Financing for Sustainable Low Carbon Transport Systems

Ko SakamotoJanuary 2009

Contents

Why financing and pricing?

Assessing the current situation on financing and pricing

A direction for change

Thoughts on next steps

Suggestions

Why financing and pricing?

To finance is to provide the money needed for something to happen*

Effective financing can help enact the various aspects of the sustainable transport puzzle:- Policies- Institutions- Infrastructure- Operations- Technology

Effective pricing can support:- Behavioural change- Sound investment decisions - Revenue generation for sustainable transport

programmes and projects

(* Cambridge Advanced Learner’s Dictionary)

Assessing the current situation

Current pricing practices

Transport prices that do not reflect costs to society:

- Taxes and levies not linked to externalities

- Subsidised / underpriced fuel

- Difficulty in implementing full cost pricing (e.g. road pricing)

- Political constraints

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0.2

0.3

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0.5

0.6

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Sing

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USD

(PPP

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Fuel tax/kmOwnership tax/kmAcquisition tax/km

Source: Hirota and Minato (2003)

Taxes on motor vehicles per kilometre

Current transport-oriented financing

International level: - Preference by donors for the road/highway sector

- (Rightly) focusing on poverty reduction through infrastructure provision – but what kind?

- Lack of long-term consideration on land and energy use

- Close link with appraisal framework

0% 20% 40% 60% 80% 100%

WB (1996–2000)

WB (2001–06)

ADB Public (as of 2007)

ADB Private (as of 2007) RoadsRailwaysPortsAviationGeneral transport

Source: ADB (2008) and World Bank (2008)

Transport lending by ADB and WB by subsector

Current transport-oriented financing

National level:

- Majority of transport financing decisions made at this level

- Typically 1-2% of GDP spent on transport investments

- Most investment goes into hard infrastructure

- Many lessons learnt to ensure financial stability (e.g. Road Funds)

0%10%

20%30%

40%50%60%

70%80%

90%100%

Chin

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Indo

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Mon

golia

Thai

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Azer

baija

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Tajik

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National

Sub-national

(Source: IMF/WB)

Split of public spending on transport and communication by level of government

Current transport-oriented financing

Local level: - Revenue generated through various instruments, e.g. parking

charges, Octroi tax

- Can provide fiscal autonomy with link to local objectives

- Often undermined by lack of institutional capacity at local level

Private sector: Infrastructure provision (e.g. BOT)

Operation of urban public transport (e.g. through franchising)

Vehicle manufacturing and other technological investments

Current climate-oriented financing

Kyoto instruments

- CDM: - Only two projects in transport sector

- Discussions regarding reform currently taking place (see Sanchez, 2008)- Using “first of its kind” approach

- Programmatic/sectoral approaches

- Emissions Trading- Difficulty in covering transport

- EU-ETS to incorporate aviation

Current climate-oriented financing

Multilateral instruments- Global Environment Facility (GEF)

- Coverage of sustainable transport objectives

- Lessons learnt in practical implementation (e.g. approval process)

- Transport pie is growing (82 million USD, or 10% of total under 3rd replenishment)

- WB Clean Technology Fund (CTF) - Proposed 5-10 billion USD (total)

- Scope includes transport, e.g. clean vehicles, BRT

- ADB Clean Energy Financing Partnership Facility (CEFPF)- Launched last year to promote renewable energy and energy efficiency

- Target of 250 million USD

- So far one transport project in China has been funded

Current climate-oriented financing

Bilateral instruments

- Japan “Cool Earth Partnership” - Mention of application to transport (including urban planning)

- Details still unclear

Summary of current situation

Current prices for transport activity do not reflect their true costs to society

Conventional, transport-oriented financing is skewed towards carbon-intensive modes

Climate-oriented financing mechanisms are still inadequate in scale, scope and detail

A Direction for Change

Reform subsidies

Implement full cost pricing

Shift priorities

Provide additional funding

Policy

Institutions

Technology

Infrastructure

Operation

Optimise usage

What does funding need to cover?

Policy

Institutions

Technology

Infrastructure

Operation

• Development and implementation of policies and programmes

• Strengthening institutional capacity• Investing in human capital

• Operation of public transport• Non-motorised transport services

• Transport infrastructure that takes into account long-term effects of land/energy use

• Vehicles• Infrastructure• Fuels

Ensuring full coverage of a low carbon transport strategy

Policy

Institutions

Technology

Infrastructure

Operation

Adapted from:GTZ/TRL (2007)

What next?

Global Climate Negotiations

Regional Transport Policy/Technical

Forums

National Level Transport Policy

Local Level Transport Programs

and Projects

Influence

SupportInitiate

InfluenceFund

Adapted from Huizenga (2008/09)

Regional “Sustainable Transport Funds”?

Sectoral / programmatic CDM?

Global ETS for aviation?

Wider applications of GEF/CIF etc?

A “Green Road Fund”?

Support fund for local initiatives?

What next?

In any case, need to recognise that:- Carbon finance is only small part of the transport pie

- Pricing and other financial flows need to be reformed

Other objectives and constraints also exist:- Efficiency (including transaction/administrative costs)

- Financial stability

- Equity (both horizontal and vertical)

- Political feasibility and importance of “packaging”

- Institutional capacity

- Practicalities of implementation, monitoring and evaluation

Suggestions for the future

Keep proportions in perspective - Whilst pursuing a unique financing mechanism for transport in the Post Kyoto framework is important, this needs to be matched by efforts to reform mainstream investments and financial flows into transport, including (traditional) ODA and private investments which dwarf the former in size and scope.

Ensure a holistic and integrated package of reforms - consisting of financing and pricing mechanisms that collectively allow the funding of the various aspects of sustainable transport (not just technology).

Be realistic – Although the need for drastic reform remains, an overly-ambitious top-down framework that discounts local concerns may not be plausible. Learn from the GEF and CDM experience to see what works and what doesn’t.

Suggestions for the future

Re-examine decision making processes - Better integrate carbon generating consequences into the decision making process for funding projects and programmes. Re-examine the current appraisal framework for transport infrastructure. Ensure coverage of sustainability in financial documents and statements.

Move towards Social Marginal Cost pricing. Where first-best solutions are impossible to implement, consider the use of fuel taxation and other proxy measures which may also act as revenue for supporting low-carbon transport strategies.

Establish and share data - on transport financing, pricing and investments in the Asian region to help identify funding gaps, good/bad practice and monitor progress.

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Thank you – Any Questions?

Ko Sakamoto

Senior ConsultantTransport Research Laboratory

Tel: +44(0)1344770709Fax: +44(0)1344770356

Email: ksakamoto@trl.co.uk