Key Environmental Issue Addressed Objectives Level of Application Co-Benefits Examples • To reduce waste at source Manufacturers / retailers / Widely applied; specific examples include South Africa Plastic Bag Levy Plastic waste Flood alleviation • To reduce litter consumers and Botswana Health, aquatic ecology, reduced South African Wastewater Discharge Charge. Similar in Wastewater Discharge Charge Water quality • To discourage discharges to water Industry water treatment costs Colombia and Dar Es Salaam Pollution Charge – Emissions Chinese Levy System – penalties applied to industry for Air quality • To discourage harmful emissions to air Industry Health, productivity to Air emissions; also Mexico and Colombia Widely applied. Woodfuel users, Tax Exemptions on Alternative Health, biodiversity, water Air quality, forest degradation • To discourage harmful emissions to air manufacturers / retailers / Fuels attenuation, climate regulation Uganda, Senegal, Botswana and India all have zero VAT vehicle users on LPG. Thailand, Taiwan Woodfuel users, • To discourage pollution / harmful Thailand introduced a differential tax system which Fuel Levy/Differential Tax Air quality, forest degradation Manufacturers / retailers / Health, climate regulation emissions to air offered unleaded fuel at discount relative to leaded vehicle users fuel. The discount was subsidized by a surcharge on leaded fuel. Korea, South Africa, Kenya, Uganda (Kampala), Sri • To encourage recycling / reduce the Lanka, Venezuela, China, Mexico. E.g. A mandatory amount of waste sent to landfill Manufacturers / retailers / Employment / poverty alleviation deposit refund systems is in place in Mexico; new car Deposit Refund System Solid waste • Can be linked to livelihoods support consumers Resource efficiency battery can only be sold with the return of an old one programs as batteries are considered highly hazardous waste and are difficult to dispose of. Payments For Ecosystem • To restore / maintain the provision of Climate regulation, habitat for Services, Including Fiscal Transfer Water quality, water supply, flood Manufacturers / retailers / ecosystem services to downstream biodiversity, employment / Mechanisms and Other Results- attenuation vehicle users beneficiaries poverty alleviation, cost savings Based Finance Schemes • To provide long-term stable funding for Can be used to generate funds to projects that focus on environmental Manufacturers / retailers / Depend on the particular Numerous examples in Africa, Latin America and SE Environmental Funds address numerous environmental conservation or enhancement activities consumers activities being financed Asia externalities that would not otherwise be funded by the governmental or private sector. • To re-establish / encourage local knowledge and traditional land use Climate regulation, habitat for Community-Based Natural Forest degradation, wetland practices to restore degraded landscapes Municipality / project biodiversity, employment, cost Tanzania, Zimbabwe, Botswana Resource Management degradation and improve the livelihoods of indigenous savings, indigenous knowledge people. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 17 THIS PAGE INTENTIONALLY LEFT BLANK                                                  Page 18 Toolkit of measures for managing environmental externalities in urban areas II. PLASTIC BAG LEVY PLASTIC BAG LEVY Water Land This instrument Quality and Air Quality Solid Waste Flooding Deforestation Degradation addresses Wastewater  —   — — • Litter reduction Targets • Sustainability within product life cycle at producer / manufacturer scale • Environmental risks associated with plastic bags Type of instrument: Market Based Instrument: Product charge / Levy • Charges must be monitored and enforced to ensure compliance • Effectiveness may decline as consumers adjust to the price Key considerations • Banning can potentially lead to the unintended consequence of a rise in a black market trade • Implementation at city-scale may require new by-laws to be passed Key Retailers, consumers, government stakeholders Case study • Kenya • Botswana examples: • South Africa 2.1 Overview The plastic bag levy is an instrument designed to assist A number of life cycle analysis assessments have been in the management of solid waste by targeting the waste conducted which examine the impact of single-use generated by discarded plastic bags. Their low cost of plastic bags. The assessments concluded that the production and multiple uses, such as for transporting extent of the negative impact of single-use plastic bags fresh food from supermarkets and less formal depends on the thickness, frequency of use and re-use market stalls, has led to their widespread popularity. and how they are disposed of at the end of their life1. Additionally, they have numerous re-use functions and The production and manufacture of plastic bags has a are commonly used for collecting household waste. large environmental impact as it generates significant emissions of harmful air pollutants2. Furthermore, Discarded, single-use plastic bags incur environmental disposing of bags in landfill or through littering has and economic costs. They incur an environmental cost a long term damaging environmental impact. Plastic by clogging up water bodies and leaching toxic chemicals bags disposed of in landfill can take several decades to from the plastic bags into the groundwater. They can also have an adverse impact on livestock, wildlife and marine life. Discarded single-use plastic bags incur a high 1 European Commission, DG Environment (2011) Final Report ‘Assessment economic cost by contributing to litter problems and of impacts of options to reduce the use of single-use plastic carrier bags’ increasing litter clean-up costs. The aesthetic impact of bio-intelligence service http://ec.europa.eu/environment/waste/packaging/ pdf/report_options.pdf discarded plastic bags hanging from trees and discarded 2 Scottish Government (2005) Proposed Plastic Bag Levy - Extended by roadsides is unsightly and has potential negative Impact Assessment: Volume 2: Appendices http://www.gov.scot/ health impacts on local populations. Publications/2005/08/1993259/33039 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 19 decompose, or longer, depending on the type of material • Collecting the levy from the manufacturers or used to produce the bag and the weather conditions. importers of bags. Targeting suppliers who are far less in number than shoppers may be the Solid waste management, including plastic bag waste most cost-effective option where implementation management, is a complex challenge that requires and administration capacity is weak. This is the integrated environmental policies to address the approach that has been adopted in South Africa, problem. Plastic bag levies can play a role as part of although consumers ultimately bear the costs as the a suite of policies. The objective of implementing a manufacturers pass the costs on to retailers who in plastic bag levy is to reduce demand for plastic bags turn pass the costs on to consumers. and ultimately bring about a reduction in the volume Levies are typically applied based on the thickness of the of plastic waste discarded in the environment. It is plastic bags and the production of thicker bags which essentially a form of product charge, which has the are more durable for re-use are encouraged. In practice, potential to bring about an added co-benefit if revenues thin single-use plastic bags, typically 17 microns thick, are recycled. are often banned and the levy applied to plastic bags of 30 microns thick. For example, the South African Plastic bag levies have been implemented globally with plastic bag levy was brought into force regulating the varying degrees of success. The plastic bag levy has been minimum thickness of plastic bags. Plastic bags were successfully implemented in several African nations. previously 17 microns thick. This was raised to an initial In the cases reviewed, implementation has been at a minimum of 24 microns thick on the basis that five years national, rather than city scale. This approach can help after the introduction of the levy, this would be raised to avoid displacement or leakage effects, that is, where to a minimum of 30 microns thick. Botswana adopted manufacturers locate in areas (or retailers’ source bags a similar approach by specifying that plastic bags, from areas) where the levy does not apply to avoid the manufactured in Botswana, or imported, must be a levy. Typically, plastic bag levies are introduced to reduce minimum of 24 microns thick. The focus on the thickness the use of non-reusable (or single-use) plastic bags is an attempt to ensure that plastic bags are sufficiently and to promote re-use and recycling behavior, where durable for re-use5. possible3. In theory, this tackles two environmental concerns; a reduction in the amount of litter generated Implementing a plastic bag levy requires political, by discarded plastic bags and unsustainable consumer societal and commercial agreement and support. behavior. It can also lead to improved environmental An appropriate levy fee must be determined and awareness about the benefits of reducing waste. monitoring system established to ensure compliance. Local authorities are central to the enforcement of the With the necessary enabling environment, including education levy, monitoring implementation, ensuring that the and awareness-raising about the purpose of the levy and levy is structured correctly at the retail level and taking transparency in the way in which funds that are raised are action where retailers have failed to comply. In practice, subsequently used, a plastic bag levy could be widely and the levy is usually implemented as part of a Waste successfully applied in other African cities/nations. Management Act. Levies can be introduced in conjunction with the 2.2 How the Instrument Works establishment of environment funds which are managed The plastic bag levy is underpinned by the polluter by environment departments. Funds raised by the pays principle which states that whoever is responsible levy can then be used to achieve a range of outcomes for damage to the environment should bear the costs including waste recovery activities, research and associated with it4. There are generally two approaches development into waste management, implementation to implementing a plastic bag levy: of waste management plans, enforcement of existing waste management legislation, partnership projects to • Collecting the levy directly from shoppers at improve the quality of local environments and support retail outlets. This has been shown to yield larger environmental education and awareness campaigns. reductions in the consumption of plastic bags; or The South African Department of Environmental Affairs and Tourism (DEAT) 3 proposed new plastic bag regulations in 2000 as part of the Environmental Conservation Act with the stated aim to “restrict the production of non- reusable plastic shopping bags and to promote re-use and recycling.” FRIDGE.(undated) Socio-economic Impact Assessment of the Proposed Plastic Bag Regulations. Report for the National Economic Development and Labour Council. Bentley West Management Consultants, Johannesburg, South Africa. OECD ‘Glossary of Statistical Terms’ available [online] https://stats.oecd.org/ 4 Dikgang, J., Leiman, A., & Visser, M. (2012). Analysis of the plastic-bag levy 5 glossary/detail.asp?ID=2074 in South Africa Page 20 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 2.3 How It Works in Practice This is also a risk that a plastic bag levy may lead to a shift from thin single-use plastic bag use towards thicker Plastic bag levies have been introduced in a number of bags designed for re-use. However there is evidence countries at various stages of development, including that such re-useable carrier bags—which often cost little several countries in Europe, Hong Kong, South Africa, more than the levy—are not always re-used8. Botswana and Kenya. The following summarizes the considerations that have arisen through the implementation of plastic bag levies 2.4 Case Studies around the world. The following case study examples illustrate applications of the instrument in different nations. 2.3.1 Financial If the levy is adequately enforced, revenues will be Box 5: Plastic Bag Levy in Kenya collected, which can be used to achieve other policy objectives. In Kenya, over 24 million plastic bags are used every month, half of which end up in the solid waste mainstream. Plastic bags now constitute 2.3.2 Co-benefits the biggest challenge to solid waste management in the country. Chain supermarkets within Kenya Implementing a plastic bag levy can result in co-benefits. and informal street kiosks rely heavily on single- For example, a levy can contribute to poverty alleviation use plastic bags. It is estimated that approximately by stimulating job creation, if it is implemented in 173,000 tons of plastic waste are released every conjunction with financing for the establishment of year into the waste stream, of which in the region recycling centers which can then offer employment of 1% is currently recycled and 30% is collected by opportunities. It can also be linked into livelihood Nairobi City Council and private waste handlers support programs as in the example of Buyisa-e-Bag, and sent to landfill. A Plastics Levy Management a non-profit company established in South Africa in Committee (PLMC) was established to design and tandem with the implementation of the plastic bag implement a plastic bag levy on plastic bags less levy. Buyisa-e-Bag aimed to promote the reduction of than 30 microns thick. waste, conduct awareness raising initiatives amongst the plastics industries and create jobs6. In 2007, Kenya banned the manufacture and import of thin plastic bags, with limited success as the ban By establishing financial charges and promoting was not enforced. In 2011, the use of thin bags was accountability for environmental harm, the levy can banned and a tax was imposed on thicker bags. play a role in broader solid waste management. The levy The levy has had limited results as neither the tax can also raise awareness of the connection between nor the ban has been well enforced. consumer behavior and environmental degradation which may extend beyond the management of plastic bags. Source:  UNEP (2005) Selection, Design and Implementation of Economic Instruments in the Solid Waste Management Sector in Kenya: The Case of Job creation co-benefits typically needs institutional Plastic Bags support from an appropriate authority. For example, the Lagos Waste Management Authority (LAWMA) in Nigeria, initiated support for Public / Private Partnership and employment opportunities in resource recovery through the ‘Waste to Wealth’ program7. This program included: nylon plastic recycling, Kraft paper collection and a buy-back program from scavengers. 2.3.3 Challenges The South African experience suggests that over time consumers adjust to the levy, resulting in limited behavioral modification. This suggests that levies, in isolation, may offer a limited solution in the long run. Ibid 6 Lagos Waste Management Authority http://www.lawma.gov.ng/lawma_faq. 7 More information available [online] http://www.carrierbagchargewales.gov. 8 html uk/retailers/?lang=en TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 21 Box 6: Plastic Bag Levy in Botswana Box 7: The Plastic Bag Levy in South Africa In an attempt to manage the plastic litter waste A plastic bag levy was introduced in South Africa resulting from plastic bags, Botswana implemented at 3 cents per bag in 2004, payable by plastic bag a plastic bag levy that took effect in 2007. The manufacturers and importers. This increased to 4 Botswana plastic bag legislation sets out terms cents per bag in 2009 and from 2013 rose to 6 cents regulating the minimum thickness of plastic bags. per bag. The levy was targeted at manufacturers, It bans the manufacture and import of plastic with the expectation that they would pass it on to bags thinner than 24 microns. Any violation of this the consumers. by any company or individual is punishable by a jail sentence of three years and a fine of BWP2 A total of ZAR1.1bn has been collected from the 5,000. The cost of plastic shopping bags has to be introduction of the levy between 2004 to October transparent and disclosed publicly. 2014. The constitution required all monies collected to be deposited into the National Revenue Fund, Retailers are free to set their own levy price, but with the intention that the funds collected would be the overall price of plastic bags across all retailers, used to establish recycling facilities. In practice this increased by 31% within 18 months of the levy’s has not happened as the Treasury does not allow introduction. taxes to be “ring-fenced”. Therefore the Department of Environmental Affairs (DEA) applies for the funds Overall, the introduction of the levy has led to a from the Treasury so that it can invest in recycling. decline in the consumption of plastic bags with the To date, the DEA has established 15 plastic buy-back following results: centers and supports 25 existing facilities. • Plastic bag use decreased by 24% in the weeks An evaluation of the levy four years after its following the introduction of charges for plastic introduction showed that while there has been an bags, with low-income retailers experiencing overall decline in the number of plastic bags used, the steepest decline of 42%, followed by high- the effectiveness of the levy has declined over income retailer (39%) time. This is attributed to consumers becoming • Within 18 months, overall plastic bag use accustomed to the levy and it therefore no longer dropped by 50% compared to pre-levy acts as a disincentive. consumption Source:  Dikgang, J.,Leiman, A., & Visser, M. (2012). Analysis of the plastic-bag The results from the Botswana experience indicate levy in South Africa that leaving retailers to set the price levy has mixed results depending on the ability of consumers to pay. As the levy is higher in high-income retail outlets, larger reductions in plastic bag usage have been achieved in these outlets. A key difference between the Botswana example and other schemes is that the levy amount was not specified by the government, retailers could set their own charges and retailers were not obliged to charge for plastic bags. Source:  Dikgang, J. and Visser, M. (2010) Behavioral response to Plastic Bag Legislation in Botswana Page 22 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 2.5 Links to Further Information Further guidance can be found at the following links: Resource Link Description of Resource Convery, F., McDonnell, S. https://wiki.umn.edu/ An overview of the successful & Ferreira, S. (2007) The pub/ESPM3241W/ implementation of the plastic most popular tax in Europe? S12TopicSummaryTeamFour/ bag levy in Ireland. Includes the Lessons from the Irish plastic Lessons_from_Irish_Plastic_bag_ rationale for implementation bags levy. levvy.pdf and examines how the tax was structured, introduced and received by the Irish public. Dikgang, J. and Visser, M. http://www.rff.org/files/sharepoint/ Investigates the use of charges (2010) Behavioral response WorkImages/Download/EfD- and standards in dealing with to Plastic Bag Legislation in DP-10-13.pdf plastic litter from shopping Botswana bags in Botswana. Assesses the environmental effectiveness and efficiency of the plastic bag legislation by analyzing consumers’ sensitivity to the improvement of the plastic bag and related price charges. Dikgang, J., Leiman, A., & https://www.researchgate.net/ Examines the implementation of Visser, M. (2012). Analysis publication/257326387_Analysis_of_ a plastic bag levy and explores of the plastic-bag levy in the_Plastic_Bag_Levy_in_South_ the short run success of the levy South Africa. Resources, Africa in reducing demand for plastic Conservation and Recycling, bags. 66, 59-65. UNEP (2005) Selection, http://www.unpei.org/sites/default/ Examines the role of plastic Design and Implementation files/PDF/policyandprogrammes/ bag levy in the solid waste of Economic Instruments in Selection-Design-Economic- management strategy for Kenya. the Solid Waste Management Instruments.pdf Sector in Kenya: The Case of Plastic Bags. UNEP (2009) The Use of http://www.unep.org/pdf/Training_ Overview of the economic Economic Instruments for Resource-Manual.pdf?bcsi_scan_ instruments available for Environmental and Natural e956bcbe8adbc89f=0&bcsi_scan_ managing environmental Resource Management. filename=Training_Resource-Manual. resources. Training Resource Manual. pdf World Bank (2005) http://siteresources.worldbank. Aims to provide a starting point Environmental Fiscal Reform. org/INTRANETENVIRONMENT/ for informing decisions about What Should Be Done and Publications/20712869/ what reforms are most relevant How To Achieve It EnvFiscalReform.pdf to a given sector and country, and how the Environmental Fiscal Reform process can be effectively designed and implemented. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 23 THIS PAGE INTENTIONALLY LEFT BLANK Page 24 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS III. POLLUTION CHARGES POLLUTION CHARGES Water Land This instrument Quality and Air Quality Solid Waste Flooding Deforestation Degradation addresses Wastewater    — — — Targets Harmful emissions to air or water and reductions in harmful pollutants Type of instrument: Market based instrument for pollution control • More complex to co-ordinate when there are multiple sources of pollution Key considerations • Monitoring and enforcement are costly • Requires monitoring data on pollutants Key stakeholders Industry, small businesses, local government Case study • Emission fees, China examples: • Wastewater Discharge Scheme, South Africa 3.1 Overview Market-based instruments (MBIs), such as charges, taxes and tradable emission permits can be applied Taxes are typically used as revenue raising for environmental protection purposes. Pollution instruments. charges are a type of MBI that seek to address negative externalities that arise as a result of pollution caused by Charges or fees are designed to offset costs incurred firms. The aim of the pollution charge is to incentivize by the government in cleaning up pollution firms to behave in a more environmentally responsible manner by penalizing them or ‘charging’ per unit of pollution. are particularly suitable in regions and cities where resources to implement, control and monitor a given A pollution charge can address externalities such as poor intervention may be limited. air quality, water quality, solid waste and noise pollution. It can take a number of different forms, for example disposal fees, effluent permit fees and emission fees. 3.2 How the Instrument Works The objective of a pollution charge is to recover the The overarching benefit of a pollution charge is that it is costs associated with the impacts of pollution and the more flexible than a command and control instrument administration of the scheme. because it can be targeted at specific pollutants or specific geographical locations. Pollution charges TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 25 There are two main ways of implementing pollution charges: Pollution charges offer policy-makers a tool that can simultaneously: 1. Emission fees, with the charge based on the volume of pollution generated: • Be applied as emissions fees or taxes • Reduce pollution at industry and household A regulator establishes the level of a given pollutant scale that a firm can discharge (i.e. the abatement level). • Incentivize technological development A charge is imposed when the standard is exceeded. A firm that is concerned with minimizing the charges will seek to reduce the volume of pollutant of administrating the scheme and therefore only discharged where doing so costs less than the partially pay for clean-up costs1. pollution charge. It is also necessary to consider the measurement, Identifying the appropriate value for the pollution monitoring capabilities of the entity responsible for charge requires technical knowledge. Ideally, the administering the scheme. To avoid the need for price should be set such that it is equal to the cost costly monitoring technologies, reasonable proxy that the pollution causes to society. For example, measures for the volume of pollution discharged can the costs of cleaning up a polluted water source and be estimated. These include: basing estimates of the making it potable, or the cost of addressing health volumes of discharge produced for an industry of a problems that have arisen as a result of the pollution. particular size, rather site-specific monitoring; using Due to the high number of variables, it is difficult to statistical estimation techniques in lieu of expensive establish in advance the value of the pollution charge end-of-pipe pollution technologies such as the that will be most effective in discouraging polluting estimation of pollution generation via models; the behavior. indirect determination of pollution generation via waste treatment or waste collection. 2. Taxes applied as a proportion of the volume of pollution generated: Box 8: The Swedish Charge on NOx Emissions A pollution tax can be easier to implement than an emission fee as it does not require an abatement A pollution tax can also be set at a high level that level to be determined. Taxes have proven successful incentivizes good behavior and offers rebates in when applied to fuel use to incentivize the use of exchange for a desired output. In 1992 Sweden cleaner, less polluting fuel such as leaded petrol. implemented a charge to incentivize firms to generate cleaner energy by offering relatively Fuel taxes can be an attractive option for government clean facilities rebates in excess of payments while as fuel consumption is typically easier to monitor relatively dirty facilities pay more in charges than than emissions. A weakness of fuel taxes is that they receive in rebates. The charge is applied to NOx they can have a regressive impact resulting in a emissions and industry pay the charge on emissions disproportional negative impact on the poor. They of NOx and receive rebates in proportion to their also require political support and need to be set at a energy output. The result is a mechanism that sufficiently high level to create a disincentive for use. raises no revenue for the government yet produces significant incentives for firms to innovate to make At the scheme design stage, it is necessary to identify existing operations less pollution intensive. the polluting firms, their location, the source of pollution and the geographical range of the impact Source:  Höglund-Isaksson, L., 2009, ‘Innovation effects of the Swedish NOx charge’, 2009, available online: http://www.oecd.org/env/consumption- of the pollution. At scheme design stage it is also innovation/43211635.pdf necessary to determine the appropriate pollution charge level. Charges / tax rates can be based on a calculation of the average marginal cost of abatement. However, it is challenging to establish the marginal cost of abatement and there is a risk that the charge may be set too low with the result that firms decide to pay the charge rather than change U.S. Environmental Protection Agency ‘Pollution Charges, Fees, and Taxes’ 1 Available online: http://yosemite.epa.gov/ee/epa/eed.nsf/2602a2edfc22e38 their behavior. Because of these challenges, charges a8525766200639df0/e0b6a259b4e16cba8525777d000cbd0b!OpenDocum / tax rates are typically established based on the cost ent Page 26 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Box 9: Institutional Requirements for Establishing and Operating Pollution Charges/Conditions for Success 1. Regulator or regulating authority needs to set up clear rules and a revenue collection system 2. Monitoring data on the pollutant must be available 3. Capacity to enforce compliance is essential to the success 4. Institutional capacity and integrity must be in place The effectiveness of pollution charges and fuel taxes location. In addition, monitoring and enforcement of is highly dependent on local institutional capacity to these instruments can be costly. design, implement and monitor such instruments. Box 9 sets out the specific requirements underpinning a successful scheme. 3.3 How It Works in Practice Gaining political support for a scheme is essential and may be challenging in situations where the 3.3.1 Financial largest polluters are also important employers. The Firms are liable to pay the charge if they cannot introduction of pollution charges is often easier where economically reduce the volume of pollution they complementary regulatory regimes already exist, for discharge. The broader community benefits from example, where discharges are already monitored as improved environmental outcomes; however, consumers part of regulations, and the administrative requirements may experience higher prices, if firms choose to pass on of the new charge can build upon those of the existing the pollution charge. regulatory regime. As illustrated by the Chinese Levy example, a levy system An effective revenue collection and distribution system can be applied to an extensive number of sources of air, is required to ensure that the revenues received are water, solid waste, and noise pollution. The revenues used for the intended environmental rehabilitation / collected as levies can be used to finance environmental clean up. Agreement must be established concerning institutional development, administration, and how the revenue is collected and spent. In general, environmental projects, and to provide subsidies or revenue from the charges can be used in two main ways: loans to pollution control projects implemented at the firm level.  he revenue can be specifically allocated for 1. T paying for the cost of pollution clean-up or other Additionally, charges that are set at the right level to environmental actions; or significantly change behavior can result in significant revenue transfers to the collecting body / government. 2. The revenue can be centrally collected and used to pay for government priorities, which may not focus on environmental actions 3.3.2 Co-benefits This instrument requires buy-in from the regulatory and Multiple objectives can be achieved using this monitoring / implementing body. It may be necessary instrument and existing schemes have proven results to implement new legislation such as an environmental in achieving environmental benefits. In addition, the statute when establishing the scheme. It may also be taxes are revenue raising which can then be used for necessary to provide the monitoring / implementing schemes that benefit the environment. A key co-benefit body with new authorities to support the discharge of of the instrument is that it can stimulate technological their duties. Typically charges and fees are established innovation in pollution control by incentivizing firms to by environment protection bodies and reviewed invest in new technologies in order to avoid incurring and monitored by environment committees and sub penalties. In addition, the revenues raised through the committees. implementation of the instrument can be used to fund other policy objectives. With the necessary enabling environment, it is possible to successfully apply pollution charges. A key strength of the instrument is that charges can be proportional to the 3.3.3 Challenges pollution level and tailored towards specific pollutants. Some of the potential risks and challenges that may be A weakness of the instrument is that it is not well-suited encountered in applying this instrument are presented to addressing multiple sources of pollution in a given in Box 10. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 27 Box 10: Risks in Establishing and Operating Pollution Charges 1. Lack of, or insufficient, data available on the damage caused by pollution which can vary from one location to another depending on factors such as the location of the population at risk, prevailing wind, sunshine, temperature. 2. Challenging to set the pollution charge at the appropriate level to encourage desired behavioral change 3. Political opposition to large revenue transfers from pollution sources (the firms) to the authority imposing the tax (government) 4. Pollution can be difficult to measure and it can be costly to implement monitoring schemes, for example in the case of a solid waste collection charge 3.4 Case Studies The following case study examples illustrate applications of the instrument in different nations. Box 11: Emission Fees in China China has the most comprehensive emission charge system in the developing world. Results from an analysis of the system indicate that the instrument has been effective in decreasing pollution. The Chinese Levy System was implemented when China’s State Council began nationwide implementation of pollution charges in 1982. The system is applied to an extensive number of sources of air, water, solid waste, and noise pollution. Implementation has been widespread and the number of firms participating, and the revenues collected, have increased year on year. The revenues collected as levies are used to finance environmental institutional development, administration, environmental projects, and to provide subsidies or loans to firm-level pollution control projects. Enforcement is implemented via a schedule of penalties. The levy has been particularly successful in managing air and water pollution. Key results of the scheme include: • Pollution discharge intensities have been highly responsive to this instrument. • For air pollution, the results suggest that emissions decline by about 0.65% for each 1% increase in the effective levy rate. Water pollution declines by 1.08% for each 1% increase in the levy. Lessons Learnt In an attempt to curb pollution from factories, the government set up an emissions fee which was deductible from taxes as a business expense. In addition, a rebate system was implemented whereby 80% of a firm’s pollution charges were returned for investment in pollution controls. This created a disincentive for firms to invest in pollution controls lest they lose the privilege of paying emissions fees and gaining the rebate. The government replaced the rebate with loans in an attempt to solve the problem; however, enforcement has been weak. This example underscores the importance of matching policy designs with institutional capabilities. Any rebates offered must be tied to upgrading pollution controls. Source:  Allen Blackman and Winston Harrington, The Use of Economic Incentives in Developing Countries: Lessons from International Experience with Industrial Air Pollution, Resources for the Future, Discussion Paper 99-39, May 1999, pp. 18-21. Page 28 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 3.4.1 Wastewater Discharge Charge – An Application of a wastewater industry) pay for the external costs they Pollution Charge impose on society. In doing so, this instrument can help The overall objective of wastewater discharge charges improve environmental quality by providing economic is to solve the problem of excessive water pollution. incentives to reduce the volume of wastewater Discharge charges make the polluter (in this case the produced. Box 12: South African Wastewater Discharge Scheme In South Africa, the Department of Water Affairs (DWA) has being developing and piloting the WDCS to promote waste reduction and water conservation. The WDCS is based on the polluter-pays principle and aims to: • Promote the sustainable development and efficient use of water resources • Promote the internalization of environmental costs by polluters • Create financial incentives for dischargers to reduce waste and use water resources in a more optimal way • Recover the costs associated with different water treatment and water quality management programs Many municipalities also impose charges to cover the costs of their own water treatment programs (i.e. as part of tier three pricing). The municipalities of eThekwini and the City of Tshwane, for example, have introduced further sanitation charges for wastewater discharges that exceed the pollution load of normal wastewater. The WDCS scheme was developed drawing on key insights from international experience and understanding of the challenges faced locally in a South African context. The scheme is run as an adaptive management system that seeks to rehabilitate and manage the local water quality problems experienced by finding mechanisms to supporting existing water management initiatives, as opposed to just the introduction of polluter charges. The approach taken makes allowances for administrative, financial and institutional frameworks. There are two charges associated with the WDCS: 1. Waste Discharge Levy (WD Levy): Charges that provide a disincentive or deterrent to the discharge of waste, based on the use of the resource as a means of disposing waste. 2. Waste Mitigation Charge (WMC): Charges to cover the costs of measures to mitigate waste discharge related impacts. The DWA is responsible for the national roll-out of the WDCS. National Treasury, together with DWA, retains oversight to ensure good governance and appropriate fiduciary management. Catchment Management Agencies (CMAs) are responsible for implementation, including planning, identifying dischargers, invoicing, debt collection and financial management, disbursement, and monitoring and evaluation. The DWA implements the charge in cases where there is no CMA. Implementation of the WDCS requires : • That all municipalities (and any other direct discharger) will have to pay to discharge treated effluent to any watercourse. • Process control and other operations at all wastewater treatment works are effective and reliable. Monitoring of the receiving water environment to determine any detrimental impact from the discharge. • Updates, modifications or revisions of the sewage disposal bylaws that were in force prior to the implementation of the WDCS. Although the previous municipal bylaws included the polluter-pays principle via the right to recover costs related to objectionable discharges by a polluter, these clauses in the bylaws had to be drawn out more strongly. Furthermore, the bylaws must give the Municipality sufficient powers to investigate and identify the actual source of any objectionable discharges into the sewers, thus ensuring it is the actual polluter who pays for any activity that leads to additional (Tier 2, 3 and 4 ) deterrent charges. Sources: Department of Water Affairs and Forestry (2007) Strategy for the Waste Discharge Charge System. Version 1.9 [online] available at https://www.dwa.gov.za/ Dir_WQM/docs/WDCSStrategyDocumentV1.9.pdf Bailey, T. (2004) Waste Discharge Charge System: The Implications on Wastewater Quality Management and Monitoring. eThekwini Water and Sanitation, Analytical Services [online] available at http://www.ewisa.co.za/literature/files/025.pdf TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 29 Properly implemented and managed discharge charges basis of ‘pollutant units’ in the wastewater discharge, can encourage the desired behavioral changes from such as concentration of oxygen-consuming waste dischargers, namely abatement of pollution at substances and heavy metals. source, recycling of waste streams and wastewater, re- use of water, water conservation and return of water to There are few examples of such schemes in African its source. The charge may also generate revenue which cities, other than the Wastewater Discharge Charge can be used to support environmental monitoring and Scheme (WDCS) in South Africa, which is still in its enforcement activities, or finance other government pilot phase. However, the experience from elsewhere policies. suggests that such schemes have the potential to be implemented more widely in African cities, particularly Wastewater discharge charges take two principal forms: where large industries are present and where it is evident that these industries are contributing to poor 1. A charge on the volume of wastewater discharged, urban water quality as a result of discharges. at a rate determined on the basis of the discharge volume, or 3.5 Links to Further Information 2. A charge on the contents of pollutants in the wastewater discharge, at a rate determined on the Further guidance can be found at the following links: Resource Link Description of Resource African Development http://www.afdb.org/fileadmin/ Provides guidelines on user Bank (2010) Guidelines uploads/afdb/Documents/Project-and- fees and cost recovery for for User Fees and Cost Operations/2011_03%20Guidelines%20for%20 rural water and sanitation Recovery for Urban, User%20Fees%20Cost%20Recovery_Rural.pdf systems, urban water and Networked Water and sanitation systems, and Sanitation Delivery irrigation systems. These guidelines should assist stakeholders, service providers and investors working in project formulation and appraisal, sector and policy analysis, sanitation, irrigation, and related agricultural projects. Anderson, R. (2002) http://www.rff.org/files/sharepoint/ Reviews incentive-based Incentive-based policies WorkImages/Download/RFF-IB-02-07. instruments for managing for environmental pdf?bcsi_scan_e956bcbe8adbc89f=0&bcsi_ pollution in developing management in scan_filename=RFF-IB-02-07.pdf countries. developing countries. Good overview and discussion of implementing incentive based charges Fox and Edminston (2000) http://core.ac.uk/download/pdf/7134417.pdf Reviews user charge User Charge Financing of financing of public services, Urban Public Services in including an extensive Africa discussion of past examples of user charge financing in Africa, consideration of revenue and equity implications, and a case study of water supply services in Egypt. Page 30 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Resource Link Description of Resource Asian Development Bank http://www.adb.org/publications/market- Summarizes water pollution (2011) Market Based based-instruments-water-pollution-control- and water pollution Instruments for water peoples-republic-china management strategies in pollution control in the People’s Republic of Peoples’ Republic of China China. UNEP (2002) http://www.unep.ch/etu/etp/events/ Provides policy-makers Opportunities Prospects, Economic_Instruments/Opportunities.pdf with context on the use and Challenges for of economic instruments the Use of Economic and command-and- Instruments in control approaches to Environmental Policy environmental, and Making, United Nations guidance on when Environment Program economic instruments may International Working be appropriate. Group on Economic Instruments UNEP (2009) The Use of http://www.unep.org/pdf/Training_ Provides step-by-step Economic Instruments Resource-Manual.pdf?bcsi_scan_ guidance to assist for Environmental e956bcbe8adbc89f=0&bcsi_scan_ instructors training and Natural Resource filename=Training_Resource-Manual.pdf policymakers and policy Management. Training practitioners in the use of Resource Manual. economic instruments for environmental and natural resource management. World Bank (2005) http://siteresources.worldbank. Reviews environmental Environmental Fiscal org/INTRANETENVIRONMENT/ fiscal reform in developing Reform. What Should Publications/20712869/EnvFiscalReform.pdf countries. Be Done and How To Achieve It World Bank (undated) http://siteresources.worldbank.org/ Provides guidance on Guidance Note on INTRANETENVIRONMENT/Resources/ the use of market-based Tools for Pollution GuidanceNoteonMarketBasedInstruments. instruments for pollution Management: Market pdf?bcsi_scan_AB11CAA0E2721250=0&bcsi_ control. Based Instruments/ scan_filename=GuidanceNoteonMarketBasedI economic incentives nstruments.pdf [This guidance note is part of World Bank Group publication: Getting to Green—A Sourcebook of Pollution Management Policy Tools for Growth and Competitiveness] WaterAid (2011) http://www.wateraid.org/what-we-do/our- Outlines possible reform Reaching the urban poor: approach/research-and-publications/view- of water utilities in the supporting utilities to publication?id=390ce0b4-2c43-4895-b8b7- developing world, in order engage communities in b0c6e161cf30 to expand service coverage service extension to the urban poor. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 31 THIS PAGE INTENTIONALLY LEFT BLANK Page 32 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS IV. TAX EXEMPTIONS ON ALTERNATIVE FUELS TAX EXEMPTIONS ON ALTERNATIVE FUELS Water Land This instrument Quality and Air Quality Solid Waste Flooding Deforestation Degradation addresses Wastewater —  — —   Seeks to incentivize transition away from traditional biomass fuel for cooking and lighting Targets towards cleaner, more sustainable fuel sources. This may help reduce the rate of deforestation as well as addressing air quality and associated public health risks. Type of instrument: Fiscal instrument: tax exemptions • Long term financing through tax exemptions can prove costly Key considerations • Instrument may have greatest uptake amongst better-off households and limited uptake amongst poor households Key stakeholders Government, importers, distributors, retailers and consumers Case study • Uganda examples: • Senegal 4.1 Overview Access to modern fuels e.g. Liquefied Petroleum Gas energy use. By setting different tax rates for different (LPG), natural gas, biogas or electricity, is an indicator fuels to reflect their relative environmental benefits of development. Approximately 730 million people in (or costs), consumers can be encouraged to shift to sub-Saharan Africa continue to rely on traditional fuels alternative fuels. e.g. solid biomass or charcoal, for cooking, typically used on inefficient stoves in poorly ventilated indoor There are several ways of subsidizing transitions to space1. Kenya, Tanzania, Nigeria, Ethiopia and DR Congo cleaner fuel alternatives, including: account for almost 50% of this figure. A large percentage of households using biomass fuel are rural, however, • Grant-based subsidies, which offer soft loans or urban usage of charcoal is increasing2. Studies suggest direct financing; and that even with access to modern fuels, households may continue to use traditional cooking methods due to • Tax-based subsidies, which can be structured financial constraints and / or cultural reasons3. as tax credits, tax breaks, tax exemptions or tax differentiation. Applying tax exemptions on alternative fuels is a way to encourage consumers to shift away from fossil fuels Multiple objectives can be achieved using a tax exemption towards less polluting fuel sources for their household instrument and existing schemes have proven results in achieving environmental and health benefits. Results from Senegal illustrate the success of LPG in displacing firewood Based on 2014 report: World Energy Outlook (2014) A Focus on Energy 1 used by urban populations and a substantial reduction in Prospects in Sub-Saharan Africa, World Energy Outlook Special Report available [online] http://www.iea.org/publications/freepublications/ charcoal consumption. The instrument can lead to several publication/WEO2014_AfricaEnergyOutlook.pdf co-benefits including reduced deforestation rates and, as Ibid 2 a consequence, potentially improving water quality and Ibid 3 reducing flooding. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 33 With the necessary enabling environment, including the offered in conjunction with a scheme to subsidize requisite retail buy-in, zero VAT schemes could lead to a cooking stoves for low income households. successful outcome in other African nations. The success of this instrument is dependent on several factors including: 4.2 How the Instrument Works • Cultural and social context; The widespread use of firewood and charcoal for • Accessibility and proximity to the fuel source; and cooking fuel in African cities has contributed to air quality degradation, unsustainable forest use and • Household income. human health problems through smoke inhalation4. The following summarizes the considerations that have LPG is an alternative fuel source that has relatively arisen through the implementation of tax exemptions on high combustion efficiency and emits relatively few alternative fuels around the world. pollutants; 1 kg of LPG produces the same amount of energy as 2.5 kg of charcoal when used with an improved stove. Depending on the type of woodfuel, 4.3.1 Financial charcoal production, and stove used, approximately Under this instrument, the government forgoes tax 7 to 30 kg of wood would be required to provide the revenue from a given fuel type and the saving is same amount of useful cooking energy found in 1 kg of passed on to consumers to support the switch to LPG5. LPG is available in African cities, but it tends to be less environmentally damaging fuels. However, to be prohibitively expensive for low income households, so successful, this instrument needs to be accompanied by uptake by these households is relatively low. careful monitoring and adequate institutional capacity Value added tax (VAT) is a commonly applied to ensure that fuel suppliers pass on the tax saving to consumption tax applied to fuel. By removing the VAT consumers in the form of lower fuel prices. on a less environmentally damaging fuel type such as Lessons learnt from the Ugandan case study suggests that LPG, national governments forfeit tax revenue and conducting a cost benefit analysis prior to implementing the tax saving is, in theory, passed on to the consumer the instrument is crucial to understand if the instrument which makes the fuel more affordable and encourages offers sufficient environmental and health gains to offset consumers to use less environmentally damaging fuels. the reduction in tax revenue for the government. This instrument requires careful monitoring to ensure that the tax saving is passed on to consumers and not In the case of a scheme involving LPG, it is also critical absorbed by the company supplying the fuel. to understand the extent of the LPG market and the geographical spread of LPG retailers. This is because Tax exemptions of alternative fuels can also be used decisions relating to energy consumption and fuel type to encourage the adoption of solar equipment and are strongly influenced by accessibility, affordability and accessories such as deep cycle batteries. the convenience of the fuel6. Zero VAT schemes have been successfully implemented in several African nations. However, many barriers exist for poorer communities in 4.3 How It Works in Practice accessing LPGs, including low income, poor infrastructure A key challenge in the transition to cleaner fuels is the for distribution of the LPG and inadequate financing challenge of over-coming strong cultural attachment to mechanisms to encourage private investors and cooking with woodfuel amongst many communities in implementation of credit facilities. sub-Saharan Africa. Users of more traditional forms of fuel may be reluctant 4.3.2 Co-benefits to switch to alternative fuels because low income By encouraging a reduction in the use of wood fuel, this households often rely on woodfuel, which is either free instrument can reduce the time spent collecting wood or very low cost and is readily available. In addition, fuel and contribute, in part, to a deforestation strategy. switching to LPG would require that these households acquire different stoves. Therefore, the implementation of the instrument is likely to more successful when 4.3.3 Challenges Risks that threaten a transition to cleaner cooking Akpalu, W. et al. (2011) ‘Demand for cooking fuels in a developing country: 4 fuel include the price competitiveness of the fuel in To what extent do taste and preferences matter?’ Available [online] http:// www.sciencedirect.com/science/article/pii/S0301421511005891 BMZ (2013), Multiple-Household Fuel Use – a balanced choice between 5 BMZ (2013), Multiple-Household Fuel Use – a balanced choice between 6 firewood, charcoal and LPG firewood, charcoal and LPG Page 34 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS comparison to traditional sources, technological issues, lack of infrastructure, lack of information and socio- cultural issues. In practice, national governments may need to adopt a number of policies to achieve the desired change in fuel use. These may include: • Creation of clean cooking fuel initiatives at national level; • Introduction of financial instruments to address economic barriers to clean cooking fuels; and • Public education and awareness programs 4.4 Case Studies The zero VAT on LPG approach has been adopted in a number of countries including Uganda, Senegal, Botswana and India. The following case study examples illustrate applications of the instrument in different nations. Box 13: Case Study of Tax Exemptions on Alternative Fuels, Uganda Between 2005 and 2006, 78% of Ugandan households depended on firewood and 18% depended on charcoal for cooking. Charcoal was mainly used in urban areas while firewood was more prominent in rural areas. Overall, 96% of the households depended on wood fuel for cooking. The Ugandan government was motivated to encourage poorer households to switch to LPG to achieve improved human health outcomes and human development. By implementing a zero VAT scheme on LPG, the government forfeited revenue worth USh3.4 billion, equivalent to US$2.1 million, the first year of implementation. Initial analysis of the scheme highlighted challenges in establishing access to LPG by the rural poor, since retail outlets had not expanded beyond urban areas. Secondly, the retail prices for LPG did not decrease after the removal of the VAT. This suggests that the importing companies benefited from the removal of VAT more than consumers. Lessons learnt from the scheme were the importance of identifying, before implementation, whether poor households can afford LPG even with zero VAT applied. In the Uganda case it was found that the tax exemption was not sufficient to stimulate demand from the poor because the cost of even the smallest LPG cylinder was still beyond the reach of the very poor. Source:  Kazoora, C. et al. (2009) Economic Instruments for Promoting Sustainable Natural Resource Use, Environmental Sustainability and Responses to Climate Change TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 35 Box 14: Case Study of Tax Exemptions on Alternative Fuels, Senegal Evidence from a zero VAT scheme implemented in Senegal indicates that widespread use of LPG can reduce deforestation and improve the quality of life for poorer households. Senegal initially implemented an LPG program in 1974, at a time when wood fuel consumption accounted for approximately 90% of energy use. This high level of dependency on wood fuel was negatively impacting the country’s natural forest. It was also a time-intensive burden to women who spent a large portion of their time collecting firewood. The LPG program was implemented with the introduction of 2.75 kg capacity gas bottles, on which all import duty was removed on the bottle and corresponding cooker. Initially the gas was not subsidized, however, in 1976 the Senegalese Government elected to subsidize the 2.75 kg gas cylinders and withdrew tax exemption on imported equipment. In 1983, in response to the needs of large families, a larger cooker model, the Nopale was introduced in Senegal, adapted to fit a 6 kg capacity cylinder. Problems arose with the subsidies, as by 1998, LPG had penetrated households of both poor and rich families and by 1994, subsidies had risen to a high US$10 million. Using subsidies in Uganda has been a considerable expense to the government. However, positive environmental outcomes have been achieved as deliveries of wood fuel in Dakar declined while LPG deliveries rose. According to estimates from the Senegalese Ministry of Energy, the growth in LPG use resulted in annual savings of approximately 70,000 tons of wood fuel and 90,000 tons of charcoal since the program commenced. Source:  Kazoora, C. et al. (2009) Economic Instruments for Promoting Sustainable Natural Resource Use, Environmental Sustainability and Responses to Climate Change 4.5 Links to Further Information Further guidance can be found at the following links: Resource Link Description of Resource BMZ Federal Ministry for https://cleancookstoves.org/binary-data/ Analysis of household fuel use, Economic Cooperation and RESOURCE/file/000/000/287-1.pdf including detail on the properties of Development (2013) Multiple- different fuels and their social and Household Fuel Use – a balanced environmental impact. choice between firewood, charcoal and LPG Kazoora, C. et al. (2009) http://www.unpei.org/sites/default/ Summarizes the performance of Economic Instruments for files/e_library_documents/uganda- six economic instruments used Promoting Sustainable Natural economic-iInstruments-final.pdf by the Government of Uganda for Resource Use, Environmental environmental management. Sustainability and Responses to Climate Change Schlag, N., Zuzarte, F. (2008) http://www.sei-international.org/ Qualitative analysis of market Market Barriers to Clean Cooking mediamanager/documents/Publications/ barriers to clean fuel in sub-Saharan Fuels in Sub-Saharan Africa: Climate/market_barriers_clean_ Africa and, where applicable, A Review of Literature. An SEI cooking_fuels_21april.pdf globally. working paper UNEP (2004) The Use of http://www.unep.ch/etb/publication/ Provides practical guidance to Economic Instruments EconInst/econInstruOppChnaFin.pdf policymakers on deciding what kind in Environmental Policy: of economic instrument is likely Opportunities and Challenges to address specific environmental problems. World Energy Outlook (2014) A http://www.iea.org/publications/ Review of energy resources and Focus on Energy Prospects in freepublications/publication/WEO2014_ energy supply in Africa, including an Sub-Saharan Africa, World Energy AfricaEnergyOutlook.pdf energy outlook for the continent. Page TOOLKIT 36 Special Outlook OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Report V. DEPOSIT-REFUND SCHEMES DEPOSIT-REFUND SCHEMES Water Land Quality and Air Quality Solid Waste Flooding Deforestation Degradation This instrument addresses Wastewater — —  — — — Inappropriate disposal of recyclable solid waste and hazardous waste, e.g. lead acid batteries. It aims to reduce Targets the prevalence of litter and associated health and environmental risks at the consumer level, and sustainability within product life cycle at producer / manufacturer level Type of instrument: Market Based Instrument: Deposit Refund Scheme • Only applicable to certain products; Key considerations • Administrative and compliance costs can be high*; • Not typically intended to raise revenue Key Manufacturers of beverage containers, distributors, retailers, consumers, local government. stakeholders • Laos; South Africa, Mexico Case study examples: • Multiple European examples * In comparison to alternative options 5.1 Overview Market-based instruments (MBIs), such as charges, taxes and tradable emission permits can be successfully The deposit return system offers policy makers a applied for environmental protection purposes. Deposit tool that can simultaneously: refund schemes (DRS) are a type of MBI that seek to address negative externalities that arise as a result of • Target reduction in litter and associated health the inappropriate disposal of consumer products. The and environmental risks DRS is an example of a price-based MBI that combines a • Be applied to alleviate problems of charge and a subsidy which together acts to encourage inappropriate disposal of solid waste and individuals to engage in recycling. hazardous waste / toxic chemicals DRS are typically applied to items that end up as • Offer the potential to reduce costs associated roadside litter, including plastic bottles, cans and glass. with the collection and redirection of There are numerous health problems associated with improperly discarded waste back to the waste uncollected litter, particularly in lower-income areas stream where waste collection services are often inadequate. • Achieve recycling objectives Not only is litter aesthetically unattractive, it also has potential to become and environmental hazard. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 37 For example litter can accumulate in street drainage Under the scheme, consumers of packaging or container systems, blocks water courses, attracting rats and acts materials are given the right to a refund if the waste as breeding grounds for disease carrying vectors. product is returned to the seller, i.e. to an authorized recycling or reuse point. For this right the consumer pays The schemes take the form of a surcharge on a product a formal deposit at the time of the purchase, or pays a at the point of sale of potentially polluting products higher price for the product at the point of purchase. In coupled with a rebate or refund offered when the cases where disposal of a product causes environmental packaging or product is returned for recycling, thereby damage, the deposit refund can take the form of a tax reducing the amount of recyclable material going into on inappropriate disposal. Such systems operate on the landfill or being inappropriately discarded through, for assumption that consumers require a financial incentive example, littering. to recycle and will pollute without this incentive. Consumers who do not return the product pay a charge, This instrument is flexible and can be applied to a wide whereas those who return the product receive a refund range of consumer goods from acid lead batteries, small and are rewarded for behaving in an environmental chemical containers, refrigerators and most frequently, responsible manner. beverage containers1. DRS can be designed in two ways: Their use on bottles and cans can be very effective in reducing the amount of such materials disposed of in 1. Downstream: The downstream approach is the the general waste stream. They can also contribute to traditional approach where the refund is transferred solid waste management, although, because of their to the consumer who has paid the deposit fee and voluntary character and the low value of the returned has returned their used product for disposal or items in exchange for deposits, they are generally not recycling. effective at addressing major environmental problems. 2. Upstream: The upstream approach subsidizes the DRSs may be particularly relevant for developing firms that collects and / or recycles the product. countries due to the following factors: This approach typically has lower transaction costs and can help ensure that the products are actually • High administrative efficiency (through self- recycled and not just collected and discarded. The enforcement) of deposit refund is a significant upstream approach tends to involve a lump sum advantage for countries with administrative payment which can be used to establish recycling constraints and limited enforcement capability; centers or to cover operating costs. This approach may work well in developing country scenarios where • Low opportunity cost of labor in developing countries existing recycling infrastructure is less common. suggests that even small deposits can generate an active collection activity that would have both Overall, the upstream approach may lead to better economic and environmental benefits; and environmental outcomes than the traditional • Success in contributing to solid waste management downstream approach. The distinguishing feature of the DRS is that it has a 5.2 How the Instrument Works disclosure mechanism; the implementing authority or company pays the refund when the potential polluter Also known as an ‘advance deposit fee’, a deposit refund demonstrates compliance by returning the item that acts as a surcharge on a product when purchased, carries the refund, therefore reducing the need for for example, a small additional charge on a bottle of monitoring of illegal disposal. The implementing soft drink or beer accompanied with a rebate when authority’s role is to require companies to offer the DRS that bottle is returned. DRS combine a charge (i.e. the and provide a tax credit or deduction for each refund ‘deposit’) and a subsidy for disposal or recycling (i.e. the paid. Implementing authorities are typically the industry ‘refund’), of packaging or containers such as beverage responsible for the production of the product, but can containers and pesticide containers or products such also be a government agency. as lead batteries. These systems may be implemented to discourage improper or illegal disposal which gives The instrument is targeted at incentivizing behavioral rise to external costs such as litter and also potential change at the producer, seller and the individual environmental and health risks. consumer level. When deposits are used to subsidize recycling operators the instrument is effectively operating as an advanced recycling fee. ‘Market-based tools for environmental management’. Proceedings of the 1 6th annual AARES national symposium 2003 A report for the RIRDC/Land & Water Australia/FWPRDC/MDBC Joint Venture Agroforestry Program, October 2004 Page 38 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS DRSs are compatible with the polluter pays principle and Initially, DRS may operate at a loss due to the costs of have high administrative efficiency because they require establishing collection processes and recycling centers, limited monitoring or collection costs, especially when if these are not already in place. It should be noted they are operated by the companies that produce and that the greater the number of returning points the sell the products that are the subject of the DRS. higher the overall system costs for handling, storage and transport of returned products. In time, the California and Hawaii have undertaken a slightly instrument can shift the burden of cost of disposal from different approach to the design of the DRS. Retailers general taxation to the manufacturers, distributors and collect deposits from final consumers and then transfer consumers of the products. the collected deposits to distributors. Distributors, in turn, pay the deposits to the state government. A DRS approach also avoids the need for costly Under this approach retailers and distributers are monitoring and enforcement and by imposing an up- not responsible for collecting used containers and for front fee on consumption and subsidizing the cost of returning refunds to consumers. Rather, consumers recycling, a deposit-refund may be able to efficiently return used containers to redemption locations and control pollution4. DRS are typically more effective than receive refunds that come directly from the state- a product tax in incentivizing individuals to behave in an managed program. Under this system, all unclaimed environmental responsible manner by offering a refund deposits stay with the state2. Two advantages of this when the product is returned. approach are that unclaimed deposits can be drawn upon by the state to supplement environmental Under the DRS consumers will face higher prices for programs. Secondly, having centrally located redemption the same product; however, this will be returned to locations may lessen the burden on smaller retailers the consumer if the scheme is implemented using the for storage space and maintenance of the system. This downstream approach. approach may also be appropriate in urban areas where capacity to operate schemes may be low. 5.3.2 Co-benefits DRS can potentially be associated with a number of co- 5.3 How It Works in Practice benefits, including: Voluntary DRSs for glass, paper, and plastic and the • Alleviating poverty through job creation associated recycling of ferrous materials are well established in with the establishment of recycling centers; various parts of the world, including Laos and Mexico. DRS are in place in several African countries including • Generating additional revenue (from unredeemed Tanzania, South Africa and Kenya and have proven deposits) that may be used by government to effective at reducing waste generation and diverting achieve other environmental objectives: waste from landfill. In addition, they have the added • Reducing illegal dumping; advantage of being reasonably straightforward to • Encouraging recycling and reducing the amount of implement and maintain. waste sent to landfill; The following summarizes the considerations that have • Raising awareness of the connection between arisen through the implementation of plastic bag levies consumer behavior and environmental degradation; around the world. • Improving health from improved waste management. 5.3.1 Financial 5.3.3 Challenges Product taxes are sometimes perceived as a type of fine and can result in unintended consequence of Establishing the appropriate deposit refund fee is an individuals illegally disposing of items to avoid payment. iterative process that may require multiple attempts For example, when solid waste disposal is directly taxed, to get the deposit refund high enough to stimulate households and firms tend to seek alternative disposal uptake. This is especially the case in situations where options, which include burning and illegal dumping. there is limited information on the possible reactions of The DRS avoids this problem by providing rebates for consumers to the scheme or the value of environmental materials returned for recycling3. damage caused by the product. Ashenmiller (2009) and Beatty, Berck & Shimshack (2007) provide some 2 empirical analyses of the California system. Available [online] http://www. calrecycle.ca.gov Deposit-Refund Systems in Practice and Theory, Walls, M., (2011) Available 3 Deposit-Refund Systems in Practice and Theory, Walls, M. , 2011. Available 4 online www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-11-47.pdf online www.rff.org/files/sharepoint/WorkImages/Download/RFF-DP-11-47.pdf TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 39 5.3.4 Establishing a DRS City Authority (KCCA) in Uganda, in conjunction with The implementation of a DRS needs to be accompanied the International Finance Corporation (IFC), offered a by various measures including: concession to a private investor for the management of Kampala City’s solid waste treatment facility - the Kiteezi • Supporting legislation such as a waste management Landfill. NGOs can also play a key role in establishing bill; and running recycling centers, for example, Wastedar, an NGO based in Dar es Salaam in Tanzania. Examples • Development of recycling infrastructure and viable of private investment in recycling centers include Coca recycling markets; Cola, who through their community social responsibility • Enforcement of the scheme; program, has facilitated the setting up of seven plastic • Education and awareness; and waste collection centers in Uganda. • Political will. Provision of recycling center(s) is essential and can 5.4 Case Studies be established through a combination of approaches, The following case study illustrates the application of a including through Public-Private-Partnership, Non- DRS to rubber tires in South Africa. Governmental Organization intervention or corporate CSR sponsorship. For example, the Kampala Capital Box 15: Case Study of Deposit Refund System in South Africa: Rubber Tire Recycling The South African National Waste Management Strategy and the Waste Management Bill are based on the Polluter Pays Principle (PPP) and holds households and companies responsible for paying the costs associated with the waste that they produce*. The National Waste Management Strategy recommends that DRS are most suitable for products that are easy to identify and handle, feasible to re-use or recycle, require careful disposal and where co-operation is feasible between producers, retailers and consumers. There are a number of private sector industry-initiated DRS in South Africa, that cover glass, plastic beverage containers and steel beverage cans. Under these schemes the consumer pays a deposit per bottle and receives a refund per bottle upon return to a retailer. A tire recycling scheme was implemented in South Africa in response to the growing awareness of the scale of the illegal disposal of scrap tires and the environmental problems that they cause; For example, scrap tire piles are a reasonably common sight in urban areas in developing cities. These scrap tire piles are a fire hazard and can burn for lengthy periods releasing toxic chemicals. Abandoned scrap tires also act as breeding grounds for mosquitoes and can leach toxic chemicals into groundwater. Disposal of whole tires in landfills creates problems as the tires tend to rise to the surface. The Recycling and Economic Development Initiative of South Africa (REDISA) Integrated Industry Waste Tire Management Plan was approved in 2012 by the Minister of Water and Environmental Affairs to tackle these problems. REDISA is an independent body that is separate from the tire industry. The tire management plan was implemented to deal with the extensive number of waste tires and to create income generating activities. Manufacturers and tire importers are charged a levy of R2.30 plus VAT on every kilogram of new rubber tire and the cost of waste tire collection is passed on to consumers. The revenue generated by the levy is used to subsidize the collection and recycling of the waste tires and acts as an incentive for consumers to return the tires to a location where they can be appropriately disposed. It is estimated that the plan will generate approximately 10,000 income-generating opportunities** and by mid-2014, more than 17,000 tons of used tires had been collected and diverted from landfill by REDISA***. As a result of the scheme, South Africa’s waste tire recycling rate has increased from 4% to 19% by the end of 2014. * Department of environmental affairs, Republic of South Africa (2011) National Waste Management Strategy, available [online] **  More information available [online] http://www.redisa.org.za/Satellite/Home%20Waste%20Tyre%20Plan.html *** http://www.bdlive.co.za/national/science/2014/08/11/redisa-collects-17000-tons-of-waste-tyres Page 40 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 5.5 Links to Further Information Further guidance can be found at the following links in the table below. Resource Link Description of Resource Eftec (2004) A Compendium http://www.eftec.co.uk/eftec-projects/a- Review of economic instruments of Economic Instruments for compendium-of-economic-instruments-for- that have been used in Environmental Policy environmental-policy environmental policy. Hogg et al. (2010) Have we got http://www.bottlebill.org/assets/pdfs/ Investigation of the the bottle? Implementing a campaigns/UK-CPRE-2010.pdf?bcsi_scan_ environmental and financial deposit refund scheme in the E956BCBE8ADBC89F=0&bcsi_scan_filename=UK- implications of a UK-wide UK: A report for the campaign CPRE-2010.pdf deposit refund system. to protect rural England’ Khanal, B., Souksavath, https://openaccess.adb.org/bitstream/ Identifies and assesses general B. (2012) Environmental handle/11540/1733/Volume%202_No%201_ practices and environmental management measures and Oct%202005_05.pdf?sequence=1 measures used in solid waste current practices in solid management in Vientiane, Lao waste management: A Case People’s Democratic Republic. Study from Vientiane, Lao People’s Democratic Republic Nahman, A., et al. (2009) http://www.scielo.org.za/scielo.php?script=sci_artt Review of the potential Environmental and resource ext&pid=S0038-23532009000500011 contributions and limitations economics in South Africa: of environmental and resource status quo and lessons for economics to sustainable developing countries development in developing countries. The study uses examples from South Africa. Panayotou, T. (1994) Economic https://www.cbd.int/doc/nbsap/finance/Panayoto Review of economic instruments for environmental u1994EconInstEnvMgSusDev_199EcInsEnvMgSus instruments used in management and sustainable Dev.pdf environmental management development. UNEP and sustainable development. Environmental Economics There is additional detail on Series Paper No. 16. the relevance to developing countries of developed country experiences with economic instruments, and a summary of developing country experience with economic instruments. Pearce, D., and Kerry Turner, http://cserge.ac.uk/sites/default/files/ Reviews the failures that R. (1992) Market-based wm_1992_02_0.pdf have inhibited efficient waste approaches to solid waste management policy and management. CSERGE practice. Working Paper WM 92-02. Quartey, E. et al. (2015) http://www.mdpi.com/1660-4601/12/8/9907/htm Analysis of the impact of plastic Ghanaian deposit refund use and disposal in Ghana. scheme Theoretical Framework for Plastic Waste Management in Ghana through Extended Producer Responsibility: Case of Sachet Water Waste UNEP (2009) The Use of http://www.unep.org/pdf/Training_ Training manual that aims Economic Instruments for Resource-Manual.pdf?bcsi_scan_ to assist in the preparation Environmental and Natural e956bcbe8adbc89f=0&bcsi_scan_ and delivery of training Resource Management. filename=Training_Resource-Manual.pdf courses focused on economic Training Resource Manual. instruments and their practical application. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 41 THIS PAGE INTENTIONALLY LEFT BLANK Page 36 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS VI. ENVIRONMENTAL FUNDS ENVIRONMENTAL FUNDS Water Land This instrument Quality and Air Quality Solid Waste Flooding Deforestation Degradation addresses Wastewater   —    Targets Funding challenges Type of instrument: Grant / funding instrument • Start-up phase of EFs is a long and often politically charged process; Key considerations • EFs have limited capacity to measure the impact of investments, even though this is essential • The announcement of the creation of EFs can generate unrealistic expectations, especially in the short term Key Financial sponsors, governing body of fund (board or steering committee), trustees, stakeholders implementing agencies & non-financial sponsors • Eastern Arc Mountains Conservation Endowment Fund, Tanzania Case study • Clean Water State Revolving Fund, USA examples: • Fund for the Protection of Water, FONAG, Ecuador • Thai Energy Efficiency Revolving Fund 6.1 Overview Environmental Funds (EF) are an innovative financial There are four principal options for financing EF: mechanism that can be used for funding biodiversity conservation and achieving positive environmental 1. establishing an endowment fund; outcomes. EF have been established in more than 2. a sinking fund; fifty developing countries. The objective of EF is to provide long-term stable funding for projects that 3. a revolving fund; or focus on environmental conservation or enhancement 4. a combination of the three. activities that would not otherwise be funded by the governmental or private sector. EF can offer donors a An endowment fund is defined as a fund that invests its reliably managed channel to allocate funds for specific capital and uses only the income from those investments activities, over a long period of time. Transparency, to finance its activities. A sinking fund is characterized accountability and sound financial management by the disbursal of its entire principal and investment characterize the funds, making them a more attractive income over a fixed period, for example, over ten years. option than government schemes, in some scenarios. Revolving funds are structured in way that allows regular financial contributions to be added so as to replenish the fund, for example, proceeds generated by a special tax ear marked for financing conservation programs1. Money is received from donors through the collection of fines or other sources and is allocated on a grant basis. 1 Conservation Finance Alliance, ‘Environmental Funds Toolkit’ available [online] http://toolkit.conservationfinance.org/ TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 37 6.2 How the Instrument Works The key advantages of EF are their ability to: EF are underpinned by four key components: capital, • Manage large funds over an extended time period; legal structures, a supervisory structure and a management structure. They tend to be implemented • Facilitate the planning of longer term conservation by independent institutions rather than government projects due to longer lifetime of the funds; agencies and are frequently implemented as a method • Offer a reliable, steady source of funds that of managing financial resources ear-marked for facilitates operation of projects and allows for long environmental purposes, for example, biodiversity term planning; conservation and the protection of wildlife, forests, • Support transparent decision making processes climate adaptation and mitigation2. The funds are underpinned by participation of government and defined by their legal, governance and financial non-governmental representatives; structures and their structure depends on their purpose, legal and political context, institutional capacity • Facilitate co-ordination of multiple stakeholders; and donor requirements. EF are often perceived as donors, civil society and governments; an attractive option due to the ability of the fund • Build capacity at a local level as funds are typically to ring-fence the allocation of certain resources for locally managed and designed to address small environmental benefits. It is important to note that scale priorities at a community, regional or national EF are not implementing agencies, rather they act as level; and channels for sources of funding. The success of these • Support the leveraging of further funds. funds is underpinned by stakeholder commitment and political support, effective operational structures and EF do, however, have some drawbacks. A challenge with transparency in order to attract and secure financial and endowment funds is that they tie up funds for an extended non-financial supporters. period of time. There is also a risk that the existence of an EF could lead to reduction in funding of conservation The Conservation Finance Alliance offers a guidance projects from governments and donors. Finally, due to the document as a part of a tool kit for the establishment of long term nature of EFs, they are not designed to respond EF3. It identifies the following key elements underpinning to short term environmental problems. the effective establishment of an EF4: • Financial commitment of a minimum of 10-15 6.3 How It Works in Practice years; The key requirements underpinning the establishment of • Active government support for establishing a new EF are as follows5: public-private sector partnership by setting up an independent foundation outside direct government control; 6.3.1 Legal and Governance Arrangements • Critical mass of individuals from diverse sectors of • Governance: EF are established as legally society working together to achieve conservation independent entities governed by a Board of goals; Directors through Articles of Incorporation or • Reliable, trustworthy legal and financial structures Charters approved by government authorities. and supporting institutions in place (e.g. banking, • Tax exemptions: To be most effective, EF require tax auditing and contracting); and exemptions to attract and maintain fund growth. • Diverse funding sources. • Legal framework: EF require the establishment of and articles of incorporation that are governed by common law and civil law frameworks. Bylaws set the structure and define the operating procedure of the EF. Directors of the EF normally draft these bylaws and they are used to regulate the organization. The majority of EFs also establish agreements or Memorandum of Understanding between the EF and the relevant national UNDP, ‘Financing Solutions for Sustainable Development’ available [online] 2 government. This element is essential to the http://www.undp.org/content/sdfinance/en/home/solutions/environmental- success of any EF scheme. trust-funds.html 3 Conservation Finance Alliance, ‘Environmental Funds Toolkit’ available [online] http://toolkit.conservationfinance.org/ Adapted from Conservation Finance Alliance ‘Environmental Funds Toolkit’ 4 Adapted from Conservation Finance Alliance ‘Environmental Funds Toolkit’ 5 available [online] http://toolkit.conservationfinance.org/ Further guidance is available [online] http://toolkit.conservationfinance.org/ Page 38 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 6.3.2 Planning around the world, for example, GEF was (until 2011) the • Includes undertaking needs assessments, developing a largest donor to African Trust Funds.6 strategic plan and drafting a business and fundraising plan. 6.3.5 Co-benefits 6.3.3 Funding In practice, EF have facilitated long term biodiversity • EF raise money as endowment funds, sinking funds, conservation through their ability to mobilize large revolving funds, or a combination of these three. financial resources. They have the capacity to be used to • Many EF have a permanent endowment that promote and support payment for ecosystem services has been capitalized by grants from the national (PES) schemes through generating awareness of PES government and international donor agencies. EF and running training courses, funding PES schemes and may also manage sinking funds created through investing in PES projects with favorable rates of return. debt-for-nature swaps or revolving funds financed EF could be used to finance PES schemes by allocating through specially designated ‘user fees or taxes that a fixed percentage of available funds annually to are earmarked for conservation. finance start-up costs for PES projects or stimulate the market by purchasing credits from an existing project. • Financial needs assessments or feasibility studies Numerous examples exist in South America where EF undertaken during the planning stage can be used are financing Payment for Watershed Services (PWS) to determine the required level of funding. programs. • A diverse source of funding is critical to the long term sustainability and viability of EF. The vast In addition, EF can also be used to buffer countries or majority of funding for EF has been generated by organizations from some of the inherent risk around national governments, multilateral and bilateral aid, activities such as REDD+7 programs. For example, a large internationally oriented private foundations major barrier to trading in carbon in many countries is and in a minor number of cases, in-country the risk involved. EF could assist the development of philanthropy. these types of programs by providing a buffer against this risk8. • Opportunities for income generation exist and include carbon offsetting projects and Payment for Ecosystem Services (PES) schemes (see Section 7). 6.3.6 Challenges Other considerations for establishing schemes include There are some challenges associated with EF, including the structure of finance and administrative elements, the risk of: investment management, and establishing an adequate monitoring and evaluation process. Developing a • Poorly managed grant making process limiting the process for delivering grants is essential as this will disbursement of funds; inform how the money is spent and allocated effectively. • Inadequate communication between the EF and Having a clear communication plan for communicating stakeholders leading to poor implementation, to potential donors, government agencies, local monitoring and evaluation of funds and projects; communities and other stakeholders is critical for establishing the legitimacy of an EF. Finally, two • Political influence over how funds are distributed; elements which ideally should underpin any EF activity • Existence of EF may result in reduced government are the implementation of an adequate monitoring and funds being allocated to conservation efforts; and evaluation system to track the conservation outcomes and monitor the institutional capacity of the EF. • International donors being discouraged from investing in governments. 6.3.4 Financial RedLAC Capacity Building Project for Environmental Funds, Fundraising 6 The majority of EF have three main sources of funding; strategies for Environmental Funds (2011) available [online] http://www. multilateral donor agencies such as the World Bank and funbio.org.br/wp-content/uploads/2012/04/4-Fundraising-Strategies-for- Environmental-Funds.pdf African Development Bank; bilateral donor agencies such Reducing Emissions from Deforestation and Forest Degradation (REDD) is 7 as European governments and large private foundations. an effort to create a financial value for the carbon stored in forests, offering International non-governmental organizations (NGOs) incentives for developing countries to reduce emissions from forested also play a role in financing EF. For example, Conservation lands and invest in low-carbon paths to sustainable development. “REDD+” goes beyond deforestation and forest degradation, and includes the role International and WWF have both funded and supported of conservation, sustainable management of forests and enhancement of several EF. Additionally, host governments often offer forest carbon stocks. http://www.un-redd.org/aboutredd financial or in-kind support. The Global Environment RedLAC Capacity Building Project for Environmental Funds, 2010, 8 Facility (GEF) funds remain critically important to EF Environmental Funds and Payments for Ecosystem Services TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 39 6.4 Case Studies Environmental Funds have been successfully implemented in multiple developing countries in a variety of ways. This section sets out a selection of case studies focusing on Tanzania, Peru and the USA. Box 16: Eastern Arc Mountains Conservation Endowment Fund, Tanzania The Eastern Arc Mountains are a globally recognized biodiversity hot spot, with high levels of endemism. They are also an important source of water and hydroelectric power for many Tanzanians. The Eastern Arc Mountains Conservation Endowment Fund is a trust fund that was established in 2001 as a joint initiative between the Government of Tanzania, the World Bank, the Global Environmental Facility, and the Fund’s Board of Trustees. It aims to provide reliable and long-term financing for community development, biodiversity conservation and applied research projects in the Eastern Arc Mountains of Tanzania. The Fund is managed by a Board of Trustees which provides policy guidance and oversight control of the Fund’s activities and operations. Fundraising is a key element of the Fund’s activities; amongst others, the Government of Norway has committed US$5,947,700 to the Fund over a five-year period from 2011. The Fund has the institutional and operational capacity to receive, manage and disburse monies from this and other commitments, and has therefore developed a reputation for transparency and good governance. Source:  Fundraising strategies for Environmental Funds (2011) RedLAC Capacity Building Project for Environmental Funds http://www.funbio.org.br/wp-content/ uploads/2012/04/4-Fundraising-Strategies-for-Environmental-Funds.pdf Box 18: Fund for the Protection of Water Box 17: Clean Water State Revolving Fund, USA (FONAG), Ecuador The Clean Water State Revolving Fund (CWSRF) A Fund for the Protection of Water, FONAG, was was established in 1987 by amendments to the established in Quito, Ecuador in 2000. It is an Clean Water Act. It is a financial assistance program example of a water endowment or trust fund. that enables states in the USA to fund projects FONAG was created to focus on the conservation that address their highest priority water needs. of water resources and was committed to The CWSRF is funded primarily by grants from finding solutions for the problems resulting from the Environmental Protection Agency, with states inadequate management of these resources. contributing an additional 20%. These funds are loaned out at low interest rates, with money paid The fund is the result of a contract between the back into the Fund subsequently re-issued as new Metropolitan Water and Sewerage Company of Quito loans. By 2015, state CWSRFs had provided more (EMAAP-Q) and the international environmental than US$111 billion to communities and issued more NGO The Nature Conservancy (TNC). The fund is than 36,100 low-interest loans. financed by Quito’s municipal drinking water and electrical utilities, a water-bottling company and The CWSRF provides loans for: construction of a private brewery. Donations are also contributed municipal wastewater treatment facilities and by international and local NGO’s, governments and decentralized wastewater treatment systems; overseas development assistance. The funds support control of non-point source pollution; the creation a range of conservation projects from educating of green infrastructure; and the protection of children about sustainable water management to aquatic resources and public health. improving parks and protected areas. The FONAG fund has successfully raised in excess of USD6 million and leveraged an additional USD7 million. The ‘Quito model’ is being replicated across other Latin American cities in Ecuador, Colombia as well as Peru. Source:  US Environmental Protection Agency Clean Water State Revolving Source:  Environmental Funds and Payments for Ecosystem Services, RedLAC Fund, available [online] https://www.epa.gov/cwsrf/learn-about-clean-water- Capacity Building Project for Environmental Funds, 2010, available [online] state-revolving-fund-cwsrf www.forest-trends.org/documents/files/doc_2627.pdf Page 40 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Box 19: Case Study of Thai Energy Conservation Promotion Fund In 2003, the Government of Thailand launched the Thai Energy Efficiency Revolving Fund (EERF) as part of its Energy Conservation Program. The EERF seeks to support investment into energy efficiency as a means of reducing Thailand’s GHG emissions. The fund was established to address key barriers to investment in energy efficiency that are present within the Thai financial sector. Investing in energy efficiency was perceived to be high risk with little demand, prior to the establishment of the EERF. However, the EERF has proven successful in obtaining private capital through low-interest loans to banks, which in turn finance energy efficiency projects with favorable interest rate loans. The Fund provides capital at no cost to Thai banks when it is used to fund energy efficiency projects. The EERF is financed through levies on petroleum and has an annual income of approximately US$225 million. The financing model adopted by the EERF is simple and is easily replicable in other countries. Replicating this model in other applying the model in other economies would require: • A revolving pool of funds from which to provide loans • Agreement from the finance sector (banks and other financial institutions) to participate in the financing model; • Commitment of a small number of staff from a government agency to establish the financing model and to carry out a small proportion of the work involved in assessing loan applications, administering loans and promoting the financing model. Source:  https://www.climate-eval.org/sites/default/files/evaluations/531%20Thailands%20Energy%20Efficiency%20Revolving%20Fund.pdf 6.5 Links to Further Information Further guidance can be found at the following links: Resource Link Description of Resource Sustainable Endowments http://greenbillion.org/wp- Detailed guidance on how Institute & the Association content/uploads/2013/01/GRF_ green revolving funds (GRF) for the Advancement of Implementation_Guide.pdf are structured. Includes a ten Sustainability in Higher step guide to designing and Education (2013) Green establishing a successful GRF. Revolving Funds: An Introductory Guide to Implementation & Management UNEP (2006) Sustainable http://www.unep.org/roa/Amcen/ Provides an overview of the range Financing for Environmental Docs/sustainable_financing.doc of conservation finance available, Projects in Africa: Some Ideas focusing on environmental funds, for Consideration PES schemes, debt-for-nature swaps and carbon offset projects. UNDP (2016) ‘Financing http://www.undp.org/content/ Provides an overview of how Solutions for Sustainable sdfinance/en/home/solutions/ Environmental Funds operate, key Development’ Environmental environmental-trust-funds.html advantages and disadvantages Trust Funds and links to case studies TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 41 Resource Link Description of Resource Conservation Finance Alliance http://www.funbio.org.br/wp- A toolkit offering a guide to the (Undated, hosted online) content/uploads/2012/04/4- creation and implementation Environmental Funds Tool Kit Fundraising-Strategies-for- of new Funds, including legal Environmental-Funds.pdf documents, manuals, plans and communication materials. Offers best practices and fundraising guidance. Fundraising strategies for http://fs-unep-centre.org/sites/ Offers a step-by-step approach Environmental Funds (2011) default/files/publications/fs- to fundraising strategy for RedLAC Capacity Building unepthaieerffinal2012_0.pdf conservation finance and Project for Environmental environmental funds. Funds Includes case studies from Bolivia, Kenya Wildlife Service, Eastern Arc Mountains Conservation Endowment Fund National Climate Finance http://fs-unep-centre.org/sites/ Explores the rationale for the Institutions Support Program default/files/publications/fs- establishment of the fund and (2012) Case study: the Thai unepthaieerffinal2012_0.pdf provides an overview of how the Energy Efficiency Revolving funds is financed, structured and Fund monitored and evaluated. RedLAC Capacity Building www.forest-trends.org/documents/ Focuses on PES schemes Project for Environmental files/doc_2627.pdf and examines the role of Funds (2010) Environmental Environmental Funds in PES Funds and Payments for projects. Ecosystem Services Page 42 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS VII. PAYMENTS FOR ECOSYSTEM SERVICES PAYMENTS FOR ECOSYSTEM SERVICES Water Land This instrument Quality and Air Quality Solid Waste Flooding Deforestation Degradation addresses Wastewater  — —    Seeks to incentivize improved land stewardship (e.g. by upstream land managers) to deliver Targets valuable ecosystem services that would not otherwise be delivered Type of instrument: Market-based incentive mechanism • Aggregating buyers and sellers • Agreeing the appropriate price Key considerations • Raising the necessary start-up capital • Selecting the most appropriate payment mode and vehicle Ecosystem service beneficiaries; ecosystem service providers; intermediaries (including Key stakeholders knowledge brokers, legal advisors and sponsors) Case study Numerous. Typically cover water quality, carbon and biodiversity. examples: 7.1 Overview The term Payments for Ecosystem Services (PES) is used can also in some cases, contribute to poverty alleviation to describe schemes in which the beneficiaries, or users, objectives2. of ecosystem services (see Box 20) provide payment to the stewards, or providers, of ecosystem services. Box 20: Ecosystem Services PES has come to prominence in the past decade Ecosystem services, simply defined, are the benefits as a new, innovative and promising approach to we derive from the natural environment. These environmental management. According to the OECD, include, for example, the provision of food, water, there were already more than 300 PES or PES-like timber and fiber; the regulation of air quality, programs in place around the world by 2010 at national, climate and flood risk; opportunities for recreation, regional and local levels1.It works by providing an tourism and cultural development; and underlying economic incentive for landowners or managers to functions such as soil formation and nutrient cycling. protect the environment. Moreover, it has the potential Maintaining and enhancing ecosystem services – to help raise new sources of sustainable finance where and restoring them where they have been lost or they may be severely lacking and to improve the degraded – is increasingly recognized as essential efficiency of restoration, rehabilitation or conservation for sustainable economic growth, prosperous interventions. It can also help secure the flow of communities and promoting peoples’ wellbeing. ecosystem services to the multitude of beneficiaries (often businesses and infrastructure operators) that rely on them. If properly designed and implemented, PES 2 Jindal R. and Kerr, J. (2016) Securing environmental services and alleviating poverty. USAID PES Brief 3.5 [online] available at http://www.oired.vt.edu/ Ibid 1 sanremcrsp/wp-content/uploads/2013/11/PESbrief3.5.AlleviatingPoverty.pdf TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 43 7.2 How the Instrument Works ecosystem services such as climate regulation, water quality regulation and the provision of habitat for In practice, PES often involves a series of payments wildlife and, in doing so, brings them into the wider to land or other natural resource managers in return economy. The novelty of PES arises from its focus on the for a guaranteed flow of ecosystem services (or, more ‘beneficiary pays principle’, as opposed to the ‘polluter commonly, for management actions likely to enhance pays principle’. Figure 2 provides an illustration of the PES their provision) over-and-above what would otherwise concept in relation to payments for watershed services. be provided in the absence of payment. Payments are made by the beneficiaries of the services in question. It is important to recognize that land or resource These could be individuals, communities, businesses or managers may already be subject to regulation which, government acting on behalf of various parties3. if properly enforced, could limit adverse impacts on ecosystem service provision. They may also undertake The basic idea behind PES is that those who provide measures to protect and enhance services where this ecosystem services – like any service – should be is in their best interests, for example, through reducing rewarded for doing so. PES therefore provides an water usage to make cost savings. Many land or opportunity to put a price on previously un-priced resource managers may also seek to protect or enhance ecosystem service provision in their role as custodians. PES schemes should therefore be carefully designed so Smith, S., Rowcroft, P., Everard, M., Couldrick, L., Reed, M., Rogers, H., 3 Quick, T., Eves, C. and White, C. (2013). Payments for Ecosystem Services: as not to undermine existing stewardship on the part of A Best Practice Guide. Defra, London. land or resource managers. Figure 7.1 The PES Concept (© Conservation International)* Note: need permission to reproduce this figure. Page 44 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Key concepts and principles underpinning PES In addition, establishing the baseline position, i.e. the likely future provision of the relevant ecosystem services A widely quoted definition of PES is: in the absence of the PES scheme, will be critical since this will allow for accurate monitoring which will, in turn, 1. a voluntary transaction where; indicate the level of additionality being delivered, thus reassuring buyers that the requisite services are indeed 2. a well-defined ecosystem service (or a land-use likely being provided. to secure that service); 3. is ‘bought’ by a (minimum of one) ecosystem While these principles should inform the development service buyer; of PES, in practice schemes may adhere to them to a greater or lesser degree. The literature on PES suggests 4. from a (minimum of one) ecosystem service that few existing schemes fulfil all these principles in provider; if and only if practice and, as such, aiming for a ‘perfect’ PES scheme may create unrealistic expectations. 5. the ecosystem service provider secures ecosystem service provision (conditionality)4 7.2.1 Opportunities for PES Drawing on this definition, it is possible to identify seven key principles, which should ideally underpin any PES PES schemes are most likely to emerge in situations scheme: where: • Voluntary: stakeholders enter into PES agreements 1. specific land or resource management actions have on a voluntary basis; the potential to increase the supply of a particular service (or services); • Beneficiary pays: payments are made by the beneficiaries of ecosystem services (individuals, 2. there is a clear demand for the service(s) in question, communities and businesses or governments acting and its provision is financially valuable to one or more on behalf of various parties); potential buyers; and • Direct payment: payments are made directly to 3. it is clear whose actions have the capacity to increase ecosystem service providers (in practice, often via supply (for example, certain land or resource an intermediary or broker); managers may be in a position to enhance supply)5. • Additionality: payments are made for actions over- and-above those which land or resource managers By way of illustration, wetland restoration could achieve would generally be expected to undertake (note an enhanced level of ecosystem services and deliver that precisely what constitutes additionality will downstream benefits to water utilities and others who vary from case-to-case but the actions paid for must are dependent on a reliable supply of clean water. at the very least go beyond regulatory compliance); Restoration activities could include creating buffer zones along rivers for wildlife and re-flooding wetlands • Conditionality: payments are dependent on the to improve water carrying capacity. This might lead delivery of ecosystem service benefits. In practice, to additional ecosystem service benefits in terms of payments are more often based on the implementation biodiversity, improved water quality and flood risk of management practices which the contracting parties management. If the risk of downstream contamination is agree are likely to give rise to these benefits; high, water utilities and other industries may be willing • Ensuring permanence: management interventions to pay upstream land managers to undertake wetland paid for by beneficiaries should not be readily restoration and maintenance activities to reduce reversible, thus providing continued service contamination where the costs of doing so are perceived provision; and to be lower than those that would be incurred by • Avoiding leakage: PES schemes should be set up investing in more conventional water treatment works. to avoid leakage, whereby securing an ecosystem service in one location leads to the loss or degradation of ecosystem services elsewhere. Wunder, S. (2005) Payments for environmental services: Some nuts and 4 bolts. CIFOR Occasional Paper 42. Center for International Forestry Smith, S., Rowcroft, P., Everard, M., Couldrick, L., Reed, M., Rogers, H., 5 Research, Bogor [online] available at: http://www.cifor.org/publications/ Quick, T., Eves, C. and White, C. (2013). Payments for Ecosystem Services: pdf_files/OccPapers/OP-42.pdf. A Best Practice Guide. Defra, London. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 45 7.2.2 Types of PES Scheme ecosystem services, habitat for biodiversity or PES schemes come in a variety of forms and there are carbon capture7. numerous ways of classifying them. The most common • Catchment: for example, downstream water users typology arises from the distinction between the paying for appropriate watershed management on ecosystem services provided. To date, most schemes upstream land. These schemes tend to be private- have focused on carbon sequestration and storage, financed, for example where a water company pays biodiversity conservation and water (quality and upland land managers on behalf of its customers to quantity)6. PES schemes may also be classified in terms implement certain measures designed to stabilize of the principal sources of funding, distinguishing or improve water quality. between: • Local/neighborhood: for example, a scheme • public payment schemes through which whereby residents collectively fund a warden or government pays land or resource managers to environmental organization to manage local green enhance ecosystem services on behalf of the wider space for biodiversity, landscape and recreational public.; value. • private payment schemes, self-organized private deals in which beneficiaries of ecosystem services 7.3 How PES Works in Practice contract directly with service providers; and For a PES scheme to work it must represent a win for • public-private payment schemes that draw on both both buyers and sellers. PES may be positive from a government and private funds to pay land or other buyer’s perspective if the payments are less than those resource managers for the delivery of ecosystem associated with any alternative means of securing the services. desired service. For example, it may be less expensive for a water utility to pay land owners for improved It is also possible to identify a fourth model which catchment management than to pay for additional water involves fiscal transfers from national or regional treatment. PES schemes may be positive from a seller’s government to local government on condition that perspective if the level of payment received at least agreed conservation, restoration or enhancement covers the value of any returns foregone as a result of objectives are achieved. The Public Redistribution implementing the agreed interventions. For example, Mechanism in operation in several states in Brazil offers a farmer may be willing to engage in alternative or an example of a fiscal transfer mechanism (see Box 21). less damaging land management practices to reduce PES schemes may also be differentiated in terms of their sediment and nutrient loading if the payments received payment types and whether payments are made in cash at least cover the costs of doing so, including the costs or kind. Some of these are shown in the table overleaf associated with any lost agricultural production. (see Table 7.1). Take, for example, a change in farm management to focus on the provision of a greater range of ecosystem 7.2.3 Scale of PES Schemes service benefits, for example through wetland restoration on existing cropland: PES schemes can be developed and operated at a range of spatial scales: • the minimum PES payment would be generally expected to at least cover any (private) return • International: examples include Reducing Emissions forgone by the farmer as a result of reduced from Deforestation and Degradation (REDD+) agricultural production; whereby developing countries that are willing and able to reduce emissions from deforestation and • the theoretical maximum payment would be the degradation are paid by developed countries for cumulative value of additional ecosystem service doing so. benefits which would accrue to the buyer(s) (which might include flood risk attenuation, fresh water • National: for example Mexico’s national PES supply, habitat for wildlife etc., depending on the scheme (Pago por Servicios Ambientales) in which services the buyer(s) wished to purchase); however, Mexico’s National Forestry Commission pays many of these benefits are hard to quantify, eligible landowners who are enrolled in the scheme and many are ‘produced’ by the same types of (through 5-year renewable contracts) to carry out management intervention; so a series of conservation activities to protect or enhance the role of forests in providing hydrological Landell-Mills, N. and Porras, I. (2002) Silver Bullet or Fools’ Gold? A Global 6 Review of Markets for Forest Environmental Services and their Impact on See http://www.teebweb.org/media/2013/10/Bundling-of-ESS-in- 7 the Poor. International Institute for Environment and Development, London agroforestry-Mexico.pdf Page 46 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Box 21: Ecological Fiscal Transfers Ecological fiscal transfers act as an incentive to municipalities for biodiversity conservation and the provision of ecosystem services and are an example of a specific-purpose fiscal transfer. To bring accountability in the use of funds, the recipient states and local bodies are required to meet certain conditions. These conditions include a clear statement of the objective and how the funds will be spent to achieve the objective, with clear targets for achieving the objectives. Local governments must demonstrate that the funds are spent on a verifiable project with measurable ecological benefits. That is, grants must be linked to physical outcomes and are independently assessed using an accredited auditing and evaluation system. The instrument provides a method for compensating the local and state public actors for their contribution to public ecological objectives; essentially the transfers redistribute public revenue from federal and regional governments to local governments. The mechanism also has the potential to be used to finance the establishment of other public services that have environmental benefits such as wastewater treatment facilities. For example, transfers could facilitate the construction of wastewater treatment infrastructure and other establishment costs, that local governments typically have trouble financing. There are an increasing number of ecological fiscal transfer programs with schemes operating in Brazil, the USA, India, China, and South Africa. In the case of Brazil, the central government has been financing conservation through ecological fiscal transfers since the 1990s. Recognizing that it is difficult for municipalities to generate income from conservation and related ecosystem services, a number of Brazilian States agreed to establish an ICMS Ecológico. The ICMS (Imposto sobre Circulação de Mercadorias e Serviços) is a tax on goods and services, similar to the value-added taxes in other countries. 5% of the revenues from the ICMS are distributed to municipalities with conservation units or protected areas or those that supply water to neighboring municipalities. The State allocates more revenues to those municipalities with the greatest amount of area under environmental protection. Essentially this means that local governments are compensated for land-use restrictions associated with conservation and the provision of ecosystem services, such as protected areas and watershed protection by providing them with financial incentives for conservation. The instrument provides a method for compensating the local and state public actors for their contribution to public ecological objectives; essentially the transfers redistribute public revenue from federal and regional governments to local governments. In order to implement the mechanism, some amendments to current state laws were necessary, including the addition of environmental indicators to the existing criteria for revenue sharing. Indicators are largely related to land use restrictions, such as protected areas within a municipality, but some States incorporated indicators related to environmental public services, such as degree of sanitation and of adequate waste disposal in the municipality. The success of a fiscal transfer instrument depends on the following criteria: • Revenue adequacy: the subnational authorities should have sufficient resources, with the transfers, to undertake the designated responsibilities. • Equity: transfer should vary directly with local fiscal needs and inversely with local fiscal capacity. • Transparency and stability: the schemes should be announced and each locality should be able to forecast its own total revenue (including transfers) in order to prepare its budget. Schemes should be stable for a minimum of 3-5 years to allow long-term planning at the local level. • Capacity building is extremely important in order to allow local organizations and firms to take over once the fiscal transfers have ended Sources of further information: Cassola R., 2010, TEEB case: Financing conservation through ecological fiscal transfers Brazil. Available [online] http://img.teebweb.org/wp-content/uploads/2013/01/ 3.  Financing-conservation-through-ecological-fiscal-transfers-in-Brazil.pdf Environmental Fiscal Reform for Sustainable Development and Poverty Reduction Workshop Proceedings and Country Case Studies, 2004, Environmental policy and 4.  management of natural resources, Convention on Biological Diversity, available [online] https://www.cbd.int/financial/fiscalreform.shtml Kumar, S and Managi, S., 2009, Compensation for Environmental Services and Intergovernmental Fiscal Transfers: The Case of India [online] available at https:// 5.  editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIPF65&paper_id=59.  orld Bank, 2006, A Practitioners Guide to Intergovernmental Fiscal Transfers, Shah, A. available [online] https://books.google.co.uk/books?hl=en&lr=&id=iKR3LFVc7 6. W pgC&oi=fnd&pg=PA3&dq=fiscal+transfer+environmental+management&ots=t2OMozI3-i&sig=q_krxSly2ByV9YpaXs0h4_0nY9g#v=onepage&q=fiscal%20transfer%20 environmental%20management&f=false TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 47 Table 7.1 Types of PES Scheme Direct Cash Payments Non-cash Rewards Individual An output-based payment Employment by The scheme invests in performance- model that estimates the project ecosystem enhancement based ecosystem services benefits activities that generate payments generated by individuals employment in local or groups of households; communities, e.g. Working for payments are conditional Water in South Africa upon the attainment of individual performance targets Payments Communities are mobilized Right to access Communities are given rights to based on through associations forest resources access specified forest resources shareholding under which participating in exchange for responsibilities households buy shares. PES aimed at reducing forest payments are allocated degradation and deforestation. according to these shares. Communities may or may not develop enterprises based on the resources they are able to access Conservation If participating farmers Right to sell Communities are granted dividends fully embrace conservation environmental the authority to sell access guidelines (e.g. resulting in services to wildlife (e.g. photograph reductions in illegal charcoal- safaris, controlled hunting and making or protection of expeditions). This might be in watersheds) they receive an community wildlife reserves or end-of-year “conservation on private land under a forest dividend” stewardship program Revenue Local communities enter Financing The scheme finances small sharing into partnerships with, for investment businesses that lead to more example, the managers of opportunities sustainable management and protected areas, to undertake use of natural resources and certain tasks. In return, they also benefit communities. This receive a percentage of (for is usually achieved through the example) tourism revenue establishment of a revolving fund (see Environmental Funds instrument) Community Income from a PES scheme Access to Land managers participate in grants through is used to establish an markets and conservation initiatives through trust funds endowment fund that premium prices improved management of their provides grants to assist land. Producers are rewarded local community groups in with premium prices if their developing socioeconomic products meet certain standards activities with positive (e.g. through certification) environmental impacts and which provide alternative livelihood options Source:  Scherr, S.J., White, A. and Khare, A (2003) Current Status and Future Potential of Markets for Ecosystem Services of Tropical Forests: A Report for the International Tropical Timber Organization (Washington, DC: Forest Trends. Page 48 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS • in practice, the level at which PES payments are For example, a wildlife charity might: sell ecosystem set would reflect supply and demand for particular services in its role as a land owner or custodian; take ecosystem services and would be at a consensually- on the role of intermediary to facilitate delivery of a agreed intermediate point between the minimum PES scheme; buy ecosystem services on behalf of its and maximum values. membership; or provide knowledge and advice on Figure 7.2 illustrates these principles, based on this appropriate management practices. example. The way that buyers and sellers can be configured in scheme development can also vary. For example: 7.3.4 The Actors Involved in PES Schemes • ‘one-to-one’: for example, where a company enters Four principal groups are typically involved in a PES into a contract with a single major land-owner to scheme: provide enhanced carbon sequestration; • ‘one-to-many’: for example, where a water utility • ‘buyers’: beneficiaries of ecosystem services who makes arrangements via a broker to pay many are willing to pay for them to be safeguarded, farm businesses for water-sensitive management enhanced or restored; practices in a key catchment; • ‘sellers’: land and resource managers whose actions • ‘many-to-one’: for example, where multiple can potentially secure supply of the beneficial buyers together invest in the development and service; maintenance of urban green space; and • ‘intermediaries’: who can serve as agents linking • ‘many-to-many’: for example, where government buyers and sellers and can help with scheme design pays farmers for sympathetic land management and implementation; and practices on behalf of the wider public. • ‘knowledge providers’: these include resource For any of these configurations, an intermediary or management experts, valuation specialists, land use broker may form a key part of the PES scheme and planners, regulators and business and legal advisors undertake various tasks including overall scheme who can provide knowledge essential to scheme administration. In particular, where multiple suppliers or development. buyers are involved, the intermediary may act on their It is important to note that some organizations could behalf to arrange exchange and distribution of payments. conceivably play different roles in different PES schemes. Figure 7.2 The Logic of Payments for Ecosystem Services Source:  Engel, S, Pagiola, S and Wunder, S (2008) Designing payments for environmental services in theory and practice: An overview of the issues. Ecological Economics, 65, 663-674. Adapted from Pagiola, S. and Platais, G. (2007) Payments for Ecosystem Services: From Theory to Practice. World Bank, Washington, D.C TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 49 7.3.5 Key Aspects of Scheme Design the downstream flood risk to its bankside facilities. The mode of payment is one of the key variables in PES These improvements simultaneously improve water design. A distinction can be drawn between ‘output- quality, enhance recreational values and provide based’ and ‘input-based’ payments: habitat for wildlife. However, no buyers are found for these additional services and the benefits they • ‘Output-based’ payments are made on the basis of provide are received at no cost to end users. actual ecosystem services provided. For example, payments might be made for a certain level of 7.3.6 Potential Sources of Funding carbon sequestration or a measured increase in biodiversity. In an ideal world, output-based As noted above, some PES programs involve contracts payments would form the basis for all PES schemes. between consumers of ecosystem services and the suppliers of these services. However, the majority of the • ‘Input-based’ payments are made on the basis of PES programs around the world continue to be funded certain land or resource management practices by governments and involve intermediaries, such as non- being implemented. For example, payments might government organizations. In the latter case, there may be made for the creation and maintenance of buffer be a need to identify additional sources of finance to strips along watercourses or the restoration and cover the costs of designing and setting up the scheme. upkeep of green spaces in residential areas. Alternative sources of funding may include microfinance A PES scheme based on input-based payments will (see Box 22) or involvement of the private sector (e.g. only emerge if buyers are content that the specified insurance or financial services providers – see Box 25). management practices will indeed deliver the required ecosystem services. In practice, input-based payments Box 22: Exploring the Role of Microfinance are more common than output-based payments as in Promoting Activities to Enhance contracting for a prescribed level of ecosystem service Ecosystem Service Provision provision may be impractical or unacceptable to the parties. There is potential for the funding to implement PES schemes to come from a range of innovative sources A PES scheme can focus on more than one ecosystem that are as yet relatively unexplored. One promising service. Those services being sold are then described example is setting conservation outcomes as a as having been ‘packaged’. Ecosystem services can be condition for accessing agricultural microfinance. packaged in three distinct ways: In Kenya, for-profit company F3 Life have set up an example of this form of ‘eco-credit’ microfinance • Bundling: a single buyer, or consortium of buyers, in the southern Aberdare mountains. Participating pays for the full suite of ecosystem services that farmers gain access to loans contingent on the arise from the same parcel of land or body of water. implementation of a series of measures aiming • Layering: multiple buyers pay separately for each to reduce downstream watershed degradation, of the ecosystem services that arise from the including planting grass strips to prevent runoff same parcel of land or body of water; layering and trees to help stabilize soil banks. Loans help is also sometimes referred to as ‘stacking’. For the farmers upscale and increase productivity, and example, an area of wetland is restored and yields the linked conservation measures help more than a range of saleable ecosystem service benefits. The offset the impacts of this increase in productivity. carbon sequestration benefits are purchased by Whilst other institutions are averse to lending to a business, the water quality benefits by a water impoverished smallholders without any credit utility, the flood risk management benefits by local history because of the perceived risks of repayment, government on behalf of downstream communities, F3 Life slowly builds up a profile of their clients’ and the biodiversity benefits by a wildlife charity on reliability by starting with small loans of as little behalf of its membership. Although some examples as $20. As clients repay loans, they gain access to of layered PES schemes exist, these remain greater financing with lower interest rates, but somewhat hypothetical. in coordination, the conservation measures tied • Piggy-backing: in this case, not all of the ecosystem to the loans increase. According to the scheme’s services generated from a single parcel of land management, 95% of the administered loans or body of water are sold to buyers. Instead, a have been repaid with full implementation of single service (or possibly several services), is conservation measures. sold as an umbrella service, whilst the benefits provided by other services accrue to users free of charge (i.e. the beneficiaries ‘free ride’). For Source:  http://watershedconnect.com/news/the_circle_of_f3_life_bridging_ example, a business pays an upstream land the_gap_between_credit_and_conservation_in_kenya manager for riparian restoration work to reduce Page 50 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 7.3.7 Technical Issues There are a number of technical issues that need to be addressed when designing and implementing any PES scheme. Some of the most significant of these are described below8. Establishing the The baseline is critical as this facilitates monitoring which in turn is necessary to baseline check that the services being paid for are actually being delivered. The baseline represents the likely future provision of the relevant ecosystem service in the absence of the PES scheme. This should take account of any existing (or anticipated future) regulatory requirements, as well as the impacts of climate change in future changes in commodity prices in so for as possible. At a minimum sellers would be expected to comply with regulatory requirements and so would only receive payments for service delivery that is additional to this. Issues of land For PES to work, it is necessary to establish land tenure or use rights. This may be ownership and challenging in places where property rights are not well defined; insecure land and property rights resource tenure of many poor people remains a key obstacle to them participating in and benefiting from PES schemes. However, formal land title does not necessarily preclude PES from working. In Uganda, for example*, while proof of ownership is necessary to enroll in a carbon credit- funded forest restoration program, proof, can come in the form of a proper land title, or approval and endorsement by the local council. The key is to firmly establish ownership within the structures of the local community. Projects carried out on communal lands can also work, but require a different payment mechanism. For example, the Uganda Wildlife Authority’s (UWA) cooperative management framework shares 20% of all park entry fees with local communities. UWA has established Community Protected Area Institutions (CPIs) based on community leadership structures associated with local parishes. CPIs serve as an advisory body and liaison between the community and UWA. They help communities identify development projects of interest and then present project proposals to the Chief Park Warden who allocates funds to the districts to implement projects. * Source: See http://www.ecosystemmarketplace.com/articles/payments-for-ecosystem-services-in-rural-africa/ Deciding on the PES can be implemented at a variety of scales. In some cases, the scale will necessarily appropriate scale be determined by the scale at which the benefits of the ecosystem service(s) in question accrue, for example, in the case of hydrological services from watershed PES schemes. Larger-scale schemes may offer economies of scale (e.g. in relation to transactions costs) and reduce the risk of leakage while smaller schemes may offer more flexibility, allow more targeted interventions and better prospects for engaging with individuals buyers and sellers. However, in some cases smaller schemes may not have a sufficient number of sellers to provide or maintain the required level of service. Identifying the It is necessary to identify and agree the specific interventions needed to achieve most appropriate the scheme objectives. These may include ecosystem restoration, ecosystem interventions rehabilitation, prevention of ecosystem conversion, prevention of ecosystem degradation, improved land management. This in turn requires that there is a demonstrable link between the interventions proposed and the ecosystem benefits of interest. The stronger the cause-effect relationship, the easier it is likely to be to attract buyers into a PES agreement. Smith, S., Rowcroft, P., Everard, M., Couldrick, L., Reed, M., Rogers, H., Quick, T., Eves, C. and White, C. (2013). Payments for Ecosystem Services: A Best 8 Practice Guide. Defra, London. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 51 Gaining acceptance Stakeholder consultation and involvement is crucial for scheme success. from all parties It can help: involved • improve scheme design and implementation • build confidence in, and a common vision for, the scheme and • increase the commitment and participation of stakeholders in its ongoing implementation • This in turn requires early identification of the participants and partners critical for implementing activities and reaching objectives. Determining the price The appropriate level of payments need to be negotiated between buyers and sellers, and willingness-to-pay perhaps facilitated by a broker. Ultimately, the price will reflect what the buyer is willing to pay and what the seller is willing to accept in return for delivering the service. Negotiations to establish price can take into account: • the opportunity costs to the seller in terms of income foregone from alternative land use or land management practices, both now and in the future • start-up and ongoing maintenance costs • transactions costs, i.e. the costs associated with establishing the scheme • the costs of alternatives, i.e. what would it cost to achieve the same benefit using a different solution. Aggregating buyers and An aggregation of buyers and sellers may be necessary to achieve certain thresholds. sellers For instance, transactions costs may be reduced where it is possible to work with established groups rather than having to negotiate agreements with multiple individuals. Similarly, it is necessary to ensure that are is a sufficient number of sellers to provide and maintain the required level of service. On the demand side, there needs to be a sufficient number of willing buyers to cover the total costs of the scheme. Understanding the It is important that all stakeholders within a PES scheme understand the nature nature and significance and significance of any risks involved and that appropriate mitigation measures are of the risks involved identified and built into scheme design as far as possible. Ongoing monitoring For schemes to succeed in the long-term, it is necessary to establish a monitoring and evaluation framework, including indicators, to evaluate the impact of the activity over time. 7.4 Case Studies While there are numerous examples of PES schemes around the world, those that are documented tend to focus on carbon storage and sequestration, biodiversity and watershed services. The examples illustrate how PES can also be applied in an urban context and typically involves urban residents (or municipalities on behalf of residents, or water companies on behalf of its customers) paying upstream (often peri-urban or rural) land managers for activities that will enhance the supply of good quality water. Page 52 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Box 23: Equitable Payments for Watershed Services (EPWS) in the Uluguru Mountains, Tanzania The EPWS program is a Payments for Watershed Services (PWS) scheme in in the Morogoro region of the Uluguru mountains in Tanzania piloted by WWF and CARE*. Before the scheme started in 2006, unsustainable farming practices and land use change in the Kibungo subcatchment were reducing water quality in the catchment through an average annual increase in turbidity of 5 NTUs (Nephelometric Turbidity Units). This reduction in water quality was imposing increased water treatment costs on two of the region’s largest urban industrial water users, Dar Es Salaam Water and Sewerage Corporation (DAWASCO) and Coca-Cola Kwanza Ltd. Subsequently, WWF-CARE facilitated the creation of a PES scheme whereby these major industrial water consumers would pay upstream sellers from Lukenge, Kibungo, Lanzi, Dimilo and Nyingwa villages to adopt more water-friendly agricultural practices. In coordination with a number of local groups including the Uluguru Nature Reserve (UNR) Office and Sokoine University of Agriculture (SUA), farmers from participating villages were paid to adopt a combined structural (including terracing), vegetative (including reforestation) and agronomic (including intercropping with fruit trees) approach to improve downstream water quality. Payments are administered on completion of a given set of conservation activities, and overseen by village governments who manage the relationship between farmers and the main urban users. As a result of the scheme, sediment levels in the catchment have fallen and the productivity of participating farmers’ has increased over threefold in places, with the mean number of meals per day rising from one and a half in 2008 to three now. One of the main challenges that the project encountered was engagement with smallholders in poverty. Many workers in the participating villages are landless or own less than 0.5 ha, over 65 years old, or do not possess sufficient labor power to implement the conservation measures which are subsequently rewarded. The project required the development of additional strategies for enabling the participation of these groups. weADAPT (2013), ‘Equitable Payments for Watershed Services (EPWS) in the Uluguru Mountains, Tanzania’ (accessed on 12/5/16 at https://www.weadapt.org/ * knowledge-base/ecosystem-based-adaptation/equitable-payments-for-watershed-services) Kwayu et al. (2013), ‘Farmer participation in the Equitable Payments for Watershed Services in Morogoro, Tanzania’ Box 24: Heredia Public Service Enterprise PES Scheme, Costa Rica Empresa de Servicios Públicos de Heredia (ESPH), or Heredia Public Service Enterprise, is a private water company serving the city of Heredia in Costa Rica. The company was concerned about the potential impact of population growth in the demand region on water supply, especially during the dry season when groundwater becomes the only viable source*. Informed by willingness-to-pay studies, ESPH added an extra charge to water bills for users in Heredia. The funds raised through this extra tariff are invested by the company in upland catchment protection and reforestation, which includes strategic planting in areas of high vulnerability. The results generated through this funding are vetted by professional foresters, and the scheme has successfully safeguarded the company’s future and mitigated risks to the city’s water supply. Some of the important factors behind the scheme’s success include the guaranteed flow of funding a as a result of the mandatory tariff added to all consumers’ water bills that allows for strategic planning and program security, and the funds generated by the scheme being transparently placed into a fund whose sole purpose is to invest in catchment conservation. This transparency helps minimize the threat of corruption or leakage. However, the scheme has also dealt with challenges. One of the predominant challenges is that the national regulatory authority did not accept the conclusions of the company’s WTP schemes and approved a mandatory tariff that was significantly lower than the company had determined users would accept. This has limited the extent of the funding available, constraining conservation efforts in the catchment. Watershed markets (2012), ‘Costa Rica- Empresa de Servicios Públicos de Heredia (ESPH)’ (accessed on 12/5/16 at http://www.watershedmarkets.org/casestudies/ * Costa_Rica_ESPH.html) TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 53 There are also some more sophisticated examples of PES-like schemes including developer contributions and credit trading schemes. While these may contain an element of ‘polluter pays’ in some circumstances, for example, where investments are made to offset environmental externalities elsewhere, they do nevertheless operate on the principle that land managers are rewarded for the ecosystem services they provide. An example of a credit trading program is provided below. Similar schemes are now in operation in hundreds of US cities. Box 25: Washington, D.C. Stormwater Retention Credit Trading Program Stormwater run-off is one of the biggest and fastest-growing source of water pollution in Washington D.C. where up to thirteen billion liters of run-off and sewage flow into local rivers that course into the Chesapeake Bay estuary each year. Because of this threat to local waterways, the nation’s capital is among more than 700 U.S. cities that are required by Federal regulation to invest in new infrastructure to manage stormwater runoff. The District has one of the country’s oldest sewage systems, which during moderate rain, sends untreated waste and pollution-laden run-off overflowing into the city streets and watershed. This severely degrades aquatic habitat and impacts industries within the Chesapeake Bay, North America’s most productive estuary. Typically, stormwater management makes use of engineered infrastructure to compensate for a regulating ecosystem service that no longer works well in cities because so much area is built and paved over. Stormwater infrastructure in many places is easily overwhelmed as severe storms are becoming more frequent. The alternative to constructing more hard infrastructure is to re-create, or approximate, the processes nature uses to handle stormwater in the first place. In 2013, the District Department of the Environment (DDOE) within Washington, D.C. adopted local stormwater regulations with an innovative trading program that allows property owners (including homeowners, churches and, businesses) who voluntarily implement green infrastructure that reduces stormwater runoff to earn credits. Developers who are required to manage stormwater runoff on projects, can then meet the regulatory requirements by purchasing credits from offsite designs that reduce stormwater runoff, like rain gardens, green roofs, permeable pavement and other green infrastructure practices. The idea is that by giving other properties throughout the district a financial incentive to trap runoff on their own land, the city can capture more “first flush” water—the initial rainfall that catches the most pollution—before it hits the rivers. -benefits, including expanded green space, Investments in green infrastructure also provide a host of valuable co­ reduced localized flooding, and jobs to build and maintain green infrastructure sites. For further information see District of Columbia Department of Energy and Environment: http://doee.dc.gov/ src%20 Page 54 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 7.5 Links to Further Information Resource Link Description of Resource PES Learning Tools http://www.katoombagroup.org/ An introductory primer to assessing learning_tools.php and developing Payments for Ecosystem Service deals. Includes links to examples and additional resources. Payments for Ecosystem Services: http://www.unep.org/pdf/ Provides an introduction to the Getting Started - A Primer PaymentsForEcosystemServices_en.pdf concept of Payments for Ecosystem Service (PES) and how PES deals work. It is intended for an audience interested in exploring the potential of PES — either as prospective PES sellers themselves or as staff of organizations that work directly with communities or landowners who may be interested in PES. Also provides guidance on conditions under which PES is most relevant and likely to succeed. Introduction to Payments for http://www.katoombagroup.org/ Provides an introduction to the Ecosystem Services: A Reference documents/cds/uganda_2011/ concept of PES as well as examples Book for Uganda Introduction%20to%20Ecosystem%20 of different types of PES schemes. Services%20and%20Climate%20Change/ Includes detailed examples of PES Learning_About_ES_FINAL.pdf transactions in Africa as well as information on where to find further support for the development of PES projects in Uganda. Katoomba- CARE Payments for http://www.katoombagroup.org/regions/ A collection of transactional resources Ecosystem Services (PES) Contract international/legal_contracts.php for use by communities, project Toolkit developers and lawyers interested in contracting for ecosystem services. Resources include template contracts, example clauses, and contract drafting and design information. PES Best Practice Guide https://www.gov.uk/government/ Detailed guidance for the design and publications/payments-for-ecosystem- implementation of PES schemes, services-pes-best-practice-guide including an annex of case studies from around the world Payments for Ecosystem Services: http://www.afdb.org/fileadmin/uploads/ Describes the potential role of A Promising Tool for Natural afdb/Documents/Publications/Payment_ PES in promoting the sustainable Resources Management in Africa for_Environmental_Services_-_A_ management of natural resources promising_tool_for_natural_resources_ in Africa and how to build a management_in_Africa_-_06_2015.pdf robust approach to harnessing this potential. It focuses on three types of ecosystem service: carbon sequestration and storage, biodiversity conservation and watershed protection and includes a number of useful case studies. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 55 THIS PAGE INTENTIONALLY LEFT BLANK Page 56 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS VIII. COMMUNITY-BASED NATURAL RESOURCE MANAGEMENT COMMUNITY BASED NATURAL RESOURCE MANAGEMENT Water Land This instrument Quality and Air Quality Solid Waste Flooding Deforestation Degradation addresses Wastewater  — — —   Unsustainable use of natural resources and unequitable access to natural resources can Targets work towards promoting livelihood security and biodiversity conservation Type of instrument: Collective approach to managing resources • Best practice examples are in rural areas. However, may have applicability in an urban setting Key considerations • Requires working closely with a local community and may require a lengthy period of time before benefits are realized Key Local communities, non-governmental organizations stakeholders Case study • CAMPFIRE Program, Zimbabwe examples: • Kam’mwamba Community Integrated Natural Resource Management, Malawi 8.1 Overview Community-based Natural Resource Management • Individuals will conserve a resource if benefits (CBNRM) is a bottom-up approach to conserving natural exceed the costs of conservation; it is unrealistic resources. It empowers local communities to take to expect poorer communities to undertake ownership and management of natural resources with conservation efforts that do not enhance their a view to managing them sustainably. This is especially livelihoods or daily lives; important in areas where natural resources underpin • Successful management of natural resources at a the livelihoods of low income households. CBNRM is community level is based on a supportive, enabling achieved by transferring or partly sharing management policy and legislative environment responsibility, and including local communities in decision making processes. The central driver of CBNRM • Equitable and transparent sharing of any revenues is the concept of shared management and the creation of earned is essential and has proved to be central to an enabling environment that facilitates communities to the success of many projects.1 take ownership of ‘their’ natural resources. The ultimate CBNRM has become a popular instrument amongst aim is to enhance conservation efforts and achieve provincial and national governments, and there have sustainable and equitable use of natural resources. been moves to integrate the approach into policies and strategies. Indeed, CBNRM became the dominant Key principles underpinning the approach include: conservation and development paradigm of the 1990s and its principles have been adopted by international aid • Decentralized decision making and power given to agencies and lending organizations across the world. local communities • Local communities are best placed to conserve 1 Mpingo Conservation & Development Initiative, Community-Based Natural natural resources; Resources Management available [online] http://www.mpingoconservation. org/community-forestry/what-is-community-forestry/community-based- natural-resources-management/ TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 57 CBNRM requires long-term engagement, decentralized 8.3 How CBNRM Works in Practice decision-making power, clearly defined objectives CBNRM offers locals an incentive to conserve natural that are understood and agreed upon by participating resources by giving them power over these resources communities, and tangible direct benefits. These and a stake in any profits earned from them. benefits are financial or related to employment opportunities. Indirect benefits comprise capacity The introduction of CBNRM in Botswana (see Box 26) building and the up-skilling of communities, as well as provides a number of valuable lessons on how CBNRM opportunities to diversify local economies. There is also projects ought ideally to work. It generally requires a need for multi-layered collaboration across NGOs, an enabling policy and legal framework. For example, private sector investors, multi-lateral development Botswana integrated the concept of CBNRM into two banks, government institutions and technical service policy documents; the Wildlife Conservation Policy organizations. (1986) and Tourism Policy (1990). This created an enabling environment for the implementation of CBNRM approaches in Wildlife Management Areas. 8.2 How the Instrument Works Successful CBNRM should bring about a number of outcomes, including the diversification of livelihood Box 26: CBNRM in Botswana options in the use of natural resources so as to minimize risks in case of natural and economic disasters and The CBNRM strategy undertaken by Botswana has the sustainability of a community’s natural resource been hailed as an innovative conservation paradigm. base, to secure livelihoods for current and future Its success is attributable to a number of key generations. CBNRM is a complementary activity that enabling factors: the country’s legal structure, and supplements incomes and activities rather than being policy and institutional environment; buy-in from the main income generating activity. Essential to the local communities; the credibility of projects; and success of any CBNRM scheme is the involvement of all the building of mutual trust within communities. stakeholders in the development and implementation In addition, Botswana’s experience with CBNRM of a scheme, including local organizations, local suggests that: governments and community organizations and community involvement in the development and • Participation from community members at all implementation of policies and laws (for instance, land levels, not just those traditionally in leadership tenure and distribution of benefits and resources). roles, is a key element in successful CBNRM; CBNRM can also facilitate local communities to • Enabling factors must be in place before introduce byelaws to regulate access to and use of a projects commence – there is no need to rush natural resource and set and collect user charges. In projects through to implementation. Although some scenarios, it also gives local communities power to communities may be keen to get started and penalize individuals who disregard byelaws. generate benefits, it is important to have key elements in place first both at a local scale and an implementing/institutional level; and 8.2.1 CBNRM in Urban Areas • Given the appropriate tools, training and CBNRM is applicable as a tool to support environmental enabling policy and legislative environment, planning and management of the peri-urban communities can produce successful outcomes, environment. Increasing pressure from expanding improving both conservation efforts and urban areas has led to environmental degradation community well-being. and created a need for environmental approaches like Source:  FAO, Thakadu, O. (undated) The Concept of Community Ownership CBNRM in urban and sub-urban areas. The need for such and Mobilization: Experiences from Community-Based Natural Resources approaches is especially pronounced at the peri-urban Management, Department of Wildlife and National Parks, Botswana. Available [online] http://www.fao.org/docrep/006/y3970e/y3970e0a3.htm interface, where urban and rural land uses mix and often clash. Environmental impacts of particular concern in these urban and peri-urban areas include agricultural land loss and degradation, water resource exploitation, and waste disposal. CBNRM is an approach that can lead to the restoration of ecological balance in such degraded and fragile ecosystems. Page 58 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS 8.3.1 Risks Risks with CBNRM include community level conflicts over how resources are shared or managed and who profits from management interventions. High expectations and poor capacity building in local communities can lead to frustration, slow progress and ultimately projects not achieving their objectives. 8.3.2 Challenges Challenges are largely context-specific, but in many parts of Africa informal land tenure is a barrier to CBNRM. Group ownership and territorial rights may be novel concepts for communities resident in target areas. Individual benefits can also be small as income is split between multiple households across communities. 8.4 Case Studies There are a number of case studies of successful CBNRM from around the world. These include: Box 27: CAMPFIRE Program, Zimbabwe The CAMPFIRE program (Communal Areas Management Program for Indigenous Resources) is a program designed to value wildlife as a renewable nature resource. It allocates ownership of wildlife to indigenous populations. At the height of the CAMPFIRE program, 60 rural district councils participated, resulting in villagers benefitting from trophy hunting, while others embarked on a number of income-generating projects such as meat cropping, fishing, Mopani worms sales and safari operations. Between 1989 and 2004, the program raised about US$30 million, which was ploughed back into communities, leading to improved wildlife management and better livelihoods. Source:  http://www.fao.org/docrep/u5200e/u5200e06.htm Box 28: Kam’mwamba Community Integrated Natural Resource Management and Use Project, Malawi The Kam’mwamba community had experienced heavy deforestation from both commercial and local exploitation of 3000 hectares of indigenous forest. The Community Integrated Natural Resource Management and Use Project aimed to identify economic value in the indigenous forests and devise incentives through which the community could benefit from such value, while also conserving the forests. Economic value was identified in the harvesting and marketing of non-timber forest products. The success of the project demonstrated the benefits of sustainable livelihood and environmental management strategies that build on community resilience. It also showed that adaptive capacity lessens the vulnerability of the community to future climate change. Source:  Chishakwe, N., Murray, L., Chambwera, M. (2012) IIED TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 59 8.5 Links to Further Information Further guidance can be found at the following links: Resource Link Description of Resource Chishakwe, N., Murray, L., http://pubs.iied.org pdfs/10030IIED. Analyses linkages between Chambwera, M. (2012) IIED pdf? community-based adaptation and community-based natural resource management, and identifies synergies that will enable the two approaches to be mutually beneficial. Lekha, A.K. (2011) The quest https://deepblue.lib. Analyses differences in for governance: Decision umich.edu/bitstream/ groundwater extraction decisions making on a groundwater handle/2027.42/84559/lyadav_1. across locations and livelihoods commons in Indias Drylands. pdf?sequence=1&isAllowed=y using a common-pool resource experiment. Gosling, A. (2011) A case http://agris.fao.org/agris-search/ Analysis of the benefits and study of Bigodi Wetland search.do?recordID=AV2012090138 constraints associated with Sanctuary as a community community-based natural driven Community- resource management at Bigodi Based Natural Resource Wetland Sanctuary, western Management initiative: Uganda. maintaining livelihoods and wetland health. Tang, Z. & Zhao, N. (2011) http://www.worldscientific.com/doi/ Applies regression analysis to Assessing the principles of abs/10.1142/S1464333211003948 identify factors influencing the community-based natural quality of local environmental resources management conservation plans in 54 cities. in local environmental conservation plans. Journal of Environmental Assessment Policy & Management Page 60 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS IX. APPENDICES Appendix 1: Potential Sources of International Finance to Support Green Urban Development Initiatives Fund Hyperlink Global Environmental Facility https://www.thegef.org/gef/whatisgef The Global Environmental Facility (GEF) provides grants and funding that assist in protecting the global environment and in promoting environmental sustainable development. It serves as a financial mechanism for five international environmental conventions: • Convention on Biological Diversity (CBD) • United Nations Framework Convention on Climate Change (UNFCCC) • Stockholm Convention on Persistent Organic Pollutants (POPs) • United Nations Convention to Combat Desertification • Minamata Convention on Mercury The Facility administers four trust funds: the Global Environmental Facility Trust Fund, Least Developed Countries Trust Fund, Special Climate Change Trust Fund, and the Nagoya Protocol Implementation Fund. GEF support for environmental sustainable development projects is provided to government agencies, civil society organizations, private sector companies and research institutions. Green Climate Fund http://www.greenclimate.fund/the-fund/the-big- The Green Climate Fund (GCF) mobilizes funding to low- picture#mission emission and climate-resilient projects in developing countries, with an even split between adaptation and mitigation projects. Its funds are focused particularly on countries that are especially vulnerable to climate change: Least Developed Countries, Small Island Developing States, and African States. The Fund is an operating entity of the UNFCCC. Clean Development Mechanism http://unfccc.int/kyoto_protocol/mechanisms/ The Clean Development Mechanism (CDM) is a climate clean_development_mechanism/items/2718.php change mitigation instrument defined by the Kyoto Protocol. The CDM allows countries with an emission- reduction or limitation commitment under the Kyoto Protocol to establish emission-reduction projects in developing countries. Such projects generate certified emission reduction credits, which contribute toward Kyoto targets. Some 1,650 CDM projects have been started since the CDM’s implementation in 2006. TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS Page 61 Fund Hyperlink Climate Investment Funds https://www-cif.climateinvestmentfunds.org/about The Climate Investment Funds provide developing and middle income countries with concessional financing Barnard, S. (2015) Climate finance for cities. for projects that reduce greenhouse gas emissions and [Online] Available from: https://www.odi.org/sites/ manage climate change. The CIF is comprised of four odi.org.uk/files/odi-assets/publications-opinion- programs: files/9660.pdf [Accessed 11 May 2016.] • Clean Technology Fund • Pilot Program for Climate Resilience • Scaling up Renewable Energy in Developing Countries Program • Forest Investment Program In total, these programs have US$8.3 billion ready for disbursement. Barnard (2015) suggests that the Clean Technology Fund is the most important actor in providing financing for urban projects. Sustainable Energy Fund for Africa http://www.afdb.org/en/topics-and-sectors/ The Sustainable Energy Fund for Africa (SEFA) is a initiatives-partnerships/sustainable-energy-fund- multi-donor trust fund administered by the African for-africa/ Development Bank (AfDB). SEFA supports small- and medium-scale renewable energy and energy efficiency projects in Africa. In particular, it aims to assist projects at an early stage of development that would not otherwise proceed to implementation because of initial development costs and a lack of start-up capital. Africa Climate Change Fund http://www.afdb.org/en/topics-and-sectors/ The Africa Climate Change Fund (ACCF) is a trust fund initiatives-partnerships/africa-climate-change- hosted and managed by the African Development fund/ Bank (AfDB). The ACCF aims to assist African countries in transitioning to a climate-resilient and low-carbon development pathway, in particular by facilitating access to climate finance. ACCF grant recipients include African governments, non-governmental organizations, and research and regional institutions. Interact Climate Change Facility http://www.edfi.be/about/iccf.html The Interact Climate Change Facility (ICCF) finances renewable energy and energy efficiency projects in the private sector in developing countries and emerging markets. It will fund up to 75% of the total combined financing, providing between EUR 10 million and EUR 45 million per project. The authorised financial instruments used by the facility are Senior Loans and Mezzanine Debt. The ICCF’s funding capacity is provided by Agence Française de Développement, the European Investment Bank (EIB), BIO (Belgium), CDC (United Kingdom), COFIDES (Spain), DEG (Germany), FINNFUND (Finland), FMO (the Netherlands), NORFUND (Norway), OeEB (Austria), PROPARCO (France), Sifem (Switzerland) and SWEDFUND (Sweden). Page 62 TOOLKIT OF MEASURES FOR MANAGING ENVIRONMENTAL EXTERNALITIES IN URBAN AREAS