Building Competitive Green Industries

BOX 7.5. Ethiopia’s Climate Resilient Green EconomyStrategy (CRGE)The Ethiopian government launched its Climate ResilientGreen Economy Strategy (CRGE) in 2011 to support the5-year Growth and Transformation Plan (GTP), which aimsfor the country to obtain middle-income status by 2025,via carbon-neutral growth. This is an ambitious target,especially given the country’s high GDP growth rates, whichaveraged 10 percent between 2004 and 2013. The CRGEstands out as being a model strategy in bringing greeneconomy and climate resilient objectives to the forefrontof national economic planning. Indeed, on paper, it isdifficult to fault the CRGE, which, unlike green strategiesin many other countries, benefits from high-level supportand oversight. The CRGE Ministerial Steering Committeeoperates within the Prime Minister’s Office, and works inpartnership with the Ministry of Finance and EconomicDevelopment and the Environmental Protection Agency.In a similar way to the Korean Green Growth Strategy, theCRGE is made up of a portfolio of specific projects, acrossnumerous sectors. These include the fast-tracking ofsupport to develop the country’s hydro power resources, thescaling up of fuel-efficient cooking stoves in rural areas,efficiency improvements to the livestock value chain, andfinancing for Reducing Emissions from Deforestation andForest Degradation (REDD) projects (Federal DemocraticRepublic of Ethiopia, 2012). Although some policyinstruments have been legislated, including a FIT to supportinvestment in grid-connected renewable energy, most ofthe strategy will be delivered through direct investmentand spending from a central fund, managed by the Ministryof Finance and Economic Development. This fund, knownas the CRGE Facility, aims to mobilize $200 billion fromnational and international public and private sources over a20-year period and has already received international donorsupport, including $24 million from the U.K. government(GGGI, 2013). In terms of how these funds are spent,the government has established the Sectoral ReductionMechanism Framework, which purports to outline theprecise mechanisms of implementation, though it makesscant reference to clean technology innovation or the roleof SMEs. Indeed this highly centralized approach risksresulting in an inefficient distribution of resources if privatesector actors and investors are not systematically drawninto decision-making processes.Another risk is weak implementation or enforcement of thegovernment’s stated policies. It remains to be seen if theCRGE’s clear national vision and planning will be translatedinto lasting support for the private sector that is necessaryto develop green industries in Ethiopia.Governments often justify these subsidies onthe basis of welfare, for example for kerosenewhich remains an important fuel for domesticlighting in rural, off-grid, Africa. However,technical progress and cost reductions withsolar lighting technology mean that subsidiesfor kerosene are no longer justified, andin fact governments would be advised totax unsustainable fuels, further driving themarket for clean technology alternatives.Clean technology SMEs and investors thatdepend upon government policies andregulations for the size and strength of theirmarkets need to be aware of the risk of policydiscontinuity. There are two types of suchpolicy risks: prospective and retroactive risk.Prospective policy risk refers to the overalllevel of instability or uncertainly regarding acountry‘s enabling framework, upon whichclean technology SMEs may depend. In otherwords this is the risk that governments willmake frequent or irregular and unpredictablechanges in policies that may have a negativeimpact on project planning, thus pushing upthe cost of borrowing or the rate of returndemanded by investors. Retroactive policyrisk refers to changes in policy or regulationsthat affect existing projects, especially whenthey have an impact on business income.Indeed, retroactive changes to policiesthat financially support clean technologyinvestments has become a main barrierto scaling up private investment in therenewable energy sector (Micale et al., 2013).In the area of renewable energies, the mostwell-known risk relates to changes in thevalue of feed-in tariffs where, for example,the Spanish government issued a decreelimiting the rate of return on RET investmentsto 7.5 percent, effectively cutting the valueof tariff support by up to 25 percent forboth existing and future projects (PV Tech,2014). Such retroactive changes in keyfinancial instruments are what businessesand investors fear most as it can resultin a drop in forecast revenues, increaseborrowing costs and diminish the confidenceof investors, undermining market growthprospects. There are various circumstancesunder which such changes tend to occur,though the most are related to changes in thepolitical ideology of presiding governmentsand economic crises.80 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries