NOVEMBER 2017 GOVERNANCE NOTES No.4 APRIL 2019 No.14 CLIMATE CHANGE AND GOVERNANCE: OPPORTUNITIES AND RESPONSIBILITIES Prepared by Adrian Fozzard, Governance Global Practice This Governance Note explains why climate change is a Extended time frame. Discounting leads decision-makers to give governance issue. It describes the development challenge that less consideration to adverse consequences far into the future. climate change poses and the policy response. It outlines the Climate change requires us to look beyond the typical planning role of institutions in tackling climate change and key entry horizon and the electoral cycle. This poses a problem of credible points for the governance practice. commitment. It is uncertain that future governments will continue today’s policies no matter how enlightened they may be. CLIMATE CHANGE IMPACTS Anthropogenic emissions of greenhouse gases are causing Uncertainty. Decision making is hampered by a cascade of increases in global average temperatures. Without intervention uncertainties: how climate change will affect future climatic global temperatures could rise by as much as 40C by end of the conditions; how climatic conditions will impact on ecosystems; century. This would have catastrophic consequences. Significant and how people will respond to changes in ecosystems. Our changes in climate and weather patterns are expected even if we decision-making methods assume that today’s environment is a succeed in curtailing the increase in temperatures to less than good guide to the future. This is no longer true. 20C. Climate change will increase the frequency and intensity of Unclear accountability. Government action on climate change is heatwaves, droughts, and storms. It will shift seasonal weather hampered by unclear institutional mandates, multiple actors, and patterns. Temperatures will rise everywhere but more so in the horizontal and vertical coordination challenges. northern latitudes. Some areas will become wetter, others drier. Climate change will impact on ecosystems: destroying some, Perceived trade-offs. Finally, investment in climate change action rendering others less productive. Small island economies and is often perceived as a trade-off with investments that generate countries in the tropics will be worst affected. Climate change more immediate benefits. This need not be the case. The response will lead to a rise in sea levels putting most of the world’s largest to climate change can create new economic opportunities. cities at risk. Climate change will push an additional 100 million people into poverty by 2030. Many of those affected will have CLIMATE CHANGE MITIGATION to relocate, moving to cities and to more productive areas. Mitigation is action to limit the magnitude and rate of long- Deteriorating living standards and migration may fuel conflict. term global warming. The Intergovernmental Panel on Climate Change (IPCC) estimates that a 20 percent absolute reduction CLIMATE CHANGE AND GOVERNANCE FAILURES in CO2 emissions is needed by 2030 to maintain a pathway Government action on climate change is hampered by a series of limiting global warming to 20C and a 40% absolute reduction in governance failures. An understanding of these governance failures emissions is needed maintain a pathway to 1.50C. If we are to is critical for the design of policy and institutional interventions to meet these targets, the world will need to move to a near zero address the challenge of climate change. carbon economy in the years to 2030. Decarbonization requires the elimination of fossil fuels from much of the world’s electricity Tragedy of the commons. Climate change is an externality. Those generation, industry and transport, the reversal of deforestation that generate greenhouse emissions as producers and consumers and adoption of sustainable agricultural practices. do not bear the cost of the damage they cause and so have no Climate change mitigation requires reductions in human incentive to reduce emissions. emissions of greenhouse gases and protection of carbon sinks, Differential impacts. Adverse impacts will not be shared equally. such as forests, soils and natural landscapes. Mitigation is largely Vulnerability to climate change is closely linked to poverty. Climate about creating incentives for economic actors – households, change also entails significant inter-generational transfers. Today’s businesses, public sector – to change technology, production emissions will remain in the atmosphere for decades affecting and consumption so that they reduce greenhouse gas emissions. future generations who have no voice in today’s policies. Governments have three key instruments. 1 GOVERNANCE NOTES APRIL 2019 No.14 Carbon Pricing. An important first step is the elimination of fossil Such investments require careful appraisal of costs, benefits and fuel subsidies. Carbon taxes can ensure that the full economic the risks inherent in long-term public investment plans (see Box 1). cost of greenhouse gas emissions is reflected in fuel prices. Local measures such as congestion charging in cities can reduce vehicle Box 1: Avoiding Stranded Assets and Lock-ins emissions. Carbon pricing can also entail payments to economic Decisions taken today will determine development pathways actors that reduce emissions by, for instance, maintaining forests far into the future. Infrastructure – power plants, roads, that sequester carbon. urban areas, irrigation schemes, flood defenses – is typically Regulation. Regulation guides the behavior of economic actors by, designed to have an operating life of many decades. Failure for instance, setting energy efficiency standards for appliances, to take climate change into account will undermine the long- requiring companies to blend renewable and fossil fuels, curtailing term viability of these investments, increase vulnerabilities deforestation and mandating land use practices that reduce to climate change and hinder future climate change emissions. adaptation and mitigation. Stranded assets are investments that become unviable Expenditure. The public sector can investment in low and zero- because of changes in the operating environment, policy emission technologies and infrastructure. Financial incentives or market conditions. Irrigation schemes become stranded can be used encourage private investment in technologies and when their water source dries up. Coal-fired power plants practices that reduce emissions. become stranded when tightened emissions standards force their closure. CLIMATE CHANGE ADAPTATION Policies and public investments can lock-in households Adaptation is action to prevent or minimize adverse climate and businesses into economic activity that limits their change impacts by strengthening the resilience of households, flexibility and increases vulnerability. Authorization of new businesses, public sector and their capability to take advantage coal-fired power plants locks in high levels of emissions for of opportunities that may arise. Given that significant climate decades to come. Construction of a dyke will encourage change impacts are inevitable, adaptation should be integral to households and businesses to invest, work and live in the all government policies and programs. protected area, leaving them exposed to extreme events and discouraging them from seeking alternatives. Vulnerability assessment and awareness raising. Government is best placed to assess risks arising from climate change and their temporal, spatial, social and economic impacts. Communicating CLIMATE CHANGE INSTITUTIONS AND GOVERNANCE this information to government officials, the private sector and At the 2015 Paris Climate Change Conference countries agreed households helps them make informed decisions about how to to submit commitments on Nationally Determined Contributions deal with future climate change impacts and take these risks into for climate change mitigation and adaptation action post-2020. account in their decision-making. As of March 2019, 183 of 189 states parties had submitted their Soft Adaptation. Soft adaptation uses natural systems, changes first NDCs. NDCs are voluntary commitments to transform in behavior, financial instruments and investments in low impact development trajectories so that they set the world on a course technologies to adapt to climate change risks. Examples include towards sustainable development, aimed at limiting warming to the use of coastal vegetation to reduce the impact of flooding, 1.5 to 2ºC above pre-industrial levels. NDCs reflect each country’s changes in cropping patterns to adapt to changes in seasonal ambition for reducing emissions, taking into account their rainfall and promoting the purchase of insurance to help manage domestic circumstances and capabilities. Parties also agreed weather-related risks. Soft adaptation often requires action to strengthen their ability to adapt to the adverse impacts of by households and businesses and typically has low up-front climate change and foster climate resilience. and long-term costs for the public sector. Investments in well- Countries have typically assigned institutional responsibility being, education and skills and the creation of new economic for the formulation of NDCs and national climate change opportunities help build households’ resilience to climate change strategies to ministries of environment or specialized climate by empowering them to respond flexibly to a changing change agencies. Most countries now have climate change environment. mitigation and adaptation strategies. A few countries have sought to strengthen the credibility of emission reduction Hard Adaptation. Engineers can design technical solutions to commitments by enacting legislation. The United Kingdom’s address some climate change impacts, such as construction of 2008 Climate Change Act, for instance, commits future dams and dykes to address increased flood risks and irrigation governments to a phased reduction in emissions to 80 percent schemes to adapt to reduced seasonal rainfall. Hard adaptation below a 1990 baseline by 2050 and puts in place independent typically requires significant upfront investment by government. review arrangements to monitor compliance. 2 GOVERNANCE NOTES APRIL 2019 No.14 Often it has proved difficult to integrate climate change Finance will also play a critical role in ensuring that Nationally strategies and commitments into the core planning instruments Determined Contributions and climate action plans reflect that drive government action. As a result, implementation of resource constraints. climate change strategies has fallen short of expectations and inadequate attention has been given to adaptation. Recognizing Policy Analysis. Ministries of Planning and Finance can assess, the short-comings of the current institutional arrangements, monitor and report on climate change impacts of public António Guterres, UN Secretary General, called for “a new expenditures using tools such as expenditure reviews and framework that integrates climate and disaster risk in all aspects expenditure tagging. Policy analysis helps government understand of finance, planning and budgeting” at the Bali Annual Meetings in the climate impacts of public policies and informs expenditure 2018. In April 2019, Ministries of Finance signed up to the Helsinki plans and budgets. Principles committing themselves to playing an active role in Public Investment Management. All public sector projects should formulating, resourcing and implementing climate change policies take climate change impacts into account, seeking to minimize and plans (see Box 2). adverse impacts on climate through mitigation and minimize adverse climate impacts through adaptation. This requires careful appraisal. Appraisal techniques should integrate the direct and Box 2: Helsinki Principles social costs of climate change and build in flexibility to respond to We, as Finance Ministers from around the world …. Hereby the uncertain impacts of climate change. establish a Coalition of Finance Ministers to demonstrate our leadership in the response to climate change, wherein we will Carbon Pricing. Carbon pricing increases the cost of activities operate within our national framework, competencies, and that have detrimental impact on climate. Ministries of Planning mandate to support the following principles: and Finance can take account of these impacts in their decision- making by applying a shadow price for carbon in policy and Principle 1. Align our policies and practices with the Paris project appraisal. They can influence the energy choices of Agreement commitments. households and businesses by eliminating fossil fuel subsidies and Principle 2. Share our experience and expertise with each introducing carbon taxes. other in order to provide mutual encouragement and promote Public Procurement. Green procurement takes in the account the collective understanding of policies and practices for climate social cost of products and works over their lifetime by factoring action. in the cost of environmental damage. Green procurement can help Principle 3. Work towards measures that result in effective create demand for green products because the public sector is carbon pricing. usually the single largest consumer in an economy. Principle 4. Take climate change into account in Risk Management. Climate change – in particular, the increasing macroeconomic policy, fiscal planning, budgeting, public intensity of weather-related disasters – poses a significant long- investment management, and procurement practices. term risk to public finances and should be taken into account when determining fiscal policy (see Box 3 on page 4). Principle 5. Mobilize private sources of climate finance by facilitating investments and the development of a financial Inter-Governmental Fiscal Relations. Local governments are sector which supports climate mitigation and adaptation. important actors in climate change mitigation and adaptation. Principle 6. Engage actively in the preparation and Well-designed inter-governmental fiscal transfers provide implementation of ambitious Nationally Determined incentives for local governments to undertake mitigation and Contributions submitted under the Paris Agreement. adaptation actions. Transfers and regulations can also be used to tackle moral hazards: the temptation for local authorities to sit back and wait for central government to deal with climate change Ministries of Planning and Finance can ensure that government risks in their jurisdiction. agencies take climate change into account by putting in place a climate-smart public financial management and planning Mobilization of Climate Finance. Governments have an interest in framework. maximizing their country’s access to concessional climate change finance from multi-lateral and bilateral sources. The World Bank Climate Change Planning. Ministries of Planning and Finance finances Development Policy Operations that support mitigation will need to integrate climate change impacts and the fiscal and adaptation. Governments can also mobilize financing from impacts of climate policies in macro-economic models, fiscal risk markets on attractive terms by issuing Green Bonds that commit assessments, fiscal plans and budgets. Ministries of Planning and them to implementing climate change policies. 3 GOVERNANCE NOTES APRIL 2019 No.14 NEXT STEPS Climate change impacts on everything that the World Bank does Box 3: Disaster Resilient Government as a development institution. The Governance Practice’s role The financial cost of natural disasters has increased steadily is to help clients put in place the institutional and governance over the last forty years. This trend due to two factors: first, arrangements that will allow them to address the challenge of the growth of populations and economic activity in areas climate change. The Governance Practice will need to embed that are vulnerable to natural disasters, notably coastal and climate change issues in our work with center of government, riverine urban areas; and second, an increase in the intensity planning and finance agencies and through our support across the of weather-related events such as storms and floods. Bank’s country programs. Task teams can promote climate smart Disasters pose a particular challenge to small, island governance by asking themselves: What are climate change economies where a single storm can cause economic challenges facing our client country and counterpart institutions? devastation and render government incapable of response. How can institutional and governance interventions help them The Governance Practice has worked with Caribbean address the challenges of climate change? How can our project countries to build resilient governments. This requires integrate smart climate change actions? support in three key areas: The Governance Practice has made commitments to increase Resource mobilization. Governments can make provision its engagement on climate change and achieve ambitious for disaster response, recovery and reconstruction targets for climate change action in its own project portfolio. before disasters strike through proactive financing using This requires the practice to ensure that all Governance-mapped insurance and contingent financing instruments. They can lending operations consider potential climate change co-benefits. plan procurement for disaster response before the storm The Governance practice will issue technical guidance on the season to facilitate the timely mobilization of materials and calculation of climate change co-benefits and the design of supplies. Procedures can be put in place to ensure the rapid, governance interventions to support climate change action. transparent and effective mobilization, execution, and audit of funds when emergencies are declared. Further reading Resilient Management. Governments can integrate World Bank, Climate Change Public Expenditure and Institutional adaptation and resilience into public investment Review Sourcebook, 2014. management, asset management and public service http://www.greengrowthknowledge.org/sites/default/files/ delivery systems. They can ensure that public assets meet downloads/resource/World_Bank_CCPEIR_Sourcebook_0.pdf appropriate engineering standards and agency-level plans are in place to prioritize services, emergency repairs and Useful resources recovery activities when disasters strike. Climate Change Knowledge Hub - https:// worldbankgroup.sharepoint.com/sites/Climate/ Continuity and Response. Communications and emergency Pages/SitePages/Climate%20Change%20Knowledge. response infrastructure and plans need to be in place to aspx?&tab=sitepages&page=managecontentadmin deal with the most extreme events, so that institutions can continue to operate and are able to implement response and Climate Change & Development 101 Module - https://olc. recovery plans. worldbank.org/content/climate-change-and-development GOVERNANCE GLOBAL PRACTICE Guiding Results through Public Institutions Governance Notes captures knowledge derived from World Bank engagements and technical and financial assistance requests. The views expressed are those of the authors and do not necessarily reflect the views of the World Bank. For more information, contact: govgplearns@worldbank.org. 4