How much
will it cost?
How much
will it cost?
Knowing how much it will cost to implement an NDC is the first step to making strategic decisions about which financial instruments and policies are needed. Bringing numbers to the table helps different stakeholders understand what implementation may entail in practice and weigh the costs and benefits of potential climate actions. For developing countries, it may help them understand how much funding will be needed from external sources. The following instruments can be used in identifying priority areas and creating high-level planning documents for governments to follow as they seek to finance their NDCs.
Estimating how much it will cost to implement an NDC—and calculating the costs of not doing so—can be crucial steps toward accelerating climate investments in developing countries.
The Importance of Planning to Finance an NDC
Governments face the significant task of planning how to deliver on and finance their NDCs to help achieve their climate-related targets. This process involves integrating high-level commitments into regulatory, financial and fiscal actions, and policies that support the delivery of ambitious climate mitigation and adaptation measures.
Financial resources will come from a variety of sources, from domestic public budgets to international public and private finance. The resources to finance the NDCs can come from different sources, but in order to allocate them efficiently, the costs must be identified. The costs, together with how much is being mobilized, will allow governments to identify the gap that needs to be closed and the policies and financial instruments that need to be in place.
How Can Governments Determine How Much Funding Is Required for NDCs?
Countries can assess the costs associated with implementing their NDCs. Countries have taken various approaches to estimating this cost. Since there is no standard way to conduct cost estimations, some use high-level estimates from aggregating project pipelines to estimate total mitigation and adaptation costs. Others use more general approaches, sometimes based on sectoral estimates of likely costs. Table 1 provides examples of methodologies.
Box 1 | NDC Costing in Colombia
In Colombia, the government has been using a bottom-up approach to estimate the cost of NDC adaptation actions. For example, one adaptation activity is to increase ecological recovery and restoration of 18,000 hectares. Using indirect information on investment, operation and maintenance costs of activities such as ecological recovery and restoration, this reaches an approximate amount, which is then added to the associated administrative and financial costs.
Table 1 | Methodologies to Plan for Implementation of NDC
| Model | Description |
|---|---|
| Econometric Models | A type of model that is primarily based on observed historic data and used to analyze potential relationships between variables. Econometric models allow policy makers to assess the potential impact of climate projects/policies on selected variables (e.g., employment). These are usually helpful in analyzing sequencing of various policy options and can be used for forecasting developments or the impact of policy interventions on certain outcome variables. |
| Macroeconomic Models | A theoretical framework representing the interactions between major economic variables in a simplified form (e.g., GDP, consumption, investment, inflation, etc.). These vary in complexity and can depict consumption behavior of households, government policy choices, monetary policy of a central bank, etc. They can be used to understand country-specific interactions, and can include dynamic features to incorporate expectations, different sectors, uncertainty, various types of shocks; they might therefore be used to, for example, understand the impact of policy changes or the occurrence of specific shocks on different sectors of the economy and understand their distributional impacts. They can be used to support policy formulation under different conditions and build scenarios. |
| Integrated Assessment Model (IAM) | PAn IAM is also a simplified model, which evaluates the interactions between economic, social and physical systems (they typically include a broad set of variables depicting all three systems). They allow to assess the impacts of climate change, calculate the potential impacts of alternative assumptions on climate policies on variables such as investments or output. These models inform policy makers by providing them with insights into costs, benefits, and economic or social trade-offs associated with different climate-related policies. They are also used for scenario analysis often in the context of the IPCC. |
| Cost-benefit analysis | This method is typically used to quantify specific projects – sometimes policies but usually in combination with other more complex models and with qualitative assessments. A process of comparing the projected or estimated costs and benefits (or opportunities) associated with a project decision. It relies strongly on a number of assumptions, including conversion into monetary values, stage of technology development, benefits timeframe (short and long term), and discount factors (related to the present value), among others. The net present value (of benefits over costs) indicates whether the project is viable or not. |
| Extrapolation | An estimating method based on using existing data from a group of countries or projects and extending trends or patterns in existing data (e.g., share of green investments as part of GDP) to assess the potential costs or benefits of potential projects/policies in countries where historical data does not exist. It is important to recognize the limitations of this methodology if used on its own. |
Source: WRI authors, HBS 2019, and World Bank N/A
These models have been utilized in important planning documents such as the World Bank’s Country and Climate Development Reports (CCDRs), which use a number of models to support their country planning and strategies related to World Bank in-country activities. For example, in South Africa’s CCDR they used three different models to develop energy-sector transition analysis. One model the South Africa TIMES Model (SATIM) focused on least-cost for achieving net-zero by 2050, the South African General Equilibrium (SAGE) utilized SATIM data and then incorporated economic variables, while a final model looked specifically at impacts on job and households from the SATIM model.
What Are the Challenges of Estimating NDC Costs?
Translating high-level goals into actionable finance plans is a tall order. Climate costing is often done at a high level, where only general estimates are possible. Governments continue to face the challenge of implementing detailed plans of action for specific sectors, government levels, geographies and projects. This leaves significant data gaps regarding what actions governments intend to undertake, and thus what costs or savings may accrue.
Planning for the future entails uncertainties; climate exacerbates these uncertainties. This makes costing more complex. The likelihood of various scenarios needs to be considered in combination with the costs and benefits of action, as well as political dynamics and social contexts. This requires data, staffing and expertise, which are in short supply in many governments.
Box 2 | Indonesia’s Low Carbon Development Initiative
In 2017, the Indonesian National Development Planning Agency (Bappenas) started Indonesia’s Low Carbon Development Initiative (LCDI). This initiative focused on mainstreaming climate considerations into their 5-year development plan. This process took into account economic growth models that looked at the climate scenarios through 2045. The report highlighted 4 scenarios: Base case (no new policies), moderate (new low-carbon policy measures for 2020-2045) and unconditional NDC target), high (ambitious policy and achieves conditional NDC target), plus (reflects high action from 2020-2024 and then greater ambition).
Source: Bappenas
Conclusion
Planning and estimating how much it will cost to implement a NDC is required to identify and assess the potential policies and financial instruments required to finance the most promising mitigation and adaptation actions. The costing process can be long and tedious, all the information will not be available but it must be started and continually improved as the data becomes available and updated. This will allow the country to be in a better position when allocating resources, whether national or international, and to ensure a better accountability throughout the process of achieving the climate commitments.
In parallel to identifying how much it will cost to implement NDCs, it is crucial to go from identification and prioritization to investment mobilization. Costing is an important step, but not the end of the climate finance planning process. Costing should be used as a trigger to later identify the financial policies and instruments necessary to close the financing gap, most importantly to develop a national investment plan that is informed and builds upon the finance needs of each country.