LEDS Finance Resource Guide – Implementing effective financial instruments
Green projects often appear to present higher risks to investors due to the higher capital costs often associated with green, and perhaps unproven and unfamiliar technologies, the financing risks from immature financial markets and institutions, the perceived risk associated with finance in a particular country and sector, and policy risks. These latter risks are not specific to green growth investments but where they apply they add to the already higher risk profile of green projects. The impact of these will vary depending on sector and country context. The real or perceived risks associated with green projects may lead to their rejection by private investors. Providing access to capital through public direct investment will not fix this problem on its own; targeted financial instruments are required to restructure risks or increase returns in order to attract private capital. This section presents resources on a range of instruments that may be used to stimulate investment in LEDS and NDCs. (text adapted from Green Growth Best Practices website)
Implementing effective financial instruments – subsections covered
- General resources
- Resources giving an overview of different instrument types and relevant across a number of different subsections of this section
- Sources of private finance
- Resources about the different types of private finance available and their characteristics
- Risk mitigation
- Resources about the range of instruments designed to mitigate risks
- Resources specifically focused on one kind of risk mitigation instrument – guarantees
- Feed-in tariffs and auctions
- Resources about two of the most widely used instruments to support renewable energy deployment – Feed-in tariffs, and auctions
- Taxes and tax incentives
- Resources looking at the role of taxes and tax incentives
- Carbon pricing
- Resources on carbon pricing, covering both carbon taxes and cap-and-trade schemes
A large number of resources have been produced in recent years on the topic of financial instruments that can be used to stimulate investment in low carbon markets. Many of these cover several or more different instrument types including those focussed more on reducing risks and those focussed more on increasing returns. This section presents a selection of these more general resources about instruments, including several introductory resources and several much more comprehensive resources and frameworks. A number of case studies showing how countries have implemented different instruments are provided, either within the main resources or as standalone case study documents.
Financial Incentives To Enable Clean Energy Deployment: Policy Overview And Good Practices (Clean Energy Solutions Centre / NREL, 2016, 17 pgs)
This policy brief serves as a useful primer on the use of incentives for clean energy and energy efficiency. It introduces the main types of incentive (including tax measures, rebates and performance-based incentives, and loans and credit enhancements), and outlines key design elements for incentives, as well as showcasing some lessons from different country experiences. The references section lists further useful resources for more detailed and country-specific information on financial incentive design.
Moving the Fulcrum: A Primer on Public Climate Financing Instruments used to Leverage Private Capital (WRI, 2012, 36 pgs)
This paper from WRI serves as a useful introduction to the use of financial instruments to promote climate action from the private sector. It demonstrates how the public sector can employ different types of public financing instruments—whether loans, equity, or de-risking instruments—alongside policy and technical support to scale-up private sector investment in low carbon markets. An appendix contains a useful glossary explaining a range of instruments (which is also available as a standalone document).
Derisking Renewable Energy Investment (DREI) (UNDP, 2013, 151 pages)
The DREI framework systematically identifies the barriers and associated risks which can hold back private sector investment in renewable energy. It assists policymakers to put in place packages of targeted public interventions to address these risks. Each public intervention acts in one of three ways: either reducing, transferring, or compensating for risk. The overall aim is to cost-effectively achieve a risk-return profile that catalyzes private sector investment in developing countries at scale. The report describes the framework’s four stages: (i) risk environment, (ii) public instruments, (iii) levelised cost and (iv) evaluation. Section 2.2 provides a guide for selecting specific instruments to address the risks and barriers identified, and for quantifying their impact. To illustrate how the framework can support decision-making in practice, the report presents findings from illustrative case studies for large scale wind energy in four developing countries (South Africa, Panama, Mongolia, and Kenya).
Designing smart green finance incentive schemes: The role of the public sector and development banks (E3G, 2014, 32 pages)
This paper identifies some criteria and principles for assessing whether a green incentive scheme is ‘smart’ and uses these to evaluate financial instruments most commonly used by development finance institutions (DFIs) in the design of green incentive schemes, i.e. concessional lending. This includes green credit lines, grants for technical assistance and investments, and guarantees and insurance products. Chapter 5 provides a case study analysis of the use of these green financial incentives (6 pgs). NB The authors note that while this paper focuses on the role of DFIs in the design of smart green incentives, such work should ideally be led by developing country governments and their national DFIs.
The Design and Sustainability of Renewable Energy Incentives: An economic analysis (World Bank, 2015, 311 pgs)
This comprehensive study assesses the effectiveness of different types of incentive mechanism for renewable energy, including feed-in-tariffs, portfolio standards, quotas, auctions and avoided-cost tariffs. It provides a global taxonomy of the different economic and financial incentives provided by renewable energy support schemes; and considers the effectiveness of incentive mechanisms, the details of tariff design, the integration of climate finance considerations into existing regulatory processes, and financing and affordability issues. The work is based on detailed case studies of Vietnam, Indonesia, Sri Lanka, South Africa, Tanzania, the Arab Republic of Egypt, Brazil, and Turkey, which are included in the report. This study will be of use to policymakers and advisors considering the design of incentive schemes and who wish to take economic principles and evidence into account when setting targets and tariffs.
See 4 illustrative case studies for wind energy in South Africa, Panama, Mongolia, and Kenya, in the UNDP DREI report above.
See case studies in Chapter 5 of the E3G report on smart green finance incentive schemes above.
See 9 detailed case studies for Vietnam, Indonesia, Sri Lanka, South Africa, Tanzania, the Arab Republic of Egypt, Brazil, and Turkey in the World Bank report above.
Using Private Finance to Accelerate Geothermal Deployment: Sarulla Geothermal Power Plant, Indonesia (CPI, 2015, 30 pgs)
This case study analyzes the Sarulla Geothermal Power Plant (GPP) which, if successful, will be the largest single contract geothermal power plant project in the world with a total capacity of 330MW in 2018. The project has the highest private sector involvement of any geothermal project on a previously undeveloped field in Indonesia, thanks to substantial public support provided through a package of instruments: financing, guarantees, and a feed-in tariff.
See also other case studies from CPI exploring best practice in the use of public finance to stimulate private investment. Numerous technologies and instruments are covered.
Taxes and incentives for renewable energy (KPMG, 2015, 80 pages)
While this report is principally designed to help companies and investors stay current with government policies and programs that support renewable energy, it does provide a useful summary of tax and non-tax incentives in use in 31 countries, which may be helpful for developing country policymakers who wish to see which incentive measures are being used in other countries, as a starting point for comparative analysis. The table on page 10 summarizes the different instruments used in the specific countries, and the following country pages provide brief information about the specific incentives.
Sources of private finance
Across debt and equity there is a diverse ecosystem of sources of capital for financing renewable energy and other low carbon options. This includes investors from across the finance sector with different appetites for risk and different return expectations. Policymakers looking to increase the levels of green investment in their country and to finance their NDCs should have a good understanding of the sources of capital available, and which are most appropriate for different project types. These resources provide an introduction to different types of finance and which might be most appropriate for particular investment opportunities based on their characteristics.[text adapted from BNEF/Chatham House report below]
Finance Guide For Policy-makers: Renewable Energy, Green Infrastructure (BNEF/Chatham House/FS-UNEP, 2016, 98 pgs)
This guide provides an introductory and factual overview of the landscape of finance as it relates to renewable energy and green infrastructure investment (including energy efficiency), and outlines how transactions work. Section 1 ‘Finance basics & sources of capital’ introduces the different financial institutions (banks, institutional investors, different types of funds, impact investors) and also explains the roles of the debt and equity markets, and introduces the concepts of yieldcos and green bonds. A brief exploration of cost of capital is provided in Section 1.4. Section 2.4 ‘Completing a transaction’ shows how the types of finance are brought together to finance individual projects.
Demystifying private climate finance (UNEP FI, 2014, 62 pgs)
This report from the UNEP Finance Initiative provides a clear explanation of the types of private finance and their key characteristics. Part A explains the different types of private finance, and describes the variety of sources, intermediaries, legal considerations, and investment objectives that are to be found in the private finance landscape. Part B then analyzes the types of private finance that are particularly relevant to a sample of mitigation and adaptation activities, explains why different project types require different forms of ‘private finance’ to succeed, and explains how the specific characteristics of the project type affect the forms of public intervention that are needed to attract private sector finance.
Catalyzing Climate Finance: A Guidebook on Policy and Financing Options to Support Green, Low-Emission and Climate-Resilient Development (UNDP, 2011, 160 pgs)
This general resource covers many aspects of financing LEDS. It outlines a four-step methodology to assist developing countries select and deploy an optimal mix of public policies and financing instruments to catalyze climate finance in line with national development priorities: Step 1: Identify priority mitigation and adaptation technologies ; Step 2: Define and assess key barriers to technology diffusion ; Step 3: Determine appropriate policy mix to catalyze climate capital ; Step 4: Select financing options to create an enabling policy environment. Chapter 5, on selecting optimal financing mixes discusses different funding sources and possible mechanisms for blending them.
Access resource here
Global Climate Finance: An Updated View on 2013 and 2014 Flows
CPI’s landscape of global climate finance publications track global flows of climate finance. In addition to commentary about the nature of recent flows, the summary graphic presented in Annex B of this update report clearly shows relative size of the main types of finance (balance sheet financing, market rate debt, low cost project debt, equity etc) that make up climate finance flows in recent years, as well as what kinds of institutions these flows come from.
Aligning Kenya’s Financial System with Inclusive Green Investment (UNEP Inquiry / IFC, 2015, 80 pgs)
This report explores Kenya’s financial system from a green investment perspective. It focuses on policy, structural, and investment innovations across the economy and financial sector that would increase capital flows that support sustainable development. Chapter 3 describes the different sources of capital in the Kenyan financial sector, covering the banking sector, retirement / pension funds, insurance funds, capital markets, private equity, savings and credit cooperatives, and FDI. For each source covered, the chapter explores market composition, policy & regulation, and barriers and potential solutions relating to green investment.
See other UNEP Inquiry country papers on e.g. Bangladesh, Indonesia, Colombia, South Africa here
Underlying market barriers and a perception of high risk constrain the development and financing of renewable energy and other mitigation projects. Although falling renewable energy technology costs have significantly lowered the capital needed to invest in new systems, financing renewable energy projects is still difficult in many parts of the world. This is due to the high cost of capital elevated by risks and to underlying market barriers. Identifying attractive projects and gaining access to capital often presents a key barrier to renewable energy investments. Project risk can take multiple forms. These include political and regulatory risk; counterparty, grid and transmission link risk; currency, liquidity and refinancing risk; as well as resource risk, which is particularly significant for geothermal energy. Policymakers, financial institutions and investors can draw from a strong toolkit that can help overcome these barriers, mitigate investment risk and improve access to capital for their LEDS and NDCs. [text adapted from IRENA risk mitigation report below]
Unlocking Renewable Energy Investment: The Role of Risk Mitigation and Structured Finance (IRENA, 2016, 145 pages)
This report identifies the main risks and barriers limiting investment, supplying a toolkit for policymakers, public and private investors, and public finance institutions to scale up their investments in renewable energy. This report is meant to serve as an all-in-one guide to the key financial market instruments for renewables (but many of the instruments are relevant for other low carbon markets). In particular, Chapter 3 (28 pgs) provides an introduction to a range of instruments that can be used to address investment risks: guarantees and insurances; currency risk mitigation instruments; liquidity risk mitigation instruments; and specific geothermal resource risk mitigations. Chapter 5 presents 3 case studies (offshore wind, geothermal, solar), in each case looking at the project structure and success factors.
Also see: Derisking Renewable Energy Investment (DREI) report from UNEP in the ‘Implementing effective financial instruments’ general resources section.
Risk management for energy efficiency projects in developing countries (UNIDO, 2011, 58 pgs)
This paper addresses risk management fundamentals for energy efficiency (EE) projects in developing countries, in particular industrial EE projects. It explores the nature of the risks presented by projects and discusses best practices for EE project risk management with illustrative case studies. The paper also describes behavioral and other obstacles to effective risk management, together with methods for overcoming these obstacles. The role of energy service companies is also considered in identifying and managing projects and reducing risks. The paper concludes with recommendations for both companies and those promoting EE schemes in emerging economies.
Energy Service Companies (ESCOs) in Developing Countries (IISD, 2010, 72 pgs)
This paper examines the potential for ESCOs to accelerate uptake of energy efficiency in developing countries, focusing on barriers to their growth and measures to eliminate those barriers. Using an ESCO can greatly reduce the risk of EE projects for clients. Section 1 discusses what ESCOs are and how they operate and reviews the potential and current status of ESCOs in developing countries. Section 2 examines programs currently in place to foster the growth of ESCOs. In Section 3, barriers to ESCO development are considered in detail, and Section 4 highlights some of the measures that might be put in place to overcome these barriers.
See 3 case studies in IRENA report above.
Risk Mitigation Instruments for Renewable Energy in Developing Countries: A Case Study on Hydropower in Africa (CPI, 2015, 44 pgs)
This case study examines the 250MW Bujagali Hydropower Project in Uganda, which raised close to $300 million in commercial loans and private equity, an unprecedented amount of private finance in a low income country. The case study is explored from a project finance perspective: it is one of very few examples of large project finance structures simultaneously to use different risk mitigation instruments provided by the World Bank Group: a partial risk guarantee from the International Development Association and the Multilateral Investment Guarantee Agency’s (MIGA) political risk insurance. It therefore offers an opportunity to analyze how these particular instruments interact and how effective they are in driving private investment and reducing the cost of renewable power in developing countries with high investment risks and very little private investment. In addition, the case examines how these instruments might be applied to drive private investment in other renewable energy projects in developing countries.
Various types of guarantees can be used to address different types of risks related to green projects. In some cases, guarantees may cover risks related to the lack of collateral and the credit risk perception on the part of lenders (credit guarantees, also called partial credit guarantees, or PCGs); in other cases, guarantees can cover uncertainty around the amount of cash flow that projects may be able to generate from their performance (performance risk guarantees). The basic principle of a credit guarantee scheme is that a third party (the guarantor) shares the credit risk of a project with the lender and takes all or part of the losses incurred by the lender in the event of default by the borrower. The objective of the guarantee is thus to lower the residual credit risk for the lender. This is why guarantee schemes are often used to unlock cases where a market is underserved by the financial sector because of the real or perceived risks. (text from IDB report on guarantees for green markets below)
Public Backed Guarantees as Policy Instruments to Promote Clean Energy (UNEP SEF Alliance, 2010, 123 pages)
This report provides a comprehensive introduction to the topic of public backed guarantees (PBGs) and how they can be used to promote investment in renewables and energy efficiency. The Executive Summary (10 pgs) is written for policymakers and gives a high level overview of where and how PBGs are used, and recommendations for the design, preparation, and implementation of PBG programs. It directs readers to chapters where more detail can be found; for example Chapter 1 places PBGs in the context of the financial system, Chapter 2 explores the economic justification for PBGs, and Chapter 3 provides a survey of PBG types. Chapters 4-7 provide detailed examples of PBGs in use.
Guarantees for Green Markets: Potential and Challenges (IDB, 2014, 66 pgs)
This report from the Latin American development bank IDB considers some of the challenges of investing in low carbon markets, explores how guarantees (principally credit guarantees) can respond to those challenges, and provides various examples of guarantees used in the LAC region. Chapter 5 considers the advantages and disadvantages of different types of guarantee (credit and performance guarantees) and Chapter 6 provides case studies of the use of guarantees.
See country examples in both UNEP and IDB reports above.
China Utility-Based Energy Efficiency Finance Program (CHUEE) (World Bank/IFC, 2 pgs)
Established in 2006 by IFC and partners, the CHUEE Program provides risk sharing facilities (in the form of a guarantee) and technical assistance to support energy efficiency measures in China. The identified barriers to the uptake are difficulties in marketing energy efficiency products and in accessing credit for energy efficiency projects. Access to credit is particularly difficult for small and medium enterprises, and in addition commercial banks lack experience in sustainable financing – CHUEE helps to address this.
See also a case study on CHUEE from the Institute for Industrial Productivity (4 pgs) here
Feed-in tariffs and auctions
This section provides some introductory and more comprehensive resources on FITs and auctions – two of the most widely adopted renewable energy support policies – as well as some case studies.
Feed-in tariffs (FITs) are designed to increase deployment of renewable energy technologies by offering long-term purchase agreements for electricity generation at a specified price per kilowatt-hour, thereby providing market certainty for developers. (text adapted from NREL policy brief below)
Renewable energy auctions are also known as “demand auctions” or “procurement auctions”, whereby a government issues a call for tenders to supply a certain capacity or generation of renewables-based electricity. They can achieve deployment of renewable electricity in a well-planned, cost-efficient and transparent manner while also achieving a number of other objectives. (text adapted from IRENA design guide below)
Feed-in Tariffs: Good Practices and Design Considerations (Clean Energy Solutions Centre / NREL, 2016, 13 pgs)
This policy brief provides an introduction to the topic of feed-in tariffs, covering key FIT design elements and good practice, and lessons from country experience. The references section lists further resources on FIT policy design and experience. The information in this brief provides a good starting point for countries to think about the key questions of FIT design in their country context.
Renewable energy auctions: a guide to design – summary for policymakers (IRENA / CEM, 2015, 52 pgs)
This guidebook assists policy makers in understanding different approaches to renewable energy auctions. It includes some specific country experiences, representing different contexts and circumstances, and offers lessons learned and best practices on how governments can design and implement auctions to meet their objectives. Chapter 2 contextualises auctions within the larger realm of renewable energy support schemes and gives an overview of their key strengths and weaknesses. Chapters 3-6 cover in turn four key design elements of auctions (demand; qualification requirements; winner selection; seller’s liabilities).
See also the more detailed chapters on the specific design elements of auctions from IRENA’s guide to auction design reports, available here.
Feed-in Tariffs as a Policy Instrument for Promoting Renewable Energies and Green Economies in Developing Countries (UNEP, 2012, 122 pages)
This report is intended as a resource for policymakers in developing countries to make informed policy decisions about the “whether”, “when”, and “how” of FITs and to support nationally appropriate policy measures to scale up renewable energy. The report is also intended to improve the understanding of the potential benefits and challenges for developing countries to design FITs as well as the factors influencing their success, whilst also analyzing the funding and capacity implications. Rather than identifying a set of rigid best practices, this report instead attempts to outline the range of possible designs that developing country policymakers may wish to pursue and to identify the different drivers that may guide their decisions. Chapter 2 provides a general overview of FIT policies and design elements and compares them to other instruments; Chapter 3 provides guidance on drafting FIT laws; Chapter 4 explores how to fund a FIT policy; and Chapter 5 examines the human, technological, regulatory, and institutional capacity needed to implement a FIT policy.
See detailed FIT and auction case studies in World Bank report on RE incentives in the ‘general resources’ subsection, e.g. Vietnam, Brazil, Tanzania, Indonesia.
Uganda GET-FIT Annual Report 2015 (Uganda GET-FiT Program, 2015, 71 pages)
The GET FiT Uganda Program was officially launched on May 31st 2013. The Program is designed to leverage private investment into renewable energy generation projects in Uganda. GET FiT is being supported by several donors and the World Bank. The Program is designed to target the key barriers confronting investors looking at potential investments in small renewable energy projects (1-20 MW) in Uganda and thereby fast track up to 20 projects. The main feature of the Program is a frontloaded results-based premium payment designed to top-up Uganda’s own Renewable Energy Feed in Tariff. This report describes all main aspects of the Program, early results achieved and future results expected, and how the program is governed, monitored and funded.
Renewable energy auctions: analysing 2016 (executive summary) (IRENA, 2017, 28 pgs)
At least 67 countries had used auctions for renewable energy contracts by mid-2016, up from less than 10 in 2005. The forthcoming report from the International Renewable Energy Agency (IRENA) – of which this summary provides a preview – provides key updates on auction results from around the world.
Performance of Renewable Energy Auctions: Experience in Brazil, China and India (World Bank, 2014, 39 pgs)
This paper considers the design and performance of auction mechanisms used to deploy renewable energy in three emerging economies: Brazil, China, and India. The analysis focuses on the countries’ experience in various dimensions, including price reductions, bidding dynamics, coordination with transmission planning, risk allocation strategies, and the issue of domestic content.
The South African Renewable Energy Independent Power Producers Procurement Programme: Lessons Learned (IPP Office, 2016, 21 slides)
This presentation presents the rationale, design elements, and results and lessons learned from South Africa’s successful Renewable Energy Independent Power Producers Procurement Programme (REIPPP).
Taxes and tax incentives
Fiscal policy provides a critical set of instruments for building green economies by pricing environmental externalities and redressing social impact. In particular, it can support the shift of investments towards clean and efficient technologies and activities. Environmental taxes have proven to be the most effective tool in addressing not only environmental externalities but also inducing green investment. Many countries employ tax breaks, or tax reliefs, to support renewable energies. Yet, such support needs to be well targeted and closely monitored. In some cases, it is difficult to assess their overall impact. In general, taxing “bad behavior” is preferable to subsidizing “good behavior” but in some cases, both might be useful. (text from UNEP Green Economy Briefing Paper below)
Fiscal Policy: Green Economy Briefing Paper (UNEP, 2013, 4 pgs)
This short briefing paper provides a basic introduction to the role of fiscal policy in the transition to greener economies, in particular the use of environmental taxes. It also briefly covers energy subsidy reform and introduces some lessons learned from experience of fiscal policy reform so far.
Providing Incentives for Investments in Renewable Energy: Advice for policymakers (World Bank, 2011, 8 pages)
This note provides a basic introduction to the use of incentives to support renewable energy investments. It covers both tax and non-tax incentives, and is included here because it considers some general principles of when to use tax and non-tax incentives, and outlines the main types of tax incentive (p. 3). The note briefly explores how tax and non-tax incentives can be combined and presents a short case study on how Spain combined tax and non-tax incentives for renewable energy.
Environmental Taxation: A Guide for Policy Makers (OECD, 2011, 12 pgs)
This policy guide provides an introduction to the use of taxes to achieve environmental outcomes. It outlines why countries might consider using environmental taxes (rather than, for example, subsidies), and then explores some principles for how to design effective environmental taxes, including defining the target and scope of the tax, and setting the rate of the tax. It also briefly covers how the revenues raised can be used, and how to overcome obstacles to implementing environmental taxes.
Environmental Taxes, Chapter 5 of the Mirrlees Review Volume 1 ‘Dimensions of Tax Design’(IFS, 2010, 125 pgs)
The Mirrlees Review was an extremely comprehensive review of the design of a good tax system. This chapter provides an overview of key economic issues in the use of taxation as environmental policy. Sections 5.2 to 5.4 discuss the economic principles of environmental taxation, reviewing the arguments for using taxes and other market mechanisms in environmental policy, the efficient design of environmental taxes, and the fiscal value of the revenue contribution from environmental taxes. Sections 5.5 to 5.8 apply these principles to four specific environmental tax areas—energy, road transport, aviation, and household waste.
Taxes and incentives for renewable energy (KPMG, 2015, 80 pages)
While this report is principally designed to help companies and investors stay current with government policies and programs that support renewable energy, it does provide a useful summary of tax and non-tax incentives in use in 31 countries, which may be helpful for developing country policymakers who wish to see which incentive measures are being used in other countries, as a starting point for comparative analysis. The table on page 10 summarizes which instruments are in use in which countries, and the following country pages provide brief information about the specific incentives.
Investment Incentives for Renewable Energy in Southeast Asia: Case study of Vietnam (IISD, 2012, 33 pgs)
In Vietnam, investment incentives are provided in several ways, including taxation (e.g. favorable income tax rates), low import duties and fees; loss transfer; and accelerated depreciation of assets. This report assesses investment incentives for renewable energy in Vietnam. It focuses on small hydro, wind, solar, biogas, and biomass resources Section 4.4 provides an overview of the different tax measures in Vietnam’s investment incentive framework that apply to all sectors, and Section 4.6.2 presents preferential tax incentives for renewable energy companies in Vietnam. The impact of different incentives is discussed in Section 5, and conclusions presented in Section 6.
A price on carbon helps shift the burden for the damage back to those who are responsible for it, and who can reduce it. Instead of dictating who should reduce emissions where and how, a carbon price gives an economic signal and polluters decide for themselves whether to discontinue their polluting activity, reduce emissions, or continue polluting and pay for it. In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society. A carbon price also stimulates clean technology and market innovation, fuelling new, low carbon drivers of economic growth. There are two main types of carbon pricing: emissions trading systems (ETS) and carbon taxes. [text from World Bank website]
Cap and Trade: The Basics (IETA, 2015, 1 pg)
This one page summary explains the basics of how emissions trading works, what sectors are typically covered, how entities comply with trading schemes, and which countries have implemented trading schemes.
The bottom line on carbon taxes (WRI, 2008, 2 pgs)
Climate policy debates often feature discussions about the role of a carbon tax, either as an alternative or a supplement to a cap-and-trade program. This factsheet describes the similarities and differences between the two policy approaches and answers other common questions about a tax on carbon.
Putting A Price On Carbon: Reducing Emissions (WRI, 2016, 36 pgs)
Although written to explore the impact of a national carbon price on the US, this issue paper provides a useful and clear explanation of how carbon pricing leads to reduced emissions and investment in low carbon technology development and deployment, including from an economic perspective. The paper describes how and when emissions reductions from a national carbon price are likely to take place in key sectors, showing for example that a strong carbon price will be transformative in the electricity sector, where systems are in place to shift production away from high carbon fuels when it becomes cost-effective to do so, but more gradual in other sectors such as transport. This paper will be a useful resource for policymakers interested in how carbon pricing works.
The FASTER Principles for Successful Carbon Pricing: An approach based on initial experience (World Bank / OECD, 2015, 49 pgs)
This report draws on a growing base of global experience in implementing carbon pricing mechanisms, as well as economic literature, to identify a
set of principles – the ‘FASTER’ principles – for successfully steering an economy towards the long-term goal of decarbonization through the use of carbon pricing. It focuses on how to achieve this in a fair, and transparent way that harnesses emission reduction opportunities at least cost, provides flexibility, and is aligned with other policies. It focuses on domestic carbon pricing mechanisms that put an explicit price on GHG emissions – whether through taxes, or emissions trading systems. Throughout the report, brief case study examples are given to show how the principles are being used in different countries.
State and Trends of Carbon Pricing 2016 (World Bank / Ecofys / Vivid Economics, Oct 2016, 140 pgs)
This report provides an up to date overview of existing and emerging carbon pricing instruments around the world, including national and subnational initiatives. It presents summary information on the level of coverage of the schemes and the prices prevailing in those schemes. Section 2.3 describes developments in national and subnational schemes. Section 3 focuses on the importance of aligning carbon pricing with the broader policy landscape. The analysis provides lessons for policymakers on how maximize synergies between climate mitigation and other related policies, while managing potential tensions and tradeoffs. This report is a useful and very up to date summary of the state of carbon pricing around the world.
Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems (OECD, 2016, 174 pgs)
This detailed report from the OECD presents the first comprehensive analysis of the extent to which countries use carbon prices. Chapter 2 (6 pgs) discusses why carbon prices are an effective and low cost policy tool, exploring the environmental effectiveness of carbon prices and why they allow countries to reach their emissions targets in the cheapest possible way, as well as looking at the economic benefits of carbon pricing. Chapter 4 presents the results of the analysis of effective carbon rates in 41(mainly OECD) economies.
The world’s carbon markets: A case study guide to emissions trading (EDF/ ICE / IETA, 2015, c. 12 pgs each)
This series presents 19 case studies of different country carbon pricing schemes. Each includes a brief analysis of the unique features of each program, as well as the challenges faced in its development, implementation, and operation. They also outline the key design elements, important issues and results to date.