CLIMATE GOVERNANCE PAPERS Reference Guide for Climate-Smart Public Investment © 2022 International Bank for Reconstruction and Development / The World Bank 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 with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Contents List of Boxes viii List of Figures x List of Tables xi Acknowledgements xiii Acronyms xiv Introduction: About this Reference Guide 1 How to Use this Guide 2 Navigating this Guide 4 1. What is Climate Smart and How Does it Relate to Public Investment Policy (PIP) and Public Investment Management (PIM)? 7 1.1 What is Climate Smart? 7 1.2 How Does Climate Smart Integrate with PIP and PIM? 8 1.3 Setting the Climate-Smart Context: CS-PIP, CS-PIM, and Meeting the Climate Challenge 9 1.4 What is the Terminology Used in this Guide’s Climate-Smart Applications? 10 2. Climate Change in Public Investment Policy 12 2.1 Climate-Smart Adaptation, Decarbonization, and Transition Policies 13 2.1.1 Physical Risks, Adaptation, and Resilience Policies 17 Reference Guide for Climate-Smart Public Investment iii 2.1.2 Decarbonization, Transition Risks, and CS Policies 18 2.1.3 Infrastructure Network Policies 21 2.2 Climate-Smart Public Investment Strategies and Planning 23 2.2.1 Creating Climate-Smart Plans from Long-Term Objectives 23 2.2.2 Assessments of Needs, Risks, and Vulnerabilities for Climate-Smart Planning 27 2.2.3 Disaster Risk Management to Assist Climate-Smart Planning 35 2.2.4 Evolving Climate-Smart Standards for Climate-Smart Planning 39 2.3 Managing Public Assets as Climate-Smart Portfolios 43 2.3.1 What is a Climate-Smart Public Asset Portfolio? 43 2.3.2 Building a Climate-Smart Public Asset Portfolio 46 2.3.3 Climate-Smart Asset Operations and Maintenance 48 2.4 Private-Sector Engagement in Implementing Climate-Smart Public Investment 49 2.4.1 Roles of the Public and Private Sectors in Addressing Market Failures 49 2.4.2 Promoting Innovation in the Public and Private Sectors 51 2.4.3 Government Funds as a Catalyst for Research and Development 51 2.4.4 Forms of Private-Sector Engagement 55 2.4.5 Project Design and Assessment Considerations for Climate-Smart PPPs 58 2.5 Financing Options for Climate-Smart Investments 62 2.5.1 Project Preparatory Facilities: Making Strategic Use of Limited Funds 65 Reference Guide for Climate-Smart Public Investment iv 2.5.2 Tapping the Global Capital Markets to Fund Climate-Smart Public Investment 66 2.6 Key Messages on Sequencing Climate-Smart 67 PIP Reforms 2.6.1 The Imperative: Moving from a Climate-Smart 67 Vision to Strategy to Implementation 2.6.2 Climate Adaptation and Decarbonization 68 Require a Holistic and Long-Term View 2.6.3 Climate-Smart Actions by the Public Sector Hold the Potential to Transform 68 National Economies 2.6.4 Sequencing and Evolution of Reforms of Climate-Smart Public Investment Policy 69 Depend on Country Starting Point 2.6.5 Specific Planning Actions for Governments 73 to Consider 3. Climate Change in Public Investment Management 76 3.1 Climate-Smart Public Investment Management: A Tool for Achieving Objectives of Climate-Smart Public Investment Policy 76 3.1.1 Climate Change in PIM versus PIM in Climate Change 77 3.1.2 Merging Climate Change and PIM to Develop CS-PIM 77 3.2 Climate-Smart Project Identification and Screening 78 3.2.1 Climate-Smart Project Concept Development 78 3.2.2 Project Risk and Vulnerability Assessment for Project Concept 80 3.2.3 Choice of Technology 80 3.2.4 Climate-Smart Pre-appraisal Screening 81 3.3 Climate-Smart Project Appraisal 82 3.3.1 Overview of the Climate-Smart Appraisal Approach: Taking Account of Uncertainty 82 Reference Guide for Climate-Smart Public Investment v 3.3.2 Project Vulnerability and Risk Assessment for Appraisal 85 3.3.3 Identification of Adaptation Options 89 3.3.4 Tools for Climate-Smart Appraisal 93 3.3.5 Alternative Climate-Smart Appraisal Tools 106 3.3.6 Practical Steps in Introducing Climate-Smart Appraisal 107 3.4 Climate-Smart Independent Review in Project Appraisal 108 3.5 Climate-Smart Project Selection and Capital Budgeting 109 3.5.1 Climate-Smart Project Selection for Budget Eligibility 109 3.5.2 Climate-Smart Capital Budgeting 110 3.6 Climate-Smart Project Implementation 113 3.6.1 Climate-Smart Project Implementation Standards 113 3.6.2 Green Public Procurement 114 3.6.3 Climate-Smart Monitoring and Adjustment 116 3.6.4 Climate-Smart Operations and Maintenance 116 3.7 Climate-Smart Ex Post Review 116 3.8 Key Messages on Sequencing Climate-Smart PIM Reforms 117 3.8.1 Building CS-PIM on Solid PIM Foundations 117 3.8.2 Concurrent Improvement in Data Collection and Updating 117 3.8.3 A Sequenced Set of Reforms 118 3.8.4 Phasing for Climate-Smart Preliminary Screening and Appraisal 120 3.8.5 Upgrading of Climate-Smart Budgeting and Downstream PIM Stages 121 Reference Guide for Climate-Smart Public Investment vi 4. Resource Links for Practitioners in Climate-Smart Public Investment 122 Annex 1. Indicative Decarbonization and Adaptation Policies by Sector 124 Annex 2. Green and Sustainability-Linked Bonds 130 2.1 Overview of the Green and Sustainability-Linked Capital Markets 130 2.2 Elements of a Sovereign Green Bond Program 133 2.2.1 Organizing a Green Bond Program 133 2.2.2 Elements of a Climate-Smart Green Bond Program 135 Annex 3. U.K. Climate Change Transition and Adaptation Framework 138 Notes 140 References 149 Reference Guide for Climate-Smart Public Investment vii Boxes Box 1. Key Terminology 11 Box 2. Stranded Assets and Lock-Ins 14 Box 3. Dutch Approach to Identifying Critical Infrastructure to Adapt to Emerging Risks 21 Box 4. International Coordination on Long-Term Objectives for Climate Planning 24 Box 5. Costa Rica’s Long-Term National Decarbonization Plan 25 Box 6. Kenya’s Climate Risks and Key Sources of 29 Vulnerability Box 7. Climate Change Risk Assessment in the United Kingdom 30 Box 8. Manitoba’s Guidance on Carrying Out a Climate Change Vulnerability and Risk Assessment to Inform Land-Use Planning 32 Box 9. Hydromet Value Chain: Impact on Socioeconomic Benefits and Infrastructure 33 Box 10. Digital Platforms for National, Regional, and Local Risk Management 34 Box 11. Quezon City, Philippines Risk Atlas 37 Box 12. Using New Technologies for Climate-Smart Asset Management 38 Box 13. Sustainable Infrastructure and Buildings: Voluntary Rating and Certification Tools 41 Box 14. Development of Voluntary Green Building Standards and Engagement with Public Investment Programs in Kenya 42 Box 15. Evaluating Existing Public Assets as Part of Climate-Smart Investment 47 Reference Guide for Climate-Smart Public Investment viii Box 16. Public Investment Vehicles to Support Research and Development 53 Box 17. Examples of Government-Sponsored R&D Investment Support Programs 54 Box 18. Responsibility Matrix for Each Project Stage by Contracting Mode 57 Box 19. Philippines Consideration of Climate Change in all PPP Project Feasibility Studies 60 Box 20. First-Level Screening for Risk Assessment (and Appraisal) in the United Kingdom 81 Box 21. Uncertainty and Climate Change 83 Box 22. Alternative Tools to Assist in Climate Vulnerability and Risk Assessment 88 Box 23. The Narrowing of Adaptation from the Space of All Possible Options to What Will Be Done 92 Box 24. France’s Choice of Approach for Valuing Carbon 95 Box 25. World Bank Guidance on the Shadow Price of Carbon 96 Box 26. European Commission Approach to Evaluation of GHG Emissions 96 Box 27. Exceedance Probability Distribution, Economic Loss Function, and Expected Economic Losses 98 Box 28. Scoring for PEFA Climate Dimension CRPFM-5.2 99 Box 29. European Commission’s Eight-Step SCBA Approach for Appraising Climate Change Adaptation Options 101 Box 30. Alternative Decision Tools to Aid Decision Making under Uncertainty 103 Box 31. Assessing the Climate Orientation of Budgeting (Climate-PIMA) 111 Box 32. Climate Budgeting: Lessons for Ministries of Finance 112 Box 33. Climate Budgeting: Importance of the Budget Circular in Signaling Climate Change Priorities 112 Box 34. France’s Law on the Energy Transition for Green Growth 113 Box 35. Green Public Procurement is Internationally Recognized 114 Reference Guide for Climate-Smart Public Investment ix Box 36. Green and Sustainable Bonds Standards 133 Box 37. Elements of a Climate-Smart Green Bond Issuance Program 135 Figures Figure 1. Climate-Smart PIP and PIM 9 Figure 2. Climate Scenarios Framework 16 Figure 3. Global Warming and Estimated Levels of Impact 17 Figure 4. Transition Risk Assessment Framework for Infrastructure 31 Figure 5. Elements Considered in Evaluating Disaster Risk 35 Figure 6. Example of GIS Layers Useful in Climate-Smart Planning 36 Figure 7. The Bigger Picture: Invisible Risks when Viewed Through the Lens of Building Codes 40 Figure 8. Integration of Climate Change and Public Asset Management 44 Figure 9. Creating a Climate-Smart Public Asset Portfolio to Assist with Public Investment Planning 45 Figure 10. Technology Development and Finance Cycle 52 Figure 11. PPP Project vs. Public Asset Life 59 Figure 12. Evaluating the Business Case for a Project in Light of Climate Concerns 60 Figure 13. Adjusting Design and Contractual Parameters 61 Figure 14. Source and Use of Climate-Related Funds across Implementation Phase 63 Figure 15. Climate Facilities: Scope and Limitations on Per Project Funding, Number of Projects Supported, and Theme 64 Figure 16. Transmission from Climate Risk to Financial Risk 66 Reference Guide for Climate-Smart Public Investment x Figure 17. Conceptual Framework for Public Investment Management 78 Figure 18. The Cascade of Uncertainty: Uncertainty Increases as Geographic Location Narrows 83 Figure 19. Accounting for Climate Change Effects in Appraisal in the United Kingdom 84 Figure 20. Conceptual Framework for Vulnerability and Risk Assessments 86 Figure 21. Example of a Risk Matrix 87 Figure 22. World Bank’s Climate and Disaster Risks Assessment Tool 88 Figure 23. Scenario-Based SCBA of Climate Adaptation Measures in the United Kingdom 103 Figure 24. Overview of RiST Methodology of the World Bank Group 105 Figure 25. Life Cycle Costs Compared to Purchase Price 115 Figure 26. Global Sovereign Green Bond Issuance History 130 Figure 27. Public Green Bond Issuances 131 Figure 28. Green Bond Issuances are Getting Larger 132 Figure 29. Green Bond Use of Proceeds Trends 132 Figure 30. Green Bond Issuance and Management Framework 134 Tables Table 1. Framework for Examining Practical Implementation Considerations 3 Table 2. Consequences of Climate Change Effects and Transition Failures in Public Investment 13 Table 3. Conceptual Framework of a Public-Sector Leadership Role in Climate-Smart Public Investment 15 Table 4. Integrating Gray and Green Infrastructure 20 Reference Guide for Climate-Smart Public Investment xi Table 5. Kenya’s National Climate Change Legal and Policy Framework 26 Table 6. Example Indicators for Measuring Infrastructure Service Needs 28 Table 7. Overview of Typical GIS Database Features 37 Table 8. Market Failures that Impede Decarbonization 49 Table 9. Indicative Sequencing of CS-PIP Reforms Depending on Starting Point 69 Table 10. Extract from Zimbabwe’s Project Concept Note Form 79 Table 11. Adaptation Options for Investment Projects in the Road Sector 90 Table 12. Examples of Adaptation Options for Energy Infrastructure 91 Table 13. Factors for Converting Greenhouse Gases to their Equivalent in Carbon Dioxide 94 Table 14. “Pay-Off” Matrix of Net Social Present Values for Decision Makers 102 Table 15. Climate Scenarios for SCBA of Climate Adaptation Measures in the United Kingdom 104 Table 16. Indicative Sequencing of CS-PIM Reforms Depending on Status of PIM System 118 Table 17. Indicative Decarbonization Policies by Sector 124 Table 18. Indicative Adaptation Policies by Sector 127 Reference Guide for Climate-Smart Public Investment xii Acknowledgements This report is the main deliverable under the global theme on Green and Resilient Infrastructure Governance within the World Bank’s Mainstreaming Climate Change in Governance Program (P172569). This report was prepared by a World Bank team comprising Eduardo Andrés Estrada (Governance Specialist, EAEG2 and Task Team Leader), Jay-Hyung Kim (Adviser, EAEG1, and co-Task team Leader), Simon Groom (Consultant, EECG2), Grant Hauber (Consultant, ELCG2), and Samuel Moon (Consultant, ELCG2), under the overall guidance of Adrian Fozzard (Practice Manager, ELCG2) and James Brumby (Senior Adviser, PA9SS). Editorial support was provided by Oliver William Balch (Consultant, ELCPV). Copyediting support was provided by Patricia M. Carley (Consultant, EECG2). Graphic design was provided by Maria Lopez (Consultant, EFIOS). The team acknowledges the funding support from the Swiss Confederation through the State Secretariat for Economic Affairs (SECO) and the World Bank’s Governance Global Practice through the Global Solutions Group for Public Financial Management and Public Investment Management. The report benefited from inputs from the following colleagues who kindly agreed to serve as peer reviewers: Viviane Clement (Senior Climate Change Specialist, SCCAO), Jonas Arp Fallov (Senior Public Sector Specialist, EECG2), Sohee Gu (Climate Change Specialist, SCCAO), Roumeen Islam (Senior Economic Adviser to the CEO, IFCMD), and Fabienne Mroczka (Senior Public Sector Specialist, EAWG2). The report also benefited from inputs from International Monetary Fund staff, including Manal Fouad (Assistant Director, FADM2) and Suphachol Suphachalasai (Technical Assistance Advisor, FADAI). The team acknowledges the contributions during the preparation of the report of Adenike Sherifat Oyeyiola (Practice Manager, EGVPF), Jens Kromann Kristensen (Practice Manager, EMNGU), James P. Newman (Senior Operations Officer, ECADE and former Task Team Leader), Ian Hawkesworth (Senior Governance Specialist, EECG1), Timothy Stephen Williamson (Senior Governance and Public Sector Specialist, EGVPF), Ivana Smolenova (former Consultant, ELCG2), and Gina Lizardi (Program Assistant, ELCG2). The team acknowledges the excellent support from the Mainstreaming Climate Change in Governance Program, including Nicholas Menzies (Senior Governance Specialist, ELCG2), Richard Anthony Sutherland (Governance Specialist, EGVPF), Abdulaziz Almuzaini (Junior Professional Officer, ELCG2), and Diana Carolina Annandsingh Rattia (Program Assistant, ELCG2). Vice President, EFI: Pablo Saavedra Global Director, Governance GP: Arturo Herrera Gutiérrez Practice Manager (Global): Adenike Sherifat Oyeyiola Practice Manager (Thematic): Jens Kromann Kristensen Task Team Leaders: Eduardo Andrés Estrada and Jay-Hyung Kim Reference Guide for Climate-Smart Public Investment xiii Acronyms ADB Asian Development Bank CBA Cost-Benefit Analysis CCA Climate Change Act (UK) CCC Committee of Climate Change (UK) CCRA Climate Change Risk Assessment CEA Cost-Effectiveness Analysis CO2 Carbon Dioxide CO2e Carbon Dioxide Equivalent CS Climate-Smart CS-PIM Climate-Smart Public Investment Management CS-PIP Climate-Smart Public Investment Policy DBFT Design-Build-Finance-Transfer DRM Disaster Risk Management EDGE Excellence in Design for Greater Efficiencies EFDB Emission Factors Database EIB European Investment Bank EIF EU Innovation Fund ESG Environmental, Social, and Governance EU European Union GFDRR Global Facility for Disaster Reduction and Recovery GHG Greenhouse Gas GIS Geographic Information System GPP Green Public Procurement IDB Inter-American Development Bank IFC International Finance Corporation IMF International Monetary Fund IPCC Intergovernmental Panel on Climate Change IRGC International Risk Governance Center ISO International Organization for Standardization LIC Lower-Income Country LTS Long-Term Strategy Reference Guide for Climate-Smart Public Investment xiv MCA Multi-Criteria Analysis MTIP Medium-Term Investment Plan MTP Medium-Term Plan NAP National Adaptation Plan NDC Nationally Determined Contribution NGFS Network for Greening the Financial System NPV Net Present Value O&M Operations and Maintenance OECD Organisation for Economic Co-operation and Development PAM Public Asset Management PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PIM Public Investment Management PIMA Public Investment Management Assessment PIP Public Investment Policy PPP Public Private Partnership R&D Research and Development RiST Risk Stress Test Tool SCBA Social Cost-Benefit Analysis SLB Sustainability-Linked Bond SOE State-Owned Enterprise TCFD Taskforce on Climate-Related Financial Disclosure UNDP United Nations Development Programme UNFCCC United Nations Framework Convention of Climate Change V20 Vulnerable 20 Group of Ministers of Finance WTO World Trade Organization Reference Guide for Climate-Smart Public Investment xv Introduction: Climate change, poverty, and inequality are deeply intertwined, and tackling them together is essential About this Reference Guide as countries plan, implement, and manage the infrastructure and investments that underpin the world’s economies. Trade-offs are inevitable, and policy makers require new information, tools, systems, and capabilities to make informed decisions. This Reference Guide brings together in one place the resources that have been developed to embed climate change within public investment management (PIM) systems and the policies and processes that inform PIM’s design and implementation. Public investment is a central tool for governments to prepare for and address the impacts of climate change. With the irrefutable impacts of anthropologically induced climate change,1 investments of all forms— whether in the public or private domain—must assist in mitigating these impacts, driving the global norm toward highly resilient, resource-efficient, low-/no-greenhouse gas (GHG) emitting ends. In recognition of the need for these stabilizing and protective investments, the world’s nation states committed to address climate change through the signatures of 196 parties under the 2015 Paris Agreement.2 The challenge before all nations now, both commonly and individually and between the public and private sectors, is to constructively and meaningfully affect the changes that this commitment entails. This must be done with all due speed in order to stave off potentially irreversible and deadly climate impacts. Reference Guide for Climate-Smart Public Investment 1 A policy-led, two-pronged approach is required public realm must be adjusted to thoroughly incorporate to address Paris Agreement commitments while climate change considerations so as to make best use protecting the public: large-scale decarbonization of available capital and time. The focus of the Guide and adaptation to climate change impacts. is to make those processes “climate smart,” leading to “Decarbonization” is the term used in this Guide to signal “climate-smart public investment policy” (CS-PIP) and the overall goal of cutting the equivalent emissions “climate-smart public investment management (CS- of carbon dioxide (CO2) from all GHGs. Given that PIM). The concept of “climate smart” refers to integral experts believe the world is already set on a path to changes to strengthen PIM processes and ensure some form of temperature rise, mitigation efforts alone due consideration of climate change in PIP. Minimum are not sufficient. Planners and policy makers need to PIM capabilities are necessary as a basis for making concurrently address the very real potential impacts systems climate smart, but critically, the term refers to of climate change events through adaptation and strengthened PIP and PIM processes rather than an resilience measures. Taken together, decarbonization additional process. This terminology will be defined and adaptation investments require a global, public- and developed within this Guide, together with other private effort to direct investment toward sustainable and important concepts. effective ends. The Intergovernmental Panel on Climate Change (IPCC) recommends a policy pathway that How to Use this Guide keeps global warming within 1.5°C above preindustrial levels. Given the pace of policy implementation, however, some assessments suggest that the world This Reference Guide informs practitioners working is already on its way to exceeding that target.3 The with and in finance and planning agencies about most effective means of getting back on track is to the key issues to consider when engaging in policy set strong, clear decarbonization policies backed by development, investment strategy, and project regulations and to support a consistent pipeline of preparation, financing, and implementation. It looks climate-targeted investments. at how PIP, regulation, and private participation can work together to address the challenge of climate change. The This Reference Guide seeks to help policy makers Guide focuses primarily on investment in infrastructure. and actors in the public and private sectors In the context of climate change, the term “infrastructure” to meaningfully address such challenges. The is defined broadly to encompass both built and natural Guide builds on the World Bank’s Public Investment infrastructure, which together support a range of social Management Reference Guide, published in 2020.4 It and economic services. The Guide provides an overview uses the same approach to policy, planning, evaluation, of issues to inform practitioners with a good understanding and management of public projects and assets to help of PIM practices but potentially limited awareness of the governments in their attempts to use public investment implications of climate change for their work. It does not to decarbonize while also responding to climate change’s attempt to be a comprehensive compendium on climate physical challenges and resilience requirements. It change and public investment issues. For example, follows the best practices established for PIM, extends the scope of the Guide does not extend to subnational them into the planning regime, and enhances project governments or state-owned enterprises (SOEs), though selection for maximum impact. Further, it guides other World Bank publications do address these areas. oversight, monitoring, and management considerations The Guide refers to other sources throughout the text during implementation to ensure that climate change and in summary in Chapter 4 for more detailed guidance mitigation and adaption goals are reliably delivered. and related topics not covered herein. Climate action requires deliberate strategies, This Reference Guide is structured to cover CS-PIP backed by actionable plans, followed by rigorous and CS-PIM, to discuss climate-smart (CS) interaction implementation. This Reference Guide focuses with national strategies, to identify policy and on two key phases of climate-informed investment regulatory actions that can support CS investment, management: upstream public investment policy (PIP) and to explain in detail how CS processes can be and downstream implementation of those policies applied in governmental PIM functions. Below, the through PIM. Given that climate change has created an Reference Guide’s contents are outlined, followed by a urgent need to address climate-related issues, this Guide detailed navigation matrix to help readers quickly access recognizes that traditional methods of PIP and PIM in the areas of interest. Reference Guide for Climate-Smart Public Investment 2 Chapter 1 provides an introduction to CS public risk analysis in PIM systems may need to be clarified investment concepts. It provides an overview of the and deepened to deal with the uncertainty surrounding process, running from the strategy and planning phases the severity and frequency of climate change’s localized of CS-PIP through the implementation, management, impacts, as is explored in further detail in this chapter. and monitoring phases of CS-PIM. This chapter defines the meanings of climate smart, CS-PIP, and CS-PIM. Chapters 2 and 3 provide a range of approaches It also describes the interrelationship between CS-PIP based on a government’s level of CS governance and CS-PIM, and explains some key terminology and maturity. It is acknowledged that every government concepts that will be used throughout this Guide. has different levels of resources, different strategies, and different degrees of practical experience in applying Chapter 2 covers the policy and strategic elements climate-related policies and techniques. These variances of CS public investment. The chapter explores the tools can occur within and across government agencies, that governments can apply in creating CS strategies regardless of the country’s income category or resource and plans, then looks at how these are rolled out through base. Accordingly, in the conclusions of these two public institutions. Planning tools assess overall risk and chapters, suggestions are provided for an evolution in vulnerability, informing how to address these factors approaches to CS-PIP and CS-PIM that propose ways through land-use planning, zoning, and other regulations. that countries can evolve their own CS approach, as It provides governments with the means to take stock summarized below in Table 1. of their public assets and practices and to determine which are climate assets versus climate liabilities. Taken The array of starting points and variety of issues together, these assessments provide planners with a across the spectrum of PIP and PIM reforms mean means of prioritizing areas for CS action. The approach that sequencing of an individual reform program will is mindful of the varying levels of capacity and ambition be highly contextual. Some countries may have limited that different partner countries may have with respect to integration of climate policy but advanced underlying climate change policies, strategies, and management. systems. As such, the appropriate design of initial reforms will be closer to the emerging rather than the nascent Chapter 3 addresses the details of how to implement options. Other countries may be advanced in some CS-PIM in practice. It sets out how climate change can areas of PIM but relatively nascent in others. However, be taken into account at each of the key PIM functions, a generally advanced PIM system does enable a wider thus making them “climate smart.” It walks through range of options, as the majority of CS-PIP and CS- the step-by-step mechanics of project identification, PIM reforms build on existing processes and capacity. appraisal, selection and prioritization, budgeting, and Pursuing a wholesale reform program all at once is not implementation as enhanced to realize CS public advised, however. It is better to prioritize critical reforms investment. Without the discipline of a functioning PIM first, thus avoiding the risk of overwhelming the system system, it is difficult to address climate change in or and confusing users. Ultimately, it is not advised that a through public investment. A precondition for CS-PIM is country place itself on a specific level or design its optimal the existence of a minimally functional—and hopefully sequencing of reforms without careful examination of the well-functioning—PIM system. The sophistication of the specific PIP and PIM context. Table 1. Framework for Examining Practical Implementation Considerations Nascent Emerging Advanced Policies or actions that are Policies or actions for countries with Policies or actions for high-capacity appropriate for lower-capacity reasonable to good institutional countries that are global or regional governments or those where capacity, access to financial leaders in setting standards existing priorities limit the markets, and existing policies and practices for combatting ambition or political space to around climate change that can be climate change. comprehensively address climate built upon. change challenges. Reference Guide for Climate-Smart Public Investment 3 Chapter 4 provides a resource guide for CS Annex 3 provides reference information on climate investment practitioners to easily access various change framework legislation, planning, and CS tools. These are listed by planning, assessment, guidance from the United Kingdom. This serves as an and management categories and are furnished with example on how countries can transition to a low-carbon hyperlinks to each of the resources. economy and adapt to climate change. Annex 1 provides a summary of possible Navigating this Guide decarbonization and adaptation policies listed by sector. These policies were suggested by internal World Bank teams and should be considered indicative rather The information in this Reference Guide can be used than a formalized framework. This provides a ready to support many functions within government; as reminder of the categories and types of policies that such, it does not need to be read sequentially or could be adjusted or adopted to address sector-based from cover to cover. It is meant to serve as a reference issues related to climate. point for up-to-date information, act as a catalyst to ideas and approaches, and help guide development and Annex 2 offers insights into today’s green and implementation of CS approaches within government. sustainability-linked bond market and how governments can prepare to take advantage of this The table below, similar to a table of contents, new source of capital. This annex provides an overview provides a convenient navigation tool for this Guide. of market issuance volumes for sovereign bonds and how The table has clickable links that will take the user to the those proceeds are being put to use. It then provides an relevant sections of the document that are of interest. overview of the requisite elements of a sovereign green Return links in each section of the Guide will bring the bond program, describing what policies, frameworks, user back to this table. and processes governments need to put in place. Reference Guide for Climate-Smart Public Investment 4 Climate Smart Reference Guide Navigation Table Hover cursor over a topic and click to navigate to that section of this Guide. A return symbol appears at the bottom corner of every page. Clicking on that icon will return to this table. Chapter 1: What is Climate Smart and How Does it Relate to Public Investment Policy (PIP) and Public Investment Management (PIM)? 1.1 What is Climate Smart? 1.2 How Does Climate Smart Integrate with PIP and PIM? 1.3 Setting the Climate-Smart Context: CS-PIP, 1.4 What is the Terminology Used in this Guide’s CS-PIM, and Meeting the Climate Challenge Climate-Smart Applications? Chapter 2: Climate Change in Public Investment Policy 2.1 Climate-Smart Adaptation, Decarbonization, and Transition Policies Physical Risks, Adaptation, Decarbonization, Transition Risks, Infrastructure Network Policies and Resilience Policies and CS Policies 2.2 Climate-Smart Public Investment Strategies and Planning Creating Climate-Smart Assessments of Needs, Disaster Risk Evolving Climate-Smart Plans from Long-Term Risks, and Vulnerabilities Management to Assist Standards for Objectives for Climate-Smart Planning Climate-Smart Planning Climate-Smart Planning 2.3 Managing Public Assets as Climate-Smart Portfolios What is a Climate-Smart Public Building a Climate-Smart Public Climate-Smart Asset Operations Asset Portfolio? Asset Portfolio and Maintenance 2.4 Private-Sector Engagement in Implementing Climate-Smart Public Investment Roles of the Public Promoting Government Funds Forms of Private Project Design and Private Sectors Innovation in the as Catalyst for Sector Engagement and Assessment in Addressing Public and Private Research and Considerations Market Failures Sectors Development for Climate-Smart PPPs 2.5 Financing Options for Climate-Smart Investments Project Preparatory Facilities: Tapping the Global Capital Markets Making Strategic Use of Limited Funds to Fund Climate-Smart Public Investment 2.6 Key Messages on Sequencing Climate-Smart PIP Reforms The Imperative: Climate Climate-Smart Sequencing Specific Planning Moving from Adaptation and Actions by the and Evolution of Actions for Climate-Smart Decarbonization Public Sector Hold Reforms of CS-PIP Governments Vision to Strategy Require a the Potential to Depend on Country to Consider to Implementation Holistic and Transform National Starting Point Long-Term View Economies Reference Guide for Climate-Smart Public Investment 5 Table continued Chapter 3: Climate Change in Public Investment Management 3.1 Climate-Smart Public Investment Management: A Tool for Achieving Objectives of Climate-Smart Public Investment Policy Climate Change in PIM versus PIM in Climate Change Merging Climate Change and PIM to Develop CS-PIM 3.2 Climate-Smart Project Identification and Screening Concept Development Vulnerability and Technology Choice Pre-appraisal Screening Risk Assessment for Project Concept 3.3 Climate-Smart Project Appraisal Overview of Project Identification Tools for Alternative Practical Steps the Climate- Vulnerability of Adaptation Climate-Smart Climate-Smart in Introducing Smart Appraisal and Risk Options Appraisal Appraisal Tools Climate-Smart Approach: Assessment Appraisal Taking Account for Appraisal of Uncertainty 3.4 Climate-Smart Independent Review in Project Appraisal 3.5 Climate-Smart Project Selection, Prioritization, and Budgeting Project Selection for Budget Eligibility Climate-Smart Capital Budgeting 3.6 Climate-Smart Project Implementation, Monitoring, and Evaluation Climate-Smart Project Green Public Climate-Smart Climate-Smart Operations Implementation Procurement and Life Project Monitoring and Maintenance and Standards Cycle Costing and Adjustment 3.7 Climate-Smart Ex Post Review 3.8 Key Messages on Sequencing Climate-Smart PIM Reforms Building CS-PIM Concurrent A Sequenced Set Phasing for Upgrading of on Solid PIM Improvement in of Reforms Climate-Smart Climate-Smart Foundations Data Collection Preliminary Budgeting and and Updating Screening Downstream and Appraisal PIM Stages Chapter 4: Resource Links for Practitioners in Climate-Smart Public Investment Annex 1: Indicative Decarbonization and Adaptation Sector Policies Annex 2: Green and Sustainability-Linked Bonds Annex 3: UK Climate Change Transition and Adaptation Framework Notes References Reference Guide for Climate-Smart Public Investment 6 01 What is Climate Smart 1.1 What is Climate Smart? and How Does it Relate to Public Investment Policy (PIP) “Climate smart” assesses the impact of investments on the climate and in turn, the impact of the current and Public Investment and anticipated future climate on any planned Management (PIM)? investments. An investment has the potential to decarbonize national economies and reduce the amount of GHGs in the environment. Similarly, an investment can also help economies and societies adapt to the impacts stemming from climate change that is already occurring. “Climate smart” means to look at “ordinary” investments more holistically, adding in climate dimensions that are anticipated to change over time. CS public investment, therefore, is an enhanced and deliberate approach to ensuring that public assets, public services, and upcoming public investments contribute constructively and deliberately to a government’s overall goals for climate change adaptation and decarbonization. A CS approach can be applied across the spectrum of investment, whether public or private, to guide society’s thinking, planning, and actions on the desired sustainability goal. Each of these decisions contributes to climate mitigation and adaptation efforts, potentially yielding higher efficiency outcomes while also inducing demand for input materials and services that serve to drive down costs. Reference Guide for Climate-Smart Public Investment 7 1.2 How Does Climate Smart Integrate sector to work jointly toward climate change goals? How can public and private investments alike be guided and with PIP and PIM? directed to achieve the necessary combined roles of mitigating climate change and adapting to its impacts? This Reference Guide provides insights and references A policy-led, two-pronged approach is required to policies, tools, and approaches that can help respond to address Paris Agreement commitments while to these questions. protecting the public: large-scale decarbonization and adaptation to climate change impacts. Adaptation is as important as decarbonization. “Decarbonization” is the term used in this Guide to signal Climate change impacts include both slow-onset climatic the overall goal of cutting the CO2 equivalent (CO2e) and ecological changes as well as an increased incidence emissions from all GHGs. Given that experts believe the and severity of extreme climate events. Gradual effects, world is already set on a path to some form of temperature such as sea level rise and desertification, particularly in rise, mitigation efforts alone are insufficient; planners equatorial regions, are ongoing, but with the effects and and policy makers need to concurrently address the very impacts growing over the space of decades. Extreme real potential impacts of climate change events through events, such as storms, droughts, and wildfires, have adaptation and resilience measures. Taken together, also been increasing in their frequency, intensity, and decarbonization and adaptation investments require scope of impact. In 2021, climate-related damage a global, public-private effort to direct investment to totaled an estimated US$343 billion globally, and since sustainable and effective ends. The IPCC recommends 2011 there have been loss events totaling more than a policy pathway that keeps global warming within 1.5°C US$100 billion in six separate years.7 This exacts a above preindustrial levels. Given the pace of policy massive toll on societies, businesses, and governments. implementation, however, some assessments suggest The impacts of these losses drain government budgets, that the world is already on its way to exceeding that as do the investments required to recover from them. target.5 The most effective means of getting back on track The increasing frequency and severity of climate is to set strong, clear decarbonization policies backed events mean that public infrastructure is under great by regulations and to support a consistent pipeline of pressure to do more. It must be resilient to this growing climate-targeted investments. frequency and severity of climate events, for example, while also providing protection for citizens impacted Decarbonization requires massive investment by those events. At the same time, it must guarantee across all parts of national economies, whether uninterrupted, high-quality public services for increasingly public or private. Governments may guide and create networked economies. incentives but they cannot address climate change on their own. In the light of climate change, public CS principles can be applied equally to both new investments and the services they deliver take on a investments and existing public assets. For new broader scope of impact. Estimates vary with regard to investments, this means revising and strengthening the scale of investment required to meet Paris Agreement design standards, construction techniques, and a targets and limit increases in global temperatures, but project’s intended outcomes so as to create public all projections uniformly place these needs in the realm assets that are more energy efficient, lower in carbon, of trillions of dollars annually over the next 30 years.6 and more resilient to climate change. For existing public Government action alone is insufficient. It will require assets, governments facing rehabilitating or renovating a whole-of-economy approach, bringing together the such assets can apply more robust, climate-informed public and private sectors, academia, civil society, and criteria to their efforts. That may mean applying new individuals around a coherent strategy to drive change. design standards. In turn, this could result in changing Although it is true that governments can provide only the scope of a project or enhancing or repurposing the a fraction of the financing necessary, they are well asset in question. In some cases, it might even mean positioned to guide private investment with the aid of replacing an asset that in ordinary circumstances could clear policy communication, regulation, and incentives. simply have been repaired. Governments worldwide are faced with the daunting task of meeting this call in the most efficient, meaningful, Response to climate change challenges and and impactful manner possible, despite the constraints opportunities, plus the development of CS-PIP of fiscal and human resources. How can governments and CS-PIM will depend on the resources and meet this challenge? How can they influence the private Reference Guide for Climate-Smart Public Investment 8 technologies available, specific market conditions, terms PIP and CS-PIP have not previously been used and the ambition of governments to manage the widely. However, for the purposes of this paper, PIP is process. Capabilities and exposure to risks differ as do a term that is emphasized to distinguish the processes the appetite and political ability to implement climate- of policy making related to public investment from the related policies. Some governments may have incredibly project cycle. PIP concerns both public policies directly ambitious climate change policies but are starting to influencing PIM, as well as national and strategic planning address the issue from lower levels of experience. Other functions that influence the design and implementation governments may have extensive resources available of PIM functions. This includes national and subnational to address climate change concerns but lack the approaches to objectives, laws, regulations, processes, framework policy structures or institutional management and institutions that deliver physical infrastructure and tools to ensure that their goals are actually achieved. investments in innovation, in alignment with national New diagnostic tools have been developed specifically economic development policy. The emergence of national to assess countries’ capacity to manage climate-related policies to govern climate change necessitates a rethink infrastructure. A notable case in point is the Climate of PIP to ensure that policies are aligned and smart from Public Investment Management Assessment (PIMA),8 a climate perspective. So deep are the implications of a climate-responsive dimension of the International climate change for public investment that all economies Monetary Fund’s (IMF) PIMA framework. would benefit from developing a CS-PIP. Doing so will increase their investment efficiency while enabling them to remain competitive in a decarbonized world. It will 1.3 Setting the Climate-Smart also assist them in adapting their national infrastructure Context: CS-PIP, CS-PIM, and Meeting portfolios in order to be resilient in the face of climate the Climate Challenge change. Chapter 2 examines where CS-PIP sits within national policy, planning, and regulation. Section 1.4 at the close of this chapter provides definitions of CS-PIP is the evolution of PIP to integrate with key terminology. and mutually support national climate policy. The Figure 1. Climate-Smart PIP and PIM Economic Development Policy Public Climate Investment Climate-Smart Policy Policy Public Investment Policy Climate-Smart PIM Source: Authors. Reference Guide for Climate-Smart Public Investment 9 CS-PIM is the key government instrument for the risk. Projects potentially requiring adaptation can be implementing CS-PIP. PIM is the regulatory and referred to as “climate-influenced” projects. In addition, oversight system within public financial management there are pure “adaptation projects.” These can be divided (PFM) that concerns the acquisition (or improvement) into two categories: (i) projects to retrofit adaptation and management of fixed assets. CS-PIM is aligned with measures to existing infrastructure that is at risk; and national climate policy as an implementation tool for CS- (ii) projects designed to reduce the vulnerability of other PIP and its scope can be country-specific. At its fullest public and private fixed assets (e.g., flood defenses). extent, it may be seen as the processes, procedures, and methods that the public sector adopts to fulfill its CS-PIP establishes a pathway and CS-PIM articulates role in achieving the objectives of the CS-PIP and in it for infrastructure development to maximize implementing the associated laws and regulations. competitiveness and societal welfare in a changing While CS-PIM strictly covers public expenditure and world. Decarbonization is necessary for all countries the acquisition of fixed assets, this note also addresses if they are to remain competitive. Adaptation alone, investments in innovation as well as in research and as described above, is not sufficient. Regardless of development (R&D). Also addressed are the impacts the individual role of a government in global efforts to of CS-PIP and CS-PIM on private-sector activities decarbonize, global economies as a whole will transition concerning the development of CS infrastructure. to low- or zero-carbon technologies. Keeping pace with this transition is important if countries are to remain CS-PIP sits at the center of overall national competitive and integrated within the global economy. development, climate, and PIPs. Figure 1 illustrates CS-PIP matters because it provides a trajectory, a the intersection among policy decisions to arrive at CS- clear signal, and a mechanism for driving the transition PIP. CS-PIM is the means by which these important of public investment portfolios toward becoming more policy goals are realized. decarbonized. CS-PIP is an appropriate framework for spelling out what shifts in investment need to take place It is in the national interest to consider the risks to achieve a government’s goals. Allied with this, CS-PIM of climate change in a government’s investment serves as an effective tool for ensuring that actual public decisions. Countries will need to decarbonize and investments are planned and implemented in ways that adapt if they are to achieve sustainable growth for their are more friendly for the climate as well as more efficient citizens. Investment choices today will have an impact on for society. domestic economies decades into the future. As such, failure to consider the effects of climate change now will 1.4 What is the Terminology leave future generations at a disadvantage. Used in this Guide’s Climate-Smart Preparing for the physical impacts of climate change Applications? on new projects and existing infrastructure allows governments to minimize economic and social costs while also ensuring the continuity of services to The listing below provides definitions of key concepts support the economy. Climate change puts a project’s that will be used repeatedly throughout this Guide. success at risk through slow-onset climatic changes and They are provided here, recognizing that other actors in the increasing frequency and intensity of climate-induced global climate policy may have slightly different focuses hazards. The response to climate change impinging on and may therefore use the terminology differently. The a new project’s success—either through damage to fixed below definitions relate to how the terms are used in assets or through interruptions to service delivery—is this paper. to consider adaptation measures to reduce or eliminate Reference Guide for Climate-Smart Public Investment 10 Box 1. Key Terminology • Public Investment refers to publicly funded investment in physical infrastructure (e.g., roads, buildings, and energy production facilities) and other non-financial assets (e.g., support for innovation and R&D) with a productive use that extends beyond a year. This must be defined nationally but should include any usage of public resources, including for public-private partnerships (PPPs) and concessions. • Public Investment Policy guides public investment and will typically define the desired coordination with, and influence on, private-sector investment activities. CS-PIP is PIP that integrates with national climate policy and mutually supports it. • Public Investment Management is a system within PFM that concerns the acquisition (or improvement) of fixed assets. The system comprises a regulatory and oversight framework but also includes practices and methodologies that may be unregulated. CS-PIM concerns the processes, procedures, and methods that the public sector adopts to fulfil its role in achieving the objectives of CS-PIP and implementing the associated laws and regulations. • Adaptation refers to adjustments in ecological, social, or economic systems in response to the actual or expected impacts of both slow-onset and extreme climate events. In the context of PIM, adaptation concerns the investment in systems of built and green infrastructure-based solutions and processes that: (i) enhance the resilience of economies and societies to the effects of climate change; (ii) limit potential damages from climate change; or (iii) generate benefits from the opportunities that arise from climate change. • Resilience refers to the ability of economies and societies to withstand both chronic and acute stresses caused by climate change, while at the same time avoiding compromising long-term prospects. The term describes not just the ability to maintain essential function, identity, and structure, but also the capacity for transformation. Infrastructure networks will face both predictable and unpredictable stresses over the coming decades. The flexibility of systems to react to these changing conditions is therefore central to climate resilience. • Decarbonization is the process of reducing net emissions of CO2 and other GHGs to zero. Decarbonization requires proactive policies to restructure economic activity and reorganize land use along four fronts: decarbonization of energy sources; electrification of national economies; increased energy efficiency; and the preservation and increased use of natural carbon sinks. These fronts affect all sectors, but particularly energy, transport, urban infrastructure, agriculture, land use, water, and sanitation. The term is primarily used in this Guide in place of “mitigation,” which appears in much domestic legislation and the Paris Agreement. This is because decarbonization better captures the policy objective and emphasizes structural rather than incremental change. • Green Infrastructure describes a network of multi-functional green and blue spaces, plus other natural features, that are capable of delivering a wide range of environmental, economic, health, and well-being benefits for nature, the climate, local and wider communities, and prosperity. Green infrastructure can be rural or urban, or a combination of both.9 Source: Authors. Reference Guide for Climate-Smart Public Investment 11 02 Climate Change in Public Anthropogenic emissions of GHGs are causing increases in global average temperatures that will Investment Policy severely impact the environment. Climate change is characterized by a cascade of uncertainties: how and when climate change will affect future climatic conditions; how climatic conditions will impact ecosystems; the pace and direction of technology; and how people, communities, and businesses will respond. Without intervention, global temperatures could rise by as much as 4°C by the end of the century.10 Less-developed countries have much higher vulnerability to climate risks than developed nations, as do areas experiencing poverty, governance challenges, or conflict.11 It is in the national interest of economies to ensure efficient, sustainable investment in public infrastructure that takes into account the physical and transition risks posed by climate change. All economies will need to decarbonize if they are to remain competitive and deliver sustainable, resilient, and inclusive growth. Global economies are beginning the process of decarbonizing in order to mitigate climate change. Decarbonization will entail changes in technologies as all economic sectors shift away from the use of fossil fuels toward renewables. All countries will need to manage an orderly transition to a low- or zero- carbon economy to remain competitive. Adaptation and decarbonization will require changes in behavior on the part of businesses and households. Governments can guide changes in behavior by providing information, regulation, taxation, and public spending. Reference Guide for Climate-Smart Public Investment 12 2.1 Climate-Smart Adaptation, The risks caused by climate change are threatening societal, environmental, and economic aspects of Decarbonization, and sustainability through the highly interdependent Transition Policies systems that humanity has developed. Non-linear change is becoming the new reality: “surprise is the new normal.”13 There are two dimensions of the risks faced: Climate change poses a “grey rhino” danger: one (i) physical risks, referring to slow-onset effects, such as that is highly obvious, highly probable, and still sea level rise or extreme hazards; and (ii) transitional neglected. Scientific evidence has identified climate risks, referring to a range of societal, political, economic, change as a key threat to the welfare of the human technological, market, and environmental impacts species and planetary ecosystems more broadly.12 caused by a failure to decarbonize effectively and adjust Currently, the experience has been largely one of slow- to a decarbonized global economy. Where the adaptation onset environmental change, with some more severe to build resilience to physical risks is inadequate or the effects now emerging. International agreements have government’s transition is poorly planned, signaling is established frameworks for addressing climate change, confused. In such a scenario, both public and private but uncertainty about the timing and severity of the investment are likely to result in a mixed portfolio of poor- effects and the extended planning horizons involved fit, path-dependency challenges and stranded assets have diminished the incentive for economies to react. (see Box 2). Table 2 below provides a summary of the types of risk discussed in this chapter and the impacts on This section looks first at the broad challenges public investment. and policy options influencing CS-PIP, followed by subsections addressing the most specific policy considerations related to adaptation, decarbonization, and critical infrastructure. Table 2. Consequences of Climate Change Effects and Transition Failures in Public Investment Climate Effects and Transition Failures Impacts on Public Investment Extreme weather events: Accelerated depreciation and inefficient life cycle choices: Damage Increasing frequency and loss to infrastructure networks grow with little or no change in PIM, and intensity reducing the net public and private benefits of public investment and Environment obstructing growth. Slow-onset environmental Stranded assets: Infrastructure no longer appropriate for change: Shift and disruption of environmental conditions. agroecological zones Path dependency and lock-ins: Infrastructure and technology choice limit flexibility for adaptation to new environmental conditions. Too late: Continued use of No climate signaling: Infrastructure choices fail to raise awareness or high-carbon technologies provide guidance. and unsustainable land-use practices Stranded assets: Infrastructure and technology choices become Transition high cost or are made redundant due to changes in market conditions and/or regulations. Path dependency and lock-ins: Economic activity, technology, and assets limit choices for adaptation to new technologies or regulation and emerging market conditions. Reference Guide for Climate-Smart Public Investment 13 Table 2 continued Climate Effects and Transition Failures Impacts on Public Investment Too early: Early adoption Low climate signaling: Infrastructure choices raise public and private of unproven low-carbon awareness but fail to inform investment and other economic decisions. technologies and land-use practices Poor fit: Infrastructure and technology choices are high cost and/or not well adapted to future technologies, market conditions, and regulations. Transition Path dependency and lock-ins: Infrastructure and technology choices limit options for adaptation to new technologies, market conditions, and/or regulations. Too messy: Poorly planned, Confusing climate signaling: Infrastructure and technology choices poorly structured changes send confusing signals to households and markets, failing to provide consistent guidance and leading to mixed portfolio of poor-fit stranded assets, lock-ins, and path-dependency challenges. Source: Adapted from Fozzard (2020). Box 2. Stranded Assets and Lock-Ins Decisions taken today will determine development pathways far into the future. Infrastructure—for example, power plants, roads, urban areas, irrigation schemes, flood defenses—is typically designed to have an operating life of many decades. Failure to take climate change into account will undermine the long-term viability of these investments, increase vulnerabilities to climate change, and hinder future climate change adaptation and mitigation. Stranded assets are investments that become unviable because of changes in operating environments, policies, or market conditions. The result is the unanticipated or premature loss of products or services, typically leading to write- downs, devaluations, or conversion to liabilities. The stranding of assets is not unique to climate change. However, in the case of climate change, the nature and size of the risks have increased due to the significant magnitude of the anticipated effects and the transition to a decarbonized society. Stranding could originate from “unburnable” carbon where fossil fuel reserves are left unused and their book value becomes worthless. Equally, they could arise from the effects of climate change on the useful lives of other non-energy assets. Stranded assets are therefore likely to be a concern for public investment by SOEs in the energy or natural resources sector. Other sectors may also be affected, such as transport, where assets may cease to deliver an economic return before the end of their originally planned economic lives. Policies and public investments can lock households and businesses into economic activities that limit their flexibility and ability to transition and adapt, thus increasing their vulnerability. Authorization of new coal-fired power plants, for instance, locks in high levels of emissions for decades to come. Or take the example of constructing a dike: such an activity enables people to invest, work, and live in a protected area, but it also leaves them exposed to extreme events and discourages them from seeking alternatives. Source: Authors; and Fozzard (2019). Reference Guide for Climate-Smart Public Investment 14 Table 3. Conceptual Framework of a Public-Sector Leadership Role in Climate-Smart Public Investment Potential Market Unique Role Government Intervention to Address Failure in the Absence of of Government Climate Mitigation Climate Adaptation Government Intervention Intervention and Transition and Disaster Resilience Underinvestment in Funding and • Fund R&D of frontier/ • Fund R&D of resilient relevant R&D by the incentivizing high-reward technologies infrastructure design/ private sector R&D and approaches standards for national for national context context (i.e., how to adapt (e.g., energy efficiency) to environmental, material, market constraints) Demand and supply Piloting new • Apply to selected assets • Apply to selected assets for CS technology and technologies (e.g., buildings, fleet) (e.g., resilient infrastructure) investment is too low and standards • Demonstrate demand • Demonstrate demand due to market and in CS-PIP and case, cost and operational case, cost, and operational technology uncertainty CS-PIM feasibility of selected feasibility of selected and externalities technologies standards • Incentivize emerging • Incentivize emerging supply supply growth growth and capacity and capacity Misinformed/poor land- Signaling to • Support transport and • Support transport and use and construction private sector energy networks for low- energy networks for risk- decisions that increase through emission development informed development emissions, exposure, CS-PIP and (e.g., denser land-use (e.g., less development in and vulnerability CS-PIM development) high-risk areas) Source: Authors, drawing from UNEP and German Development Institute (2017); Kattel and Mazzucato (2018); Hallegatte, Rentschler, and Rozenberg (2019); and Fay et al. (2015). Reference Guide for Climate-Smart Public Investment 15 Adaptation and decarbonization policies must be inaction) to address these risks in a coordinated manner coordinated within government policy and use gives dimensions for possible scenarios with an orderly various policy instruments to manage physical or disorderly policy environment and a met or unmet and transition risks. National and global action (or adaptation to physical risks (see Figure 2). Figure 2. Climate Scenarios Framework Disorderly Too Little Too Late Disorderly Sudden unpredictable policy response Policy and investment to avoid disrupts the economy but is sufficient physical risks are inadequate, to meet climate goals; poor planning spurring a reactive, disorderly, and leaves stranded assets and inefficient ineffective transition. Transition pathway path dependencies Orderly Hot House World Coherent plans, investments, Little policy change or adaptation Orderly and behavior change leads to a investment occurs, emissions increase decarbonized economy that meets and global economies are exposed to climate goals and is resilient to the physical risks of climate change unavoidable effects without adequate resilience Met Not met Adaptation to physical risks Source: Adapted from NGFS (2019). Fiscal policies can be used to send price signals nudge public or corporate behavior rather than mandate that influence societal and corporate behavior, such it can be cheap and effective, though typically with some as through consumption, conservation, reduced limitations in scope. emissions, or taxes on externalities. Such policies can discourage fossil fuel use through higher taxes, support To thrive in a decarbonized future, economies must demographics disproportionally affected by climate embrace “green growth” policies that place CS-PIP change, and encourage more efficient investment in at the center. Incorporating the physical and transition adaptation. Public investment contributes to the toolkit risks into public investment decisions can be seen as by allowing governments to climate proof infrastructure defensive measures to ensure that economic progress networks and stimulate low-carbon technologies. is maintained as efficiently as possible in the coming The coordinated use of these instruments across years. Economies must go beyond this and seek out a sectors and levels of government signals public-sector growth agenda that is built around clean technologies commitment to adaptation and decarbonization policies and communicates confidence in a long-term green and provides confidence and resources to the private transformation. This section takes a closer look at sector to develop resilient infrastructure and embark on physical and decarbonization risks and policies, plus the an orderly transition. The toolkit should not be entirely impact of these factors on public investment. limited to technical tools. Behavioral tools designed to Reference Guide for Climate-Smart Public Investment 16 2.1.1 Physical Risks, Adaptation, Climate change will have an impact on ecosystems, and Resilience Policies destroying some while rendering others less productive. Temperatures will rise everywhere, but more so in the Significant changes in climate and weather patterns northern latitudes. Some areas will become wetter, others are expected even if there is success in curtailing drier. Small island economies and countries in the tropics the increase in temperatures to less than 2°C. Global will be worst affected. Climate change will lead to a rise in temperatures have already risen by approximately 1ºC, sea levels, putting most of the world’s largest cities at risk. and a significant amount of change has already occurred Climate change will push an additional 100 million people or is unavoidable. Climate change is shifting seasonal into poverty by 2030.14 Many of those affected will have weather patterns and will increase the frequency to relocate, moving to cities or to more productive areas. and intensity of heatwaves, droughts, and storms. The impact of this change is uncertain, but analysis from the IPCC shows it is likely to be significant (see Figure 3). Figure 3. Global Warming and Estimated Levels of Impact Impact and risks for selected natural, managed, and human systems Global mean surface temperature change relative to pre-industrial levels (ºC) H H 2.0 M M M H M H 1.5 M M 1.0 M H VH 2006-2015 H H H H VH H H H H M 0 ls es rie e on s g ng ds m ta ty em he al in ra or di is ov el gi di fis l-sc od y s ur m rbi co yi re st oo lit gr To flo sy o p al er an l fl tic an m ro Sm co al at ia c M C ed Ar st -w le uv oa e at d m ria Fl ud el C ar st t-r tit W rre -la ea Te w H lo Confidence level for transition: L=Low, M=Medium, H=High, and VH=Very high Very high Purple indicates very high risks of severe impacts/risks and the presence of significant irreversibility or the persistence of climate-related hazards, combined with limited ability to adapt due to the nature of the hazard or impacts/risks. High Red indicates severe and widespread impacts/risks. Moderate Yellow indicates that impacts/risks are detectable and attributable to climate change with at least medium confidence Undetectable White indicates that no impacts are detectable and attributable to climate change. Level of additional impact/risk due to climate change Source: IPCC (2018). Reference Guide for Climate-Smart Public Investment 17 Some of the risks will be unavoidable. Environmental considerations for development policy, including practical change will affect the useful lifespan of many investments. tools for policy makers. Infrastructure is susceptible to damage and loss due to the increased frequency and intensity of extreme Poor adaptation choices can leave infrastructure weather events. Environmental change may force a susceptible to damage and render the public more retreat from previously economically productive areas or exposed and vulnerable. Public investment choices lead to the premature abandonment of assets because signal commitment to a certain pathway. A government’s infrastructure is no longer able to operate effectively. choice of technology may lock in households and businesses, limiting their flexibility to adapt to changing Physical risks consist of slow-onset hazards, such environmental conditions and leaving them vulnerable as sea level rise, droughts, and water access, and to environmental impacts. Inadequate information on acute hazards, such as landslides, wind velocities, future climatic and environmental conditions puts at and extreme weather events. The physical risk is the risk infrastructure assets and increases the vulnerability probability that an event will occur (hazard), combined of households and businesses. Poor choices, mixed with the number of people, assets, and economic activity messages, siloed thinking, or delays in signaling located in a given area (exposure) and the various commitment may lock in unsustainable decisions. conditions that affect their susceptibility to being affected Examples of such decisions include investing in high- by the event (vulnerability). These conditions change risk areas, such as floodplains and coastal zones, or over time and space in line with physical, environmental, in areas subject to changing rainfall patterns, droughts, geographical, social, economic, demographic, and and wildfires. institutional factors. Countries are not all equally exposed to the severity of physical risks. That said, Adaptation policies anticipate further shocks and the overwhelming majority of disasters globally have build in the ability to cope with natural disasters been weather related and have increased dramatically or other future climate change impacts. To guide in the past 20 years.15 Climate change is expected to practitioners, the World Bank’s sectoral departments increase the frequency and intensity of acute hazards identified an illustrative set of adaptation and and the pace of slow-onset hazards. Poverty, inadequate decarbonization policies to respond to issues across physical infrastructure, and environmental degradation the economy (see Annex 1). Soft adaptation measures can increase the vulnerability of people and assets to include supporting the use of natural systems to reduce the shocks and stresses of natural hazards. Expansion environmental impacts and develop capabilities and of human settlements and investments in hazard-prone preferences for household and business well-being, areas will further increase exposure to these threats. skills, and resilience. Hard adaptation should be used Impacts of exposure to physical risk may be in the form as a last resort: engineered investments in infrastructure of damaged assets, disrupted supply chains, or lower where impacts cannot be addressed by other means. agricultural output. Indirect effects include a reduction Adaptation policies should include: (i) management in the productivity of assets, businesses, or individuals measures, where operations and maintenance (O&M) are because of the effects of heat, drought, and severe flexible and can adapt to account for changing patterns; weather on well-being and performance. and (ii) structural measures, where natural infrastructure, materials, standards, or construction are used.17 Delivering investments to adapt to the changing environment must be a core role for public 2.1.2 Decarbonization, Transition Risks, investment. A government’s infrastructure investments and CS Policies signal its expectations about future environmental conditions. These signals will influence the investment Risks arising from transition to a low-carbon economy and livelihood choices of households and businesses. go beyond the economic and include corporate A failure to anticipate future climatic and environmental governance and social justice. Efforts to understand and conditions not only puts public assets and the services measure risks from a low-carbon transition are relatively they provide at risk but also increases the vulnerability recent. Helpful contributions include the Climate Change of the households and businesses that have made their Performance Index (CCPI), which assesses institutional location and investment decisions based on the networks and policy risks of transition, and the Assessing Low these public assets support. The World Bank’s guide Carbon Transition Initiative (ACT), which has developed to Adaptation Principles16 expands on key adaptation a framework for assessing corporate transition risk. To Reference Guide for Climate-Smart Public Investment 18 frame the problem, the International Risk Governance in asset viability. Should governments transition too late Centre (IRGC) has highlighted eight key transition risk (e.g., by retaining or continuing to invest in unsustainable categories.18 Distribution of gains and losses of transition land-use practices or energy-intensive technologies), feature prominently, as do justice outcomes: they run the risk of creating stranded assets and path dependencies. These outcomes in turn limit the ability of • Societal and political strain caused by unequal public entities, households, and businesses to respond distribution of costs, such as job losses linked to to changing technology and market conditions. Should changing subsidies or other disorderly policy change governments transition too early, on the other hand, actors may find themselves locked into nascent technologies • International impacts of uneven starting points, that become redundant, prove a poor fit, or increase varied reliance on fossil fuels, and new comparative future transition costs. The timing and appropriate advantages in trade and migration policy mix for transition will vary between economies, so planning for the transition is of great importance. • Financial stresses as a result of stranded assets or inadequate risk management Public investment in infrastructure can address transition risks and send improved climate • Macroeconomic challenges from changing health information signals in ways that private investment care and demographics due to decarbonization generally cannot. Expectations of government policies, assumptions around growth and labor commitment to transition are essential to incentivize markets, and network effects caused by these or the development of backstop technologies, a other transition risks transition to renewable energy sources, and broader decarbonization.19 In terms of piloting and bringing • Corporate uncertainty, leading to inadequate investments to scale, all investors are faced with investment or counterproductive investments as transition risks. This is particularly the case for early a result of mixed signals or weak links between adoption and lock-in risks related to “choosing wrong”— policy and regulation. This may result in investment namely, selecting technologies or investment programs in technology that is inconsistent with a net-zero that prove inferior to other options over time. This economy, litigation by or against corporations, and concern has been shown to be somewhat overstated, reputational risk to companies. as markets tend to favor established technologies that are cheap today but may not have the greatest longer- • Environmental damage caused by some term value proposition. This is due to a variety of effects, investments that are consistent with decarbonization, including: knowledge externalities (i.e., innovations that for example, introducing biofuels as a replacement produce benefits beyond what their inventors can fully for fossil fuels or extracting materials critical to low- capture), learning by doing (i.e., the lowering of supply carbon technology costs due to experience and capacity gained over time), and economies of scale (i.e., decreases in supply costs • Energy system strains caused by changing energy due to increases in scale).20 Therefore, public actors can supply and demand, resulting in service disruptions pilot new technologies to selected assets, such as public buildings and vehicle fleets (together with their related • Technology risk from the rapid investment in new infrastructure, such as garages and charging stations). technologies, possibly causing path dependency or They can also test the cost and operational feasibility of triggering other unforeseen issues such technologies, as well as incentivize nascent supply growth and capacity. CS public investment sends price signals to private-sector actors, such as increases and • Model risk leading to uncertainty, as incorrect decreases in land value. or inappropriately interpreted models of complex risks and impacts may cause inefficient or damaging outcomes Decarbonization policies establish pathways to long-term growth and improved human, natural, and physical capital that embed an orderly transition Failure to plan for and execute an orderly transition of the economy to zero carbon. Such policies focus to a zero-carbon economy poses significant risks on such strategies as: electrification in energy and to national competitiveness. Governments must plan transport and increases in energy efficiency across all for an orderly transition that avoids predictable losses Reference Guide for Climate-Smart Public Investment 19 sectors; protection of carbon sinks and development of of a natural system, such as forests, agricultural land, ecosystem services; regulation, incentives, and signals floodplains, riparian areas, and coastal forests (e.g., through investment for green building; and guarantees mangroves), in order to produce more resilient and and incentives to support R&D. The introduction of lower-cost services. The increased use and restoration of circular economy strategies (where waste is decreased, ecosystems can deliver greater social and economic co- materials are reused, and reliance on extracting virgin benefits and be more cost-effective as a component of a materials is reduced) has the potential to greatly affect broader infrastructure network. Identifying opportunities emissions. Annex 1 provides further detail on appropriate, for enhancing networks with green infrastructure may not economy-wide decarbonization policies identified by always be obvious and should therefore be integrated into sector within the World Bank. PIP in regional planning and raised as counterfactuals in project-level appraisal functions. Practical guidance to Green infrastructure can play an important part in support green infrastructure development is emerging. networks to both improve cost efficiency and create For example, the World Bank has recently issued “Green social and economic co-benefits. Engineering bias in Roads for Water,” a set of guidelines for harmonizing infrastructure development has tended to skew investment road infrastructure with water management in diverse toward gray infrastructure, namely, built structures landscapes.21 Table 4 below gives some examples of and equipment. Green infrastructure intentionally and how green infrastructure can enhance networks. strategically preserves, enhances, or restores elements Table 4. Integrating Gray and Green Infrastructure Gray Infrastructure Examples of Green Infrastructure Components Service Components and Their Functions Water supply Reservoirs, treatment Watersheds: Improve source water quality and thereby and sanitation plants, pipe network reduce treatment requirements Wetlands: Filter wastewater effluent and thereby reduce wastewater treatment requirements Hydropower Reservoirs and Watersheds: Reduce sediment inflows and extend life power plants of reservoirs and power plants Coastal flood protection Embankments, groynes, Mangrove forests: Decrease wave energy and storm sluice gates surges and thereby reduce embankment requirements Urban flood protection Storm drains, Urban flood retention areas: Store stormwater and pumps, outfalls thereby reduce drain and pump requirements River flood Embankments, sluice River floodplains: Store flood waters and thereby management gates, pump stations reduce embankment requirements Agriculture irrigation Barrages/dams, irrigation, Agricultural soils: Increase soil water storage capacity and drainage and drainage canals and reduce irrigation requirements Source: Browder et al. (2019). Reference Guide for Climate-Smart Public Investment 20 Experience from other major economic supply chains may affect a wide variety of sectors from transformations can provide useful insights to health care to industry. Government guidance in the guide the understanding of risks, opportunities, and United States suggests that the interconnected nature of effective strategies. Lessons from the recent revolution critical infrastructure now means that major disruptions in information technology point to the importance of are likely to have cascading effects on all other sectors.23 regulation and public investment in reducing risk and ensuring transition across the entire value chain.22 The With the addition of climate change risks, possible same experience also teaches that resistance to change threats have multiplied and cascade effects have is likely. It is probable therefore that the process of become harder to predict, creating additional decarbonization will also face key bottlenecks that will uncertainty. Critical infrastructure across all sectors require concentrated efforts to overcome. Engaging and will be affected by the physical risks of climate change. supporting large incumbent companies in key sectors Predicting these risks and adapting infrastructure so that they can reposition themselves for a low-carbon networks accordingly will take time and may leave economy is likely to be an important factor in driving some sectors permanently vulnerable. Decarbonization overall change. requires massive adjustments to key sectors, from energy to agriculture and transportation. Sequencing 2.1.3 Infrastructure Network Policies and managing this transition smoothly to minimize disruption and maintain sustainable growth represents a The interconnectedness of infrastructure networks huge challenge. exposes economies to widespread impacts should critical infrastructure fail. Critical infrastructures are New approaches to planning resilient critical assets within a network that provide essential products, infrastructure emphasizes flexibility and the ability services, or processes, which, should they fail, have to maintain performance under changing conditions the potential to cause casualties, extensive economic rather than preparations for specific challenges. damage, or other serious societal disruptions. Their Given the extent of expected effects of climate change criticality derives from their essential nature (without on the world’s economies, it has become impractical them, normal societal functions will not operate) and to plan to address all risks in modern systems of from the lack of realistic alternatives. Digitalization and networked infrastructure. Instead of relying on strategies growing networks of public and private stakeholders for addressing specific challenges, the focus should have led critical infrastructure to become increasingly be on establishing flexibility to adapt as circumstances nodal, dependent on key points of interchange systems change.24 In practice, resilience might mean building in and processes rather than simply facilities. As a result, a redundancy for critical infrastructure through the use single failure can potentially generate cascading effects of low-emissions alternatives, such as public transport across the wider sector and other sectoral networks. The or pedestrian routes. Governments can learn from the energy sector provides an illustrative example. Failures Dutch approach of focusing on safeguarding services here will likely result in transport bottlenecks as certain rather than specific facilities, and on understanding the transportation modes or necessary infrastructure become critical processes that are required for those services temporarily unusable. The consequent breakdown in (see Box 3).25 Box 3. Dutch Approach to Identifying Critical Infrastructure to Adapt to Emerging Risks In 2014, the Netherlands adopted a process-based strategy for identifying critical infrastructure to adapt to the growing variety of risks and increasingly networked nature of critical services. There are two risk levels for critical processes: (i) level B, when failure is likely to have an economic impact of €5 billion, to cause over 1,000 casualties, or to significantly affect the lives of 100,000 people; and (ii) level A, when any of these impacts increase by a magnitude of 10, or if failure is likely to result in the breakdown of at least two other sectors. The table below identifies key processes, assigns a category to each risk area, and identifies the geographic, functional, and administrative areas involved. Reference Guide for Climate-Smart Public Investment 21 Product, Service, Processes Category or Location Sector Ministry National transport and distribution of A Electricity Energy Economic Affairs electricity Regional distribution of electricity B Gas production A Natural gas National transport and distribution of gas Regional distribution of gas B Oil supply A Oil Internet access and data traffic TBD IT/Telecom Economic Affairs Speech-communication services (mobile and landlines) Satellite Time and location services (satellite) Drinking water supply A Drinking water Drinking water Infrastructure and the Environment Flood defences and water management A Primary flood Water Infrastructure and defences the Environment Regional flood defences Air traffic control B Schiphol Airport Transport Infrastructure and the Environment Vessel traffic service B Port of Rotterdam Large-scale production/processing B Chemical and Chemistry Infrastructure and and/or storage of chemicals and petrochemical the Environment petrochemicals industry Storage, production, and processing of A Nuclear industry Nuclear Infrastructure and nuclear materials the Environment Retail transactions B Financial Financial Finance transactions Consumer financial transactions B High-value transactions between banks B Securities trading B Communication with and between B Maintaining Public Order Security emergency services through the 112 public order and Safety and Justice emergency number and C2000 and safety Police deployment B E-government: the availability of reliable B Digital Public The Interior personal and corporate data about government Administration and Kingdom individuals and organisations, the ability Relations to share such data, and the availability of data systems which multiple government agencies require in order to function Source: Hamelink and Mutsaers (2015). Reference Guide for Climate-Smart Public Investment 22 Infrastructure network planning should precede country’s approach to adaptation and its transition to a project planning, and projects should always low-carbon economy. be considered within the broader context of the infrastructure networks within which they sit. It is important that medium-term strategies are Infrastructure planning is usually done through long- consistent with a country’s long-term objectives term infrastructure network master plans (e.g., a long- and that any interim goals to track progress do not term national road sector master plan) and medium-term incentivize investments or technology pathways that investment plans (e.g., a five- to 10-year road sector will fall short of the ultimate targets. Medium- and long- investment plan). Climate-informed project planning term goals must be broken down by the scope and time requires that projects are formulated and prioritized frames so that individual sectors can avoid excessive for further development depending on the importance disruption. Actions in the short run, for example, such as of their contribution to a network’s overall resilience, switching energy production infrastructure from coal to in addition to standard criteria—in other words, their natural gas, may help hit short-term targets but may prove criticality in the face of climate change–induced hazards incompatible with net-zero targets in the long run. Long- and their role in decarbonizing the economy. An essential term strategies should be careful to identify potential component of the planning process is to review existing risks for public investment that can lead to stranded assets and the project portfolio. The objective here is to assets and path dependency. Both these outcomes can identify strengths and weaknesses, as well as to spot create setbacks in a country’s long-term objectives and candidates for additional investment, new investment, or can contribute additional costs. elimination.26 Delivery of infrastructure services through transport, electricity, water, and telecom networks is International coordination on climate objectives important in its own right. However, these networks is important but must remain closely aligned can also be important in ensuring continuous delivery to national objectives and ambitions. Nationally of important public services in social sectors, such as Determined Contributions (NDCs) are set by individual health and education. A project’s criticality should extend countries as a voluntary mechanism for communicating to its importance in ensuring continuity in public service their adaptation and decarbonization ambitions in a delivery in other sectors, particularly those where timely coordinated framework. High impact NDCs and Long- delivery is essential. This will require governments to term Strategies (LTSs) tend to be closely connected break down barriers between what are historically siloed so as to provide a consistent message on national sector-focused activities and to become more holistic in objectives and investment priorities, thus guiding the their planning and implementation efforts. flow of domestic and international resources efficiently.27 Although countries face pressure to align their targets 2.2 Climate-Smart Public Investment to the Paris Agreement (see Box 4), most country commitments fall short of this mark. Strategies and Planning Net-zero commitments often require difficult trade- offs between development objectives, adaptation 2.2.1 Creating Climate-Smart Plans from choices, and the pace and depth of decarbonization. Long-Term Objectives The World Bank’s new diagnostic tool, the Country Climate and Development Report,28 is designed to Decarbonization and adaptation will take decades to support countries in examining development, adaptation, achieve, and long-term strategies are necessary to and decarbonization objectives across different establish clear objectives and pathways that span climate scenarios. This helps to inform national climate multiple political cycles. Long-term climate strategies strategies in a structured and rational manner. The result typically extend to 2050. These integrate climate with of the diagnostic is a Resilient and Net-Zero Pathway national development strategies and outline a clear (RNZP) with concrete and efficient development path for decarbonizing the economy. Ideally, they are options, medium-term milestones, and short-term backed by a robust framework for delivering on the priorities that are consistent with a country’s long-term headline objectives. Such strategies provide signals climate objectives. that set the pace of change and the broad direction of a Reference Guide for Climate-Smart Public Investment 23 Box 4. International Coordination on Long-Term Objectives for Climate Planning With very few exceptions, all countries have submitted NDCs to the United Nations Framework Convention on Climate Change (UNFCCC) registry and are in the process of updating them for the treaty’s second five-year cycle. Although this appears impressive, the level of ambition is far from what is needed29 and it obscures the relatively poor coherence between NDCs and the existing planning framework in most countries. Escalating ambition in the NDCs needs to be clear and consistent if the necessary global targets are to be met. Mainstreaming of NDC Target Into National climate change policy/strategy/law Sectoral budgets Sectoral development plans Sub-national budgets Sub-national development plans National budgets National development plans 0% 20% 40% 60% 80% 100% Yes In preparation No National and sector plans should provide the basis for NDCs. In practice, this link is often poorly articulated. The last stocktake of NDCs notes that fewer than half of all countries surveyed have developed long-term transition strategies, and the majority of those that have are industrialized economies. About half of countries have mainstreamed NDCs into policy and planning, although fewer than half have integrated NDCs with national budgets and investment programs. Articulation between national plans, sectoral plans, and NDCs tends to be particularly weak in developing countries. All too often, national investment programs do not reflect NDC priorities. Meanwhile, NDCs are typically geared toward mobilizing climate finance, with a particular focus on ambitious investment programs that require external financing. As regards regulatory, tax, and spending policies, however, most NDCs provide little guidance. Further work is needed on the development of policy instruments that allow developing countries to communicate their financing needs while ensuring that their planning instruments create a realistic basis for investment programming. The World Resources Institute has prepared guides to support countries in enhancing NDCs in advance of the Conference of Parties (COP26).30 It also hosts an NDC Partnership platform with useful toolkits and knowledge sharing. In cooperation with the platform, the World Bank has a facility to support client countries in developing and implementing their NDCs. An example is the support given to Zimbabwe to link its NDC with PIM and budgeting processes and to pilot that approach in key projects. The “Vulnerable 20” group of countries (V20) has established a more aggressive approach to addressing climate change and the decarbonization of their economies. The group has developed Climate Prosperity Plans (CPPs) that go beyond NDCs to identify specific measures and actions that each country will take to reduce its emissions. The V20 group is backing up national-level CPPs by assembling financial support facilities. A case in point is their Sustainable Reference Guide for Climate-Smart Public Investment 24 Insurance Facility, developed as part of the broader network under the InsuResilience Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions. The World Bank Outlook 2050 Strategic Directions Note31 serves as an important starting point and reference for guiding long-term climate planning. Source: Authors; and UNFCCC (2019). The time frames, actions, and legislation developed in a government’s plan and can see a pipeline of CS through a country’s national framework for transition investments in the medium and long term. Sector planning will determine how realistic and credible its strategies form an important vehicle to ensure policy climate goals are. Transition plans underpin a country’s coherence at the sector level and to guide change national long-term objectives. To be effective as signals, across networks. The consolidation of the sectoral risk it is important to show ambition while also being realistic. assessments and plans in the national planning process Doing so will help communicate a credible, phased should be iterative, thus guaranteeing that cross-sectoral pathway and a commitment to an orderly transition (see risks and opportunities are captured. A framework to Box 5 for an example from Costa Rica). Plans should lock in cross-sectoral policy for future governments identify sequenced packages of indicative investments is essential. Legislation is likely to be the method of for public institutions and investors to engage, identify, achieving this, although it is not a golden bullet: if plans and develop specific investment opportunities. Public- are not clear and realistic or if signals are mixed, then and private-sector actors will be more likely to make legislation may fail or cause unnecessary disruption.32 the necessary internal changes if they can be confident Box 5. Costa Rica’s Long-Term National Decarbonization Plan Costa Rica launched its long-term national decarbonization plan in 2019. This made the Central American country among the first in the world to showcase a comprehensive roadmap and policy package to achieve net-zero emissions by 2050. The plan covers three periods: beginning (2018–2022), inflection point (2023–2030), and massive deployment (2031–2050). The plan is ambitious, calling for the generation of all electricity from renewable sources by 2030, then making electricity the main source of energy for the transportation, residential, commercial, and industrial sectors by 2050. It also lays out countrywide solutions for solid waste management. The cost of implementation is currently estimated to be US$6.5 billion over the next 11 years alone, to be shared between the private and public sectors. Costa Rica built its plan through a combination of backcasting (goal-driven projections), open-source energy modeling tools, policy roadmaps, socioeconomic integration, and participatory processes. The framework includes both a scientific and a citizen advisory council, which equally provide evidence to the government on planning and progress. Source: Government of Costa Rica, adapted from World Bank (2020a). Kenya offers a good example of the evolution and period. Importantly for PIM, beneath the medium- progressive sophistication of a climate-informed term plans (MTPs) are medium-term investment plans policy and strategic planning. Table 5 shows, in (MTIPs) for individual sectors that mutually contribute chronological order, the main strategic documents and to the higher-level national planning and strategy plans for climate change mitigation and adaptation. The development cycle. Kenya has prioritized adaptation on five-year National Climate Change Action Plan is in its the basis of its high strategic importance to the country, second iteration, building on the intervening CS planning but decarbonization policies are also built into its sector- and legislation that has occurred during the intervening level planning where most relevant. Reference Guide for Climate-Smart Public Investment 25 Table 5. Kenya’s National Climate Change Legal and Policy Framework National Framework Description Kenya Vision 2030 (2008) The country’s long term development blueprint: this recognized climate change as a and its Medium-Term risk that could slow the country’s development. The Third MTP (2018–2022) elevated Plans climate change to a cross-cutting thematic area and mainstreamed climate change actions in sector plans. MTIPs are prepared to support implementation of the MTPs. National Climate Change The first national policy document on climate change: this aimed to advance the Response Strategy integration of climate change adaptation and mitigation into all government planning, (2010) budgeting, and development objectives. National Climate Change A five-year plan: this aimed to further Kenya’s development goals in a low-carbon Action Plan 2013–2017 climate resilient manner. The plan set out adaptation, mitigation, and enabling actions. Kenya’s NDC (2016) The country’s formal climate commitments adopted after Paris: this includes adaptation actions aligned to Vision 2030 and the MTPs. Its mitigation objectives seek to abate GHG emissions by 30 percent by 2030. Its success depends on international support in the form of finance, investment, technology development and transfer, and capacity development. Climate Change Act The first comprehensive legal framework for climate change governance for Kenya: (No. 11 of 2016) this Act has the state objective to “enhance climate change resilience and low-carbon development for sustainable development of Kenya.” It established the National Climate Change Council (Section 5), the Climate Change Directorate (Section 9), and the Climate Change Fund (Section 25). Kenya Climate-Smart A 10-year plan focused on agriculture: the objectives of this strategy are to adapt to Agriculture Strategy climate change and build resilience of agricultural systems, while minimizing GHG (2017–2026) emissions. The actions will lead to enhanced food and nutritional security, plus improved livelihoods. Climate Risk This integrates disaster risk reduction, climate change adaptation, and sustainable Management Framework development. It ensures that these goals are pursued in a way that is mutually (2017) supportive rather than in a stand-alone fashion. National Climate Change Successor to the country’s first Action Plan (2013–2017): this updated Plan provides Action Plan (2018–2022) mechanisms and measures to achieve low-carbon, climate-resilient development in a manner that prioritizes adaptation. It provides a framework for Kenya to deliver on its NDC under the UNFCCC’s Paris Agreement. The Plan guides the climate actions of Kenya’s national and county governments, the private sector, civil society, and other actors as the country transitions to a low-carbon, climate-resilient development pathway. In addition to the above (Volume 1), it consists of an Adaptation Technical Analysis Report (Volume II) and a Mitigation Technical Analysis Report (Volume III). Source: Kenya (2018). Reference Guide for Climate-Smart Public Investment 26 2.2.2 Assessments of Needs, Risks, and focus on individual sectors but should be coordinated Vulnerabilities for Climate-Smart Planning across the economy and take into account multi-sectoral network effects. A wide ecosystem of data and monitoring led by government is required to understand emerging A multi-disciplinary team is necessary to agree on infrastructure needs and to assess the increased the social and economic objectives motivating risk and vulnerability posed by climate change. investment. Infrastructure objectives will vary; economic Countries undertake assessments of their needs, risks growth, well-being, justice, environmental stability, and (both national and regional), and vulnerabilities to inform security all play a part. Political goals should not be their national climate change policy and to help frame ignored. In all countries, a small fraction of the project their long-term strategies and land use. These “macro” portfolio could be more socially efficient without such assessments are geographically broader than the structural constraints. An understanding of this may location-specific assessments that should be undertaken lead to trade-offs and policy packages that yield a more for individual projects (as discussed in the next chapter). effective overall investment plan. A range of possible Assessments will have to be updated periodically to metrics is identified in Table 6. take into account evidence of climate change as it proceeds, improvements in scenario modeling, and new With objectives in place, the assessment must understandings of risks and the adaptive capabilities of lay out options to meet these objectives under a natural and human systems. Governments will have to range of scenarios that take into account hazard determine the timing of assessments, the appropriate and transition risks. Options to consider include gray methodologies, the institutional responsibilities, and the versus green infrastructure (See Table 4 in Section role of nongovernmental stakeholders. 2.1.2), the degree of flexibility in design, centralized versus decentralized systems, and the balance between Assessments of needs, risks, and vulnerabilities meeting peak demand or overall level of service, among should cover both the adaptation and transition others. Payoffs between these different objectives raise aspects of climate policy. The discussion of both the importance of giving serious consideration to a variety physical and transition risks is found in Section 2.1, of innovative options for infrastructure development. The which also summarizes recent work by the IRGC to Network for Greening the Financial System (NGFS) conceptualize transition risks. The development of climate scenarios portal is a useful source of data for concepts, tools, and systems to assess a country’s domestic vulnerability assessments. In addition, the physical risks, vulnerabilities, and needs associated Country Climate and Development Report (referred to with climate change is more advanced than for transition in the previous section) represents a powerful diagnostic risks. Many of these tools can and should be expanded to tool. The report uses the data from these assessments incorporate a framework for transition risks (such as that to help countries understand the payoffs they face and developed by the IRGC) into the assessment process. to integrate the assessments into their climate strategy. This would enable a structured understanding and inclusion of these risks into the development of strategic Requirements to maintain the desired level of frameworks that guide PIM. services and outcomes over the lifetime of an investment are frequently underestimated. The cost Needs assessments are tools to understand the of ongoing maintenance and periodic overhauls are often gap between existing and desired infrastructure omitted or inadequately considered in assessments. within an economy. Significant new infrastructure33 and This is despite good maintenance that reduces the life technologies34 are required to deliver services effectively cycle costs of investments in transportation, water, and and remain competitive in the context of climate change. sanitation by over 50 percent.35 Existing and predicted To be useful, needs assessments must establish stresses caused by climate change and decarbonization infrastructure requirements under a range of scenarios must be incorporated into the assessments. Different that conform to the risks and ambitions in a country’s scenarios also need to be examined to ensure decision national framework. Needs assessments will usually makers can make informed choices. Reference Guide for Climate-Smart Public Investment 27 Table 6. Example Indicators for Measuring Infrastructure Service Needs Quality and Financial Environmental Sector Access Reliability Affordability Stability Sustainability Energy Number of people Frequency Electricity tariff; Share of Air quality; connected to the of brownouts connection cost operating costs water quality; grid; amount of and blackouts and capital CO2 emissions kilowatt-hours per costs covered capita consumed by tariffs Transport Number of people Road Road user cost; Adequate Air quality; living within roughness user fees and regular CO2 emissions 2 kilometers of an index maintenance all-weather road; budget number of people served by public transporation Water Number of people Water quality; Tariff; Share of Sustainability with access to number of connection cost operating costs of groundwater basic sanitation; hours of and capital extraction of people with continuous costs covered access to service by tariffs safe water Flood Number of people Absence of Local taxes; Adequate Ecosystems protection protected by the infrastructure land prices and regular destruction infrastructure failure in case maintenance of extreme budget event Source: Rozenberg and Fay (2019). National risk assessments provide national and A key objective is to cover macro and multi-sectoral regional governments and the private sector with issues so as to capture interconnected aspects of risk. an awareness of the physical and transition risks The government of Kenya produces a risk report to that they are likely to face over the medium to long identify broad risks to adaptation, which in turn informs term. The purpose of the national risk assessment its National Adaptation Plan (NAP) and sector plans (see is to provide a comprehensive review and prioritize Box 6). The importance of individual factors may change, interventions to inform a country’s national climate given evolving information. Revision of the assessment policy and its transition plan, land-use plans, and sector criteria must therefore be built in, as with the example plans. It also provides background for examining risks of the UK’s Climate Change Risk Assessment, which is in individual projects (as discussed in the next chapter). revised every five years. Reference Guide for Climate-Smart Public Investment 28 Box 6. Kenya’s Climate Risks and Key Sources of Vulnerability Kenya’s NAP and National Climate Change Action Plan are underpinned by a hazard risk and vulnerability assessment contained in separate technical documents (which are then summarized in the plans). The latest assessment is contained in the Adaptation Technical Analysis Report. The risks and hazards identified in the assessment are summarized in graphic form below. Climate Hazards/ Sources of Climate Risks Key Sources of Vulnerability High levels of Environmental Destruction or multi-dimensional poverty, degradation degradation of Rising temperatures particularly in ASALs ecosystems Uncertain changes High reliance of the Water scarcity and Insecure land tenure and in rainfall patterns national economy and mismanagement of land fragmentation local livelihoods on water resources, rain-fed agriculture particularly in ASALs Rising sea levels and stronger storm surges Rapid population Heavy disease burden Gender inequality growth and migration to and limited access to urban areas quality healthcare Extreme weather events (droughts, floods, and landslides) Increased insecurity Source: Kenya (2018). Note: ASAL refers to Arid or Semi-Arid Lands. Reference Guide for Climate-Smart Public Investment 29 Assessments must prioritize risks in terms of urgency research is required to reduce uncertainty about the risk in order to inform policy and funding decisions. As in question and to ascertain whether or not additional a first step, policy makers must decide what tolerance action is necessary. The third tier covers risks where they have for climate risks. This is typically done using the planned level of activity is judged appropriate and a matrix to plot an event’s impact versus its probability information to assess the risk is considered adequate, of occurring. This analysis then allows for actions to but where continued implementation of policies and be prioritized based on respective risk preferences.36 plans will assist in the risk’s ongoing management. Policy makers can then apply a traffic light system to The least urgent tier covers areas where there is no identify “tiers” of tolerability. The most urgent risks are indication of significant risk. Even here, risk levels and those that require immediate action with new, stronger, adaptation activity should still be kept under review so or different government policies in the next five years that further action can be taken if necessary.37 The United in order to reduce a country’s long-term vulnerability to Kingdom uses this framework in its Climate Change Risk climate change. The second tier of risks are those where Assessment (CCRA, see Box 7). Box 7. Climate Change Risk Assessment in the United Kingdom The UK’s Climate Change Risk Assessment (CCRA) 2017 is a legal requirement of the 2008 Climate Change Act.38 Its purpose is to outline the governments’ medium-term views on climate change–related risks to Parliament. It also directly informs the NAP and appraisal guidelines. The assessment is updated every five years and is national in scope. It identifies broad priority levels for each identified risk and the time frame for its anticipated impact. The broad priorities are split into 56 individual risks and opportunities, each receiving similar urgency scores with policy recommendations to support each one. Each of the three devolved governments has variations in climate risks and its own legislative framework. Tailored reports covering specific subnational risks, opportunities, and priorities are included. These are used in the first instance to give an indication of the potential climate change risks that are relevant to any options considered for a policy, program, or project. The full list of risks should then be consulted in detailed planning. Flooding and coastal change risks to communities, businesses and infrastructure Risks to health, well-being, and productivity from high temperatures MORE Risk of shortages in the public water supply, and for agriculture, energy ACTION generation and industry NEEDED Risks to natural capital, including terrestrial, coastal, marine and freshwater ecosystems, soils and biodiversity Risks to domestic and international food production and trade New and emerging pests and diseases, and invasive non-native species, RESEARCH affecting people, plants, and animals PRIORITY Now Risk Magnitude Future LOW MEDIUM HIGH Source: United Kingdom (2017). Reference Guide for Climate-Smart Public Investment 30 Assessment of transition risks must consider be considered within a scenario framework. This financial and non-financial impacts at portfolio allows policy makers to examine financial and non- and individual asset levels to adequately inform financial impacts at different possible trajectories and investment policy. Figure 4 below lays out a transition over different time horizons. The network of public and risk assessment framework for infrastructure adapted private assets that all need to decarbonize means that from ClimateWise at the Cambridge University Institute alignment between public and private financial driver for Sustainability Leadership. The three-step approach analysis is important. Consistent use of a framework starts at the portfolio level, examining transition risk for analyzing non-financial drivers of transition risk is exposure across the existing asset and project pipeline. similarly important as this helps ensure that assessments An exposure matrix will reveal areas of greater risk are simple to understand and easy to compare. In this or opportunity across the portfolio, helping to identify way, their value as a source for informing a national or priorities for deeper asset-level assessment. Across sectoral investment strategy is greatly increased. the steps, financial and non-financial drivers should Figure 4. Transition Risk Assessment Framework for Infrastructure Quantification of Transition Impact Step 1 Step 2 Step 3 Portfolio Risk & Project or Asset Impact Financial Scope Opportunity Exposure Identification Modelling Analysis Financial driver analysis: Assess how a project/assets’ cost and revenue drivers could be impacted by low-carbon transition (align with TCFD) Non-financial driver analysis: Assess how low-carbon transition affects social welfare, environ- Methodology mental, justice, or other non-financial drivers (align with IRGC or similar transition risk framework) Transition scenarios: Select appropriate scenarios and leverage publicly referenced datasets to determine transition impact on drivers Infrastructure Risk Project/Asset Impact Financial Exposure Matrix: Identification: Modeling Analysis: Assessment Assessment across a breadth Depicted via case studies to Incorporate transition impacts of asset types and their assess transition impact at on financial drivers into an transition exposure project/asset level asset model For organizations to assess For departments, agencies, For departments, agencies, exposure to transition risk or companies to assess impacts or companies that have User across their portfolio on their assets and proposed completed steps 1 and/or projects across different step 2 asset types Informs decision makers Indicates options for asset Enables qualification of and planners on potential managers and owners to potential financial impact on Benefit future allocation of funds improve asset resilience, asset returns, assessment and diversification of identifying the most of investment options, investment portfolios exposed drivers or exit strategy Inform Investment Strategy Source: Adapted from CISL (2019). Reference Guide for Climate-Smart Public Investment 31 Relative vulnerability to physical and transition risks benefit from a more comprehensive risk assessment varies across economies, but all economies should for projects that are very large or long lived. Particular work to include both aspects in risk assessments. focus should be given to those project that classify as National and regional geography, politics, demographics, critical infrastructures. economic development, and existing infrastructure will significantly impact exposure to physical and transition National risk assessments comprise important risks and opportunities. Establishing assessment inputs into land-use planning. The Kenyan and UK capabilities can be challenging; countries will benefit examples refer to high-level national climate hazard risk from starting with relatively simple tools and building up, and vulnerability assessments. Where available climate focusing on either physical or transition risks—whichever change projections allow (which will often depend on the is more important—rather than trying to do everything geographic size of a country), climate hazard risk and at once. Both areas of risk are, or will be, relevant vulnerability assessments should be carried out to inform to some extent in almost all countries. Adaptation or land-use planning and zoning. The Canadian Province decarbonization issues may seem abstract in certain of Manitoba, for instance, requires such an assessment national circumstances. However, infrastructure as an input to land-use planning. This recommended development has extended lead times and very often, approach is summarized in Box 8. decades of lifespan. This suggests that countries would Box 8. Manitoba’s Guidance on Carrying Out a Climate Change Vulnerability and Risk Assessment to Inform Land-Use Planning “The first step to climate change adaptation is to assess vulnerability and risk. Any planning authority can undertake this and use the information to help guide land-use planning… 1. Forecast the possible impacts of a changing climate on the region: This generally entails using climate models. Because the climate is changing, using past climate data will not provide an accurate prediction of how the climate will look in future. Climate models will predict a region’s future climate and ways that the region may be affected. Once anticipated changes are assessed, determine what some of the impacts of those changes might be, for example, increased flooding or drought. 2. Determine the risks associated with the likely impacts and the level of vulnerability to those risks: Assess the vulnerability of the natural environment, infrastructure, and health and safety of citizens to weather-related events. This will determine the degree of damage or loss that may occur when severe weather strikes. Examine the resilience of existing systems and the capacity to be able to handle changes by asking the following questions: • Can the service area currently accommodate existing weather patterns and changes in climate? For example, has the storm water system been able to handle flash floods? • Are there any barriers to the service area’s ability to accommodate changes in climate? • Is the service area already strained in ways that will limit its ability to accommodate future changes in climate? Remember that not all changes will be risks; some are also opportunities. For example, the potential to develop a new product or service may arise out of a warmer climate, such as growing new crops. 3. Apply the information learned to land-use planning: Knowing the changes most likely to come, the risks (and opportunities) associated with them, and local vulnerabilities, apply this information to land-use planning processes. What changes are needed, if any?” Source: Government of Manitoba: https://www.gov.mb.ca/mr/plups/pdf/cca.pdf. Reference Guide for Climate-Smart Public Investment 32 Investments in weather forecasting and early services are well documented, as is their relatively high warning systems save lives and help protect assets benefit-to-cost ratio.41 All things considered, studies at relatively low cost.39 Monitoring and warning systems suggest that such ratios for weather forecasting fall for fires and floods are a high-return method for protecting between 1:2 and 1:14 in European and Asian countries.42 assets. A significant proportion of household and business assets can be moved out of harm’s way given Weather forecasting and early warning capabilities adequate warning; for example, a study from Germany form a chain that is only as strong as its weakest noted that one-third of household assets and 80 percent link. The value chain of climate-related data requires of manufacturing assets could be protected from floods both capacity and systems for collecting such data and this way.40 In the case of hurricanes, even a few hours or the ability to interpret, share, and use this subsequent minutes can be enough to secure essentials and move information to guide policy or individual investments. to safer ground. Increasingly, air quality forecasts warn In many developing countries, the low capacity of of dangerous levels of pollutants typically caused by hydro-meteorological monitoring systems hinders the weather events combined with fires or urban pollution. availability of useful and timely data and forecasts. Weak Such weather forecasting and early warning systems communication and poor use of these forecasts can also have other benefits. They help farmers to decide further limit their effectiveness. The significant investment when to plant, sow, and harvest; they help electricity and cost involved in upgrading and expanding systems and water utilities manage demand; and they help airlines and monitoring capabilities may be off-putting for some shipping companies to plan routes. The socioeconomic governments, despite the socioeconomic benefits of a benefits of hydrological and meteorological (hydromet) well-developed hydromet value chain (see Box 9). Box 9. Hydromet Value Chain: Impact on Socioeconomic Benefits and Infrastructure Basic hydromet services cover forecasts and warnings of Hydromet Value Chain disasters to improve the safety and well-being of citizens and to safeguard property. Specialized services provide sector-specific information for weather-sensitive activities, such as projections to Weather guide the operation of solar farms, marine traffic, or agricultural cycles. A combination of historic data and forecasts is essential in the development of large infrastructure, both on construction Observation Service provided by specifications and efficiency in O&M. National meteorology and public or private? & Monitoring hydrology services (NMHS) are public-sector entities typically mandated to provide the most basic services while a mix of providers offer specialized services. There is no particular Modelling & Forecasting arrangement for the provision of public and private roles that is superior,43 but the literature does emphasize the importance of developing the entire hydromet value chain for the full value of the Services: approach to be realized.44 NMHS are facing serious challenges Basic/Specialized in responding to increasing demands due to climate change. This is especially the case for low-income countries (LICs) and some middle-income countries due to a lack of resources, basic Communication & Interpretation infrastructure, technical capacity, and visibility within their own governments. To address these issues, governments must strategically consider roles throughout the value chain, not just the NHMS. Additionally, they must embrace the growing amount Decision Making of information provided by global open-source data platforms. Source: Concepts and diagrams adapted from World Bank and GFDRR (2020); WMO (2015); and Lazo (2016). Reference Guide for Climate-Smart Public Investment 33 Risk and vulnerability assessments require a range Platforms for data access and management allow of data sources for information on future climate authorities designing and managing projects to use change scenarios.45 Atmospheric-Oceanic General available data to its full extent. The array of information Circulation Models (AOGCMs) provide mathematical available from national, international, and local sources representations of the climate and ocean systems that can be bewildering and difficult to interpret and forecast changes in global climate patterns induced by disseminate. The government plays an important role in increasing GHG concentrations. AOGCMs typically have coordinating this part of the value chain. Environmental a horizontal resolution of 250–600 kilometers, which is too and disaster management agencies use various platforms low for country-level analysis. Downscaling techniques to manage information on weather-related risks as well have to be used to translate AOGCM results into more as climate and environmental changes. They can also granular regional, country, and local-level projections. advise on, and contribute to, the targeted assessments This can be done using either dynamic downscaling, required for different purposes (see Box 10). GeoNode based on a regional climate model within a global is a widely used, open-source platform for spatial data model, or statistical downscaling, which relates climate management designed to inform project planning. City- features to meteorological data from a particular region level geographic information system (GIS) platforms in or country. Regional modeling tools with fine resolutions Peru and elsewhere (see the list of resources in Chapter are available (e.g., UK Meteorological Office’s PRECIS), 5) bring spatial data together with environmental and but these require significant computer capacity and skills hazard data and regulatory requirements to provide a in data interpretation. public one-stop shop to inform the design and location of infrastructure and buildings. Box 10. Digital Platforms for National, Regional, and Local Risk Management Free platforms such as the World Bank’s Climate Change Knowledge Portal and Think Hazard!, provide data that are adequate for broad policy purposes. Organizations, such as the Sendai Framework and PreventionWeb, have been established for coordinating and sharing knowledge on disaster risk management (DRM) with themes around infrastructure. Open source, global facilities, such as CRU, Copernicus, EM-DAT and OpenDRI, provide increasingly granular and accessible datasets on historical and projected climate indicators, as well as disaster incidence and risk. At the city level, platforms such as YBPS in Yangon provide the public with access to regulatory and risk information on building projects. Commercial and nongovernmental actors are producing risk assessments at the national and city levels in developing countries (see Verisk 2021 and germanwatch.org). Source: Authors. To manage risks in a low-cost manner, policy makers damage from weather events to changing use and must use risk assessments to identify measures reliance patterns. Inventorying and categorizing risk for risk reduction and inform risk layering. Over the is an important first step to prioritized planning. long run, well-costed and implemented risk reduction measures are a more effective use of public money than (2) Identifying risk appetite. Some risk is unavoidable, ex post response and recovery.46 Dealing with contingent but some can be eliminated through investments. liabilities requires: The public sector must decide what level of exposure to a risk is tolerable and justifiable if it is realized. (1) Identifying and prioritizing risks through risk Put another way, what is the public sector willing to assessments. Risk assessments identify the nature, put at risk to achieve the desired benefits to society? severity, and likelihood of possible risks, both within The appetite for risk will vary between the public and individual assets as well as the broader public asset private sector, between institutions, and over time. It portfolio. Risks may cover a range of outcomes, may inform overall risk priorities and therefore be an from the impacts of catastrophic failure to chronic iterative process as the assessment is undertaken. Reference Guide for Climate-Smart Public Investment 34 (3) Setting out clear roadmaps to reduce liability financial instruments that reflect the opportunity through hard and soft risk reduction activities. costs. Options may include contingency funds, Hard risk reduction activities include strengthening insurance, or future fiscal policy adjustments. Not all vulnerable structures and constructing protective of these will be available. Furthermore, over time, infrastructure, while soft ones include development governments may wish to modify the instruments planning and building code enforcement. Some used and add, drop, or reprioritize the coverages activities may need to be terminated to reduce risk provided to manage their portfolio in line with the to acceptable levels. revised risk assessment criteria. (4) Identifying and deciding between risk retention 2.2.3 Disaster Risk Management to Assist or risk transfer for managing remaining risks. Climate-Smart Planning Where risks still remain that cannot be eliminated or where the risk exposure is considered tolerable, Many of the same methods, tools, and documentation policy makers must decide whether to retain the risk for preparing disaster risk management assessments or seek to transfer it. Risk transfer can be realized can be applied to identify CS adaptation needs. through insurance or other mechanisms to offset Disaster risk management (DRM) has a well-established the consequences of the risk to a third party that is protocol of evaluation and assessment that has been more capable of managing the realized effects of a used by governments at the central, state/provincial, hazard. Some risks are not fully transferrable, so risk and municipal levels for decades. It allows planners transfer may not always be an option. to understand where the greatest risks from natural disasters may occur, what people and assets may be (5) Using risk layering to select the most efficient at risk, how great these risks are, and what means can financial instruments and interventions to best mitigate and respond to risks as they materialize. address the risks. Some hazards may be unlikely An illustration of these similarities can be seen in the but require huge amounts of financing if they happen. approach taken within the Asian Development Bank’s Others may be far more likely but less costly. Efficient (ADB) guide, Understanding Disaster Risk for Advancing risk management requires governments to select Resilient Development, illustrated in Figure 5. Figure 5. Elements Considered in Evaluating Disaster Risk Exposure Vulnerability Disaster risk Geophysical and hydrometeorological hazards Source: ADB (2018). Reference Guide for Climate-Smart Public Investment 35 DRM plans can be adapted to make public planning greatest benefits. These are all critical components of climate smart, helping to shape the destination of CS-PIP. DRM assessments inform governments where billions of dollars of critical public investment— risks and opportunities to protect or mitigate lie and and the livelihoods that are linked to it. Disaster risk help create an efficient allocation of resources—natural, assessment processes yield a rich trove of public and economic, financial, and social—to address the risks that natural assets, mapped to specific geographic locations are identified. In the context of DRM, these resource and and population clusters and assessed against a wide planning decisions take on heightened importance in the array of risks. Typical output from a DRM assessment face of climate change risks, providing the difference yields inventories of vulnerable population centers, between a city remaining functional or being crippled and details of climate-sensitive infrastructure, and insights as for its inhabitants, potentially constituting the difference to where hardening and improvements could yield the between life or death. Figure 6. Example of GIS Layers Useful in Climate-Smart Planning Source: USGS (2016). Reference Guide for Climate-Smart Public Investment 36 Development of a comprehensive GIS database can is permitted. A GIS database provides a common be one of the most powerful tools any government destination for information and a common language has to prioritize CS planning and investment. GISs for planning. It can also serve as a primary means of are among the most important tools that governments prioritization of the myriad project proposals in front of can have to identify risks and understand the potential a planning team. A sample of GIS layers is illustrated in scope of their impacts. They provide the location of Figure 6 and information on potential layers is provided critical infrastructure (i.e., on, above, and below ground); in Table 7. By way of illustration, a practical example of a where populations are concentrated; how vulnerable city-level tool for accessing GIS-linked vulnerability and a topography is to flooding; and where development risk assessments is found in Box 11. Table 7. Overview of Typical GIS Database Features Natural Features Built Land-Use and Environment Environment Categorization Demographics Economics • Topography • Property • Zoning overlay • Population • Per capita • Water bodies ownership and vs. actual density income • Meteorological boundaries land use • Gender • Property tax data • Roadways, • Land-use change • Age rates • Flood zones for bridges, tunnels historic records • Ethnicity • Employment various intensity • Rail, transit • Development • Education types storms infrastructure plans • Employment • Travel origins/ • Soil character • Utilities • Areas of critical destinations, • Impervious area, • Structures habitat commute time green cover (categorized) and distance • Critical public facilities Additional • Critical means • Vulnerable • Social and • Type of dimensions of egress settlements environmental economic activity • Movement of • Trends in natural justice areas • Concentration of supplies and cover, impervious economic activity assistance surfaces, • Economic, erosion, flooding health, and social lifelines Source: Authors. Box 11. Quezon City, Philippines Risk Atlas Use of GIS-linked vulnerability and risk assessments allowed the municipality of Quezon City in the Philippines to develop a citywide “risk atlas.” Quezon City is part of the Metro Manila urban agglomeration on Luzon Island in the Philippines. It is the country’s most populous city, with 3.2 million residents living at a density of 17,760 people per square kilometer. The city has a particularly high risk exposure due to extreme terrain, with sharply rising mountains to the north, narrow but high flowing rivers running through its center, and a preponderance of low-lying areas that are densely populated. This has led to severe flooding on a regular basis with devastating impacts for the city’s population. With the help of extensive surveys to populate a GIS database, backed by district-by-district, ground-level data corroboration, the Quezon City government has been able to map out the areas of greatest vulnerability and to indicate areas of safety. This has allowed the government to strategically locate rescue and relief resources around Reference Guide for Climate-Smart Public Investment 37 the city to areas of highest need. It has also led to the construction of both natural and manmade defenses in the river valleys to both absorb and calm moderate flooding and divert flows during high volume periods. As such, the city now has a highly effective, well-coordinated disaster response. Furthermore, it is well positioned to prevent development in the most vulnerable land areas. Source: Bendimerad et al. (2013). See Earthquakes and Megacities Initiative for further information. . Modern satellite and geolocation tools can greatly location specific, it is also important for geo-referencing assist governments in building CS portfolios (location coordinates) to be included as part of the that embody core resiliency and sustainability comprehensive data held in asset registers and information. Since vulnerability and risk are highly supporting systems (see Box 12). Box 12. Using New Technologies for Climate-Smart Asset Management Using new technologies such as satellite images can make collecting and processing climate data easier and facilitate the updating of asset registry databases. A comprehensive information system also represents a precondition to ensuring that controls are implemented and applied consistently and that the (climate-resilient) information needed to inform decisions is clear. Enhancing the governance of public asset management (PAM) involves not only creating awareness on climate change implications, including risk management and cost-benefit analysis (CBA), but also fostering accountability for asset management and inclusive decision making. Such information systems need to be interconnected with countries’ meteorological and geological datasets as well as with disaster risk and response databases where they exist. As planning and climate change require a forward look, authorities can leverage accepted climate forecasting models that become increasingly precise and granular from a geospatial perspective. Source: World Bank (forthcoming). Reference Guide for Climate-Smart Public Investment 38 Geospatial relationships can assist planners in development plans so as to better align public creating a lower-carbon, more efficient living space. investment activities with sustainability goals. Buildings, both residential and commercial, and road Spatial climate risk and vulnerability assessment transportation are among the top activities driving approaches should be uniformly applied for public, most developed land-area emissions, accounting for private, or institutional land development or land-use 31 percent of the global total.47 Individual passenger activities. Equally, mapping and land-use planning vehicles emit more CO2 per kilometer than any other can go hand-in-hand to create lower carbon-emitting form of transportation.48 Cities with greater reliance development, transportation, and energy consumption on individual passenger vehicles to get between profiles for populated areas. This approach therefore origins and destinations have a higher percentage forms an important part of any PIP planning process of transportation-related emissions. Creating means and subsequent PIM. Accordingly, detailed land-use by which to allocate land uses for more densified and inventories and well-considered land-use plans can convenient origin-destination pairs, accessible by a have a major impact on directing climate-informed variety of public and micro forms of transportation, can public investment. lead to significant reductions in GHG emissions. Further, immediate proximity of developed areas to green 2.2.4 Evolving Climate-Smart Standards for space has measurable impacts on air quality, street- Climate-Smart Planning level temperatures, and populations’ mental well-being. Such factors make proper allocation of space, and the CS planning requires context-appropriate use of that space, critical to promoting decarbonization standards to address physical risks and align and sustainability. public infrastructure with decarbonization goals. To achieve this, governments will need to review and revise CS-PIP processes will encourage government existing standards. Governments can be informed by agencies to thoroughly screen regional and local new international and voluntary standards that address Reference Guide for Climate-Smart Public Investment 39 climate concerns, but these need to be adapted to result of numerous ad hoc efforts to address specific local contexts. Typical standards will include increased established hazards by actors across the sphere of resilience, energy and water efficiency, sustainable government.49 The result is a patchwork of standards that sourcing (in some cases), and use of renewable energy. is inconsistently updated and often fails to fully address The first question governments will want to ask is the bigger picture of economy-wide risks. Figure 7 uses whether public assets are to be subjected to the general the example of building codes to compare discrete national codes and standards or whether more rigorous sets of risks where there is a clear sectoral mandate standards are necessary. (in the central circle) with larger-scale cross-sectoral emerging risks (outside the circle) where climate-related Reviewing standards to meet CS planning risks feature prominently and mandates for regulation requirements creates an opportunity to improve the and enforcement are less clear. Coherence of these overall coherence of the framework of standards. cross-sectoral risks across the standards framework Most standards are regulated at the national level but is essential for CS planning. Although the updating of developed and maintained through semi-autonomous standards will need to be managed by the mandated agencies. Many are developed reactively and in silos, agencies, national-level guidance to improve coherence leading to a regulatory system that is the cumulative is crucial. Figure 7. The Bigger Picture: Invisible Risks when Viewed Through the Lens of Building Codes Risks to future generations Climate impact Resource depletion Fire safety Structural integrity Embodied energy Dependence on non-renewable energy Means of egress Pollution Light Loss of habitat Ventilation Toxicity of materials Heat Loss of biodiversity Water & wastewater Nutrification of water Electrical & gas Loss of agricultural land Energy efficiency Heat island effect Increased transportation Externalized costs to society Source: Eisenberg (2016). Reference Guide for Climate-Smart Public Investment 40 Guidance set by the International Organization increasingly being used in larger public investment for Standardization (ISO) offers a common default projects and critical infrastructure funded by both national system in many countries, but this may not be and subnational actors in higher-income countries. These appropriate for all contexts and is often used to fill codes may not be appropriate for all circumstances gaps in nationally developed code systems. The code as they have predominantly been designed for system has recently undergone significant upgrades developed countries and are typically biased toward to improve life cycle analysis to identify and address the environmental dimension of the “triple bottom line” decarbonization objectives and also the construction and definition of sustainability.51 Box 13 provides an overview retrofitting of existing structures with efficient materials of major infrastructure sustainability and building rating and standards for adaptation planning.50 Although these and standard systems. Economic or societal aspects changes will not yet be reflected in most national systems, of sustainability are particularly important for LICs as they provide a useful guide to regulatory gaps. They can development and urbanization take different paths and be used to support voluntary components of regulatory have varied national preferences compared to developed systems, for example, and can help inform pathways for countries. The International Finance Corporation (IFC) increased ambition. Excellence in Design for Greater Efficiencies (EDGE) and Greenstar systems are simpler to use and designed Established international voluntary sustainable for audiences in developing countries. GreenStar SA is building standards now exceed most national currently working to expand the socioeconomic indicators regulation, and those tailored for low-income in its rating system. countries (LICs) include important socioeconomic objectives. Sustainability and resilience ratings are Box 13. Sustainable Infrastructure and Buildings: Voluntary Rating and Certification Tools Numerous standards for rating and certifying infrastructure have gained international recognition in recent years. They cover a range of different aspects, from civil infrastructure efficiency and resilience in the public realm to building codes and sector-specific infrastructure. Most have evolved from voluntary codes developed in national settings and, as such, are tailored to suit different types of economies and geographies. More recently, building code systems have been designed specifically for use in LICs. EDGE, supported by the IFC, has been widely used in IFC-funded projects. GreenStar is designed to be modified and maintained by national associations to improve country relevance. Below is a list of the most common and relevant standards for most client countries. For a more complete list of global rating systems, their areas of coverage, and their regional variants, see: International Federation of Consulting Engineers (FIDIC) and World Green Building Council (WGBC). Infrastructure Sustainability Building Codes BREEAM Infrastructure (UK and international) BREEAM (UK, Europe, and international) IS Rating (AUS and NZ) LEED (US and international) Envision (US) CASBEE (Japan) GreenStar (AUS, LICs) EDGE (IFC for LICs) Source: Authors. Reference Guide for Climate-Smart Public Investment 41 To steadily progress toward CS regulations, for reducing CO2 when policy packages to improve governments can use voluntary standards combined compliance are deployed.55 In LICs, bridging between with incentives to raise the bar over time. Regulation government programs and voluntary standards can be an and transition targets depend on the existing infrastructure effective way to build regulatory systems that are able to portfolio and the level of national ambition. Achieving be adaptive and can respond to larger risks without relying those targets will require a mix of tools and policies that on the traditional, slower, and more reactive regulatory respond to the context and local capacity. Voluntary development. The affordable housing scheme in Kenya standards are extremely helpful for proof of concept and described below in Box 14 provides an illustrative case in for building momentum as investors and consumers seek point. In the absence of incentives, voluntary standards, assets that comply with those standards. Case studies in such as the European Performance of Buildings directive West Africa and the Pacific rim find that regulation can (which led to the Energy Performance Certificate), be improved by reassessing codes based on voluntary can have an indirect impact by means of perceived standards52 and that coercive regulation is more effective and real improvements to asset value and efficiency.56 when combined with advocating for the adoption of Introducing bans on low-efficiency rental properties and voluntary standards and financial incentives.53 A review deadlines for higher levels of compliance can reinforce of American building codes makes a strong economic value differentials. Announcing changes with enough case for adopting upgraded codes and exceeding lead time and providing options for financial support to them.54 A study of the Australian buildings control regime budget-constrained owners (e.g., through subsidies) are finds building codes to be a cost-effective instrument important considerations. Box 14. Development of Voluntary Green Building Standards and Engagement with Public Investment Programs in Kenya The Kenya Green Building Society is a not-for-profit pioneered by local private-sector actors, such as the consultancy firm Urban Green Consultants. It is supported by the World Green Building Council and by the developers of international green building standards, Green Star and EDGE (IFC). Established in 2012, its mandate is to advocate for the sustainable certification of buildings, to support the training and accreditation of assessors, and to link investors and contractors with certification agents. It has helped support the modification of the Green Star SA rating code for the local context in Kenya. More recently, it has successfully advocated for the government of Kenya to decree that a major affordable housing initiative funded by the Ministry of Transport must meet EDGE compliance. Finally, it has worked to establish short-term bulk discount rates for auditing and certification fees. Source: Authors. Reference Guide for Climate-Smart Public Investment 42 2.3 Managing Public Assets as cases, between continuity of life and its disruption. Given that current assets are likely to have been put in place Climate-Smart Portfolios over wide-ranging periods of time, their functionality and suitability for current usage can vary considerably. Having a firm grasp of public asset portfolios therefore Governments possess a wide array of assets represents a high priority for governments in a designed to provide specific public services, yet changing world. those assets can also be useful in providing “climate services” beyond their original purpose. This section Public assets can work double duty to provide CS will define what public asset portfolios are and explain services. Public assets could be purposely designed how government agencies can make use of them to and built to deliver climate resiliency or protection. Others deliver reliable, sustainable, and resilient public services, may be existing assets built for a different purpose but whether as part of a decarbonization plan or as part of have the capacity to be modified or repurposed in order a climate adaptation program. Planners benefit hugely to also provide CS services. Alternatively, they may have from having a clear picture of a government’s portfolio of been built to provide services to a specific government assets. Information about the location and use patterns sector but are able to provide climate-related services to of these assets, coupled with their strengths and another; for example, an embankment carrying a transit vulnerabilities, can assist planners in focusing capital line could also be designed with a secondary use as a and maintenance monies in a prioritized manner that flood barrier. Protection against intensifying weather guarantees the highest impact. events is only one way that public assets can be climate smart. They can also be designed and operated to 2.3.1 What is a Climate-Smart Public advance a government’s overall climate agenda across Asset Portfolio? multiple dimensions: Grouping public assets together into portfolios of • Decarbonizing built and operating environments related functions or types allows governments to • Using energy more efficiently better understand and account for the wide array • Reducing waste or pollution of assets they own, operate, maintain, or contract, • Increasing public health and safety as well as the nature of services that these assets • Providing “green lungs,” i.e., nature-based assets provide. Governments invest in infrastructure and that also provide and enhance public space equipment to provide services to the public. Some of • Creating greater efficiency in movement of the public these serve critical needs, while others provide safety and goods or protection, and still others enhance convenience and • Improving resilience against acute climate events: quality of life. Whatever their specific function, all are for wind, snow, flood, landslides, erosion the public good. Governments may finance, own, and • Ameliorating the intensity of disasters and operate such assets, or they may contract out, oversee, improving disaster response and recovery and regulate service delivery by private third parties. Whatever the format or nature of such assets and their The key for governments implementing a CS plan is services, governments—and the people they serve— to: (i) recognize the climate services that current public benefit from understanding what assets they possess, assets provide (even if not initially intended to do so); what services those assets provide, and what those (ii) purposely improve the design specifications of public assets cost to maintain. investments to make them climate smart; and/or (iii) combine existing and new assets together in ways that In an increasingly climate volatile world, produce broader climate-aware and resilient outcomes. understanding the risks that public assets and services face is of rising importance. The public A formalized public asset management (PAM) benefits from government knowing the level of service framework assists government in accounting for those assets deliver, the criticality of those services, and climate assets; monitoring performance and risk the costs or benefits arising if those services were to be exposure to operate assets and networks efficiently interrupted. Understanding where there are beneficial without disruption; and informing planning redundancies or detrimental gaps can mean the processes on the most effective new investments difference between resiliency and disaster or, in some to undertake. Taking stock of public assets first allows Reference Guide for Climate-Smart Public Investment 43 countries to know what they already have and how those assets can help to determine how they work together to assets are functioning. Conversely, if a government achieve broader policy goals. CS considerations must be knows what it has, it also has more clarity regarding what integrated throughout the PAM framework, as shown in it is lacking. A more enhanced, strategic view of these Figure 8. Figure 8. Integration of Climate Change and Public Asset Management Operations & Disposal Planning Acquisition Maintenance Decomposition of Definition, evaluation, Asset evaluations, Rehabilitation, assets, removal from performance strategy ownership transfers depreciation, obsolescence financial statements • Identification of critical • Asset vulnerability • Changing maintenance • Waste management resilient infrastructure assessment schedules • Resource recovery • Climate-informed • Insurable value • Adapting for uncertainty and recycling asset strategy • Replacement cost • Modifying or • Site rehabilitation • Information technology retrofitting design Source: Adapted from World Bank (forthcoming). Introducing a climate risk management approach contingent liabilities, cascading effects on networked helps to identify, evaluate, and potentially, assets, reputation, human well-being, and mitigate climate risk exposures that may impact environmental damage. The expected value of such key infrastructure assets. It follows these steps: consequences can be calculated or, more likely, identification of the most critical assets; assessment of estimated. Because the value of loss and implications threats to the selected assets; evaluation of vulnerability for replacement is often location dependent (rather to the selected threats; identification of expected than asset-type dependent), determining the precise consequences from damage; and identification and value of such impacts is not always possible. prioritization of mitigation measures.57 This process is summarized in Figure 9. • Prioritizing mitigation measures. Prioritization or risk reduction and risk adaptation measures requires • Assessing risk. As discussed in previous sections, decisions about the deployment of scarce resources risk assessments will identify the nature, severity, to make assets more resilient, the likelihood and and likelihood of possible risks. This information will consequences of service disruption, and the establish the risk profile of individual assets as well best means to effectively and reliably address as of the broader asset portfolio. Risks to consider these considerations. Risks may be reduced by include asset stranding, accelerated depreciation, capital measures (e.g., upgrading facilities) or damage from weather events, disruption due to operating measures (e.g., adjusting maintenance network effects, changing use patterns, liability, schedules). Measures that are flexible and provide distribution of risks, or supply-chain risks that may co-benefits are preferred (e.g., providing a primary be out of national control. public service, like a park, while providing climate adaptation benefits, such as the ability of a green • Determining the criticality of an asset. This is space to serve as a storm or flood buffer). usually defined as a measure of the consequences of failure or loss of the asset, including repair or • Transferring climate risk to insurance. In some replacement time and costs, service disruption, cases, insuring assets against loss may be an Reference Guide for Climate-Smart Public Investment 44 important augmentation to the provision of physical then need to decide whether to decommission such infrastructure. Although it is important to build in assets or replace them as an integral part of their robust and/or redundant capacity to avoid service public investment process. disruption, some loss of critical assets may be difficult to avoid. The more critical the asset, the • Carrying out an efficiency assessment. Looking more important it might be to insure it against loss. at public assets as part of a CS portfolio can Taking out insurance means that funds are more facilitate evaluation of their operational efficiency immediately available to reconstruct or replace an and resource intensiveness. Certain assets asset should an expected risk materialize. may use outdated technology, causing them to consume outsized proportions of energy or • Eliminating existing risks as a part of adaptation requiring extra maintenance attention that could planning decisions. Based on a government’s risk be better used elsewhere. Objective assessments assessment and adaptation needs, it may be the of public expenditures against CS metrics can help case that public assets are determined to be in too governments determine whether they should invest great a peril or so inadequately designed that they in targeted upgrades, make enhancements, or even can no longer be relied upon to serve the needs of commence with decommissioning. the public should a climate event arise. Governments Figure 9. Creating a Climate-Smart Public Asset Portfolio to Assist with Public Investment Planning Public Assets Assessment in the Climate-Smart Context Base Asset Inventory Climate Risk Evaluation Climate-Smart Actions What are the assets? Asset vulnerability? Can it provide climate services? • Currently at risk? Where are they? • Becoming a risk over time? Can it be made resilient? • Subject to degradation under More efficient? Who is responsible for increased climate intensity? the assets? Can it be combined with other Service criticality? public assets to improve What condition are they in? • Life threatening? climate performance or provide • Impact if lost, damaged, or enhanced services? What services do they extended shutdown? provide? Relationships amongst Asset options? assets? Can other decisions What are the quality of • Should it be insured? of government share in their those services? • Should it be rehabilitated? climate benefits? • Should it be replaced? • Geography • Should it be • Complementary decommissioned? • Alternative uses Source: Authors. Reference Guide for Climate-Smart Public Investment 45 2.3.2 Building a Climate-Smart Public areas where there are resources at their disposal to Asset Portfolio tackle sustainability issues as well as areas where they can focus their efforts to achieve improvements. Create a base public asset inventory. Building a comprehensive public asset inventory is acknowledged Governments should identify whether there is a need to be a large task, especially if it is necessary to start to rehabilitate, expand, improve, remove, or replace from scratch. Useful launch points do exist, however, public assets in light of vulnerability and criticality. whether by sector, function, or subdivision/jurisdiction. Although a qualitative assessment of asset performance One such starting point, particularly from the perspective can provide an initial screening, decision making can be of assessing climate risk, is to adapt the results of a better informed to the extent that costs and benefits can DRM assessment for a prioritized asset inventory (use of be assigned. For an existing asset, a good starting point DRM tools is discussed in more detail in Section 2.2.3). is to quantify any repairs, rehabilitation, or other capital Ideally, these assets should be geolocated and entered investments that are required to bring it to its intended into a database accompanied by their attributes, namely, level of service. Understanding its ongoing O&M costs services provided, build date, physical condition, and over its remaining life is important. so on. The more granular the information, the better the inventory will be. Inclusion of items, such as an asset’s A consistent set of evaluation criteria allows maintenance history, its future maintenance requirements, government to prioritize potential investment needs and its position on the maintenance cycle, is particularly and interventions. Taken together, the list of needed helpful. This is especially so if ongoing operations and repairs, enhancements, additions, and replacements are periodic maintenance are already budgeted for or if the typically long and often beyond the budget capabilities costs and scope are already projected. Ideally, a uniform of government within a given budget year. Not all grading scale should be applied that characterizes an issues will be weighted equally, with some assets being asset’s condition. more vulnerable to climate change or more critical to achieving sustainability goals than others. It is important Asset-based climate risk assessments help to prioritize investments in order to get the “biggest governments to determine the strength or bang for your buck.” As such, when looking at possible vulnerability of their service portfolio. Having climate change impacts or mitigation measures for the public assets that are climate smart means examining asset, there are more challenging assumptions and them under two sets of criteria: (i) their impact on the assessments to consider. What would be the impact if environment; and (ii) their vulnerability in light of the the asset suffered a reduced level of service or failed environment in which they exist. Public assets may not completely, for instance? What might it cost to restore be functioning as originally intended. This could be due that service? How much time would it take? It is likely that to deficient maintenance, overstressed operations, or many government assets were not designed for the level the fact that their designs/functionality no longer match of resilience that a climate-impacted world may require. modern requirements. Alternatively, the assets and Thus, in order to ensure the delivery of the required level services may be functioning fine, but they are judged unfit of service, decisions need to be taken as to whether to for purpose once framed in the context of climate risks improve, expand, or (if severely deficient) retire existing or their impact on decarbonizing targets. Constructing a assets or whether to invest in entirely new assets (see climate asset inventory allows governments to identify Box 15). Reference Guide for Climate-Smart Public Investment 46 Box 15. Evaluating Existing Public Assets as Part of Climate-Smart Investment Evaluating existing physical assets’ current functions or deficiencies in light of evolving CS resiliency, decarbonization, and efficiency requirements can help guide what investments are required, the nature of those investments, and the budget amounts that need to be allocated to deliver climate-robust services over the operating life of those assets. Understanding an asset’s updated, CS investment and operating costs can be aided by looking at life cycle costs in a CS context. Climate-Smart Lifecycle Climate- Climate-Smart Assessment Assessment Smart Public Budget Outcome Investment Evaluate existing What Strategy Allocate budget for public assets and investment climate-smart capital services against is needed How to investment priorities climate-smart to achieve proceed with and their operations. policy criteria. policy goals investments? and what are the projected benefits? O&M Satisfactory budget Financial/ Functional/ Improve/ Capital O&M economic + resilient? enhance improvement budget assessment Capital O&M Climate Expand expansion project + budget Asset condition/ data and Public Asset performance performance Public Service assessment indicators Capital O&M Rehabilitate improvement + budget Deficient/ Financial/ Capital O&M vulnerable? economic Replace expansion project + budget assessment Decommission Eliminate and rehabilitate Source: Authors. Reference Guide for Climate-Smart Public Investment 47 Priorities can be time based: some adaptation needs asset management function. A fully functioning are immediate, and others will grow over time. asset management system will: monitor public asset Climate impacts have both current day and slow-onset performance, condition, and associated maintenance characteristics. Therefore, when assessing the public schedule; ensure that parts or input inventories are asset portfolio, it is imperative that trends and trajectories adequately stocked; and warn when maintenance are taken into account. Time-linked evolution of levels of is falling behind minimum thresholds for adequate service or criticality are not only tied to the potentially resilience. Assumptions on values in the system models increasing severity of weather impacts but also to should be regularly updated to reflect market values project changes in use as regions develop over time. As and adequately capture valuations that are affected by always, planning up-front and investing up-front for future stranding. With more complex networks and supply chains conditions can help to save capital in the long run. It can that are typically global, the amount of data required to also serve to ensure that infrastructure assets are in a manage assets efficiently is extensive. In higher-income position to handle future conditions. countries, artificial intelligence and machine learning solutions are being deployed to assist agencies in such A climate-informed asset management system is planning efforts. This helps governments to understand important as a foundation for CS planning. A well- what elements need to be kept in an inventory, which designed asset register can include information that maintenance activities are critical, and how much budget either identifies the vulnerability and/or criticality of may be required to meet these needs. existing infrastructure assets or helps decision makers in this endeavor. An asset register can also assist in Accrual accounting reforms improve the integration planning for greater resilience. In particular, it can aid in of assets, liabilities, and contingent liabilities the identification of pure adaptation projects to protect into financial statements. Reviewing standards and existing vulnerable and critical assets. Similarly, they guidelines for the recording of climate-related liabilities can help pick out retrofitting projects, that is, assets that will help to improve accuracy of the data as well as better can be made more resilient by investment in adaptation inform planning and PIM processes.58 Where countries after their completion. As with other climate-informed operate on a cash or modified cash basis, accounting for PIM reforms, a minimally functional asset management liabilities and the register of assets will be external to the system is a prerequisite to introducing climate accounting system. change considerations. It is worthwhile to subject existing assets to cost- 2.3.3 Climate-Smart Asset Operations benefit analyses (CBAs) and risk assessments that and Maintenance include climate-related risks, particularly for assets identified as critical. Although it may seem unusual Ideally, PAM should have an asset life cycle to undertake such analyses for existing assets, assets perspective and incorporate maintenance. A well- may be used or operated in a different environmental designed system can be used to monitor the condition of circumstance when in a CS context. Similarly, they an asset and the maintenance interventions related to it. may need to be maintained in a way that is significantly Such a system would then warn when the maintenance different from that which they were originally designed. of vulnerable or critical assets is falling behind the levels Understanding what recurring costs and/or capital required to ensure adequate resilience. Further, it can improvements may be required under this new application be used to provide evidence for changing maintenance scenario will provide better insight into public budgeting regimes (either in terms of frequency or with respect to and investment management. This is most relevant for intensity of effort) in response to increases in climate- assets with longer lifespans, and particularly important induced hazards. Rather than using historic values, for long-lived assets near the beginning of their lifespan. regularly updated market or fair values should be used A basic form of the risk management approach can in the asset register. These should reflect the effects be applied immediately, even where an asset registry of stranded assets (see Box 2) and maladaptation on is not functional. Network-level analyses allow for the valuations. identification of the most vulnerable segments (in terms of highest lack of redundancy) and enable the resilience Collection, management, and dissemination of of the overall transport network to be tested,59 thus information on climate assets is central to the helping to identify new investments. Reference Guide for Climate-Smart Public Investment 48 2.4 Private-Sector Engagement underinvestment. Information asymmetries and the uncertainties involved in the emergence of technology in Implementing Climate-Smart and environmental events require governments to Public Investment take a lead in harmonizing the provision of information on climate scenarios and future policies as well as incentivizing disclosure of risks in investment projects. 2.4.1 Roles of the Public and Private Sectors in Market forces encourage the private sector to seek “low Addressing Market Failures hanging fruit” to meet net-zero targets. These typically involve targeting marginal operational changes or hybrid Public investment should be carefully planned to technologies while tending to avoid longer-term and maximize impact on addressing market failures more capital-intensive investments that pose higher that cannot be resolved using other measures. The risks. Governments play an important role in identifying private sector will provide the majority of the investment and supporting the development of these underserved required to achieve adaptation and decarbonization technologies. A typology of possible market failures policy goals. Misalignment between economic choices for for policy makers to consider is presented in Table 8. investment and a broader climate-informed development Although these market failures are presented as risks for strategy can often be addressed by influencing private- decarbonization, they may also provide opportunities. In sector investment with improved information on risks addition, many may well affect investments in adaptation and opportunities or through regulation. Where this is and resilience. ineffective or inefficient, subsidies or taxation policies can provide the incentives needed to adjust investment Public-sector leadership is essential to coordinate choices. Only when these instruments are exhausted efforts across sectors and maintain consistency should planners and decision makers consider public of messaging and implementation. Transition plans investment to address market failures.60 must be flexible enough to adapt as new information becomes available and sufficiently responsive to A wide range of market failures must be considered maintain consistent signals to address inefficiencies as in developing a coherent strategy for improving the they arise. Policies that are drawn up need to respond efficiency and effectiveness of public investment. to market failures but avoid being developed in silos Impacts on the long-term viability of investments will by single sectors or limited to single issues. Public- influence the choice of investment and design standards sector leadership to coordinate a coherent strategy for of infrastructure, but the time frame poses a challenge addressing market failures is essential. because discounting of long-term benefits will lead to Table 8. Market Failures that Impede Decarbonization Category Definition Types Examples for Public Investment in Decarbonization Static Price Market prices of goods Negative Coal power station commissions a CBA but does Failures and services do not externalities not factor in public health/environmental costs of reflect their full cost emissions or factors them in incorrectly. or benefit to society. A First-mover Early investors in renewable energy technology change in prices, and risks shoulder the costs of innovation, the risk of a resulting change in failure by governments to credibly commit to patterns of consumption decarbonize, and the uncertainty of technological and production, could viability and also develop supply chains and make society better off technology that bring prices down over time (i.e., as a whole. positive externalities). Public goods Investment in cycle lanes and pedestrian-only areas encourages a shift away from fossil fuel transport, yet because they are free, non-rivaled, Reference Guide for Climate-Smart Public Investment 49 Table 8 continued Category Definition Types Examples for Public Investment in Decarbonization and typically non-excludable, they are not suitable for private investment. Natural The electricity grid is very expensive to build and monopolies has low marginal costs, making a single producer more efficient but exposing the market to inflated prices and poor services if left unregulated. Non-Static There are appropriate Information Poor or inconsistent messaging around government Price price incentives, but failures policy on renewable energy leads investors to back Failures other constraints prevent older, familiar, fossil fuel–based technology. a socially optimal Inertia and High discount rates for emissions costs justify outcome. bounded continued investment in coal plants as the future rationality impact is underestimated. Split Improved insulation in warehousing facilities would incentives reduce energy costs in the long run, but tenants fail to invest as they are unable to commit to the time frame required to recoup costs. Liquidity Conversion to a renewable energy source is constraints cheaper in the long run, but market conditions result in borrowing costs that are greater than long- term cost savings, so the investment is not made. Dynamic People make choices Uncertainty Uncertainty about time frames, viability, costs, and Failures that appear to be and risk politics surrounding improved forms of nuclear economically sensible bearing power leads to increased investment in natural gas in the short run but energy solutions instead. leave society worse off First-mover Early investors in renewable energy technology in the long run. This is risks shoulder the costs of innovation, the risk of a particular feature of failure by governments to credibly commit to the development of new decarbonize, and the uncertainty of technological technologies. viability and also develop supply chains and technology that bring prices down over time (i.e., positive externalities). Coordination Uptake of electric vehicles is limited due to failures perceived lack of infrastructure to support long journeys; lack of demand limits firms’ investment in charging stations. Network Strategy and investment in energy distribution fail change to account for energy demand due to demographic failures changes or transport technology. Technology No subsidies made available for solar panels, and development the photovoltaic industry and its corresponding curves value chain are unable to get to a scale to compete with fossil fuels. Source: Adapted from United Kingdom (2020b). Reference Guide for Climate-Smart Public Investment 50 2.4.2 Promoting Innovation in the Public broader decarbonization.62 In terms of piloting and and Private Sectors bringing investments to scale, all investors are faced with transition risks, particularly early adoption and lock- Addressing the demands of climate change and in risks related to “choosing wrong”—namely, selecting decarbonization will require an all-of-society effort, technologies or investment programs that turn out to drawing upon technologies that currently exist or be inferior to other options over time. Therefore, public are yet to be developed and those that exist but actors can pilot new technologies to selected assets, need to be evolved to become fit for purpose. To such as public buildings and vehicle fleets and related meet such challenges, each of these approaches will infrastructure (e.g., garages, fuel/charging stations), require innovation among public- and private-sector testing their costs and their operational feasibility as well actors, engaging companies, universities, and research as incentivizing nascent supply growth and capacity. institutions. Many of the technologies required to meet Finally, CS public investment sends price signals to net-zero targets already exist, but it is not yet clear which private-sector actors, such as increasing and decreasing will be the most appropriate or cost-effective over their land value. Governments can shape that pricing signal life cycles or which will provide the biggest opportunities through risk-informed land-use planning, steering private for economic growth.61 Some of these solutions are development away from hazard-prone areas. globally applicable, while others need to be tailored for local contexts, resources, and needs. That means that 2.4.3 Government Funds as a Catalyst governments around the world, no matter their size, for Research and Development may have some role to play in catalyzing responses to climate needs. For the world to reach a stable climate and sustainable means of living requires not only extensive rollout Government CS policy, backed by catalytic public of available forms of low- or no-carbon technology investment, can play an outsized role in guiding but also the use of technologies that have not yet innovation markets toward solutions that are been developed. Governments can play a catalytic role appropriate for policy goals. Governments have the in stimulating development of new technology that is in ability to promote innovation both on the supply side line with their CS policy objectives. and the demand side of technology. Supply-side support comes in the form of supporting investment in R&D and Governments can provide different types of piloting and rolling out new commercial technologies catalytic financial support through public funding and/or new applications of technology in a manner that at key points in the technology development cycle. helps to meet strategic policy goals. On the demand side, Some countries with available resources directly take governments can be purchasers of innovation, thereby part in new technology development through publicly helping to demonstrate the role that new technologies funded national laboratories. However, given the can play at an appropriate scale. The manner in which complications and expense of running national labs, governments can use PIP to help create the conditions many more countries sponsor technology development for innovation and stimulate demand for innovation through financial partnerships with the research arms products through sound policy choices is important for of universities and/or by partnering with promising promoting innovation. domestic technical companies. The challenge is having public funding in place in the correct amounts, at the Public investment can address transition risks and correct time, and in the correct form in the technology send improved climate information signals in ways development cycle (Figure 10). The role of governments that private investment generally cannot. Expectations is to facilitate innovation and encourage the use of private of government commitment to transition are essential and research capital through the promise of effective co- to incentivize development of backstop technologies, financing and risk sharing at appropriate points in the transition to renewable energy sources, and accelerate development and rollout process. Reference Guide for Climate-Smart Public Investment 51 Figure 10. Technology Development and Finance Cycle Full Deployment Research & Pilot Initial Commercial & Commercial Development Demonstration Deployment Maturity Private Debt Financing & Equity Private Equity DOE Grants, National Labs, Available Investment Funds Private Equity LPO DEBT FINANCING Commercial Deployment Funding Gap Clean Energy Technology Maturity Source: United States (2015). Note: DOE = United States Department of Energy. LPO = Loan Programs Office of the DOE. Governments should integrate R&D support into for progress and review. Should milestones not be met, their capital and operating budget plans as part of there may be grounds for cutting losses and discontinuing CS-PIP. R&D funding is a strategic measure that can support. Up-front due diligence should verify the venture help address specific climate-related challenges in a team’s qualifications, prior performance outcomes in manner appropriate to a country’s specific context. similar types of research or venture incubation, and the However, such financial support must have structure overall management practices to be used. Governments and qualifying criteria, and it must form part of a rollout can benefit from having outside advisors provide an and performance monitoring structure. R&D support can independent opinion about the nature of the technology be as vital a public investment as funds dedicated to in question, the scope of R&D proposed for funding, and hard infrastructure and should be treated as such. The the probability of the proposed development timeline following describes the manner in which public funds can being met. be applied for innovation support and commercialization. Governments can provide direct financial support Governments should develop appropriate to technical entrepreneurs through grants, equity performance outcome criteria and undertake investments, or loans. Each of these options has its effective counterparty due diligence before backing merits and its challenges. In addition, there are passive a venture. Performance criteria might include scope of means of supporting R&D life cycle activities, such as the R&D, reasonable duration of the support period, clear collection and dissemination of high-value data. These definitions of expected outcomes, and interim milestones pros and cons are discussed in Box 16 below. Reference Guide for Climate-Smart Public Investment 52 Box 16. Public Investment Vehicles to Support Research and Development With careful design and allocation of monies, governments can make use of public budgets to invest in R&D and to catalyze the rollout of maturing technologies. Grant-based support A grant is a one-time, non-recoverable allocation of funds to help support a research group’s technology development. The government receives no rights to the technology but rather, plays a catalytic role through supplementing some of the development costs. Grants are good for supporting early-stage development of technology since they are typically limited in size. The reason for the limitation is that grants are non-refundable and non-recoverable. As such, they comprise a very finite source of support. Yet, a well-considered grant can be the difference between success and failure when it comes to a private entity proving its technology in prototype. Recurrent grant programs Grants can be dispersed through a regular process, such as an annual or and one-time competitions quarterly application. Such regular enrollments over periods of time are helpful for researchers and start-ups because they can rely on them being available rather being one-off activities. That said, one-off grant programs such as innovation competitions can be useful for advancing many ideas at one time. Such competitions work well for larger-than-normal grant amounts as they stimulate interest. They can also be done in partnership with other technology investors/supporters in order to allow greater exposure to new ideas. Equity investments in Governments could take equity stakes in a technology start-up, typically at technology start-up companies a point where the company is trying to take its technology from prototype to first-to-scale commercial deployment. This first-of-a-kind step is one where many banks would not typically lend due to its unproven commercial nature. As such, equity represents a good alternative. However, governments struggle to manage their participation in the case of equity. This is because making an equity investment means effectively joining a start-up’s board of directors and having the evaluative and managerial savvy to nurture its commercial growth. This requires a major switch of mindset for government representatives. Having a public-sector body in a decision-making role in a start-up company is a challenging combination. A public-sector equity fund should therefore be a very tightly designed vehicle. Ideally, it should have a majority independent investment committee or a contracted, third-party fund manager. Equity venture vehicles are not recommended for governments that are inexperienced in their use. Public-sector technology debt A potentially valuable area of support for new technology developers is in the form facilities and loan guarantees of loans or loan guarantees. The most difficult stage of launching new technology is taking the concept from prototype to commercial-scale deployment. Providing a start-up with commercialization support is highly catalytic as it keeps the technology owners/developers incentivized to succeed through their continued equity ownership. Source: Authors. Reference Guide for Climate-Smart Public Investment 53 Although governments can be a financial catalyst Consider developing a dedicated incubator finance for the rollout of new technology, they should institution for climate technology. Governments should deliberately share the risks with other financiers. weigh whether they wish to support R&D as a policy; if it Typically, a government would not want to provide 100 is to be a longer-term endeavor, consideration should be percent of the commercialization funding. Rather, it would given to establishing some form of technology incubator look to co-finance and share the risk with the private lending facility. The goal of such a facility would be to sector. Having the government as a lending partner or lend capital to qualified candidates and recover it through backing private lenders’ funds with partial guarantees fostering their success in order to recycle the capital can help make the risk more palatable. With lending, it is with other start-ups. Under such a structure, it would be very important to have a well-developed set of qualifying prudent to hire a third-party professional fund manager criteria for companies to apply for loan supports. to operate the lending facility on the government’s These criteria should be backed up by a technical behalf. Such a fund manager can be procured through board and a credit decision committee comprised of a competitive tender process. To make this money go subject matter professionals who can assist in targeting even further, governments could seek co-participation good candidates. from other research funds and/or private capital. Box 17 provides examples of government-sponsored R&D investment support programs. Box 17. Examples of Government-Sponsored R&D Investment Support Programs U.S. Government, Department of Energy Title XVII Innovative Energy Loan Guarantee Program. This is a recurring funding program with scheduled support solicitation schedules throughout the year. Supports prototyping and commercialization funding. European Union EU Innovation Fund (EIF). Targets demonstration and scale up of new low-carbon technologies. The EU Horizon 2020 facility, concluded in 2016, was supported with co-finance from InnovFin under the European Investment Bank (EIB) and its incubator for micro, small, and medium-sized enterprises, the EIF. The EIF provides the technical due diligence and management support for the instruments provided, namely, debt, guarantees, and quasi- equity products. InnovFin and business support functions through EIB have continued past the end date. Government of India The Ministry of Science and Technology’s Technology Development Board provides grant, debt, and equity facilities covering the full spectrum of R&D, prototyping, and commercialization activities. The Ministry of Commerce and Industry’s Startup India program offers a comprehensive source of information and support for individual and corporate technopreneurs. Its services include coaching/mentoring, business formation and management resources, matchmaking services, seed capital funding, and lending guarantees. It also has the authority to grant tax exemptions/incentives. Source: Authors. Reference Guide for Climate-Smart Public Investment 54 Facilitating progress by closing information gaps. • Traditional public procurement. This uses an input- The public sector has the ability to strategically close based specification developed by a government information gaps by undertaking advanced studies, agency and features construction contracting with conducting site surveys, and collecting and assessing private entities. critical data. It is important that governments research the quality and granularity of data that researchers • Alternate contracting models. These use various require in order to ensure the data gathering exercise combinations of integrated services under a single is of appropriate value. One of the most common forms contract with a private-sector contractor to undertake of government research facilitation is to make data design, construction, and potentially some post- available, especially those related to hydromet as well as completion O&M services. to geological and land surveys. The provision of relevant, regularly updated information of a high quality helps to • Public-private partnerships (PPPs). These use a de-risk projects that may depend on it. complete life cycle approach that sees the private sector invest in, build, operate, and maintain a public 2.4.4 Forms of Private-Sector Engagement infrastructure or service for a long period of time. Although the public sector determines which 2.4.4.1 Traditional Public Procurement government investments will take place, the majority of public investments in infrastructure and services An advantage of a traditional procurement model are delivered through some form of direct contracting is that a public entity essentially has full control of with private-sector service providers. The resulting a project. Using traditional procurement, government assets and public services are then managed and controls the development process, the contracting, and typically, operated and maintained by sector-based the operations of the resulting projects. The government government agencies, either directly or again, under determines how something is designed, chooses what some form of contracting with private entities. However, materials are to be used, and sets out how the project there are alternatives available to this traditional model will deliver its services and benefits to the public. It can that can assist governments in advancing their policy choose how a given project will meet the policy goals agendas. Private-sector engagement helps governments of its agency and the government at large. Accordingly, to achieve their public investment goals and also provides governments use this modality to deliver between 85 a solid, risk-allocated basis for progressing CS projects. and 95 percent of all public capital investment.63 Given Three main engagement approaches exist: these factors, traditional procurement is a useful tool for Reference Guide for Climate-Smart Public Investment 55 deploying CS design and testing out new, low-carbon can make use of these different modalities to reallocate materials. On the flipside, the government also bears all risk, thus striking a better balance depending on the nature the risk (which can be the rationale for sharing the risk and complexity of a given undertaking. This is of particular through PPPs, as discussed below). importance when considering the implementation of new CS designs, whether of adaptation or mitigation. Traditional procurement methods can be used to advance a CS agenda, particularly where methods or • Design-build contracts. This approach encourages technology choices are new or challenging. One of the integration of new technologies and techniques the advantages that public-sector managers possess is by having the solution designer and the construction that given the foregoing challenges, they have a relatively contractor as part of the same consortium. This high tolerance for risk and are adept at modifying scopes forces the consortium to take the risk of successfully of work to conform to evolving conditions or challenges implementing the solution they propose. While raised by use of new methods. This experience and the public entity remains responsible for funding skill are well suited to adapting CS designs, technology, the project in its entirety, an integrated design and construction, and operating techniques in first-of-a-kind construction solution has been found to save time applications. With the public sector working through and costs and increase the likelihood of completion implementation issues and demonstrating the concepts, and performance as intended. this can help to educate the market on how to handle risk and catalyze new CS sustainable development • Design-build-finance-transfer (DBFT). Taking the and services. above risk transfer model a step further toward a full PPP modality, public contracting agencies could Traditional public investment should be used to request a bidding consortium not only to design and catalyze policy development goals. Traditional build their solution, but also to arrange for its funding public procurement projects can be used to develop during the construction period. Construction finance industry-wide experience with new materials, new is short term but not without risk. Construction design techniques, and new CS outcomes. This will contractors are expected to complete the project on help to demonstrate the CS concept; build experience in time and to budget, while meeting the performance deploying such solutions among private-sector designers parameters. In contrast, the public entity is and construction contractors; and stimulate demand for responsible for providing take-out financing once the sustainable design, new materials, and techniques in project is complete and ready for transfer. order to prove their efficacy and drive down the unit cost of such innovations. A prime example of using public • Design-build-maintain (DBM) or design-build- development and operating budget programs to derive finance-maintain (DBFM). A variant of DBFT, these the desired innovation is green public procurement contract forms retain the construction contractor’s (GPP) (see Section 3.6.2). services during the operating life of the contract so that the contractor can provide overhaul maintenance 2.4.4.2 Alternative Contracting Modalities services. This permits continuity in specifications and responsibility across the design, construction, and Alternative contracting modalities can assist the operating periods. The difference between DBM and public sector in making its climate vision a reality. DBFM is whether or not the contractor is responsible Government agencies can make use of more holistic for providing the construction period financing; if not, contracting modes to better integrate low-carbon and the public-sector entity is responsible for funding. sustainable designs and specifications in projects in pursuit of more innovative solutions. These alternative • Full PPPs. The most extensive scope of public-sector contracting modes bundle more of the services together use of the private sector is through comprehensive and assign their responsibility to the private-sector PPPs. The private sector is contracted, on a counterpart. This, in turn, provides significant reallocation competitive bidding basis, to undertake all design, of implementation risk and better outcomes for the public funding, building, operating, and maintenance of a sector in terms of time and cost. Box 18 illustrates the project over a life set out by a long-term contract. range of risk allocation and responsibility among the most The nature of PPPs and the process for using them common modalities for public contracting. Governments is described in more detail in the next section. Reference Guide for Climate-Smart Public Investment 56 Box 18. Responsibility Matrix for Each Project Stage by Contracting Mode Design- DBM/ Contract Format Traditional Build DBFT DBFM BOT PPP Specification G G G G G Preliminary design G G G G G E* & cost estimate Construction design G E C C C C Stage of project implementation & engineering Bid specifications G E G G G G E* and bill of quantities Bid proposal C C C C C Financing G G C** G C** G C Building C C C C C Operating G G G G C Maintaining G G G C C DBFT = Design-Build-Finance-Transfer G Government DBFM = Design-Build-Finance-Maintain C Contractor/Private partner BOT PP = Build-Operate-Transfer from Public-Private Partnership * = Engineering firm as PPP technical advisor for tendering E Engineering firm ** = Construction period finance only Source: Authors. 2.4.4.3 Public-Private Partnerships help modernize and protect the economy while meeting decarbonization targets. PPPs can be a useful tool for delivering long-term, high-quality performance from infrastructure and PPPs are often misunderstood. This section provides public-service investments, including projects with enhanced explanations of what PPPs are, the nature CS objectives. Well-planned, time-certain delivery of of their structures, and how they can be used in a CS long-term climate sustainable projects is essential to context. The added explanations herein are not meant achieving carbon reductions and locking those in over to promote PPPs as a preferred model for CS public the life of a public asset. Well-specified and constructed investment. Rather, they seek to dispel myths and clarify projects can provide critical climate resiliency and how PPPs can be used effectively, helping governments disaster risk protection to the public. PPPs can readily to evaluate how this model might be used in meeting fulfill the challenges of those roles. PPPs promise climate goals. PPPs have some advantages as well as large-scale foreign private investment, helping national some marked limitations. budgets go further in providing public infrastructure. They also can mobilize global expertise and technologies to Reference Guide for Climate-Smart Public Investment 57 2.4.5 Project Design and Assessment benefits have economic value. Financially, PPPs will Considerations for Climate-Smart PPPs have a higher cost of capital because they cannot borrow at sovereign rates and because equity requires a return Life cycle CBA has added economic dimensions in the commensurate to the risk being taken. Any prospective climate context. Traditional life cycle cost assessments additional costs (when compared to business as usual) tend to focus on the physical construction and operation of more robust designs may be offset by a number of of a given asset. In a climate-challenged world, this is factors, such as: the use of improved technology and no longer sufficient. The full economic and societal costs techniques that meet policy goals; on-time delivery and benefits of a project must be considered in order to of the project; on-budget completion of construction; properly evaluate public investment options. The critical and reliable and consistent service provision. These additional evaluation factors include climate externalities characteristics have both fiscal and economic value. and impact risks. There are costs to carbon emissions and Thus, careful recalibrating of an overall life cycle CBA is benefits to emissions being avoided or eliminated. There important in CS investment evaluations. is also a benefit to creating enforceable mechanisms that ensure delivery of environmental outcomes and Evaluation of a project by the public sector should mitigate the risk of non-performance, contributing to risk take place using two bases: project life and whole adjustment of the project assessment. asset life. A PPP contractual period is a way to artificially define a financial transaction. Given that typical PPP When evaluating traditional public investment versus contract terms range between 20 and 30 years, they a PPP, it is important to be certain that the basis of rarely cover the entire physical useful life of an asset. comparison is equivalent. There are many arguments Further, given that the majority of PPP projects are build- made that PPPs can be “more expensive.” This depends operate-transfer formats, the government will be handed on which investments and what costs are measured back the asset in good working order at the end of the and the time period in question. The most appropriate contract. As illustrated in Figure 11, there could easily be basis is a full life cycle assessment. This assures that another 20–50 years of useful asset life remaining, all all costs—investment, construction, operations, and the while delivering the societal economic and climate maintenance/rehabilitation—are fairly accounted for benefits of its original design. Accordingly, when looking across both modalities. Risk-adjusted benefits should at the CS cost-benefit value of a particular project also be considered; PPPs rely on selecting high-quality from the perspective of the government, the life cycle prequalified parties and binding them contractually to assessment should be conducted on the asset’s entire perform to an agreed standard over the contract life. useful life. This creates the need to perform two sets Publicly procured projects typically rely on ordinary of life cycle CBAs: the project life cycle assessment for day-to-day performance of staff funded through annual the PPP transaction and the whole-of-life cycle analysis budget appropriations that may or may not materialize for the project’s CS and economic contributions over its as required. The realities of these dynamics must be full asset life. This means that CS assets are far more reflected in a risk-adjusted performance outcome, as valuable to the economy than a typical PPP financial- reliable, consistent delivery of the service and climate economic assessment would indicate. Reference Guide for Climate-Smart Public Investment 58 Figure 11. PPP Project vs. Public Asset Life Asset life = 45 years Project life = 23 years Socioeconomic Avoided cost benefits of service of externalities Hand back to government Benefits Costs Capital Operating Maintenance Major Decommissioning investment costs capital costs overhaul cost investment Source: Authors. Apply climate-robust standards for resiliency efficiency, the use of novel materials, and improved and/or low-carbon outcomes in the design and control systems. If the goal is to hit those targets, then specifications to ensure that all prospective bidders they must be explicit in the tender specifications and factor in the true cost of the project. PPPs are subject evaluation criteria. It is therefore important that all CS to a highly competitive tender process: bid prices can aspects of design are considered as a system in terms often fall within single percentage points of one another. of both costs and benefits, which means that traditional Ensuring that appropriate assumptions are prepared assessment methods and benchmarks will need to be and then made visible to all prospective participants adjusted to meet these new norms. is important such that they are priced into the design and operation. Project plans must take into account Take into account climate-specific considerations evolving local climate conditions that may impact the when planning for private participation in public design, longevity, and availability of the asset during investment. Integrating climate-related aspects into the term of the contract. As such, it is essential that the project identification, design, and specifications requires tender include robust design and output performance deliberate planning and comprehensive evaluation. It is specifications explicit to all parties, thus ensuring that helpful to have a checklist of considerations to ensure the costs of meeting those requirements are taken into all aspects of climate impacts are included, accounted account. This is of particular importance in the context for, evaluated, and used in decision making regarding of designs that are forward-looking, progressive, and projects. The Inter-American Development Bank (IDB) adaptive to climate change. Looking at a climate-affected has produced a helpful guide64 to integrating climate world means making use of more enhanced design considerations into the evaluation of PPP projects, considerations in terms of: (i) the potential impacts of illustrated in Figure 12. The government of the Philippines flooding, high winds, drought, and rises in temperature; has decided to take a legally compelled, comprehensive and (ii) the knock-on effects on soil conditions, revised approach to such climate integration. Indeed, it has gone structural designs, or enhanced heating or cooling. an extra step and integrated climate issues into the Further consideration must be given to policy targets in assessments required to develop PPP projects in the low- or net-zero carbon objectives through higher energy country (see Box 19 for details). Reference Guide for Climate-Smart Public Investment 59 Figure 12. Evaluating the Business Case for a Project in Light of Climate Concerns Project Contract Business Case Transaction Identification Management • Climate resilience • Comprehensive • Embedding Including climate • Tools assessment of resilience in cost risk in: climate risk exposure. estimates. • Cost benefit analysis. • Comprehensive • Risk valuation assessment of methods. • Financial feasibility. project vulnerability. • Value for money. • Comprehensive assessment of • Environmental the overall climate impact assessment. risk profile. Source: Adapted from IDB (2020). Using PPP for CS investment requires that thinking is, given the increased probability of encountering be revised when it comes to design and contracting unforeseen variations in climate over time. Although such practices. Despite the benefits, PPPs have inherent risks exist regardless of implementation modality, the risks and limitations in the context of a volatile and nature of a PPP makes proper contract design, including changing climate. The very same rigidity of performance both robust up-front design specification and the ex post requirements under a PPP contract can also make it a potential for adjustments and renegotiation, important challenge to adapt to a changing world. This “inflexibility factors to consider in project design and implementation risk” gets magnified the longer the term of a PPP contract modality selection. Box 19. Philippines Consideration of Climate Change in all PPP Project Feasibility Studies The Republic of the Philippines adopted a new Climate Change Act in 2009 that required climate issues to be considered when planning any new public investment. When the government overhauled the national PPP program over the 2011–18 period, it leveraged the 2009 law with a new policy that explicitly calls for climate change impacts to be studied as part of a PPP project’s feasibility review and design considerations applied in acting to mitigate the identified risks. As a result, the Philippines integrates climate resiliency, adaptation, and mitigation measures into project design for public projects, enhancing their application in PPP plans. RA 2097, “An act mainstreaming climate change into Government policy formulations, establishing the framework strategy and program on climate change, creating for this purpose the Climate Change Commission and for other purposes.” Adopted July 27, 2009. Reference Guide for Climate-Smart Public Investment 60 PPP Governing Board Action, “Safeguards in PPP: mainstreaming environmental, displacement, social, and gender concerns.” Adopted December 14, 2018. Section 5.3, A. Environmental Safeguards, Item 3 reads: “In addition to the PPP project’s impact to the environment, the [Implementing Agency] shall consider resiliency to man-made and natural hazards including climate change risks by: (a) including as part of the criteria in selecting the project location, the vulnerability to short- and long-term impacts of natural hazards; (b) assessing disaster risk through the identification of applicable climate and natural hazards, and considering these in the project’s risk allocation matrix; (c) coming up with an adaptation and risk management plan containing appropriate disaster resiliency measures, and incorporating the same in the project design, an, if applicable, in the business continuity plan for projects with O&M components; and (d) documenting in the [feasibility study] climate change mitigation strategies (e.g. energy/water conservation measures, green building).” Source: Adapted from the Republic of the Philippines PPP Center. Two key parameters that need to be considered At the same time, limit the contractual definition of what when structuring a CS PPP intervention are physical constitutes an “event of force majeure” to include only resilience and the definition of force majeure. those aspects of risk that were not accounted for in Consider how to create a more robust, resilient physical the more robust design above. Figure 13 provides an asset through its design, construction, and operations. illustration of these concepts. Figure 13. Adjusting Design and Contractual Parameters Daily operations 30-year event design tolerance Traditional Increasing magnitude of potential loss disaster risk Revised, design scope enhanced climate 100-year event resiliency informed Move design design scope parameters out to create a more robust 500-year event asset for insurers Narrow the scope Extraordinary of risks being risks beyond addressed by force reasonable design 1,000-year event majeure in contract thresholds Array of risks impacting project Source: Authors. Reference Guide for Climate-Smart Public Investment 61 Consider how to contractually handle potentially revising national design and operating regulations to volatile climate change risks over the life of a PPP account for climate change (and periodically adjusting contract. Climate-robust design specifications go a long those measures based on new evidence gathered), way toward minimizing or mitigating the impacts of climate governments can help the insurance market to remain events that may occur with increasing frequency. Based comfortable in providing coverage. If the asset is more on climate data trends, base design conditions need readily insurable, it indicates that the insurer sees it as to be enhanced to create assets that are better able to a lower risk of loss despite a changing climate. It also tolerate a wider-ranging environment. This creates what signals that the insurer would be willing to pay out if amounts to a “physical insurance policy” that can absorb there was a loss. This inspires the confidence of lenders a deeper assortment of climate risks before damage to back the project as they know that there is a good or failure occurs. By demonstrating that assets created chance that their loan will remain recoverable even in under a PPP are more physically robust and resilient, it the event of a climate-related impact. If the risk of loss increases the potential that risks that fall outside those is lower, lenders become more willing to lend capital on design parameters would be eligible for insurance. more reasonable terms and at a more reasonable cost. Thus, climate-robust specifications and standards are Moderate what qualifies as force majeure in a CS PPP both economically and financially beneficial, particularly contract.65 In the historic context of PPP contracts, most in the context of PPPs.66,67 climate-related risks would fall under a force majeure regime, where no party is truly at fault but where both 2.5 Financing Options for parties take financial hits. Most often in a force majeure event, however, it is the public partner that suffers the Climate-Smart Investments greater loss: loss of the asset, loss of its benefits, and potentially, a need to pay out some form of cost recovery (beyond that which is covered by insurance) to the Careful consideration of long-term impacts will assist private investor if the asset cannot be reinstated. Thus, it governments in developing an effective climate is of paramount importance to set realistic expectations financing strategy. This section will discuss the range against cautious design criteria. In a climate at-risk of financing methods available to governments, including world, traditional definitions of qualifying force majeure their advantages and drawbacks. More importantly, events need to be modified to narrow their scope of for larger-scale funding requirements, this section will application to conditions that lay outside an expected address the CS policy, planning, and implementation design envelope of conditions that a project is expected tools that governments can adopt to help qualify for the to handle. This relates closely to the need for explicit maximum amounts of financing from these sources. enhanced design standards and criteria in regulations and project-level specifications. There is a wide array of financing options available for government to support CS investments, including Deliberate consideration and contractual handling sources of private capital. These options include: of climate risks in PPPs may improve the chance of successfully financing and insuring an asset • Multilateral and bilateral development funds and co- in a climate-challenged environment. No financial financing facilities market participant is impacted more by climate change than the insurance industry. The frequency and intensity • Climate-specialized mitigation and of climate-related impacts on assets has risen, with adaptation funds (including co-financing insurance claims rising in scale accordingly. Insurers are with various development partners and faced with raising premiums to reflect these increased philanthropic entities) levels of payout, changing the scope of their coverage • Individual project linked or not offering coverage at all. Yet, access to reasonable • Project preparatory funds insurance coverage is a key risk mitigant, enabling the • Policy-based lending to government insurance holder to recover from loss of services due to unforeseen events. Contractual parties with no access • Public bonds and Treasury financing options to insurance are exposed to considerable losses, leading to the need to set aside funds to self-insure or • Plain vanilla sovereign bonds possibly to forego the investment altogether. By explicitly • Green bonds and sustainability-linked bonds (SLBs) Reference Guide for Climate-Smart Public Investment 62 • Direct private-sector lending and investment implementation cycle when such finance is available • Public-sector budgets and the scale at which it is deployed. Providers of capital often have specific end uses in mind when offering Funding sources often have niche availability and financing; this means government planners need to take applicability, so governments must navigate these into account why, when, where, and in what quantity such limitations to maximum available monies. Illustrated funds are available and the role they will play in realizing in Figure 14 is the universe of climate-related finance, an investment project. coupled with the times in the project identification and Figure 14. Source and Use of Climate-Related Funds across Implementation Phase Preparation Phase Implementation Phase Public National and Sector Budgets Domestic Public $1 billions Sources of Finance NAPs Public Treasury Bond Issues NDCs LTSs Multilateral Climate/Green Funds Project Preparatory Facilities International Public Bilateral Multilateral Multilateral Program Lending $10s of billions Sources of Finance Individual Public Projects Bilateral Multilateral/Bilateral Project Funds Domestic Commercial Bank Project Lending Banks Private Activity Bonds Private $100s of billions Sources of Finance Private Climate/Green Funds Source: Figure adapted by the authors from Saint Lucia (2020). Market size comparison from Climate Bonds Initiative (2021). Note: NAP = National adaptation plan. NDCs = National determined contributions. LTS = Long-term climate strategy. Many climate funds from multilateral development of availability (see Figure 15). Often these allocations institutions now exist, but they are constrained by are only suitable for preparatory work or for small-scale the amount of allocation they can provide to a single deployment of solutions. The Clean Technology Fund activity. It is important when dealing with CS support and the Global Climate Facility are rare in that their funding to understand the providers’ limitations. These funding levels run into the tens of millions of dollars. could relate to the quantum of funding available for a single project, for example, or to end-use restrictions, Green bonds and SLBs are becoming an important such as by economic sector. Specialized climate-related source of financing for governments. For climate- funds, frequently arranged and managed by development related investments, a large and emerging source of finance institutions, provide targeted amounts of money. finance is in the category of green bonds, with SLBs also Often, these are for specific matters linked to the climate advancing in popularity. Sovereign governments whose agenda. Some financing supports the preparation of an investment plans meet green or sustainable criteria can investment activity, while other financing is directed to the issue bonds to fund those activities. The advantage resulting project. The nearly universal characteristic of of green bonds and SLBs is that they can serve as a these facilities is that they are of limited size and duration pool of funding for a number of government-led CS Reference Guide for Climate-Smart Public Investment 63 projects, rather than being highly specific, project-linked project include demonstrating that it is approved, has a financing. Green bond and SLB issuances hit a record confirmed site, is fully permitted, has a clear government level in 2021, totaling over US$1 trillion. It is therefore sponsor, and is projected to deliver clear benefits. If important to better understand how governments can governments wish to tap private capital, it is then up to harness green bonds and SLBs as a source of capital to them to create the conditions to attract and secure it. advance their CS goals. Annex 2 provides an overview of how the emerging markets for green bonds and SLBs Limitations on multilateral and bilateral climate works and what steps governments need to take in order funds make it imperative for governments to wisely to tap them. leverage such funds to access the bigger sources of capital. When wisely used, funding from public, bilateral, Private-sector capital is the most abundant globally, and multilateral sources can take single-digit billions of as well as the most demanding on government dollars, while also attracting and mobilizing the tens or performance. The largest sources of capital come hundreds of billions that are available from investors. from the private sector, available in the hundreds of Thus, it is incumbent upon government planners and billions of dollars. These far outweigh what is available budget officials to: (i) understand the nature of funds from public or development sources. However, private available; and (ii) maximize the strategic use of these capital providers have many precondition requirements facilities, plus the support resources that may accompany that must be satisfied before such climate finance is them. The next section discusses the mechanics of committed. In particular, private financers want to see that setting up a capital-raising framework for green bonds at a project is “real,” namely, that it is in advanced stages the national level to help achieve this catalytic possibility. of readiness for implementation. Characteristics of a real Figure 15. Climate Facilities: Scope and Limitations on Per Project Funding, Number of Projects Supported, and Theme 400 GEF 350 Number of projects funded 300 250 LDCF 200 150 100 CTF SCCF PPCR 50 AF FIP GCF SREP 0 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 Average amount funded per project (USD millions) Both mitigation and adaptation Adaptation only Mitigation only AF = Adaptation Fund CTF = Clean Technology Fund GEF = Green Environment Facility LDCF = Least Developed Countries Fund FIP = Forest Investment Fund Countries Fund PPCR = Pilot Program for Climate Resilience GCF = Green Climate Fund SREP = Scaling-up Renewable Energy Program SCCF = Special Climate Change Fund Source: Adapted from Amerasinghe et al. (2017). Reference Guide for Climate-Smart Public Investment 64 2.5.1 Project Preparatory Facilities: appropriate implementation timelines while helping to Making Strategic Use of Limited Funds mitigate project implementation risks. This is good use of time and money, as having a catalogue of well-prepared Governments in developing economies should projects will allow governments to develop a book of make strategic use of smaller dollar amount investments that development partners and the private climate-financing facilities to create the conditions market can help to fund. for their larger CS public investment projects. Given the smaller amounts of grant-based and co- More refined CS project identification and financed technical assistance facilities from bilateral preparation will help to balance the risks between and multilateral institutions illustrated in Figure 14, the public and private sectors and to incentivize governments would be well-served to consider pooling the mobilization of private capital in the face of those monies into the creation of project development climate change uncertainty. The investment gap in facilities (PDFs).68 These are effectively government infrastructure is not the result of a shortage of capital, self-serving technical assistance facilities that help the as real long-term interest rates are relatively low, there public sector to implement CS investment planning and is ample supply of long-term finance, interest from the implementation at scale. PDFs can make available the private sector is high, and the benefits are obvious.69 monies needed to hire well-qualified outside professional The problem is that bankable, ready-to-implement green services and to fund the technical studies necessary to climate-resilient projects are in short supply. This is due to prepare projects ahead of tendering and implementation. inadequate risk-sharing arrangements in project design70 Professional services can include engineering firms, and incomplete project development structures, both of lawyers, financial advisors, and so on, while technical which are exacerbated by increasing uncertainty in the studies could include detailed site surveys, cadastral face of climate change and inconsistent signaling from databases for those sites, subsurface geotechnical government. Figure 16 below examines transmission investigations, and environmental impact assessments. pathways from physical and transition risks to financial risks that undermine the ability of the financial sector Detailed project preparation assists governments to invest in infrastructure or new technology. Pipeline in creating a reliable pipeline of CS public development and basic maturing of those project investment projects ready for implementation. propositions individually is necessary in order to mitigate Project preparatory works allow governments to develop their inherent structural challenges, which materialize project specifications more in line with CS criteria, refine (at least from the perspective of investors or lenders) as cost estimates for those approaches, and determine financial risk. Reference Guide for Climate-Smart Public Investment 65 Figure 16. Transmission from Climate Risk to Financial Risk Climate Risks Economic Transmission Channels Financial Risks Transition Risks Micro Credit Risks • Policy and regulation Affecting individual businesses and households • Defaults by • Technology businesses and development Businesses Households households • Consumer • Property damage and • Loss of income (from • Collateral depreciation preference business disruption weather disruption from severe weather and health impacts, • Stranded assets and labor market frictions) Market Risks new capital expenditure • Property damage • Repricing of equities, due to transition (from severe fixed income, • Changing demand weather) or commodities, etc. and costs restrictions (from • Legal liability (from low-carbon policies) Financial system contagion failure to mitigate increasing costs and Underwriting Risks or adapt) affecting valuations • Increased insured losses • Increased Physical Risks Macro insurance gap • Chronic Aggregate impacts on the macroeconomy (e.g., temperature, precipitation, • Capital depreciation and increased investment Operational Risks agricultural • Shifts in prices (from structural changes, • Supply chain productivity, supply shocks) disruption sea levels) • Productivity changes (from severe heat, diversion • Forced facility closure • Acute (e.g., of investment to mitigation and adaptation, higher heatwaves, floods, risk aversion) cyclones, and • Labor market frictions (from physical and Liquidity Risks wildfires) transition risks) • Increased demand • Socioeconomic changes (from changing for liquidity consumption patterns, migration, conflict) • Refinancing risk • Other impacts on international trade, government revenues, fiscal space, output, interest rates, and exchange rates Climate and economy feedback effects Economy and financial system feedback effects Source: NGFS (2020). 2.5.2 Tapping the Global Capital Markets to categories of the rapidly growing environmental, social, Fund Climate-Smart Public Investment and governance (ESG) funding markets, such as green bonds, climate bonds, adaptation bonds, and disaster Governments can create the necessary conditions risk bonds. However, all of these require governments to for a climate capital fundraising program that recurs have a clear investment plan for those funds. No investor regularly. For governments to truly deploy CS national wishes to see their monies sitting in reserve. Equally, they and subnational investments at the scale needed to are extremely wary of their capital not being deployed meet the challenge, there needs to be a budgetary and for the intended purpose or, worse still, potentially being treasury-based view for creating programs of large-scale redirected for non-qualifying purposes. A solid CS public capital raising, tapping the far deeper pool of private- investment plan is imperative to unlocking access to this sector monies in the global markets. There are many massive pool of private capital. Reference Guide for Climate-Smart Public Investment 66 Governments can tap this ESG capital pool to fund their sustainability outcomes is imperative. Following the public investments in sustainability and green recommendations of this CS-PIP and PIM guide is one projects. In the past few years, a growing number of helpful means to achieve that goal. sovereigns are issuing and green bonds and SLBs. The purpose of these instruments is to use their proceeds 2.6 Key Messages on Sequencing to fund public investment in national CS projects and services. For well-structured bond programs, about 60 Climate-Smart PIP Reforms percent of sovereign green bond issues in 2021 were issued at a slight discount to the issuing country’s ordinary sovereign bonds of the same tenor—this 2.6.1 The Imperative: Moving from a Climate- is sometimes referred to as a “greenium,” or green Smart Vision to Strategy to Implementation premium.71 The discount reflects the market’s sentiment that the proceeds will be channeled to investments IPCC reporting is clear: human-induced climate that are more positive to the economy than ordinary change is impacting our planet’s environment and government spending. This is due to their green end use creating widespread disruption in people’s lives. and the subsequent improvements to sustainability and Weather-related climate events are becoming more public health. However, achievement of a “greenium” is frequent and of higher intensity. The use of fossil fuels not a given; the quality and consistency of the proposed to drive industrial and economic development has had climate-aligned assets and investments to which funds a measurable impact on this. The degree of impact of will be directed is extremely important. Otherwise, the environmental and economic effects varies from country basis for the discount will erode and eventually disappear. to country. As the 2015 Paris Agreement acknowledges, however, all countries have some part to play in actively Governments must follow one of the standard green creating a sustainable future. The risk of inaction is too bond issuance protocols in order to raise green great. Governments must intervene to reduce the impacts capital. There are specific frameworks, policies, and of humans on the climate as well as the impact of the protocols required from the capital markets in order to climate on our economies and society. Establishing and issue green bonds or SLBs. Following these frameworks enforcing a CS approach to public investment decisions demonstrates to the investment market that governments is among the most essential actions a government can are serious about their CS investment commitments and make to provide the benefits of efficient decarbonization intend to follow through on them. Annex 2 of this report and resiliency to their constituents. provides the current trends in the green bond market and outlines the requirements that governments need to Governments benefit from setting a climate vision follow in order to participate. from which they can develop sustainability policies that create a course for national development CS-PIP and PIM hold great potential to ease the through public investment, and this is where CS- process of raising and managing green bond PIP comes in and where this Guide can help. The capital. Investors in green capital market instruments scope and scale of climate-related impacts have the are doing so because they want to see their money potential to overwhelm budgets and the global economy. directed with certainty toward sustainable outcomes. Governments must be deliberate in their plans to address It becomes incumbent upon green bond issuers to climate risks to their communities while taking steps to prove they have both a pipeline of suitable prospect do their part to reduce the factors that exacerbate those investments and, even more important, a verifiable track risks. Decarbonization strategies promote better energy record of implementing and achieving their sustainability use and reduce emissions. In doing so, they present promises. Having robust CS oversight and management opportunities to save money and promote public health for government projects helps to ensure that projects in the long run. Climate adaptation measures require funded through green bonds adhere to a government’s strengthening, relocating, or removing infrastructure, representations in the issuance prospectus. In any event, thereby protecting economies, promoting livelihoods, reporting and verification comprise a core component and saving people’s lives. All of these options require of any management framework for green bonds. If a that public budgets and funding be guided toward both government wishes to reliably and consistently return capital investment and operating expenses that uphold to the capital markets to issue them, refining and sustainability and resiliency principles. internalizing the process of delivering and reporting on Reference Guide for Climate-Smart Public Investment 67 From a sustainability vision comes a CS strategy, and their economy. As sustainability principles reach from a strategy come CS plans, paving the way for all aspects of the economy, low-carbon design and private-sector engagement and financing. The scope technology applications are proving to not just be of the climate change challenge is all-encompassing, environmentally sensitive but also more economically requiring a whole-of-government response and the efficient. Governments can benefit from the low-carbon participation of the private sector. CS policies and transition by making commitments, such as the following: strategies coming from the highest levels of government pursuing GPP; adopting and implementing higher energy can guide all sectors onto a more sustainable path. efficiency standards for government entities; transitioning Already, many governments have developed NDCs and to electrified fleets and zero-emission vehicles; and LTSs coming from their Paris Agreement submissions to improving spatial planning and management. the United Nations Framework Convention on Climate Change (UNFCCC). The key to realizing those pledges is 2.6.3 Climate-Smart Actions by the Public to convert them into explicit public policy backed by public Sector Hold the Potential to Transform investment plans, followed by disciplined implementation National Economies for strategic delivery. Developing an evidence-based CS planning approach to public investment can better Public-sector leadership in CS planning and prepare the economy for the future by making more development has a positive influence across all efficient use of often limited resources, both physical and sectors of the economy, especially in the private financial. Consistency of the plans across government sector. Government action in implementing a CS policy and over time is essential to signal a commitment to in public investment and in the delivery of public services a chosen strategy, allowing greater predictability for demonstrates CS concepts in practice. It also helps private-sector investment. prove the benefits and value of the approach, while at the same time leading by example. Governments can induce 2.6.2 Climate Adaptation and Decarbonization demand for CS development by procuring projects Require a Holistic and Long-Term View and materials in the public realm that demonstrate the benefits of their climate policy and strategy. Through such Adaptation planning must account for both empirical proof of concept, governments subsequently near-term acute risks as well as longer-term have latitude to roll out enhanced standards and environmental changes. Already, many countries are regulations governing private-sector development. experiencing more frequent and more intense climate catastrophes. Although immediate weather-related Governments can deliberately use the private sector events grab attention, other impacts will be slow onset, to advance their CS agenda. Progressive public requiring planners to be very forward thinking in building policy can direct the private sector to complement and regulations and designing requirements. One area can enhance government efforts. Improved building codes be affected by rising sea levels, shrinking snowpacks, and design specifications, climate-sensitive zoning and or desertification, for example, while another is subject transportation planning, energy efficiency standards, to flooding; all require advanced planning to tackle the and requirements for greener materials in the built knock-on impacts. environment all contribute to making countries more sustainable and more cost-effective, while simultaneously A government’s holistic CS approach to land-use and promoting healthier livelihoods. development planning benefits the entire economy while addressing future risks. Land-use strategies Public investment processes can be used to can positively influence low-carbon development and embed CS standards and can incentivize private- transportation patterns while creating reservations for sector capacity for implementation. The cyclical natural buffers against climate change impacts. Taking PFM process, of which PIM forms a part, allows for cues from flood mapping and disaster risk planning incremental changes to guidance and regulation as well can inform more sustainable land development and as the planned upgrading and tightening of standards land uses. over time. The relative size of public-sector investment gives the government significant influence to incentivize Decarbonization planning allows governments the private sector to develop the necessary capabilities to improve their own operational efficiency while for CS implementation, especially if the pathway of CS incentivizing GHG emissions reduction across policy and regulation is clear and predictable. Reference Guide for Climate-Smart Public Investment 68 2.6.4 Sequencing and Evolution of Reforms emerging CS-PIP function has most of the core elements of Climate-Smart Public Investment Policy in place, but the practices, procedures, and capabilities Depend on Country Starting Point to employ them still require further strengthening. In an advanced CS-PIP function, the core elements are in place CS-PIP is an evolutionary process. First, a government and performing reasonably effectively. What reforms to must want to undertake the transformation, setting embark on will depend on individual country priorities a clear vision and targets to move into a CS planning and the stage of development across the spectrum of mindset. The goals arising from this transition range from PIP reforms. As a result, the sequencing of an individual modernizing and decarbonizing the economy through to reform program will be highly contextual. protecting people from the intensifying impacts of climate change–related weather events. Often, these efforts Moving from conceptual targets to actionable plans can be complementary and combined. CS-PIP takes starts with understanding what governments already deliberate planning and perseverance to implement. have, developing measures of the performance Policies are the building blocks for new rules, regulations, and efficacy of existing assets, and then applying and standards. New standards pave the way for new an investment prioritization framework to improve forms of infrastructure design and operation. All the or replace assets and related services. Very few while, governments can guide and shape this process as governments start this process from scratch; there are they monitor how implementation progresses. always asset inventories, assessments, and records that can form the basis of a CS evaluation. These are Considering the evolutionary process described augmented by large bodies of institutional knowledge above, Table 9 proposes a sequenced set of reforms from those who understand the details of how a piece of based on the state of development of the CS-PIP public infrastructure was built, how it is being maintained, function, which may be described as nascent, and how it is performing relative to its originally intended emerging, or advanced. The table is meant to assist purposes. The aim of CS-PIP is to institutionalize these governments in the identification of reforms to translate measures and methods, continually improving the level their strategy and vision—as reflected in their long-term of detail and expanding the scope of coverage. Table 9 CS plans—into effective policy implementation. A nascent below provides an illustration of how governments can CS-PIP function is one where practices, procedures, and evolve and refine key dimensions of the CS-PIP process capabilities are in the early stages of development. An as experience and capacity grow. Table 9. Indicative Sequencing of CS-PIP Reforms Depending on Starting Point PIP Area Nascent CS-PIP Functions Emerging CS-PIP Functions Advanced CS-PIP Functions Policies • Conduct national climate • Transition and physical risk • Improve coherence change risk assessments assessment capabilities. between national using internationally and subnational risk available data and models. assessment and adaptation/transition plans. • Sequence transition or physical risk assessment • Use risk assessments to capacity development inform asset and portfolio focusing on the highest management registries priority (physical and uniformly and periodically decarbonization). on risk profiles (e.g., every five years). Strategies • Reflect public infrastructure • Develop national • Expansion of land-use plan and projects in land-use plans. adaptation and granularity and functions. Planning transition plans. Reference Guide for Climate-Smart Public Investment 69 Table 9 continued PIP Area Nascent CS-PIP Functions Emerging CS-PIP Functions Advanced CS-PIP Functions • Enhance land-use plans to incorporate anticipated climate impacts into the future, identify critical assets, and lay out future infrastructure needs. Risk maps provide users with detailed guidance. Managing • Use or complete a • Apply the asset inventory • Consistently track public Assets DRM assessment of a to develop a prioritized assets to maintain a given geography. CS investment and prioritized list of conforming management program. assets and those in need • Derive an inventory of of additional investment. core public assets from • Use a prioritized program that assessment, creating to develop annual • Use inventory and a database of core asset CS investment and performance reports to characteristics: operating budgets. create a regular, revolving • Design specifications CS investment program. • Age and condition • Track progress against • O&M requirements investments on the • Use CS metrics to • Vulnerabilities and risks prioritized list and the identify, design, and • Agency responsible— operational. performance/ prioritize investments and identify or assign readiness of those interventions among public CS assets. assets and services to • Create an inventory of minimize climate impacts, climate-resilient or climate- • Consider developing an maximize efficiency, vulnerable assets, ranking inventory of performance and reduce or eliminate them by criticality and risk. against decarbonization, GHG emissions, in effect, energy efficiency, making them CS. • Create a prioritized list of resiliency, and other investments required to CS criteria. • Use the annual reporting address critical risk areas, on public CS asset assigning responsibility to inventory performance specific agencies. to help address progress against NDCs. Institutional • Utilize diagnostic tools, • Approve and operationalize • Fully operationalize Framework such as the Climate-PIMA essential CS-PIM public institutions in and the Country Climate legislation, regulation, implementing all tiers of and Development Report, and guidance. CS legal, regulatory, and to identify institutional guidance framework. capabilities and gaps. • Consider options for emissions trading schemes. • Regulate CS risk disclosure. • Develop high-level CS-PIM legislation, assigning clear • PIM Unit uses a mix of • Introduce emissions trading mandates for proposer, in-house and external schemes or equivalent appraiser, reviewer, and capacity for CS-PIM mechanism at national and/ decision makers. functions. or subnational level. Reference Guide for Climate-Smart Public Investment 70 Table 9 continued PIP Area Nascent CS-PIP Functions Emerging CS-PIP Functions Advanced CS-PIP Functions • Establish inter-agency • Update SOE reporting • Establish capacity for cooperation bodies requirements to reflect climate risk and CS and processes. CS-PIM where appropriate, technical aspects of PIM including pilots for independent review in • Finance ministry voluntary climate risk PIM Unit or other central, participates in disclosure. independent unit. cross-sectoral coordination. • Upgrade legislated • Assure widespread • PIM Unit outsources CS- building regulation compliance with building PIM capacity. to comprehensively and infrastructure include CS. sustainability codes. • Encourage development of subnational capacities • Introduce infrastructure • Implement regulation regardless of status and sustainability rating for to establish energy pace of national capacity. larger public infrastructure. performance certification. • Introduce and/or support • Pilot building energy voluntary building performance standards standards in government- and metrics. funded investment schemes, focusing on priorities (adaptation or mitigation). PPPs • Review public infrastructure • Apply CS design standards • Apply CS design standards and Private and facility design widely in the majority of consistently in all projects, Sector standards to determine public investment projects. public or private sector. where CS improvements can be made. • Widespread integration • Regularly use of of GPP competitive dialogue • Create CS O&M standards procurements to facilitate for public assets and • Mainstream the use of advanced/innovative CS services to conform with alternative procurement investments in public CS government policy. modalities appropriate assets. to individual projects • Implement design standard in order to achieve CS • Regularly use of PPPs updates, ideally providing investment goals. to achieve enhanced, estimates quantifying the consistent CS public extent of improvements • Develop dedicated/trained service performance, while possible over a given CS procurement teams maximizing private-sector time period. to assist departments participation in public across government in infrastructure. • Introduce GPP principles. implementing alternative procurement projects. • Consider a wider range of public procurement modalities appropriate to design, implementation, Reference Guide for Climate-Smart Public Investment 71 Table 9 continued PIP Area Nascent CS-PIP Functions Emerging CS-PIP Functions Advanced CS-PIP Functions and operational challenges for new CS public investments: • Traditional public procurement • Alternative contracting modes • PPPs • Modify public procurement regulations to permit alternative forms of procurement. • Pilot CS construction and operating standards on critical public asset projects. Financing • Develop a taxonomy • Successfully complete one • Demonstrate a positive of green areas that bond issue reporting cycle. track record of deploying governments wish green capital for intended to address. • Provide accurate and purposes and show clear reporting on past that projects have been • Develop a green bond issue performance. well implemented. framework under which green issues will take place • Return to the green bond • Provide independently and be managed. market with new issues on verified corroboration of an ad hoc basis. government CS reporting. • Obtain a concurring second-party opinion • Begin to develop a portfolio • Conduct a regular program regarding the efficacy of of green public bond of green bond issues, with the framework. issues, applying bond predictable issuance sizes proceeds towards projects and dates. • Complete first green new sectors named under bond issue. the green bond framework. • Expand the application of proceeds to a wide variety of sectors/project types that address CS investment. • Link green bond program progress to national progress against NDCs. Source: Authors. Reference Guide for Climate-Smart Public Investment 72 2.6.5 Specific Planning Actions for understand water resource availability and flood, Governments to Consider erosion, or landslide risks. It is also helpful to monitor performance of existing stormwater, sewer, 2.6.5.1 Make Use of and Improve the Quality of and natural collection/storage areas to understand if Information Gathered to Inform Climate-Smart they are performing as designed and to what capacity, Public Investment Policy and whether there are deficiencies. Data can be used to update flood maps, projecting higher levels resulting Data is the key to informed CS planning. from more intensive episodes. Governments have many forms of data available, whether inventories, meteorological measurements, GISs allow governments to track the location of or maintenance records. These can be transformed critical infrastructure, property, and developments. into CS planning tools. Improving the quality and detail GISs can be linked to information about the construction, of existing information allows governments to determine inspection, and maintenance history of public assets where gaps exist that are critical to decision making. to better understand where the assets are in their life Deliberate strategies to enhance collected data can cycles. Topographic and cadastral data can be linked make decisions on CS investments more apparent and to understand which structures are at risk from climate easier to prioritize. impacts and the scale of that potential impact. Databases, ongoing climactic measurement, and 2.6.5.2 Manage Public Climate-Smart Assets mapping comprise core components in developing in a Portfolio a holistic CS approach to public planning. Public availability of increasingly disaggregated climate data and Recognize that governments currently possess risk assessments, coupled with improved accessibility assets, such as infrastructure, buildings, equipment, of information through mapping applications and other and land holdings, that can provide degrees of digital tools, will greatly enhance the ability of economic adaption or could be modified to do so. Many public actors—public or private—to make informed decisions assets were put in place years ago and were designed on investment. for conditions prevailing at that time. Often, those design parameters are no longer sufficient for the intensity and Disaster risk assessments and plans can be adapted frequency of current or future climate events. The assets to inform CS public investment planning. Risk may also have been built or specified in a manner that assessments from the national to the local level provide means they are more carbon intensive than current governments and private-sector actors with an awareness technology or other available options. Understanding of the physical and transitional risks that they are likely where carbon intensity comes from and where the to face over the medium to long term, enabling them strengths or weakness in climate resiliency lie is a great to make investment plans accordingly. Governments aide in more effectively directing public investment to can focus on reducing gaps in this information and where it is most needed. strengthening scenario planning to be better prepared for the uncertainties of climate change. Close coordination Develop an inventory of public assets, documenting with DRM platforms will help. their adaptation capabilities and carbon footprints. Governments should evaluate what public assets Capabilities for the assessment and management they have, what condition they are in, and whether of transition risks are essential but will typically or not they are climate resilient or consistent with be established after basic capacity for managing decarbonization targets. physical risk. Frameworks and tools for assessing and managing the risks associated with an incomplete Use a combination of the inventory of public assets or ineffective transition to a low-carbon society are far and disaster risk assessment plans to create a less advanced than for physical risk. Closing this gap is prioritized set of public investment projects that important for all governments, especially for those with promise the greatest benefits. Combining these economies that are highly dependent on fossil fuels. information sources can help to determine budgets and timelines for implementation, as well as to clarify Governments can collect and/or augment weather the risks addressed and benefits created. These are and hydrological data in watersheds to better important elements in planning and prioritization. Once a Reference Guide for Climate-Smart Public Investment 73 project comes to financing, they can also help to identify of climate adaptation and decarbonization, many new appropriate sources and methods of capital allocation technologies and techniques will be promulgated over and fundraising. the coming years. Governments may find themselves in the position of having to trial these methods without Use the prioritized list of CS assets to inform where full information of how they have performed elsewhere. to focus O&M budgeting activities. If a government Allowing for more consultative forms of procurement, has invested in public assets critical to climate change such as competitive dialogue, will help governments adaptation, it is important that these assets operate and contractors alike reach better outcomes while as intended when the time comes to make use of their delivering innovation. climate functions. Focus resources on those priorities. Merge CS policy into public procurement strategy. 2.6.5.3 Designing Procurement for Climate-Smart Upgrade design and performance standards to reflect Investment Projects CS targets. Procure green materials and products at the public-sector level, as this can create induced demand Any public sector procurement inevitably involves for such materials and the design practices that make working with the private sector, whether through use of them across all sectors. design engineering, surveying and studies, or construction contracting. That relationship can even 2.6.5.4 Financing Climate-Smart Public extend to financing and operating and maintaining Investment Activities assets on behalf of the public sector. There is a wide array of contractual formats, each of which have different Make strategic use of funding sources from the advantages and challenges for the government to public budget, treasury operations, development consider. It is in the public’s interest for governments finance, and the private sector. Implementing a CS- to strategically approach their choices for project PIP requires sustained funding over years. As part of CS structuring, contracting, and implementation. In the planning, governments would benefit from having a clear climate-smart context, governments can look beyond idea of where funding for CS investments will be sourced traditional contracting structures to unlock the full from. By tapping a variety of funding and financing potential of innovation, contractually bound performance modalities, governments do not have to rely upon any risk sharing, and reliability that the private sector has one source of finance to pursue CS investments. Making to offer. the right choice depends on the scope, scale, novelty, risk, and at times, possible commercial nature of the Consider an array of procurement and contracting target investment. This chapter discussed a number of alternatives with private-sector counterparts to these methods, summarized below. best manage CS project implementation. A focus on CS outcomes and performance quality from public Governments can use policy backed by funding to investments may influence the modality under which they selectively catalyze climate innovations. Targeted are procured. Procurement and contract structures can grants, competitions, or programs can help to foster be strategically employed to implement long-lasting and nationally relevant climate technology or technique reliable CS plans. Three categories of public procurement, solutions. Such innovation does not necessarily need namely, traditional public procurement, alternative public to be a major new technological breakthrough; rather, it procurement, and PPPs, were addressed in this chapter could be adapting a current technology to a lower-cost (see Section 2.4.4). design, to a more appropriate scale, or to alternative materials or inputs that are locally available. Proactively update public procurement regulations to permit the use of alternative forms of contracting Create project development funds to assist for CS purposes. Many public procurement and government agencies in identifying and preparing contracting regulations do not provide for the alternative CS projects. A core challenge facing governments means listed above. This artificially limits choice and implementing CS projects is having a long list of restricts the flexibility to adapt to new technologies, novel prospective projects/ideas and a very short list of projects methods, or enhanced techniques for implementation ready to tender. Supporting project preparation through a management. Given the scope, scale, and challenge dedicated fund will allow governments to hire the outside Reference Guide for Climate-Smart Public Investment 74 professional expertise and conduct the technical studies advantage of the global push toward financing green and needed to properly prepare CS investment opportunities. sustainable finance. To do this, governments must follow These expert resources can support government a process of policy, planning, and development that is agencies to develop tender packages, draft contractual becoming standardized globally. This process includes: agreements, and negotiate the final deal with contractors or private investors. • Categorizing through a taxonomy what is defined as “green” in the country Wisely use multilateral institutions and philanthropic climate funds to jumpstart the public CS agenda. • Establishing a green bond framework that governs how Development finance has many climate-specific issues will be raised and how funds will be applied, financing facilities to support sustainable development, managed, and disclosed but these often have limits on the amount of money that can be dedicated to a single project. Alternatively, they • Creating a pipeline of viable CS public investment have tightly defined end uses, such as specific sectors or projects that would be subject to funding from project types. Despite this, governments can strategically bond proceeds use these funds to help catalyze far larger investment plans and activities than they could if acting alone. • Obtaining a second-party opinion on the efficacy of a government’s framework PPPs have a potential dual advantage of providing turnkey implementation of a project while also • Issuing reports and obtaining audits after a project’s obtaining capital investment from a private partner. implementation Depending on the nature of the investment, PPPs can be fully commercially viable, thus allowing the private A sovereign green bond issuance program could party to finance the project on its own. Sometimes, a potentially create a recurring source of funding for PPP project may require government payments during CS activities. Bond investors will gain comfort from the operating period. In the latter case, however, these governments that have a regular and reliable program of payments effectively function as a deferred payment plan bond issues, particularly if those bonds meet the green for governments, without up-front capital expenditure. or sustainable criteria. This requires government to have a strong, long-term pipeline of CS investment projects A sovereign green or sustainable bond funding identified and to have successfully implemented its program holds the potential to finance a wide array originally listed projects, verified by reports and audits. of CS public investments, if government creates the This can become a reliable means by which to develop appropriate conditions. CS development plans can take CS asset portfolios. Reference Guide for Climate-Smart Public Investment 75 03 Climate Change in Public 3.1 Climate-Smart Public Investment Investment Management Management: A Tool for Achieving Objectives of Climate-Smart Public Investment Policy To maximize societal welfare in a changing world, CS-PIM articulates the pathway for infrastructure development established through CS-PIP. Through its investment choices, a government can influence GHG emissions and hence climate change. CS-PIP matters for climate change because it provides a mechanism for ensuring a shift toward a more decarbonized portfolio of public investments while remaining competitive and aligned with international commitments to reduce GHGs.72 To achieve the climate change goal of reducing a government’s GHGs, CS-PIP is an appropriate framework for clarifying what shifts in investment are required. CS-PIM builds on this by helping ensure that actual public investments are planned and implemented in a more climate-friendly manner while remaining socially efficient. Reference Guide for Climate-Smart Public Investment 76 3.1.1 Climate Change in PIM versus PIM Equally, a good PIM system should be part of the in Climate Change broader strategy for tackling climate change. When functioning well, a PIM system can help to allocate The relationship between PIM and climate change resources efficiently to projects that reduce GHGs as well can be looked at from two perspectives: as those aimed at specifically reducing the vulnerability of public (and private) assets to climate change hazards. • The principles, concepts, methods, and procedures This is possible since PIM should be one of the core of a well-functioning PIM system are already set up tools for affecting government policy through national to take account of the implications of factors such as investment budgets. climate change. Without the discipline of a functioning PIM system, • A good PIM system is an important “weapon” in a it is difficult to address climate change in or through government’s armory for meeting climate change public investments. A precondition for climate-informed objectives and/or commitments. public investment is the existence of a minimally functional—and, preferably, well-functioning—PIM A good PIM system involves accounting for system. At the same time, the sophistication of the risk externalities when appraising projects and analysis in PIM systems may need to be deepened to identifying and managing risks that threaten project deal with the uncertainty surrounding the severity and success. Implicitly, PIM already covers climate change; frequency of localized climate change impacts and the task is to make the treatment of climate change the transition to a low-carbon economy. The effects explicit. Risk and uncertainty around physical hazards of climate change are not an “add-on” to business- caused by climate change and the necessary adaptation as-usual planning. Instead, they should be integral to to new environmental circumstances represent one considerations about how public infrastructure and public aspect of this task. GHG emissions comprise a global services work in a changing world. negative externality, and PIM is usually concerned with effects inside national boundaries. However, international 3.1.2 Merging Climate Change and PIM treaty commitments and NDCs bind nations into a to Develop CS-PIM global framework of obligations that necessitate a wider perspective. This is not entirely new; transboundary CS-PIM requires a coordination of climate change effects must be considered in relation to projects that policy and PIP as well as a comprehensive change the flow of international rivers, for example, or application of climate considerations as an integral that address air and water pollution. part of existing PIM functions. The World Bank usually Reference Guide for Climate-Smart Public Investment 77 identifies eight core functions, or stages, that must be line with broader guidance issued by the environmental present for a PIM system to be effective.73 Each stage economist, Nicholas Stern: “Adaptation should not be needs to be explicitly informed by climate considerations, seen as an additional policy agenda to deliver, but as but there is no need to invent a new framework for development in a harsher climate.”74 That said, achieving the system or to add new stages or modules. Such this aim should take account of the stage of development considerations should be embedded in this system from and performance of PIM systems in individual countries. beginning to end and must not be seen as necessitating Equally worthy of attention is a country’s capacity to an additional set of processes. The objective should be to implement reform if and where required. build in climate change responses to existing systems in Figure 17. Conceptual Framework for Public Investment Management Authority to screen Evaluation to and reject projects improve guidance Maintain asset Consistency in register, operate, project preparation and maintain asset 1 2 3 4 5 Implementation 6 7 8 Independent Adjustment Evaluation Operation Guidance Appraisal Selection review Link to a Key to credible An effective budget and procurement development selection process to support implementation strategy and operation Source: Rajaram et al. (2014). 3.2 Climate-Smart Project planning and with legal/regulatory requirements; and (iv) making a preliminary risk assessment. The concept Identification and Screening development stage also entails exploring and narrowing down alternatives to the envisaged project. Based on a relatively succinct project concept note that summarizes 3.2.1 Climate-Smart Project these aspects,75 the pre-appraisal decision—namely, to Concept Development proceed (or not) to more in-depth project preparation and appraisal—is then made. The concept note is also Project concept development is the first step in project the starting point for defining the in-depth work that preparation after a project idea has been identified. may follow. This involves: (i) specifying the problems or opportunities that the project is designed to address; (ii) establishing Project concept development provides the first the logic behind the intervention; (iii) confirming the and, in many ways, the most important opportunity project’s conformity with national and sectoral strategic to consider the climate impact of a project and its Reference Guide for Climate-Smart Public Investment 78 potential exposure to climate risks. A government’s responses. The only exception is when climate change climate change strategies, plans, and commitments (see is explicitly singled out as an issue. It is all too easy to Chapter 2) will identify priority areas for public investment assume that a generic concept note will implicitly reflect dedicated to mitigating or adapting to the effects of climate climate change (under such broad headings as “strategic change. These policies will form the drivers for identifying relevance,” “environmental impact,” or “risk”) and that “pure” climate change projects and will, of necessity, no specific action is required, yet such assumptions are be reflected in concept notes. But climate change is a unwise. Reflecting these potential gaps, Zimbabwe’s horizontal issue. As such, these same strategies, plans, government recently updated its public investment and commitments will have implications for investments guidelines to impose two specific climate change–related across all other policy areas. For example, they may elements in the project concept note form (see Table define “no-go” areas for investment, such as potential 10). These elements now appear alongside the other stranded assets (see Section 2.1), or point to areas standard requirements. where mitigation and/or adaptation are advisable. In addition, they may determine the kind of alternatives In the context of climate change, it is more important that should be considered, including for adaptation than ever that projects should be conceived and (see Section 3.2.3 below). Furthermore, under project designed with a view to the networks within which preconditions and constraints, concept notes should they are situated. Network dependencies are important examine the regulatory environment for the project. when designing and prioritizing public infrastructure These considerations should include conformity with projects. This is more acutely so when investing with land-use plans, zoning requirements, and applicable climate change mitigation and adaptation in mind. construction standards, all of which should have climate Projects cannot be designed in isolation of the networks change dimensions (see Section 2.2.4). in which they operate. Decarbonization and adaptation require structural changes in infrastructure networks, The design and guidance for project concept such as the electrification of transport, the safeguarding notes must give explicit recognition to climate of water and wastewater, changes in urban structure, change. In most jurisdictions, experience suggests and shifts to renewable fuels in energy. Projects must that climate change will not be adequately reflected in duly be conceived and designed to work within these the development of the project concept: business-as- new or evolving networks. usual procedures tend to prompt business-as-usual Table 10. Extract from Zimbabwe’s Project Concept Note Form Item76 Project Information Requirement Alignment with Climate Change Objectives Highlight how the project is expected to contribute to climate change adaptation, resilience, or mitigation objectives outlined in the national development plans and strategies as well as the NDCs. Climate Risk Screening • Does climate change impose a high degree of risk to the project? • Is the project located in an area prone to climate change-related events? Do climate change scenarios suggest that these events’ frequency and/or severity is likely to increase? • What will be the implications, including the cost of infrastructure rehabilitation and the cost of service disruptions, for the project and for service users? Source: Zimbabwe (2021). Reference Guide for Climate-Smart Public Investment 79 3.2.2 Project Risk and Vulnerability procedural and/or capacity constraints. Ethiopia, Assessment for Project Concept for example, has for the most part introduced the risk assessment at appraisal stage, rather than at pre- The earlier in the project cycle that a climate change appraisal. In the PIM Guidelines under the Public risk and vulnerability assessment can be performed, Projects Administration and Management Proclamation, the better for public investment outcomes. As already it is recommended that the vulnerability and risk indicated, the project concept note should include a assessment be applied selectively for high-risk projects preliminary assessment of the climate change risks at pre-appraisal stage but be mandatory at appraisal.77 faced by a project and how vulnerable it is to these risks, in terms of both damage to physical assets and the 3.2.3 Choice of Technology wider environment for delivering the project’s services. The latter involves looking at the broader implications of The choice of technology can easily become locked an interruption in service availability and the effects of in too early in a project’s development, making it interruptions on critical complementary services. Ideally, difficult to change course later. Too often, projects a structured vulnerability and risk assessment should be are conceived from a narrow technical perspective, part of developing the project concept note and should with embedded technological choices. Project concept inform the pre-appraisal decision. If an assessment development is the optimal time to begin thinking is performed for pre-appraisal, this should be seen as about the technology that will be used in a project. a preliminary assessment to be followed by a more in- This allows for the exclusion of technologies that are depth assessment at appraisal. obsolete (or likely to become so) and the inclusion of those that are likely to be durable (both in terms of The climate change risk and vulnerability assessment technical and policy relevance). Choice of technology at pre-appraisal stage may involve a simple checklist should be considered during pre-appraisal as part of or the use of more sophisticated tools. This section the assessment of project alternatives. A long list of looks in more depth at structured approaches to options should initially be considered. Such a list should the assessment, which may be applied at both pre- embrace alternative technological solutions as well as appraisal and appraisal stages but with greater depth mainstream options. This list should then be slimmed and intensity of effort directed toward data accuracy at down for further assessment at appraisal. For long-lived appraisal. Purpose-built rapid assessment tools, as well projects, the choice of technology should incorporate as internationally shared, digital geospatial information, government policy commitments and trends in addition to may also be used. In broad terms, risk assessment at technical considerations. pre-appraisal should be used to identify projects where: Appropriate technological choices are important for • Regulatory requirements demand enhanced design decarbonization and for adaptation to climate risk specifications to mitigate climate change effects and and should be addressed first at pre-appraisal stage. adapt to climate change risks. Technological choices should not lock in business-as- usual carbon-intensive technologies where government • In-depth work (both design and assessment) policy calls for their phasing out. Nor should such on climate change adaptation will be required choices lead to public resources becoming tied up in at appraisal. stranded assets (see Box 2). Different technologies may also have different levels of resilience to future • The risks from climate change and potential costs climate-induced hazards. Further, technological choice are too high to consider the project’s continuation. should be interpreted widely to include options that involve expenditure on non-physical assets, not • More in-depth assessment of climate change just on hard infrastructure. For example, improved vulnerability and risk is not necessary watershed management could represent an alternative because the project is small, short lived, or not to investment in physical flood protection infrastructure. significantly affected. As with other alternatives, promising technologies for addressing climate change should be identified in the Undertaking a preliminary climate change project concept note for further assessment at appraisal vulnerability and risk assessment at pre-appraisal stage, when social cost-benefit analysis (SCBA)78— stage might not always be possible because of or cost-effectiveness analysis (CEA), if outputs are Reference Guide for Climate-Smart Public Investment 80 the same—can be used to help determine the optimal should eliminate project concepts that are out of line choice (see Section 3.3.4). An illustrative example of with long-term decarbonization policies and international technological choice is the choice in electric power commitments, or where adaptation to climate change– generation between plants run on fossil fuels or on induced hazards that are high probability and high impact renewable fuels. In Indonesia, to incentivize greener is unlikely to be achieved at an acceptable cost. choices, financing is provided from the Clean Technology Fund to support geothermal power development.79 The Pre-appraisal screening permits the proportionality choice of design and climate-control technology in a principle to be applied in subsequent CS appraisal. green building presents another example. Screening for vulnerability and risk as early as possible in the project cycle (preferably beginning at pre-appraisal) 3.2.4 Climate-Smart Pre-appraisal Screening forms part of the application of the proportionality principle. This helps to identify those projects where the Pre-appraisal involves screening out projects where application of CS appraisal is likely to bring the highest strategic relevance is weak, the intervention logic returns for the effort applied. This is illustrated in Box 20 (“results chain”) is not coherent, or the risks are for the case of the United Kingdom, which applies first- too high. Rigorous screening at pre-appraisal stage stage screening criteria prior to a full risk assessment: ensures that resources are not wasted on preparing and only projects that meet one of the criteria go forward to the appraising low-priority or flawed concepts. Additionally, it assessment. The proportionality principle applies equally stops such projects from gaining “planning momentum.” to CS appraisal that should be directed to high-value, Screening also allows for the identification of high-value/ long-lived, or network-critical projects facing high risks high-risk projects where a more intensive appraisal effort from climate change. In countries with scarce analytical will be warranted, in line with the proportionality principle capacity and nascent PIM systems, it will be particularly of PIM.80 important to apply this principle. In such instances, climate risk assessment efforts and development of CS pre-appraisal screening involves rejecting adaptive measures should focus on areas where the projects that are out of line with climate change biggest savings from avoided future losses are likely policies or where resilience to climate change hazards to occur. is likely to come at too high a cost. Decision makers Box 20. First-Level Screening for Risk Assessment (and Appraisal) in the United Kingdom In the United Kingdom, only a project that meets one or more of the following criteria goes through to a full risk assessment and climate resilient appraisal: • Has assets or elements affected by weather and the effects of climate change, including variability and extremes • Is associated with the natural environment • Involves significant investment, has high value at stake (including human well-being and biodiversity), or involves significant operational or maintenance costs • Is associated with critical national infrastructure • Has significant interdependencies with other government activities or the wider economy • Involves decisions that will result in lock-in to a particular future • Responds to the identified CCRA [the higher-level assessment, see Section 2.2.2] risks These criteria are designed to direct appraisal efforts toward projects most at risk and where the costs of making a poor decision are likely to be highest. Thus, the focus is on high-value, inflexible projects with the most important linkages in their own sector and more widely. Source: United Kingdom (2020a). Reference Guide for Climate-Smart Public Investment 81 3.3 Climate-Smart Project Appraisal tipping points, plus the specific effects of climate change at the subregional and local levels. However, the highest degree of uncertainty relates to the effectiveness of international 3.3.1 Overview of the Climate-Smart Appraisal actions to contain global warming between now Approach: Taking Account of Uncertainty and 2050. In the context of climate change– induced uncertainty, it may no longer be Climate change introduces new dimensions into possible to rely on the standard measures of project appraisal that demand specific treatment project worth, such as net social present value within the mainstream approach. Generic appraisal81 or, taking account of risk, expected net social processes and methods are well documented in guidance present value.85 The analysis must include a from international agencies82 and well established in range of different possible future states of the the better performing national PIM systems.83 Generic world, involving different benefit-cost trade-offs methods are also complemented by a substantial and potentially different appraisal decisions. In body of sector-specific methodological guidance, both these conditions, choices may be more effective internationally and among better performing countries. So when they reflect decision makers’ attitudes why is it so important to give special attention to climate to uncertainty (i.e., their position on factors change and make appraisal more climate informed? Two where data are not sufficient to approximate main reasons can be identified: a probability distribution) as well as the usual objective criteria. As climate modeling improves 1. Climate change poses difficult-to-predict in reliability and granularity and as the “cascade physical and transition84 risks to projects, of uncertainty” shown in Figure 18 narrows, altering the approach to appraisal: more objective decision making may become possible, although this may still be some way • Climate change overturns the basic assumption off.86 To an extent, uncertainty can be offset by of project appraisal that baseline conditions will identifying ”no-regrets” options and by flexibility be stable or at least will change in a predictable in design (see discussion of real options below). way (allowing for knowable stochastic variation) No-regrets options tend to be low cost and will over time and can be planned for accordingly. bring net benefits (or at least no losses) under The nature of the uncertainty induced by climate current conditions. If the effects of climate change at the project level is summarized in Box change occur as anticipated, these options will 21. Figure 18 illustrates the increasing scale of bring larger benefits. By the same token, such the uncertainty: the more localized the subject of options will not be regretted if the anticipated analysis, the greater the degree of uncertainty. effects do not end up occurring. This carries implications for both sides of the cost-benefit calculus. On the one hand are 2. Climate change requires a global perspective the effects on project design and costing. Not to appraisal. GHG emissions are a global negative only must climate proofing (or retaining options externality. Most appraisal guidance is from a for future climate proofing) be considered, national perspective. However, CS appraisal needs but the costly lock-in of potentially obsolete to adopt a global societal perspective that takes into technologies must also be avoided. On other account externalities beyond a country’s borders, as hand, the impacts on project benefits from the per the intentions of the Paris Agreement and the aforementioned problem of stranded assets international drive toward decarbonization. demands consideration. Project appraisal procedures and methods can • The inherent uncertainty attached to climate be extended to encompass consideration of the change and its location-specific effects contribution of a project to both climate change and complicates the way that appraisal decisions decarbonization efforts on the one hand, and the are reached. Although the fact of anthropogenic potential effects of climate change on a project, on climate change is beyond question, scientific the other. For signatories to the Paris Agreement, the uncertainty still surrounds the exact pace of conceptual step of including a global externality in national global warming. The issue of pace is further policy decisions is already taken. In theoretical terms, the complicated by feedback loops and potential Reference Guide for Climate-Smart Public Investment 82 approach to incorporating treatment of externalities in of a project on GHG emissions and then valuing this SCBA methodologies for appraisal is also well explored. effect using an appropriate shadow price, is set out The constraints to incorporating contributions (both more thoroughly in Section 3.3.4.2 below). Examining positive and negative) to decarbonization in appraisal the potential impact of climate change on the project is are more practical than theoretical, relating as they do methodologically more challenging. to the estimation of values and quantities for GHGs (this approach, which involves quantifying the net impact Box 21. Uncertainty and Climate Change Crafting adaptation strategies is complicated by uncertainty: “It is still not possible to quantify with any precision the likely future impacts on any particular system at any particular location. This is because climate change projections at the regional level are uncertain, current understanding of natural and socio-economic processes is often limited, and most systems are subject to many different interacting stresses.” Areas of uncertainty involve the following: • Estimating the future growth (negative or positive) in GHG emissions, as well as the relationship between the rate of emissions and the concentrations of these gases in the atmosphere. • Specifying the extent of the warming that results from any specified change in concentrations and taking regional climatic responses into account. • Assessing impacts on various human and natural systems. At the level of individual adaptation activities, the informational requirements of planners and decision makers become more local, specific, and detailed, and as a result, uncertainty rises. Source: UNDP (2010). Figure 18. The Cascade of Uncertainty: Uncertainty Increases as Geographic Location Narrows Future society GHG emissions The cascade of uncertainty Climate model Regional scenario Impact model Local impacts Adaptation responses The envelope of uncertainty Source: EC (2013). Reference Guide for Climate-Smart Public Investment 83 CS appraisal needs to be integrated into existing any, associated with different project options determined. appraisal procedures and methods (where these Incorporating the “attitude to uncertainty” approach are already well defined), rather than being stand- mentioned earlier in this section may help in identifying alone. This is illustrated in Figure 19 for the case the weight that a decision maker places on uncertain of the United Kingdom, but the broad principles are outcomes where data are poor. This in turn leads to transferable. The UK appraisal process is set out in the the identification of adaptation measures to eliminate or “Green Book,”87 and the detailed approach to accounting reduce the identified climate change risk that might be for climate change effects is detailed in accompanying incorporated into a project design. Adaptation may mean supplementary guidance that links directly to the steps in low-cost, low-regret measures or more fundamental the main guidance. As Figure 19 shows, once the policy- design features involving substantial costs. Selected based rationale for a project is determined, which should adaptation options then form part of the options taken ideally be done at pre-appraisal and reconfirmed at the forward for appraisal. The idea is to go from a long list beginning of appraisal, the different options for achieving of options, including adaptation options, to a short list the agreed objectives of a project should be considered of options, with and without adaptation, for appraisal. at appraisal. It is at this early stage that climate change As discussed in Section 3.2, this should be partly should first be considered and the climate change risk, if accomplished at the pre-appraisal stage. Figure 19. Accounting for Climate Change Effects in Appraisal in the United Kingdom Policy rationale Make decision based on: Develop options Appraisal of costs and benefits • Flexibility • Available information Adaptation • Climate scenario(s) must be Climate risk incorporated into baseline. Adaptation • Costs and benefits of options Monitor and assessment reflect those expected in evaluate relevant climate scenarios. chosen option 1. Identifying climate risks and 2. Incorporating climate risks into 3. Valuing flexibility and adapting options appraisal of options adapting accordingly Source: United Kingdom (2020a). Note: Boxes in dark green are the steps in the mainstream PIM process. Once potential adaptation options have been the most beneficial adaptation option (where there is identified, they should be appraised to see if they more than one). Options analysis is usually done through represent value for public money.88 In the next step the application of SCBA, a methodology discussed of appraisal, a short list of options goes forward for below (see Section 3.3.4). However, when it comes to evaluation of costs and benefits. It is at this step, by assessing adaptation options, there are limitations on comparing the costs and benefits of different options— the application of a “pure” methodology that arrives at a both with and without adaptations—that an assessment is unique measure of the economic viability of adaptation. made as to which adaptation option, if any, is worthwhile. These limitations arise from data issues and the The aim is to provide an answer to the question of aforementioned uncertainty surrounding climate change whether the future climate change–related costs saved effects, namely, the extent to which climate change can (i.e., damage costs and broader economic losses) be contained by international action, coupled with the outweigh the life cycle costs of adaptation, and to identify resulting location-specific effects. The scenario-based Reference Guide for Climate-Smart Public Investment 84 approach developed by the United Kingdom provides an CRPFM-5.3 example of how such uncertainty can be accounted for. The approach involves the application of SCBA under National procedural and methodological guidelines different scenarios that take account of different potential for appraisal should cover evaluation of climate paths for global warming, depending on the success of change impacts of new projects. Adaptation the Paris Agreement. measures to address climate risks should also be part of project design. Climate change impacts Uncertainty complicates decision making, and this should be reviewed by an entity other than the should be recognized in the design of CS appraisal. sponsoring entity. There is, for example, no clear decision rule when scenario-based SCBA is used, as in the United Kingdom, Implementation of CS appraisal is contingent on and other supplementary tools may be needed to support the existence of a robust appraisal process. It is decision making. In the context of uncertainty, options important to note that both the Helsinki Principles and that retain the flexibility to adjust to climate change over PEFA Climate implicitly assume the existence of a well- time (see discussion of real options in subsection 3.3.5.2 defined appraisal process to which the climate dimension and Box 30 below) may have an advantage over those is added. Without such a framework and the capacities that lock in a solution. Such potential benefits must be to implement it, introducing a systematic treatment of considered when making a decision, even if they cannot climate change in decision making becomes difficult necessarily be valued in SCBA.89 As already mentioned, (see Section 3.3.6). Notwithstanding the importance no-regrets options may offer a means of dealing with of introducing CS appraisal, it remains important to uncertainty, but these may not always exist or may remember the proportionality principle (see above) and provide only a partial adaptation solution. to focus analytical effort where the risk is likely to be greatest—in other words, on more costly projects that are The importance of making appraisal climate smart is subject to high-probability, high-impact climate risks. This recognized in international governance frameworks is especially the case in countries with lower capacities and tools such as the Helsinki Principles,90 the and weaker governance. pilot PEFA [Public Expenditure and Financial Accountability] Climate framework,91 and the IMF’s 3.3.2 Project Vulnerability and pilot Climate-PIMA.92 Application of the PIM component Risk Assessment for Appraisal of the fourth of the Helsinki Principles93 requires: “… integrating climate change considerations and policies in A vulnerability and risk assessment of a project the guidance, procedures and methodologies used for must be undertaken at the beginning of the appraisal program and project selection and appraisal, including process to assess climate change resilience and the use of a shadow price of carbon in economic analysis the necessity, or otherwise, of exploring adaptation and appropriate assessment of climate change risks and measures. Ideally, a preliminary assessment should vulnerabilities.” Indicator CRPFM-5 of PEFA Climate have been undertaken at pre-appraisal stage (see relates to climate-related provisions for project appraisal. Section 3.2). The assessment should not be seen as a It has four dimensions, the second and third of which stand-alone exercise but should be integrated into the relate to selection and appraisal, as follows: overall risk assessment of a project. This means revising appraisal (and pre-appraisal) templates and guidelines CRPFM-5.2 so that the treatment of risk assessment includes specific reference to climate change. The assessment Climate-related criteria should be included among can be quantitative and involve ratings or it can be more those used for selecting new projects. These criteria descriptive. In general, the former is preferred. should cover the climate impact of the project and its exposure to climate risks, based on adequate The aim of the assessment is to identify those hazard and exceedance data (or based on adequate projects that are vulnerable and at high risk so that hazard and available data, recognizing the difficulty adaptation measures can be foreseen. Conceptually, in obtaining reliable exceedance data).94 assessments of vulnerability and risk can be separated, with the former preceding and informing the latter, as shown in Figure 20. Reference Guide for Climate-Smart Public Investment 85 Figure 20. Conceptual Framework for Vulnerability and Risk Assessments Vulnerability If highly If risk vulnerable Risk Assessment is high Adaptation Assessment • Sensitivity to • Probability of hazard • Identification and climate hazards • Severity of appraisal of adaptation • Exposure to consequences options climate hazards • Probability x Severity • Integration of • Sensitivity x Exposure = Risk adaptation in design = Vulnerability • Assessment of residual risk • Monitoring Source: Authors’ illustration based on JASPERS (2017). A vulnerability assessment looks at a project’s that conclusion is duly validated, a risk assessment may sensitivity and exposure to climate change– not be needed. For those projects that are shown to be induced hazards to determine which hazards are vulnerable, the risk assessment looks at the likelihood important enough to be taken forward for a fuller risk of the hazard occurring and the severity of the impact assessment. Sensitivity is determined by the nature on the success of the project should the hazard occur. of the project in question, and exposure is determined The combination of probability and severity gives by the location of the project. Some projects or project the risk to a project: the higher the probability and the components are more sensitive to certain hazards than higher the severity, the higher the risk from a particular others. For example, ports are susceptible to sea level hazard. A similar approach is usually adopted to assess changes, whereas roads are more sensitive to flooding any potential risk to a project as part of the general risk or heat stress events. Some projects will be more assessment; the difference is the degree of uncertainty exposed to certain hazards because of their location. The surrounding the probability of a climate hazard occurring. floodplain of a river represents a case in point. The range Best judgment has to be used based on available of hazards that are initially considered should have been information and knowledge, including outputs from identified in a high-level vulnerability and risk assessment climate change models, insofar as they can give insights (see Section 2.2.2), but not all of the identified hazards into future changes in the climate at the project location. will be relevant to a specific project location. Available information on climate variability and future trends in a The severity of a hazard should be considered in project location should be consulted. The more location terms of the impact on both the physical assets and specific the climate information is, the better. However, their operations. Other factors to consider are health data availability and the limitations of climate models and safety, environmental and social effects, financial will impose inevitable constraints here. The combination implications, and reputational risk. The assessment must of sensitivity and exposure determines the vulnerability also consider the adaptive capacity of a project, together of a project. Ranking sensitivity and exposure on a with the broader system that it serves, to cope with and scale (high-medium-low) will help in identifying higher- absorb the negative shock.95 The assessment also needs sensitivity, higher-exposure projects. to take account of any wider impacts and cascading effects because of the criticality of the investment to the A risk assessment is performed in relation to those wider network or public delivery system. hazards to which a project is found to be vulnerable. If the finding of the vulnerability assessment is that Probability and severity of climate-induced hazards a project is not vulnerable to any climate hazards and should be rated using objectively defined scales. Reference Guide for Climate-Smart Public Investment 86 Concrete criteria should be defined for each rating,96 while concerning the probability of the hazard occurring and probability and severity should be expressed together in the higher the risk aversion, the lower the degree of risk a risk matrix (see Figure 21 for an example). This is done that will be acceptable without adaptation. If the finding for each hazard to which a project has been assessed of the risk assessment is that a project does not face as being vulnerable. The decision as to the level of risk significant risk from climate change and that conclusion that requires the design and assessment of adaptation is duly validated, there may be no need to proceed to the options should reflect the degree of risk aversion of identification and appraisal of adaptation measures. decision makers. The higher the degree of uncertainty Figure 21. Example of a Risk Matrix Almost certain Probability Rare Unlikely Probable Likely or unknown Severity 1 2 3 4 5 Insignificant 1 1 2 3 4 5 Minor 2 2 4 6 8 10 Moderate 3 3 6 9 12 15 Major 4 4 8 12 16 20 Catastrophic 5 5 10 15 20 25 Negligible risk Low risk Medium risk High risk Extreme risk Source: Adapted from JASPERS (2017). Note. “Unknown” is added by the authors to reflect the precautionary principle (See Section 3.8.4). Various existing tools can be used to carry out World Bank’s tool is illustrated in Figure 22. It should be vulnerability and risk assessments in line with the noted that adaptive capacity is assessed explicitly in this conceptual framework described above. These tools tool, rather than implicitly (as part of “severity”), as in the include the World Bank’s Climate and Disaster Risk generic framework previously discussed. Some other Screening (CDRS) tool.97 This offers sector-specific climate risk assessment tools, both freely available and screening for a range of sectors at two levels of detail— proprietary, are described in Box 22 and in the hub of rapid and in-depth98—depending on the stage of project resources in Chapter 4. development. The approach to screening used in the Reference Guide for Climate-Smart Public Investment 87 Figure 22. World Bank’s Climate and Disaster Risks Assessment Tool Exposure Potential Impact Adaptive Capacity Project Risk What types of Given the exposure How will the Based on the hazards might my to hazards, what are non-physical previous steps, what project experience the potential impacts components and the is the overall risk and to what extent? on the physical broader development from climate and aspects of my context modulate the geophysical hazards project design? potential impacts on on my project? specific aspects of my project? Non-physical components Climate risk Hazards Physical Outcome/ summary for and location components service delivery project Development context Source: World Bank (2021f). Box 22. Alternative Tools to Assist in Climate Vulnerability and Risk Assessment • World Bank Climate and Disaster Risk Screening Tool. This includes a risk rating at both national/policy level and project level. A key component is an institutional adaptive capacity rating to assess the local institutional ability to manage or mitigate the risks arising from hazards. https://climatescreeningtools.worldbank.org/ • World Bank Climate Change Knowledge Portal (CCKP). A “one-stop shop” for climate-related information, data, and tools, this portal provides an online tool for accessing comprehensive global, regional, and country data related to climate change and development. https://climateknowledgeportal.worldbank.org/ • ThinkHazard! This tool provides a high-level “traffic light” risk rating for countries and locations within a country for a range of natural hazards. It also suggests ways of gaining more advanced information or strategies for adapting to the hazard in that location. Global Facility for Disaster Reduction and Recovery (GFDRR), ThinkHazard! http://thinkhazard.org/en/ Reference Guide for Climate-Smart Public Investment 88 • ND-GAIN Country Index. This index summarizes a country’s vulnerability to climate change and other global challenges in combination with its readiness to improve resilience. Although it is a country-level index, it includes measures of the “adaptive capacity” of a sector in a country and the “readiness” of the country to undertake adaption to mitigate risks. Notre Dame Global Adaption Initiative, ND-GAIN Country Index, University of Notre Dame. https://gain.nd.edu/ our-work/country-index/rankings/ • Aware for Projects. This online proprietary tool is used by ADB and EIB to screen projects for climate risks. The tool uses data from 16 general circulation models, as well as databases on temperature increases, wildfires, permafrost, sea ice, water availability, precipitation change, flooding, snow loading, tropical storms, and landslides. For each screened project, the tool generates an overall climate risk ranking of low, medium, or high. It also provides information on key risk areas, plus narratives on potential impacts and adaptive measures to guide subsequent activities. http://www.acclimatise.uk.com/wp-content/uploads/2018/11/Aware_brochure_ Nov2018.pdf Source: World Bank staff. 3.3.3 Identification of Adaptation Options Management (or non-structural) adaptation • measures: these could comprise, among other steps, If the vulnerability and climate risk assessment changes to the timing of a project’s maintenance to identifies a high risk from climate-induced hazards, account for changing patterns of energy demand the next step is to identify adaptation measures. and supply, investment in early warning systems, This process must be integrated into the design and or the purchase of insurance to address the appraisal of options for a project as a whole and may financial consequences of climate variability. These involve some iterations. Adaptation to climate change management-related measures can also include the can take many forms, and it is important that different enhanced monitoring of existing assets to reduce the options are considered during appraisal. Two categories risk of failure as climate conditions change. Adaptive of adaptation—structural and managerial (or non- management approaches also include provisions to structural)—can be identified: include flexibility from the outset of a project, allowing for adjustments to be made during an asset’s lifetime • Structural measures involving physical adaptation: in light of changing climate circumstances.99 these refer to changes to a project’s design that can reduce the probability of a risk occurring (e.g., works Table 11 identifies a range of mostly structural for protecting against sea surges) and/or reduce its measures to address different climate hazards severity (e.g., using materials less susceptible to relating to road infrastructure. The information in the heat stress). Structural measures can also include table comes from a useful series of sectoral guides on design features to reduce disaster recovery times. climate-proofing investments published by ADB100 (see Non-engineering measures, such as changing a also Chapter 4). Non-structural measures, including project’s location, or green infrastructure solutions, retaining flexibility, are equally important and are such as eco-system approaches using natural potentially more cost-effective. As such, they should not infrastructure for adaptation, also come under be forgotten in the search for adaptation solutions. Table this category. 12 gives some examples of non-structural measures for energy infrastructure. Reference Guide for Climate-Smart Public Investment 89 Table 11. Adaptation Options for Investment Projects in the Road Sector Climate Issues Potential Adaptation Options Sea level rise • Monitoring of certain roads that may be submerged and storm surges • Using suitable materials and providing lateral protections • Raising the level of the road • Constructing levy bank with drainage/seawall • Carrying out road realignment • Increasing maintenance budget • Including additional longitudinal and transverse drainage systems • Protecting levy bank with suitable mangroves • Planting artificial reefs • Replacing metal culverts with reinforced concrete Reduction in rainfall • Using flexible pavement structures or increased erosion • Increasing maintenance budgets to clear dust and landslides • Increasing water retention capacity and slow infiltration through environmental measures and bioretention systems to recharge aquifers and reduce surface flow runoff • Revegetating with drought-tolerant species • Mulching • Using matting/erosion control blankets • Applying granular protection • Moistening construction materials • Obtaining the optimum level of compaction (to avoid any subsequent settlement) • Ensuring the selection of materials with high resistance to dry conditions Increase in • Applying a safety factor to design assumptions precipitation • Reducing the gradients of slopes • Increasing the size and number of engineering structures (hydraulic structures, high river crossings) • Increasing water retention capacity and slow infiltration through natural or bioengineered systems • Raising pavement and adding additional drainage capacity • Increasing monitoring of vulnerable roads in order to prevent disasters • Using water capture and storage systems • Realigning natural water courses (river training) • Enclosing materials to protect from flood water (e.g., impermeable linings) • Using materials that are less affected by water • Allowing for alternative routes in the event of a road closure Increased • Modifying the design of supports and anchorages wind speed • Installing protection systems such as windbreaks • Planting coastal forests and mangroves Source: ADB (2011). Reference Guide for Climate-Smart Public Investment 90 Table 12. Examples of Adaptation Options for Energy Infrastructure Climate Impacts Management on Infrastructure (Non-Structural) Measures Structural Measures Generation • Inundation of coastal • Model climate impacts • Fortify coastal, off- infrastructure, such as on existing and planned shore, and flood-prone generation plants assets in collaboration with infrastructure against • Reduced efficiency of meteorological service flooding solar energy • Revise maintenance • Increase cooling system • Insufficient cooling water schedules capacity for solar energy • Temperature of cooling • Update hydropower • Locate new facilities water before and after use operating rules outside high-risk zones • Reduced output from hydropower generation Transmission • Flooding of electricity • Implement programs for • Increase transmission and Distribution substations pruning and managing tower height • Damage to transmission trees near transmission • Bury distribution lines lines from climate extremes and distribution lines • Use stainless steel material • Create disaster to reduce corrosion from mitigation plans water damage • Train emergency response teams for quick repair and restoration actions Consumption • Changes in energy • Undertake load forecasting • Improve building and demand patterns using climate information industrial energy efficiency (e.g., increased demand • Promote behavioral for cooling and reduced change measures to demand for energy reduce peak consumption for heating) Source: OECD (2018). Planning to overcome all climate change risks is in a particular adaptive solution) is also an important unrealistic, and residual risks will always remain option to be considered. Technical constraints, as well even after risk reduction measures have been as institutional and political barriers, will preclude some put in place. Risk management involves accepting a adaptation measures. This is potentially the case even certain level of risk and putting in place management when such measures are justified through the appraisal arrangements should any anticipated risk occur. In cases process. Box 23 provides a useful visualization of the of extreme uncertainty, retaining the option to carry out narrowing down of adaptation from what is possible to adaptation measures in the future (and avoiding locking what is actually done in practice. Reference Guide for Climate-Smart Public Investment 91 Box 23. The Narrowing of Adaptation from the Space of All Possible Options to What Will Be Done Forces causing the narrowing are listed in black: t is suggeste Wha d a t we can Wh do t we want to ha W do What we will do Implementation constraints ch Objectives Te nic its al a im nd physical l Ada ptation space • The first outside circle represents the “adaptation needs,” that is, the set of adaptation actions that would be required to avoid any negative effects (and capture all positive effects) from climate change. It can be reduced by climate change mitigation, namely, by limiting the magnitude of climate change. • The second circle represents the subset of adaptation actions that are possible considering technical and physical limits. This circle can expand in light of improvements through, for example, R&D. The area between the first and second circles is the area of “unavoidable impacts” that one cannot adapt to (for instance, it is impossible to restore outdoor comfort under high temperatures). • The third circle represents the subset of adaptation actions that are desirable considering limited resources and competing priorities: some adaptation actions will be technically possible but undesirable because they are too expensive and because better alternatives for improving welfare exist (e.g., investing in health or education). This circle can be expanded through economic growth, which increases resources that can be dedicated to adaptation. • Finally, the last circle represents what will be done in the future. This considers the fact that market failures or other constraints (e.g., practical, political, or institutional) might make it impossible to implement some desirable actions. The area between the first and the last circles represents residual impacts, namely, those impacts that will remain after adaptation because adapting to them is impossible, too expensive, or impossible owing to one or more barriers. Source: Chambwera et al. (2014). Reference Guide for Climate-Smart Public Investment 92 3.3.4 Tools for Climate-Smart Appraisal i. Determining if adaptation is worth doing from the perspective of society, that is, if the social costs of Although SCBA should be the default tool for CS adaptation measures are less than the potential appraisal, application of the proportionality principle social losses from the hazards they are intended to will necessitate the application of simpler tools in prevent or reduce. many cases. Multi-criteria analysis (MCA) and CEA might be more appropriate for low-value/low-risk projects ii. Accounting for the impact of a project on global GHG or in low-capacity environments.101 Neither of these emissions so that climate-friendly options are given tools can give an absolute answer as to the social worth due weight in appraisal. of an adaptation option, but they can help in ranking alternatives. CEA will identify the lowest-cost adaptation In relation to projects with specific climate- option (considering life cycle costs), assuming that the related objectives: adaptive benefits of the options being compared are the same. MCA can be used to rank adaptation options in a iii. Appraising dedicated climate change mitigation103 structured way using subjective criteria. or adaptation projects, including those that involve premature decommissioning of existing assets in 3.3.4.1 Approaching Climate-Smart SCBA favor of lower-carbon alternatives. In a well-designed and functioning PIM system,102 3.3.4.2 Achieving Decarbonization Goals: SCBA will help decision makers choose projects Using SCBA to Take Account of Impacts on Global that represent the best value for public money. SCBA GHG Emissions assesses the impacts of different project options on social welfare by comparing related social welfare benefits with SCBA takes account of positive and negative social welfare costs over a project’s lifetime. In this way, externalities and can be extended to include global an estimate of the net benefit to society as a whole can externalities, like GHG emissions. For all but the be arrived at. Unless it is unreasonable or unfeasible to largest and most populous economies, reductions or do so, all relevant social costs and benefits are valued in increases in GHG emissions are for the most part global monetary terms. This includes those for which the market externalities—in other words, the social benefits (or does not provide a satisfactory measure of value. Where costs) of lower (higher) global warming accrue largely the latter is the case, various techniques can be used to residents of other countries. The standard SCBA to estimate values where there are no market prices methodology covers valuation of positive and negative or, alternatively, to make adjustments to market prices externalities. Reflecting the international commitments where these are not a good reflection of social value. to keeping global warming well below 2ºC made by the Social costs and benefits occurring at different points in signatories to the Paris Agreement, the methodology can time are put on a comparable basis by discounting. be extended to cover global externalities. SCBA yields a unique measure of a project’s social Governments in LICs should be cautious about the value: the net present social value. Where there implications of including global externalities, as this is uncertainty concerning key values included in the may mean subsidizing richer countries. For example, analysis, the robustness of this measure can be tested if a project has a negative net present value (NPV) before using sensitivity analysis, which captures the effects inclusion of GHG savings and a positive NPV after their of downside assumptions. Where there is stochastic inclusion, residents of the project country in question variation in some of the values included in the SCBA, will be incurring a net social welfare loss if the project an expected net social present value can be estimated proceeds. For LICs, this part of the SCBA calculation when probability distributions can be projected. may be more useful in securing external green financing to bridge the gap between national and global social As a tool for CS appraisal, SCBA has three functions: welfare gains. In relation to projects without specific climate- Valuing changes in GHG emissions brought about by related objectives: a project has two dimensions: (i) quantifying changes Reference Guide for Climate-Smart Public Investment 93 in volumes of GHGs; and (ii) estimating a value for because not all GHGs have the same potency in terms each unit of GHG emitted. Quantifying GHG emissions of their effect on global warming. This is usually done in is a technical exercise requiring estimates of changes in terms of tons of CO2e. Table 13 shows the equivalency for the use of fossil fuels and the resulting impact on GHG various gases. It demonstrates, for example, that one ton emissions or of changes in GHGs generated from other of methane is equivalent to 25 tons of CO2, in terms of its activities (e.g., methane from agriculture). International global warming properties. The IPCC has led an initiative financial institutions have agreed on a harmonized to create a publicly accessible database of emission approach to accounting for GHGs during project factors for different activities, known as the Emission appraisal.104 There are standard calculation methods Factors Database.105 This can be used to estimate GHG for making these estimates that are based on average emissions and removals by projects. Governments consumption figures for different fossil fuels, uses, and should consult this database when preparing projects technologies and that involve the use of conversion with significant effects on GHGs. The Greenhouse Gas factors for expressing figures on a common basis. GHG Protocol is another important resource.106 emissions need to be expressed in comparable units Table 13. Factors for Converting Greenhouse Gases to their Equivalent in Carbon Dioxide CO2e Greenhouse Gas Global Warming Potential per Unit Mass (relative to CO2) Carbon Dioxide (CO2) 1 Methane (CH4) 25 Nitrous Oxide (N2O) 298 HFC – 134a 1,430 HFC – 143a 4,470 Sulphur hexafluoride 22,800 Source: United Kingdom (2019). Note: HFC = hydrofluorocarbon. Secondly, GHG emissions are valued in terms of Stern Review108 and has been previously employed a value per unit of CO2e, usually referred to as the by the United Kingdom. The approach is currently “shadow price of carbon.” Estimates of the shadow used by the U.S. Environmental Protection Agency price of carbon sit within wide ranges reflecting different and other federal agencies. The SCC has two approaches to estimation and the degree of uncertainty drawbacks. These relate to: (i) assumptions about regarding the future path of GHG emissions. There are the behavior of other countries; and (ii) the accuracy two main approaches to estimation,107 together with a of estimates of the future impacts of climate change market-based approach where there are quantitative across different sectors, communities, and countries. limits on GHG emissions: • The marginal abatement cost (MAC) approach, • The social cost of carbon (SCC) approach, or or target-consistent approach, provides monetary marginal damages approach, provides monetary estimates for GHG emissions based on the MAC estimates of the future environmental and social for achieving a given emissions reduction target, impacts caused by a small (one metric ton) increase namely, the cost of preventing the last metric ton of in GHG emissions in a given year. Equivalently, the CO2 needed to meet a particular emissions target SCC approach values the economic benefit that at the least cost to society. Following the Paris results from reducing GHG emissions by the same Agreement to limit average temperature increases amount in that year. Also known as the cost-benefit and the ensuing quantitative targets for limiting approach, the SCC was used in the pathbreaking GHGs to meet country net-zero objectives, this Reference Guide for Climate-Smart Public Investment 94 approach (also known as the cost-effectiveness for variations between countries, notably between approach) has become more widely used. It is rich and poor. used by the European Union (EU) and (now) by the United Kingdom. It is also recommended by the • Alternatively, where there is an active emissions World Bank109 on the basis of work by the High-Level trading scheme (e.g., the European Emissions Commission on Carbon Prices, as mentioned below. Trading System [ETS]), the market value of a ton Box 24 sets out France’s rationale for adopting this of CO2 can be used. The volatility of market values approach. The further advantage of this approach for permits to emit CO2 is one problem with this (in addition to its consistency with cost-effective approach, but the ranges are not necessarily wider achievement of emissions targets) is that it allows than the range of estimates from other approaches.110 Box 24. France’s Choice of Approach for Valuing Carbon In practice, the term “carbon value” may refer to several rationales. The first consists of calculating the social cost of GHG emissions, that is, the cost connected to the emission of one metric ton of CO2e. This rationale, inspired by Arthur Pigou’s key work on externalities and given formal expression in the Stern Report, leads to calculation of the damage suffered by humankind due to the increase in GHG concentrations, independent of an emission’s country of origin and location of damage. A great many uncertainties surround the monetary evaluation of damage necessary for a CBA. Without disputing the legitimacy of the cost-benefit approach, its implementation in the national context comes up against two difficulties of principle: • First, uncertainties on valuation of damage are too great to develop a reference designed to guide short- and medium-term political action. • Second, with regard to global externalities, it is difficult to restrict a cost-benefit assessment to the borders of a given territory. This Commission’s approach is therefore based on a complementary rationale. It does not consist of evaluating the social cost of damage produced by the emission of one metric ton of CO2e on French territory, but rather, of identifying a carbon value consistent with the goal of net-zero GHG emissions by 2050. In order to implement this cost-effectiveness approach, the Commission has endeavored to provide an accurate picture of the scope of French commitments so as to come up with an appropriate multiyear shadow value trajectory. Source: France Stratégie (2019). Most countries will not need or wish to go through project. For projects that lead to a net increase in GHGs, the process of estimating a national shadow price testing the robustness of the NPV estimate using the high of carbon but may instead turn to internationally end of the range would be most interesting. In the case of acceptable estimates. Box 25 summarizes World Bank projects that lead to a net decrease in GHGs, meanwhile, guidance based on work by the High-Level Commission testing the robustness of the NPV estimate using the low on Carbon Prices111 that was completed in 2017. For end of the range would be most informative. Both the comparison, with the US$50–100 range recommended World Bank and the IMF acknowledge that there is a by the World Bank for 2030, the IMF has estimated that a case for LICs to set their shadow price of carbon lower global average price of US$75 per ton of CO2 by 2030 will than higher-income countries. This is consistent with be required to meet the targets in the Paris Agreement.112 the Paris Agreement, which leaves room for “common Given the wide range for the shadow price of carbon, good but differentiated responsibilities” as expressed through practice would be to assess GHG impacts using both the country NDCs. For some countries, their NDCs may lower and higher ends of the range, where the valuation therefore imply a lower shadow price of carbon. of this impact is critical to the results of the SCBA for a Reference Guide for Climate-Smart Public Investment 95 Box 25. World Bank Guidance on the Shadow Price of Carbon The High-Level Commission on Carbon Prices was led by Joseph Stiglitz and Nicholas Stern. Based on an extensive review, it suggests a price range of US$40–80 per ton of CO2e in 2020, rising to US$50–100 per ton of CO2e by 2030. The authors deemed these levels to be consistent with achieving the core objective of the Paris Agreement of keeping temperature rise below 2ºC degrees Celsius. Both figures assume a supportive policy environment is in place. In line with the Commission, this Reference Guide recommends that a project’s economic analysis use a low and high estimate of the carbon price, starting at US$40 and US$80, respectively, in 2020 and increasing to US$50 and US$100 by 2030. Given that the Commission report does not prescribe any specific carbon price values beyond 2030, the low and high values on carbon prices are extrapolated from 2030 to 2050 using the same growth rate of 2.25 percent per year that is implicit between 2020 and 2030. This leads to low and high values of US$78 and US$156 by 2050, respectively. Source: World Bank (2017). Countries can follow well-established methodologies the Carbon Footprint Methodology proposed by the used by international organizations for evaluating European Investment Bank (EIB).114 The methodology the contribution of projects to their decarbonization explains the emissions calculation approach for various goals. For example, European Commission guidance on sectors, including wastewater and sludge treatment, CBA113 requires the evaluation of GHG emissions using waste treatment management facilities, municipal the kind of methodology summarized above (see Box solid waste landfill, road transport, rail transport, urban 26). The recommended approach to integrating climate transport, and building refurbishment. change externalities into the economic appraisal draws Box 26. European Commission Approach to Evaluation of GHG Emissions 1. Quantification of the volume of emissions additionally emitted or saved in the atmosphere because of the project. Emissions are quantified on the basis of project specific emission factors (e.g., tons of CO2 per unit of fuel burned, kilograms of CO2 per kilometer traveled) and are expressed in tons per year. In the absence of project specific data, default emission factors from the economic literature can be used. 2. Calculation of total CO2e emissions using global warming potentials (GWPs). GHGs other than CO2 are converted into CO2e by multiplying the amount of emissions of the specific GHG with a factor equivalent to its GWP. For example, set the GWP of CO2 equal to unity (=1), the GWP for CH4 and N2O are 25 and 298, respectively, indicating that their climate impact is 25 and 298 times larger than the impact of the same amount of CO2 emissions (IPPC 2007). Reference Guide for Climate-Smart Public Investment 96 3. Evaluation of externality using a unit cost of CO2e. Total tons of CO2e emissions are multiplied by a unit cost expressed in euros per ton. It is suggested that the values illustrated in the table below be used for the central scenario, going from €25 per ton of CO2e in 2010 and then assuming a gradual increase to €45 per ton of CO2e until 2030. Due to the global effect of global warming, there is no difference between how and where in Europe GHG emissions take place. For this reason, the same unit cost factor applies to all countries. However, the cost factor is time dependent in the sense that emissions in future years will have greater impacts than emissions today. Unit Cost of GHG Emissions Value 2010 (Euro/t-CO2e) Annual Adders 2011 to 2030 High 40 2 Central 25 1 Low 10 0.5 Source: EC (2014). 3.3.4.3 Using SCBA to Appraise Climate Change functions depends on the availability of data on Adaptation Measures: The Ideal SCBA Methodology losses associated with previous extreme climate events, together with information on the intensity of An ideal, “full-scope” SCBA methodology for those events. appraising adaptation options (and for appraising pure adaptation projects) would involve the 4. Determining expected (in a statistical sense) following steps: economic losses, by combining exceedance distributions with economic loss information. This 1. Identifying the current and future climate change yields a figure for the sum of the possible losses hazards. This is undertaken as part of the vulnerability weighted by their probabilities. and risk assessment but revalidated at appraisal. 5. Determining the life cycle costs (capital and 2. Attaching probabilities to the occurrence of different recurrent) of adaptation measures. intensities of each identified climate-related hazard. This involves use of exceedance probability 6. Comparing climate change losses with adaptation distributions115 (see Box 27). Historical climate costs over a project’s lifetime in expected present and hazard event data are used for estimating value terms to determine if adaptation makes the current probability distribution. However, the economic sense. probability distributions will most likely shift with climate change (extreme events becoming more In line with the integrated approach to CS appraisal, frequent), and it is here that climate models come the appraisal of adaptation options is done as part into play when determining future exceedance of the broader economic analysis of project options probability distributions. using SCBA. This means that project options with adaptation and those without adaptation are compared to 3. Developing economic loss functions that can be the do nothing or status quo option. For “pure” adaptation used to value losses at different intensities of the projects, such as stand-alone flood protection, the same hazard (as predicted by the exceedance probability methodology applies, although an exception exists here, distributions). Losses include both damage to namely, that there will be no options without adaptation assets and economic losses from service delivery (this is the do nothing case). interruptions. Calculation of economic loss Reference Guide for Climate-Smart Public Investment 97 Box 27. Exceedance Probability Distribution, Economic Loss Function, and Expected Economic Losses Exceedance probability distribution curve An exceedance probability curve shows the probability that a certain level of intensity of a climate variable will be exceeded. It can be derived for climate variables like rainfall, wind speed, and wave height. Exceedance probabilities decrease as the level of intensity of the climate variable increases because of the decreasing functional nature of the distribution (extreme events become increasingly less likely as their intensity increases). The curve may be estimated from historical data on the frequency and intensity of extreme climate events. The probability distribution function that best fits the data is estimated and may take various mathematical forms. The fitted probability function is then used, for example, to obtain the probability of getting wind speeds above a certain intensity in a year. Historical data do not indicate what will happen in the future when the climate is changing, bringing with it an increasing likelihood of extreme events. Climate change models can give some insights into how the probability function will shift over time, but model outputs are dependent on assumptions concerning trends in carbon concentrations in the atmosphere. The figure shows the exceedance distribution for extreme wind speeds related to tropical cyclones.116 It shows the probability declining as intensity increases. It also shows an increasing probability of extreme wind events over time (“early” equals the first half of the 1979-2017 period, while “late” equals the second half of the same period). 0.8 0.7 0.6 Exceeding probability 0.5 0.4 0.3 0.2 0.1 0 60 80 100 120 140 160 Wind speed (kt) Early Late Economic loss functions A loss function describes the economic losses for a particular type of asset in a particular location in relation to the intensity of the various extreme climate hazards to which it is vulnerable. The expected yearly loss would be the present value of the asset loss and cost of disruption to economic services. Estimating a loss function requires collecting historical data on losses for different climate-related disasters. Once enough loss information has been gathered for different disasters, losses are plotted against corresponding climate parameter intensities. These data points can then be fitted with a best-fit function known as an “economic loss function.” This loss function will show an increasing value of the damages and public services lost in relation to the intensity of the hazard. Reference Guide for Climate-Smart Public Investment 98 Expected economic loss functions Combining the exceedance probability distribution and the economic loss function yields a function that shows the expected losses from a defined climate hazard in any one year. The expected loss in economic terms can be calculated by multiplying each damage value with its corresponding probability and adding all these results (expected losses) together to obtain annual expected loss. This methodology is then replicated for each of the future years of the project appraisal period. An estimate of the value of the expected losses averted by investment in adaptation can then be obtained: the expected annual losses are discounted and summed to give a present value of total losses averted for comparison (as part of the economic analysis of project options) with the present value of the total lifetime costs of adaptation. Source: World Bank staff. 3.3.4.4 Using SCBA to Appraise Climate Change surrounding the future evolution of climate change, which Adaptation Measures: The Challenges in Practice is dependent on progress toward Paris Agreement targets, and the uncertainty concerning the localized impacts of Applying the ideal methodology presents challenges climate change. The difficulty of estimating exceedance in practice, mostly in relation to estimating probability distributions is recognized in the scoring exceedance probability distributions and economic criteria for PEFA Climate dimension CRPFM-5.2, which loss functions. The availability of accurate and complete allow for the highest rating even when other approaches historical data on the occurrence of climate-related are used (see Box 28). Some practical approaches to hazards, their severity, and the economic losses involved dealing with these information and predictive challenges is one problem. Other problems include the uncertainty are discussed below. Box 28. Scoring for PEFA Climate Dimension CRPFM-5.2 Score A. Published climate assessment and prioritization criteria are used to select new investment projects. Climate assessment criteria cover the climate impact of the project and its exposure to climate risks, based on adequate hazard and exceedance data (or based on adequate hazard and available data). Score B. Climate assessment and prioritization criteria are used to select new investment projects. Climate assessment criteria cover the climate impact of the project or its exposure to climate risks. Score C. Climate assessment and prioritization criteria are used to select new investment projects. Score D. Performance is less than required for a “C” score. Source: PEFA Secretariat (2020). Technical challenges and motivations. Advanced risk analysis may be beyond the current capacities of some countries. Many Most countries, even those with a more advanced will be in the early stages of building their PIM systems appraisal process, will find the technical aspects of and will still be creating the necessary capacities to make the theoretically rigorous approach a challenge and them function properly.117 In these contexts, undertaking will still not adequately address underlying incentives advanced risk analysis that involves the application of Reference Guide for Climate-Smart Public Investment 99 probability distributions to costs and benefits will not yet be expected to “go live” until the core features of SCBA have standard practice (even if foreseen in the methodological become minimally operational. guidance for SCBA). Often, the application of sensitivity analysis and switching values will be the extent of risk 3.3.4.5 Using SCBA to Appraise Climate Change analysis. For those countries that are at the very start of Adaptation Measures: Advanced Practices Applied their PIM reforms, introducing and beginning to apply the by the European Commission, the United Kingdom, basics of SCBA to their most significant projects will be and the World Bank Group the main focus of attention. A particular difficulty in applying the ideal model Information challenges methodology is plotting future exceedance probability distributions when future progress in Even assuming that these technical challenges can implementing the Paris Agreement is unknown. be surmounted, the information challenges remain, Using scenarios is one way round this information gap, even for countries with more advanced PIM systems. although it still leaves the awkward problem of how to Estimating exceedance probability distributions depends consolidate the findings under alternative scenarios and on the existence of adequate historical data sets and on come to a decision. Both the European Commission and the availability of sufficiently granular results from climate the United Kingdom apply such an approach. models that can be assumed to apply to the project locations. Neither of these conditions is a given; many The disadvantage of a scenario-based approach countries do not have reliable systems for collecting and is that it does not give a unique answer. Unlike an analyzing climate data, for instance, while climate change approach where probability distributions for future climate projections at the project level are uncertain (as already events are known, using climate change scenarios does discussed). Even if models become more accurate at the not give a single number for the expected net social local level, there is still the uncertainty surrounding global present value of adaptation options. It gives an answer efforts in achieving the targets of the Paris Agreement.118 for each scenario but says nothing about the likelihood Estimating loss functions also requires an institutionalized of its occurring. If the answers point toward the same data collection and analytical effort that in turn provide appraisal decision, this is not a problem; if they do not, estimates of the economic losses associated with historic however, then the choice comes down to the judgment extreme climate events and correlates these estimates and risk aversion of the decision maker. However, a with measures of the intensities of the events. scenario-based approach is easier to apply and more reflective of the current state of understanding. In the light of these likely challenges, the full-scope SCBA methodology set out above should, in many The European Commission’s Approach countries, be viewed more as an agenda for more advanced PIM reforms in the future. This is not a Recognizing some of the informational difficulties, low-priority agenda; it is vital that it be progressed as the European Commission has issued guidelines119 soon as feasible, especially in countries likely to face that may be more attainable for some countries. the severest effects of climate change. However, it will These set out a reasonably standard step-by-step most likely not be implementable until the application appraisal process (see Box 29) using SCBA but of SCBA has become embedded in the processes of extended to include an assessment of adaptation critical organizations (i.e., those with big investment options. Establishing a project baseline(s) is step 3 in programs), and it will certainly not be implementable until the process. The use of climate change scenarios for information constraints are resolved. In countries that are the do nothing baseline is recommended. This means at the beginning of their PIM reform journey and have at least one scenario for short-lived projects and several yet to adopt a national appraisal methodology covering scenarios, that is, more than one baseline, for projects SCBA, it would be sensible to include guidance on CS with appraisal periods beyond 20 years. SCBA. However, this part of the guidance should not be Reference Guide for Climate-Smart Public Investment 100 Box 29. European Commission’s Eight-Step SCBA Approach for Appraising Climate Change Adaptation Options 1. Determine the project boundary. 2. Define the forecast period and discount rate. 3. Establish project baseline(s), including climate change scenarios. 4. Identify costs and benefits for different adaptation options. 5. Value costs and benefits of different adaptation options, including avoided damage and economic losses. 6. Assess hedging effectiveness and certainty of impacts of different options and adjust accordingly. 7. Assess distributional aspects. 8. Determine the decision rule for option selection. Source: EC (2013). The anticipated pace of climate change and the scenario. There is scope in the methodology for applying nature of a project can influence adaptation options. probabilistic scenarios at this point, meaning for cases When considering the choice of options (step 4), the where the probability distributions can be estimated, but European Commission’s guidelines suggest looking at it is recognized that this is likely to be a rarity. the evolving nature of climate change and the type of construction works as follows: The process allows a discretionary, iterative step to identify the option(s) that is more in tune with the • If gradually increasing over time only, then a time- “risk appetite” of decision makers. Step 6 is additional phased option implementation strategy with gradually to the standard appraisal process and allows for an increasing risk protection levels is cost efficient. It iteration to take into account the effectiveness of each will also be feasible if the project design has built- option in reducing exposure to climate risks. If different in flexibility for later upgrades (“quasi-options”), that options are not equally effective in reducing climate risk, is, where upgrades take place later when more is then the NPV on its own will not determine the choice and known about the level of climate change risk. attitude to risk must be considered. This iteration allows for adaptation options that do not allow for adequate • If the adaptation measures are to hedge increasing perceived hedging against risk to be supplemented or extremes in climate, then high levels of risk protection dropped at this point. are likely preferable, as well as cost efficient, early on. When SCBA is applied to different scenarios, there will be no single measure of economic performance. • If design flexibility is limited, as it is in many building Step 8 involves mapping economic NPVs for different works, climate change adaptation measures will adaptation options under different scenarios—a “pay- need to be implemented up front. off” matrix—as an aid to decision making (see Table 14). The final decision will be influenced by the risk attitude of Value transfer is one way of circumventing gaps decision makers as follows: in data for valuation. When it comes to valuing the economic losses avoided through adaptation (step 5), • If the decision maker is a high-risk taker (“risk lover”) the European Commission’s guidelines suggest using then only economic efficiency matters and the option the value transfer method120 in the absence of other strategy with the highest net social present value121 information, together with historic information where this should be selected. is available. • If the decision maker is risk neutral, then the option SCBA is applied to each adaptation option under each with the highest (simple) average net social present scenario. At step 5, the comparison is made between value from relevant sensitivity testing in the one- with- and without-adaptation options under each climate scenario case or from across scenarios in the multi- change scenario to arrive at an economic NPV for each scenario case should be chosen. Reference Guide for Climate-Smart Public Investment 101 • If the decision maker is risk-averse, then the The final decision on adaptation should also take into distribution of the net social present value values account distributional issues or social acceptability as from conventional sensitivity testing or from scenario per standard appraisal using SCBA. simulations must be taken into consideration such that options that perform robustly—offering better risk protection, for example—relative to their costs are selected. Table 14. “Pay-Off” Matrix of Net Social Present Values for Decision Makers122 Climate Change Climate Change Climate Change Scenario 1 Scenario 2 Scenario n No adaptation Adaptation option 1 Adaptation option 2 Adaptation option n Source: EC (2013). The UK’s Approach for change in sea level under both scenarios. This gives a basis for deciding on the intensity and frequency of the Consistent with the EU’s approach, the United climate hazards likely to affect a project. From Table 15, it Kingdom has adopted alternative climate scenarios can also be seen that even within scenarios, the range of and carries out the SCBA under each of these possible climate outcomes (rainfall and temperatures) is scenarios. The United Kingdom uses two climate wide. For example, by 2070 the summer rainfall in central scenarios. The first assumes 2ºC of global warming England under the lower emissions scenario is projected and the second 4ºC. As shown in Figure 23, projects to range between 4 percent less and 9 percent more. that are assessed as high risk and have long-lived Meanwhile, projections for temperatures stretch from no effects beyond 2035, are appraised using SCBA under change to 3.3ºC higher. both these scenarios (as a minimum). Projects that are shorter lived are appraised only under the lower global Although the UK’s scenario-based approach deals warming scenario (again, as a minimum). The difference with some of the uncertainty surrounding the future made between longer-lived and shorter-lived projects evolution of climate change, information requirements is another part of the UK’s proportionate approach to are still demanding. Adopting climate change scenarios appraisal of climate resilience (see Section 3.2). does not escape the need for exceedance probability distributions and loss functions (or an equivalent means The effects on climate of different global warming of estimating losses) under the two scenarios. The scenarios are generated by a climate model. For United Kingdom has the information and capacities to each of the UK’s two climate scenarios, the effects on the estimate exceedance probability distributions and has climate (precipitation and temperature for summer and good information on economic losses relating to the winter) at the national level are defined using the latest relevant climate hazards,123 particularly flooding.124 Many projections from the country’s climate change model (see other countries are probably not in such a good position. Table 15). Similar projections are available in the guidance Reference Guide for Climate-Smart Public Investment 102 Figure 23. Scenario-Based SCBA of Climate Adaptation Measures in the United Kingdom Triage Stage One Does the project, policy, or programme meet any of the following criteria: 1. Have assets or elements affected by the weather and effects of climate change, including variability and extremes. 2. Is associated with the natural environment. 3. Involves significant investment, or has high value at stake (including human well-being and biodiversity), or involves Yes Carry out climate risk significant operational or maintenance costs. assessment to identify likely impacts 4. Associated with Critical National Infrastructure. 5. Has significant interdependencies with other government activities or the wider economy. Triage Stage Two 6. Involves decisions which will result in ‘lock-in’ to a Does the project, policy, or programme particular future. have a lifespan that goes beyond (or has the potential to go beyond) 2035? 7. Responding to identified Climate Change Risk Assessment. No No Yes A. Continue with B. Follow the climate resilient C. Follow the climate resilient appraisal standard Green Book appraisal approach using climate approach using at least two climate approach to appraisal scenario aligned with 2ºC scenarios aligned with 2ºC and 4ºC Within your policy options, consider You must consider options which include and implement adaptation options all adaptation measures which would to address known climate risks. mitigate the known impacts of with 2 degrees and then make decisions based on your own risk appetite about whether you also want to consider adaptation measures aligned with 4 degrees. Source: United Kingdom (2020a). Reference Guide for Climate-Smart Public Investment 103 Table 15. Climate Scenarios for SCBA of Climate Adaptation Measures in the United Kingdom Summer and winter changes by the 2070s Summer Winter Summer Winter Rainfall Change Precipitation Change Temperature Change Temperature Change For a location in central England 41% drier to 9% wetter 3% drier to 22% wetter No change to 3.3ºC warmer -0.1ºC cooler to 2.4ºC warmer 57% drier to 3% wetter 2% drier to 33% wetter 1.1ºC warmer to 5.8ºC warmer 0.7ºC warmer to 4.2ºC warmer For a location in central Scotland 30% drier to 6% wetter 4% drier to 9% wetter -0.1ºC cooler to 2.8ºC warmer -0.3ºC cooler to 2.7ºC warmer 40% drier to 8% wetter 3% drier to 12% wetter 0.6ºC warmer to 4.8ºC warmer 0.6ºC warmer to 4.5ºC warmer For a location in central Wales 39% drier to 3% wetter 2% drier to 19% wetter No change to 3.3ºC warmer 0.1ºC warmer to 2.4ºC warmer 56% drier to 2% wetter No change to 29% wetter 0.9ºC warmer to 5.9ºC warmer 0.7ºC warmer to 4.1ºC warmer For a location in central Northern Ireland 28% drier to 6% wetter 3% drier to 17% wetter No change to 2.8ºC warmer 0.1ºC warmer to 2.2ºC warmer 38% drier to 3% wetter 2% drier to 25% wetter 0.8ºC warmer to 4.9ºC warmer 0.6ºC warmer to 3.9ºC warmer Low emission scenario High emission scenario Source: United Kingdom (2020a). Note: All results are for the 10th-90th percentile range for the 2060-2079 period relative to 1981-2000 The World Bank Group’s Approach to identify the conditions under which the project may fail, as well as the consequences in the case of failure. Recognizing some of the information problems that The step-by-step methodology is summarized in Figure exist for LICs, the Bank Group has developed a 24. A reporting template is included to help decision methodology125 for stress testing appraisal findings makers assess the level of residual risks and therefore in the face of uncertain climate change risks. The the project’s attractiveness and economic feasibility. methodology is related to the Bank’s Resilience Rating Practically, the methodology is designed to highlight the System, which has as one criterion that a climate and risks to project outcomes and evaluation criteria (such disaster risk stress test has been incorporated into the as NPV and benefit-to-cost ratio) over long-time horizons project’s economic and financial analysis. Projects and in multiple scenarios, as well as accounting for risks are also required to report on how, after risk-reduction along the following three dimensions: measures are included, residual risks do not make the project economically or financially unviable (or they at • Changes in average climate conditions (e.g., least must disclose the existence of any residual risk). temperature, precipitation) The methodology is supported by an Excel-based tool • Impacts from natural disasters, with historic frequency called the Risk Stress Test (RiST). The methodology and intensity (e.g., hurricanes, floods, wildfires) involves performing a stress test as part of a project’s economic analysis using various scenarios ranging • Changes in the occurrence of future disasters due to from the most optimistic to the most pessimistic so as climate change Reference Guide for Climate-Smart Public Investment 104 Figure 24. Overview of RiST Methodology of the World Bank Group STEP STEP 1A 1B Baseline CBA (optimistic and pessimistic) and performance indicators + thresholds STEP STEP 100% 2A 2B 90% More pessimistic on climate and disaster risk NPV<0 Estimate low/high Estimate low/high 80% impacts of climate impacts of current 70% change on qualities, extreme events NPV>0 60% prices, and costs 50% STEP STEP 40% 2C 2D 30% Estimate low/high 20% changes in extreme 10% event frequencies due 0% to climate change 100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% More pessimistic on the baseline STEP 3A Assess revised NPV or BCR based on climate and disaster impacts Result of the analysis and STEP reporting 3B Stress test and decision point: Unacceptable NPV No risk identified. in the range of possible scenarios? No Revised NPV/BCR for the four extreme STEP Yes Yes STEP scenarios are reported. 4A 4B Identify failure Estimate Significant scenarios consequences in case risk identified. of failure (for the project Revised and community) NPV/BCR reported. Failure scenario reported, STEP with its consequences. 4C Are failure scenarios considered plausible and No consequences of failures significant? No Yes STEP STEP 5B 5A Is more sophisticated analysis Can additional mitigation actions be included? possible? No Yes Yes More sophisticated analysis Source: Hallegatte et al. (2021). Note: BCR refers to benefit-cost ratio. Reference Guide for Climate-Smart Public Investment 105 3.3.5 Alternative Climate-Smart Appraisal Tools Other aids to decision making are available, including real options,127 but applying them can be 3.3.5.1 Climate-Smart Multi-Criteria Analysis very demanding in low-capacity environments. Risk management, robust decision making, and real options MCA is a useful tool for informing appraisal decisions approaches, as summarized in Box 30, can assist decision for smaller projects and can also be helpful where making. However, the application of these techniques capacities for using more sophisticated tools are can in practice “be costly, data intensive and technically still being developed. Small projects may be subjected complex;”128 thus, the choice of tool has to be sensitive to to a multi-criteria screening, which can be formalized the context in terms of data availability, human capacities, through a scoring and weighting system. Such a system and maturity of PIM system development (remembering should include the following criteria: (i) the alignment that diagnostic assessments generally find appraisal to of their services with sector priorities or their meeting be the weakest function). Real options have the most minimum service delivery targets; (ii) the availability promise when used in conjunction with SCBA, because of funding for construction and operation phases; (iii) they incorporate dynamic learning and the potential for adequate managerial and technical capacity to manage fiscal savings, as described in more detail in the following project implementation and operation; and (iv) the paragraphs. meeting of all legal ownership conditions (especially for land), regulatory requirements, and environmental and The real options approach incorporates uncertainty social standards. about future costs and benefits into a CBA by considering options that may be exercised in the MCA may be augmented to include criteria relating to future. Immediate action, before the effects of global climate change. Such criteria could include: (i) alignment warming on climate change are fully understood, could with decarbonization goals and international climate result in excessive expenditure that is unwarranted by change commitments; and (ii) adequate adaptation the scale of the hazards that then materialize, whereas to identified climate risks. In relation to the adaptation inaction risks costly damage from climate-induced criterion, care should be taken not to score projects hazards. The real options approach involves reserving with negligible climate change risk negatively. Either the option to take action at a future date when more the criteria should be applied only to projects identified information on the scale of the potential hazards becomes as high risk, or low-risk projects should be given the available. In this way, it avoids closing any doors to future highest score. action. For example, when building new sea defenses, ensuring that the construction is designed in such a way 3.3.5.2 Decision Tools under Extreme Uncertainty as to allow for the height of the defenses to be raised in the future would represent a real option. Any additional Alternative decision tools are required under extreme costs incurred at this stage, for example, in strengthening uncertainty. The “traditional” SCBA’s limitations as a the foundations to allow future heightening, are the price decision-making tool when there is extreme uncertainty, of securing the option to be able to raise the height. This as is the case regarding future climate conditions, has option does not have to be exercised, however. already been noted. One approach, when applying the scenario analysis described above, is to use alternative The key elements captured in the real options decision rules that reflect risk preferences. Instead of approach are uncertainty, flexibility, and learning. maximization of expected net social present value— Uncertainty is dealt with through the identification of a which is not calculable when probability distributions are series of possible scenarios for future climate change undefined—different decision rules may be used to decide impacts (as in the UK example discussed above). between options under alternative scenarios.126 Applying Flexibility is incorporated through having an adjustable the maxi-min criterion involves choosing the decision design so that the redesign of the project remains possible with the best outcome in the worst-case scenario. No- should circumstances change. Learning is built in through regrets adaptation decisions employ the mini-max regret continual monitoring of evolving evidence of climate criterion, whereby the option with the smallest deviation change impacts, and through improving modeling to allow from optimality under any of the climate scenarios is decision makers to decide whether and when to exercise preferred. There are also various hybrid criteria that the real options incorporated in the design. By avoiding balance optimal and worst-case performance expenditure on projects that may prove unnecessary and by delaying expenditures that are premature in the face Reference Guide for Climate-Smart Public Investment 106 of uncertainty, the real options approach has advantages Real options can be incorporated in SCBA. As the from the fiscal perspective. A lower level of expenditure UK case illustrates, SCBA allows decision makers to that is adequate to protect people or infrastructure in the appraise options in relation to a range of scenarios and near term can be undertaken, and decisions for greater to make decisions that reflect current knowledge and expenditure can be left to the medium and longer term. risk preferences. The additional costs related to options However, given the additional analytical effort, the real that may be exercised in the future can be included in options approach will be best directed toward those major the analysis. Theoretically, a value may also be placed infrastructure projects where uncertainty and adaptation on the right to exercise the option and included in costs are highest. the analysis, but this is more difficult to do given the uncertainty and is usually handled in qualitative terms when making decisions. Box 30. Alternative Decision Tools to Aid Decision Making under Uncertainty Risk management: an approach that seeks to identify risks and the extent to which specific adaptation interventions could reduce these risks. It thus focuses on identifiable risks (“known knowns”) and aims to quantify the likelihood of the risk occurring and the potential consequences. This approach is useful when there is a good understanding of potential outcomes of climate change thanks to past experience; it is less useful in cases where the future is not easily predictable based on historical experience. Robust decision making: an approach that seeks to identify adaptation measures that are most likely to be successful in a range of possible future environmental conditions. This approach may involve using complex modeling of future environmental scenarios and finding adaptation measures that successfully reduce the negative impacts of as many scenarios as possible. Real options: an approach that seeks to identify small interventions to be made in the short term that can keep open options in the longer term. In doing so, it acknowledges the uncertainty of future climatic conditions. Examples include building strong foundations on a small dike so that it can be raised later if necessary and purchasing the land required to extend an airport runway if weather conditions later make it useful to have a longer one. This approach makes it possible to avoid large investments that may or may not be required while making a smaller investment to keep open the option for the future. Source: World Bank (2014a). 3.3.6 Practical Steps in Introducing included as part of appraisal (and as part of Climate-Smart Appraisal other PIM functions). Assuming that a country’s PIM system is already B. Changes to procedural instruments minimally functional in the area of appraisal, there are a number of changes that should be introduced • The project concept note template should to make appraisal climate smart: be amended to include findings from a preliminary climate risk assessment to identify A. Changes to the legal and regulatory framework whether a project should go forward to a more detailed climate risk assessment as part of the • The PIM regulation should be updated to ensure feasibility study. that consideration of climate change is explicitly Reference Guide for Climate-Smart Public Investment 107 • The concept review criteria should be modified • National parameter values should be extended to verify that climate risk has been assessed to include: and the right conclusions drawn. • A value for the shadow price of carbon • The contents of a prefeasibility and feasibility • Climate change scenarios study should be extended to include, under risk • Economic loss parameters for the most analysis, an optional129 section on climate risk likely climate hazards and adaptation. 3.4 Climate-Smart Independent • The project appraisal reporting template should be extended to include the results of climate risk Review in Project Appraisal assessments and the design and appraisal of adaptation options, together with valuation of GHG impacts. It is a necessary good practice for projects to be subjected to “challenge” and careful analysis by an • The appraisal review criteria should be modified agency that is independent of the project sponsoring to include quality control of: body. Especially for larger projects, this review should take place prior to the submission of a proposal in • Climate risk assessment a ministry’s budget request. Although ministries, • Appraisal of adaptation options departments, and agencies (MDAs) will often have the • Valuation of GHG impacts best information on which to base their new project proposals, they may have weak incentives to produce C. Changes to guidelines and methodologies high-quality proposals aligned with a government’s strategies. In addition, they may lack technical capacity in • Methodological guidelines for appraisal using project design and analysis. It is also difficult for officials SCBA and other tools should be expanded130 to in MDAs to challenge or question projects put forward include methods for: or championed by their own minister. Empirical analysis has shown that there is a strong tendency for project • Climate risk assessment proposals to systematically overestimate project benefits • Use of SCBA for appraisal of adaption and to underestimate costs, either because of strategic options misrepresentation or optimism bias—a behavioral • Decision making under uncertainty characteristic of planners. • Valuation of GHG impacts Reference Guide for Climate-Smart Public Investment 108 Independent review becomes even more important claims on budget allocations (see next section on CS with regard to climate change considerations capital budgeting). where the appraiser’s treatment of uncertainty, estimation of decarbonization effects, and costing CS selection132 involves different considerations of adaptation all point to the benefit of objective for: (i) projects without a specific climate-related external scrutiny. Uncertainty concerning the path of objective; and (ii) projects with a specific climate- global warming and the resulting changes to the climate, related objective (the two categories identified in coupled with the need to adopt assumptions that follow Subsection 3.3.4.1): from this, require that major projects should be subject to a robust independent review process, especially for • For climate-influenced or climate-influencing high-risk projects. The continual updating of the evidence projects without specific climate-related objectives, also indicates the usefulness of external expert review. the selection decision involves examining the Optimism bias with respect to the costs of adaptation and following dimensions: the decarbonization benefits of projects is also likely to be an important issue. • For projects identified, at concept stage (or later), as potentially vulnerable to climate hazards: The specialist nature of climate change science, in- depth vulnerability and risk assessments, and CS i. Was an in-depth risk assessment appraisal methods suggest that additional expertise undertaken? would add value to the review function. The role of independent reviewer is typically carried out by a central ii. If so and the risk was assessed as agency, such as a ministry of finance or ministry of unacceptably high, were adaptation options planning, but these organizations may lack the specialist identified and appraised? skills to review climate change considerations. One alternative is for the traditional reviewers to “buy in” iii. Allowing for uncertainty concerning the external expertise from a specialist institution or supplier; frequency and severity of future climate- the other is for projects to be subject to a dedicated induced extreme weather events, have climate change review, in addition to the standard review. the preferred adaptation options been demonstrated to represent good value for 3.5 Climate-Smart Project Selection public money and has the residual risk been shown to be acceptable? and Capital Budgeting iv. If no adaptation is the preferred option, is there a realistic risk management plan that 3.5.1 Climate-Smart Project Selection for can minimize the severity of climate-hazard Budget Eligibility events to an acceptable degree? Project selection is a key decision point and the • For projects with significant impacts (reducing culmination of the processes designed to ensure or increasing) on GHG emissions: that only quality-controlled projects are considered for budget support, whether direct or indirect. The i. Have mitigation or amelioration133 measures decision is made based on appraisal findings and been considered and incorporated into the recommendations, which are usually presented to project design? If not, is it clear why not? decision makers in a summary appraisal report together with the supporting documentation.131 Project selection ii. Has the volumetric impact on GHG ends with a formal decision on a project’s social viability emissions of different project options been and sustainability, plus confirmation of its eligibility to quantified in a realistic way? be proposed for budget funding. Selection does not mean that funding is guaranteed, as funding can be iii. Has the impact on GHG emissions been guaranteed only through the budgetary process when valued using an appropriate shadow price a project’s merits are considered alongside competing Reference Guide for Climate-Smart Public Investment 109 of carbon and incorporated into the SCBA additional weight for CS projects in its analytic hierarchy of the project and the determination of the process (AHP) of the prefeasibility study system. preferred option? 3.5.2 Climate-Smart Capital Budgeting • Similar questions can be asked of projects with specific climate-related objectives when reaching a Extension of pre-budgeting checks to cover climate selection decision: change considerations strengthens the “gatekeeper” function. Capital budgeting must respect the quality- • For pure adaptation projects: at-entry processes by preventing projects from being “parachuted” into the budget without first having been i. Allowing for uncertainty concerning the appraised, selected, and prioritized as “budget eligible.” frequency and severity of future climate The absence of a strong gatekeeping function to enforce hazards, does the present value of all social quality-at-entry decisions is a frequent problem with benefits of the project (measured in terms weak PIM systems. Gatekeeping is an administrative of reduced damage and economic loss check on projects presented in budget requests to from climate change hazards in the national ensure compliance.135 It is usually performed by the economy) outweigh the present value of all budget department in the finance ministry and relies on social costs of the project? the ministry having sufficient power to turn away non- compliant projects. In a CS system, screening should ii. Are there any benefits from the project extend to ensuring that no projects that are presented that have not been valued and are these in budget requests have evaded requirements for a potentially significant enough to change the climate risk assessment or appraisal of climate-resilient result of SCBA? design (where indicated by the risk assessment). This is not a quality check on the application of these • For pure mitigation projects:134 processes (this should already be done in a system that is performing well).136 i. Does the present value of all social benefits of the project (measured in terms of the Budgeting is a technical-political process involving value of reduced GHG emissions) outweigh prioritizing the expenditure requests and making the present value of all social costs of trade-offs within a fiscal constraint. The technical part the project? is aided by the application of transparent criteria, such as the following:137 ii. Are there any benefits of the project that have not been valued and are these • Strategic importance of the project and the sector potentially significant enough to change the based on government policy as expressed in result of SCBA? strategic planning documentation and the budget strategy paper (or equivalent) Selection decisions may take account of effects that extend beyond the findings of SCBA. For example, • Indications, following positive appraisal decisions,138 climate change mitigation or adaptation projects that that the project will deliver better value for public have important effects that extend beyond those that money than comparable competing projects are captured in the SCBA may be given additional weight when reaching a decision. CS projects that are • Significance and sustainability of future budgetary innovative or have special demonstration value could consequences on completion (O&M costs and also be examples. Where a project is critically important “availability” payments for some types of PPPs) to a network or other service delivery systems, and where this has not been fully captured in the SCBA, this • Compatibility with other proposals for new projects feature could be given additional weight when arriving and non-capital expenditures at a decision. The importance of these supplementary determining effects can be assessed in a purely • Readiness to proceed in the forthcoming budget year, qualitative way or captured in a scoring system. This is including deliverability of plans for detailed design the case in Korea, which, if necessary, explicitly gives Reference Guide for Climate-Smart Public Investment 110 and procurement and status of land acquisition, • Demonstrated resilience to climate change in the compensation, and resettlement arrangements project design • Compatibility with the spending ministry’s portfolio of A portfolio perspective may be needed ongoing projects in terms of implementation capacity when considering a project’s contribution to (based on monitoring reports) decarbonization as budgeting may involve balancing projects that contribute to decarbonization against • Impact on the overall balance and risk profile of the those that do not and determining a mix that makes a national public investment program net contribution to reduction targets. The importance of incorporating climate criteria in budget decision making CS prioritization involves adding criteria to the is included in one of the dimensions of the IMF’s Climate- core criteria listed above to ensure that projects PIMA instrument (see Box 31). Comprehensiveness and contribute to the achievement of a government’s transparency are also important in relation to climate- climate change priorities and represent resilient oriented capital budgeting (as they are for the whole solutions. Prioritization of projects for budget funding budget process). For the dimension described in Box 31 should therefore take account of: to be fully met, not only should climate-oriented selection criteria be used for all major projects (including those • Consistency with international climate change funded externally and using extra-budget funds) but also commitments and obligations the criteria applied should be published. • Contribution to government’s decarbonization goals Box 31. Assessing the Climate Orientation of Budgeting (Climate-PIMA) Dimension C.3.c: Are climate-related elements included among the criteria used by the government for the selection of infrastructure projects? This dimension assesses whether, at the key project gateway of selection for funding in the budget, climate-related elements are explicitly included among the list of decision criteria used by the government. These criteria normally include such elements as consistency with government’s policy priorities, expected net benefits, and fiscal affordability. The criteria should also include consistency with the government’s climate change mitigation objectives and an appropriate design to mitigate exposure to climate risks. Source: IMF (2021). Criteria embodying the government’s climate sending an early and clear signal of the importance of change priorities need to be embodied in the budget climate action through the budget process, preferably documentation, beginning with the budget policy before actual budget development (see Box 32). The IMF statement (or its equivalent) and the budget call also emphasizes the importance of incorporating climate circular. One of the key lessons from a 2014 World Bank change priorities in the budget call circular (see Box 33). policy note on climate budgeting139 is the importance of Reference Guide for Climate-Smart Public Investment 111 Box 32. Climate Budgeting: Lessons for Ministries of Finance Lesson 2. Send an early and clear signal of the importance of climate action through the budget process, preferably before actual budget development. Signaling the importance of climate action can be done through administrative guidelines issued at the start of the budget process. The UK Treasury’s Pre-Budget Report of 2009, for example, highlighted revenue and expenditure measures in support of policies related to the environment and to climate change. In South Africa, policy commitments, such as the proposed carbon tax and the creation of a fund for green economy initiatives, are announced in the medium-term budget statement. The budget circular supports implementation of these policies by providing guidance on the presentation of climate change–related expenditures in the agency budget proposals. The Philippines Budget Circular, meanwhile, requires agencies to categorize programs according to the government’s five priority areas of spending, one of which corresponds to the environment and climate change mitigation and adaptation. Source: World Bank (2014b). Box 33. Climate Budgeting: Importance of the Budget Circular in Signaling Climate Change Priorities The budget circular is a key instrument in sending a clear signal on the importance of climate issues. The budget circular, also known as the budget call circular, is arguably the single most important guidance document produced by budget departments. It is the key vehicle for operational guidelines and targets to be shared with sectoral ministries prior to budget preparation. Providing environmental or climate-related instructions in the circular (for example, stating that climate change will be a major criterion for budget allocation; requiring the use of a consistent set of climate-related assumptions, such as CO2 prices or GHG-emission factors when assessing policies; asking line ministries to identify climate-friendly investment projects, to link spending to strategic environmental priorities, or to justify all new policy proposals in terms of their climate impact, etc.) compels line ministries to take them into account during the preparation of their budget submissions and helps the finance ministry to gather useful information to factor in environmental concerns in budget decisions (as occurs, for example, in Bangladesh, Burkina Faso, France, and Pakistan). Source: Gonguet et al. (2021). As well as in decisions about which individual requires that the annual budget law be accompanied projects to fund, it may be helpful from a policy by supplementary information showing how public making and/or monitoring perspective to reflect expenditure is contributing to the government’s goals climate in the broader process so that it can be in reducing GHG emissions while meeting the country’s seen how the budget works in aggregate to meet energy demands. The next section on budget tagging a government’s climate change objectives. As Box shows how expenditures can be recorded to facilitate this 34 shows, this approach is written into law in France. kind of presentation. The Law on Energy Transition for Green Growth Reference Guide for Climate-Smart Public Investment 112 Box 34. France’s Law on the Energy Transition for Green Growth Article 174 I. - The Government presents to Parliament, as an annex to the budget bill for the year, a report on the financing of the energy transition, quantifying and analyzing the public financial means and evaluating the private financial means used to finance the energy transition as well as their adequacy with the financial volumes necessary to achieve the objectives and the pace of transition set by the current law. In particular, it takes stock of actions to control energy demand, measures to promote renewable energies and the evolution of the environmental impact of energy consumption, in particular the evolution of emissions of GHGs. This report also covers the contribution to the public electricity service and the charges covered by this contribution. It includes scenarios for the evolution of this contribution in the medium term and includes the elements mentioned in Article L. 121-28-1 of the Energy Code. Source: France (2015). Tagging can be used to keep track of budget enhancing transparency and accountability. Through expenditure directed toward goals related to climate these latter means, climate tagging can also assist change. Climate change budget tagging involves the in mobilizing external finance. The intention is that identification, measurement, and monitoring of climate- tagging should assist in focusing attention on climate relevant public expenditure, including spending on capital considerations in the design of programs and projects. investment. Tagging has been developed to map activities It should also help governments’ allocation of resources undertaken by many different government agencies and toward climate change policy objectives during budgeting directed toward a common policy objective. First applied and subsequent tracking of how these policies are to poverty, gender, and international development implemented. Research by the World Bank suggests that goals, this approach is now being extended to climate such tracking has so far met with limited success, partly change. As with these earlier policy goals, addressing due to the novelty of the tools involved in this approach.141 climate change is complex, requiring cross-sectoral and whole-of-government interventions, while also involving 3.6 Climate-Smart Project activities and expenditure undertaken by multiple government agencies. However, for accountability Implementation reasons, budget systems allocate resources to individual agencies, making it difficult to plan, budget, and track the application of funds for multi-agency policy initiatives. 3.6.1 Climate-Smart Project Consequently, a non-standard approach—additional to Implementation Standards the usual expenditure reporting requirements—is needed to keep track of the public financial resources directed New or revised technical standards or construction toward this kind of cross-cutting policy goal. As such, codes can be used to build climate change climate expenditure tagging is a relatively new initiative, adaptation into detailed designs and to increase often encouraged through Climate Public Expenditure project resilience, while minimizing administrative and Institutional Reviews (CPEIRs), implemented effort. Provided such requirements are well conceived with support from the World Bank and United Nations and assuming that enforcement and oversight are Development Programme. The first climate expenditure effective (which will not always be the case in many tagging system was introduced in Nepal in 2012. countries), this can be a low-cost, low-regret route toward Since then, at least 19 countries have developed their robust adaptation, avoiding the need to do the detailed own systems.140 analytical work described in Section 3.3 above on “Climate-Smart Project Appraisal.” In this way, managing Climate tagging increases awareness of climate climate hazards through adaptation becomes a matter change issues in central finance and line agencies of course and not an option to be decided. Subsection while also helping to communicate the government’s 2.2.4 has already examined how codes and standards commitment to climate change action, thus are evolving internationally. Reference Guide for Climate-Smart Public Investment 113 Revising or introducing new technical standards as being more likely to be prone to hazards induced might be a good first step for countries with strong by climate change. This approach can reduce the regulatory capacities but weak analytical capability aforementioned risk of under- or over-investment for performing risk assessments and appraisals. In in adaptation. such contexts (as is often the case in economies that used to be centrally planned), consistent application of 3.6.2 Green Public Procurement straightforward standards may offer advantages over a more flexible approach that seeks to optimize adaptation. Governments can legitimately use GPP to contribute However, tackling adaptation and resilience through to achieving their environmental and climate change application of standards has its drawbacks. These mostly goals. GPP has been defined as “…a process whereby relate to the uncertainty attached to climate change public authorities seek to procure goods, services, and effects, which can be very location specific. The risk is works with a reduced environmental impact throughout that rigid standards could lead either to under- or over- their life cycle when compared to goods, services, investment in adaptation. and works with the same primary function that would otherwise be procured.”142 GPP has gained international Technical standards for adaptation can be seen as acceptance and is now recognized as a legitimate tool an adjunct to the application of the proportionality for pursuing governments’ environmental objectives (see principle (see Subsection 3.2.4). For smaller projects Box 35). The fourth of the Helsinki Principles indicates where in-depth CS appraisal of adaption is not deemed that finance ministries should take climate change worthwhile, minimum levels of adaptation can be into account in procurement practices.143 Specifically, achieved through the specification and application of the requirement is for climate change considerations robust but low-cost standards. to be integrated into the guidance, procedures, and methodologies for public procurement, including Technical standards can also be applied in appropriate measures to improve energy efficiency and conjunction with land-use planning. Higher standards favor low-carbon solutions. may be specified for land-use planning zones identified Box 35. Green Public Procurement is Internationally Recognized GPP is now recognized by international public procurement standard setting bodies. The Government Procurement Agreement of the World Trade Organization (WTO) and the European Commission allow contracting authorities to integrate environmental criteria into procurement processes. The World Bank revised its Procurement Framework in 2016 to recognize “value for money with integrity in delivering sustainable development” as a core objective. In 2017, the ISO released a Guidance on Sustainable Procurement (ISO 20400), a signal that green and sustainable procurement is becoming a standardized practice in public and private organizations around the world. The WTO Government Procurement Agreement (2012) provides for GPP under Article X.6, which states that “a Party, including its procuring entities, may … prepare, adopt, or apply technical specifications to promote the conservation of natural resources or protect the environment.” Source: World Bank (2021e). GPP reflects a move away from an emphasis sense. Figure 25 illustrates how the purchase price may on minimizing the cost of acquiring an asset to represent only a small share of the total cost incurred minimizing the costs over the asset’s lifetime, by a purchaser over an asset’s lifetime, especially if including social costs. This means selecting the most externalities are considered. Life cycle costing goes advantageous bid rather than the bid with the lowest beyond a total cost of ownership perspective, which cost of acquisition. GPP therefore takes account of costs recognizes that the lowest bid may not represent value incurred over the entire lifetime of goods, services, or for money because of such additional lifetime costs works and their environmental impact in the broadest as high needs for energy or water use, maintenance Reference Guide for Climate-Smart Public Investment 114 requirements, and disposal costs. Life cycle costing pollution, but also extends to global externalities, such also takes account of those environmental externalities as GHG emissions. that can be monetized, such as waste disposal and Figure 25. Life Cycle Costs Compared to Purchase Price Source: World Bank (2021e). There are four channels through which GPP can their requirements without running the risk of failed work to favor environmentally and climate-friendly tenders because of no market replies. Proactive acquisition of fixed assets:144 contractors can be identified and recognized in bid evaluation while not crowding out those needing 1. Supplier selection criteria to ensure that more time to adjust their practices to meet the new participating bidders have the fundamental technical requirements. This channel requires the design of capabilities, ethics, and management processes in appropriate scoring and weighting that integrates place to deliver on the desired environmental/climate climate change considerations into the overall bid change outcomes. evaluation framework. 2. Technical specifications prescribing core 4. Contract performance clauses to ensure winning environmental/climate change criteria that bidders suppliers deliver the contract in an environmentally must meet to satisfy the requirements of the friendly way and continuously improve their tender, including such factors as policies to reduce environmental performance through the contract an asset’s carbon footprint during works. These duration. This channel can be useful where supplier might be introduced gradually as awareness and capacity to deliver green alternatives is low but there capabilities develop among contractors. is a willingness to adapt. 3. Environmental bid award criteria that encourage, Despite its potential for achieving climate change challenge, and reward bidders proposing solutions goals, GPP may pose particular problems in with improved environmental/climate change contexts where public financial governance is weak. performance. This is the most common approach Minimum standards of public procurement145 using more allowing procurers to test out the market response to conventional approaches should therefore be achieved Reference Guide for Climate-Smart Public Investment 115 before a GPP framework is adopted. GPP introduced into more at risk. As well as ensuring that maintenance a weak procurement system could open opportunities needs are met, an enhanced maintenance regime, for malfeasance. for example, the more frequent cleaning of culverts on roads, could also be seen as an adaptation 3.6.3 Climate-Smart Monitoring and Adjustment strategy. Although maintenance planning (together with verification of sustainable maintenance funding) Active monitoring is always important but is should form part of project preparation and appraisal, particularly so for projects that are vulnerable to maintenance plans need to be monitored and adjusted climate change. The level of uncertainty concerning during implementation. In addition, funding commitments the probability and severity of climate change hazards made at the time of project selection need to be followed and, consequently, the nature of the optimal adaptation through. Feedback from maintenance requirements to response make it very important to generate regular capital planning could also be important in adapting to and reliable feedback from project implementors and the uncertainty of climate change; rapidly increasing operators through to planners and decision makers. maintenance requirements could, for example, be a sign Active monitoring, whereby up-to-date information is fed that it is time to adopt one of the real options considered systematically to suitably empowered decision makers at appraisal. and acted upon when required, is important so that mitigation and adaptation measures can be adjusted on 3.7 Climate-Smart Ex Post Review the basis of experience during implementation. Projects should be monitored during the construction phase. Just as importantly, however, they should also be monitored Ex post review is an important PIM function, but during operation to provide information for assessing the its application in the case of CS-PIM poses some success of any adaptation measures in relation to the special problems emanating from the uncertainties emerging climate risks. Monitoring is critical with the real at the project planning stage and the extended time options approach because of the need to know when horizon over which climate change impacts are the thresholds have been reached that should trigger likely to be felt. Ex post review is always one of the the contingent adaptation options, as defined during more difficult functions to put in place and is often one project design. Monitoring during operations provides of the last PIM reforms to be successfully implemented. the information required to carry out the ex post reviews In spite of the difficulties, ex post review is especially discussed in Section 3.7. important in relation to climate change. This is because of the pressing need to learn about what works in terms 3.6.4 Climate-Smart Operations of both mitigation and adaptation as the negative impacts and Maintenance of climate change become more concrete. Adequate planning and resourcing of O&M Basic completion review is the “must-have” of ex expenditure is essential if public investment projects post review and can inform the design of mitigation are to deliver benefits to target beneficiaries on a and adaptation measures for new projects. Basic sustainable basis. This is often where apparently well- completion review is carried out not long after completion conceived projects with the potential to offer long-lived and focuses on learning lessons from implementation benefits fall down and fail to deliver their anticipated of projects and on verifying that they are delivering outcomes. There are multiple examples from around the planned outputs—that is, services to the public. It the world of projects that are unable to deliver planned is intended to provide quick feedback to the technical services to users because of inadequate provision of design and implementation processes, contributing to operational resources. Likewise, there are plenty of improved project design, planning, and implementation cases where projects deliver benefits for a shorter period management. In verifying the technical specifications or of lower quality than expected because of poor asset and the functioning of a newly completed project, basic maintenance. completion review can be used to check the successful operation of decarbonization measures built into the Climate change risks only serve to emphasize design—for example, the reduced use of carbon-intensive the importance of planning for and delivering inputs in operations. Basic completion review cannot tell adequate maintenance expenditure, because poorly planners much about the longer-term effects on GHG maintained facilities (drainage, roofs, etc.) are even Reference Guide for Climate-Smart Public Investment 116 emissions, such as reductions in traffic congestion or 3.8 Key Messages on Sequencing greater use of public transport, as these are foreseen as project outcomes. As far as adaptation is concerned, Climate-Smart PIM Reforms basic completion review cannot tell planners much about the success of adaptation measures either (unless, by chance, a project is hit by an extreme weather event 3.8.1 Building CS-PIM on Solid PIM Foundations shortly after completion). Instead, it yields information on the implementation of adaptation measures. An approach to introducing CS-PIM that takes Examples include whether such measures have been account of the current state of development of PIM completed on time, to budget, and to specification, institutions and their effectiveness is advisable. for instance, or whether any problems have arisen. As the rest of Chapter 3 has noted, CS-PIM should be Such information is important for improving technical integral to PIM and neither an optional add-on nor a design and implementation planning of adaptation parallel process. The introduction of CS-PIM should measures. However, this should not be mistaken for therefore be mindful of the maturity of a country’s PIM assessing the success of such measures in improving a system as a whole and involve the development of new project’s resilience. CS components so that they are not more advanced than the design of the function to which they relate or the Ex post evaluation will be particularly important capacities to perform that function. in informing the choice of adaptation measures, but to do this, it needs to be more comprehensive Based on a thorough review of the current structure and longer term in perspective than would often be and effective operation of all the basic PIM functions expected in a PIM system. Ex post evaluation focuses across the public sector, a country should ensure on assessing the effectiveness and impact of projects. it has an adequate legal and regulatory framework Often, it is carried out on a selective basis, with the largest covering PIM stages. This would be expressed in: (i) projects, or particularly successful (or unsuccessful) the public financial management and related or similar projects, being assessed to optimize lesson learning laws and regulations; (ii) PIM guidelines covering the rather than having evaluations be universally applied. procedures required by institutions at each stage of However, this approach may not be suited to evaluating performing PIM functions; and (iii) PIM manuals covering adaptation given the uncertainties concerning localized the detailed methods to be used, particularly in the climate change effects and the stochastic nature of screening and appraisal of projects under consideration extreme weather events (even ignoring climate change). and in the monitoring of implemented projects. A systematic ex post evaluation of adaptation across all major high-risk projects (or at least a sample sufficiently The use of a diagnostic framework to identify and large to yield examples of adaptation in action) may be prioritize the weaknesses and gaps in a country better suited to these conditions so that real observations PIM system is important as there is no simple way of the effectiveness of adaptation can be obtained. of giving a summary diagnosis of country PIM Ex post evaluation is usually carried out some years foundations that is useful to identifying the specific after a project has been operating. This time period is reforms needed in CS-PIM. Diagnostic frameworks usually around five years, but sometimes more. In view have been developed by the World Bank and IMF since of the extended time scale over which climate change 2008.146,147 A commonly applied PIM diagnostic tool in will play out and its degree of inherent uncertainty, a recent years is the IMF PIMA,148 which has been applied longer time frame for evaluating adaptation measures to a growing set of countries. Where gaps are identified in should be envisaged, including repeat evaluations of a country’s current PIM system structure or performance, the same project. These factors suggest that countries reform steps must be designed and implemented. should anticipate establishing a systematic program of evaluation for assessing resilience outcomes from 3.8.2 Concurrent Improvement in Data adaptation measures. A more classical approach may Collection and Updating be appropriate for assessing the long-term impacts of mitigation measures, where GHG outcomes should be CS-PIM cannot be successfully introduced without observable after shorter time frames. concurrent improvements in data coverage and Reference Guide for Climate-Smart Public Investment 117 regular updating, notably on the frequency and 3.8.3 A Sequenced Set of Reforms intensity of weather-related hazards and disasters and their costs (direct and indirect). Over time, With this evolutionary approach to CS-PIM in mind, country systems for collecting information on climate- Table 16 suggests a sequenced set of reforms that induced changes in the frequency and intensity of relate to the developmental status of the PIM system, weather-related extreme events need to be upgraded. which may be described as nascent, emerging, or The primary challenge when introducing CS-PIM, advanced. A nascent PIM system is one where reforms particularly the upstream planning and decision-making are only just beginning and procedures, methods, and stages, is the lack of granular data and information on capacities are in the early stages of development. An the specific effects of climate change in the locality of emerging system has most of the core functions and projects. Shortage of information on damage costs, as procedures in place, but the methods and capacities well as wider social and economic costs, also marks to employ them still require further strengthening. In an a constraint. advanced system, the core functions are in place and performing reasonably effectively. When introducing Efforts on the part of the institutions responsible the reforms represented in Table 16, the proportionality for coordinating and overseeing the channeling principle should be applied, namely, the focus of reforms of information to the appropriate planning and and the efforts to apply them should be on major, long- budgeting institutions are also important. Information lived projects at greatest risk from climate hazards. The on weather-related hazards and disasters need to flow reform path is indicative only and should be applied efficiently to the institutions responsible for regulation, flexibly, depending on the pace of change in each sector planning, and project design and appraisal. separate function, which may diverge. The phasing of Improved data and updated information will help reduce CS preliminary screening and appraisal deserves closer uncertainty concerning the probability of the occurrence attention than can be given in Table 16. of extreme events and their costs. Eventually, more reliable exceedance distributions and loss functions may be estimated. Table 16. Indicative Sequencing of CS-PIM Reforms Depending on Status of PIM System PIM Function Nascent PIM System Emerging PIM System Advanced PIM System Preliminary Basic, first-stage screening First-stage screening for climate change risk continually screening for climate change risk is improved based on emerging evidence integrated into early stages of project development and potential adaptation needs are signaled, together with conformity with climate change–driven zoning of land use. Preparation Adaptation measures for In-depth screening for climate High-risk projects are and appraisal projects at the highest risk change risk. appraised using alternative, of the greatest impacts evidence-based climate from climate change Risk management plans for change scenarios to inform and application of the significant climate hazards decision making. precautionary principle in are required. project design. Appraisal fully incorporates No-regrets adaptation GHG impacts. measures are built into project designs. Reference Guide for Climate-Smart Public Investment 118 Table 16 continued PIM Function Nascent PIM System Emerging PIM System Advanced PIM System Designs for high-risk projects incorporate flexibility and real options. Independent Impartial verification of: Quality of assessment of Quality of scenario testing review GHG effects are verified. is assessed. • Climate change risk screening • Application of climate change–relevant construction standards (both mitigation and adaptation) in design Project Budget preparation Climate change tagging Sensitivity to worst-case selection and process ensures: information is considered climate change scenarios is budgeting when medium-term considered when medium- • Budget requests expenditure allocation term expenditure allocation include information on decisions are made. decisions are made. climate change risk for major projects. GHG impacts are included in budget requests for • Highest risk projects— major projects. i.e., high probability and high impact of climate change on success—are excluded from budget if no adaptation. Implementation Systematic monitoring GPP introduced of adaptation Adjustment (No specific CS-PIM reforms in addition to achieving PIM functionality) Operations and Climate-informed Assets managed in a CS maintenance maintenance regimes are way, including optimized planned and adequately maintenance and information funded. flows for real options. Ex post review Lessons learned for Lessons learned for design implementation from from ex post evaluation completion reviews of of effectiveness of adaptation measures. adaptation measures. Source: Authors. Reference Guide for Climate-Smart Public Investment 119 3.8.4 Phasing for Climate-Smart Preliminary • Take policy decisions and develop methods for Screening and Appraisal phase 2. In Table 16, there is a requirement for a phased • Phase 2: Assess climate change impacts of the approach to the upgrading of CS appraisal that project and prepare for phase 3: takes account of the current state of development of project appraisal and data availability. As already • Adopt shadow price of carbon and consider discussed, CS appraisal is not a stand-alone function adoption of declining discount rate for long-lived but should be integrated into mainstream appraisal. investments. Likewise, using SCBA to assess climate adaptation options should not be done independently of analyzing • Introduce methods for estimating a project’s net options for achieving a project’s specific objectives effect on GHG emissions. (see Section 3.3.1 showing the integrated approach in the United Kingdom). Furthermore, CS appraisal • Begin to incorporate value of carbon saved/ involves more sophisticated methods than mainstream added in SCBA. appraisal, particularly in the areas of risk assessment, the application of SCBA in options analysis, and decision • Develop data sources required for implementing making involving uncertainty. phase 3. CS appraisal cannot be introduced independently of • Phase 3: Assess climate change risks to project mainstream appraisal, while mainstream appraisal inputs, outputs, and outcomes: must reach minimum standards of institutional design and performance before it can be made • Analyze costs and benefits of adaptation under climate smart. These are the implications of the 2–3 alternative climate change scenarios, taking requirement for integrality and the additional complexity account of: of a CS appraisal. A phased approach to introducing CS appraisal is therefore suggested, with the phases • Damage to infrastructure assets conditioned by the current context. An indicative three- • Economic losses from interrupted phase approach to introducing CS appraisal might look infrastructure service provision like this: • The need for approaches to decision making under uncertainty, such as real • Phase 1 (may be implemented while the basics options analysis of mainstream appraisal are being put in place): Introduce the essentials of CS appraisal: • Collect and analyze data required to develop exceedance probability distributions and • Introduce basic disaster risk analysis, beginning economic loss functions. at project concept stage in cases of high-risk and major projects. The precautionary principle used in Phase 1 has disadvantages, but these are likely to be outweighed • Focus on identifying, and then pursuing, no- for the projects most at risk. Adopting the precautionary regrets options at concept stage. principle risks over-investment in adaptation. However, with no capacity or limited capacity to optimize adaptation • Design and build in adaptation measures for measures, the alternative is to do nothing and accept assets identified as being vulnerable to high- the risk. Although this might prove to be the best policy probability/high-severity climate hazards on the for individual projects, it is assumed that a cautious basis of the precautionary principle,149 referring approach to high-risk/long-lived projects is likely to be to cost-effective measures to adapt to risks optimal for the portfolio as a whole. posed by a business-as-usual climate scenario. Objective criteria exist that could help in deciding • Take account of the flexibility left for future when to commence Phase 2. It is suggested that Phase adaptation (versus lock-in). Reference Guide for Climate-Smart Public Investment 120 2 is started only once minimum standards for appraisal will not be the only determinant of funding decisions, but have been achieved. These could be represented by the it needs to be on the table when decisions are taken. achievement of a “medium” (yellow) rating for IMF PIMA Indicator 4 (revised 2018 framework) or a “C” rating for Advanced budgeting should take into account PEFA dimension PI-11.1, where one or another of these the results of climate change scenario testing. assessments has recently been carried out. As discussed in the previous subsection, advanced CS appraisal involves stress testing adaptation under Further phases may be required to achieve the full different climate change scenarios, including a worst scope approach to CS appraisal, but this is probably case. This analysis forms part of the appraisal decision, a distant objective for many countries. As discussed but the findings should also be available during budget above, the disadvantage of the scenario-based approach preparation. This way, decision makers can take a adopted in Phase 3 is that there is no definitive result portfolio view of risk that goes beyond the individual from SCBA. Decision makers would consequently be project when taking allocation decisions. left having to use judgment concerning the likelihood of different scenarios based on current information and the Emerging PIM systems should begin to integrate risks that they are prepared to accept. However, Phase climate change into downstream PIM stages. This 3 is already intensive with respect to information and would include introducing systematic monitoring of skills, as well as ambitious in practical terms for many adaptation both during implementation and operation countries. Use of the full-scope model (Section 3.3.4.3) so that appropriate steps can be taken if adaptation may be achievable only in the longer term, if at all. measures go off track. Monitoring will also be important Indeed, many higher-income economies are not yet in a in determining when real options should be exercised. position to perform full-scope CS SCBA. In addition, CS maintenance regimes for completed projects should be established and then funded on a 3.8.5 Upgrading of Climate-Smart Budgeting sustainable basis. Basic completion reviews should be a and Downstream PIM Stages feature of an emerging system and should be designed to incorporate climate change considerations, focusing Integrating basic climate change considerations into on whether adaptation measures have been delivered upstream processes, including budgeting, should to specification and to budget and ensuring that any take precedence for nascent PIM systems. For lessons are fed into future projects. budgeting, this means that some information on climate change risk should be available for decision makers so Advanced PIM systems should build on the that high-risk projects can be identified. If no adaptation downstream CS features already introduced and measures are built into their designs, the precautionary extend further into procurement, asset management, principle can be exercised by excluding such high-risk and impact assessment. GPP can be introduced in projects from budget funding. advanced systems, together with climate-informed asset management. The latter may be designed to inform In an emerging system, more information on optimal maintenance regimes and to trigger contingent climate change should be available during budget adaptation measures when predetermined thresholds preparation. Analytical information from climate tagging for the exercise of real options are crossed. Finally, can be used to inform allocation decisions. The GHG systematic evaluation of the effectiveness of adaptation impacts of individual projects should also be included measures may be introduced as a basis for improving in submissions and taken into account when making adaptation choices. selection decisions for budget funding. Such information Reference Guide for Climate-Smart Public Investment 121 04 Resource Links for Climate Change and Governance Series and Related Practitioners in Climate- • Outlook 2050 – Long-term planning strategic note Smart Public Investment • Reference Guide to Climate Change Framework Legislation • Green Public Procurement • Climate Change Budget Tagging • Climate-Sensitive Management of Public Finances (IMF) • Climate Change and PFM (forthcoming) • Climate Change and PAM (forthcoming) Climate Change and PIM • The Power of Public Investment Management: Transforming Resources Into Assets for Growth • Public Investment Management Reference Guide • Economic Analysis of Climate-Proofing Investment Projects (ADB) • Climate Resilient Infrastructure (OECD) Model Documents • United Kingdom (See Annex 3), Costa Rica, Kenya Policy and Institutional Assessments • Climate Change Institutional Assessment • Country Climate and Development Report • Climate Change PEIR • PEFA Climate • Climate-PIMA and background paper Vulnerability and Risk Indices • Notre Dame Global Adaptation Index • Germanwatch Global Climate Risk Index Reference Guide for Climate-Smart Public Investment 122 • INFORM Risk Index level with links to strategies and location-relevant • Actuaries Climate Index information • Coalition of Finance Ministers for Climate Action – Climate Policy Indices Over 50 countries committed to principles for a just transition to low-carbon development • Environmental Regulatory Framework Index • V20 – A group of climate-vulnerable nations aligned • Climate Change Performance Index to coordinate actions and funding Screening Tools Physical Risk Management Communities • Climate Screening Tools – World Bank • Coalition for Disaster Resilient Infrastructure – • Aware for Projects – Tool used by ADB and EIB Intergovernmental knowledge, advocacy, and • CCORAL – Caribbean Screening tool capacity-building partnership to promote the resilience of infrastructure systems • Climate ADAPT – European data, screening tools and knowledge • Prevention Web – A hub of reports, case studies, and conferences relating to physical risk with • US Climate Resilience Toolkit themes including critical infrastructure • Resilience Rating System – World Bank • Sendai Framework – UN initiative to coordinate • Risk Stress Testing Methodology and associated policy and actions on physical risk Risk Stress Test (RiST) Tool – World Bank • Understanding Risk – A community for collaboration, knowledge sharing, and innovation Other Toolkits in identifying and assessing disaster risk led by GFDRR • Toolkit for Greening the Financial System – World Bank Financial Risk Management Initiatives • Adaptation Metrics Toolkit – NOAA • Climate & PPPs Toolkit – IDB • TCFD – Investor-led body developing • Practical Guide to Insuring Public Assets – recommendations on climate-related financial risk Insurance Development Forum disclosure • Knowledge Series on Financial Protection of Public • CDP – A not-for-profit that runs the global Assets – SEADRIF environmental risk disclosure system for investors, • Adaptation Principles – World Bank Guide companies, cities, states, and regions, including physical and transition risk Datasets • Climate 100+ – Investor-led network engaging companies to cut emissions, improve climate • Climate Research Unit – Global historic climate change governance, and disclose risk data at high resolution • NGFS – Climate scenarios portal Transition Risk Framework • ARC-X – U.S. Environment Protection Agency Adaptation Resource Centre • IRGC – Dimensions of transition risk • OpenDRI – Data and communication tools • IMF Climate Change Dashboard Building Permit and GIS Hubs • Copernicus – Global data supported by the EU • Spatial Mapping – Auckland, Los Angeles, France, Research and Knowledge Communities Miraflores – include integrated land-use hazards and regulation • World Bank Climate Knowledge Portal • Digital Regulation and Permitting – Morocco, • GFDRR - ThinkHazard! – A tool for high-level Auckland, Copenhagen, Rwanda, Yangon, Sydney, physical risk assessment at national or subnational Hong Kong, Qatar, Taiwan Source: Authors. Reference Guide for Climate-Smart Public Investment 123 Annex 1. Indicative Decarbonization and Adaptation Policies by Sector Table 17. Indicative Decarbonization Policies by Sector Planning and Information Regulation and Standards Fiscal Measures Economy-wide • Economic planning: NDC; • Financial sector regulation • Revenue: fuel excises and long-term decarbonization; for climate risk disclosures taxes; carbon taxes green and blue growth and reporting; risk strategies, plans, assessment and stress • Expenditure: elimination and roadmaps testing; ESG regulation of fossil fuel subsidies; and supervision; green subsidies and tax • Just transition planning: taxonomies and green expenditures for energy managing social and product regulation efficiency and GHG distributional impacts emissions reductions; GPP • SOEs’ GHG emissions • Land-use planning: disclosures, reporting, • Public Investment: infrastructure networks and targets practices of CS investment and systems; green management; low/zero infrastructure management • Emissions trading emissions research and schemes: cap-and-trade; technology development • GHG emissions monitoring tradable emissions permits and reporting • Energy efficiency and • Consultation, emissions standards, communication, and certificates, and stakeholder engagement product labeling Energy • Integrated energy and • Renewable energy • Revenue: pricing power system planning: portfolio and energy externalities (including cost optimal paths to scale efficiency standards carbon taxes), fuel excises up zero-carbon power and and taxes fossil fuel phaseout; sector • Market regulation: coupling preparation competition policies; • Expenditure: subsidies primary energy contracts; for renewables and Reference Guide for Climate-Smart Public Investment 124 Table 17 continued Planning and Information Regulation and Standards Fiscal Measures • Improve system flexibility: emissions certificates; time- energy efficiency expand power grid of-use tariffs; demand-side balancing zones, energy management incentives; • Public Investment: storage, digitalization, and and smart electricity pricing off-grid household and demand-side management micro renewable energy; • Emissions trading: grid reinforcement and • Efficient renewable energy certificates and flexibility; renewables integration: improved load emissions permits R&D; manufacturing and forecasting incentives and guarantees • Disclosures: generation for renewables, efficiency, dispatch, primary energy and storage contracts, emissions Transport • Integrated and multi- • Vehicle fuel economy • Revenue: vehicle and modal transport and and emissions standards, fuel taxes; parking and green logistics planning: testing, and enforcement congestion charges; tolling fossil fuel phaseout and (including for imported, electrification; reducing second-hand vehicles) • Expenditure: feebates automobile use; promoting and subsidies for electric public and active transport; • Vehicle labeling and vehicles; subsidies for aviation and shipping certificates public transport decarbonization strategies; shift toward rail and inland • Biofuel blending standards • Public Investment: waterways in freight integrated, intermodal, • Vehicle scrapping and low-carbon infrastructure; • Active traffic management: recycling regulations electric vehicle charging ridesharing; eco-driving infrastructure; low/zero training; e-working emissions fuels and campaigns transport technology R&D; (high-speed) rail Urban and • Urban planning: • Land-use regulations • Revenue: parking and Buildings densification, district and zoning congestion charges; land heating, integrated urban and property tax and transport planning, • Appliance energy efficiency building stock retrofitting, standards, certification and • Expenditure: subsidies and green infrastructure; labeling and tax benefits for wastewater treatment; efficiency and property waste management • Energy building standards retrofitting; incentives for and recycling and codes densification, greening urban services; payments • Air quality monitoring, • Demand-side management for environmental services information, and warning • Waste management • Public Investment: regulation (recycling, urban infrastructure and circular economy) green infrastructure • Payments for environmental services Reference Guide for Climate-Smart Public Investment 125 Table 17 continued Planning and Information Regulation and Standards Fiscal Measures • Energy efficiency benchmarks for utilities (e.g., water supply/ sanitation) Industry • Industrial policy and • Energy efficiency, • Public Investment: planning: decarbonizing technology, and recycling guarantees and patent industry; industry standards financing for R&D in benchmarking hard-to-abate sectors, • Product efficiency and electrification, green • Energy management emissions labeling innovation, and recycling system training and certification • Leakage detection and repair regulation • Public education on recycling • Voluntary agreements for emissions reduction and efficiency • Tradable emissions permits Agriculture • Land-use planning: • Land- and forest-use • Revenue: taxes on and Land Use sustainable agricultural regulations, zoning, GHG-emitting inputs and forestry; fertilizer-use permitting, and reduction; management enforcement • Expenditure: reduced of ecosystems and subsidies for GHG- protected areas • Protected areas emitting agricultural demarcation and inputs: payments for • CS sustainable agriculture enforcement ecosystem services education, training, and awareness • Regulation of agricultural • Public Investment: inputs and practices, and CS agriculture and • Public education dietary waste management forestry R&D; restoration choices and protection • Pricing ecosystem services natural resources • Crop and harvest and tradable emissions loss reduction reductions permits • Forestry and food product labeling Human • Climate education: • Environmental and public • Expenditure: retraining Development school curriculum, public health regulations programs; transition education campaigns, support for households. community programs • Training and reskilling: retraining/reskilling, public engagement and education Source: World Bank (2021b). Reference Guide for Climate-Smart Public Investment 126 Table 18. Indicative Adaptation Policies by Sector Planning and Information Regulation and Standards Fiscal Measures Economy-wide • Risk and vulnerability • Financial sector regulation • Revenue: post-disaster assessment: disaster for: climate risk disclosures revenue relief measures and long-term and reporting; risk environmental change assessment and stress • Expenditure: disaster testing; ESG regulation risk fiscal management • Economic planning: and supervision; green and financial layering; national and subnational taxonomies and green guarantees, subsidies adaptation and product regulation; disaster and tax expenditures for resilience planning risk assessment and resilience investments, financial layering; insurance post-disaster “build back • DRM: critical market regulation better” and natural asset infrastructure planning management; payments for • SOE risk reporting and environmental services • Land-use planning: resilience planning adaptation and resilience • Public Investment: infrastructure, land use, • Land-use regulation CS investment and natural assets and zoning management practices; climate proofing public • Early warning systems infrastructure, critical infrastructure and services; • Information and environmental resource education on climate management; adaptation change vulnerabilities and resilience R&D cross-sector risk • Consultation, communication, and stakeholder engagement Energy • Planning: energy asset and • Utility and system • Expenditure: guarantees, system-level disaster and risk reporting and subsidies, and tax long-term environmental stress-testing standards expenditures for climate change risk assessment proofing energy systems; and resilience planning • Service standards “building back better” for resilience and post-disaster • Metering and recovery after extreme communication networks weather events • Public Investment: for outage detection/ climate proofing energy addressal • Standards and infrastructure; backup enforcement of asset-level power systems with • Improvements to fortification (underground distributed renewable forecasting capabilities for cabling, fuel reserves, energy and storage for extreme weather no-build zones) critical infrastructure (e.g., hospitals) Transport • Planning: transport system • Construction, maintenance, • Expenditure: guarantees, modal and integrated and service standards for subsidies, and tax disaster and long-term resilience and extreme expenditures for climate environmental change risk weather events proofing transport systems Reference Guide for Climate-Smart Public Investment 127 Table 18 continued Planning and Information Regulation and Standards Fiscal Measures assessment and network • Emergency response and and “building back better” resilience planning evacuation plans for public post-disaster transport systems • Public Investment: • Utility and system risk climate proofing public reporting and stress testing transport infrastructure standards Urban and • Urban planning: • Land-use regulations • Revenue: integration of Buildings disaster and long-term and administration: land protection costs in land and environmental change tenure regularization, property tax risk assessment and updating cadastral resilience planning surveys with climate risk • Expenditure: guarantees, data, zoning, permitting, subsidies, and tax • Air quality monitoring, and enforcement expenditures for climate information, and warning proofing private assets • Building codes and and relocation from standards for heating, vulnerable sites cooling, and resilience to extreme weather events • Public Investment: climate proofing urban • Property insurance infrastructure; public regulation housing in safety zones; urban and • Payments for building adaptation and environmental services resilience R&D Industry • Industrial policy and • Land-use regulations, • Expenditure: guarantees, planning: disaster and industrial zoning, and subsidies, and tax long-term environmental enforcement expenditures for climate change risk assessment proofing industrial assets and resilience planning • Building codes and and relocation from standards for resilience to vulnerable sites • Information on industry- extreme weather events specific climate change and climate change • Public Investment: risks, impacts, and industrial parks; urban and opportunities for industry building adaptation and resilience R&D. Agriculture • Food security planning • Land- and forest-use • Expenditure: payments and Land Use regulations, zoning, for ecosystem services; • Land-use planning: permitting, and enforcement retraining programs; sustainable agricultural guarantees, subsidies, and and forestry, ecosystem, • Land tenure and tax expenditures for climate and protected property rights proofing agricultural and area management forestry assets; relocation • Protected areas at vulnerable sites • CS sustainable agriculture demarcation and education, training, and enforcement • Public Investment: CS awareness agriculture/forestry R&D; Reference Guide for Climate-Smart Public Investment 128 Table 18 continued Planning and Information Regulation and Standards Fiscal Measures • Crop and restoration and protection parametric insurance natural resources • Payments for environmental services • Forestry and food product labeling Human • Risk and vulnerability • Environmental and public • Expenditure: retraining Development assessment: health, health regulations programs; transition employment and support for households; distributional impacts post-disaster social protection. • Climate education: school curriculum, public • Public Investment: education campaigns, climate proofing critical community programs health and social infrastructure; health, • Training and reskilling, education, and social public engagement protection; adaptation and and education resilience R&D Source: World Bank (2021b). Reference Guide for Climate-Smart Public Investment 129 Annex 2. Green and Sustainability-Linked Bonds This annex provides an overview of the evolving proportion of long-term investors, such as pension funds global green bond market and describes the and insurance companies, are looking to provide their prerequisites and implementation steps currently clients with green or sustainable investment products. required for a sovereign bond issuer to access These lenders are seeking sustainable, ESG-compliant this capital. investments that will, with a high degree of certainty, be deployed to achieve the green and socially beneficial goals their issuers advertise. Sovereign green bond 2.1 Overview of the Green and issuances have rapidly increased in the past few years, Sustainability-Linked Capital Markets rising from less than US$100 billion in 2016 to over US$1 trillion in 2021 (Figure 26). There are tremendous amounts of private investment capital looking to find a green home. A growing Figure 26. Global Sovereign Green Bond Issuance History GSS + Debt Volume Surpassed USD1tn in 2021 1000 800 US Dollar Billions 600 400 200 0 <2015 2016 2017 2018 2019 2020 2021 Green Social Sustainability SLB Transition Source: Climate Bonds Initiative (2022b). Reference Guide for Climate-Smart Public Investment 130 Sovereign and other public issuers are increasingly single sovereign green bond: an €8.5 billion, 24-year accessing the green market. Although the data above note. This handily beat the previous record of €6.5 billion applies to all green issuances in 2021, sovereign green set by Germany in 2020. Figure 27 illustrates the rapid bond issuances have been rising steadily over the past growth in government-linked green bond issuances. five years (Figure 27). Municipal and state-owned entities Successful issuers are not limited to industrialized initiated offerings in 2014. Then, beginning with Poland in country markets. The Republic of Indonesia, for example, 2016, 24 sovereigns have issued green bonds, with nine has visited the green market three times since 2018, of them returning to the market for additional rounds of including its debut offering of US$1.25 billion, done as a fundraising.150 In March 2021, Italy debuted its sovereign Sharia-compliant Sukuk. green bond framework by issuing the world’s largest Figure 27. Public Green Bond Issuances 180 160 140 120 US Dollar Billions 100 80 60 40 20 0 2014 2015 2016 2017 2018 2019 2020 2021 Government-backed entity Local government Sovereign Source: Climate Bonds Initiative (2021). Offerings have been growing in size as investors billion or more. This trend indicates that sovereigns become more comfortable with the framework. can increasingly rely on green bonds to help finance a Green bond issuers have been able to increase the size wide variety of qualifying green and sustainable public of their primary offerings year on year. By year-end 2021, investments (see Figure 28). nearly 40 percent of green bond offerings were US$1 Reference Guide for Climate-Smart Public Investment 131 Figure 28. Green Bond Issuances are Getting Larger 600 500 US Dollar Billions 400 300 200 100 0 2014 2015 2016 2017 2018 2019 2020 2021 0-100m 100m-500m 500m-1b 1b+ Source: Climate Bonds Initiative (2021). Use of green bond proceeds varies widely but and mechanical systems. However, not all issuers follow appears concentrated in a few sectors—at least for this formula. In its 2020 green issue, for example, Egypt now. A green bond framework specifies for an issuer applied over two-thirds of the proceeds to projects linked what the proceeds will be applied toward. As seen to environmental protection, water, and wastewater. in Figure 29, the energy sector has topped the use of Green funds can be applied in line with what governments proceeds category since green bonds started, followed see as a priority and/or what forms part of their national closely by buildings/real estate. The latter focuses mainly development strategy. on energy efficiency investments in building envelopes Figure 29. Green Bond Use of Proceeds Trends 500 400 US Dollar Billions 300 200 100 0 2014 2015 2016 2017 2018 2019 2020 2021 Energy Buildings Transport Water Waste Land-use Industry ICT Unspecified Adaptation & Resilience Source: Climate Bonds Initiative (2021). Reference Guide for Climate-Smart Public Investment 132 2.2 Elements of a Sovereign Green There are rapidly evolving global standards to assist governments in developing these green issuance Bond Program frameworks. Markets, governments, and investors have realized that the rapid growth in demand for green investment has catalyzed the need for standardization. 2.2.1 Organizing a Green Bond Program A debt offering that is labeled “green” should be independently demonstrated to be environmentally robust, Globally, standards are converging for issuing green regardless of country or sector. Several global standards bonds and SLBs. There are common elements and have been promulgated (Box 36); governments and requirements governments need to follow to issue and their advisors should familiarize themselves with these manage green bonds. It is important to follow these protocols to see which have appropriate characteristics steps in order to create the conditions and confidence for their country as well as a successful track record from necessary to attract the substantial pool of green issuances. It should be noted that many private-sector capital that has amassed in this space. The remainder corporate entities are making use of these principles to of this section walks through these elements and develop their own corporate green bond frameworks and explains how they contribute to an overall green bond issuance programs. The key point to keep in mind is that issuance program. regardless of the standards, the core elements of their programs remain similar. Box 36. Green and Sustainable Bonds Standards • Green Bond Principles – International Capital Markets Association • Climate Bonds Standard – Climate Bonds Initiative • European Union Green Bond Standard – European Commission • ASEAN Green Bond Standards – The ASEAN Capital Markets Forum Source: Authors. Note: ASEAN = Association of Southeast Asian Nations. Green bonds require governments to create a • Green Bond Framework – defining how projects national green bond framework governing use of are identified, categorized, validated; how bonds will proceeds. The framework typically defines a taxonomy be designed; how the proceeds from the issue will be of project categories where funds can be proportionally managed; and how their deployment in investments allocated in preference to their priority and need. The will be confirmed and reported on framework may go into detail regarding the nature of investments that may take place within each taxonomic • Second-Party Opinion – securing an independent group. Governments that have issued green bonds assessment report that opines on how green the typically look at only short- or medium-term investment bond framework is compared to global benchmarks horizons (say, one to three years) in order to create the ability to return to the market to fund additional green • Monitoring and Reporting Protocol, with investment candidates. There are several common independent verification – defining how the elements in a green bond framework. These are government will oversee, monitor, and manage its listed below: green investment program; providing a reporting format and submitting the collected information and • Green Taxonomy – defining what types of results to an independent validator (typically the investment projects are “green” entity that provided the initial second-party opinion) Reference Guide for Climate-Smart Public Investment 133 A green bond program involves many arms of finance budget arms must see that the budgets for government beyond its treasury. For a green bond these investments are valid and that funds are allocated program to succeed, many elements of government and accordingly. Supreme audit authorities have a role to governance must work together to deliver prospects play in assuring the entire system is operating as claimed and results. Sector line ministries are responsible for and intended. The interconnected nature of the green identifying and delivering the downstream investment bond process is illustrated in Figure 30. Each of these projects that are aggregated to comprise the candidate elements will be described in A.2.2.2 below. project pool to be funded by bond issues. Ministry of Figure 30. Green Bond Issuance and Management Framework151 Treasury MOF Budget Treasury/MOF Government Climate- Climate- Green Smart Public Smart Public Investment Investment Independent Investment Principles Plan Evaluator Treasury/Investment Banks Management Proposed Green Bond Pipeline of Proceeds Second Green Bond Issue Investment Compliant Management Party Opinion Prospectus to Market Framework Green Plan Investments Independent Universe Validation Green Annual of Public Report Investment Input for Next Issuance Monitoring Projects Typology By Report Proposed Second Party Provider Sector Ministries Sector Ministries Sector Ministries Sector Ministries Sector Ministries Line Ministry Project Ideas Source: Authors. Reference Guide for Climate-Smart Public Investment 134 Box 37. Elements of a Climate-Smart Green Bond Issuance Program Green Development Policy. A helpful prerequisite for establishing a green bond framework is for a country to have developed a national sustainability policy. This framework serves the purpose of identifying the NDCs to which the country has committed and elaborating upon how those are intended to be pursued through an LTS. The policy will establish the areas of focus for greening and sustainability and a range of goals. Green Taxonomy. The taxonomy of green investment areas should naturally flow from the subjects covered in the national green development policy. Typical taxonomies can be divided by sectors or may be thematically focused, say, on energy efficiency matters across all sectors. Taxonomies allow governments to establish activity pods for investment projects and then allocate funding pools to those areas. Green Bond Framework. The framework is the main operating document for the green bonds. It references the typology and describes the qualities of projects that can be considered for use of green bond proceeds. It is necessarily broad in its scope as it is intended to be used for the entire green bond program, likely extending over several years. The framework may establish base parameters, such as limits on retroactive financing (i.e., refinancing of projects already completed), how far forward funds can be applied, and more specific definition of “green qualities” of investment. It may also provide qualifications regarding the stage of a qualifying green project’s maturity or whether or not the funding could be used to support O&M of green facilities. Whatever the criteria, they need to be realistic and comparable to other similar issuances globally in order to be attractive to ESG investors. Monitoring and Reporting Protocol as a Part of Proceeds Management. To ensure that the bonds’ proceeds are being used as represented at the time of offering, government proposes a monitoring and reporting framework that will allow investors to review a country’s green performance credentials annually. This reporting is essential to verifying an issuing country’s credibility, especially for supporting any future green bond issues. Second-Party Opinion. In order to validate the green credentials of a sovereign’s overall green bond framework, it is customary for the government to hire a professional, independent evaluator to render an opinion on the framework, typology, and funds management and monitoring procedures. All second-party opinion providers have developed their own proprietary rating scales that evaluate various aspects of the bond program’s design and issue an overall green rating. Commentary is provided to describe the manner in which the issue complies or varies from their evaluation criteria. Prospectus and Issue. The bond prospectus forms an integral part of the bond offering documentation. It incorporates the green framework, taxonomy, and second-party opinion, describes the monitoring and reporting regime, and lists a standard set of risks, variables, and terms and conditions for sovereign bonds. Source: Authors. 2.2.2 Elements of a Climate-Smart nowhere more so than within the EU itself. The European Green Bond Program Commission recommended that nuclear power plants and natural gas power generation facilities (as well as Green taxonomies delimit what the government other natural gas use applications) be permitted in the is considering to be “green” or “sustainable.” A EU’s green taxonomy. The European Parliament is highly taxonomy is a good starting point for establishing what divided over this. The main ingredient in natural gas types of projects and activities in a country are green is methane, a GHG with many times the GHG-forcing and which fall outside that definition. This demonstrates potential of CO2. Although emitting less CO2 than coal, to outside investors the general categories to which the combustion of natural gas still emits CO2 as well as proceeds of bond issuances will be directed. There oxides of nitrogen, which causes an increase in ozone exists great debate around taxonomies currently, levels. Although nuclear power has zero CO2 emissions, Reference Guide for Climate-Smart Public Investment 135 it faces the unsolved problem of waste disposal. Many their frameworks and the mechanisms contained therein in the private green investment community have and provide a rating of how well those plans compare to challenged the European Commission’s green taxonomy global norms. The second-party opinion is furnished by recommendation as being unsustainable and therefore the government to investors as part of the prospectus not meeting their capital’s green investment criteria. This and roadshow process. illustrates the challenge governments face; even if the government sees a need to transition through other fossil The government then develops a bond prospectus fuel applications before arriving at net zero, it cannot force for the specific bond issue. The prospectus lists what green investors to accept that path as being “green.” types of projects the government will be funding from the Thus, for a country to define its own green taxonomy is proceeds of the issue. Depending on market conditions no minor task. and the ability of the government to manage projects, this list of projects can be very specific. With greater Green bond frameworks define the rules and process specificity comes not only greater market confidence of bond issuance, fund management, and reporting. but also greater expectations for governments to follow The green bond framework is the most important through on their pledges. The prospectus also includes functional document of a green finance program. The references to the government’s green development framework lays out the following important parameters: plans, its taxonomy, and its green bond framework, the latter of which governs the bond issue. Data collection • The definition of a green project and reporting procedures are detailed in the prospectus • For what purpose government will use the monies such that lenders understand how the government will raised through the green framework ensure that their monies are used for the intended green • How those green projects are identified, assessed, end purposes. and qualified • How those monies will be managed during their Robust project selection is important, and CS application period planning plays a key role in creating a green bond • How the application of those monies will be monitored issuance program. CS-PIP is helpful for governments and reported on to reliably and coherently create high-quality prospective investment pipelines to make use of green bond capital. The framework is essentially the rule book under which a This allows a government, whether through cabinet or government will operate its green bond treasury program. by its finance ministry, to press the point among sector line ministries or SOEs for the need to identify investment Getting a “second-party opinion” on the projects that adhere to the green bond framework government’s framework and plans is important to principles and sit within the taxonomy. Sector ministries bolster investor confidence. There exist specialist and SOEs are the key source of qualifying projects investment rating agencies that focus on evaluating that will fill a green framework’s investment pipeline; and validating green bond investment programs. A therefore, ministers and managers must be fully on board government hires the specialist firms to read through and contributing to this goal. Reference Guide for Climate-Smart Public Investment 136 Government monitoring reports are essential to Although government monitoring reports are important, demonstrate the commitment to, and efficacy of, the just like audited financing statements, having an green bond program. Once a government is successful outside party review performance is helpful to shoring in raising its bond monies, it has the task of living up up confidence in the program. Second-party opinion to the promised green commitments. Most green bond providers audit those reports and provide their view as to frameworks have, at minimum, an annual monitoring how well a government conformed to the promises made and reporting requirement that describes how funds in the issue’s prospectus. These independent reports are were used and the outcome of those deployments. The important for proving the efficacy of the green issue and key to reliably and repeatedly tapping the green capital setting the stage for government to return to the market market is demonstrating to investors that the government in the future with new green bond opportunities. is following through on the commitments elaborated in the bond prospectus and, overall, is adhering to its Performance reports inform the next round of CS- green bond framework. Investors want to know that the PIP. The process outlined above is part of a “living” capital they are providing is being used for the intended set of procedures that can help assist governments purpose. Further, they want to see the money actually in advancing CS goals across the economy and over used; therefore, progress against project implementation time. The learning and experience that comes from timelines matters. implementing early parts of these programs is invaluable; therefore, it is important that governments make use of Second-party opinions also are used to check that experience to inform policy updates and strengthen and validate green bond performance during the CS development investment plans. management and deployment of capital raised. Reference Guide for Climate-Smart Public Investment 137 Annex 3. U.K. Climate Change Transition and Adaptation Framework The United Kingdom has established a framework that uses an independent body to deliver evidence-based advice with extensive consultation to underpin evolving, legally binding targets and inform a range of policy instruments, including investment policy. The original Act and subsequent legislation have “ratcheted down” the original NDC targets to a much tighter schedule as evidence and public opinion align to demand a more ambitious transition plan. Central to the framework is a knowledge that it is setting an example for the rest of the world and signalling the importance and achievability of an orderly transition. Legislation Climate Change Act (CCA) 2008 Sets out the broad framework for climate change policy, including: a) Commitment to 80 percent reduction in emissions from 1990 levels by 2050 b) Implementation framework in a five-year cycle that includes national risk assessments (CCRA, see Box 7) that inform carbon budgets and adaptation plans c) Creation of the Committee on Climate Change (CCC), an independent statutory body to compile evidence and advise on CCA implementation and report on progress Net-Zero CCA Amendment 2019: informed by the CCC Net Zero report, it resets the UK target from 80 percent to net-zero emissions by 2050. Carbon Budgets are advised by the CCC and enshrined in law by Parliament. They set a legal limit on the amount of carbon that can be emitted in a given five-year period by any future government. The latest (2021) has set the legal emission limits well below earlier targets and NDCs, effectively bringing the original 2050 targets of the CCA forward by 15 years. Reference Guide for Climate-Smart Public Investment 138 Plans Adaptation Plan – Legally required on a five-year cycle, the plan uses the national risk assessment as a starting point and incorporates sector assessments to provide an integrated plan with risks and actions covering: (i) the natural environment; (ii) infrastructure by sector and across sectors; (iii) buildings and well-being; (iv) private sector; and (v) local government. Net-Zero Report – Prepared by the CCC, this advisory report emphasizes ambition and global leadership; a just transition where the vulnerable are protected; and a participatory approach with extensive consultation and a science- based methodology. Infrastructure is a focus; it is acknowledged that it is very difficult to speed up the time frame for development, so starting now is critical for new technologies. Policies across all sectors are examined and proposals are made for adjusting them to increase the ambition of the plan within achievable targets. The CCA was amended in 2019 to reflect the recommendations. National Infrastructure Strategy – The strategy embeds decarbonization and adaptation targets as well as other national priorities, including equitable distribution and support for the private sector, into integrated sectoral infrastructure plans. The strategy specifically addresses inequalities derived from the appraisal process and informs a Green Book update. Guidance Appraisal – The Greenbook is the government’s guide on appraisal of projects and programs. It is updated annually to reflect emerging evidence, and includes supplementary guidelines for separate sectors and issues, including infrastructure valuation, carbon pricing, and the incorporation of climate risks identified in the CCRA. Selected Instruments Taxation – the United Kingdom opted for an emissions trading system rather than carbon taxation and introduced specific emissions taxes to complement certain policies, such as Fuel Duty. Emissions Trading through the UK ETS and Carbon Price Floor to financially penalize carbon emissions and incentivize investment and innovation in low-carbon infrastructure and technology. Scheduled bans on polluting technologies, such as coal energy and petrol and diesel vehicles. Energy Company Obligations (ECO) require energy firms to invest in the efficiency of homes, especially in disadvantaged areas. Source: Authors. Reference Guide for Climate-Smart Public Investment 139 Notes 1. IPCC (2021a). 2. UNFCCC (2015). 3. Climate Analytics and NewClimate Institute (2021). 4. Kim, Fallov, and Groom (2020). 5. Climate Analytics and New Climate Institute (2021). 6. Numerous studies support this: The International Renewable Energy Agency estimated in its Roadmap to 2050 a required US$27 trillion investment in renewable energy to facilitate the energy transition to net zero (IRENA 2019); The International Energy Agency, in its study “Net-Zero by 2050,” estimated a need for US$4–5 trillion in annual clean energy investments from 2030 to 2050 to be on a path to net zero (IEA 2021); The United Nations Environment Programme estimated a need for US$8.1 trillion in investment through 2050 in nature-based climate change solutions alone (UNEP 2021); The McKinsey Global Institute estimates the aggregate investment need, across all mitigation and adaptation measures, to total approximately US$275 trillion over the period 2021 to 2050, or about US$9.2 trillion per year, with the bulk of investment front-end loaded (MGI 2022). 7. AON (2021). 8. See the C-PIMA website and background paper (IMF 2021) for additional material. 9. United Kingdom (2021). 10. PIK (2013). 11. IPCC (2022). 12. Ibid. 13. UNDRR (2019). 14. Hallegatte et al. (2016). Reference Guide for Climate-Smart Public Investment 140 15. UNDRR and CRED (2020). 16. Hallegatte, Rentschler, and Rozenberg. (2020). 17. OECD (2018). 18. Collins, Florin, and Sachs (2021). 19. Van der Meijden, and Smulders (2017). 20. Hallegatte, Fay, and Vogt-Schilb. (2013). 21. Van Steenbergen et al. (2021). 22. Mazzucato and McPherson (2019). 23. Interagency Security Committee (2015). 24. Duijnhoven et al. (2017). 25. Hamelink and Mutsaers (2015). 26. See Section 2.3 for further discussion of asset and portfolio management at the national and project levels. 27. See World Bank (2021d). 28. See Country Climate and Development Reports (CCDRs) (World Bank 2022). 29. UNFCCC (2021). 30. Fransen et al. (2019). 31. World Bank (2020a). 32. See World Bank (2020b). 33. Rozenberg and Fay (2019). 34. UNEP DTU Partnership and GTCK (2020). 35. Rozenberg and Fay (2019). 36. United Kingdom (2004). 37. United Kingdom (2017). 38. The Act requires that the CCRA be prepared every five years. The first assessment was prepared in 2012. 39. World Bank (2014a). Reference Guide for Climate-Smart Public Investment 141 40. For an overview, see Hallegatte (2012). 41. WMO (2015); and Lazo (2016). 42. World Bank and UN (2010). 43. World Bank (2020). 44. Lazo (2016). 45. World Bank (2014a). 46. World Bank (2014a). 47. WRI (2021). 48. TNMT (2021). 49. Eisenberg (2016). 50. ISO (2018). 51. Gulácsy (2020); and Diaz-Sarachaga et al. (2016). 52. Atanda and Olukoya (2019). 53. Nguyen, Gray, and Skitmore (2016). 54. Vaughan and Turner (2013). 55. Enker and Morrison (2020). 56. Rademaekers (2014). 57. Moteff (2007). 58. CFRR and Pulsar (2020). 59. Espinet et al. (2018). 60. A forthcoming report from the World Bank examines policy considerations for PFM and climate change. 61. United Kingdom (2020b). 62. Van der Meijden and Smulders (2017). 63. Burger and Hawkesworth (2011). 64. IDB (2020). Reference Guide for Climate-Smart Public Investment 142 65. PPIAF (2016). 66. World Bank and PPIAF (2016). 67. World Bank (2021c). 68. Governments and multilateral development banks can work together to identify and pool bilateral grant-based funding to focus deployment within a given country. As an example, the Republic of the Philippines PPP Center has a technical assistance facility called the “Project Development and Monitoring Fund,” funded through contributions from the governments of Australia and Canada, as well as allocations from trust funds managed by ADB and other multilateral development banks. The Republic of the Philippines contributed matching funds. By pooling sources of grants, the PPP Center had far more money available than otherwise would have been the case. Further, having grant-based funding for highly uncertain project preparatory works is preferable than borrowing such monies. 69. B20 Taskforce (2017). 70. Rana (2017). 71. Climate Bonds Initiative (2022a). 72. As set out in NDCs under the Paris Agreement. 73. Rajaram et al. (2014). 74. Stern (2009). 75. The concept note may also be referred to as a “project profile,” although this term may also be used to refer to summary information on appraised projects for budgeting purposes. 76. The complete project concept note form has 29 items, of which two relate specifically to climate change. 77. Making the risk assessment mandatory at pre-appraisal as part of the project concept note is considered too demanding, given the capacity constraints. 78. Consistent with Kim, Fallov, and Groom (2020), the term “social cost-benefit analysis” (SCBA) is used to refer to what economists know as an “economic CBA,” i.e., an analysis that tries to value as many effects of a project as possible, including non- market effects, using shadow pricing where appropriate. This is done because experience demonstrates that non-economists often confuse an economic CBA with a financial CBA. SCBA is used to avoid this confusion by making the treatment of society-wide effects explicit in the title. For the same reason, “net present social value” is used instead of the usual “net present value (NPV)” to define the performance measure derived from SCBA. 79. Jayawardena et al. (2014). Reference Guide for Climate-Smart Public Investment 143 80. Proportionality is an important principle of PIM. This means that analytical effort should be proportionate to the scale and riskiness of a project, with more sophisticated approaches to appraisal focused on high-value/high-risk projects where the value added to decision making is greater. See Kim, Fallov, and Groom (2020, 74). 81. “Appraisal” is used broadly in this discussion to encompass pre-appraisal (or first- stage screening) and appraisal. Where pre-appraisal is being discussed as a separate process, this will be made clear. See Chapter 5 of Kim, Fallov, and Groom (2020) for a discussion of each of the two processes. 82. See, for example, Chapter 4 of Rajaram et al. (2014) and Chapter 5 of Kim, Fallov, and Groom (2020). 83. For example, see the extensive guidance issued by Chile as summarized in Kim, Fallov, and Groom (2020, 76, Box 5.4). 84. Transition risks occur when moving toward a less polluting, greener economy. Such transitions could mean that some sectors of the economy face big shifts in asset values or higher costs of doing business. See Bank of England (2019). 85. A distinction is usually made between risk and uncertainty. Risk is when there is a reasonable degree of knowledge about the likelihood and scale of benefits and costs, making an estimation of an expected net social present value (the sum of the probability- weighted set of possible net social present values). Uncertainty is commonly defined as the situation where consequences (possible costs and benefits) are known but their probability distributions are not, making it impossible to estimate the expected net social present value. This kind of uncertainty is generated by climate change. Even more difficult is the situation where neither the consequences nor their probabilities are known. This kind of extreme uncertainty can be envisaged with climate change (although, by definition, examples only emerge after the event). A fuller discussion of risk and uncertainty in the context of climate change can be found in Chapter 5 of Rajaram et al. (2014). 86. See Section 3.3.5.2 for further discussion of tools to aid decision making under extreme uncertainty. 87. United Kingdom (2022). 88. A certain degree of adaptation may be automatic through construction standards (see Section 2.2.4). Here, adaptation is being addressed beyond that embodied in such standards, where there are choices to be made. 89. Sometimes it may be possible to place a value on such flexibility, and this should then be incorporated into SCBA. 90. The Helsinki Principles, adopted by the Coalition of Finance Ministers for Climate Action, are a set of six principles that promote national climate action, especially through fiscal policy and the use of public finance. See Coalition of Finance Ministers for Climate Action (2019). 91. PEFA Secretariat (2020). Reference Guide for Climate-Smart Public Investment 144 92. IMF (2021). 93. The fourth Helsinki Principle is to “take climate change into account in macroeconomic policy, fiscal planning, budgeting, public investment management, and procurement practices” (emphasis added). 94. The meaning, use, and availability of exceedance data will be discussed in subsection 3.3.4.3. 95. In some risk assessment tools, this dimension is assessed separately. See Figure 22 showing the structure of the World Bank’s Climate and Disaster Risk Assessment tool. 96. For example, high risk, defined as a 95 percent chance of occurring, or catastrophic impact, defined as meaning “disaster with the potential to lead to shut down or collapse of the asset/network, causing significant harm and widespread, long-term impacts.” 97. World Bank (2021f). 98. In-depth screening assessment is only available for the agriculture, energy, health, transport, and water sectors. 99. OECD (2018). 100. For agriculture, rural development, and food security, see ADB (2012b); for the energy sector, see ADB (2013); for the electric power sector, see ADB (2012a); and for the water sector, see ADB (2016). 101. Kim, Fallov, and Groom (2020) give more detailed guidance on the use of CEA and MCA in general. 102. See Chapter 5 of Kim, Fallov, and Groom (2020) for an overview of SCBA and Appendix A for references to more in-depth methodological guidance at the general and the sector levels. 103. Such projects will be relatively few. The purpose of a wind or solar power project is to generate electric energy. A carbon capture and storage project might be an example of a pure mitigation. 104. World Bank (2015). 105. IPCC (2021b). 106. The Greenhouse Gas Protocol, a partnership between the World Resources Institute and the World Business Council for Sustainable Development, provides standards, guidance, tools, and training for business and government to measure and manage climate-warming emissions. See https://ghgprotocol.org/about-us. 107. NYSERDA and RFF (2020). 108. See Grantham Research Institute (2006) for a summary of the main findings. Reference Guide for Climate-Smart Public Investment 145 109. World Bank (2017). Earlier guidance from 2014 had referred to both approaches. 110. The value of a carbon emission permit on the ETS hovered around €25/ton from mid- 2018 to end-2021. Since then, it has risen very steeply to plateau at around €90/ton during the first part of 2022, but with significant daily variation. 111. The High-Level Commission on Carbon Prices is a group of economists convened by the Carbon Pricing Leadership Coalition (CPLC), a voluntary partnership of national and subnational governments, businesses, and civil society organizations that agree to advance the carbon pricing agenda. The CPLC secretariat is administered by The World Bank. 112. IMF (2019). 113. EC (2014). 114. EIB (2022). 115. Exceedance probability distributions can also be estimated for non-climate hazards like earthquakes. The focus here is on climate. 116. See J. Kossin and others, “Global Increase in Major Tropical Cyclone Exceedance Probability over the Past Four Decades” (Livermore, CA: Lawrence Livermore National Laboratory, 2020). 117. A review of the findings of the first 30 assessments undertaken by the IMF using its 2015 PIMA tool gives some insight into the general level of development of the appraisal function across the world. Out of the 15 indicators, the average score for the appraisal indicator was lowest, at 2.8/10. The sample included one advanced economy, 14 emerging market economies, and 15 low-income developing countries. See IMF (2018). Similar findings are repeated in World Bank assessments using a different tool. 118. This can be addressed using scenario analysis as in the case of the United Kingdom (see United Kingdom 2020a). 119. EC (2013). 120. Value transfer is when values from another comparable jurisdiction are used with suitable adjustment for the local context, for example, differences in income levels. Most frequently used for environmental values, the approach can also be extended to other areas of valuation. 121. European Commission guidance refers to economic net present value (ENPV). This is the same as net social present value (see footnote 81). 122. The Guidelines allow for an optional column for “No Climate Change.” This has been omitted as it is of limited use for decision makers. 123. The UK Climate Impacts Programme (UKCIP) has developed a spreadsheet tool to help calculate the costs of climate impacts under different scenarios and compare these to the costs of adaptation measures. See UKCIP (2018). Reference Guide for Climate-Smart Public Investment 146 124. The Flood Hazard Research Centre has developed methodologies and a database of flood loss information for use in the SCBA for flood protection. These are available in: Penning-Roswell et al. (2013). 125. Hallegatte et al. (2021). 126. Chambwera et al. (2014). 127. The concept of an option is borrowed from financial markets. In finance, an option is a contract that gives the buyer the right (but not the obligation) to purchase an asset at a future point in time at a specific price; the contract is acquired through the payment of a fee. 128. World Bank (2014a). 129. Not required to be completed if the preliminary risk assessment indicates no/minimal climate risk. 130. Another option here is to issue supplementary guidelines. 131. Part of the role of the independent reviewer is to assure that the summary appraisal report accurately represents the feasibility study, the preliminary design work, and supporting impact studies. 132. Other aspects of selection should be the same. Alignment with sectoral or national plans (which should ideally include climate dimensions) should therefore be one of the selection criteria for all projects. 133. Amelioration measures are aimed at supplementing GHG-reducing effects. 134. As already indicated in footnote 106, such projects will be relatively few. 135. It is not the same as an independent review, which is more of a “challenge function” that should precede budgeting. 136. For the smallest projects, quality control and budgeting can be combined in the interests of proportionality. For major projects, quality review will generally take more time than is available in the budget preparation calendar. 137. See Chapter 6 of Kim, Fallov, and Groom (2020). 138. Only projects that have been positively appraised and selected should be allowed to request budget funding. Gatekeeping should control this. 139. World Bank (2014b). 140. World Bank (2021a). 141. Ibid. 142. EC (2008). Reference Guide for Climate-Smart Public Investment 147 143. The Coalition of Finance Ministers for Climate Action has signed up to six principles that guide their commitment to climate action. 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