Principle 13: Incentives-based instruments

Developing Financing Model for Energy Efficient Practices in the PRC

Date posted: 
Nov 18 2008

The China Utility-Based Energy Efficiency Finance Program (CHUEE) is established to provide market-based solutions that will promote novel and sustainable financing model to promote energy efficiency in the private sector. In March 2008, participating banks in the CHUEE program approved 70 energy efficiency loans, with a loan portfolio of US$ 243 million. Interestingly, projects financed by the loans contribute to a net annual reduction of greenhouse gases of 4.3 million tons.

Responsible Party: 
Regulated Community
I. Objectives or Impact: 

Pressures from population growth create a heavy demand for energy resources. In China, economic growth puts a heavy toll on energy resources. Since 2001, energy consumption was seen to increase much faster than GDP. The increase in the country’s living standards created a demand for products. Also, the flourishing of the heavy industry in China is quite rapid due to its growing position in the world market as a competitive player in the sector. Interestingly, the demand pressures might naturally prompt producers to churn out large volume of products at the expense of efficiency, especially in energy use. The China Utility-Based Energy Efficiency Finance Program (CHUEE) is established to provide market-based solutions that will promote novel and sustainable financing model to promote energy efficiency in the private sector.

II. Description of the Good Practice (Outputs): 

Past experiences show that investments and efforts to promote energy efficiency, both in the household and firm levels, can be profitable. For example, conversion to less carbon-intensive energy sources is doable, and in fact can be a source of income. However, a major barrier to actual implementation is the scarcity in financing. It is typical that local banks have a skeptical view on the profitability of environment projects per se. Also, the guidelines of banks are often not aligned with the peculiarities of environment and renewable energy projects (e.g. long gestation periods, issues on track records of borrowers). Also, banks are most often not equipped to evaluate these projects. The International Finance Corporation (IFC) of the World Bank leverages its experience with renewable projects in promoting energy efficiency via the development of novel financial models and schemes. The CHUEE program is co-funded by the IFC, the Global Environment Facility, and the Finnish and Norwegian governments. The program offers a risk-sharing facility for partner banks and tailored advisory services that aim to develop the partner banks’ capacity to appraise projects, and at the same time develop its approval process and credit-underwriting procedures.

III. Outcomes or Results: 

Recently, the IFC signed a memorandum of understanding with the China Export-Import Bank to provide capacity building on the bank’s environmental and social risk management policy and practices for overseas investment. Since 2007, more than 1,400 product managers, credit officers, and loan officers from 100 business outlets in the country received energy efficiency financing training from the IFC. The participating banks included the Industrial Bank, the Bank of Bejing, and Shanghai Pudong Development Bank. Industrial Bank is the initial bank partner in the program. The linkage between IFC and the Industrial Bank started in 2004, with the IFC’s initial investment of US$ 52 million on the bank. The first-phase of the risk-sharing arrangement in 2006 made possible the creation of a facility that has been used to leverage a portfolio of US$ 65.7 million of energy efficiency equipment and project loans for small and medium-scale projects. Projects typically pursued were industrial boiler retrofitting, wasted heat recovery, co- and tri-generation projects for district heating, power saving, and optimization of industrial energy use. The initial efforts of the IFC and Industrial Bank attracted two prominent international co-investors, namely the Hang Seng Bank of Hong Kong and Singapore’s GIC Special Investments. In March 2008, participating banks in the CHUEE program approved 70 energy efficiency loans, with a loan portfolio of US$ 243 million. Interestingly, projects financed by the loans contribute to a net annual reduction of greenhouse gases of 4.3 million tons.

A. Policy Framework: 

One of the crucial steps for endeavors like this is how to fully incorporate a lending program for environment projects within the bank. Given the financial viability of environment projects, resistance from the top management of formal institutions is present. In the case of the CHUEE program, a memorandum of understanding was undertaken between IFC and the partner bank. A careful and explicit risk-sharing arrangement needs to be laid out due to perceived technical and financial risks of energy conservation investments and lending among industrial enterprises and banks.

On the side of the government, policy and regulatory interventions are required complements to encourage industrial enterprises to invest on energy efficient practices. This is pressing given a presence of the large size and share of energy-intensive industries in the economy. Strong regulatory policies, especially command-and-control schemes, and monitoring activities, might be required especially if inefficient practices are already widespread.

B. Budgetary and Financial Requirements: 

(see materials and resources; further information)

C. Human Resources: 

Initially, reliance for technical support for evaluation from outside expertise might be heavy. In China, support was given for staffing development, capacity building, and training. Trainings were also provided to instill due-diligence on skills related with project development and appraisal of energy efficient projects.

D. Material Resources: 

Aside from the financing requirements and support for partner banks, resources might also be required for energy conservation investment promotion, particularly via project demonstrations. Testing of business models and institutional arrangements will require resources for pre-investment activities like feasibility studies and the development of new financing mechanisms.

E. Institutional Support: 

For programs that aim to introduce novel practices, support from the banking sector might be required. For China, the IFC supported a series of national workshops to present successful case studies of subprojects.

F. Planning, Scheduling or Sequencing of Activities: 

The gestation period of programs that aim to promote sound practices on energy conservation is long, especially given perceptions on the nature of environmental investments. For China, the memorandum of understanding occurred in 2004. The initial years might just be devoted towards analyzing the capabilities of the banking sector with regard to business development. The development of strategies, financing models, and appropriate sectoral arrangements and practices, might occur after two years. Scaling-up of the lending activities might happen during the later years of the program.

V. Further Information: 

The Clean Water Act Law of the Philippines: The Use of Incentives to Promote Investments

Date posted: 
Jan 26 2010

The Philippines is once known to be relatively abundant in water resources. However, the pressures of population growth, urbanization, and industrialization placed a toll on the resource. One of the most pressing concerns is the increased competition in the various uses of water. There is also serious concern regarding watershed degradation and unmonitored extraction of groundwater by illegal users. The Clean Water Act Law of the Philippines aims to promote and encourage the protection of the country’s water resources.

Responsible Party: 
Compliance
I. Objectives or Impact: 

The Philippines is once known to be relatively abundant in water resources. However, the pressures of population growth, urbanization, and industrialization placed a toll on the resource. One of the most pressing concerns is the increased competition in the various uses of water. There is also serious concern regarding watershed degradation and unmonitored extraction of groundwater by illegal users. At the same time, pressing issues on water pollution is present. From a World Bank study, 90% of the sewage generated in the country is not treated. Major rivers and waterways are also confronted with pollution and degradation due to the encroachment of settlers, especially in urban centers. The Clean Water Act Law of the Philippines aims to promote and encourage the protection of the country’s water resources. To fully encourage local governments, water districts, communities, and the private sector to partake in efforts on reducing water pollution, provisions on incentives are provided for in the law.

II. Description of the Good Practice (Outputs): 

The Clean Water Act provides incentives to local government units, water districts, enterprises, private entities, and individuals to develop or undertake efforts that would result to effective water quality management and pollution abatement. Specifically, it encourages efforts on wastewater treatment, cleaner production, and adoption of technologies that minimizes waste. Incentives specifically mentioned in the law are tax and duty exemption on imported capital equipment and tax credit on domestic capital equipment.

III. Outcomes or Results: 

The guidelines and procedures on availing the incentives provided by the Clean Water Act have just been recently formulated. However, from the consultations conducted by the Department of Environment and Natural Resources (DENR) with various stakeholders (manufacturers, private sector, NGOs, and local government units), positive response on the incentives was generally elicited.

A. Policy Framework: 

An initial barrier that was encountered was the Clean Water Act’s harmonization with preceding laws on incentives and taxation. For instance, heavy discussions with respect to exemption from Value-Added Tax (VAT) occurred. Also, it was realized that other government agencies are tasked on evaluating the merits of an application for tax exemptions. In the case of the CWA, heavy coordination with other government agencies, specifically with the Bureau of Investments (BOI), was necessary. Another barrier encountered is that though the law mentions the involvement of private lending institutions, it was discovered that lending institutions do not have a regular source of funding for environment projects like waste water treatment and pollution abatement. The funds they are using for existing environment projects are dependent on support given by various international donor agencies.

B. Budgetary and Financial Requirements: 

Another input that was identified as necessary is the availability of personnel within the DENR who can assess whether an application merits the CWA incentives. Also, it was also important to have a unit or regular staff that will assess the performance (in terms of pollution control, discharge) of those who would avail of incentives.

C. Human Resources: 

A complete program on evaluation to monitoring of CWA-related investments and efforts would require funding for regular operations. It was identified that regional DENR office need to have resources in order to conduct evaluation and monitoring of those granted with CWA incentives. Also, additional staff needs to be hired in order to accommodate the administrative tasks related with accommodating applicants.

D. Material Resources: 

The additional administrative tasks related with evaluating the applications would require additional resources like vehicles for inspection and evaluation, and an information and data base system for keeping track of the performance of those granted with the incentives. At the same time, the Bureau of Investment would also require an information system that will aid whether the incentives given were really spend on CWA-related activities.

E. Institutional Support: 

Partnerships with the local government and other stakeholders (NGOs, civic groups) are required to ensure that performance actually improves due to the provision of incentives. Also, regular coordination with other agencies like the Bureau of Internal Revenue and the Department of Finance needs to be undertaken.

F. Planning, Scheduling or Sequencing of Activities: 

Typical programs that provide subsidies or incentives for environment programs have a gestation period. This provides an incentive to stakeholders to immediately implement their program their investment plans. In the case of the Clean Water Act, less than ten years is provided for the the provision of incentives.

V. Further Information: 

Bureau of Investment. www.boi.gov.ph Department of Environment and Natural Resources. www.denr.gov.ph

Promotion of Cleaner Production in the PRC

Date posted: 
Nov 17 2008

Industrial growth is the primary driver for the rapid development of China. However, the growth experienced in the industrial sector was accompanied by heavy consumption of resources, resulting to generation of pollution. Interestingly, large firms were not solely responsible for the generated pollution in the country. Small and medium-scale enterprises (SMEs) located in villages and towns also contributed to the pollution problem. The pace of development and the growth of the industries put pressure in China’s resource use. Air pollution also is a threat due to coal combustion.

Responsible Party: 
Compliance
I. Objectives or Impact: 

Industrial growth is the primary driver for the rapid development of China. However, the growth experienced in the industrial sector was accompanied by heavy consumption of resources, resulting to generation of pollution. Interestingly, large firms were not solely responsible for the generated pollution in the country. Small and medium-scale enterprises (SMEs) located in villages and towns also contributed to the pollution problem. The pace of development and the growth of the industries put pressure in China’s resource use. Air pollution also is a threat due to coal combustion.

The Cleaner Production Law promotes cleaner production, efficiency of the utilization rate of resources, and reduction and avoidance of generation of pollutants. The law mainly addresses the problems caused by overuse of resources due to utilization of outdated technologies and facilities. The law particularly helps small and medium-scale enterprises to shift production practices. This is quite important in the country since SMEs play an important role in economic development. However, these firms also have a substantial share in industrial pollution loads.

The law also identifies the key role of local governments in providing solution to the problem. This is quite critical since SMEs are more often than not, are clustered together. Most of the SMEs are township and village enterprises which uses outdated technologies and facilities.

II. Description of the Good Practice (Outputs): 

The Cleaner Production program is touted as the key strategy for achieving sustainable development. The application of the program started from the conduct of demonstration projects in industrial sectors. The program also has a long history in the country. It started laying foundation by focusing on the introduction of the methodology, personnel training, and demonstration. This initial phase extended from 1992 to 1997. From 1998 to 2002, efforts were geared towards the study and formulation of the law.

From the policy formulated, it was identified to use compulsory mechanisms. This came in the form of direct restriction of toxic and harmful substances, particularly for SMEs. It also required the industry to adopt waste abatement plans and release environment reports.

Support mechanisms were also provided by the law. This came in the form of provision of expertise, information, technologies, and funding for cleaner production practices. Various incentives are given to firms in order to induce them to shift production practices. Products produced from wastes and materials reclaimed from wastes benefit from reduced taxation or exemption from value-added tax. Costs incurred for cleaner production auditing and training are also allowed to be booked as operating costs for the firms. Funds from the Small and Medium-Sized Enterprise Development Fund are also set aside to support cleaner production for SMEs. In some provinces, R&D programs supportive of cleaner production are given priority in application of bank loans.

III. Outcomes or Results: 

Interestingly, in provinces where the local economy is more developed, firms responded positively on economic incentives. In some provinces and cities, more stringent regulations are required because of the severity of environment problems. There are a number of cases where firms and enterprises failing national standards on environmental standards become compliant given the clean production law. Firms initially started with pursuing cleaner production by looking at end-of-pipe treatment. Eventually, some firms realized that disposal costs increases production costs and creates negative image for the entire company.

One firm, HeNan Lotus Monosodium Glutamate Group Limited, showed gains on profit margins when it adopted cleaner production techniques. Initially, pollution control was pursued via end-of-pipe treatment efforts. Eventually, the firm combined this effort with material substitution and recycling. Interestingly, the procedure they applied for end-treatment resulted to the production of solid fertilizers which yields considerable profit for the company (annual profit of RMB 280 million yuan).

The firm also integrated environment targets in the production management level. Bonuses are distributed according to conditions of cleaner productions. Specifically, with outstanding achievements, staff bonuses can be elevated by five percent. On the other hand, non-attainment of environment targets results to cutting down of bonus by one percent and five percent for staff and leaders respectively.

IV. Essential Elements for Success: 

Policy Framework: Enabling Policy, Regulation, Inter-agency/Multiparty Agreements

The Cleaner Production law is a product of careful promotion, awareness campaigns, and demonstration projects.  In its initial stage, cleaner production was integrated with the existing environment policies of the country.  Support from the regional and local Environment Bureaus was solicited.  Modified policies supportive of cleaner production were also introduced, namely: policy on environmental impact assessment and pollution discharge licensing system. 

Provinces also promoted cleaner production by pursuing supporting activities at the local level.  These activities came in the form of establishment of funds for cleaner production processes, setting evaluation standards, promotion of the use of environmental labels in products, IECs, and offering of tax and price incentives.

Human Resources and Skills

Since the cleaner production promotes eventual shift of production approaches, training and awareness raising were conducted on the earlier stages.  Training programs came in the form of demonstration projects.  These primarily targets managers and technical staff directly involved in the production management.  Cooperation with other countries during the demonstration projects was present during the demonstration projects. 
   
Material and Resources & Institutional Support

Since a shift of production techniques can be costly for a firm, support for cleaner production efforts is necessary.  The establishment of funding mechanisms supportive of cleaner production is necessary.  Tax and price incentives play a key role in assisting firms.  Economic departments and local governments also adopted policies that encourage cleaner production.  Specific endeavors like material replacement, conventional technologies process innovation, solid fertilizer production, and methane utilization are encouraged.

V. Further Information: 

Tianzhu Zhang and Jining Chen. Promoting Cleaner Production in China. 2008 (http://www.chinacp.com/EN/PolicyDetail.aspx?id=41)

Case Studies of Cleaner Production in China http://www.chinacp.com/EN/Case.aspx

Cleaner Production in China (Environmental Legislation) http://www.chinacp.com/EN/PolicyDetail.aspx?tp=Law&id=38

Promotion of Compressed Natural Gas (CNG) in Bangladesh via Command and Control Schemes

Date posted: 
Nov 13 2008

The transport sector is identified to be one of the contributors of air pollution in Dhaka. In particular, two-stroke auto rickshaws or baby taxis were identified as one of the strongest contributor. It was also found out that this vehicle emits a hydrocarbon; volatile organic compound; and particulate matters. The program to achieve better air quality was kicked-off by conversion to Compressed Natural Gas (CNG) and the startup of fueling stations in October 2001. In December 2002, the Ministry of Communications issued a ban on two stroke baby taxies.

Responsible Party: 
Enforcement Agency
I. Objectives or Impact: 

The transport sector is identified to be one of the contributors of air pollution in Dhaka. In particular, two-stroke auto rickshaws or baby taxis were identified as one of the strongest contributor. It was also found out that this vehicle emits a hydrocarbon; volatile organic compound; and particulate matters. The program to achieve better air quality was kicked-off by conversion to Compressed Natural Gas (CNG) and the startup of fueling stations in October 2001. In December 2002, the Ministry of Communications issued a ban on two stroke baby taxies. The following year, a new fleet of CNG three-wheeler was introduced.

Sector/subsector:

The objective of the policy was to ease air pollution problems in major cities like Dhaka. It was easy for the government to pinpoint the source of pollution in the capital since there are no heavy industries or power stations near the city.

II. Description of the Good Practice (Outputs): 

The program employed command and control schemes to address the problem. The government introduced an option by bringing in CNG. The program was also accompanied by an air quality-monitoring project funded by the World Bank and the Dhaka Clean Fuel Project of the ADB.

With the introduction of CNG in 2001 and the start-up of fueling stations, about 25,000 light vehicles were converted to CNG. Initially, conversion to CNG was thought to be prohibitive, averaging to about US$583 per vehicle. However, increasing prices of fuel triggered the demand for conversion. Currently, an average of about 3500 vehicles are converting to CNG. Currently, there are more than a hundred refueling stations in the country.

Currently, the government is also converting their fleet to CNG. As of today, almost half of their fleet converted to CNG. The government also recently established the Bangladesh Energy Regulatory Commission, which aims to monitor and make regulations on CNC use.

Currently, the government is also looking at CNG conversion for diesel buses and trucks. The plan is to do it side by side with the phasing out of old buses and trucks. It is also planning to look at pricing issues on fuel. For example, there is an incentive in the other sectors to use diesel fuel since it is provided with subsidy.

III. Outcomes or Results: 

The introduction of CNG resulted to an improvement in air quality of urban cities, like Dhaka. As of date, around 50,000 baby taxis converted to CNG. Initially, the public found the initial phase out of old rickshaws difficult. However, the benefit of the program was realized with the improvement of air quality in the city. Currently, the increasing price of fuel creates an incentive to convert to CNG.

IV. Essential Elements for Success: 

Policy Framework: Enabling Policy, Regulation, Inter-agency/Multiparty Agreements

The government carefully planned the move towards promotion of alternative fuels.  The country’s Environmental Conservation Rules requires the use of catalytic converter and diesel particulate filter for petrol and diesel driven vehicles.  Also, this policy was effective since ban on old buses plying the city was done side by side. 

In terms of the program’s operation, a national standard that will guide daily program routines (conversion, refueling, etc) needs to be developed.  The various components, from licensing, conversion, monitoring, and enforcement of emission standards, need to be properly assigned to respective agencies.

Human Resources and Skills

A well-integrated organization is required to man the program’s operation.  A licensing office should be prepared to handle the annual increase of applicants for vehicle regulation, inspection, and CNG conversion.  A pool of trained technicians and fleet managers should be developed to handle the day-to-day operation (refueling, ensuring of safety, conversion). 

On the side of monitoring of air quality and emission standards, technicians should be regularly available.  Also, the tasked agency should be prepared for expert who can handle the equipment used for emission testing.

Material and Resources

The program is quite intensive in the use of capital equipment, from licensing to monitoring of air quality.  For the CNG stations, fueling stations should be carefully designed for efficiency and safety.  The size of the fueling station should be appropriate given the daily demand for CNG.  The government should also invest on proper emission testing equipment. 

Institutional Support

The business of CNG refueling and conversion is becoming lucrative given the demand for CNG.  In Bangladesh, a large number of entrepreneurs is applying license to operate fueling and CNG converting stations.  The government recently granted more than 2000 permits to operate for CNG fueling stations alone.  The mechanisms on accreditation and monitoring should be laid down since there are both safety and pricing concerns in this business. 

In terms of emission testing, an office should be properly designated on handling the daily emission testing activities.  A procedure on how to properly conduct testing should also be prepared. 

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