Private aid to help cope with climate change
Koos Neefjes, climate change expert and director of Climate Sense Ltd., writes about the obstacles as well as the future advantages for private investment in responding to climate change.
Vietnam is severely hit by climate change, but lacks financial resources for its green projects.
In 2015, Vietnam issued its Nationally Determined Contribution (NDC) to the Paris Agreement on climate change.
This contains the country’s pledges to reduce its greenhouse gas (GHG) emissions and to adapt to the effects of climate change until 2030.
Vietnam’s GHG emissions mitigation target is an 8 per cent reduction by 2030 compared with “business as usual” emissions levels by using its means, and 25 per cent reduction if it receives international financial and technical support.
For this adaptation, the government estimated that the national budget would carry “one-third of the financial needs” and “international support and private sector investment for the remainder”.
Vietnam is reviewing and updating its NDC and is expected to submit it in early 2020.
According to international agreements, countries will increase their commitments on every review and revision.
So, what are the opportunities for Vietnam to do so?
Most of the investment that is required for responding to climate change, above what Vietnam has committed to achieving with its means, would have to come from official development assistance (ODA) and the domestic and foreign private sector, especially for emission reduction.
However, a large part of ODA concerns loans to state-owned enterprises (SOEs) such as Electricity of Vietnam (EVN).
Such loans used to be guaranteed by the state, but because of the national public sector debt ceiling, it is preferred that such loans are directed to SOEs, without a state guarantee and liability.
So, SOEs might get less ODA and need more private finance, for example, to invest in increased energy efficiency and renewable energy production.
However, just targeting the private sector does not make it happen. Policies are needed to encourage financiers and businesses to invest in measures that reduce emissions and that increase Vietnam’s climate resilience.
Such policies can be divided into three groups: financial incentives, subsidies and other public sector support to encourage investment and consumption; taxes or fees to dis-incentivise certain investments and consumption patterns; and regulations that enterprises or consumers must follow, and that must be enforced by authorities.
Let me give a couple of examples of policies that can increase private sector investment in green growth, GHG emissions mitigation, and climate change adaptation in Vietnam.
To encourage investment in wind and solar power production, the government has issued feed-in tariffs (FiTs) that the electricity buyers (for example EVN corporations) must pay.
The current FiTs for solar and wind power are seen by investors as attractive enough to invest in, and that could lead to major GHG emissions reduction.
In the past year, we have indeed witnessed substantial investment in solar photovoltaic and also some investment in wind power.
These tariffs are higher than the average electricity selling price, and so this renewable energy is cross-subsidised by cheaper power sources such as hydroelectricity, and ultimately paid for by the consumer.
However, the policies are temporary, and these technologies are becoming more affordable, so FiTs are expected to be reduced, and retail prices will be gradually increased so that the subsidy will be phased out.
On the flipside, coal mining, transport, and consumption in power production and heavy industry are still being supported as well.
The public sector invested and has provided guarantees for loans for the transport infrastructure, which is money that stimulates emissions, whereas it could also be used for cleaner alternatives.
Such support to fossil fuels is counter-productive from a climate change perspective.
An example of support to recover from damage and losses from climate-related disasters is to apply insurance products.
A few years ago, the government and an insurance company piloted agricultural insurance for small farmers, with the government paying part of the premiums and farmers the other part, thus generating a private capital flow.
Insurance companies invest the revenue in markets, grow the capital and pay farmers who suffer disaster damages.
Without this insurance, the government would have to step in with emergency aid, including for example the provision of seeds for replanting of crops.
Vietnam’s environmental taxes are comparatively low, and carbon taxes are still absent.
This contributes to low petrol prices compared to other countries.
A significant tax or carbon-fee on petrol and diesel would increase costs.
Such a price rise will not be popular, but it will encourage consumers to limit petrol consumption, or drive less or more slowly.
Consumers would also buy more efficient motorbikes and cars, or electric ones.
A tax on coal would have a similar effect on power production and heavy industry, therefore encouraging investment in energy-efficient tech and perhaps switch partly to other forms of energy.
The government could allocate additional tax revenue to green investments or incentive policies.
Economic model analysis suggests that the result of such changes would mean an increase in national economic growth because of increased efficiency and modernisation, even though many believe that the opposite would happen.
Vietnam is currently preparing policies on carbon markets, which can have the same effect as a carbon tax.
For example, all producers in cement or steel production would be allocated a maximum amount of GHG emission rights per unit of production.
If they emit less GHG than those rights because they have invested in efficient, low-carbon technologies, they can sell their emission rights to manufacturers who emit more GHG than they have the rights to.
Depending on how many units of emission rights are allocated, this can create a high carbon-price and therefore, a strong incentive for industries to become more energy efficient with a low carbon footprint.
Energy efficiency or pollution/emission standards are types of regulations that can make a real difference.
This can be done for specific sectors of the manufacturing industry, vehicles, buildings, and household appliances.
They may be recommended standards or just labels for consumers to be able to compare products or mandatory standards that inspection agencies must be able to enforce.
This could force producers to invest in certain technologies, and it could also forbid the manufacture, sale, or use of certain equipment.
Construction standards for “climate-proofing” should be developed for industrial zones and manufacturing plants, tourist venues, schools and hospitals, to ensure that they are adapted to flood risks, extreme temperatures, or extreme rainfall.
Standards for construction of roads, railways, bridges, or harbours will make them more resilient for similar risks as well as landslides.
Some of this is public infrastructure that will not attract the private sector.
However, most manufacturing and tourism, as well as investment in some schools and hospitals, will be by carried out by the private sector.
Transport infrastructure includes build-operate-transfer investments where the private sector can recover their investment by charging tolls for a certain period.
Climate proofing standards will ensure that they contribute to the climate resilience of the nation. VIR
Climate change expert and director of Climate Sense Ltd.