EUROPE AND CENTRAL ASIA MOLDOVA World Bank Group COUNTRY CLIMATE AND DEVELOPMENT REPORT November 2024 © 2024 The World Bank Group 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 Group with external contributions. “The World Bank Group” refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The World Bank Group does not guarantee the accuracy, reliability, or completeness of the content included in this work, or the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. 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Table of Contents Acknowledgments.....................................................................................................................................v Abbreviations............................................................................................................................................vi Overview..................................................................................................................................................viii Climate action presents opportunities that Moldova cannot afford to miss....................................viii Policy priorities for financing and implementing the transition.........................................................xvii Investment needs for financing low-carbon growth and climate change adaptation......................xix Facilitating a people-centric transition..................................................................................................xxii 1. Development and climate in Moldova................................................................................................ 2 1.1.. Development context: structural challenges to high-income convergence.............................. 2 1.2.. Climate change context: climate impacts and cost of inaction................................................... 4 1.3.. Climate policy context: risks and opportunities from the global climate transition................. 9 2. Climate commitments, policies, and capacities.............................................................................. 14 2.1.. Moldova’s major commitments and policies on climate change................................................14 2.2.. Institutional framework for climate change action.......................................................................15 2.3.. The political economy context.........................................................................................................16 3. Policies and investments to address climate and development challenges in key sectors....... 22 3.1.. Building resilience and adapting to climate change.................................................................... 22 3.1.1.. Raising productivity and strengthening climate resilience of agriculture.............................22 3.1.2.. Climate-proofing public infrastructure and essential services................................................28 3.1.3.. Strengthening disaster preparedness and response capacity................................................ 31 3.2.. Decarbonizing the economy to realize growth opportunities.................................................... 32 3.2.1.. Energy sector reforms and decarbonization in the context of EU Integration.....................34 3.2.2.. Decarbonizing energy supply to boost energy security, financial sustainability, and competitiveness........................................................................................................................37 3.2.3.. Reducing GHG emissions from agriculture and solid waste....................................................42 3.2.4.. Maximizing potential for carbon sinks from land use and forestry.........................................43 Implications for poverty, inclusion, and the macroeconomic outlook.......................................... 50 4.  4.1.. The macroeconomic impacts of adaptation and transition.........................................................51 4.2.. Financing low-carbon growth and climate change adaptation.................................................. 54 4.2.1.. Fiscal policies for decarbonization and climate adaptation.....................................................56 4.2.2.. Mobilizing private capital and greening the financial sector....................................................59 4.3.. Potential welfare impacts of mitigation and adaptation policies............................................... 62 4.4.. Enabling decarbonization and climate change adaptation........................................................ 65 4.4.1.. Human capital policies to mitigate the costs of transition and adaptation...........................65 4.4.2.. Private sector development............................................................................................................69 From assessment to action: aligning climate action with Moldova’s development......................74 5.  References.............................................................................................................................................. 79 i Country Climate and Development Report: Moldova List of Figures Figure O.1.. Impact of adaptation and decarbonization measures on the economy by 2050 under different scenarios....................................................................................................... x Figure O.2.. GHG emissions pathway under the net zero scenario, by sector, 1990–2050............. x Figure O.3.. Impact of different Resilient scenario sectoral GDP, by 2030....................................... xii Figure O.4.. Labor demand effects by income decile and sector, by 2030 ..................................... xiii Figure O.5.. Share of imported energy goods under different scenarios......................................... xiv Figure O.6.. Final energy intensity of the economy under different scenarios ............................... xiv Figure O.7.. Climate risk and vulnerability in Moldova and peer countries...................................... xvi Figure O.8.. Drought impacts on agricultural output and associated economic losses................ xvi Figure O.9.. Climate change impacts on GDP in the absence of adaptation measures................ xvi Figure O.10.. Total cumulative investments by sector and scenario, 2030 and 2050...................... xx Figure O.11.. Total cumulative operational costs, by sector and scenario, 2050.............................. xx Figure O.12.. Impact on public debt/GDP under three scenarios......................................................... xx Figure O.13.. Financing sources under two scenarios............................................................................ xx Figure O.14.. Labor demand effects across occupations and sectors in 2030, under the Resilient NECP scenario................................................................................................... xxiii Figure O.15.. Poverty rate and historical drought frequency, by raion.............................................. xxiii Figure 1.1.. Urban v rural poverty rate, 2014–22.....................................................................................3 Figure 1.2.. GDP growth and potential growth, 2005–21.......................................................................3 Figure 1.3.. Climate risk and vulnerability in Moldova and peer countries.........................................5 Figure 1.4.. Drought impacts on agricultural output and associated economic losses...................5 Figure 1.5.. Mapping poverty rate and historical drought frequency, by raion..................................6 Figure 1.6.. Simulated poverty impacts of the 2020 drought...............................................................6 Figure 1.7.. Average climate change impact (%) on crop production in the absence of adaptation measures, 2041–50............................................................................................. 7 Figure 1.8.. Flood exposure in Moldova....................................................................................................9 Figure 1.9.. GHG emissions by sector 1990–2023................................................................................ 10 Figure 1.10.. Simulated poverty impact of energy price shock in the absence of mitigating measures................................................................................................................... 11 Figure 1.11.. Moldova’s Right Bank has limited exposure to EU CBAM (1st stage).......................... 12 Figure 1.12.. Moldova’s green export opportunities lay in natural resource and electrical products................................................................................................................ 12 Figure 3.1.. Agricultural crop yields (2041–50) under different climate and irrigation and water storage investment scenarios, % change relative to 2020 levels......................23 Figure B3.1.1.. National water storage yield curve.....................................................................................25 Figure 3.2.. Investment costs and economic benefits of different adaptation scenarios for irrigation and water storage (cumulative, 2024–50)........................................................26 Figure 3.3.. Benefits of irrigation and storage adaptation, by raion (average crop revenues 2041–50, compared to REF scenario)................................................................................26 Figure 3.4.. Flood exposure of the road network..................................................................................29 Figure 3.5.. GHG emissions pathway under the net zero scenario, 1990–2050..............................33 Figure B3.2.1.. Interconnectors under construction or discussion.........................................................35 Figure 3.6.. Energy sector GHG emissions and demand under different climate action scenarios.................................................................................................................... 38 Figure 3.7.. Heat consumption in residential buildings under the NECP and net zero scenarios....................................................................................................................... 40 Figure 3.8.. GHG emissions from agriculture....................................................................................... 43 Figure 3.9.. Trends and targets in LULUCF emissions........................................................................ 44 Figure B3.4.1.. Natural capital efficiency frontier for Moldova................................................................ 46 Figure B3.4.2.. Changes in land use needed to reach the efficiency frontier........................................47 Figure 4.1.. Climate change impacts on GDP in the absence of adaptation measures.................53 ii Country Climate and Development Report: Moldova Figure 4.2.. Impacts of adaptation and decarbonization measures on the economy, compared to the REF scenario (no climate actions).......................................................54 Figure 4.3.. Total investments and operational costs, by sector and scenario, cumulative over 2024–50.........................................................................................................................55 Figure 4.4.. Financing sources under NECP and net zero scenarios................................................55 Figure 4.5.. Labor demand effects across occupations, sectors, and income deciles in 2030.....63 Figure 4.6.. Poverty rate under four scenarios..................................................................................... 64 Figure 4.7.. Impact on private consumption under three scenarios................................................ 64 Figure 4.8.. Share of firms reporting selected climate and environmental attributes (in percent)...........................................................................................................70 Figure 4.9.. Share of firms indicating they experienced climate or environmental losses (percent)..................................................................................................................... 71 List of Tables Table O.1.. CCDR scenarios: policy and investment scenarios considered in this report............. xi Table O.2.. Recommendations and priority policy actions for achieving net zero GHG emissions by 2050.............................................................................................................. xviii Table O.3.. Policies for a human-centered green transition............................................................. xxii Table 2.1.. Key institutional actors and mandates for the climate agenda..................................... 18 Table B4.1.1.. Policy and investment scenarios considered in this report........................................... 51 Table 4.1.. Moldova’s estimated development, climate adaptation, and mitigation investment needs in key sectors........................................................................................57 Table 4.2.. Policies for a human-centered green transition.............................................................. 66 Table 5.1.. CCDR policy recommendations..........................................................................................75 List of Boxes Box 3.1.. Expanding water storage to support irrigation and prepare for a future of increasing water scarcity.........................................................................................................24 Box 3.2.. Overview of Moldova’s energy sector and alignment with EnC priorities...................... 34 Box 3.3.. Key features of energy modeling scenarios.........................................................................35 Box 3.4.. Maximizing the efficiency of natural capital to increase CO2 sequestration without economic tradeoffs....................................................................................................45 Box 4.1.. CCDR scenarios....................................................................................................................... 50 Box 4.2.. Macroeconomic models used................................................................................................52 iii Country Climate and Development Report: Moldova Acknowledgments This Country Climate and Development Report (CCDR) is a collaborative effort of the World Bank, the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA), produced by a core team led by Jun Rentschler, Melanie Trost, and Silvia Martinez Romero. The core writing team included Marcel Chistruga, Thomas Farole, Gregor Semieniuk, Jana Lemke, and Colin Lenoble. Macroeconomic modeling results were contributed by Chung Gu Chee, Ira Irina Dorband, Charl Jooste, Bence Kiss-Dobronyi, and Xinru Lin. The energy system modeling results were provided by George Vourliotakis of Exergia. Climate change impact and adaptation modeling results were provided by Gebriel Bendat, Brent Boehlert, Diego Castillo, and Ken Strzepek of Industrial Economics. Further sectoral and technical inputs were received from a wider team of World Bank Group staff, comprising Fisseha Abissa, Axel Baeumler, Lucia Casap, Galina Cicanci, Roger Coma Cunill, Elena Corman, Stefano Curto, Oxana Druta, Ion Efros, Eduardo Espitia Echeverria, Ismael Fontan, Anatol Gobjila, Johannes Herderschee, Olivera Jordanovic, Thea Jung, Niklas Kirsamer, Christoph Klaiber, Anne Kuriakose, Nadia Leonova, Arjola Limani, Aurel Lozan, Elena Lungu, Smita Misra, Maja Murisic, Gabisile Ndlovu, Natalie Nicolaou, Koji Nishida, Anna Olefir, Maria Pachon, Serge Piabuo, Felicia Pricop, Naomi Rupasinghe, Jason Russ, Pablo Salas Bravo, Inna Samchynska, Klas Sander, Raha Shahidsaless, Ahmed Shawky, Iryna Shcherbyna, Guillermo Siercke, Jennifer Solotaroff, Lilia Taranu, Mersedeh Tariverdi, Kristina Vaughan, Ilie Volovei, Roman Zhukovskyi, and Alena Zielinski. The report builds on a prior climate and development assessment for Moldova led by Klas Sander. The team is grateful for the support received from Eliana Jimenez Rico, Paula Bernal Blanco, and Viorica Strah. Detailed feedback, suggestions, and comments were received from internal peer reviewers Lauren Culver, Carole Megevand, Nathalie Picarelli, Hector Pollitt, Marc Sadler, Klas Sander, and Anna von Wachenfelt. Further invaluable comments were also received from Craig Meisner and Stephane Hallegatte. This CCDR benefitted from dialogue with the Government of Moldova, including the Ministry of Agriculture, Ministry of Energy, Ministry of Environment, Ministry of Finance, and Ministry of the Interior. The team received valuable feedback and comments on the draft CCDR at a series of consultation workshops with private and nongovernmental stakeholders in Chisinau in April 2024. This CCDR was prepared under the leadership and guidance of Arup Banerji, Jasmin Chakeri, Inguna Dobraja, Thomas Farole, Hiroyuki Hatashima, Lisa Kaestner, Rana Karadsheh, Moritz Nebe, Ines Rocha, Javier Suarez, Sameh Wahba, and Kate Wallace. Lucy Southwood was the editor. The World Bank’s Global Corporate Solutions’ Editing and Design teams provided design and proofreading services. v Country Climate and Development Report: Moldova Abbreviations CBAM Carbon Border Adjustment Mechanism CO2 carbon dioxide CO2e carbon dioxide equivalent EBRD European Bank for Reconstruction and Development EnC Energy Community ETS emissions trading system EVRF Energy Vulnerability Reduction Fund GCF Green Climate Fund HRD holistic regional development (scenario) LULUCF land use, land use change, and forestry MFMoD-CC Climate Macrofiscal Model (World Bank) Model of Innovation in Dynamic Low-carbon Structural Economic and MINDSET Employment Transformations (World Bank) MSME micro, small, and medium-sized enterprise MtCO2e million tons of CO2 equivalent NBS National Bureau of Statistics of the Republic of Moldova NCCC National Climate Change Commission NECP National Energy and Climate Plan (scenario) NFERP National Forest Extension and Rehabilitation Program tCO2 tons of carbon dioxide RCP Representative Concentration Pathway tCO2e tons of carbon dioxide equivalent $ all dollar amounts are US dollars vi Country Climate and Development Report: Moldova Overview Photo Credit: Vadim Parpalac / iStock Overview Moldova’s climate and development challenges are inextricably linked. Weak and volatile growth, high levels of poverty, near total energy import dependence, and a strong reliance on drought-prone agriculture are all symptoms of intrinsic structural vulnerabilities. Climate-smart development policies offer a pathway to address long-standing structural barriers to growth and accelerate convergence with European Union (EU) standards. Renewable energy and energy efficiency scale-up are crucial for improving the country’s energy security but will require substantial investments as well as full implementation of sectoral reforms to accelerate integration with EU energy markets. Adaptation investments are key, not only to manage the impacts of climate shocks, but also to raise productivity in the most vulnerable sectors. Most funding will need to come from the private sector, while public sector investments need to be substantially augmented by development partners. With smart macro-fiscal policies, Moldova has the opportunity and potential to implement these ambitious measures and lay the foundations for sustainable and resilient growth. Climate action presents opportunities that Moldova cannot afford to miss The past two decades of Moldova’s strong yet volatile economic growth were built on an unstable foundation of climate vulnerability, carbon- and energy-intensive production and consumption, and increasingly outdated infrastructure. If unaddressed, these challenges will undermine Moldova’s pathway to a convergence with the EU and attainment of high-income status. Between 2000 and 2021, per capita gross domestic product (GDP) expanded at almost 5 percent per year, resulting in an impressive reduction in poverty from about 90 percent to just above 10 percent.1 But rural areas are still dominated by low productivity, small-scale agriculture, and lack of access to good jobs has triggered massive outmigration, leaving Moldova with a large diaspora and a domestic economy that is heavily reliant on remittances. This growth model has failed to nurture structural transformation and proven detrimental to productivity, competitiveness, and modernization. Russia’s invasion of Ukraine led to a large influx of refugees, as well as spillovers on the regional and global economy that have highlighted structural vulnerabilities, including almost total dependence on fossil fuel imports. Tackling these challenges is key to realizing Moldova’s potential on the doorstep of the EU. Structural economic vulnerabilities are exacerbated by intensifying climatic risks that demand urgent adaptation action. Severe flooding is already common; the 2008 flood alone resulted in $120 million in losses. Almost 10 percent of the population—about 400,000 people—live in high-risk flood zones. Droughts have also grown more frequent and severe over the last two decades, with six significant droughts between 2000 and 2020 impacting agricultural output and incomes, particularly as only 0.2 percent of agricultural land is effectively irrigated. Climate risks coincide with poverty, with drought- and flood-prone rural areas in the south and center of the country experiencing high poverty rates and reliance on agriculture. The vulnerability of these rural communities to climate shocks is aggravated by inadequate basic service provision. Moldova’s average annual losses from multiple hazards are estimated at around $164 million (DRF 2022), equivalent to about 1.3 percent of 2021 GDP. Without decisive actions to safeguard communities against the intensifying effects of climate change, Moldova will not only face mounting economic losses, but also an accelerating decline of rural livelihoods. 1 Based on the upper-middle-income country poverty line of $5.5 a day in 2011 purchasing power parity. viii Country Climate and Development Report: Moldova Embracing an ambitious program of climate action is indispensable if Moldova is to achieve its core development objectives. To fulfil its goal and potential to be a thriving economy that is seamlessly integrated in the European market, Moldova needs to overcome its structural challenges. To achieve this, climate policies will be instrumental in achieving the following national development priorities: • A new growth paradigm to converge with EU living standards: Laying the foundations for a more productive, diversified, and private sector–led economy is key for Moldova’s convergence with, and accession to, the EU, and for boosting its regional and global competitiveness. Macroeconomic modeling in this report shows that climate change adaptation and decarbonization measures contribute to accelerating GDP growth because they support the diversification and modernization of Moldova’s economy and help generate modern, high-quality jobs. • Energy security and efficiency: Access to reliable, affordable, and clean energy is essential for Moldova to achieve economic transformation and modernization. The country’s almost complete reliance on fossil fuel imports and the associated price volatility have proven detrimental to growth and inclusion. Investments and reforms to reduce reliance on fossil fuels and energy intensity, by enhancing energy efficiency and increasing the share of renewable energy in its energy mix, can significantly improve energy security and service quality. Furthermore, integration into EU energy markets is essential for ensuring a reliable renewable energy supply and mitigating the risk of supply disruptions. Although requiring substantial up-front investment, implementing these measures will help improve efficiency and reduce greenhouse gas (GHG) emissions, to align with the EU Climate Law. • Socioeconomic resilience to shocks: High vulnerability to shocks—including to climate hazards such as droughts and floods—imposes large costs on the Moldovan economy and people. Investing in resilience is a no-regret measure that not only reduces climate-related damages in vulnerable sectors during shocks, but also offers significant productivity gains, particularly in the drought- affected agricultural sector. These investments are also crucial for protecting rural livelihoods and reducing the rate of outmigration. The findings of this report indicate that Moldova can fulfill these objectives by 2050 through a commitment to decarbonization and resilience, which will also promote economic growth and human development. Macroeconomic models used in this Country Climate and Development Report (CCDR) show that resilience and climate change adaptation measures alone (resilient scenario) could increase GDP by 1.3–3.0 percent by 2050 (figure O.1). A resilient decarbonization scenario (National Energy and Climate Plan or NECP scenario), which illustrates the effects of adaptation with additional decarbonization measures—including heavy investment in energy efficiency and renewable energy to meet the country’s nationally determined contribution (NDC) targets—could increase GDP by 1.4–4.0 percent. The most ambitious decarbonization pathway (net zero scenario) aims to achieve net zero by 2050 and could increase GDP by 1.7–4.6 percent, albeit with increased public debt.2 Climate action would not only contribute to boosting economic growth but also facilitate the structural transformation and modernization of the economy. The NECP and net zero scenarios could significantly enhance Moldova’s energy independence and climate resilience, resulting in a diversified economy capable of generating modern, high-quality jobs. In contrast, the absence of climate action (reference or REF scenario) could result in a carbon-intensive and vulnerable economy that may continue to deliver volatile growth for some time but would increasingly diverge from EU standards. 2 The report uses two macroeconomic models—MINDSET and MFMod-CC—with different assumptions about the effects of climate change and mitigation to provide a range of impacts and sense of the uncertainty. MINDSET is more sensitive to climate impacts and the growth benefits of adaptation and climate mitigation than MFMod-CC. ix Country Climate and Development Report: Moldova Figure O.1. Impact of adaptation and decarbonization measures on the economy by 2050 under different scenarios % deviation from reference scenario GDP levels 5.0 4.6 4.5 4.0 4.0 3.5 3.0 3.0 2.5 2.0 1.7 1.5 1.3 1.4 1.0 0.5 0 Resilient Resilient Resilient Resilient Resilient Resilient NECP net zero NECP net zero MFMOD-CC MINDSET Source: World Bank staff calculations, using MFMod-CC and MINDSET macro models. Note: Reference (REF) scenario includes climate impacts but no adaptation or mitigation measures. Figure O.2. GHG emissions pathway under the net zero scenario, by sector, 1990–2050 GHG emissions (kt CO2e) 40,000 Other Commercial 35,000 Industry Waste 30,000 Manufactuing and construction Agriculture 25,000 Buildings Transport Electricity and heat 20,000 Land use change and forestry Net 15,000 10,000 5,000 0 –5,000 19 0 19 2 94 19 6 98 20 0 20 2 04 20 6 08 20 0 20 2 14 20 6 20 8 20 0 20 2 24 20 6 28 20 0 20 2 34 20 6 20 8 40 20 2 44 20 6 48 50 9 0 1 2 3 4 9 0 1 2 3 4 1 3 9 0 1 2 3 20 20 20 20 20 19 20 20 20 19 20 20 Source: World Bank calculations based on data from Climate Watch, NDC, and Moldova NBS. Note: Chart shows historical emissions up to 2020 and projected emissions for 2021–50. x Country Climate and Development Report: Moldova Table O.1. CCDR scenarios: policy and investment scenarios considered in this report Growth policies Climate Adaptation Decarbonization Scenario (EU convergence) impacts measures measures REF (climate impacts) ✓ ✓ Resilient (adaptation measures alone) ✓ ✓ ✓ Resilient NECP (announced policies to meet ✓ ✓ ✓ ✓ NDC targets) Resilient net zero (by 2050) ✓ ✓ ✓ ✓✓ Opportunity 1. Achieving a new growth paradigm to converge with EU living standards To converge with the EU’s average GDP per capita, Moldova needs to accelerate annual GDP growth to 5 percent through to 2050. However, the country’s reliance on remittances as a growth driver, amidst persistent structural challenges in the economy—such as gaps in the rule of law, state capture by vested interests, fragile institutions, and barriers to private sector development—has hindered structural transformation. This has negatively impacted productivity, competitiveness, human capital, and the creation of quality employment, leading to a decline in the economy’s productive capacity. Moldova is trapped in a vicious cycle of low labor productivity, limited investment, and weak job creation, which in turn fuels further emigration. Combined with a rapidly aging population, this results in a shrinking and increasingly low productivity workforce. In the absence of structural reforms, Moldova risks a decline in long-term economic prospects and a stagnation of living standards. Moldova’s integration with EU markets and institutions presents an opportunity for significant improvements in private sector productivity, a more competitive economy, and greater job creation. But to achieve this, the country urgently needs to lay the foundations for a more competitive and diversified economy that supports structural transformation and income convergence with the EU in a sustainable manner. Economic diversification is expected to reduce the carbon intensity of the economy and provide protection against trade-related shocks induced by global decarbonization efforts. Decarbonization policies are key for meeting EU standards, a precondition for energy integration with the EU and its associated benefits. These policies are also crucial to overcome new challenges in accessing international markets, which are increasingly influenced by environmental standards and regulations. While the impact of the EU’s Carbon Border Adjustment Mechanism on Moldova’s economy is likely to be limited in the initial phase, it will have consequences for certain sectors and firms, in particular large carbon dioxide (CO2) emitters within the area left of the Dniester River, or Left Bank. It is also an indication of ongoing global trends toward reducing the trade competitiveness of carbon-intensive economies. Climate action would not only help boost growth, but also facilitate the modernization of the economy and support job growth in high value-added sectors. Macroeconomic modeling conducted for this CCDR highlights that climate policies can support the development of high value-added sectors, including services, construction, and advanced manufacturing (figure O.3), all of which are necessary to support the implementation of major decarbonization efforts, such as in the energy and residential sectors. The growth of these sectors directly translates into employment outcomes. In the absence of adaptation and decarbonization measures, job losses from climate impacts could amount to 1.1 percent of total employment in 2030. The impact of climate shocks is projected to impact jobs across all income levels, predominantly in the agriculture sector (figure O.4a). Low-income households would be disproportionately affected, and the top 10 percent of earners—typically in the highest-paid positions—least affected. Implementing adaptation and decarbonization measures, on the other hand, can avert job losses and create an additional 0.2 to 0.8 percent of jobs across all income groups, driven by advanced manufacturing and construction. In short, climate action saves, creates jobs, and helps diversify the economy. xi Country Climate and Development Report: Moldova Climate adaptation measures have the Figure O.3. Impact of different Resilient potential to transform Moldova’s crucial scenario sectoral GDP, by 2030 but underperforming agriculture sector by Agriculture significantly increasing outputs and incomes. and forestry 5.0 Although a pivotal sector in the rural economy, Energy and Moldova’s agriculture sector is marked by low extraction 3.5 productivity and value-added. About 30 percent Basic of the country’s labor force works in agriculture, manufacturing 2.0 with 98 percent of these working as small-scale Advanced farmers on fragmented, undercapitalized, manufacturing 10.4 and inefficient family farms. Decades of Public services underinvestment and mismanagement of 1.5 centralized irrigation systems are major Construction factors for low agricultural productivity, and 6.4 while about 9 percent of arable land (217,000 Private services 3.7 hectares) is technically equipped for irrigation, only about 0.2 percent is actually irrigated.3 0 5 10 15 Low productivity is projected to worsen with Deviation from REF scenario (%) climate change, with most crops expected to Reslient scenario suffer significant yield declines by 2050 due Resilient NECP scenario to temperature and precipitation changes.4 A Resilient net zero scenario hotter, drier climate could lead to a 41 percent decrease in sugar beet production, 33 percent Source: World Bank staff calculations, using MINDSET. decrease in maize, and 29 percent decrease in wheat. Irrigation and water storage investments are no-regret measures that would could almost fully mitigate yield losses due to climate change, and could result in substantial (around 12 percent) yield gains in a moderate climate scenario. As such, climate policies are instrumental for enhancing productivity regardless of future climate changes, safeguarding rural livelihoods, and tackling the challenge of outmigration. Opportunity 2. Achieving energy security and efficiency Investments in domestic renewable energy (RE) capacity, energy efficiency, and sustainable heating are the solution to Moldova’s challenge of energy insecurity and exposure to volatile fossil fuel prices. The unprecedented increase in energy prices and high uncertainty in energy supplies following Russia’s invasion of Ukraine highlighted the need for an energy sector transition to increase energy security. Moldova is one of Europe’s most energy-vulnerable countries, as it imports nearly all its coal, gas, and oil products. Total natural gas imports in 2022 are estimated at $800 million (equivalent to 6 percent of GDP), a fivefold increase since 2020. Before rapidly rebalancing its energy import sources in the wake of Russia’s invasion of Ukraine, Moldova relied almost entirely on gas supplied by Moldovagaz (a subsidiary of the Russian majority state-owned Gazprom) and two main sources of electricity: the gas-fired, Russian-controlled MGRES in the Left Bank and imports from Ukraine. Reducing the country’s reliance on fuel imports will help mitigate its exposure to gas price volatility, reduce the need for subsidies to mitigate social impacts, and improve financial stability in the energy sector. Energy system modeling for this CCDR shows that, in the absence of decarbonization measures, energy import dependence is projected to increase from 78 to 83 percent by 3 Source: Cadaster Agency. 4 Although the overall effects of heat on crop yields is expected to be limited (less than a 1 percent decline), in some districts (or raions) in the north—notably Donduseni, but also Briceni, Edinet, and Ocnita—it could reach up to 13 percent. Yield decline from precipitation changes in the dry/hot scenario is more severe and spread out across the country, ranging from 9 percent to 17 percent. xii Country Climate and Development Report: Moldova 2050 due to higher electricity imports needed for Figure O.4. Labor demand effects by income economic growth. However, adopting domestic decile and sector, by 2030 RE generation and energy efficiency measures a. Resilient REF scenario under the net zero scenario can reduce energy Change in labor demand import dependence to 40 percent by 2050. (as % total employment) Attracting private investment to develop utility- 0 scale RE projects, especially solar, represents –0.025 a cost-effective way for Moldova to address –0.050 –0.075 its energy supply deficit. But the country first –0.100 needs to address fundamental bottlenecks that –0.125 undermine the development of the electricity –0.150 system and market, beginning with investments –0.175 to modernize and expand the capacity of the –0.200 grid (World Bank 2023e). –0.250 1 2 3 4 5 6 7 8 9 10 Income decile Decarbonization is also a prerequisite for EU integration, yet Moldova’s reliance b. Resilient NECP scenario Change in labor demand on inefficient infrastructure and carbon- (as % total employment) intensive sectors stands in the way. 0.075 Moldova’s GHG emissions continue to rise, driven by energy, agriculture, and waste, reflecting inefficiencies and the degradation 0.050 of carbon sinks. Moldova is highly energy intensive, with GHG emissions per $1,000 0.025 of GDP being sixfold the EU’s average and surpassing that of most regional peers. The energy sector accounts for about 70 percent 0 of total GHG emissions, with power and 1 2 3 4 5 6 7 8 9 10 Income decile heat generation, transport, and buildings (in Agricultural and forestry Construction that order) as the top emitters. The net zero Manufacturing Water and waste scenario has the largest reduction in energy Wholesale and retail trade management intensity, driven by routine technological renewal and targeted efficiency measures. Source: World Bank staff calculations, using MINDSET. To decarbonize its energy supply and increase its energy security, Moldova can adopt a multifaceted approach to significantly expand its RE capacity. Simplifying the authorization, certification, and licensing procedures for RE plants will encourage private investment, while piloting sealed bid auctions can gather market feedback to develop bankable RE projects to unlock the utility-scale market for local independent power producers. Improving the capacity of local financial institutions to finance RE projects and expanding initiatives with development financial institutions on the creation of de-risking packages can help attract local and international investors. The country can also explore public-private partnerships (PPPs), invest heavily in electricity infrastructure to integrate variable RE sources into the grid, and improve energy forecasting tools to better manage variable energy sources. Focusing on real-time dispatch assessments, enhancing system flexibility, and expanding combined heat and power plants are crucial for integrating renewables into the energy mix. xiii Country Climate and Development Report: Moldova To significantly reduce GHG emissions and Figure O.5. Share of imported energy goods improve energy service quality, Moldova under different scenarios can reform and invest in key energy demand Percent sectors. With buildings accounting for 58 100 percent of the country’s energy consumption, 90 energy efficiency and sustainable heating 80 initiatives will be central to this. Yet, despite 70 60 a comprehensive legislative framework and 50 numerous plans and programs, Moldova 40 has made little progress in improving energy 30 efficiency. Significant efforts are needed 20 to improve the enabling environment for 10 investments, including regulatory energy 0 efficiency incentives in the residential sector, 2016 2020 2025 2030 2035 2040 2045 2050 improvements in lending practices, enhanced REF NECP Net zero energy audit capabilities, and an ecosystem Source: World Bank staff estimations based on Exergia for contracting and implementing renovations in the residential sector. GHG emissions in the transport sector have tripled over the past Figure O.6. Final energy intensity of the economy two decades, and there is a need to upgrade under different scenarios the rail system for freight transport, introduce Energy intensity (toe, €, thousands) regulatory measures to modernize the vehicle 0.35 fleet, and develop targeted policies to promote 0.30 the use of public transport and shift to more sustainable modes of transportation. 0.25 Transitioning to a low-carbon energy sector 0.20 will not only boost energy security and 0.15 efficiency; it also offers co-benefits, such as trade competitiveness, reduced exposure to 0.10 volatile energy markets, and improved public 0.05 health outcomes. Decarbonization policies in Moldova’s key emitting sectors present an 0 2016 2020 2025 2030 2035 2040 2045 2050 opportunity to address long-standing barriers to REF NECP Net zero economic growth. Increasing energy efficiency, including in the building and industrial sectors, Source: World Bank staff estimations based on Exergia could further contribute to energy security, while also yielding direct economic benefits to end users by protecting them from volatile international energy markets (Figures O.5, O.6). The associated co-benefits—such as reduced air pollution from clean heating solutions—would improve health outcomes, especially for vulnerable groups. Air pollution in Moldova causes up to 3,000 deaths per year. Decarbonization policies would reduce the country’s reliance on polluting fossil fuel–fired technologies, potentially reducing the small particulate matter (PM2.5) concentrations associated with anthropogenic sources by up to 84 percent, preventing over 4,100 premature deaths by 2050 compared to the REF scenario. To achieve net zero emissions, Moldova must also look beyond energy—and focus on sectors such as agriculture, forestry, and solid waste management—which would also help it meet EU sustainability standards. Agriculture and waste are significant nonenergy contributors to emissions, each accounting for around 11 percent of total GHG emissions in 2020, including the xiv Country Climate and Development Report: Moldova large majority of methane emissions (Republic of Moldova 2023). Land use, land use change, and forestry (LULUCF), which offset nearly 20 percent of the country’s emissions in 2000, no longer provide a substantive carbon sink as of 2020, highlighting a divergence from the EU’s ambitious climate targets and environmental standards. Adopting climate-smart agriculture (CSA) practices will therefore be key to improving production efficiency and reducing emissions. Upgrading solid waste management practices and infrastructure to EU standards is also important. Introducing measures to recycle and recover the material and energy value of waste can help Moldova exceed its NDC goal in the LULUCF sector, while also tackling soil and groundwater pollution. Implementing the National Forest Extension and Rehabilitation Program, which aims to increase forest area by 145,000 hectares by 2032, thus increasing GHG sequestration potential by 56 percent, will allow the country to leverage the sequestration potential of its landscapes to achieve net zero emissions by 2050. Opportunity 3. Achieving socioeconomic resilience to shocks Without proactive investment in climate resilience, Moldova will likely incur escalating losses that suppress productivity and exacerbate the decline of rural areas. Europe is the world’s fastest- warming region and, like many other European countries, Moldova is projected to face an intensifying risk from natural hazards, particularly droughts. In the absence of adaptive measures, climate change is projected to reduce Moldova’s GDP by up to 2.8 percent by 2050, relative to the REF scenario. And the most severe impacts are expected in the agriculture sector. Climatic change is expected to exacerbate pressures on vulnerable communities, especially in rural areas, and further drive outmigration. The four key impact channels that are most relevant to the Moldovan economy are: • Significant yield reductions for most agricultural crops by 2050 due to temperature and precipitation change, including a 29 percent decrease in wheat production, • Soil erosion, which will be exacerbated by climate change and worsen land degradation under current agricultural practices, • Increased damage from flooding, with climate scenarios indicating a reduction in riverine flood damages along the Dniester River by 2050 due to lower river flows, but an increase in surface flood risks due to more intense rainfall, and • Labor productivity losses due to heat stress in exposed sectors.5 5 Estimated climate impacts should be understood as a lower bound only, as only a subset of climate impact channels was assessed. xv Country Climate and Development Report: Moldova Figure O.7. Climate risk and vulnerability in Moldova and peer countries Agriculture, forestry, and fishing (% of GDP) Annual extreme heat days increase in 2050 Average annual risk to assets Average annual risk to well-being Forcibly displaced population Maize yield change in 2050 Poor population exposed to high flood risk (%) Population exposed to SLR & coastal floods in 2050 Population exposed to high flood risk (%) Share of transport network exposed Finland Portugal Ireland New Zealand Poland Belgium Japan Spain Sweden Armenia Austria Estonia Latvia Lithuania Moldova Romania Slovenia France Greece Mexico Turkiye Netherlands United States Czech Republic Slovak Republic Germany Hungary Italy Norway Luxembourg Denmark Low Medium High No data Source: World Bank staff calculations. Note: Countries are rated using a benchmark approach: those rated at high risk (red) are in the top one-third, medium risk (yellow) are in the middle one-third, and low risk (blue) are in the lowest one-third. SLR denotes sea level rise. Figure O.8. Drought impacts on agricultural output and associated economic losses Change in output (%) 30 $169.7 m $987 m $400 m $13.8 m $328 m 20 10 0 –10 –20 –30 00 20 1 02 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 03 99 22 0 20 20 20 20 20 20 20 20 20 20 20 20 20 19 20 20 20 20 20 20 20 20 20 Source: World Bank staff calculations, based on data from the National Bureau of Statistics of the Republic of Moldova and the Food and Agriculture Organization of the United Nations. Figure O.9. Climate change impacts on GDP in the absence of adaptation measures Deviation from baseline, with no climate impacts (%) 0 –0.5 –1.0 –1.5 –1.1 –1.1 –2.0 –1.9 –2.5 –2.1 –3.0 –2.8 –3.5 2030 2040 2050 2030 2050 MFMOD-CC MINDSET Droughts Soil erosion Floods Heat stress GDP Source: World Bank staff calculations, using MFMod-CC and MINDSET models. Note: The aggregate effects observed are smaller than the sum of individual climate impacts on GDP, when considered separately, because heat stress–related productivity losses in agriculture are smaller when the sector has already shrunk due to drought. xvi Country Climate and Development Report: Moldova Investing in climate resilience and adaptation is essential to boost productivity in the agricultural sector and protect livelihoods from climate change. Although Moldova has made notable progress in adaptation, it remains among the region’s most vulnerable and least resilient countries. Faster growth will significantly strengthen resilience to climate change at the economy and household levels, but further action is required to strengthen adaptation, especially in vulnerable key economic sectors such as agriculture, infrastructure, and health systems, which while necessitating substantial investment, should yield large net benefits for the economy. Adaptation investments in transport, health systems, and other critical public infrastructure can protect communities against shocks and enhance service quality. Priorities include retrofitting and upgrading public buildings and infrastructure, starting with schools and health facilities, to ensure their safety and functionality in the aftermath of climate and seismic shocks. The resilience of lifeline infrastructure, including energy, transport, and water, can be improved through better design, maintenance, deployment of nature-based and grey infrastructure, and risk-assessing new investments. Expanding, upgrading, and properly maintaining flood protection infrastructure, including dikes and drainage systems, and implementing the Flood Management Master Plan and Investment Program developed with the European Investment Bank would help improve flood protection. The effect of disasters and climate extremes can be mitigated by investing in emergency preparedness, including upgraded early warning systems and civil protection. While Moldova has made significant progress and has joined the EU Civil Protection Mechanism, it still faces challenges to ensure effective and efficient disaster responses. Priorities include developing policy and institutional mechanisms to strengthen emergency preparedness in health facilities and systems, improve disaster response capacity, and enhance civil protection capacity. This includes acquiring modern emergency response equipment for search, rescue, and firefighting, and improving management, logistics, and communication protocols. To meet regular disaster response and recovery needs and protect against the financial unpredictability of more severe climate change effects, a disaster risk financing strategy is crucial. The government retains most of the climate and disaster risk on its balance sheet, making little use of catastrophe insurance or other sovereign risk transfer mechanisms. As a result, the country is estimated to face an annual average disaster response funding gap of about $146 million. Its contingency funds require larger budget allocations and more efficient last-mile disbursement mechanisms to ensure they can effectively respond to regular crises, such as seasonal floods and droughts. Adopting contingent financing instruments would enable the government to rapidly mobilize funds in response to the extreme events that exceed the capacity of regular contingency reserves. Policy priorities for financing and implementing the transition Moldova’s national development strategies already include many of the necessary policy measures to achieve a thriving, low-carbon, and resilient economy. Its NDCx established stringent mitigation commitments, aiming for a 70 percent reduction in GHG emissions from 1990 levels by 2030, with the potential to reach 88 percent with adequate international support in low-cost finance, technology transfer, and technical cooperation. Moldova has developed extensive legislation, policies, and strategies to support the implementation of its climate commitments. A member of the Energy Community Secretariat since 2010, the government has developed an ambitious NECP that seeks to create a competitive and sustainable energy sector that aligns with European energy systems and provides reliable and affordable energy to consumers. Meeting its NECP commitments would enable the country to achieve 50 percent of the energy sector emissions reductions required to meet its net zero targets by 2050. But implementing these strategies is challenging and will require concrete steps to raise financing and incentivize the transition, with strong coordination across key ministries and government programs. This report highlights the priority actions needed to achieve net zero GHG emissions by 2050. xvii Country Climate and Development Report: Moldova Table O.2. Recommendations and priority policy actions for achieving net zero GHG emissions by 2050 Recommendation Priority policy actions Strengthen climate resilience and disaster preparedness Support CSA measures to adapt to Expand irrigation and water storage climate impacts, including upgrading Implement CSA practices, including credit and insurance and expanding irrigation >>> Section 3.1.1 schemes Strengthen the resilience of critical Strengthen flood protection infrastructure infrastructure and public services Establish systematic risk assessments, a building registry, >>> Section 3.1.2 and a valuation system Strengthen the resilience of key public services and facilities Strengthen disaster risk management Strengthen civil protection capacity and emergency preparedness capacity Strengthen emergency preparedness of health systems >>> Section 3.1.3 Upgrade the national disaster early warning system Achieve net zero through a concerted policy and investment approach in line with economic growth objectives Accelerate the transition to clean Decarbonize the energy supply, including by scaling up energy supply >>> Section 3.1.2 renewable energy Accelerate regional power market integration Decarbonize the heating supply Increase efficiency and decarbonize key Support energy efficiency, including in the buildings sector energy demand sectors >>> Section 3.2.1 Decarbonize transport through modal and fuel switches Expand efforts on sustainable forestry Sequester carbon through afforestation and reforestation and modern solid waste management programs >>> Section 3.2.3 Develop a solid waste management strategy in line with EU standards Enable the transition through adaptation of people and firms, financing, and institutional capacity Finance the transition >>> Section 4.2 Implement a carbon pricing framework in line with the EU framework Adopt a green taxonomy that is aligned with the EU Sustainable Finance Framework Develop a comprehensive risk financing strategy Strengthen institutions, governance, Operationalize the National Climate Change Commission and incentives >>> Sections 2.2 and 4.2.1 Implement systematic climate risk screening and climate budgeting Support people and firms to mitigate Strengthen education and green skills development the costs of the transition and cope with programs climate shocks >>> Section 4.4 Expand social protection programs Note: For a more detailed version, see table 5.1. CCDR policy recommendations. xviii Country Climate and Development Report: Moldova When designing policies for decarbonization and climate adaptation, Moldova has significant challenges to consider in its political and economic landscape. The government has limited influence over large CO2 emitters, particularly in the Left Bank’s energy and industry sectors, which limits the effectiveness of regulatory climate change mitigation measures—including air quality or energy efficiency standards—on major emitters. But by concentrating its efforts in the area to the right of the Dniester River, or Right Bank, to foster energy efficiency, expand renewable energy, and develop low-carbon industries, Moldova can reduce its dependence on carbon-intensive suppliers from the Left Bank, strengthening energy security (table O.2). Similarly, the heavy influence of state-owned enterprises (SOEs) and monopolists makes decarbonization policy challenging. While in theory, having direct oversight should make the decarbonization process smoother, in practice, SOEs often represent entrenched interests that are resistant to change. Enhancing SOE reporting requirements to include climate-related information could improve governance and create better incentives—for example, by mandating disclosures on capital and operational expenditures for environmentally sustainable activities, in line with EU regulation on sustainable investment.6 And implementing an effective competitive neutrality framework can help facilitate the entrance of private sector players in SOE-dominated sectors where competition may be feasible and even desirable. Finally, implementing climate action is further hampered by long-standing structural barriers, including capacity and financing constraints, gaps in the rule of law, state capture by vested interests, and regulatory barriers to private sector development. Investment needs for financing low-carbon growth and climate change adaptation Moldova’s climate-resilient green transition will require substantial investment. This CCDR estimates that the NECP scenario will require a total investment of $31 billion over the next 30 years, considering a 6 percent discount rate to arrive at a net present value (NPV), or 13.2 percent of the cumulative GDP (also discounted). The net zero scenario requires an additional $8.0 billion, or 3.6 percent of GDP. This compares to the $15.4 billion, or 6.6 percent of GDP, required under the REF scenario (figure O.10). But, while total investment expenses are significantly higher under the NECP and net zero scenarios, operational expenses decline due to lower fuel import needs (figure O.11). To fund these investments, Moldova can implement progressive tax reforms, improve public spending, introduce carbon pricing, and mainstream climate change in public finance. Funding the mitigation measures partially through public resources would result in a higher public debt-to-GDP ratio compared to the REF scenario (figure O.12). But public financing alone will not suffice; Moldova will also have to mobilize finance, including from development partners and the private sector. Modeling for the NECP scenario indicates that about two-thirds of the financing will need to come from the private sector (figure O.13), and accelerating climate-smart private investments will require improving the business environment, increasing labor productivity and skills, fostering competition in the SOE-dominated sectors, and accelerating the pace of reform around trade harmonization with the EU (World Bank 2023e). In the energy sector, de-risking mechanisms, standardization of power purchase agreements, and guarantees and blended finance supported by development financial institutions could help attract private investment, including pilot projects for utility-scale renewable energy. Scaling up green finance, attracting foreign direct investment (FDI), and accessing grants and concessional finance from the EU and development partners are also crucial, in particularly to finance the steep increase in investments in the near term. Moldova is expected to benefit from grants and concessional loans to support its preparations for EU membership, boost economic growth, and accelerate socioeconomic convergence.7 A greater share in grants and concessional finance from development partners could reduce the public debt-to-GDP ratio. 6 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Regulation (EU) 2020/852). 7 In this CCDR, about one-third of the investments are covered by public funding, including domestic and EU contributions. Moldova is expected to benefit from grants and concessional loans before acceding to the EU. The rest of the investment financing will come from private sources. xix Country Climate and Development Report: Moldova Figure O.10. Total cumulative investments by sector Figure O.11. Total cumulative operational costs, and scenario, 2030 and 2050 by sector and scenario, 2050 $, billions (NPV) $, billions (NPV) 50 60 39.0 49.5 40 50 46.1 45.3 30.8 30 40 20 15.2 15.4 30 11.9 10 5.4 20 0 10 –10 REF Resilient Resilient REF Resilient Resilient 0 REF Resilient NECP Resilient NECP net zero NECP net zero Opex; 2050 net zero Capex; 2030 Capex; 2050 Total investments Industry Power Total investments Transport Fuel costs Fuel costs Commercial Climate resilience Climate resilience Industry Residential Transport Residential Agriculture and forestry Agriculture and forestry Commercial Power Source: World Bank staff estimates. Source: World Bank staff estimates. Figure O.12. Impact on public debt/GDP under Figure O.13. Financing sources under two three scenarios scenarios Deviation from REF scenario (%) $, billions (NPV) 25 39.0 40 20 30.8 30 15 24.3 10 20 19.8 5 4.8 10 3.5 0 7.5 9.9 2020 2025 2030 2035 2040 2045 2050 0 Reslient Resilient NECP Resilient Net zero Resilient NECP Resilient Net zero Public, domestic Public, EU Private Total Source: World Bank staff estimates. Note: The REF scenario has climate impacts but no climate action. Source: World Bank staff estimates. Note: Estimates are in NPV terms, with a 6 percent discount rate used for future investments. Smart macrofiscal policies are essential for raising the necessary financing and managing public debt. To achieve the ambitious climate adaptation and mitigation goals outlined in this report, Moldova will need to have macroeconomic policies that facilitate their implementation. This includes implementing carbon pricing and mainstreaming climate change considerations into planning and public financial management. As part of its EU integration, Moldova is preparing to implement a carbon pricing framework, which can generate public revenue and promote decarbonization by incentivizing emission reductions. In the absence of a direct carbon pricing policy, Moldova currently uses indirect instruments, such as fuel xx Country Climate and Development Report: Moldova excise taxes on gasoline, diesel, and liquefied petroleum gas, and other policies that change the price of products associated with GHG emissions in ways that are not directly proportional to the relative emissions associated with those products. It will be able to allocate the revenue generated by direct carbon pricing to the general budget or to targeted initiatives to reduce distortive taxes, encourage green investments, support vulnerable populations, or reduce public debt. In the medium term, reforming fossil fuel subsidies will be crucial to align overall carbon price incentives.8 But before introducing such reforms, ensuring a strong social protection framework is established would help mitigate any adverse effects on the most vulnerable groups. Mainstreaming climate change considerations into planning and the public financial management system and process is critical. This includes climate risk screening, climate budgeting to improve the transparency, efficiency, and impact of public spending on climate actions, and integration of adaptation and decarbonization strategies in public investment decisions. Mobilizing private capital and advancing green finance are critical for channeling investments toward climate-related projects in Moldova. The private sector is expected to cover around two-thirds of all investment needs under the NECP and net zero scenarios, mainly focusing on adopting energy- efficient commercial appliances and renovating buildings and heating systems for improved energy efficiency. To mobilize private investment to meet decarbonization targets, this CCDR proposes three strategic approaches. First, Moldova can enhance the profitability of private assets through policies that make investing in private sector projects more financially attractive. In some cases, blended concessional financing with private capital or subsidized funds—such as guarantees, syndicated loans, and credit lines for on-lending purposes—is needed to reduce perceived risks for private investors and make climate projects more attractive. For example, the government could offer financial incentives for investments in technologies and infrastructure that enhance the overall efficiency and resilience of the energy system, including ancillary services for the electricity grid and energy storage, especially as the grid integrates more variable renewable energy. Second, it can allow private companies to use state-owned assets through PPPs, where government and private companies share the costs and benefits, or through privatization, where the private company takes full control. For example, unbundling the railway sector into separate entities that are responsible for infrastructure, freight, and passenger services, along with relaxed entry restrictions in the transport sector, could promote private investments. Third, it can adopt supportive public policies and promote a conducive policy and regulatory framework to facilitate the private sector’s transition and create green jobs. Key policy reforms include enhancing the business environment, particularly for micro, small, and medium-sized enterprises, enhancing the FDI framework to integrate domestic firms into more productive value chains and global markets, and promoting competition in network industries, including energy, transport, and communications. Specific measures could include, for instance, streamlining the process for private companies to get permits for green investments, such as wind farms or solar panels, and enhancing public awareness of the benefits of energy efficiency. The private sector can also play a crucial role in supporting adaptation by modernizing operations and offering financing, goods, and services that help others adapt. With support from multilateral development banks and the government, Moldovan banks can create credit lines to fund such investments, offering conventional and innovative instruments with environmental incentives, such as green bonds and loans. The country can also tap into international climate funds, such as the Green Climate Fund (GCF) and the Global Environmental Facility, while government incentives and advice from 8 Moldova maintains fossil fuel subsidies in the form of reduced value-added tax (VAT) rates for gas, electricity, and heat consumption for households (tax expenditures), which reduce the price of fossil fuels and can counteract positive carbon pricing effects. xxi Country Climate and Development Report: Moldova multilateral development banks and donors can encourage companies to become more climate resilient. Finally, adopting sustainable technologies and practices, such as CSA, can foster a market for eco- friendly products and services. Through fundamental financial sector reforms, Moldova can mobilize private capital and promote the green transformation of its financial sector. A sustainable finance roadmap and a green taxonomy aligned with the EU Sustainable Finance Framework could enhance climate-focused lending and investment. The roadmap would set clear goals and steps for creating green financial products and increasing financial transparency, while the taxonomy would define sustainability criteria for green finance. Facilitating a people-centric transition Supporting workers and communities is crucial for facilitating an equitable transition that is centered around people. The green transition holds the promise of new job opportunities in sectors such as renewable energy and sustainable agriculture. But it also poses risks to certain groups and areas, particularly low-skilled workers and poorer raions (districts). Enhancing social safety nets, education and training programs, and health care services can help mitigate the negative impacts of the transition, countering these risks and capitalizing on climate-smart growth (table O.3). The shift toward green jobs—including those in renewable energy, sustainable agriculture, and green technologies—requires a skilled workforce to drive innovation and implement sustainable solutions. Green jobs generally require a more complex skillset, and even the least skilled roles demand a higher level of skills than traditional jobs. Macroeconomic modeling for this CCDR indicates that decarbonization policies will likely generate more jobs that require mid-level skills (figure O.14). But Moldova has significant skills gaps and human capital development challenges, including labor shortages, an inadequately educated workforce, and skills mismatches. Targeted support for workers, such as active labor market programs, is crucial for upskilling or reskilling workers whose abilities do not meet the demands of the new green job market. In the medium term, the education system should focus on providing students with foundational skills for lifelong learning, which are crucial for transitioning to a green economy. Table O.3. Policies for a human-centered green transition Adapt workers and households Mitigate the unintended consequences Enable the transition to a new reality and costs of the transition Education Foundational and fungible skills Research & development, and innovation (R&D+I) Demand-driven technical, vocational education, and training (TVET) systems and training Behavioral change and lifelong learning Health Mental and physical health support Physical health protection systems Social Labor market programs protection and Social assistance and compensation jobs Social insurance: pensions (old-age pensions, disability pensions, and survivors’) Social care service Source: Adapted from World Bank 2023b. xxii Country Climate and Development Report: Moldova Figure O.14. Labor demand effects across occupations and sectors in 2030, under the Resilient NECP scenario Managers Agricultural and forestry Construction Professionals Manufacturing Technicians and associate professionals Wholesale and retail trade Clerical support workers Service and sales workers Skilled agricultural, forestry, and fishery workers Cra and related trades workers Plant and machine operators, and assemblers Elementary occupations 0.0 0.05 0.10 0.15 Change in labor demand (as % of total employment) Source: World Bank staff calculations, using MINDSET. This report emphasizes that climate change Figure O.15. Poverty rate and historical is already causing significant welfare and drought frequency, by raion distributional effects, exacerbating existing inequalities. It particularly affects low-income families and agricultural workers who are at risk of job losses due to climate events (figure O.15). The 2020 drought showed that the poorest and the most vulnerable—especially women and rural, northern, and southern residents—are highly susceptible to climate shocks, facing income and price volatility. Meanwhile, urban residents, who tend to not depend on agriculture for their livelihoods, are more susceptible to energy price Poverty rate surges, while also exposed to sectoral shifts due Historical drought to decarbonization, and will require targeted frequency support. Social protection coverage in Moldova is limited, and developing a comprehensive last High resort program that addresses all adverse events, including energy and other shocks, such as natural disasters or the death of the main breadwinner, and Low chronic poverty, could help facilitate an equitable, Low High people-centric transition. Source: World Bank 2023d. xxiii Country Climate and Development Report: Moldova Chapter 1 Development and climate in Moldova Photo Credit: Russieseo / iStock 1. Development and climate in Moldova MAIN MESSAGES Moldova’s climate and development challenges are inextricably linked. Weak and volatile growth, high levels of poverty, and a strong urban-rural divide are at least partly a function of climate vulnerability, but Moldova’s economic structure, infrastructure, and governance contribute directly to low levels of climate resilience. The global energy transition presents a unique opportunity for Moldova to green its economy and strengthen its energy security, but there are significant risks and challenges inherent in shifting from the status quo. European Union (EU) integration offers a platform for Moldova to unlock the barriers to accelerated growth and strengthened resilience. 1.1. Development context: structural challenges to high-income convergence Two decades of strong yet volatile economic growth have improved Moldova’s standards of living. Between 2000 and 2021, per capita gross domestic product (GDP) expanded at an average annual pace of almost 5 percent, helping Moldova reach 15 percent of the EU average GDP per capita in 2021 ($5,315 vs an EU average of $38,234), compared to just 3 percent in the early 2000s. This sustained growth has resulted in a significant reduction in poverty, from close to 90 percent in 2000 to just above 10 percent by 2021.9 Despite this, Moldova remains one of Europe’s poorest countries, and its large rural population lacks access to services and productive economic opportunities. Moldova is a small, landlocked, predominantly rural country, where around 60 percent of the population lives in rural areas, compared to the Europe and Central Asia (ECA) average of less than 30 percent. With limited natural resources and a long-standing unresolved status of the area left of the Dniester River or Left Bank, Moldova’s economy has long been characterized by low-productive, small-scale agriculture: around 57 percent of Moldovans derive their income and food mainly from their own production (UNDP 2020). Rural poverty is high: nearly one-in-three rural residents live below the national poverty line, that is three times the rate in urban areas (figure 1.1). The rural population also has lower educational outcomes and is significantly less likely to have health insurance, improved water and sanitation, hot water, modern sources of heating, durable homes, a bank account, or access to the internet. Throughout the country, but especially in rural areas, opportunities for productive employment are limited. According to the International Labor Organization, 25 percent of workers are in the informal sector, mainly in subsistence agriculture, as well as nontradable services. Lack of access to good jobs has triggered massive outmigration, leaving Moldova with a large diaspora and heavily reliant on remittances. And although these have declined as a share of GDP from their peak of 34 percent, they remain one of the highest in the ECA region, at more than 14 percent in 2022.10 Long-term structural challenges, aggravated by the remittance-driven growth model, raise severe constraints to Moldova’s potential to converge to high income. Converging with the EU average GDP per capita would require accelerating annual GDP growth to 5 percent for the next three 9 Based on the upper-middle-income country poverty line of $5.5 a day in 2011 purchasing power parity. 10 World Bank staff estimates, based on IMF balance of payments data, and World Bank and OECD GDP estimates. 2 Country Climate and Development Report: Moldova decades. But business-as-usual will not Figure 1.1. Urban v rural poverty rate, 2014–22 be sufficient.11 In the context of failure to address long-standing structural Poverty rate (%) barriers in the domestic economy— 40 including gaps in the rule of law, state capture by vested interests, weak 30 institutions, and regulatory barriers to 20 private sector development—Moldova’s remittance-driven growth model has not 10 nurtured structural transformation and has proven detrimental to productivity, 0 competitiveness, and good job 22 4 5 6 7 8 9 20 21 1 1 1 1 1 1 20 20 20 20 20 20 20 20 creation. The factors that have limited 20 private investment, foreign direct Urban Rural investment (FDI), and job creation in Source: World Bank 2023d. tradable sectors have also affected Note: The figure is based on household budget survey (HBS) data; and starting Moldovans’ incentives to invest in with 2019, there was a modification in the HBS methodology, making the data incomparable to previous periods. This is depicted visually as a break in the higher education, informality and series. Based on the national poverty line. underemployment in agriculture, and low labor force participation. The result has been declining productive capacity Figure 1.2. GDP growth and potential growth, 2005–21 of the economy, with potential GDP Poverty rate (%) growth falling by almost 1 percentage 15 point over the past decade (figure 1.2). 10 This is due to a vicious cycle of low labor productivity, low investment levels, and 5 weak job creation, which stimulated 0 further outmigration and, combined with a rapidly aging population, has –5 resulted in a shrinking and increasingly –10 low productivity workforce. Without 10 20 09 20 9 08 13 18 12 14 20 1 21 06 16 20 5 15 20 7 20 7 1 1 0 0 1 structural reforms, Moldovans face a 20 20 20 20 20 20 20 20 20 20 20 20 deterioration of long-term economic GDP growth HP filter prospects and stagnant living standards. Source: World Bank staff analysis. The recent crises have also revealed the intrinsic vulnerabilities of a growth model with limited resilience to shocks. Moldova’s vulnerability is associated with its small, landlocked economy, its reliance on food and energy imports, and an increasing frequency of natural disasters exacerbated by climate change. And, although the country’s economy was relatively resilient to the impacts of the COVID-19 pandemic, direct impacts from Russia’s invasion of Ukraine—including a large inflow of refugees (as of June 2024, an estimated 120,000 Ukrainian refugees, equivalent to around 4 percent of Moldova’s population, remained in the country12) and security challenges—as well as indirect spillovers on the regional and global economy, pose risks to its short-term recovery and long-term prospects. The 2021–22 energy crisis highlighted the country’s vulnerability, due to its extremely high reliance on energy imports, while the 2020 and 2022 droughts illustrate the economy’s vulnerability to increasingly frequent climate-related events. Under the Reference scenario with no policy changes and accounting for demographic change, economic growth is expected to average 4 percent over the 11 next 20 years and decline to 3 percent afterward. 12 UNHCR data. 3 Country Climate and Development Report: Moldova EU integration represents an opportunity to unlock growth potential, converge with EU socioeconomic standards and, if it stimulates accelerated reforms, strengthen resilience to shocks. Seizing the opportunity to integrate with EU markets and institutions can stimulate private investment (including FDI), gains in productivity growth, a more competitive, diverse economy, and job creation. The EU gender acquis highlights Moldova’s commitment to advancing women’s labor force participation, representing women in leadership roles and decision-making, and enhancing targeted women’s entrepreneurship programs.13 Such outcomes will increase the resilience of both the economy and households to external shocks, including from climate change. But to achieve this, Moldova urgently needs to lay the foundations for a more competitive and diversified economy that can support structural transformation and income convergence to the EU in a sustainable manner. This includes: • Strengthening the business environment for Moldovan firms and foreign investors, which remains limited by regulatory uncertainty, high transaction costs, and weak market forces and competition policies • Building on recent investments to improve infrastructure to reduce costs and increase the reliability of trading with EU markets, and strengthen the reliability, resilience, efficiency, and affordability of energy and water services • Strengthening human capital by addressing large inequities in access to quality education, and more broadly of service delivery across the spectrum of public services, to help the population benefit from and contribute to a modern economy while acknowledging the importance of addressing gender inequalities in resource allocation and service delivery • Implementing fiscal policy that provides the right incentives and reduces market distortions to support the transition. 1.2. Climate change context: climate impacts and cost of inaction Moldova is the third most vulnerable ECA country to natural hazards,14 partly due to its high reliance on a low-productivity agricultural sector, as well as the high exposure of its population. In Moldova, 12.2 percent of the population is exposed to natural hazards, compared to the upper-middle-income country average of 2.1 percent, and the economy and households are highly dependent on natural capital, particularly through the agricultural sector. In 2018, natural capital accounted for over 12 percent of Moldova’s wealth in 2018—that is more than three times the average share among low- and middle- income ECA countries—with cropland accounting for around 60 percent of the total, which is four times the ECA average (World Bank 2021e). Agribusiness contributes 14.5 percent of Moldova’s GDP, around 50 percent of all exports, and nearly 30 percent of jobs. Agricultural production is characterized by a dichotomy between a relatively small group of productive corporate farms and a large number of fragmented, undercapitalized, and unproductive family farms. The vast majority (98 percent) of Moldovans in agricultural are small-scale farmers owning 0.8–10.0 hectares, or (mostly informal) farmworkers (UNDP 2020). Women-owned farms are on average 30 percent smaller than those held by men, highlighting persistent gender disparities. Previous studies have identified large productivity gaps between Moldova’s agricultural sector and that of its regional peers (World Bank 2016). With only around 9 percent of land under irrigation, and irrigation use almost nonexistent in small farms, most Moldovan farmers are not only unable to take advantage of higher yield potential but are highly exposed to climate variation. 13 In 2022, the gender pay gap was 15.5 percent, and highest (38.1 percent) in the information technology sector. 14 https://gain.nd.edu/our-work/country-index/. 4 Country Climate and Development Report: Moldova Figure 1.3. Climate risk and vulnerability in Moldova and peer countries Agriculture, forestry, and fishing (% of GDP) Annual extreme heat days increase in 2050 Average annual risk to assets Average annual risk to well-being Forcibly displaced population Maize yield change in 2050 Poor population exposed to high flood risk (%) Population exposed to SLR & coastal floods in 2050 Population exposed to high flood risk (%) Share of transport network exposed Finland Ireland New Zealand Poland Portugal Belgium Japan Spain Sweden Armenia Austria Estonia Latvia Lithuania Moldova Slovenia Romania France Greece Turkiye Mexico United States Netherlands Czech Republic Slovak Republic Germany Hungary Italy Norway Luxembourg Denmark Low Medium High No data Source: World Bank staff. Note: Countries are rated using a benchmark approach: those rated at high risk (red) are in the top third, medium risk (yellow) are in the middle third, and low risk (blue) are in the lowest third. Without adaptation measures, climate-related hazards, especially droughts, will have increasingly large impacts on growth. While Moldova has experienced droughts on a regular basis throughout its history, particularly in the south, they have become more frequent and severe in the last two decades. Between 2000 and 2012, the country experienced four devastating droughts—in 2000, 2003, 2007, and 2012—and further droughts in 2015, 2020, and 2022, with major impacts on agricultural output and incomes, particularly for small farmers (figure 1.4). The 2007 drought, which affected 80 percent of the country’s territory, led to a 23 percent decline in agricultural production and caused an estimated $1 billion in economic losses overall (World Bank 2007, 2021b; Government of the Republic of Moldova 2015). While the losses from the 2020 drought are difficult to disentangle from the economic impacts of the COVID-19 pandemic, estimates suggest a 26–34 percent decline in agricultural production and a loss of almost 20 percent of agricultural jobs.15 Severe flooding is also common. In 2008, torrential rains, together with releases from upstream in Ukraine, led to flooding in the north and south, resulting in $120 million in losses. In 2021, multihazard average annual losses are estimated at around $164 million (DRF 2022), or 1.3 percent of GDP. In the absence of adaptation actions, annual GDP losses are estimated to be over 2.8 percent by 2050 (section 4.1). Figure 1.4. Drought impacts on agricultural output and associated economic losses Change in output (%) 30 $169.7 m $987 m $400 m $13.8 m $328 m 20 10 0 –10 –20 –30 00 20 1 20 2 20 3 04 20 5 20 6 20 7 08 20 9 10 20 1 20 2 13 14 20 5 16 20 7 18 20 9 20 20 1 20 9 22 0 1 2 0 1 0 1 0 1 0 0 0 1 9 20 20 20 20 20 20 20 19 20 20 Source: World Bank staff calculations, based on data from the National Bureau of Statistics of the Republic of Moldova (NBS) and the Food and Agriculture Organization of the United Nations. 15 https://www.worldbank.org/en/news/press-release/2022/06/02/moldova-to-build-economic-resilience-and-enhance-competitiveness-with-world-bank-financing. 5 Country Climate and Development Report: Moldova Natural hazards and climate shocks dispropor- Figure 1.5. Mapping poverty rate and historical tionately impact poor and marginalized commu- drought frequency, by raion nities. Poverty overlaps with climate exposure in Moldova. Raions (districts) in the south and center with high poverty rates also have moderate to high drought risks (figure  1.5), exposing households and communities to potential shocks. Using the 2020 drought as an example of an agricultural ‑ shock, figure 1.6 shows that the effects are gener� ally worse on populations that are already poorer or vulnerable: in rural areas, in the south, and on women. This is not only from lost income among Poverty rate agricultural-dependent households, but also from Historical drought expenditure impacts that result from higher food frequency prices. Vulnerability is aggravated by poor ­ basic service provisions, particularly in rural areas, High which otherwise could serve as a buffer against climate shocks and environmental degradation. Diminishing water reserves due to prolonged dry Low seasons can further limit access to clean water Low High and sanitation services and increase the price of water—a critical development for poor and vulner‑ able communities, and particularly women, due Source: World Bank 2023d to the gender division of labor around prevailing household responsibilities (UNDP 2020). Vulnerable and marginalized groups already face greater chal‑ lenges in the context of climate change. For example, women in rural Moldova are four times more prone to poverty and vulnerable to climate change, while Roma communities often face access problems to finance, education, health care, housing, and other social services. Around 15 percent of Roma commu‑ nities live in substandard housing with acute exposure to natural hazards (ACTED 2023). Figure 1.6. Simulated poverty impacts of the 2020 drought Change in poverty rate (percentage points) 12 10 3.5 4.4 8 5.1 4.4 6 3.9 3.5 4.5 4 7.7 6.6 5.7 2 4.3 3.0 4.4 4.6 3.5 2.3 0.7 0.1 0 National Urban Rural North Center South Chisinau Men Women (15+) (15+) Income Expenditure Source: World Bank staff calculations, based on data from HBS 2020 Note: Estimates show the percentage increase in the poverty rate over baseline poverty due to the income channel (i.e., contraction of agricultural income) and the expenditure channel (i.e., higher food prices). 6 Country Climate and Development Report: Moldova While there is uncertainty over future climate patterns, Moldova is likely to experience more frequent and severe impacts from climate hazards in the coming decades. The analysis carried out for this report uses six climate scenarios to represent the uncertainty pertaining to future climate change impacts: three dry/hot scenarios, which correspond to general circulation models (GCMs) that predict high increases in temperature and reductions in precipitation; and three wet/warm scenarios, corresponding to GCMs that predict a lower increase in temperature and an increase in precipitation. While Moldova has already experienced an average annual temperature rise of 1.1°C during the last 20 years compared to the previous decade, both sets of scenarios project an acceleration of temperature rises by 2050 (from 1.9°C under wet/warm to 2.8°C under dry/hot) relative to the 1995–2020 average, with mostly uniform increases across the country. Projections on precipitation are less consistent. Dry/hot scenarios project annual declines in precipitation, peaking at nearly 9 percent by the 2040s, with some models predicting the largest deficits in the north and others in the south. Wet/warm scenarios project a 13 percent increase in precipitation over the same timeframe. However, shifting timing of rains in both sets of scenarios could negatively impact agricultural output, while increased variability could result in increasing the frequency and severity of droughts. Without adaptation, the scale of crop losses that Moldova experiences in drought years today could be a normal feature by 2050. Most crops are expected to experience large declines in yields through 2050 due to temperature and, especially, precipitation changes.16 A dry/hot future is projected to result in average declines of 41, 33, and 29 percent, respectively, in sugar beet, maize, and wheat production in 2041–50 (figure 1.7). Projected losses in export crops such as sunflowers and grapes are somewhat lower, at 15 and 13 percent, respectively. Taking the weighted average of current production, overall losses in a dry/hot future would be around 17 percent, which means that by 2041–50, the average year would experience shocks on the scale of existing severe drought conditions today. The situation is more benign under a wet/warm future, with overall crop production remaining similar to today’s, although some crops are still expected to experience losses, notably sugar beets (–10 percent) and wheat (–4 percent); maize, sunflower, and grape production is projected to increase. Output changes vary moderately across the country, with higher losses in northern raions (especially Drochia and Donduseni in a dry/hot future, and Briceni and Donduseni in a wet/warm future) and more sanguine impacts relative to the current climate in central and southern raions under both futures. Figure 1.7. Average climate change impact (%) on crop production in the absence of adaptation measures, 2041–50 20 10 10 2 4 0 –3 –4 –4 –4 –10 –10 –20 –13 –15 –19 –22 –30 –29 –29 –33 –40 –41 –50 Apple Grape Maize Wheat Other Sunflower Potato Sugar cereal beet Dry/hot mean Wet/warm mean Source: World Bank and Industrial Economics staff analysis, based on NBS data. Notes: Results represent a percent shock to rainfed and irrigated crop yields from heat and water availability effects; crop selection is based on NBS acreage and production data by district for permanent and sown crops in 2022; the top crops and groups are selected to cover 94 percent of total area and 94 percent of total tonnage; NBS crop data exclude the Left Bank; dry/hot mean represents the average of three selected model runs around the 10th percentile of change in mean precipitation, and 90th percentile change in mean temperature, across all GCMs (within SSP2–4.5 and 3–7.0); wet/warm mean represents the average of three scenarios around the 90th percentile of change in mean precipitation and 10th percentile change in mean temperature across all GCMs (within SSP2–4.5 and 3–7.0). 16 The effects of heat on crop yields is expected to be limited (less than a 1 percent decline) overall, but under the dry/hot scenario, could reach 13 percent in some raions in the north, notably Donduseni, but also Briceni, Edinet, and Ocnita. Yield decline from precipitation changes under the dry/hot scenario is more severe, ranging from 9–17 percent, and spread across the country. 7 Country Climate and Development Report: Moldova While soil erosion from future climate change is not expected to contribute to large additional losses in agricultural output, extensive land degradation is already having a major impact in Moldova. An analysis of expected topsoil loss through excess erosion17 under future climate scenarios identifies minimal impacts on crop yields by 2050. On average, less than 0.1 percent loss is projected in a wet/warm future (driven by increases in extreme precipitation) and even smaller impacts in a dry/hot future. However, Moldova’s fertile soils face anthropogenic threats, including land fragmentation; low land management capacity; inadequate practices that affect soil health (especially tillage); overgrazing; poor forestland management, including illegal logging of protective forest belts and extensive use of low climate–adapted exotic species; and inefficiencies in land use planning, including crop rotation (World Bank and CIAT 2016). Estimates indicate that up to 29 percent of all land,18 and 43 percent of agricultural land (World Bank and CIAT 2016), is degraded, with areas in the center and north most affected. Degraded agricultural land directly reduces yield potential. Future climate change, particularly hotter and drier conditions, could aggravate the practices that worsen degradation. The ecosystem benefits of Moldova’s forests are at risk from climate change, exacerbated by management practices. The share of forested land in Moldova (11.8 percent19) is among the lowest in the ECA region, and forest cover is highly fragmented. An analysis of high conservation–value forests shows that Moldova has no intact forest landscapes and only a few small forest bodies of medium integrity; the majority has a low forest integrity index (EU4Environment 2023) and needs more shelterbelts to protect cropland from wind and water erosion. Harboring more than 80 percent of the country’s biological diversity, forests play a crucial role as a source of genetic diversity-nourishing agrifood systems. Forest dependency in Moldova remains high, including as a source of firewood, which contributes to deforestation and indoor air pollution. The scale and nature of its forests also make them susceptible to wildfires, particularly in the center, where forests are classified as wildfire hazard level 4, indicating high susceptibility. Floods already cause substantial damage, and climate change is expected to further exacerbate and shift current exposure patterns. A flood hazard analysis shows that more than 10 percent of the population (about 400,000 people) live in high-risk flood zones. About 185,000 people could experience flooding of over 0.5 meters in a 1-in-100-year flood event. Flood impacts on roads, buildings, and agricultural land cost Moldova about 0.8 percent of GDP annually in asset damages alone, primarily to roads, followed by buildings. These costs are distributed unevenly across the country, with the most flood-exposed raions (relative to raion GDP) located along the Dniester River. In the southwest, several raions—including Stefan Voda, Cantemir, Causeni, and Cahul—face a combination of above- average flood exposure and poverty, highlighting the socioeconomic vulnerability of flood-exposed people. For example, by 2050, climate change under a dry RCP4.5 scenario is expected to result in a decrease in fluvial flood damages along the Dniester River due to reduced river flows, while pluvial floods could worsen due to intensified precipitation. As a result, raions along the Dniester River could see net reductions in flood damages, while all other raions, particularly in the south, could see significant increased damages (Figure 1.8.b). Rising temperatures may impact human capital, particularly through productivity losses among agricultural workers and health impacts on older residents. The impact of heat on labor productivity is projected to increase in all climate scenarios and all sectors, particularly after 2035. In a dry/hot future, average productivity losses over 2041–50 could reach 1.7 percent in the agriculture sector, 0.6 percent in industry, and 0.4 percent in services. Impacts are lower, but still significant, in a wet/ warm future. These effects only capture the impact of average temperature and not the effects of 17 Changes in the erosion of topsoil caused by climate change are estimated using the Revised Universal Soil Loss Equation (RUSLE). 18 UN SDG data 19 https://data.worldbank.org/indicator/AG.LND.FRST.ZS?locations=MD-RO-UA-BG-HU. 8 Country Climate and Development Report: Moldova severe heatwaves, which can be a particular threat to Moldova given its large elderly population20 and limited availability of air conditioning.21 Even in the most optimistic climate change scenario, the number of extreme heat days is projected to more than double by 2050, from 17.6 days per year (1995–2014 average) to over 40.0.22 The incidence of heat-related illnesses, such as heatstroke, is expected to increase, especially among the elderly, who account for 82–92 percent of excess mortality during heatwaves (Kenny et al. 2010). Figure 1.8. Flood exposure in Moldova a. Total average annual flood losses b. Changes in losses due to climate change to roads, buildings, and agriculture in 2050 (% change relative to 2020) (% of raion GDP) (0%;3%) (–35%;–20%) (3%;5.3%) (–20%;–5%) (5.3%;7.7%) (–5%;5%) (7.7%;10.3%) (5%;20%) (10.3%;17%) 1.3. Climate policy context: risks and opportunities from the global climate transition Although a small emitter, Moldova is highly energy intensive. Contributing only 0.03 percent of global greenhouse gas (GHG) emissions, it ranks second-lowest in energy supply per capita and has the lowest electricity consumption per capita among EU and Energy Community (EnC) contracting parties. But its GHG emissions per $1,000 of GDP are six times higher than the EU average and well above most ECA peers, reflecting both the low value added from the economy and inefficiency in energy use. To meet its nationally determined contribution (NDC) targets, Moldova will need to act on its rising emissions, which are driven by energy, agriculture, and waste. Its NDC, submitted in 2016 and updated in 2020, has an economy-wide unconditional target to reduce GHG emissions by 70 percent below 1990 levels by 2030, with up to 88 percent of this reduction conditional on access to international low-cost 20 In 2023, about 600,000 people (24 percent of the population) were ages 60 and over, 60 percent of them women. By 2040, the share of the elderly is expected to rise to 33 percent of the population. 21 According to household survey data, just 6.1 percent of households have air conditioning. 22 World Bank Climate Change Knowledge Portal. “Moldova Heat Risk Profile.” https://climateknowledgeportal.worldbank.org/ 9 Country Climate and Development Report: Moldova financial resources, technology transfer, and technical cooperation. While emissions in the 1990s fell below the NDC target due to a shrinking economy and structural change following independence, the emissions intensity of GDP has declined at an increasingly slower rate. As a result, emissions have been rising as the economy grew since the early 2000s (figure 1.9). Energy accounts for around 70 percent of total emissions, with heat and power generation, transport, and buildings (in that order) the main contributors. Agriculture and waste are significant nonenergy contributors, each accounting for around 11 percent of total emissions in 2020. These sectors also account for the large majority of methane emissions—which represent 17.5 percent of carbon dioxide equivalent (CO2e) GHG emissions in 2020— with waste accounting for 62 percent of methane emissions, and agriculture and energy for the rest.23 Land use, land use change, and forestry (LULUCF), which offset nearly 20 percent of emissions in 2000, are no longer a significant carbon sink, as of 2020. Figure 1.9. GHG emissions by sector 1990–2023 GHG emissions (kt CO2e) 40,000 Other Commercial 35,000 Industry Waste 30,000 Manufactuing and construction Agriculture 25,000 Building Transport Electricity and heat 20,000 15,000 10,000 5,000 0 19 0 19 91 19 2 93 19 4 19 5 96 19 97 19 8 20 99 20 0 20 01 2002 2 0 03 2004 2005 2006 20 07 2008 20 9 20 0 20 1 1 2012 2013 2014 2015 2016 20 17 2018 20 19 20 0 20 21 2022 23 9 9 0 9 9 9 0 1 2 19 19 19 Source: World Bank staff calculations, based on data from Republic of Moldova National Inventory and World Development Indicators. The unprecedented rise in energy prices and high uncertainty in energy supplies in 2021 and 2022 exposed the vulnerabilities posed by Moldova’s high energy dependence. Moldova is among Europe’s most energy-insecure countries. Natural gas accounts for more than one-half of its primary energy supply, and Moldova only produces around 20 percent of this domestically. It also imports nearly 100 percent of its coal, gas, and oil products. Moldova has the least-developed electricity and gas markets in Europe due to high market concentration in both wholesale and retail, a lack of trading platforms and, until late 2022, low or no diversification of its supply sources. Until recently, Moldova relied almost entirely on gas supplied by Moldovagaz and on two main sources of electricity supply—MGRES and imports from Ukraine—with Russian entities controlling both Moldovagaz and MGRES.24 Existing threats to energy supply security in the area of the Right Bank were heightened after Russia’s invasion of Ukraine. Energy product imports to the Right Bank increased almost fivefold since 2020, reaching $2.7 billion in 2022.25 In the winter of 23 In 2020, methane emissions totaled 2.39 million tons of CO2e. Key sources include: solid waste (52 percent), enteric fermentation (16 percent), fugitive emissions (10 percent), and wastewater treatment (10 percent) (Republic of Moldova 2023). 24 MGRES is 100 percent owned by Russia’s RAO-EES, while Gazprom is a majority shareholder of Moldovagaz. 25 International accounts of the Republic of Moldova, 2022 (provisional data), National Bank of Moldova, 30 March 2023; CIF prices. 10 Country Climate and Development Report: Moldova 2022/23, consumer gas tariffs were six times higher, electricity twice as high, and heat two and one- half times higher than pre-November 2021 levels. Gas interconnections to Romania are being expanded (box 3.2) to reduce the country’s dependency on imports from Russia, and domestic renewable energy (RE) generation increased from 3 to 117 gigawatt hours between 2014 and 2021; but lack of system flexibility and energy storage capacity remains a constraint for further development of renewables.26 These vulnerabilities are aggravated by Moldovan households’ high exposure to energy prices, raising serious socioeconomic risks. Energy poverty is pervasive in Moldova, where households spend an average of 15 percent of their budget on energy. This is one of the highest rates in the ECA region and far above the typically accepted affordability threshold of 10 percent. Nearly one in three households (four times the EU-27 average) report not being able to keep their homes adequately warm. Thus, even small energy price increases can have large impacts on the welfare of energy-vulnerable households. A simulation of the poverty impacts of recent energy price shocks found that, in the absence of social protection measures and behavioral changes, poverty would have increased by 15.4 percentage points (figure 1.10), with impacts higher among urban households and with simulated poverty tripling in the capital, Chişinău. Although Moldova successfully overcame the challenges of the 2021/22 and 2022/23 winter heating seasons by making progress in diversifying energy supply and partly mitigating the social impact with the Energy Vulnerability Reduction Fund (EVRF), vulnerability to energy supply and price shocks remains a major concern. EU trade policy, as an instrument of the Green Deal, offers both risks and opportunities for Moldova. The EU’s Carbon Border Adjustment Figure 1.10. Simulated poverty impact of energy price Mechanism (CBAM), expected to shock in the absence of mitigating measures become fully operational by 2026, will act like an import tariff, imposing taxes Poverty headcount rate (%) on imports to the EU according to a 70 66.6 product’s emissions intensity. Products included in the first phase of the CBAM— 60 iron and steel, aluminum, cement, 48.5 fertilizers, electricity, and hydrogen— 50 44.5 45.6 43.6 42.4 account for less than 1 percent of exports from the Right Bank (Figure 1.11). So, 40 36.2 36.7 while some individual exporters may face 31.8 28.2 29.2 adjustment challenges, CBAM is unlikely 30 25.7 to have much impact on the Right Bank. By contrast, the economy of the Left 20 15.1 Bank could face significant challenges, 10 8.3 with exports concentrated in iron and steel, and produced with high emissions 0 intensity, going mainly to the EU. Beyond an th h u r l al na te ut na CBAM, while deeper EU trade integration or ur rb en So io si N R U at hi C offers opportunities for Moldova, C N particularly in the agrifood sector, EU Poverty rate at pre-crises energy prices requirements for trading partners to Poverty rate with energy price shocks and no mitigation meet sustainability standards will mean Source: World Bank 2023d, based on nowcasted data from HBS 2020. many of its smaller producers will face significant compliance challenges. On the other hand, technical and financial support available through the EU’s pre-accession programs, such as IPARD,27 can help unlock green trade opportunities for Moldova. 26 Power storage has become particularly important since 2022, with the application of the new electricity market rules (adopted in 2020), including new balancing rules (balancing market). National Agency for Energy Regulation Decisions nr. 283 of 07.08.2020 and nr. 232 of 29.04.2022. 27 IPARD (Instrument for Pre-Accession Assistance for Rural Development) is part of the EU’s pre-accession assistance program to provide financial and technical support to EU candidate countries. 11 Country Climate and Development Report: Moldova Moldova can expedite its green transition Figure 1.11. Moldova’s Right Bank has limited by diversifying into more sophisticated exposure to EU CBAM (1st stage) green products. While it ranks only 86th on Percentage potential exposure the Green Complexity Index (Andres and 0.8 0.7 Mealy 2023), significantly behind neighboring 0.7 0.6 Ukraine (46th) and Romania (15th), it ranks 0.6 higher (67th) on green complexity potential, 0.5 indicating potential to advance into more 0.4 complex green products. Moldova’s strengths 0.3 0.2 0.2 relate to low-complexity green products in 0.2 0.1 0.1 0.1 areas of efficient consumption of energy 0 0.0 0.0 technologies and carbon capture and storage, Fertilizers Iron and Articles of Aluminum health and energy management, renewable steel iron and steel energy, and wastewater management Share of total exports (Figure 1.12). Preliminary analyses suggest that Share of total exports to the EU Moldova could venture into new green export Source: IFC 2021 markets that are well-aligned with its existing capabilities in renewable energy, environmentally friendly consumer products, and natural resource management. Developing these areas can also help ensure women’s participation in the formal sector in emerging green industries, particularly given their relatively strong representation in science, technology, engineering, and mathematics education. Figure 1.12. Moldova’s green export opportunities lay in natural resource and electrical products Product Complexity Index 2.0 1.5 Instantaneous/ storage waterheaters 1.0 0.5 Electricity supply, production and calibrating meters 0 Chlorine –0.5 Limestone material for manufacture of lime or cement –1.0 Electric transformers –1.5 Undenatured Brooms/brushes ethyl alcohol of vegetable materials –2.0 –2.5 0 5 10 15 20 25 30 35 40 45 Proximity Source: Pia Andres and Penny Mealy, Green Transition Navigator, 2021 Note: The Product Complexity Index (PCI) is used as a proxy for the technological sophistication of a product. Proximity measures the product’s similarity to the country’s productive capabilities and is correlated with the probability of developing future competitiveness in a product. 12 Country Climate and Development Report: Moldova Chapter 2 Climate commitments, policies, and capacities Photo Credit: Victoria Moloman / iStock 2. Climate commitments, policies, and capacities MAIN MESSAGES Moldova has strengthened its climate commitments and developed extensive legislation, policies and strategies to support implementation of its climate commitments and EU integration. But implementation remains a challenge, with further improvements in intergovernmental coordination and stronger institutional capacity needed. The political economy of the transition is challenging in Moldova, with the strong influence of state-owned enterprises (SOEs), limited influence over actions in the Left Bank, and limited citizen awareness and engagement. But EU integration, and associated regulatory and investment support, can help facilitate climate action. 2.1. Moldova’s major commitments and policies on climate change Moldova’s climate policy framework is showing increased commitment. It ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1995, the Kyoto Protocol in 2003, and the Paris Agreement in 2017, and is a signatory to the Global Methane Pledge. After signing the Paris Agreement, Moldova submitted its NDC in 2016, updating it in 2020 to establish more stringent mitigation commitments, with a target to reduce GHG emissions by 70 percent below the 1990 level by 2030 and with an option to increase this to 88 percent if international low-cost financial resources, technology transfer, and technical cooperation are ensured.28 Among the sectoral subobjectives in the updated NDC, they include the unconditional reductions (by 2030, relative to 1990) in industrial processes and product use (27 percent), agriculture (44 percent), and waste (14 percent), as well as a 10 percent enhancement in carbon sequestration in LULUCF. The revised NDC also included cross-sectoral and sector-specific adaptation actions and measures. Moldova is developing extensive strategies, policies, and legislation to help implement its climate and EU commitments. The European Moldova 2030 National Development Strategy mainstreams climate and sustainable development through the following policies and plans to support mitigation and adaptation: • Low Emission Development Program 2030, which came into force on January 1, 2024 and systematizes policies and sectoral action plans to reduce GHG emissions in the energy sector (81 percent), transport sector (52 percent), buildings sector (74 percent), industrial sector (27 percent), agriculture sector (44 percent), and waste sector (14 percent) by 2030, compared to 1990, to achieve the GHG reduction targets specified in the updated NDC and considers commitments set forth in the EU-Moldova Association Agreement.29 • Integrated National Energy and Climate Plan (NECP) 2025–30,30 which provides a roadmap for achieving Moldova’s short-term decarbonization objectives along with a perspective to 2050, in the context of Moldova’s participation in the EnC. The NECP incorporates previously separate plans, such as the National Renewable Energy Action Plan and the National Energy Efficiency Action Plan. • National Short-Lived Climate Pollutants Plan and National Methane Roadmap, which are under development to support Moldova’s commitments under the Global Methane Pledge. 28 NDC1’s unconditional commitment was 64–67 percent below 1990 levels, with a conditional commitment 78 percent below 1990 levels. 29 Art. 95 of Chapter XVII “Climate Policies” of the Association Agreement. 30 Consultation draft: https://particip.gov.md/ro/document/stages/*/11984. 14 Country Climate and Development Report: Moldova • The National Adaptation Strategy (NAP-1), which was completed in 2014 and includes national adaptation plans and sectoral adaptation plans for six climate-sensitive sectors: agriculture, forestry, water resources, health, transport, and energy. • National Climate Change Adaptation Programme until 2030 and its Action Plan, which were adopted in August 2023 to drive the implementation of Moldova’s NDC and NAP-1 adaptation commitments.31 Moldova is also in the process of aligning its climate-related legislation with the EU as part of the wider EU and EnC acquis process. This includes specific legislation related to mitigation, including establishing a scheme for GHG emissions allowance trading; regulations on fluorinated gases and ozone- depleting substances; regulations on monitoring and reporting of GHG emissions; and directives related to renewable energy and energy efficiency. A climate law, approved by Parliament in April 2024, provides an overarching framework to support climate mitigation and adaptation actions. The Law on Climate Actions establishes a legal reference to NDC commitments and 2050 climate neutrality and provides a basis for implementing and evaluating policies and measures for GHG emissions reductions and adaptation. As well as establishing mechanisms for more efficient stakeholder participation in planning, implementing, and evaluating climate policies and measures, the law establishes the principle for pricing carbon emissions and provides the legal basis for developing the mechanisms for emissions monitoring, reporting, and verification needed to support the adoption of an emissions trading system (ETS) or carbon tax. Despite progress in developing the legal framework to support climate action, gaps remain, and significant attention is needed to ensure implementation. The European Commission’s (EC’s) 2023 report on Moldova’s progress in aligning with the EU acquis, assesses the country as having a “some to moderate level” of preparedness on energy, noting that it “had the highest progress…among contracting parties in the Energy Community Annual Implementation Report 2022.” But on environment and climate change, the EC assesses Moldova as being in the “early stage” of preparedness. Noting that it had made some progress on alignment, key barriers include “limited administrative capacity, fragmented sectoral policies and absence of a whole-of-government oversight on implementation of climate policies and commitments, and insufficient monitoring and checks of greenhouse gas emissions, including the reliability of data across the country.” A lack of budgeting also means that implementation, particularly for adaptation, is often delayed and fragmented (EC 2023). 2.2. Institutional framework for climate change action Although the core institutional arrangements for managing and implementing climate change policies are in place, there is a need for clearer segregation of duties and stronger capacity. As in most countries, the cross-cutting nature of the climate agenda results in intersecting mandates and a need for strong coordination across many Moldovan ministries and agencies (table 2.1). The Ministry of Environment is the key ministry for developing and implementing environmental protection, climate change, and natural resources policies and strategies. It also holds the responsibility for implementing international environmental treaties, such as the Paris Agreement and the Kyoto Protocol, and for evaluating sectoral strategies from the context of climate change. The State Hydrometeorological Service under the ministry is the focal point for the Sendai Framework. The State Chancellery coordinates and oversees the wider strategic planning, monitoring, and evaluation process, and reviews compliance of sectoral development strategies with national policy priorities, including those relevant to climate change. The Ministry of Finance is responsible for ensuring the availability of budget sources for their implementation and public investments, including incorporation of environmental impact assessments. 31 https://www.undp.org/moldova/press-releases/moldova-has-national-climate-change-adaptation-programme-developed-support-undp. 15 Country Climate and Development Report: Moldova Subnational governments are enhancing efforts to develop climate change measures and can benefit from strengthened guidelines and support. Forty municipalities and villages have signed the Covenant of Mayors – Europe, and made climate mitigation commitments, with most committing to reduce GHG emissions by 30–40 percent by 2030; 27 have made adaptation commitments in their sustainable energy and climate action plans or sustainable energy action plans. Given that the National Development Strategy and the National Strategy for Regional Development for 2022–28 identify tasks to support raions in climate change, risk prevention, and disaster resilience, subnational governments would benefit from the introduction of unified guidelines on strategic climate planning at the local levels. Capacity building for integrating climate change into budget planning and financing would also help support local-level implementation. Despite some progress in climate change–related planning, there is room to improve intergovernmental coordination and strengthen the capacity of involved institutions. While the Climate Framework Law may help clarify roles, responsibilities, and core processes, further efforts can be made to link results with resources. Moldova can strengthen low institutional capacity, as defined by the EC (2023), by establishing dedicated units across public authorities and increasing staff knowledge through regular training and other capacity development opportunities. Specific skills and knowledge require further development. For example, to ensure climate consideration in public investment management (PIM), the Ministry of Finance will need to incorporate a climate assessment of projects, develop relevant key performance indicators and selection criteria for public investments, and introduce systematic performance monitoring of climate-related expenditures. The National Climate Change Commission (NCCC) has a key role to play in coordinating climate change policy and implementation, but is not yet operational. The commission is expected to be responsible for coordinating, promoting, and overseeing the climate change–related activities necessary to achieve the UNFCCC and Paris Agreement targets. The NCCC was to include representatives of central and local public administration authorities, educational and scientific institutions, nongovernmental organizations, and the private sector (Republic of Moldova 2023). But despite a decision to establish the NCCC in mid-2020, it has yet to be formally established or meet. The government is in the process of modifying the NCCC as part of the Law on Climate Actions. Under the revised arrangements, the prime minister will lead the NCCC and the Ministry of Environment will act as Secretariat. In the meantime, in absence of the NCCC, the Interagency Strategic Planning Committee, which coordinates and monitors implementation of the National Development Strategy and select public investment projects, could support coordination of the climate agenda. 2.3. The political economy context The government has limited direct policy influence over large carbon dioxide (CO2) emitters in the Left Bank—especially in energy and industry sectors—but decarbonization offers a route to diversification and energy security. A significant share of Moldova’s CO2 emissions originate on the Left Bank. For example, the Cuciurgani-Moldavskaya GRES gas-fired power plant, located on the Left Bank and owned by Russian company Inter-RAO, covers about 80 percent of Moldova’s electricity needs and is also a major emitter. Moldova’s major producers of iron, steel, and aluminum products are also located on the Left Bank. Although this limits the reach of regulatory instruments for climate change mitigation, including air quality and energy efficiency standards for major emitters, strategies focused on the Right Bank to foster energy efficiency, RE capacity, and low-carbon industries can help reduce the country’s reliance on carbon-intensive suppliers on the Left Bank, strengthening energy security. While the heavy influence of SOEs and monopolists makes decarbonization policies challenging, the legislative framework and EU integration can help facilitate climate action. Due to the monopolistic tendency of the Moldovan energy sector and significant roles played by SOEs in the energy sector, policies targeting decarbonization can be challenging. While direct oversight might theoretically make the decarbonization process smoother, in practice, SOEs often represent entrenched interests 16 Country Climate and Development Report: Moldova that are resistant to change. Building political will and public support through awareness campaigns highlighting the benefits of clean energy, setting RE incentives, and developing a supportive legislative and regulatory framework can all help overcome these challenges. For example, the Low Emission Development Program 2030’s action plan defines sector-specific goals and priority actions and includes specific activities for named SOEs to implement. Developing a clear strategy for SOE ownership and implementing an effective competitive neutrality framework would also incentivize change within SOEs, allowing the country to promote private sector development in sectors where competition is feasible or desirable. The EU integration process and initiatives such as EU4Climate are good examples of the role that international cooperation can play in supporting the shift to renewables. Expanding SOE reporting data can strengthen both oversight and the country’s ability to raise funds for climate-related investment projects. Given their critical role in infrastructure investment, SOEs can also play a central role in strengthening resilience to climate change. The state can lead by example by expanding the coverage of its annual aggregate reporting to include climate-related information regarding the SOE portfolio, while individual SOEs could report on capital and operational expenditure related to economic activities that qualify as environmentally sustainable, as required by EU regulation on sustainable investment.32 This could later be expanded to include private enterprises. While there is general concern about climate change among Moldova’s citizens, awareness about government priorities remains low. A recent survey found that 68 percent of Moldovans identified climate change as a serious concern for them or their families, but only 44 percent felt informed about climate change, and just 20 percent felt informed about what their government was doing about it (World Bank and IPSOS 2022). This is below the ECA averages of 77 percent, 52 percent, and 33 percent, respectively. These results confirm the statement of the updated 2020 NDC, which indicates low awareness of communication practices that can build community resilience, and low awareness of disaster risk reduction, climate adaptation, and related practices as following barriers in climate adaptation capacity and gaps in public awareness that hinder the development of community resilience (Government of the Republic of Moldova 2015). At the same time, the survey revealed that 84 percent of Moldovans are concerned about air pollution, 88 percent about water pollution, and 87 percent about deforestation, all well above the ECA averages, and there is wide support (92 percent) for greater use of alternative energy sources (World Bank and IPSOS 2022). These findings suggest there are opportunities to engage citizens on the climate agenda through broader environmental channels that impact their day-to-day lives. Better access to climate-related information and enhanced education and incentives can help raise citizens’ awareness of, and engagement with, the climate agenda. The State Open Data Portal provides historical data on climate-related and other indicators—such as temperature, precipitation, GHG emissions, air pollution and ozone depletion, and environmental financing—but not future projections. The Particip.gov.md platform, where responsible institutions publish drafts of climate (and nonclimate) strategic documents, does not contain information on whether the relevant authority has considered the comments submitted by citizens. In November 2023, public consultations were conducted about establishing the platform for supporting participatory e-democracy.33 The platform is intended to enable active citizen participation in decision-making through digital tools such as electronic petitions, surveys, and public service and service provider evaluations. Using this platform for climate-related issues could improve citizen engagement. Public campaigns, environmental education, and incentive schemes can also help raise awareness and increase public participation in government efforts. The Ministry of Environment already plays an active role in citizen engagement on environmental issues and could naturally expand its outreach to climate. The Energy Efficiency Agency, which is already responsible for disseminating information about the renewable sector and supports measures to the public, local, and regional planning authorities, can also take a leading role on decarbonization (IEA 2022). 32 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Regulation (EU) 2020/852). 33 https://particip.gov.md/ro/document/stages/anunt-consultare-publica-privind-proiectul-hg-pentru-aprobarea-conceptului-platformei-pentru-sustinerea- democratiei-participative-e-democratie/11434. 17 Country Climate and Development Report: Moldova Table 2.1. Key institutional actors and mandates for the climate agenda Main stakeholder institution Climate change core mandates Interagency cooperation/cross-government coordination State Chancellery Coordinates and oversees strategic planning, monitoring, and evaluation, including reviewing sectoral development strategies concerning compliance with national policy priorities Inter-ministerial Committee on Strategic Planning Coordinates and monitors the activities on elaborating and implementing the policies, strategies, and plans, including those related to the process of European integration Approves public policy priorities and ensures compliance with government priorities, and approves the list of investment projects of national importance and monitors their implementation NCCC: The Ministry of Environment (MoE) functions Coordinates climate policy instruments, the implementation of national and sectoral climate adaptation plans, and the inclusion of Country Climate and Development Report: Moldova as the secretariat; established but not functioning mitigation and adaptation measures in program documents Reviews and gives conclusions on acceptability criteria for climate adaptation and mitigation projects, and monitors the implementation of climate-related projects and programs National Commission for Emergency Situations: Responsible for managing activities of state executive institutions during emergencies and implementing long-term programs to prevent chaired by the prime minister; comprises all key emergencies and eliminate the consequences of an emergency ministries and agencies 18 National Coordinating Council for Regional and Approves decisions on the allocation of funds assigned to the National Fund for Regional and Local Development; monitors the use of fund Local Development, Ministry of Infrastructure and resources Regional Development Working Group on Decentralization of the Ministry of Coordinates the process of updating the legislation to implement the sectoral strategies and action plans on decentralization Environment Ministry of Economic Development and Digitalization Develops green procurement priorities within the draft Program for the Promotion of Green and Circular Economy 2024–28 National Courts of Accounts Conducts performance audits with some elements of specific climate change–related activities Ministry of Environment Develops, monitors, and implements environmental protection, climate change, and sustainable natural resource management policies Environmental Agency: under the MoE Ensures the collection, validation, and processing of data and information needed for GHG emissions monitoring and reporting Evaluates environmental and public health impacts in documents developed by local public authorities State Hydrometeorological Service: under the MoE Monitors, forecasts, and issues warnings related to hydrometeorological, agrometeorological, and some environmental hazards Ministry of Finance Reviews the costing of the climate change strategic and program documents Leads the development of a methodology for tracking climate-related expenditures Manages the state capital investments planning process through its Working Group on Public Capital Investments Ministry of Internal Affairs (General Inspectorate for Responsible for planning, coordinating, and managing disaster preparedness and emergency management Emergency Situations) Table 2.1 Key institutional actors and mandates for the climate agenda (continued) Main stakeholder institution Climate change core mandates Ministry of Economy Promotes policy on administration of public property Ministry of Energy Ensures the implementation of government energy policy Proposes state interventions to promote renewable electricity generation and energy efficiency National Agency for Energy Regulation Approves energy regulations and normative acts in line with the requirements of the EU and EnC Treaty National Center for Sustainable Energy Manages the fund for energy efficiency in the residential sector Manages programs for replacing old household appliances with new energy-efficient ones Develops energy efficiency information systems Other core functions in accordance with sectoral laws (e.g. Renewable energy sources law, energy efficiency law, energy performance of Country Climate and Development Report: Moldova buildings law) Ministry of Labor and Social Protection Reviews relevant policies to ensure sectoral institutions have formal administrative capacity to address climate change, including from a gender and migration perspective Conducts climate change capacity building and training programs, including on gender and climate change, and mainstreaming the nexus of migration, environment, and climate change for key staff in ministries and sector agencies 19 Ministry of Infrastructure and Regional Development Leads the development of the Energy Strategy 2050 Ensures access to safe water and sanitation, including responsibility for infrastructure investments Responsible for urban planning policies and the buildings sector Public Property Agency Maintains and publishes the Public Property Registry Oversees as owner SOEs, state-owned companies, or companies with state and private capital Ministry of Agriculture and Food Industry Supports adaptation to climate change and mitigates its effect on agricultural production, particularly by strengthening the potential of the primary agricultural sector and promoting smart, sustainable, and climate-resilient agricultural practices, as defined by the National Agricultural and Rural Development Strategy 2023–30 Ministry of Education and Research Modernizes the educational curriculum to promote learner-centered education in response to sustainable development challenges, including climate change mitigation Supervisory Committee of the National Bureau for Decides on the use of the National Ecological Fund’s resources Implementation of Environmental Projects (MoE) Subnational Local governments Some localities have developed action plans for sustainable energy and climate, which are supported by the Covenant of Mayors, but do not explicitly address adaptation Develop and implement local programs for environmental protection and restoration of natural resources Propose projects for funding from local environmental funds Source: WBG staff Chapter 3 Policies and investments to address climate and development challenges in key sectors Photo Credit: Dmitrii Bykanov / iStock 3. Policies and investments to address climate and development challenges in key sectors MAIN MESSAGES Building resilience to shocks Irrigation and water storage investments are no-regret measures that can protect agricultural yields from climate shocks and boost productivity regardless of future climate change. Adaptation investments in critical public infrastructure and services (including transport and health systems) can protect communities against shocks and improve baseline service quality. The effect of disasters and climate extremes can be mitigated through investments in emergency preparedness, including early warning systems and civil protection. Decarbonizing economic growth Building up Moldova’s RE capacity is crucial for improving energy security and achieving its NDC goals. Electrifying its transport systems and enhancing energy efficiency in buildings are key to reducing demand for carbon-intensive energy sources. An ambitious forestry program can contribute to decarbonization goals while creating a sustainable forest economy. The extent and pace with which adaptation and decarbonization measures are implemented will determine long-term growth and transition prospects. Resilience measures are key to managing the significant climate pressures that Moldova is already experiencing, which are bound to intensify under future climate changes. Moldova has made notable progress on the adaptation agenda. Yet additional action is needed to strengthen adaptation and resilience capacity, especially in vulnerable key economic sectors such as agriculture, infrastructure, and health systems. And although these measures require substantial investments, they are estimated to yield net benefits to the Moldovan economy. Decarbonization measures, especially in the energy sector, can be instrumental for boosting efficiency and energy security, while also contributing to Moldova’s EU alignment goals. Decarbonization policies in the energy sector are key to meeting Moldova’s NDC goals. Domestic renewable energy would reduce the country’s dependence on volatile fossil fuel imports, particularly natural gas. Increasing energy efficiency, including in the building and industrial sectors, could further contribute to energy security, while also yielding direct economic benefits to end users. The associated co-benefits—for example, in terms of reduced air pollution from clean heating solutions—would improve health outcomes, especially for vulnerable groups. There are also notable opportunities to reduce GHG emissions in the agriculture, forestry, and solid waste sectors. 3.1. Building resilience and adapting to climate change 3.1.1. Raising productivity and strengthening climate resilience of agriculture Modernizing and intensifying agriculture will raise returns and build resilience to climate risks. Moldova’s agriculture sector is already experiencing major impacts from climate events, with severe droughts occurring with growing frequency.34 While the future is uncertain, there are high risks of more 34 The 2007 drought, for example, reduced agricultural output by 23 percent and cost the economy around $1 billion. 22 Country Climate and Development Report: Moldova intense and frequent shocks along with worsening conditions for key crop production. But exposure to climate risks is only part of the story. The agriculture sector’s vulnerability to climate change also stems from weak endowments and structural conditions, including the prominence of small-scale producers who lack the capital and skills to invest in resilient, higher productivity, and higher value- added production. Moldovan agriculture faces substantial yield gaps compared to its European peers, particularly for field crops, along with higher rates of variation in annual output. Limited access to irrigation is a barrier to productivity and resilience. Decades of underinvestment have resulted in a loss of functionality for centralized irrigation systems, with only one large effort in the past 30 years: the Millennium Challenge Corporation Compact Project, which rehabilitated 10 such systems. As a result, although around 9.0 percent of arable land (217,000 hectares) is equipped for irrigation, only 5,000–6,000 hectares—just 0.2 percent of arable land—is irrigated in any one year.35 Irrigation and water storage investments can substantially mitigate the adverse impacts of climate change on future agricultural yields. figure 3.1 shows the results of a modeling exercise that uses climate and crop models to assess the impacts of climate change on Moldova’s agricultural yields up to 2050. In the absence of investments in irrigation infrastructure, yield losses could reach 17 percent, on average, by the 2040s relative to current levels, while key crops such as maize and wheat could see reductions of up to 30 percent. But expanding irrigation infrastructure to 124,400 rainfed hectares of agricultural land could reduce yield losses from 17 to 11 percent, on average, in a dry/hot scenario, with much larger impacts in key crops, including sunflowers (from 15 to 4 percent), maize (from 33 to 8 percent), and wheat (from 29 to 13 percent). Making additional investments in water storage to address unmet irrigation demand toward the outer years in a dry/hot scenario reduces average yield losses to just 6 percent. Such measures would not only have the potential to almost fully mitigate yield losses in key crops such as maize and sunflowers in a dry/hot scenario, they could even result in substantial yield gains of around 12 percent in a wet/warm climate future. Figure 3.1. Agricultural crop yields (2041–50) under different climate and irrigation and water storage investment scenarios, % change relative to 2020 levels a. REF scenario 20 10 10 2 4 0 –3 –1 –4 –4 –4 –10 –9 –10 –13 –15 –15 –20 –19 –22 –23 –30 –29 –29 –33 –40 –41 –50 e ze re e et r pe fr er o s s at be uga er le pl ce Oth at he th ai al s ra t ab Ap w t ui M Po O S W G lo t ge nf Ve Su (continued) b. Holistic regional development 2050 (HRD 2050) scenario 50 40 37 30 20 17 17 15 7 10 10 4 6 3 35 Source: Cadaster Agency. 0 –10 –4 –6 –9 –8 –11 –20 –16 –13 –16 –13 –30 23 –28 –32 Country Climate and Development Report: Moldova –40 e ze ea e et r pe ru er o s s at ga er e pl th at he th ai bl l s ra it Ap Su ow O ot M O ta G –19 –22 –23 –30 –29 –29 –33 –40 –41 –50 le e re e et r pe fr er to s es at be uga er z ce Oth p he th ta ai bl al s ra t Ap w ui M Po O ta S W G Figure 3.1. Agricultural crop yields (2041–50) under different climate and irrigation and water lo ge nf Ve Su storage investment scenarios, % change relative to 2020 levels (continued) b. Holistic regional development 2050 (HRD 2050) scenario 50 40 37 30 20 17 17 15 7 10 10 4 6 3 0 –10 –4 –6 –9 –8 –11 –20 –16 –13 –16 –13 –30 –28 –32 –40 e e re e et r pe fr er to s es at be uga er pl z ce Oth he th ta ai bl al s ra t Ap w ui M Po O ta S W G lo ge nf Ve Su c. HRD 2050 + storage scenario 50 40 37 30 20 17 17 15 7 10 10 4 6 3 0 –1 –1 –10 –6 –6 –8 –8 –6 –8 –11 –20 –19 –30 –30 –40 re e et r e ze fr er to pe s es at be uga er ce Oth pl he th ta ai bl al s ra t Ap w ui M Po O ta S W G lo ge nf Ve Su Dry/hot mean Wet/warm mean Sources: World Bank staff calculations, based on World Bank 2021d (panel b) and World Bank 2022 (panel c). Note: Panel a models current crop production, irrigation levels, and unmet water demands are kept constant, while yields change in response to climate conditions; in panel b, irrigation and unmet demands grow from 2024 to 2035, reaching 55,300 irrigated hectares and are interpolated to 2050, reaching 124,400 irrigated hectares and unmet demands increasing from 8 percent in 2020 to 30.5 percent in 2050; panel c shows the same scenario as panel b, but with 127.5 million cubic meters of water storage capacity to reverse increases in unmet demands due to climate change. Horizontal lines show the national aggregate yield change, weighted by crop values. Box 3.1.  Expanding water storage to support irrigation and prepare for a future of increasing water scarcity Future water availability will depend significantly on climate and development dynamics. Moldova largely depends on surface water from the inflow of its two large transboundary rivers, the Dniester and the Prut. Total water endowments (4,952 cubic meters per capita per year) are large enough for current modest levels of water withdrawals (231 cubic meters per capita per year). Thermal cooling—mainly for the Cuciurgan combined heat and power plant—forms the largest share of Moldova’s water withdrawals (77 percent), followed by drinking water (19 percent), and industry (4 percent). Irrigation accounts for just 1 percent of water withdrawals. But water security challenges may emerge. Decreasing annual surface water runoff (continued) 24 Country Climate and Development Report: Moldova Box 3.1.  Expanding water storage to support irrigation and prepare for a future of increasing water scarcity (continued) and reduced groundwater recharge, due partly to climate change, combined with national economic development targets, and the need to shift rural households away from unsustainable and often-polluted water sources (shallow wells), will significantly increase demands for surface water. The need to massively scale up irrigation will place further heavy demands on water resources. On the other hand, given the dominance of thermal cooling, a transition toward renewable energy could significantly reduce water withdrawals—benefitting downstream water availability, sediment transport, and nutrient cycling—and reduce thermal pollution. Increasing water storage capacity by 40–50 percent can mitigate risks of increasing unmet demand resulting from climate and development factors. Moldova’s national water storage is currently 240.7 million cubic meters, split between the Dniester, Prut, and Danube basins (FAO AQUASTAT), and unmet water demands are estimated at 8 percent, which is generally considered easily manageable. But under the development scenario set out in figure B3.1.1. —where irrigation is expanded to 55,300 and 124,400 hectares, respectively, by 2035 and 2050—unmet demand is projected to rise to 30.5 percent by 2050 in a dry/hot future. A modeling exercise was conducted to identify storage capacity required to reverse the increase in unmet demand using monthly runoff data for the three water basins and estimating water storage-effective water yield curves. The analysis identified additional storage needs of 127.5–246.5 million cubic meters, using the national storage and individual basin yield curves, respectively. A cost-benefit analysis shows that water storage investments have strong returns and would play an important role in supporting irrigation expansion and water security. Figure B3.1.1. National water storage yield curve E ective water yield (MCM/year) 600 Storage needs: 127.5 500 471.3 Yield E ective water yield 400 at 8% unmet demand grows 115.3 356 E ective water yield 300 at 30.5% unmet demand Current Required 200 storage storage (30.5% for 8% 100 unmet unmet demand) demand 0 0 100 200 240.7 300 368.2 400 500 Storage capacity (MCM) Source: Industrial Economics staff calculations, undertaken for this CCDR. 25 Country Climate and Development Report: Moldova Figure 3.2. Investment costs and economic benefits of Irrigation is a no-regret investment for different adaptation scenarios for irrigation Moldova, with high returns regardless and water storage (cumulative, 2024–50) of future climate scenarios. Investing in water storage raises returns even US$ million 2,500 4 in a dry/hot future. Irrigation and $2,028 3.4 $1,997 $1,997 water storage investments translate 2,000 2.9 3 2.3 2.8 into sizable economic benefits that 1,500 $1,354 2 significantly exceed the investment 1,000 $705 $705 costs. For example, investing in 124,400 $580 $580 1 500 hectares newly irrigated by 2050, would 0 bring cumulative economy-wide benefits 0 HRD 2050– HRD 2050 + HRD 2050– HRD 2050 + of $1.35 billion in a dry/hot future, which dry/hot storage–dry/ wet/warm storage–wet/ means benefits exceed costs by a factor hot warm of 2.3. A more ambitious investment Total costs Benefits Benefit-cost ratio package that also includes 127.5 million Source: World Bank staff calculations cubic meters of water storage capacity Note: Costs and benefits are discounted at 6 percent. Costs for small-scale irrigation systems and rehabilitating or modernizing irrigation systems are raises these returns to $2 billion, with a weighted and adjusted for construction index. Weighted costs are $6,094/ benefit-to-cost ratio of 2.9 (figure 3.2). hectare (2023 $), with a 15-year project length and 2 percent operations and maintenance rate; storage costs are median cost of a dam for irrigation, These investments deliver greater yield adjusted based on the normalized cost for the relevant raion and size, and for construction index and currency. For scenario definitions, see Figure 3.1. improvements in a benign (wet/warm) future and, although storage investment does not provide additional direct returns, they remain strongly positive, Figure 3.3. Benefits of irrigation and storage justifying storage as a worthwhile risk adaptation, by raion (average crop revenues management investment. 2041–50, compared to REF scenario) The benefits of irrigation vary across the country, which may help inform prioritization of investments. Irrigation and storage investments benefit all crops in all in locations, but the scale of benefits depends both on cropping patterns and location-specific conditions. Figure 3.3 suggests the relative benefits of irrigation and storage investments may be higher in some raions in the north and center, although the raions with the 57% highest relative gains from irrigation and 50% storage are spread across the country, 40% from Balti municipality and Donduseni in the north, to Soldanesti, Calarasi, and 30% Ialoveni in the center, and Basarabeasca 20% in the south. 10% Expanding irrigation will require not 0% only investment, but effective planning and governance of the irrigation system and incentives for uptake at the farm Source: Industrial Economics level. Moldova has been taking steps to Note: Benefits calculated on a per-crop basis by raion and presented based on weighted average crop coverage in each district. establish an enabling environment for 26 Country Climate and Development Report: Moldova sustainable investment and operation of the irrigation system. In 2023, it established a dedicated Land Improvement Agency under the Ministry of Agriculture and Food Industry to manage the irrigation sector, and the country has made progress in establishing a legal and regulatory framework for water user associations and transferring assets to them. To date, 35 associations are registered, 27 of which manage state-owned irrigation infrastructure.36 But, although financing has been committed for rehabilitating nearly 4,000 hectares of irrigation infrastructure, investments in centralized irrigation systems outside of the Millennium Challenge Corporation Compact Project have been limited. Formulating a national irrigation masterplan would catalyze the expansion of the irrigation system by providing a comprehensive irrigation investment plan and financing framework. This would help Moldova prioritize investments in areas where water is cheap, the basic infrastructure is in reasonably good condition, the benefits of irrigation are high, and the environmental and social costs are low. Lack of scale, exacerbated by inefficient land markets and insufficient clustering and cooperation between farms, remains a major barrier to investment in the irrigation network. At the farm level, small farmers continue to face barriers to adopting irrigation services, including a lack of knowledge of efficient irrigation technologies, lack of access to finance for last-mile investments, high energy costs, and a lack of access to markets, which would support investments. Women farmers are disproportionately affected by such constraints. Beyond irrigation, investing in a range of climate-smart agriculture (CSA) solutions can further raise returns and strengthen resilience, but farmers will need support to overcome barriers to adoption. Adapting to climate change is in farmers’ self-interest and many will eventually adjust by changing cropping calendars, investing in irrigation, and adopting CSA practices. Some are already practicing conservation agriculture techniques, such as no-till, inter-cropping, and agro-forestry, have installed micro-irrigation systems, anti-hail and anti-frost systems, or remote sensors and farm-based weather stations, and have adopted improved pastures and grazing methods. But they may struggle to implement adaptation measures, hindered by a lack of timely meteorological information, limited access to alternative crop varieties, and limited access to efficient irrigation technologies. The long- term benefits of CSA investments are also generally unknown, making farmers skeptical about new agricultural paradigms. A natural capital analysis (box 3.4) demonstrates that intensifying agriculture is necessary for maximizing both crop yields and carbon sequestration. To promote CSA and strengthen resilience to climate shocks, farmers need access to financial products that are tailored to their needs. Access to financial products for smallholders, family farms, and agricultural small and medium-sized enterprises (SMEs) is limited. Banks perceive small farmers as risky lenders and demand collateral, typically in the form of land. And even when farmers can meet collateral requirements, many financial products do not meet their needs. For example, most credits are medium- term loans with maturities of three to five years, but investing in irrigation systems, climate-controlled greenhouses, and other CSA technologies has heavy up-front costs and delayed cash flows, requiring longer maturity periods (WBG 2023). The uptake of agricultural insurance under the current scheme also faces significant barriers, with penetration estimated to be just 2–3 percent of total acreage (von Cramon- Taubadel and Walter 2018). So, while the government offers publicly supported agriculture insurance under Law 243/2004 for a defined list of crops, farmers are reluctant to enroll due to expensive premiums, a weak legal foundation, and a mistrust of insurers. There is no clear regulation to assess the impact of crop damage, and loss assessments are undertaken by insurance company experts on-site with local authority participation. International reinsurers provide reinsurance, but it is not required by law. Triggers or deductibles are negotiated ad hoc between the insurer and the insured. Alternative instruments—such as weather index insurance and multihazard crop insurance—could help improve small-scale farmers’ access to agricultural risk transfer schemes and reduce the public sector’s burden. Women farmers may require tailored loans, with options for alternative collateral forms or group-based guarantees. 36 By law, centralized irrigation infrastructure is owned by the state. Water user associations or other private users can arrange long-term leases to manage centralized irrigation systems, but are not permitted to own the assets. 27 Country Climate and Development Report: Moldova Developing policy and institutional mechanisms to deliver relevant extension and financial services to farmers in a timely and effective manner is key for greater uptake of CSA. A first step toward this is strengthening early warning, weather, and hydrological information systems, accompanied by public-private compulsory insurance mechanisms against natural hazards that are accessible to small- scale farmers. The uptake of climate-smart technologies and methods also depends significantly on effective agricultural extension services, including technical advice and the supply of inputs, services, and information to support farmers. But extension service provision has declined significantly since 2018. While there are plans to use existing education and research institutions for delivery, these entities lack the physical presence, resources, and skills to provide effective extension services. Broader investments and reforms—for example, investing in rural infrastructure and reforming land markets to facilitate aggregation—would also help facilitate competitiveness and strengthen resilience in the agriculture sector, while extension services need develop information channels and content that meets the specialized needs of women farmers. 3.1.2. Climate-proofing public infrastructure and essential services Climate shocks affect the functionality of critical infrastructure and public service systems that firms and households depend on, such as energy, inforation and communication technology (ICT), transport, water, health, and education. Infrastructure disruptions are estimated to cost Moldovan businesses about $55.7 million in losses each year, driven by power outages and transport disruptions (Hallegatte, Rentschler, and Rozenberg 2020). Natural shocks, such as storms and floods, are among the leading drivers of infrastructure disruptions and can cause substantial asset damage, as well as wider economic losses that propagate along infrastructure networks and supply chains. Climatic hazards are further compounded by significant seismic risks, which threaten schools and other crucial public buildings. There is a lack of systematic and up-to-date risk assessments on the exposure and vulnerability of infrastructure assets and public buildings, including schools and hospitals. The lack of spatially disaggregated data on the location and condition of critical assets is a key bottleneck for assessing the climate risk to public infrastructure and prioritizing investments. Similarly, despite significant seismic risk, Moldova does not have a national program to assess and reduce earthquake risk in public and residential buildings. Implementing an up-to-date building registry and mass valuation system would help provide important information for calculating the costs of resilient reconstruction—such as flood proofing and heat mitigation—and determine insurance premiums in support of crisis preparedness and risk reduction. Developing and rolling out a national spatial data infrastructure is key for identifying climate shocks on lifeline infrastructure and public services. The national transportation network experiences mounting damages from climate shocks, particularly floods. A countrywide flood risk assessment identified about 47,000 kilometers of roads (7 percent primary, 8 percent secondary, and 85 percent tertiary roads). During a 1-in-100-year flood event, about 3,360 kilometers (7 percent) are estimated to be exposed to flood depths of at least 25 centimeters, with the eastern and central-western raions most susceptible to flood-related road damage. The average annual damages to road assets are estimated at around $82 million. Over 1,000 kilometers of city roads are directly located in high-risk flood zones, which could cause wide-ranging urban mobility disruptions. A flood exposure analysis of four Moldovan cities (including the capital, Chişinău) shows that 1,029 kilometers (16 percent) of urban roads are directly exposed to at least 20 centimeters of flooding in a 1-in-100-year flood scenario. For more intense flood scenarios, with higher return periods, the extent of the exposed road network increases systematically (Figure 3.4). As with all network infrastructure, even localized climate shocks can have wide-ranging impacts on connectivity, with flooding in certain road segments disrupting mobility patterns across a whole city. 28 Country Climate and Development Report: Moldova The analysis shows that these indirect mobility impacts, proxied by failed trips, can far exceed direct network exposure (figure 3.4). During a 1-in-100-year flood event, Moldovan cities could see up to 20 percent of their road network flooded, leading to mobility disruptions of 60–70 percent. The following measures are crucial for increasing the resilience of road networks and decreasing flood risks: • Maintaining road infrastructure, including drainage systems and culverts. Reforming road maintenance practices and introducing output- and performance-based roads contracting, which are usually longer term than traditional road maintenance contracts, and committing Figure 3.4. Flood exposure of the road network governments to fund maintenance for several years a. Estimated road network inundation and associated mobility disruptions • Increasing road redundancy in Moldova and Romania Failed routes, as share of total routes (%) • Protecting road assets through a 100 combination of green (nature-based solutions) and grey infrastructure 80 e • Integrating hazard maps when planning l in r ee new road investments 60 eg d 45- Romania Moldova’s energy sector infrastructure 40 Moldova is likely to be affected by climate shocks and stresses in at least three ways. First, 20 rising temperatures will trigger demand surges for electricity during summer 0 0 20 40 60 80 100 months and heatwaves to meet the need Share of road network flooded (%) for air conditioning and industrial cooling. b. Average annual losses due to flood damages Increased electricity demand also implies to roads (percent of raion GDP) increased fuel use for generation, primarily natural gas. Insufficient heat loading will also reduce electricity-generating capacities. Second, sustained reduction in water availability will increase the need for substantial expansion of energy-intensive irrigation systems in arid regions. Reduced precipitation volumes may also decrease water flows in the Prut and Dniester Rivers, affecting power plant electricity generation capacity. An increase in RE generation and demand reductions through energy efficiency can mitigate such pressures. [0%;1%] Third, the increased frequency of extreme [1%;2%] weather events, such as heatwaves, frost, [2%;3%] floods, storms, and severe drought, will [3%;4%] cause recurring direct damages to energy [4%;7%] assets, with vegetation debris damaging transmission and distribution lines, or floods or wildfires damaging transmission Source: Based on global study by He, Rentschler, and Avner 2022 substations. Such damages increase the Note: Panel a: Each data point represents one city at one flood event scenario, with results covering four cities in Moldova and ten (5, 10, 20, 25, need for capital expenditure and higher 50, 75, 100, 250, 500, and 1,000) year return periods. operations and maintenance costs. (Filiutsich 2022). 29 Country Climate and Development Report: Moldova Moldova’s flood protection infrastructure is inadequate for future needs and poorly maintained. Reassessing and investing in the country’s flood protection infrastructure, which was built in the 1980s, is vital. Comprising ponds, dams, canals, and over 1,200 kilometers of flood defenses, a lack of maintenance means that these measures provide neither dependable flood protection nor adequate water storage during droughts. Substantial upgrades and repairs are needed to ensure their adequacy for future economic growth, infrastructure expansion, and climate change. Such measures are also key for improving compliance with EU legislation, including the EU Flood Directive. To this end, the European Investment Bank has developed a countrywide flood management masterplan and investment program, which identifies measures to reduce flood risks and develops a phased investment program with an overall cost of around €325 million for structural measures and €120 million for nonstructural measures, including maintenance, over a 20-year period. Current annual flood damage in Moldova is estimated at $61–$96 million, including $12 million in damage to buildings. This is significantly higher than the cost of the proposed program of flood protection measures, implying that the benefits of flood protection measures exceed costs by a factor of 4.6 to 7.3. Climate-related hazards—including floods and droughts—and earthquakes have the potential to disrupt health service delivery by impacting health facilities, infrastructure, and essential lifelines that support their functionality. Disasters also typically increase short-term demand for health services, specifically emergency services, and can increase long-term demand. An analysis of the Moldovan health system’s resilience to climate shocks revealed the following action areas with the potential to significantly increase disaster risk management (DRM) capabilities: • Exposure of health and other key public facilities. A risk exposure analysis for a 1-in-100-year flood event revealed that 47 (14 percent) of the country’s public health care facilities are at risk of flooding. Nisporeni municipality has the most health facilities located in flood zones (four), while Cantemir and Ungheni each have one exposed facility. With climate change expected to affect flood hazard patterns due to the combination of droughts and extreme precipitation events, it should be possible to identify and mitigate hazard exposure for all critical public facilities. Flooding can have direct and indirect impacts on the health sector, disrupting service delivery at flooded facilities, reducing or blocking accessibility, and increasing demand for health services—for example, through waterborne disease outbreaks. • Gaps in emergency preparedness of health facilities, especially in rural areas. Based on results from the World Health Organization’s 2016 Hospital Safety Index, 88.7 percent of the 66 evaluated health facilities were found to have a high level of structural safety. But implementing mandated redundancies in the health sector and supporting lifelines infrastructure—such as backup generator capacities and fuel storage as fail-safes in case of service disruptions caused by disasters—and developing multi-hazard contingency plans would further strengthen the climate resilience of health assets. With support from development partners, Moldova upgraded all its secondary- and tertiary- level hospitals and equipped them with at least one electric generator that can power critical sections. Expanding recent efforts to increase the health system’s telemedicine capacity and digitalization can also help alleviate pressure on scarce resources and improve access to health services in remote and underserved areas. • Gaps in health system staff capacities to respond to climate shocks and stressors. Sufficient and well-trained staff are essential for effective disaster preparedness and response. Yet, the Moldovan health system has experienced a continuous decline in the rural health care workforce in recent years. Staff trainings for emergency preparedness and the use of telemedicine can counteract such trends, increasing efficiency and freeing up scarce human resources, thus increasing service coverage during surge demand events and service accessibility in remote and underserved areas. While some emergency preparedness trainings exist for health staff 30 Country Climate and Development Report: Moldova and emergency coordinators, organized by government agencies or through international cooperation—e.g., with Japan's Disaster Medical Assistance Team (DMAT)—these should be further strengthened and institutionalized. • Gaps in integration with national emergency response coordination. Following recent reforms, the health system has become better integrated into broader national disaster response frameworks and health staff from ministries and health facilities are represented in emergency commissions at both national and local administrative levels. But gaps remain in integrating the Ministry of Health, municipal authorities responsible for hospitals, and emergency coordinators at health facilities into regular, hazard-specific, inter-agency training and joint crisis exercises, and neither the Ministry of Health nor the Ministry of the Interior, which supervises the General Inspectorate of Emergency Situations (GIES), has enough consistent annual funding available for such activities. Developing hazard-specific plans for health facilities and their supporting lifelines infrastructure would also help better incorporate the health system into the country’s larger disaster response network. 3.1.3. Strengthening disaster preparedness and response capacity Building climate and disaster resilience is essential for protecting Moldova’s recent socioeconomic gains and ensuring its development efforts are sustainable. Despite adopting a comprehensive DRM institutional framework, working to harmonize Moldovan legislation with EU standards, and joining the EU Civil Protection Mechanism, Moldova faces significant challenges to ensure effective and efficient disaster response. The government has been strengthening institutions to better prepare for and respond to disasters, but much remains to be done. Strengthening its DRM institutional architecture will enable Moldova to better respond not just to climatic hazards but also to other shocks, crises, and pressures. Key issues that require attention include: • An inadequate legal and strategic DRM framework, which does not adequately address disaster risk identification, prevention, reduction, and recovery • A lack of integration and linkages between climate adaptation and DRM, as separate processes or frameworks address these interlinked areas • The climate adaptation framework’s inadequate attention to critical sectors, such as construction, in terms of seismic resilience, energy conservation, and climate-resilient construction norms, particularly in the most affected urban areas • A lack of risk reduction investments (such as flood protection) to address known risks: despite investment plans, seismic audits, investments into critical public infrastructure, and the operationalization of climate adaptation services provision, Moldova lacks a robust recovery framework. Moldova’s emergency response capacity is substandard, and its crisis response equipment is absent or outdated. The lack of modern search and rescue, firefighting, and other crucial response equipment can lead to inefficient resource allocation and loss of life. So, addressing these challenges is crucial for effective emergency response. Developing an integrated concept for warning systems for various hazards and prioritizing earthquakes due to their potentially devastating effects would improve outcomes, while improving management, logistics, and communication protocols between local, regional, and national response teams would strengthen Moldova’s technical rescue operational capacities within its existing DRM framework. Emergency response services, government buildings that provide critical public services, such as health and education, and critical infrastructure must continue to function in emergencies, with alternative energy and communications. But most of the country’s fire and emergency equipment is outdated, ill-fitted for current needs, and prone to failure. 31 Country Climate and Development Report: Moldova Although Moldova has made significant progress in terms of civil protection and DRM, stronger institutional cross-coordination is required. The country joined the Union Civil Protection Mechanism in September 2023, and its sectoral development action plan, adopted in December 2022, outlines priorities and encourages participation in the mechanism’s exercises and training. But Moldova should continue strengthening its civil protection and DRM system, particularly in disaster prevention and preparedness, boosting its operational capacity, infrastructure, early warning systems, and hydrometeorological service to increase resilience (World Bank 2020a). Establishing secure trans-European services for telematics between administrations would facilitate coordinated communication with the European Commission’s Emergency Response Coordination Centre. Moldova actively participates in regional and international initiatives, promoting knowledge sharing and technical assistance. But to strengthen cross-coordination and build a more efficient and effective civil protection and DRM system, Moldova could establish a national disaster management platform (World Bank 2020a), invest in communication infrastructure, conduct regular joint exercises and training, and build community-based DRM initiatives. These measures will ultimately protect citizens and infrastructure from natural disasters and other emergencies. Emergency communication and early warning systems are inadequate, especially in isolated rural areas. Data collection tools and DRM information systems are outdated, hindering accurate risk assessments and timely responses. There is no modern public warning system in place in Moldova, and technologies such as cell phone alarms/alerts are not used. Limited access to information and outdated equipment also contribute to communication gaps during emergencies, resulting in delayed responses, which increase vulnerability, misinformation, and panic (World Bank 2021c). Global best practices show that marginalized populations, such as women, children, the elderly, and people with disabilities, are often overlooked in DRM strategies. Developing multisectoral partnerships between disaster management agencies, national hydrometeorological services, critical infrastructure operators, and civil society organizations would strengthen links between preparedness efforts and end users. Reliable, effective, and inclusive early warning systems are essential DRM tools for saving lives and protecting livelihoods. Shifting to impact-based forecasting,—for example, describing wind strength in terms of its ability to knock over an empty truck—is more likely to prompt adequate reactions. Risk financing and social protection system reform can enhance Moldova’s resilience against future disasters. The government currently retains most of the climate and disaster risk on its balance sheet and has almost no catastrophe insurance or other risk transfer mechanisms in place. To bolster financial resilience, it must tackle the estimated annual $146 million funding gap for disaster recovery. Risk financing strategies—including through insurance or risk transfers—are necessary for cost- effective management of government contingent liabilities due to disasters. Enhancing resilience also requires clear loss and damage assessments and readily available contingency funds, and to this end, the government can reform emergency funds, expand insurance schemes, and establish a system for tracking budget allocations for DRM. The agricultural insurance system, plagued by low uptake and inefficiency, needs revamping and alternative insurance options made available to farmers. The government can also consider disaster risk insurance mechanisms for nonagricultural disasters, such as floods and earthquakes. Finally, social protection system reforms will aid emergency response and recovery, protect vulnerable groups, and support workers unable to transition to greener roles. 3.2. Decarbonizing the economy to realize growth opportunities Decarbonization measures offer an opportunity to achieve robust growth, converge with EU living standards, and boost energy security. This section outlines the actions necessary to achieve net zero GHG emissions by 2050 in a way that can support Moldova’s economic development priorities (figure 3.5). Reforming the energy sector—a leading source of GHG emissions—is crucial to facilitate access to 32 Country Climate and Development Report: Moldova reliable, affordable, and clean energy for all Moldovans, while realizing economic transformation and modernization goals. The country’s almost complete reliance on fossil fuel imports and the associated price volatility have proven detrimental to growth and inclusion, so reducing its reliance on fossil fuels and energy intensity—by enhancing energy efficiency and increasing the share of renewable energy in its energy mix—can significantly improve Moldova’s energy security and service quality. Facilitating efficiency and fuel switching in energy demand sectors, such as buildings and transportation, is key. Moldova will need to reduce emissions in its agriculture and waste sectors to deliver long-term mitigation objectives and reduce methane emissions. Yet it cannot achieve decarbonization without ambitious afforestation and carbon sink protection. With agriculture and waste each accounting for around 11 percent of total GHG emissions—mostly from methane—Moldova needs to implement efficient mitigation instruments in these sectors, including CSA techniques and solid waste management systems that align with EU standards. Significantly increasing GHG sequestration from land use and forestry is also crucial to compensate for hard-to-abate sectors, including emissions from the Left Bank. To achieve net zero, Moldova will have to implement its ambitious National Forest Extension and Rehabilitation Program for 2023–32 (NFERP), which aims to increase the country’s forest area by 145,000 hectares by 2032 and has an expected average net GHG sequestration potential of 1,272 kilotons of CO2 per year; an increase of about 56 percent of current capacity (figure 7). Decarbonization measures will help facilitate Moldova’s transition to a more productive, diversified, and private sector-led economy, which is key for its convergence with, and accession to, the EU, and for boosting its regional and global competitiveness. Figure 3.5. GHG emissions pathway under the net zero scenario, 1990–2050 GHG emissions (kt CO2e) 40,000 Other Commercial 35,000 Industry Waste 30,000 Manufactuing and construction Agriculture 25,000 Buildings Transport Electricity and heat 20,000 Land use change and forestry Net 15,000 10,000 5,000 0 –5,000 19 0 19 2 94 19 6 20 8 00 20 2 04 20 6 08 20 0 20 2 14 20 6 20 8 20 0 20 2 24 20 6 28 20 0 20 2 34 20 6 38 20 0 20 2 44 20 6 48 50 9 0 1 2 3 4 9 0 1 2 3 4 9 1 9 1 2 3 4 20 20 20 20 19 20 20 20 20 19 20 20 Source: World Bank staff calculations based on data from Climate Watch, TIMES energy model output, and NECP projections. Note: The figure shows historical emissions up to 2020, and projected emissions for 2021–50. 33 Country Climate and Development Report: Moldova 3.2.1. Energy sector reforms and decarbonization in the context of EU Integration Moldova’s energy sector is characterized by high energy intensity and vulnerability to external price shocks. Although the country’s per capita energy supply and electricity consumption are among the lowest in Europe—including EU and EnC contracting parties37—its energy usage is inefficient, with almost complete reliance on imported petroleum, natural gas, and coal. Historically dependent on Moldovagaz for gas, and MGRES and Ukrainian imports for electricity (both Moldovagaz and MGRES are under Russian control), Moldova has been working to align its energy policies with EU and EnC goals to comply with the EU legislative package, the Paris Agreement, and other commitments. At the fifth EU-Moldova High-Level Energy Dialogue in February 2024, the government and the EnC reaffirmed their commitment to energy cooperation, with Moldova focusing on implementing the EnC acquis and the EnC supporting decarbonization and financing for Moldova’s energy sector. (box 3.2). Box 3.2.  Overview of Moldova’s energy sector and alignment with EnC priorities Energy market and regional integration: Moldova’s wholesale gas market is underdeveloped, compared to its neighbors Romania and Ukraine, due to high import concentration and a lack of trading platforms. Recent strides include the designation of Vestmoldtransgaz as an independent system operator and diversification of gas sources. The retail gas market remains regulated, with Moldovagaz as the primary supplier under public service obligations until 2026. Moldova’s electricity infrastructure, largely built in the Soviet era, requires further modernization. The electricity market is liberalizing, with new rules to increase competition. Performance of authorities: The National Agency for Energy Regulation operates within the EnC framework. The Competition Council has the capacity to enforce competition laws but has been inactive in the energy sector. Timely data submission to EUROSTAT by the NBS indicates compliance with statistical obligations. Decarbonization and renewable energy (RE): Moldova is expanding its RE capacities and aligning with the EU’s Clean Energy Package. RE sources contributed to 5.5 percent of Moldova’s electricity consumption in 2022. Despite significant growth in solar and wind installations since 2019, the country’s RE potential is largely untapped. Grid integration of renewables is challenging due to peak consumption times and the absence of storage capabilities. Moldova has implemented European market rules for energy balancing, but the lack of domestic flexible generation means that, if its RE capacity increases beyond certain levels, it would need to rely on costly unplanned energy exchanges with neighboring countries. Energy security and regional integration: Moldova’s energy supply is heavily dependent on the Russian- owned MGRES power plant on the Left Bank, with a contract extended to the end of 2024. Cross-border energy exchanges are constrained by limited capacity with Romania and halted imports from Ukraine due to the Russian invasion. But there are emergency supply options from both countries, and Moldova has distanced itself from Russian gas, meeting storage goals independently. The 2023 Cybersecurity Law is in place, but Moldova must expedite the adoption of EU regulations on electricity risk preparedness and gas supply security. Its grid is interconnected with Ukraine’s system and underwent an emergency synchronization with the European Network of Transmission System Operators in 2022, accelerated by the Russian invasion of Ukraine. Cross-border cooperation has been crucial for Moldova’s energy security, and new interconnectors with Romania are under construction to bolster the grid (figure B3.2.1). Electricity demand peaks in winter, with cogeneration units in cities contributing significantly to meet both heating and electricity demand. The electricity market, though liberalized, lacks a spot market and relies on bilateral contracts, limiting competition, and imports. Recent legislative changes aim to improve market operations and supply security. (continued) 37 In 2021, Moldova’s energy supply amounted to 3,115 kilotons of oil equivalent and its electricity consumption to 4.16 terrawatt hours for 2.6 million residents. 34 Country Climate and Development Report: Moldova Box 3.2.  Overview of Moldova’s energy sector and alignment with EnC priorities (continued) Figure B3.2.1.  Interconnectors under construction or discussion Suceava Kotovsc Ribnita Balti UKRAINE Iasi Straseni Chisinau ROMANIA MGRES Gutinas Artsyz Vulcanesti 330 kV 400 kV Under construction or planning Issaccea Source: World Bank staff The government intends to establish an energy sector that is competitive, environmentally sustainable, and well-integrated with European energy systems, ensuring that consumers have reliable access to energy at reasonable costs. To support this goal, it has prepared the NECP. As part of this CCDR, an energy decarbonization study has been conducted using the TIMES model. This analysis explores a reference (REF) scenario, with no climate actions, and two decarbonization pathways: the Resilient NECP scenario, which aligns with the draft NECP’s proposed policies, and the more ambitious Resilient net zero scenario, which includes additional measures to achieve net zero emissions by 2050 (boxes 3.3 and 3.4). Both scenarios are applicable to the Right Bank. Box 3.3.  Key features of energy modeling scenarios Framework conditions Population projections are based on assumptions for fertility, life expectancy, and net migration, and refer to the Right Bank. By 2050, Moldova’s population is expected to decrease; after 2027, this will be at a slower pace than current demographic trends. The World Bank Commodities Price Forecast (October 2021) was used for the period to 2025, and the EU reference scenario (updated in 2023) was used for longer-term price projections. Energy commodity prices are expected to remain relatively stable to 2025 levels, with only crude oil prices presenting a small increase from 2037 onward. Transport fuel price assumptions are in line with crude oil prices. (continued) 35 Country Climate and Development Report: Moldova Box 3.3.  Key features of energy modeling scenarios (continued) Scenario assumptions for the TIMES energy model The Resilient NECP scenario assumes the implementation of the (draft) NECP mitigation policies, which have been designed to meet the NDC targets, including reducing network losses in energy supply and generation, and the following decarbonization measures: • Transport sector: subsidies for clean vehicles, tax reduction for clean vehicles, rail electrification • Buildings sector: subsidies for building refurbishment • Energy efficiency: standards for natural gas boilers, switching from inefficient stoves (regulatory measure), replacing streetlights, energy savings in the water supply sector The NECP scenario considers neither carbon taxes nor feed-in tariffs, but includes adaptation measures discussed in section 3.1. The net zero scenario assumes the same targets until 2030 as in the NECP scenario, with the following additional policies/measures: • Continuation of subsidies/measures beyond 2030 • Electricity from the Left Bank will continue to have emissions on a similar level to a combined cycle gas turbine • Small modular nuclear reactors are not an option in the power mix • Electricity trade with Romania and Ukraine at maximum capacity of the planned interconnectors • Nature-based carbon sinks, as the implementation of effective LULUCF policies (already announced for the short term, and assuming that their trend will be extended to 2050) would lead to significant emissions sequestration • Negative emissions technologies to sequester additional CO2, including 81 and 78 kilotons through industrial carbon capture and storage in cement plants by 2045 and 2050, respectively, and 335 kilotons by 2050 from direct air capture. The energy model suggests that it is feasible to decarbonize the energy system by  2050, allowing for economic growth without a corresponding increase in carbon emissions. figure 3.6 presents emission trajectories and energy demand in the REF, Resilient NECP, and Resilient net zero scenarios. The Resilient net zero scenario requires more aggressive policy decarbonization measures, particularly after 2030, on both the demand and supply sides, which are more expensive (Chapter 4). Both decarbonization scenarios  will improve energy security and reduce import dependency (40 percent under the net zero scenario, compared to around 55 percent under the REF scenario). Modeling of the NECP and net zero scenarios leads to the following conclusions regarding energy demand: • Along with strong economic growth, reducing demand in the building (mostly residential) and transport sectors is key to achieving decarbonization targets. The residential and transportation sectors were the largest consumers of energy in 2020, accounting for 48 and 30 percent of energy use, respectively, and along with the power sector, will remain primary energy consumers (section 3.2.2). In comparison, commercial and public services, industry, and agriculture consumed 10, 8, and 3 percent, respectively. • Under the NECP scenario, energy demand will start to decline from 2025 and is projected to drop by 37 percent by 2050, compared to 2030 and 25 percent under the REF scenario. This is driven by the residential sector (52 percent decline), supported by broad energy efficiency measures, and 36 Country Climate and Development Report: Moldova driven by transport (33 percent decline). A much more aggressive implementation of the relevant energy efficiency policies and measures is required to meet the net zero scenario targets, culminating in the 2045–50 period when electrification expansion in the residential sector occurs due to the availability of technologies, such as heat pumps, which will be more affordable to households. Both decarbonization scenarios will achieve significant reductions in CO2 emissions (figure 3.6a). Under the REF scenario, overall CO2 emissions keep rising steadily by 2050, with contributions from all sectors remaining constant. Under the NECP scenario, Moldova would achieve a significant reduction in CO2 emissions, especially between 2030 and 2040, with projections indicating a stable contribution from most energy sectors, with the notable exception of the transport sector where CO2 emissions are expected to be halved. A higher reduction in CO2 emissions is achieved under the net zero scenario, which provides for an almost threefold reduction in total emissions by 2050, with the transport and central electricity production sectors notably reducing their share.  ecarbonizing energy supply to boost energy security, financial sustainability, and 3.2.2. D competitiveness Decarbonizing Moldova’s energy supply will require a significant scale-up of renewable energy. To accommodate the anticipated economic growth and shift toward decarbonized sectors, Moldova will need to substantially increase its RE supply. Post-2035, as decarbonization efforts intensify in the residential, transport, and industrial sectors, demand for electricity will rise sharply. Under the NECP scenario, RE capacity (specifically solar and wind) is expected to grow more than tenfold, from about 329 to 4,633 megawatts (figure 3.6d). The net zero scenario is even more ambitious, projecting a 25-fold increase to approximately 8.8 gigawatts by 2050 (figure 3.6d). Constituting up to 80 percent of the country’s total power capacity, this increase will require the integration of battery energy storage systems after 2040, capable of storing up to 415 megawatts under the NECP scenario and 1.3 gigawatts under the net zero scenario. Renewable energy (RE) currently accounts for about 6 percent of electricity supply and about 22 percent of total energy supply (mainly biomass). Renewable potential is estimated at over 27 gigawatts, including 20.9 and 4.6 gigawatts of wind and solar potential, respectively (IRENA 2019). A recent USAID (2023) study identified 34 wind energy zones in Moldova with good technical and economic potential. Hydropower with pumped storage is estimated at up to 100 megawatts, although this type of infrastructure poses environmental risks. Biomass, particularly from the agricultural sector, presents another substantial opportunity, with a potential of around 400 megawatts, including biogas from agricultural, industrial, and household waste. The country aims to achieve a 30 percent renewable electricity share by 2030, aligning with its draft NECP goals. Despite being on track for biomass targets, Moldova lags in wind and solar energy development. An enhanced investment environment and policy reforms are crucial for RE growth. Eliminating technical, regulatory, and competitive barriers would help increase private investment in renewables. The lack of system flexibility and balancing reserves remains an important technical barrier for the new plant development. Complex authorization, certification, and licensing procedures for renewable plants do not encourage RE investments, and there are at least 21 administrative steps to authorize a RE project. The electricity market regulations and incentives outlined in the 2016 Law are not efficient enough and do not promote competition. Other challenges hindering broader RE adoption include the small market size, gaps in power infrastructure, limited local power system balancing capabilities, and transport systems to support wind power projects (including a lack of suitable ports and roads). Given the substantial increase in RE sources needed by 2030–50 and the limited fiscal space, exploring public- private partnerships (PPPs) is critical. Integrating variable RE into the grid will require major investments in electricity infrastructure. Short-term actions include establishing functional wholesale and ancillary service markets, enhancing local financial institutions’ capacity for RE projects, and improving energy forecasting tools to help 37 Country Climate and Development Report: Moldova Figure 3.6. Energy sector GHG emissions and demand under different climate action scenarios a. CO2 emissions, b. Energy demand, by sector and scenario by sectors and scenario CO2 emissions in kt Energy demand in PJ 6,000 160 5,000 140 120 4,000 100 3,000 80 2,000 60 40 1,000 20 0 0 o o o o F F F CP CP CP CP F er er er er RE RE RE RE tz tz tz tz NE NE NE NE Ne Ne Ne Ne 2030 2050 2030 2050 Electricity Services Other Industry Residential Industry Residential Transport Agriculture Transport Agriculture Services c. Energy sources, d. Installed power generating by fuel type and scenario capacity, by scenario Energy sources in PJ Installed capacity in MW 160 10,000 140 9,000 8,000 120 7,000 100 6,000 80 5,000 60 4,000 3,000 40 2,000 20 1,000 0 0 o o o o F F F F CP CP CP CP er er er er RE RE RE RE tz tz tz tz NE NE NE NE Ne Ne Ne Ne 2030 2050 2030 2050 Gas/diesel Solid biomass Wind parks Natural gas fired Electricity Derived heat Solar/PV power plants Natural gas Other Other integrate variable RE into the power system. Medium-term efforts should focus on real-time dispatch assessments, system flexibility upgrades, and the expansion of combined heat and power plants. Over the long term, integrating generation and transmission infrastructure planning will help attract investment, facilitate cross-border trade, and internalize distributed energy resources, setting the stage for a robust, clean energy sector. The government has recently amended the Renewable Energy Law, which is expected to support an uptake in green energy. The amendments set up a legal framework for national support schemes, upgrading the “net-metering” to a “net-billing” system, which is expected to encourage investment in RE technologies by both small and large producers and defines the necessary requirements for compliance. It further streamlines administrative processes for RE initiatives and strengthens the National Center for Sustainable Energy’s Investor Information Center to serve as a one-stop shop, offering all necessary documents, authorizations, and certifications to prospective RE investors. The law also advocates for 38 Country Climate and Development Report: Moldova RE use in heating, cooling, and transportation sectors, and enables the government to implement “statistical transfers” of renewable energy with other EnC or EU member states, a mechanism that allows Moldova to credit renewable energy produced elsewhere toward its own RE target, promoting cross- border cooperation. As a result of the amended law, the government announced its inaugural round of energy auctions for RE projects for 2024. While the private sector has welcomed competitive auctions, the relaxation of eligibility criteria, aimed to increase competition, could also lead to speculation and delays in project construction. Decarbonizing the (residential, public, and commercial) buildings sector The buildings sector is one of Moldova’s largest energy consumers, responsible for more than one- third of the country’s GHG emissions. As of 2023, Moldova had an estimated 1,324,500 dwellings (NBS 2023), 75 percent of which were built before 1991. The decline in construction of dwellings after this year explains the widespread lack of modern insulation and efficiency standards. About 80 percent of energy consumption in the sector is in residential buildings, with 20 percent used by commercial and public buildings. Total annual energy consumption in residential buildings and public institutions (2019–21 average) is about 440 million cubic meters (Mcm) of natural gas, 2 terrawatt hours of electricity, and 1,335 thousand gigacalories of heat.38 With energy consumption in buildings representing 58 percent of the country’s total final energy consumption, improving energy efficiency in the sector is a priority. According to the government’s long-term building renovation strategy, energy efficiency measures can save about 360 kilotons of oil equivalent per year (deep renovation) in residential buildings, and about 150 kilotons in nonresidential buildings.39 Renovating the entire building stock would bring expected energy savings of 35.9, 43.9, and 54.2 percent for simple, medium, and deep renovations, respectively, and comparable CO2 emission reductions (Republic of Moldova 2020). Although recent strengthening of the legislative framework is expected to improve the incentive structure for energy efficiency and sustainable heating investments, regulatory and administrative barriers remain, particularly in the residential sector. Realizing energy savings in the residential sector, which has the largest share of energy consumption in buildings, will require significant efforts to improve the enabling environment. This includes legislation to improve incentives for energy efficiency investments, improved lending practices, energy audit capacity development, and developing an ecosystem for contracting and implementing residential renovations.40 In October 2023, Parliament adopted a new law intended to transpose Directive 2018/844/EC on the energy performance of buildings. A long-term building renovation strategy was developed, but not adopted. In addition, the first draft of the Nearly Zero Energy Buildings Action Plan was prepared. If passed, several legislative efforts that are underway or under consideration—on heat metering, consumption-based billing, and an efficient heating and cooling assessment—can help enable investments. Private sector engagements will be crucial for facilitating energy efficiency investments in the residential sector. Significant financing, both public and private, will be required to deliver the efficiency gains envisioned in the government’s long-term building goals. Despite numerous strategies, action plans, programs, and an extensive body of legislation, progress in improving energy efficiency has been limited to date. The relatively high up-front costs and difficulties in accessing affordable financing are serious impediments to energy efficiency improvements in the industrial sector (IEA 2022). The International Finance Corporation is promoting the adoption of energy efficiency standards and the 38 Based on data from the National Agency for Energy Regulation and Ministry of Infrastructure and Regional Development. 39 Nonresidential buildings include office buildings, educational institutions, hospitals, hotels, restaurants, sports buildings, buildings for wholesale and retail trade services, and mixed purpose buildings. 40 Moldova lacks key market preconditions to attract private-sector financing for energy efficiency investments in multifamily buildings. Despite some recent advances—such as the new condominium law—barriers remain, linked to the lack of interest and collateral from homeowner associations to obtain financing for energy efficiency investments, the lack of adequate green taxonomy for the banking sector, and a lack of guidance for local banks (USAID 2023). 39 Country Climate and Development Report: Moldova creation of a green mortgage market in the region. While cost of living considerations will determine the willingness of residential homeowners to invest in efficiency measures, it will also depend on local regulatory interventions and taxes, which could include subsidies, enacting stricter emission standards, and banning sales of higher-emitting products. Heating accounts for over one-half of the country’s total energy consumption, so implementing sustainable heating solutions is vital. While electricity accounts for 12–15 percent of Moldova’s final energy consumption, heating accounts for about 55–58 percent. Nearly 65 percent of dwellings are heated primarily with individual stoves fueled by natural gas and biomass. In rural areas, 94 percent of households use individual stoves, whereas 48 percent of urban households use district heating systems as their main heating technology, and 33 percent use autonomous systems. Biomass is the primary heat energy source in rural areas; in urban areas, it is natural gas, with heavy fuel as a secondary source. Under the net zero scenario, the space heating demand is 30 percent lower than under the NECP scenario (figure 3.7). The share of district heating increases under both scenarios up to at least 2045, before reducing as a share of total consumption in the last five years of the study. For both scenarios, decarbonizing district heating with centralized heating pumps and biomass and rolling out individual electric heating systems increase efficiency and improve service quality. Fiscal and financial policies can help incentivize the uptake of clean heating technologies to gradually phase out outdated and polluting technologies. Accelerated modernization of district heating systems in Chişinău and Balti and small-scale district heating in secondary towns will facilitate co-generation and enhance flexibility. Electrification of heating and cooking in areas not served by the gas distribution network can facilitate the flexible integration of excess renewable power generation expected to rapidly increase after 2030, while also reducing household exposure to volatile natural gas prices. Other modern heat transfer solutions—such as integrating excess residual heat sources from industry or data centers into district heating systems and heat recovery technologies in commercial sectors—can also decrease the share of natural gas, firewood, and coal in heating applications. In rural areas, decentralized heating solutions can help households transition from biomass use, especially firewood, to modern technologies such as heat pumps and battery storage. Figure 3.7. Heat consumption in residential buildings under the NECP and net zero scenarios a. NECP scenario b. Net zero scenario GWH Share of district heating (%) GWH Share of district heating (%) 10,000 25 10,000 25 9,000 9,000 8,000 20 8,000 20 7,000 7,000 6,000 15 6,000 15 5,000 5,000 4,000 10 4,000 10 3,000 3,000 2,000 5 2,000 5 1,000 1,000 0 0 0 0 2025 2030 2035 2040 2045 2050 2025 2030 2035 2040 2045 2050 Lignite/brown coal Solid biomass Electricity Share of district heating Natural gas Derived heat Total Source: Exergia Decarbonizing the transport sector GHG emissions from the transport sector have tripled in the last 20 years, growing from 0.73 to 2.21 million tons of CO2e (MtCO2e) between 2000 and 2019, with road transport now accounting for 98 percent of these emissions (IEA 2023). This has been driven by: the continued increase in passenger 40 Country Climate and Development Report: Moldova car motorization rate41 and transport activity; growth of total freight transport activity; and an increasing reliance on roads to move goods, with a significant decline in the modal share of rail freight. Reducing GHG emissions in transportation is one of the stated priorities in Moldova’s NDCs, which aim to reduce transport emissions by 15 percent compared to a business-as-usual scenario. A multipronged decarbonization strategy following the “avoid-shift-improve” approach could reduce transport-related emissions by 95 percent by 2050, compared to current levels. This approach avoids unnecessary travel without limiting access to goods and services, shifts to more sustainable modes of travel, such as active mobility, public transport, and intermodal freight transport, and improves vehicle technology for gains in fuel economy and the transition to zero emissions.  A comprehensive approach to urban mobility will help Moldova reduce GHG emissions from the transport sector in urban areas, through avoid and shift. Investing in public transport and green mobility infrastructure, when complemented with demand management measures—such as parking management and congestion charging—can reduce the reliance on passenger cars and therefore GHG emissions from urban transport. Implementing the Sustainable Urban Mobility Plans for Chişinău and other cities will help encourage a behavioral change in passenger transport. Additional “avoid” strategies for passenger transport could focus on creating transit-oriented developments, which would allow for greater access to services within compact mixed-use communities. Small towns with limited or no public transport could explore on-demand public transport services, which do not have fixed routes. Pursuing a significant freight modal shift from roads to rail would require infrastructure renewal and significant reform to improve the sector’s performance. The rail system would need to be upgraded to manage freight transport, which has doubled in ton-kilometers in the last 20 years and increasingly relies on road transport. In 2008, almost 50 percent of all ton-kilometers were being moved by rail; this is now down to only 16 percent. The railway network is in urgent need of modernization, as it consists mostly of single-track and non-electrified rails, with outdated infrastructure and signaling equipment, which limits both capacity and speed. This makes rail freight increasingly uncompetitive against trucking. Expenditures in transport infrastructure investment and maintenance have focused mainly on roads over the last decade. To ensure sustainability, a series of reforms can help improve the quality of rail infrastructure and create more commercially oriented operations. These include, but are not limited to: defining stable funding mechanisms for infrastructure, including multiannual infrastructure contracts, and operations, including introducing public service contracts for passenger services; unbundling infrastructure management and operations (passengers and freight); establishing a tariff policy consistent with a commercial approach of railway activities; attracting private sector participation in railways to boost efficiency, for example, by privatizing infrastructure or rolling stock maintenance activities or introducing concessions in some operations; and strengthening corporate management in railway companies, with clear management accountability for improving financial and efficiency outcomes (World Bank 2020b). Increasing the competitiveness of the rail sector against trucking also requires a focus on service efficiency and reliability. Efficient multimodal facilities and logistics centers consolidate demand and capture traffic to railways in a cost-effective manner, unlocking synergies with the flexibility of the road sector. The completion of the logistics centers in Giurgiulesti, Chişinău, and Balti, as defined in the EU’s Eastern Partnership Indicative TEN-T Investment Action Plan,42 contributes to this objective. 41 While the EU average motorization rate increased by 15 percent between 2012 and 2022, Moldova’s grew by 84 percent. Driven by higher per capita income, this increase is expected to continue further as the country’s motorization rate (288 passenger cars per 1,000 inhabitants) is still well below the EU average of 567. 42 https://neighbourhood-enlargement.ec.europa.eu/news/eastern-partnership-new-indicative-ten-t-investment-action-plan-stronger- connectivity-2019-01-15_en 41 Country Climate and Development Report: Moldova Large-scale electrification of the vehicle fleet (improve) can help Moldova achieve net zero, where electricity would account for 73 percent of final energy consumption from transport. In the short term, implementing two priority policy instruments can help the country achieve the electric vehicle (EV) penetration rate for passenger cars it needs under the net zero scenario, which is two to three times higher than under the NECP scenario. First, it can target the early electrification of state-owned and public transport fleets and other high-use vehicles, such as taxis, ride sharing, and urban delivery vehicles with CO2-differentiated vehicle taxation, corporate social responsibility reporting, GHG emission mitigation obligations, and/or specific regulatory requirements for fleets. High-use vehicles are particularly suitable for early transition, as they benefit most from the lower operational costs of EVs. In the medium term, this can also help increase the availability of affordable EVs in the domestic secondhand market and improve the business case for EV charging infrastructure. Second, it can introduce stricter vehicle emission standards for secondhand vehicle imports. Over 83 percent of all vehicles are more than 10 years old, and the share of diesel-powered vehicles is increasing.43 Given that secondhand cars account for the largest share of new registrations (Republic of Moldova 2021), targeted policy actions for this market segment are needed.44 Decarbonizing the transport sector is also essential for tackling urban air pollution, for which transport is the leading source (OECD 2019). By reducing the country’s reliance on polluting fossil fuel– fired technologies, the net zero scenario is estimated to result in an 84 percent reduction in the small particulate matter (PM2.5) concentration associated with anthropogenic sources alone. This would avoid over 4,100 premature deaths by 2050 that would otherwise occur in the absence of decarbonization, equivalent to about $4.6 billion in net present benefits.45 3.2.3. Reducing GHG emissions from agriculture and solid waste Although modernization and growth in the agricultural sector have led to a decline in emissions, these are expected to rise over the next decade. GHG emissions from agriculture fell by almost 50 percent between 2000 and 2020, and by 70 percent since 1990 (figure 3.8). This was due to a large decline in emissions from enteric fermentation after a significant reduction in the livestock population reduced its share of agricultural emissions from more than one-half in 2000 to just one-fourth in 2020. These numbers are expected to continue to decline over the next years (Environment Agency of the Republic of Moldova 2021). However, emissions from agricultural soils have grown by 43 percent since 2000 and now account for close to 60 percent of agricultural emissions, driven partly by the expansion of planted areas but also by increasing intensification and mismanagement of soil fertility.46 Yet fertilizer use remains relatively low, and is to increase as Moldovan farmers close the productivity gap with their EU peers. As such, adopting more efficient precision application techniques as part of broader improvements in soil management will be vital to maintain productivity gains without incurring large increases in GHG emissions. Adopting climate smart agriculture (CSA) practices could reduce agricultural emissions while strengthening resilience and supporting higher productivity, output, and profits. The CSA practices discussed in section 3.1.1 to support resilience will also support mitigation. CSA includes a wide range of practices designed to: improve soil nutrition, such as crop rotation, organic fertilizer use, and precision application technologies; optimize water use, such as irrigation; reduce energy, such as no- or minimum- till; and make better use of data and knowledge, such as remote sensing, digital technologies, and drought-resistant seeds. Recent research on the potential gains from selected CSA technologies in 43 https://am.gov.md/ro/node/440 44 According to UNEP (2021), Moldova has a “very weak” regulatory environment for secondhand vehicles. 45 Implementing net zero policies is estimated to avoid about 1,050 additional deaths compared to the NECP scenario, equivalent to $1.2 billion in net present benefits. Soil management measures have a significant effect on the level of humus storage. Lower humus storage contributes to higher demand for fertilizers to 46 maintain agricultural productivity, creating higher GHG emissions 42 Country Climate and Development Report: Moldova neighboring Ukraine found that their broad adoption on about two-thirds of Figure 3.8. GHG emissions from agriculture arable land area could reduce overall MtCO2e GHG emissions by about 30 percent 2.5 (IFC 2021). While Moldova’s significantly lower farm and market scales mean the 2.0 returns to CSA will likely be lower, this provides some perspective on mitigation 1.5 potential in agriculture. 1.0 Ensuring irrigation investments are climate smart also has a significant 0.5 potential to lower emissions. Investments to upgrade and expand 0 20 0 20 0 20 20 9 20 19 03 20 8 13 20 8 20 2 20 2 20 4 20 4 20 01 20 11 irrigation must include careful evaluation 20 6 20 6 20 5 15 20 7 20 7 0 0 1 0 1 0 1 0 1 0 1 0 0 1 20 20 20 20 of energy consumption, energy costs, Enteric fermentation Manure management and implications for GHG emissions Agricultural soils Urea application reductions. Wider adoption of climate- smart irrigation and drainage could lower Source: Republic of Moldova 2023 GHG emissions due to lower electricity consumption for pumping and water transportation. Irrigation is also among the most important agronomic practices that directly affects nitrogen and carbon turnover. Studies have shown that the timing and amount of water applied to crops could play a role in reducing GHG emissions. GHG emissions from waste have remained steady on a per capita basis over recent decades. In 2020, waste contributed 1.6 MtCO2e, 80 percent of which was from solid waste disposal, mainly as methane emissions. Per capita waste emissions are high on both regional and global bases, driven by insufficient waste management practices. Most household waste ends up in landfills, pollulting the soil and groundwater, and landfill infrastructure is insufficient to capture emissions. Moldova aims to reduce its GHG emissions from waste by 14 percent by 2030 and could exceed its NDC target in the sector. Several programs are in place as part of efforts to align its waste management strategy and practices with EU standards. These will help introduce measures to recycle and recover the material and energy value of waste, and to upgrade its solid waste infrastructure. Investment gaps remain, especially with respect to separate collection, sorting, and recycling infrastructure. 3.2.4. Maximizing potential for carbon sinks from land use and forestry Moldova will need to reverse the trend in LULUCF emissions and leverage the sequestration potential of its forests and landscapes to achieve a mid-century net zero target and strengthen resilience to climate change. In 2000, net sinks from LULUCF were more than 2.1 MtCO2e, enough to offset around 20 percent of Moldova’s total emissions. But by 2020, LULUCF was no longer a net sink, due especially to sharp declines in sequestrations from grasslands—down 835 tons of CO2e (tCO2e) or 24 percent, between 2010 and 2020—and forestland (down nearly 600 tCO2e or 24 percent), as well as increased emissions from cropland. This partly reflects land conversion for agriculture, but it is also a function of declining productivity of landscapes due to land degradation and poor land management practices. Declining carbon sequestration coincided with a period of increased forest cover after years of decline; between 2000 and 2020, forest cover grew by more than 12 percent. But continued problems, including unsustainable harvesting, selective illegal logging, and failure to adapt forest management to new climatic conditions, has led to a decline in forest productivity from the perspective of the economic output, carbon sequestration potential, and potential to support biodiversity and act as a buffer against climate impacts on the agricultural sector. 43 Country Climate and Development Report: Moldova Figure 3.9. Trends and targets in LULUCF emissions MtCO2e 3 2 1 0 –1 –2 –3 –4 –5 –6 1990 1995 2000 2005 2010 2015 2020 2025 2030 2032 WAM WAM WAM Forestland Grasslands Wetlands Cropland Se lements Other LULUCF-total Source: Republic of Moldova 2023. WAM = With additional measures, i.e., corresponding to a Resilient net zero scenario. Moldova has made afforestation and reforestation a priority, including to support decarbonization of the economy. Its National Appropriate Mitigation Action Plan targets carbon removal of more than 260,000 per ton of CO2 annually by 2030,47 with a significant share of increased carbon removals expected to come through reduced emissions from croplands and increased removals from forests. Under the action plan, Moldova planned to afforest 45,000 hectares of degraded, unproductive lands and plant 15,000 hectares of riparian forest belts and 1,500 hectares of forest protection belts in farming systems. Its adoption of the NFREP in 2023 set a more ambitious afforestation target to increase the forest area by 145,000 hectares (6.3 percent) by 2032, rehabilitate and restore 35,000 hectares of damaged forests, and expand 100,000 hectares of new forest plantations. While the NFERP has broader objectives, including promoting the forest economy and strengthening the resilience of ecosystem services to climate change, it is also expected to make an additional contribution to decarbonization (Figure 3.9). The net sequestration potential expected under NFERP will average about 1,272 kilotons of CO2 per year, an increase of about 56 percent of current capacity. A natural capital analysis (box 3.4) shows that afforestation goals under the NFERP are a step in the right direction for establishing the sequestration capacity needed for net zero. Implementing the NFERP is expected to cost around $727 million over a 10-year period.48 This means that NFERP measures are expected to yield carbon sequestration at the cost of about $63 per ton of CO2, well below the shadow price of carbon. The investment will also yield socioeconomic benefits other than carbon sequestration. An Organisation for Economic Co-operation and Development (OECD) report ranked Moldova among the top 30 countries globally (out of 166 assessed) for cost efficiency of forest carbon sequestration, both for afforestation and forest conservation (Grafton et al. 2021). Financing the program is expected to require significant resources from international sources. Focusing on native species, including through a strong network of nurseries, is crucial for successful NFERP implementation. The area of newly created monocultured of nonnative acacia (including black locust) plantations almost matches in size the area of native oak-type dominant forests. The reliance on acacia species poses threats to the long-term development of the forestry sector, as monocultured plantations are prone to fail due to a mismatch between species’ bio-eco-features and site requirements. Promoting native species alongside targeted black locust management for multipurpose production— 47 Environmental Agency of the Republic of Moldova: http://www.clima.md/lib.php?l=en&idc=82 48 https://www.eu4environment.org/app/uploads/2022/12/EU4E-Moldova_NFERP-Analysis-and-recommendations.pdf. 44 Country Climate and Development Report: Moldova wood, honey, and so on—on selected sites could mitigate this challenge. Prioritizing native species in terms of seed provenance is also essential for forest restoration and conservation efforts. At Moldsilva, forest reproductive material production is carried out at 57 state-owned and managed nurseries, producing an average of 33 million seedlings per year. The NFERP envisages the establishment of the National Centre for Seed Forest Genetics and three Regional Centers for Forest Industrial Production with capacity to produce 85-90 million seedlings per year or about 80–90 percent of all sectoral needs for NFERP implementation. These centers will be crucial for delivering the NFERP, but their construction has yet to begin. Effectively leveraging forest resources to support climate mitigation and adaptation in Moldova will require complementary reforms and capacity building. Several deficiencies in the forest sector hold back its effective transformation, including a lack of proper extension or advisory services, limited access to investment capital, skills gaps, and the deficient transfer of knowledge on climate coping and water-saving technologies. On the legal and institutional side, governance of the sector—notably the 1996 Forest Code49 and the current setup in Moldsilva—needs further reform to incorporate modern sustainable forest management practices, forest contribution to climate change, and the role of forests in providing environmental services, as well as Moldova’s accession to the EU. Parliament adopted a new Forest Code in March 2024, which aligns with EU standards and global practices and sets out a forest classification that underpins one of the key institutional reforms being made in Moldsilva, separating the roles and responsibilities for special protection forests (conservation areas) versus production forests (multipurpose forests for economic use). This institutional change, which will need to be supported by broader reforms and capacity development, is expected to address conflicts of interest and improve efficiency in forest resource management. Box 3.4.  Maximizing the efficiency of natural capital to increase CO2 sequestration without economic tradeoffs Modeling work described in Damania et al. (2023) examines Moldova’s use of its land, water, and forests to find where it can use landscapes more efficiently to achieve both economic and environmental goals, including GHG sequestration. The analysis begins by estimating two key outputs supported by landscapes: net economic production of marketed outputs for crops, grazing, and forestry, measured in monetary terms; and net GHG sequestered, which includes changes in carbon storage due to land use change, as well as methane emissions from livestock production. It is estimated that, with its current configuration of input use and efficiency levels, Moldova has a sustainable production of $338 million per year from crops, livestock, and forestry, and net GHGs sequestered in above- and below-ground biomass (trees, shrubs, and grasses, including cropped agriculture) of 132 MtCO2e. This value is plotted in figure B3.4.1 as point A. The analysis focuses on two important points on the efficiency frontier. Point B in figure B3.4.1 shows a scenario where Moldova can maximize net GHGs sequestered without economic tradeoffs. So, under this scenario, Moldova will continue to produce $338 million from crops, grazing, and forestry,a but sequester an additional 182 MtCO2e. This is equivalent to 14 years of GHG emissions at 2020 levels. At a shadow price of carbon of $40–80 per ton, this amounts to $7.2–14.5 billion. The maps in figure B3.4.1 compare land use and land management between scenarios A and B to show how this is accomplished, with the amount of natural forest increasing significantly, from 18,630 to 514,605 hectares. Managed forestry, where trees are periodically harvested for timber, also increases significantly, from 231,000 to nearly 1 million hectares, mostly from converting cropland from 2.7 million to 1.5 million hectares, and intensifying two-thirds of the remaining cropland to increase yields.b Figure B3.4.2 demonstrates how these land use changes would occur. (continued) 49 With amendments in 2001, 2003, 2005, 2009, 2011, and 2013. 45 Country Climate and Development Report: Moldova Box 3.4.  Maximizing the efficiency of natural capital to increase CO2 sequestration without economic tradeoffs (continued) A second important point is found at point C, where economic production is maximized without reducing carbon sequestration, so that there are no tradeoffs—that is, Moldova continues to sequester 132 MtCO2e, but will increase the value of crop, grazing, and forestry production by $247 million per year. Comparing land use and management between scenarios A and C in figure B3.4.1, it is clear that much of the land remains devoted to economic production, with land devoted to cropped agriculture remaining relatively constant, at 2.63 million hectares. But more than one-half of this land is converted to intensified agriculture, where yield gaps are closed. Natural land increases from 18,000 to 200,000 hectares, largely by retiring a very small share of cropland. Grazing land and forestry also decline slightly. Figure B3.4.2 provides a visual illustration of how these land use changes would occur. Several key takeaways can be drawn from this analysis. First, Moldova is far below its efficiency frontier when it comes to natural capital and has significant room to increase carbon sequestration, economic production, or both simultaneously, without tradeoffs. Second, cropped agriculture is a significant driver of this inefficiency. Sustainably intensifying agriculture and adopting best management practices can lead to large increases in production, which can either offset the release of more land for forests and carbon sequestration—leading to a shift toward point B in figure B3.4.1—or shift Moldova toward point C, where it maximizes economic production without environmental tradeoffs. All points on the green line between B and C also represent efficient allocations where increasing in both economic production and carbon sequestration are feasible. Figure B3.4.1.  Natural capital efficiency frontier for Moldova Carbon sequestration (million tons CO2-eq) 795 Maximize GHG No data sequestered, Cropland - rainfed no tradeo s Cropland - irrigated B Cropland - intensified 314 rainfed 182 million tons Cropland - intensified CO2-eq sequestered Maximize irrigated without any economic production tradeo s. Equal to 14 years Grazing value, no of total GHG emissions tradeo s Forestry at 2020 levels Multiple use C 132 Shrubland Current A Grassland scenario US$247 Natural forest 110 million increase in Natural vegetation economic Bare areas output with no environmental Developed tradeo s Water Permanent ice –882 338 585 682 Net economic output from land (US$ millions) (axes not to scale) A Current scenario B Maximize GHGs C Maximize production equestered, no tradeo s value, no tradeo s Source: World Bank staff based on Damania et al (2023) (continued) 46 Country Climate and Development Report: Moldova Box 3.4.  Maximizing the efficiency of natural capital to increase CO2 sequestration without economic tradeoffs (continued) Figure B3.4.2.  Changes in land use needed to reach the efficiency frontier Croplands. 516,358 Croplands. 1,225,200 Intensified crops 545,636 Intensified crops Croplands 329,338 Croplands Intensified + BMPs 2,717,247 2,717,179 465,087 Intensified + BMPs Forestry. 991,126 1,075,440 Grazing 19,916 Multi use 73,799 Natural 18,629 Natural. 203,990 Forestry 231,777 Natural. 514,605 Forestry 231,778 Grazing. 10,579 Natural 18,630 Multi use. 20,219 Forestry. 176,071 Multi use 73,799 Grazing 19,917 Grazing. 8,271 Multi use. 40,751 Source: World Bank staff based on Damania et al (2023) a These values are net of the transition costs required to transform the landscape from point A to B. See Damania et al. (2023) for details. b In the modeling, intensified agriculture are areas where global yield gaps are closed. To achieve this, it is assumed that nitrogen fertilizer application rates increase. Intensified agriculture is split into several different categories, including rainfed/irrigated, and current/best management practices. 47 Country Climate and Development Report: Moldova Chapter 4 Implications for poverty, inclusion, and the macroeconomic outlook Photo Credit: Akintevs / iStock  mplications for poverty, inclusion, and the 4. I macroeconomic outlook MAIN MESSAGES In a future where climate change leads to hotter and drier conditions, adaptation measures can significantly enhance GDP when compared to the REF scenario. The NECP and net zero scenarios could lead to additional economic growth, with the net zero scenario offering the greatest increase in GDP, albeit with the potential for a considerable rise in public debt. Lower-income households and agricultural workers in Moldova could shoulder a disproportionate share of job losses due to climate change. But implementing adaptation and decarbonization measures can help prevent these job losses and, in addition, create 0.3 to 0.8 percent of jobs by 2030, with mid-skill workers in sectors such as advanced manufacturing, construction, and services standing to benefit most. The shift toward a sustainable economy necessitates human capital policies to reduce transition costs, equip the workforce for new green jobs, and support vulnerable populations, particularly women. It also necessitates policies that enhance the private sector’s capacity and competitiveness to attract investments and stimulate economic growth. Funding the transition to a low-carbon economy and climate adaptation will require unprecedented levels of investment, necessitating a shift in investment strategies. Most of this funding will need to come from the private sector, with a focus on the growth of green finance and the attraction of FDI, while development partners will need to substantially augment public sector investments, especially for kickstarting investments. This chapter assesses the economic and social impacts of climate change and associated policies, while also exploring the macroeconomic policies that support their implementation. Moldova’s future growth and transition hinge on the rapid and comprehensive adoption of adaptation and decarbonization measures. The success of the climate change strategies detailed in Chapter 3 is subject to a range of factors, including the availability of financial resources, the domestic political climate, and the broader international economic and geopolitical situation. Box 4.1.  CCDR scenarios Table B4.1.1 outlines the scenarios that have been considered in this CCDR. The starting point is the REF scenario, aligned with the projections of the World Bank’s Moldova Country Economic Memorandum (World Bank 2023c), which assumes that the government will undertake structural reforms to cultivate a new growth model driven by private sector productivity and competitiveness measures to enhance market competition, improve public infrastructure and services, and upgrade skills. But unlike the projections in World Bank (2023e), the REF scenario also accounts for future climate impacts through four primary channels: asset losses from inland flooding; the effects of climate change on crop yields; soil erosion; and a decline in sectoral labor productivity due to increased heat stress. The REF scenario does not consider any new climate policies beyond the existing ones. (continued) 50 Country Climate and Development Report: Moldova Box 4.1.  CCDR scenarios (continued) This CCDR compares the REF scenario with: • A Resilient scenario, illustrating the effects of adaptation measures. • A Resilient NECP scenario, illustrating the effects of adaptation with additional decarbonization measures, considering the implementation of the government’s (draft) NECP policies, designed to meet its NDC targets. Comparing the REF and NECP scenarios allows us to assess the “implementation gap.” • A Resilient net zero scenario, illustrating the effects of the adaptation and NECP scenarios, with additional policies designed to achieve net zero by 2050. Comparing the NECP and net zero scenarios allows us to assess the “ambition gap.” Table B4.1.1. Policy and investment scenarios considered in this report Growth policies Climate Adaptation Decarbonization Scenario (EU convergence) impacts measures measures REF: Climate impacts, no adaptation or ü ü decarbonization policies Resilient: Climate impacts, adaptation ü ü ü policies, no decarbonization measures Resilient NECP: Adaptation policies and ü ü ü ü reform package to achieve NDC and NECP (announced policies) Resilient net zero: Adaptation policies ü ü ü üü and reform package to achieve net zero by 2050 4.1. The macroeconomic impacts of adaptation and transition The scenarios are analyzed using the World Bank’s MFMod-CC and MINDSET models. These are further elaborated in box 4.2. Both models start from the REF scenario and consider the same impact channels through which climate change is expected to affect the economy: asset losses from inland flooding; the effects of climate change on crop yields, including temperature and precipitation variations; soil erosion; and a decline in labor productivity within certain sectors due to increased heat stress. In addition, MFMOD assumes that the impact of climate change leaves a scar on total factor productivity, to capture expected persistent impacts of climate-related shocks. For example, repeated climate shocks can lead to a decline in soil quality and fertility, resulting in lower yields over multiple seasons. Both models calculate how adaptation and mitigation investments from Chapter 3 can be consistent with the macroeconomic pathways to 2050 associated with the resilient, NECP, and net zero scenarios. 51 Country Climate and Development Report: Moldova Box 4.2.  Macroeconomic models used The CCDR employs two climate macroeconomic models—MFMod-CC and MINDSET—to evaluate the potential impacts of selected climate threats on agriculture, labor productivity, and infrastructure, and their follow-on effects on growth, employment in the aggregate and by sector, fiscal stress, and poverty. MFMod-CC is a structural econometric model that reproduces the flow of funds across the whole economy by mapping out the main identities of the national accounts, balance of payments, labor markets, and financial sectors. Macrostructural models make long-term projections but also estimate the economic and behavioral determinants of economic variables to include observed dynamics of the economy in the short term, making them particularly suitable for analyzing the impacts of one-off climate-related shocks, such as a flood. Developed to accommodate the impact of climate change, MFMod-CC features damage functions from higher temperatures, pollution, and flooding on economic activity and an adaptation module to analyze the economic benefits of adaptation investments to adjust to climate change. MINDSET is a demand-driven global model to assess the macroeconomic impacts of climate change, adaptation measures, and mitigation strategies with high sectoral granularity. It accounts for a range of climate impacts and regulatory and fiscal policies. Model outputs include standard macro indicators, sectoral emission levels, production, and employment effects across socioeconomic groups. Here, it complements MFMod-CC with a sectoral analysis of policy effects on employment and value-added. The models differ in structure and therefore in the way that they model transmission channels. MINDSET is sensitive to climate impacts and models production losses—for example, from droughts or floods—as upstream supply-side constraints, affecting all downstream sectors along the value chain, using a measure of input criticality. In MFMod-CC, climate impacts are confined to a few broad sectors. MINDSET is also sensitive to the positive effects of adaptation and low-carbon investments on GDP by raising expenditure. In MFMod-CC, the effect of low-carbon investment on GDP is limited by crowding out and long-term price adjustments—that is, investments for mitigation divert scarce resources, such as labor, from other productive uses and push up overall prices and input costs. And when the increased investment is met by increased imports, the effect is further restricted. MINDSET assumes that investments mobilize additional resources that were previously underused, incorporating assumptions of spare economic capacity and involuntary unemployment. While climate change already exerts a tangible impact on Moldova’s economy, projections suggest that without adaptation measures, the country could experience a further decline in GDP. Specifically, the MFMod-CC model projects a 1.1 percent GDP reduction by 2030 and a 2.8 percent decrease by 2050, relative to a hypothetical scenario of a world without additional impacts of climate change in the future (figure 4.1). Similarly, the MINDSET model estimates a 1.1 and 2.1 percent GDP reduction by 2030 and 2050, respectively, due to the same four climate impact channels, and anticipates a 1.1 and 1.7 percent drop in employment for the same years, due to diminished economic activity. These projections, while seemingly modest, are conservative and do not account for the full spectrum of climate impact channels or their potential interactions. Faster economic growth significantly reduces the negative impacts of climate change. The robust growth assumed in the REF scenario (aligned with structural reforms and market integration driving productivity growth) reduces the negative GDP impacts of climate change by 40 percent in 2050 relative to the impacts under the current growth trajectory. Sharply improved per capita income stemming from faster growth will also strengthen household resilience against climate change—for example, by enabling people to accumulate savings or strengthen the resilience of their dwellings and assets. 52 Country Climate and Development Report: Moldova Figure 4.1. Climate change impacts on GDP in the absence of adaptation measures Deviation from baseline, with no climate impacts (%) 0 –0.5 –1.0 –1.1 –1.1 –1.5 –2.0 –1.9 –2.5 –2.1 –3.0 –2.8 –3.5 2030 2040 2050 2030 2050 MFMOD-CC MINDSET Droughts Soil erosion Floods Heat stress GDP Source: World Bank staff calculations, using MFMOD-CC and MINDSET. Note: The aggregate effects observed are smaller than the sum of the individual climate impacts on GDP, when considered separately, because heat stress–related productivity losses in agriculture are smaller when the sector has already shrunk due to drought. Adaptation investments are expected to improve GDP relative to the REF scenario. According to the MFMod-CC model, such adaptation measures could lead to a 1.3 percent GDP increase by 2050 (figure 4.2a). The MINDSET model reports a higher 3 percent GDP increase, with agriculture seeing the most gains (figures 4.2b, d). The reason for the stronger effects on GDP in MINDSET is that it accounts not only for the avoided climate damages thanks to adaptation measures but also the economic stimulus of the additional investment. That includes both the direct economic and employment effects sustained by the investments, such as building irrigation storage, the induced effect on suppliers of the storage materials and equipment, and the wider economy when newly employed workers spend their incomes in the Moldovan economy. Section 4.3 details the types of jobs that are likely to be created. The benefits are smaller in MFMod-CC due to the assumption that additional adaptation investments come at the expense of other activities ongoing in the economy (crowding out), so it is a substitution rather than an addition to economic activity. The NECP scenario, which includes both adaptation and mitigation measures, could further enhance economic outcomes. The MFMod-CC model projects a 0.7 percent higher GDP by 2030 and 1.4 percent increase by 2050 under the NECP scenario, compared to the REF scenario (figure 4.2a). The MINDSET results even anticipate a 2.8 and 4.0 percent increase in GDP by 2030 and 2050, respectively, reflecting the economic stimulus of the additional investment in mitigation measures under the NECP. The advanced manufacturing, agriculture, and construction sectors are likely to benefit most. Funding the mitigation measures partially through public resources would result in a higher public debt-to-GDP ratio compared to the REF scenario (figure 4.2c).50 The most ambitious strategy, the net zero scenario, yields the strongest positive impacts on GDP but also results in significantly higher public debt. The impact on growth is larger compared to the NECP scenario because it has a more radical decarbonization trajectory, including a higher uptake of energy efficiency measures, RE production, and investments in transport, including rail. The advanced manufacturing sector is expected to see the largest gains, followed by construction and agriculture. But the substantial investment required for this pathway could cause public debt to exceed 40 percent of GDP in the late 2030s, before declining to about 30 percent of GDP by 2050. 50 The MFMod-CC model assumes that capital investments are predominantly funded by the private sector at 67 percent, with the private sector contributing 33 percent. It is assumed that operational expenditures, which encompass fuel imports, are primarily financed by the private sector. 53 Country Climate and Development Report: Moldova Figure 4.2. Impacts of adaptation and decarbonization measures on the economy, compared to the REF scenario (no climate actions) a. Impact on GDP (MFMOD-CC) b. Impact on GDP and employment (MINDSET) Deviation from REF scenario (%) % deviation from REF 5.0 5.0 4.6 4.0 4.1 4.0 4.0 3.0 2.8 3.0 3.0 2.0 1.8 1.7 2.0 1.7 1.3 1.4 1.0 0.9 0.7 0.8 1.0 0.3 0.5 0 0.0 0 0 0 0 0 0 40 40 40 0 30 30 50 50 50 3 5 3 5 3 5 3 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Adaptation NECP Net zero Resilient NECP Net zero GDP GDP e ects Employment e ects c. Impact on public debt/GDP d. Impact on sectoral GDP, by 2030 % deviation from REF scenario % change from REF scenario (sectoral GDP) 25 Agriculture and foresty 0.5 20 Energy and extraction 3.5 15 Basic manufacturing 2.0 10 Advanced manufacturing 10.4 5 Public services 1.5 Construction 0 6.4 Private services 3.7 –5 0 2.5 5.0 7.5 10.0 12.5 40 30 50 20 45 35 25 Deviation from REF scenario (%) 20 20 20 20 20 20 20 Resilient NECP Net zero Resilient NECP Net zero Source: World Bank staff calculations, using MFMod-CC (panels a and c) and MINDSET (panels b and d) 4.2. Financing low-carbon growth and climate change adaptation Estimating the incremental investment requirements for climate change adaptation and mitigation is inherently complex. The future costs of such investments are highly contingent on the evolving price dynamics of low-carbon and resilient technologies. For example, if the price of EVs continues to decline, they may become more cost-effective than their nonelectric counterparts, leading to widespread adoption by consumers without the need for incentives or significant extra investment. The climate-resilient green transition will require substantial investments. This CCDR projects that the total cost of development, climate adaptation, and mitigation strategies under the NECP scenario will be around $31 billion over the next 30 years, equivalent to 13.2 percent of cumulative GDP during this period, as shown in figure 4.3 and table 4.1 with costs calculated using a 6 percent discount rate to arrive at a net present value (NPV). This projection includes the costs for mitigation strategies, adaptation 54 Country Climate and Development Report: Moldova strategies to enhance climate resilience, Figure 4.3. Total investments and operational costs, such as irrigation and water storage for by sector and scenario, cumulative over agriculture, and additional costs from 2024–50 external sources, such as implementing a national afforestation program. It does not $, billions cover operating expenses or consumer 60 durables, such as residential appliances and 49.5 50 46.1 45.3 EVs, but does include the cost of residential 39.0 40 building upgrades, such as EV chargers, 30.8 which are counted as an investment. The 30 primary investments under the NECP 20 15.4 scenario are in commercial sectors 10 (including appliances, heating, building refurbishments), followed by transport 0 RFF NECP Net zero RFF NECP Net zero (including railway and EV charging stations), Capex, 2050 Opex, 2050 and electricity generation. Some adaptation Total investments Transport Fuel costs measures, including certain CSA actions, Climate resilience Industry Residential are expected to be cost-neutral. This Agriculture and forestry Commercial Power compares to the total investment cost of $15.4 billion (6.5  percent of GDP) under the Source: World Bank staff estimates. Note: Estimates are in NPV terms, with a 6 percent discount rate used for REF scenario. future investments. The net zero scenario would require an additional $8 billion (3.5 percent of cumulative GDP). As detailed in section  3.2, Figure 4.4. Financing sources under NECP and net this scenario demands more substantial zero scenarios investments in energy efficiency and RE $, billions (NPV) adoption. 39.0 40 While total investment expenses are higher in the NECP and net zero scenarios, 30.8 30 operational costs decrease due to 24.3 lower fuel import needs. The ambitious decarbonization strategies in both these 20 19.8 scenarios involve significant investments in 4.8 energy efficiency, renewable energy, and the 10 3.5 transport sector, especially railways. These 7.5 9.9 investments could lead to a considerable 0 decrease in fuel import costs—of nearly NECP Net zero one-third under the NECP scenario Public, domestic Public, EU Private Total and about one-half under the net zero scenario—compared to the REF scenario. Source: World Bank staff estimates Around one-third of adaptation and mitigation investments will be financed by the public sector, and two-thirds by the private sector, including households and private enterprises (figure 4.4). Public funding includes EU public funding, as Moldova is expected to benefit from grants and concessional loans in advance of accession. Public financing can be boosted by progressive tax reforms and measures to enhance public spending efficiency, as recommended in the 2023 public finance review. This includes transitioning to a less distortive taxation system and improving spending efficiency in social sectors— including health and education—and capital investments. Implementing carbon pricing and removing 55 Country Climate and Development Report: Moldova fossil fuel subsidies can also help finance these investments, although ensuring these policies do not harm lower-income households is crucial. Boosting green finance, attracting FDI, and accessing concessional climate funds from development partners are essential to enable the country to shoulder the steep increase in investments in the near term (figure 4.2c). 4.2.1. Fiscal policies for decarbonization and climate adaptation Carbon pricing Moldova is preparing to implement a carbon pricing framework as part of its EU integration efforts. Carbon pricing encourages investments and behavioral shifts toward sustainability and innovation, while also generating revenue and supporting broader development objectives. Direct carbon pricing instruments include an ETS, carbon taxes, and carbon crediting. Moldova employs indirect carbon pricing instruments, such as select fuel excise taxes on gasoline, diesel, and liquefied petroleum gas (LPG).51 Its Law on Climate Action lays the groundwork for establishing a monitoring, reporting, and verification system and carbon pricing, which will enable Moldova to put a price on carbon and mitigate the potential impacts of the EU CBAM. The selection of a carbon pricing tool will be based on the country’s national and economic context. A USAID study indicates that an ETS could be feasible after Moldova’s EU accession date is confirmed. In the shorter term, it may consider a carbon tax, partially to offset CBAM liabilities and impacts on trade competitiveness with EU trade partners, and to internalize the revenues of prices paid on carbon as opposed to allowing external parties in the EU to accumulate them. Revenues from carbon pricing can be used to support the transition. Carbon revenues can be used for general budgetary spending or earmarked for specific purposes, including a reduction in more distortive taxes, green investments, direct support to vulnerable groups, or public debt reduction. Linking carbon revenue to explicit goals can enhance stakeholder acceptance of carbon pricing. Public support for climate policies, including ETS and carbon taxes, tends to be higher when the revenue is used for green infrastructure or redistributed to low-income households or those most affected by the policy. But earmarking can lead to underinvestment if revenues are insufficient or overinvestment if too much is allocated to a particular area, potentially distorting spending and reducing economic efficiency. Adding carbon revenues to the general budget, on the other hand, can be administratively simpler and offer more flexibility, allowing for optimization within the broader tax and spending framework. 51 Indirect carbon pricing refers to other policies that change the price of products associated with GHG emissions in ways that are not directly proportional to the relative emissions associated with those products. 56 Country Climate and Development Report: Moldova Moldova’s estimated development, climate adaptation, and mitigation investment needs in key sectors Table 4.1.  $ billion (discounted, 2024) Incremental changes REF NECP scenario Net zero scenario scenario NECP REF v v Net NECP zero Total Total Total Total Total 2024– 2031– 2024– 2024– 2024–50 2024–50 2024–30 2031–50 o/w Public Private 2024–50 30 50 o/w Public Private 50 50 Domestic EU Domestic EU Power Central electricity and heat generation 0.5 3.8 1.2 2.6 1.7 0.6 1.5 4.7 1.1 3.5 2.1 0.9 1.7 3.3 0.9 Upstream technologies 0.1 0.3 0.1 0.2 0.2 0.1 0.0 0.3 0.2 0.1 0.2 0.0 0.0 0.2 (0.1) Country Climate and Development Report: Moldova Residential Renovation of private buildings for increased EE 1.3 0.4 1.0 0.5 0.3 0.6 3.4 1.7 1.7 1.4 0.5 1.5 1.3 2.1 Heating of private buildings, including RE 1.3 1.3 0.4 0.9 0.4 0.4 0.5 1.8 0.3 1.5 0.6 0.5 0.7 0.1 0.4 Commercial Renovation of commercial and public buildings for increased EE 0.4 0.1 0.3 0.1 0.1 0.3 0.6 0.4 0.1 0.1 0.0 0.4 0.4 0.2 Heating of commercial and public buildings, including RE 2.2 2.5 0.9 1.6 0.5 0.3 1.6 3.1 1.2 1.9 0.6 0.4 2.1 0.3 0.6 Commercial appliances 8.2 8.1 3.1 5.0 8.1 8.9 3.2 5.7 8.9 (0.1) 0.8 57 Industry Industrial technologies 0.2 0.6 0.2 0.4 0.6 0.5 0.3 0.2 0.5 0.4 (0.1) Transport Charging infrastructure 0.8 1.3 0.2 1.1 0.4 0.3 0.5 3.0 0.3 2.7 0.9 0.8 1.3 0.5 1.7 Rail transport 2.1 7.3 2.9 4.4 1.5 1.2 4.7 9.0 4.1 4.9 1.8 1.4 5.8 5.2 1.7 Agriculture and forestry Irrigation 0.6 0.2 0.4 0.4 0.1 0.1 0.6 0.2 0.4 0.4 0.1 0.1 0.6 Water storage 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Climate smart agriculture 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Forest rehabilitation 0.7 0.5 0.2 0.6 0.0 0.1 0.7 0.5 0.2 0.6 0.0 0.1 0.7 Other costs to increase climate resilience Heat stress management 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Flood management 0.4 0.2 0.2 0.4 0.0 0.0 0.4 0.2 0.2 0.4 0.0 0.0 0.4 Water supply and sanitation 0.3 0.2 0.2 0.2 0.0 0.1 0.3 0.2 0.2 0.2 0.0 0.1 0.3 DRM 0.6 0.3 0.4 0.6 0.1 - 0.6 0.3 0.4 0.6 0.1 0.6 Total Investment and economic costs in these sectors Total investment Investments, US$ billion (discounted, 2024) 15.4 30.8 11.9 18.9 7.5 3.5 19.81 39.0 15.2 23.8 9.9 4.8 24.3 15.4 8.2 Total investments, percent of cumulative GDP 6.6 13.2 17.9 11.3 3.2 1.5 8.5 16.6 22.7 14.2 4.2 2.1 10.3 6.5 3.5 Source: World Bank staff estimates. Note: Estimates are in NPV terms, with a 6 percent discount rate used for future investments. *EV chargers are counted as investments. EE is energy efficiency. RE is renewable energy. In the medium term, reforming fossil fuel subsidies will be crucial to align overall carbon price incentives. Moldova maintains fossil fuel subsidies in the form of reduced value-added tax (VAT) rates for natural gas, electricity, LPG, and heat consumption for households and public institutions (OECD 2021), which reduce the price of fossil fuels and can counteract positive carbon pricing effects. Energy subsidies have grown amid the recent energy crisis and the introduction of the EVRF. Short-term measures include revising the EVRF and transitioning to targeted income support that is independent of energy consumption, incentivizing efficient energy consumption. In the medium term, Moldova can reform the energy sector’s tax structure. The OECD suggests that an increase in the VAT rate and a subsequent increase of the gas, electricity, and heat tariffs for households could significantly boost government revenue and result in a modest reduction of GHG emissions (OECD 2018). But due to the substantial effect of VAT hikes on consumer prices and household energy expenses, such reform should be accompanied by measures to strengthen the social protection framework and facilitate the energy system transformation necessary to allow households to switch to affordable RE-powered heating. Mainstreaming climate change in public finance Mainstreaming climate change mitigation and adaptation considerations into the country’s planning and public financial management systems through climate risk screening and climate budgeting would improve the transparency, efficiency, and impact of public spending on climate actions. Despite progress in public financial management, challenges remain in fully integrating climate change into the budget process. Moldova does not use specific climate-related expenditure forecasts in its medium-term budget planning or consider climate change measures in its intergovernmental fiscal relations. Fiscal risks from climate change and natural disasters are not assessed or included in fiscal risk statements. Moldova can use such measures, combined with a gender budgeting lens, to improve the sustainability and equity of fiscal planning, ensuring that budgetary decisions support both environmental goals and the needs of disadvantaged groups. The Ministry of Finance’s annual budget circular, which will include climate change recommendations, could help guide agencies to align their budget proposals with climate strategies. In collaboration with the Ministry of Environment, it is developing a methodology for tagging climate-related expenditures and will need to carefully assess how the climate information will be used before launching its new expenditure management tool. Starting with a spending review could lay the groundwork for incorporating climate budget tagging within the broader budgetary framework. The existing budget program classification is well designed, and its structure could be used to identify and tag climate-related expenditures. Moldova’s public investment management (PIM) framework has seen substantial improvements, presenting an opportunity to incorporate climate-related impacts and strengthen climate policy. Public investments are pivotal in realizing climate goals, serving as a catalyst for private sector green investments by addressing market failures and underpinning essential infrastructure development. But capital spending in Moldova has plateaued since 2017 and remains modest compared to its peers, underscoring the need to address inefficiencies in public investments. In October 2022, Moldova took a decisive step by instituting a new regulation that standardizes the process for identifying, selecting, and appraising all public investment projects, regardless of funding source. This single project pipeline approach ensures a unified and transparent framework for public investments. While the PIM framework now mandates environmental and climate impact assessments during feasibility studies and project appraisals (IMF 2023), it stops short of requiring specific adaptation or mitigation strategies. Nor does it provide guidance on crucial climate parameters, such as a shadow carbon price, which can be introduced relatively easily. The integration of climate change considerations for adaptation and decarbonization is particularly important because public investment decisions taken today will have impacts decades into the future. 58 Country Climate and Development Report: Moldova The Public Property Registry, overseen by the Public Property Agency, holds data that could be pivotal for climate policy and investment decisions. Enriching the registry with information on asset conditions and climate vulnerability would enable the public sector to better assess risks and prioritize investment projects. Although Moldova has a regulatory framework for green procurement, its application has been sporadic. The forthcoming green and circular economy program is expected to foster the implementation of sustainability criteria in procurement. Disaster risk financing Not all disaster risks can be eliminated; so a coherent disaster risk financing strategy is crucial to complement adaptation investments. The country is estimated to face an average annual funding gap in disaster response of about $146 million. A disaster risk financing strategy would ensure the country can meet regular disaster response and recovery needs, and protect against the uncertainty of more variable and extreme financial losses due to climate change. With proper financial planning, Moldova can ensure the availability of adequate and timely financing and manage the fiscal and debt impacts of disasters, financing the overall expenditures required for the recovery of households, firms, and farms after a disaster, reducing the impact on the most vulnerable, and safeguarding jobs and the economy. Moldova’s contingency funds are underfunded and lack effective last-mile delivery mechanisms to offer targeted support to communities affected by seasonal climate shocks. The Ministry of Finance manages two contingency funds to provide immediate liquidity for financing post-disaster relief and recovery: the Intervention Fund, for an immediate emergency response, including to natural disasters; and the Reserve Fund, for disaster reconstruction and recovery needs. But with limited financial resources, disaster victims rarely receive financial compensation. Larger budget allocations would ensure these contingency funds can effectively respond to regular crises, such as seasonal floods and droughts, while more efficient last-mile disbursement mechanisms would ensure post-disaster assistance reaches affected raions and communities—for example, delivered through a shock-responsive social protection system. Contingency funds need to be complemented by risk financing instruments that enable the rapid mobilization of funds in the aftermath of more extreme events. Moldova has minimal catastrophe insurance or other risk transfer mechanisms, and instead retains most of the disaster risk on its balance sheet. But with insufficient contingency funds, it has to rely on appeals to the international community for post-disaster support. And in the absence of up-to-date data and clear mechanisms for calculating loss and damage, estimating its contingent liabilities and post-disaster needs is difficult. Adopting contingent financing instruments would allow it to rapidly mobilize disaster response financing and hedge against more extreme events for which regular contingency reserve funds are insufficient. Moldova could prepare contingent credit lines, which can be released immediately following a disaster complementing them with sovereign risk transfer solutions, such as market-based instruments (catastrophe bonds), which transfer risks to international capital markets, or a national catastrophe risk insurance program to protect national and local government agencies. 4.2.2. Mobilizing private capital and greening the financial sector Mobilizing private capital and advancing green finance will help channel investments toward climate-related projects in Moldova. Between 2010 and 2023, Moldova’s investment landscape was primarily supported by retained earnings and household savings, which accounted for approximately 50 percent of the total gross fixed capital formation (compared with the banking sector’s credit to the private sector, which contributed an average of 15 percent, with an annual average of 1.7 percent of GDP in credit flow to the private sector). By 2023, the credit stock to the private sector reached 23 percent of GDP. This level of financial intermediation lags behind regional peers, and Moldova’s capital market is notably 59 Country Climate and Development Report: Moldova underdeveloped. Bank lending is held back by an overreliance on collateralized loans, and the broader financial sector, including the nonbanking financial institution sector and financing for micro, small, and medium-sized enterprise (MSME), suffers from a lack of diversity and innovation. These financial entities often do not possess the expertise required to effectively evaluate and fund climate-focused projects. The presence of local private investment funds and institutional investors is minimal, and the domestic capital markets are characterized by their lack of depth and liquidity. This presents a significant challenge for raising long-term financing for climate initiatives through debt or equity securities. Moldova’s access to international financial markets is limited, and FDI remains low. To achieve this CCDR’s objectives, a more robust approach to financing private investment is necessary. A small set of strategic decarbonization measures concentrate the majority of private sector investment needs for Moldova. The investment figures presented in table 4.1 show that the private sector is expected to cover around two-thirds of the investment needs in the NECP and net zero scenarios. The primary opportunities for private investment include: adopting energy-efficient commercial appliances (37  percent of total private investment under the net zero scenario), improving and expanding rail transport (24 percent), renovating buildings and heating systems to improve energy efficiency (20 percent), power and heat generation (7 percent), developing EV charging infrastructure (5 percent), and climate smart agriculture (4 percent). So, policy reforms aimed at stimulating private sector investments in these areas can allow Moldova to achieve its decarbonization targets.52 This CCDR proposes three strategic approaches to facilitate the mobilization of private investment. 1. Enhance the profitability of private assets through policies that make it more financially attractive to invest in private sector projects. Blended concessional financing with private capital or subsidized funds may be needed to reduce the perceived risk for private investors and make climate projects more attractive. Possible instruments include risk-sharing mechanisms such as guarantees, syndicated loans, and credit lines for on-lending purposes. Relevant policy incentives include: • Financial incentives for technology and infrastructure investments that enhance the overall efficiency and resilience of the energy system, including ancillary services for the electricity grid and energy storage, especially as the grid integrates more variable renewable energy; • Sealed bid auctions to enable price discovery, set a benchmark for the cost and terms in which RE can be developed by independent power producers at utility-scale, and develop bankable power purchase agreements that follow international standards; • Economic incentives for establishing EV charging infrastructure, possibly through urban development planning that prioritizes electric cars and buses within Moldova’s existing transport networks, in partnership with electricity providers, transport operators, municipalities, and EV firms; • Energy efficiency standards for appliances, aligned with international best practices; and • Revising energy subsidies to encourage energy efficiency in residential and commercial buildings, while implementing protective measures for vulnerable groups (section 4.4.1). 2. Allow private companies to use state-owned assets, including through PPPs, where both the government and private companies share the costs and benefits, or through privatization, where private companies take full control. Relevant policy incentives include: • Unbundling the railway sector into separate entities responsible for infrastructure, freight, and passenger services, relaxing entry restrictions in the transport sector to stimulate private investments, and piloting output- and performance-based contracts for rolling stock and infrastructure maintenance and investment; 52 For a detailed analysis of policy recommendations linked to the private sector, see IFC (2023). 60 Country Climate and Development Report: Moldova • A comprehensive roadmap for integrating multimodal trade and logistics services using PPPs— including by establishing peripheric logistic terminals • Reforming the road fund to allow adequate and multiyear payment mechanisms for road rehabilitation and maintenance; and • Promoting the development of new district heating facilities and pilot waste-to-energy projects. 3. Adopt supportive public policies to promote a conducive policy and regulatory framework, which is essential for facilitating the private sector’s transition and creating green jobs. Key policy reforms include enhancing the business environment, particularly for MSMEs, enhancing the FDI framework to integrate domestic firms into more productive value chains and global markets, and promoting competition in network industries, including energy, transport, and communications. Relevant policy incentives include: • Enhancing public awareness of the benefits of energy efficiency and supporting the development of an ecosystem of firms specialized in renovating and certificating energy efficiency in buildings, including training and certification programs for workers • Developing a competitive market for energy service companies that offer energy efficiency solutions on a contractual basis • Streamlining the process for private companies to get permits for green investments, such as wind farms or solar panels—for example, through the recently approved Renewable Energy Law and the National Center for Sustainable Energy’s investor information center (section 3.2.2). The private sector can also play a crucial role in supporting adaptation measures in Moldova through three main channels: financing, adapting its own operation, and providing goods and services that facilitate adaptation for others. Moldovan banks can collaborate with multilateral development banks and the government to create credit lines that encourage investments in adaptation. Financing mechanisms might include traditional debt instruments, such as bonds and loans, and innovative instruments with environmental performance incentives, such as green, sustainable, and sustainability-linked bonds and loans. Such incentives can support purely private projects—such as a firm investing in irrigation for its own operations—and hybrid projects that involve both public and private investments (that is, public infrastructure projects funded and implemented by PPPs). Projects may be able to benefit from international climate funds that Moldova is eligible for, such as the Green Climate Fund (GCF) and the Global Environmental Facility,53 and the government can offer incentives, along with technical advice from multilateral development banks and international donors, to encourage companies to make their own operations more climate resilient. Finally, adopting sustainable technologies and practices, such as CSA, can lead to the emergence of a local ecosystem of companies providing related goods and services. The National Bank of Moldova’s recently approved Sustainable Finance Roadmap will help promote lending and investment in climate objectives. Aligned with the EU Sustainable Finance Framework (IMF 2024), Moldova’s roadmap comprises four pillars: increasing awareness and capacity building; developing a taxonomy of environmentally sustainable economic activities based on the EU taxonomy and tailored to the reality of Moldova’s economic structure; managing risk and integrating environmental, social, and governance considerations; and transparency and market discipline. In line with the roadmap, the government has established an interagency steering committee on climate finance—chaired by a national bank representative and with representatives of several ministries, the banking association, the 53 GCF is the world’s largest climate fund, with a global portfolio of $13.9 billion ($53 billion, including co-financing) and projects in 129 countries (GCF 2024). Moldova is recipient of two GCF projects, both co-funded by the European Bank for Reconstruction and Development: “Sustainable Energy Financing Facilities,” a 15-year, $1.5 billion project that aims to scale up private sector climate finance through local partner financial institutions in 13 countries (GCF 2017), and “Green Cities Facility,” a 23-year $726 million project that aims to help at least ten cities in nine countries implement actions around low- carbon and climate-resilient buildings, water and wastewater, solid waste, urban transport, municipal energy systems (district heating or cooling), and street lighting (GCF 2018). 61 Country Climate and Development Report: Moldova National Commission of Financial Markets, and other institutions as needed—aimed at strengthening collaboration between agencies, regulators, banks, and environmental experts. The roadmap is expected to foster the development of green financial products, enhance transparency and disclosure for financial institutions, and encourage sustainable investment. Lending for green activities is currently limited, as there is no clarity on what is green. When implemented, the green taxonomy will provide clear criteria to ascertain the environmental sustainability of an activity for green financing eligibility. The roadmap will also help raise awareness within the financial sector of green finance principles, climate risks, and the significance of sustainability in investment decisions. Managing climate-related risks will also enhance the resilience of the financial sector. The sector’s exposure to climate-related transition and physical risks is poorly understood, and Moldova has yet to adopt a clear strategy to align its financial sector with national climate objectives. Implementing a framework to measure the carbon footprint of banking activities will provide insights into the sector’s environmental impact and support the development of strategies for carbon reduction, while undertaking a diagnostic to develop a climate risk assessment matrix can help identify the principal climate risks, their potential macrofinancial implications, and their transmission channels. Fundamental financial sector reforms are necessary to mobilize private capital and foster the green transformation of Moldova’s financial sector. This includes continuing with current regulation and supervision reforms, emphasizing risk-based supervision, and resolving asset quality issues. Modernizing credit risk systems is imperative to reduce the reliance on real estate collateral for MSME financing in Moldova. Enhancing the movable collateral registry, promoting open banking, and creating regulatory frameworks in line with EU regulations will not only drive competition but also promote innovation. Strengthening the regulatory framework for nonbank credit organizations, especially in the insurance sector, will help facilitate the development of new financial products for sectors such as real estate, industrial accidents, liability, transport and logistics, infrastructure investment, and agriculture. 4.3. Potential welfare impacts of mitigation and adaptation policies As highlighted in Chapter 1, climate change and climate policy have large welfare and distributional implications in Moldova, with heterogeneous impacts across households. The 2020 drought analysis (figure 1.5) reveals that the poorest populations—particularly rural women and people living in the southern raions—are some of the most vulnerable to climate shocks, suffering from both income and price fluctuations. Conversely, urban areas feel the brunt of the impact of energy price shocks (figure 1.10), which also affect the nonpoor, highlighting the varied impact of such shocks across different household types. These insights underscore the potential consequences of adaptation and energy transition investments on diverse groups. Macroeconomic modeling suggests that climate impacts pose a significant threat to agricultural jobs due to increasing droughts, a sector characterized by elementary and low-skill jobs. This poses a risk to lower-income households and workers who are likely to bear the brunt of the impacts of climate change (figure 4.5d). Reduced investment in agriculture could also lead to job losses in related industries, such as domestic motor vehicle manufacturing. The MINDSET model projects that, in the absence of adaptation and decarbonization measures, job losses from climate impacts could amount to 1.1 percent of total employment in 2030. These losses will not be evenly distributed across income levels; the lowest- paid 40 percent of workers are expected to face the most significant job losses, while the top 10 percent of earners, who occupy the highest-paid positions, will be least affected. 62 Country Climate and Development Report: Moldova Figure 4.5. Labor demand effects across occupations, sectors, and income deciles in 2030 a. By occupation, b. By occupation, c. By occupation, REF scenario Resilient scenario Resilient NECP scenario Accommodation and food services Administrative and support services Managers Agricultural and forestry Arts and recreation Professionals Construction Technicians and associate Education professionals Electricity and gas Clerical support workers Finance and insurance Health and social work Service and sales workers Household employers Skilled agricultural, forestry Info & Comm. and fishery workers Manufacturing Country Climate and Development Report: Moldova Cra and related trades Mining and quarrying workers Other services Plant and machine Professional and technical activities operators, and assemblers Public admin and defense Elementary occupations Real estate Transportation and storage −0.5 −0.4 −0.3 −0.2 −0.1 0.0 0.0 0.1 0.2 0.3 0.4 0.5 0 0.05 0.10 0.15 Water and waste management 63 Change in labor Change in labor Change in labor Wholesale and retail trade demand (as % of demand (as % of demand (as % of total employment) total employment) total employment) d. By income decile, e. By income decile, f. By income decile, REF scenario Resilient scenario Resilient NECP scenario Change in labor demand Change in labor demand Change in labor demand (as % total employment) (as % total employment) (as % total employment) 0 0.20 0.075 –0.025 –0.050 0.15 –0.075 0.050 –0.100 0.10 –0.125 –0.150 0.025 –0.175 0.05 –0.200 –0.250 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Income decile Income decile Income decile Source: World Bank staff calculations, using MINDSET. But the Resilient scenario offers a promising outlook. It suggests that effective adaptation measures could not only prevent the anticipated job losses attributed to climate change, particularly safeguarding jobs in the vulnerable agriculture sector, it could also create an additional 0.2 percent of jobs across all income groups. Given that many lower-income households are employed in elementary and low-skilled agricultural jobs, adaptation strategies like improved irrigation and crop storage could have a substantial positive impact on these communities (figure 4.5b). Investments aligned with Moldova’s NECP or net zero targets could further enhance job creation. By 2030, an additional 0.44 percent of jobs might be generated under the Resilient NECP scenario, compared to the Resilient scenario, mainly in mid-skill roles within advanced manufacturing, construction, and services. The MINDSET model indicates that labor demand in advanced manufacturing sectors— such as machinery, equipment, fabricated metal products, and motor vehicles— could see a significant uptick under the Resilient NECP scenario (figure 4.5c), especially given Moldova’s existing domestic manufacturing capabilities in technologies pertinent to the energy transition.54 These investments would also necessitate more workers in construction and trade sectors. The additional jobs would be clustered in mid-skill occupations, benefitting workers across the whole income spectrum. The distributional analysis indicates a Figure 4.6. Poverty rate under four scenarios substantial decrease in poverty under the US$6.85 poverty line Resilient, Resilient NECP, and Resilient net 20 18.1 zero scenarios. Despite significant strides in 18.1 18.1 18.1 poverty reduction, poverty rates in the country 15 remain high, with nearly one in three rural residents living below the national poverty 10 line. As highlighted in Chapter 1, multiple 5 4.2 4.2 4.6 4.8 shocks have affected poverty rates in the past, 0.1 0.1 0.1 0.1 including the COVID-19 pandemic and multiple 0 Reference Resilient NECP Net zero droughts, which have been particularly harmful 2022 2030 2040 2050 for poor people in rural areas, who have limited resources to adapt to a changing climate and Source: World Bank staff calculations, based on $6.85 poverty line. cope with its effects. Models used in this CCDR suggest a significant decline in the poverty rate Figure 4.7. Impact on private consumption under (based on the $6.85 poverty line), from about three scenarios 18 percent to less than 1 percent by 2040 (figure 4.6). This is primarily attributed to a substantial % change in poverty rate, relative to reference scenario increase in private consumption, reflecting 0.1 0 strong economic growth that helps buffer –0.1 against negative climate and transition risks. By –0.2 2030, poverty rates are marginally higher under –0.3 the Resilient NECP and net zero scenarios than –0.4 the Resilient scenario (figure 4.7), primarily due –0.5 to lower private consumption in the Resilient –0.6 NECP and net zero scenarios, partly reflecting –0.7 lower fuel import costs. This underscores the 50 20 23 26 29 32 35 38 41 44 47 importance of strengthening SP measures to 20 20 20 20 20 20 20 20 20 20 20 Resilient NECP Net zero alleviate impacts on lower-income households, particularly as individuals may experience Source: World Bank staff calculations, using MFMod-CC temporary periods of poverty due to climatic shocks such as droughts. 54 https://atlas.cid.harvard.edu/countries/135/export-basket. 64 Country Climate and Development Report: Moldova A Just Transition approach is necessary to ensure that decarbonization and adaptation policies do not further exacerbate existing inequalities and social exclusion, and instead actively support vulnerable and marginalized groups. The distributional impacts of climate change and climate policies differ according to income group, raion (depending on the regional development level), and a wide range of socioeconomic determinants of vulnerability and social exclusion. The estimated employment losses discussed above, calculated by income tier, also have intersectional outcomes that disproportionately affect women or minority groups, including refugees, Roma populations, persons with disabilities, and the elderly. Legal labor market protections or targeted social protection programs can help address such vulnerabilities, along with skill development provision and enabling service support. For example, with 71 percent of the Roma population living in substandard dwellings that are particularly at risk from climate shocks, identifying and adding them and other vulnerable groups to social registries will enhance effective outreach and support as part of disaster response and adaptive SP measures intended to buffer such shocks at household levels. As well as physical infrastructure support, they may need culturally sensitive support to service delivery to promote inclusion and social cohesion, particularly where Roma families have been displaced. Such targeted adaptation support to already marginalized communities is key to strengthen their adaptive capacity and resilience. Climate change mitigation initiatives can provide several welfare co-benefits, especially for marginalized groups. Regulations to reduce air pollutants can reduce health sector expenditures and improve the lives of vulnerable communities, particularly women and children. This helps ease required outlays on health care and other population support measures which can, in turn, be used toward other welfare gains. Increased resource efficiency in the production sector can also lead to cost reductions, which can be passed on to consumers, although labor analyses are also required to determine potential levels of job losses resulting from such reforms. Circular economy approaches can help provide more sustainable economies that enhance overall livelihoods security for communities (UNECE 2016). 4.4. Enabling decarbonization and climate change adaptation 4.4.1. Human capital policies to mitigate the costs of transition and adaptation Human capital plays a crucial role in enabling a successful green transition, necessitating appropriate human development policies. Moldova needs to continue its efforts to build its human capital, reduce inequality in opportunities, and improve living standards. With a Human Capital Index score of 0.60 in 2020, only marginally improved from 0.55 in 2010, Moldova faces significant deficits in expected years of schooling and adult survival rates. The green transition is expected to reshape the labor market, creating new jobs in renewable energy and sustainable agriculture. The shift toward green jobs requires a skilled workforce to drive innovation and implement sustainable solutions. This transition can have unintended negative impacts on certain groups, such as low-skilled workers, and lagging raions. These impacts can have further knock-on effects on communities, such as increases in substance abuse and gender-based violence perpetrated by male workers losing their breadwinner role, or lags in women entering green employment in nontraditional sectors. Adapting its social protection programs, education and training systems, and health services, in consultation with the wide range of stakeholders directly and indirectly affected by the transition, will help address these challenges by mitigating the adverse effects of the transition and helping individuals and raions adapt to the new situation (table 4.2). 65 Country Climate and Development Report: Moldova Table 4.2. Policies for a human-centered green transition Enable the Adapt workers and households to a Mitigate the Stakeholders transition new reality unintended consequences or costs of the transition Education Foundational and fungible skills (numeracy, literacy, Ministry of Education and socio-emotional skills; communication, problem- solving, leadership, and critical thinking) through the education system Education quality; Curriculum adaptation through National Qualifications Framework Action Plan on Promoting Environmental Awareness and Education Research, development, and innovation capacity for Ministry of Economic technological change Development and Digitalization Demand-driven technical, vocational education, and National Coordinating Council training systems and training that support employers in the domain of VET, private directly with their training and vacancy need sector, MoEDD, MoER, and the Ministry of Labour and Social Moldova dual VET (dVET) program (upskilling) Protection (MoLSP) Behavioral change and lifelong learning Health Mental and physical health support to mitigate the cost of Ministry of Health (MoH) switching career paths Physical health protection systems to MoH prepare for growing waste management industries and the circular economy Social Labor market programs: enhance labor supply (through training, re- and National Employment Agency protection upskilling) and increase labor demand (through subsidies or public works), and (NEA), private sector and jobs provide unemployment insurance and parental benefits Training programs to enhance job-relevant skills, representing the nonformal TVET Job search and matching assistance such as job search training, counselling, and monitoring that support jobseekers Private sector incentive programs that offer microfinance schemes to the unemployed and wage subsidies to cover the labor costs borne by employers Social assistance and compensation: MoLSP Ajutor Social Program •  • EVRF Social insurance: MoLSP pensions e.g., old age, disability State Social • Allocation for Elderly Persons Social care services MoLSP (at-home care services, specialized social services) Source: Adapted from World Bank 2023b. Preparing the workforce to take on green jobs The transition toward a greener economy will influence the skillset demands in the job market. As shown in section 4.2, adaptation and mitigation investments are expected to generate employment opportunities across a wide range of sectors and occupations, including mid-skilled and higher-wage occupations in advanced manufacturing, construction, and services (figure 4.5b). As well as preserving agricultural employment, there is potential for increased labor demand for professionals, technicians, and 66 Country Climate and Development Report: Moldova craft workers in the water sector, as well as machine operators and craft workers in the manufacturing and construction sectors. Since jobs in these sectors are traditionally typecast “male,” dedicated measures are required to ensure women can benefit equally from these opportunities. Beyond the green transition, Moldova’s labor market faces significant challenges in meeting the demand for skilled workers. Companies struggle to grow due to an inadequately educated workforce. This shortage is exacerbated by a mismatch between offered salaries and employee expectations, as well as a lack of skilled and unskilled applicants. Young people struggle to transition from school to stable, well-paying jobs, and while university graduates generally have better labor outcomes than those with lower education levels, there are growing concerns about the relevance, quality, and effectiveness of tertiary education. The issues around Moldova’s inadequately educated workforce are nearly twice as pronounced as in other countries in the region, underscoring the urgent need for comprehensive workforce development and effective human resource management strategies. Marginalized groups, including women and the Roma community, are particularly at risk from the sectoral shifts of decarbonization. Despite offering higher wages and requiring higher education, there is low participation from women in green jobs, especially in energy efficiency engineering, environmental engineering, infornation technology (IT), and similar fields. While women graduates dominate in business and teaching, they are significantly underrepresented in science, technology, engineering, and mathematics areas, and sectors with traditionally high female participation—such as agriculture— are expected to be disproportionately affected by climate-related challenges. Other marginalized groups, like the Roma community, also face discrimination and employment disparities, heightening their risk of being disproportionately affected by labor market and sectoral transitions associated with decarbonization, and may require targeted support. Active labor market programs will be necessary to activate and/or retrain workers whose skills do not align with the requirements of green jobs. Public employment services are ill-equipped to effectively match job seekers with suitable positions or to provide necessary upskilling or reskilling programs.55 National Employment Agency staff are overwhelmed with manual tasks, such as monitoring budget allocations for active measures, and lack the tools for in-depth profiling of job seekers that would facilitate better placements in both training programs and employment. But public employment services will play a vital role in job-matching during the green transition, which will require a strategic shift in their approach to help workers secure employment. Experience from other contexts has shown that quality profiling is crucial for activation, as it establishes a stronger connection to job seekers’ interests and values, leading to greater success in upskilling/reskilling programs and the quality of job matches. Labor market observatories can provide essential information on labor market conditions to help stakeholders make informed decisions. Moldova faces challenges in collecting, analyzing, and disseminating labor market information, limiting its ability to inform students and job seekers of the skills that are valued in the labor market. To address this gap, the government is in the process of establishing a skills observatory to oversee data analysis and dissemination. It will also need to enhance the use and impact of available labor market information, including developing accountability mechanisms for vocational education and training institutions and universities, improving the training of career guidance counselors, and upgrading the National Employment Agency’s operational model and information system. In the medium term, education systems should focus on providing students with foundational skills for lifelong learning. Education plays a central role in the transition to a green economy and needs to adapt its infrastructure and methods to develop new green skills. Improving collaboration between 55 In 2023, the labor force participation rate stood at 45.1 percent, employment at 43.1 percent, unemployment at 4.6 percent, and youth unemployment at 18.7 percent; 16.1 percent of women ages 15–24 were not engaged in employment, education, or training, rising sharply to 30.3 percent among women ages 15–29. This is in stark contrast to 11.5 percent and 15.3 percent among their male counterparts, respectively. 67 Country Climate and Development Report: Moldova education systems and industry will help ensure that students learn skills that align with the needs of the labor market. This is exacerbated by factors such as outdated equipment and a theoretical curriculum. Efforts are underway to integrate green skills into the curriculum at lower education levels, and the Ministry of Education and Research has been reforming the higher education system to enhance the quality and relevance of studies, offering an opportunity to promote the development of green skills. This presents an entry point for incentivizing women and marginalized groups to enter the energy, DRM, water management, land and forest management, fisheries, agriculture, and other sectors where they are underrepresented. Protecting the livelihoods of the poorest and most vulnerable Social protection protects the livelihoods of the poorest and most vulnerable members of society. Certain workers and individuals may find themselves in need of (temporary) social assistance, such as financial support, to alleviate associated costs from the transition. A robust social protection system provides a safety net for individuals and communities affected by the transition, mitigating the adverse effects on livelihoods and ensuring equitable access to opportunities. Social protection programs serve as readily accessible channels that help vulnerable groups to better cope with the impacts of climate change, such as extreme weather events, or mitigate the adverse effects of policy reforms, such as increases in energy prices, by providing compensation, access to health care, and other essential services. Social protection coverage in Moldova is limited. The country’s social protection framework comprises three types of programs: social insurance programs that rely on individual contributions, such as pensions; labor market programs aimed at enhancing labor market functionality and labor supply, including employment services, training, and unemployment insurance; and noncontributory social assistance programs, such as Ajutor Social, which targets poverty, the EVRF, and social care services. Pensions, social assistance benefits, and other social transfers are an important source of income for the bottom 40 percent of Moldovans. In 2019, 53 percent of the population and 64 percent of the bottom quintile were enrolled in at least one social protection program (World Bank 2021a). But Moldova’s social assistance spending, amounting to about 1 percent of GDP, lags neighboring countries and regional averages, and benefits do not always allow beneficiaries to cross the poverty line. For example, despite being well-targeted, Ajutor Social has limited coverage, benefitting only 3 percent of the population in 2019 (World Bank 2021a). The income eligibility threshold is low and many beneficiaries remain impoverished. Conversely, the EVRF, which was introduced in 2021 in response to escalating gas, heating, and electricity prices, has a broad coverage, reaching about 70 percent of the population, but it lacks targeting. Moldova’s pension system also faces challenges, with low employment, an aging population, and emigration contributing to a significant financial deficit, and declining coverage, especially in rural agricultural areas, due to high informality.56 For example, following a pension reform in 2009, a significant number of farmers opted out of the voluntary pension scheme, reducing the number of registered farmers from about 200,000 in 2008 to 3,000. This exodus rendered them ineligible for old-age pensions, as they do not meet the minimum contributory period requirement (World Bank 2019, 2021a). Alarmingly, pension system projections indicate that nearly one-half of Moldova’s elderly population would eventually become ineligible for pensions (World Bank 2019). To address immediate social and economic challenges and support the green transition, Moldova needs to expand and reform its social protection system. To ensure a socially and fiscally sustainable system, reforms can aim to increase coverage of the last resort social assistance program and improve pension adequacy while managing fiscal costs. On social assistance, the government could consider consolidating categorical benefits, focusing on targeted cash transfer programs and strengthening links 56 In 2020, 22.4 percent of all workers were employed informally, nearly 80 percent of whom lived in rural areas. 68 Country Climate and Development Report: Moldova to employment activation—for example, through case management. Improving the targeting of social assistance spending, particularly in the EVRF, is also crucial. In the medium term, it could develop a comprehensive last resort program that addresses all adverse events, including energy shocks and natural disasters, and the death of a breadwinner, as well as chronic poverty situations. Pre-populated registries of potential beneficiaries allow for rapid scale-up of social protection coverage and transfers in the face of climate-related income shocks. Redirecting funds from a carbon tax and eliminating fossil fuel subsidies could offset the impact of transition policies on the poor, along with ex ante fiscal planning that makes use of contingency funds, insurance, risk transfer, and other instruments that can allow for large-scale infusions of finance in response to need. Pension system reforms could include measures to generate additional funds, increase transparency, and maintain uniformity between social benchmarks, such as the income cutoff for social assistance programs, the minimum pension amount, and the minimum wage. Careful enumeration of household members and de facto household heads, ensuring smooth digital payment transfers, including directly to women, and considering dependency ratios (of the elderly and children) within households when categorizing poor households and target groups can all help ensure reforms protect the most vulnerable. Integrating social protection systems with the green transition in landscapes-based approaches in agriculture, livestock, forestry, and water opens up possibilities for innovative policy measures. These include, for example, compensating individuals for engaging in environmental services through cash incentives linked to responsible land use or conservation efforts, through payments for ecosystem services. Green public work initiatives could provide temporary employment opportunities, and households could also benefit from subsidies or financial incentives for investing in RE or energy-efficient home improvements, reducing initial financial outlays required. 4.4.2. Private sector development In Moldova, the private sector is predominantly composed of SMEs, which account for over 90 percent of active legal entities. Moldovan SMEs are smaller and less likely to export than their ECA counterparts, and are concentrated in the capital, Chişinău, exacerbating geographic disparities. They often operate in low-productivity, nontradable services such as wholesale and retail trade. Larger, export-oriented, foreign-owned firms, on the other hand, tend to be more productive and innovative, providing significant employment. Yet, they often lack strong integration with local suppliers. SMEs can play a crucial role in promoting a circular economy, which is crucial for climate mitigation and adaptation. Despite their smaller size, they have a substantial collective environmental impact, particularly in key sectors such as livestock farming, construction, processing industries, and tourism. By adopting efficient technologies and practices, SMEs can reduce their consumption of electricity, energy, water, and raw materials, and minimize waste production. This not only lessens their environmental footprint but also positions them to benefit from green financing and incentives. Considering that women tend to own and operate small and micro-sized companies (80 percent and 76 percent, respectively) rather than medium-sized firms (45 percent) (World Bank 2018), it will be important to target incentives for SMEs to invest in climate-smart technologies, especially to women, including through SME climate finance. Moldova’s private sector compares well with its regional peers in terms of readiness to adapt to a more stringent climate policy, yet few firms are proactive in planning for a green transition. Results from the 2019 Business Environment and Enterprise Performance Survey indicates that, on average, around 23 percent of Moldovan firms monitor climate and environmental outputs, while around 25 percent have adopted climate-related practices or made climate-related investments—for example, upgrading machinery, equipment, or vehicles; implementing low-carbon on-site energy generation; improving heating and cooling systems; minimizing waste through recycling; enhancing energy and water management; or implementing air pollution control (figure 4.8). This compares relatively well with regional peer countries, 69 Country Climate and Development Report: Moldova indicating that Moldovan firms are responding well to regulatory or market demands. This is perhaps not surprising, given that they have faced high and volatile energy prices in recent years and increasingly stringent customer requirements as they pivot to EU markets. Many of them also have first-hand experience dealing with climate shocks, with 16.5 and 4.6 percent experiencing losses due to extreme weather and pollution, respectively, in the last three years (figure 4.9). These figures are close to double the regional average. Despite this, just one in ten respondents have firm-level strategic objectives related to climate change, and less than 2 percent have a dedicated manager responsible for climate and environmental issues. On both measures, Moldovan firms lag far behind their regional peers. This suggests potential strategic capacity gaps, which may extend beyond climate issues. Despite improvements in the business environment, structural weaknesses continue to constrain private sector growth. Challenges include a convoluted legal system characterized by redundant and unclear regulations, which contribute to the informality of firms. SOEs also exert significant influence in Moldova’s economy, posing barriers to private sector entry due to a lack of competitive neutrality. Market power remains high, and there is little incentive for leading firms to innovate or improve efficiency— for example, by adopting more advanced foreign technology. While Moldova’s trade policies align with the World Trade Organization and its EU exports grow, trade harmonization and facilitation lag, with deficiencies in food safety, standards, and customs. Its outdated transport and logistics hinder full EU trade integration benefits, and access to finance is particularly challenging for MSMEs, which typically rely on reinvested profits for capital. Skill shortages and educational gaps add to these challenges. Financial intermediation for MSMEs is hampered by limited offerings on both the demand and supply sides, high credit costs, and a high degree of informality in business operations. Various incentives— such as subsidization, loan guarantees, and grants—can encourage MSMEs to invest in climate-smart, resilient practices and equipment, and evidence shows that financial incentives and small grants can help women’s MSMEs to grow and become bankable (Government of Moldova 2023) for larger investments in the enterprise. Figure 4.8. Share of firms reporting selected climate and environmental attributes (in percent) Share of firms (%) 30 27.6 25.6 26.3 25 22.9 20.2 20.3 20 18.7 18.9 15.9 15.0 15 13.3 10.0 10 8.2 7.6 6.6 5 1.8 0 Strategic objectives Had a manager Avg score—monitoring Avg score—adopting mention environmental responsible for climate and climate and or climate change environmental and environment environmental issues climate change practices issues Moldova Western Balkans EU- NMS ECA* Source: 2019 EIB-EBRD-WB Enterprise Survey. 70 Country Climate and Development Report: Moldova Figure 4.9. Share of firms indicating they experienced climate or environmental losses (percent) Share of firms (%) 2.4 ECA* 9.4 1.7 EU-NMS 8.9 Western 1.6 Balkans 10.4 4.6 Moldova 16.5 0 5 10 15 20 Experienced losses from extreme weather Experienced losses from pollution Source: World Bank 2023a. A supportive policy and regulatory framework are essential for facilitating the private sector’s transition and fostering job creation. Priority policy reforms to support private sector development in Moldova include accelerating improvements in the business environment—particularly in investment policy and e-government for MSMEs—and enhancing the FDI framework to integrate domestic firms into more productive value chains and global markets (World Bank 2023e). Other areas of focus include leveling the playing field between SOEs and private firms, and promoting competition in network industries, including energy, transport, and communications. Complementary reforms to enhance trade facilitation with the EU include improving transport and logistics services, and access to finance for MSMEs. Moldova can encourage innovation and support the shift to new technologies and sectors— including digital and green economy skills—through targeted policy instruments. The country’s innovation ecosystem is limited by inadequate infrastructure, funding constraints, skill shortages, and regulatory barriers. To address these challenges, the government can provide targeted support to facilitate enterprise innovation, promote the development and commercialization of climate-oriented technologies and business models, encourage the adoption of green technologies by established firms, incentivize entrepreneurial ventures that are focused on climate-related innovations, and develop technology investment roadmaps for priority sectors to guide strategic implementation and support. Public-private dialogue and sharing best practice, as suggested in the IEA’s roadmap for integrating renewables into Moldova’s electricity system (IEA 2022b), can be a first step to promote knowledge exchange and data sharing, build skills, and develop an innovative environment for green development. Marginalized socioeconomic groups can also benefit from the digital green economy sectors through financial inclusion, employment opportunities, and access to services. 71 Country Climate and Development Report: Moldova Chapter 5 From assessment to action: Aligning climate action with moldova’s development Photo Credit: starpik / iStock  rom assessment to action: aligning climate 5. F action with Moldova’s development The recommendations of this CCDR highlight the synergies between development and climate action in Moldova. This report shows how climate change is already exerting significant pressures on Moldova’s economy, particularly in the agriculture sector. Recent geopolitical pressures—most importantly, Russia’s invasion of Ukraine—have impacted Moldova’s priorities in energy sector planning and investment and exposed the vulnerability of lower-income groups to energy and food price shocks. Decarbonization and resilience policies offer an opportunity to address these concerns in a way that supports the country’s goals of economic growth and integration with the EU. To navigate the transition, Moldova will have to prioritize interventions. The recommendations in table 5.1 are prioritized in terms of cost, urgency, and impact. Costs (or investment needs) are broken down into high, medium, or low, based on the investment needs identified in this chapter. Urgency is divided into high and medium. While many measures are important, some are relatively more urgent because inaction will lock in carbon-intensive development patterns or vulnerabilities that increase subsequent costs and financial risks. Because some measures are expected to contribute to both climate and development goals, impact is ranked as high (+++), medium (++), or low (+) for climate adaptation (A), climate mitigation (M), and Moldova’s overall development vision (D). This ranking considers whether policies will have positive development impacts, even if climate risks do not materialize. The shading highlights the top policies identified from this ranking in terms of their overall score across these five categories. 74 Country Climate and Development Report: Moldova Table 5.1.  CCDR policy recommendations Cost Urgency Impact Recommendation Priority policy action A M D Strengthen climate resilience and disaster preparedness Support climate-smart Expand access to irrigation and water storage to mitigate the adverse impacts of climate change on agriculture (CSA) future agricultural yields. A key first step is to develop an irrigation masterplan to identify priority raions measures to adapt and define a comprehensive investment and financing plan. An ambitious investment package would Medium High +++ + +++ to climate impacts, provide irrigation to an estimated 124,400 hectares of agricultural land by 2050, plus around 127.5 million including by upgrading cubic meters of water storage capacity. and expanding irrigation Develop policy and institutional mechanisms to promote climate-smart agriculture practices; such as >>> Section 3.1.1 conservation agriculture techniques (no-till, intercropping, agroforestry), microirrigation systems, anti- hail and anti-frost systems, remote sensors and farm-based weather stations, and improved pastures Country Climate and Development Report: Moldova and grazing methods. While some farmers already implement such measures, access to tailored credit Medium Medium +++ ++ +++ and insurance will enable widespread uptake among smallholders and women. Existing public support measures to agriculture need to be reviewed and aligned with CSA priorities, including to incentivize intensification of production. Strengthen the Retrofit and upgrade critical public buildings and infrastructure; starting with schools and health 75 resilience of critical facilities, to ensure their safety and ability to function in the aftermath of climatic and seismic shocks. infrastructure and As part of these retrofitting programs, resilience objectives can be combined with improved energy public services efficiency and overall service quality. Medium High +++ ++ ++ >>> Section 3.1.2 Strengthen the resilience of lifeline infrastructure (energy, transport, water) by improving maintenance protocols and budgets, deploying green (nature-based solutions) and grey infrastructure, and mandating systematic risk assessments for all new investments. Expand, upgrade, and properly maintain flood protection infrastructure, including dikes and drainage systems. The European Investment Bank’s flood management masterplan and investment program High High +++ + ++ provides site-specific prioritization of investment needs of about €325 million for structural measures and €120 million for nonstructural measures, including maintenance, over a 20-year period. Collect and update spatially disaggregated data on the location and condition of critical assets to enable systematic and up-to-date risk assessments on the exposure and vulnerability of infrastructure assets and public buildings, including schools and hospitals. Low Medium +++ + ++ Implement an up-to-date building registry and mass valuation system to be able to calculate the costs of resilient reconstruction and insurance premiums. (continued) Table 5.1.  CCDR policy recommendations (continued) Cost Urgency Impact Recommendation Priority policy action A M D Strengthen disaster Strengthen civil protection capacity to improve disaster preparedness, acquiring modern search and risk management rescue, firefighting, and other crucial response equipment, and improve management, logistics, and and emergency communication protocols between local, regional, and national response teams. preparedness capacity Low High +++ + ++ Establish a multihazard early warning system. >>> Section 3.1.3 Engage communities and marginalized groups in preparedness and disaster management to ensure their specific needs and priorities are addressed. Strengthen emergency preparedness of health facilities and systems and ensure access to health Country Climate and Development Report: Moldova care, especially in disaster situations and underserved rural areas. This includes formulating contingency protocols for hospitals, providing emergency trainings for staff, increasing telemedicine capacity, and Low High +++ + ++ digitalizing health services. Improving the integration of health system functions into a national crisis response is key, including through joint interagency training.   Upgrade the national disaster early warning system, especially in rural areas, to improve the disaster preparedness of communities and reduce losses in the case of emergencies, replacing the outdated Low High +++ + ++ 76 system of sirens with modern technology, such as cell phone alerts. Achieve net zero through a concerted policy and investment approach in line with economic growth objectives Accelerate the transition Decarbonize energy supply by: significantly scaling up renewable energy generation capacity; to clean energy supply upgrading and expanding the transmission and distribution networks to enable renewable energy >>> Section 3.2.1 connection and integration, focusing on real-time dispatch assessments and system flexibility upgrades; expanding the battery storage; promoting adequate remuneration of ancillary services through ancillary service markets to accommodate the integration of renewable energy. Expedite private investment in renewables by simplifying the authorization, certification, and licensing procedures for renewable energy plants. High High +++ +++ Improve local financial institutions’ capacity to support renewable energy projects through appropriate green taxonomy, national programs, and capacity building. Explore PPPs to attract investment in renewable energy projects, piloting sealed bid auctions to gather market feedback that can be used to develop bankable renewable energy projects and unlock utility- scale markets for local independent power producers. Accelerate regional power market integration to foster competition and cross-border cooperation with Romania, Ukraine, and the broader EU market and participate in regional balancing mechanisms that High High ++ +++ +++ can reduce the cost of balancing services. (continued) Table 5.1.  CCDR policy recommendations (continued) Cost Urgency Impact Recommendation Priority policy action A M D Promote the decarbonization of the heating supply by: increasing the operational efficiency of district heating companies by supporting modernization of heating networks and enabling temperature controls Medium Medium ++ +++ +++ and optimized heating distribution, and promoting the use of renewable sources for heating and the electrification of heating demand when economically feasible. Increase efficiency and Decarbonize the buildings sector through sustainable financing mechanisms that support energy decarbonize key energy efficiency, such as: accelerating the implementation of the super energy service company being demand sectors piloted to increase impacts in public buildings; bolstering the National Center for Sustainable Energy’s >>> Section 3.2.2 capacity and budget to administer the Efficiency Residential Fund to help eliminate regulatory and High High +++ +++ +++ Country Climate and Development Report: Moldova financial barriers, particularly for multifamily buildings; raising awareness of the costs and benefits of EE investments; engaging the financial sector to reduce the costs of green loans in the commercial sector; and building capacity in the buildings sector to increase the number of certified auditors. Support a clean transport sector through modal switch, fuel switch (electrification), and the use of low-carbon fuels in the long term, with targeted investments to improve public transit infrastructure and 77 incentivize modal switch—including expanding electric buses to towns beyond Chişinău—regulatory measures to spur the modernization of the outdated vehicle fleet, including a shift to EVs, and tax incentives and financing mechanisms to attract private sector investment and ensure build-up of High High + +++ +++ charging infrastructure. Decarbonize freight transport by upgrading rail infrastructure and and enforcing stricter efficiency standards for trucking. Incentivize private sector participation to facilitate last-mile cargo logistics. Expand efforts on Implement afforestation and reforestation goals under NFERP, with over 100,000 hectares of sustainable forestry afforestation and rehabilitating 35,000 hectares of damaged forests, prioritizing more resilient and modern solid waste native species, including through nurseries and the new National Centre for Seed Forest Genetics. management Implementation costs for the NFERP are around €759 million by 2032. High Medium +++ +++ + >>> Sections 3.2.3 Promote sustainable forestry through complementary reforms and capacity building, adopting and and 3.2.4 implementing the new Forest Code, and reforming Moldsilva to address conflicts of interest—e.g., separating responsibilities for managing conservation and production forests. Adopt a modern solid waste management strategy that is in line with the Eastern Europe Energy Efficiency and Environment Partnership (E5P) to align Moldova with EU standards on waste management, resource efficiency, and reducing GHG. Medium Medium + +++ +++ Expand ongoing efforts in recycling and recovering the material and energy value of waste. (continued) Table 5.1.  CCDR policy recommendations (continued) Cost Urgency Impact Recommendation Priority policy action A M D Enable the transition through adaptation of people and firms, financing, and institutional capacity Support people and Strengthen education and skills development programs to integrate green skills demanded by the firms to mitigate the low-carbon economy into the curriculum at all levels, in close coordination with the private sector. This costs of the transition includes technical skills (for RE systems, energy efficiency, efficient waste management, CSA, green Low Medium + + +++ and cope with climate construction), management skills (sustainable business practices, green project management), and soft shocks >>> Section 4.4 skills (including environmental awareness). Expand social protection programs to support emergency response and recovery and mitigate the costs of the transition for the poorest and most vulnerable members of society. Country Climate and Development Report: Moldova Reform the social protection system so it can support emergency response and recovery, such as maintaining a comprehensive registry of potential beneficiaries (considering de facto household heads Medium High and intrahousehold dependency ratio structure as a proxy for vulnerability) using modern disbursement mechanisms and coordinating with a contingency financing strategy that ensures the rapid availability of emergency response funds. Better targeting is also required for supporting groups that are vulnerable to possible increases in electricity and heating prices, as well as sectoral transitions. 78 Finance the transition Implement a carbon pricing framework in line with the EU framework (an ETS or carbon tax) to provide >>> Section 4.2 financial incentives for reducing emissions and support the transition to a greener economy, aligned with Medium High +++ +++ ++ fossil fuel subsidy reform to create overall carbon price incentives. Start by revising the EVRF and then transition to targeted income support. Implement the Sustainable Finance Roadmap and develop a green taxonomy that is aligned with the EU’s Sustainable Finance Framework. Support green capacity building in the financial sector and Medium Medium ++ ++ + introduce reporting obligations and environmental standards to stimulate green financing and promote eco-friendly initiatives. Develop a comprehensive risk financing strategy to strengthen Moldova’s financial resilience, modernizing the Ministry of Finance’s two contingency funds, ensuring adequate budget allocations to tackle the estimated annual $146 million funding gap for disaster recovery, and improving the efficiency of last-mile delivery mechanisms to ensure disaster assistance reaches affected communities (e.g., by Medium High +++ + ++ using the SP system). Use risk transfer instruments, including through contingent credit lines, to hedge against extreme events. 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