## cr18181

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### EXECUTIVE SUMMARY — Overview and General Preparedness
- St. Lucia has been a leader among vulnerable Caribbean states in prioritizing a response to climate change.
- Nationally Determined Contribution (NDC):
  - Outlines a balanced mitigation strategy backed by costed investment plans, and a qualitative adaptation strategy with identified priority sectors.
- National Adaptation Plan (NAP) process launched in April 2018.
- This paper assesses St. Lucia’s climate plans from macroeconomic perspective, suggests macro-relevant reforms, and identifies policy gaps and resource needs.
- Strengths:
  - Strong government commitment and high public awareness.
  - Disaster preparedness is a relatively strong point.
- Key next steps (selected):
  - Update strategic plans and legislation to align development framework with resilience-building goals (including the Development Strategy and Coastal Zone Management Strategy; passage of the Climate Change Bill and Sustainable Building Code).
  - Ensure national and sectoral plans specify costed priority projects for inclusion in the PSIP and the budget.
  - Better understand economic impact of disasters and ensure disaster-financing is available quickly when needed.

### MITIGATION — Targets, Measures, and Fiscal Tools
- NDC mitigation pledges (conditional):
  - Limit GHGs to 634 and 628 kilo-tons (or Gg) of CO2 equivalent in 2025 and 2030 respectively.
  - These are reductions of 16 and 23 percent below projected ‘business as usual’ levels in those years.
  - NDC estimated cost: US$241 million by 2030, including US$23 million in government program costs.
- Renewable energy targets:
  - 35 percent of installed capacity by 2025.
  - 50 percent of installed capacity by 2030.
  - Current renewable power generation: 0.2 percent of installed capacity.
  - Meeting the 50 percent renewables target for 2030 would reduce CO2 emissions about 25 percent below BAU levels in 2030.
- Clean energy measures envisioned:
  - Expand renewable power generation (wind, solar, geothermal).
  - Improve energy efficiency (buildings, appliances, lighting).
  - Promote fuel-efficient vehicles (including hybrid and electric).
  - Improve power grid efficiency and expand public transport.
- Feasibility notes:
  - LUCELEC projects: 3 megawatt (MW) solar plant and a 12 MW wind farm planned.
  - Geothermal potential: more than 75 MW relative to 60.3 MW of peak demand in 2016; envisaged 30 MW geothermal facility operational by 2023; total geothermal investment needed estimated at US$66 million (2015 estimates).
- Fiscal and policy tools (selected):
  - Introduce a carbon tax to:
    - Make emission targets more likely by changing behavior.
    - Help offset declining fuel tax revenue if emissions fall.
    - Impose the bulk of the burden on better-off households.
  - Reform vehicle taxation through an ad valorem plus ‘feebate’ system to lower vehicle emission rates efficiently without undermining fiscal objectives.

### CARBON PRICING — Scenarios, Revenues, and Distribution
- Context:
  - Imported fuel bill currently about 8 percent of GDP.
  - Road fuel excise raised EC$43 million in revenue in 2016 (about 1 percent of GDP).
  - Road fuel excise rates increased from EC$2.50 per gallon in 2016 to EC$4 per gallon in July 2017.
  - Price cap on road fuel at EC$12.75 per gallon; binding cap can lower excise (example: November 2017 excises of EC$3.02 and EC$3.60 per gallon for gasoline and diesel).
  - Fossil fuels outside the road sector subject to lower levy of EC$1 per gallon.
- Proposed carbon-tax strategy (examples):
  - Extend recent EC$1.50 per gallon increase in road fuel excises to all diesel products, then repeat increase across all fuels.
  - Scenario labels:
    - “Modest carbon tax” (includes recent increase): diesel prices for non-road purposes rise by 16.5 percent.
    - “High carbon tax” (further $1.50 increase): road fuel prices rise about 12.5 percent above current levels; diesel prices for non-road purposes exceed current levels by 33 percent.
  - Assumption: removal of road fuel price cap.
- Emissions impacts in 2030 (from staff spreadsheet and macro models):
  - Modest carbon tax alone reduces CO2 emissions by 7 percent in 2030.
  - High carbon tax alone reduces CO2 emissions by 12.5 percent in 2030.
  - Renewables policy is essential; emissions-reduction targets could not be met without success of renewables strategy.
- Revenue gains by 2030:
  - Modest carbon tax: additional revenues of 1.3 percent of GDP.
  - High carbon tax: additional revenues of 2.5 percent of GDP.
  - Extending VAT to road fuels and electricity would yield nearly 1 percent of GDP.
- Distributional effects (2030 outcomes and simulations):
  - Road fuel tax scenario imposes burden on households of about 1.2 percent of total annual consumption in 2030 on average; bottom and top quintiles: 1.3 and 1.2 percent respectively.
  - High carbon tax scenario burdens bottom and top income quintiles by 5.2 and 4.2 percent of total annual consumption in 2030 respectively.
  - Simulation indicates 94 percent of the burden is borne by households other than those in the bottom income quintile.
  - Compensating the bottom income quintile would need only about 6 percent of the revenues raised.
  - In high carbon tax scenario, loss in annual household consumption for poorest quintile is US$94 while per capita loss averaged across all households is US$307.

### VEHICLE TAX REFORM, CONGESTION PRICING, AND COMPLEMENTARY POLICIES
- Vehicle tax reform:
  - Current system rewards smaller engine size but not lighter vehicles or lower emissions within brackets.
  - Feebate proposal: sliding scale of surcharges/rebates for vehicles with above/below average emissions, combined with a uniform ad valorem rate to stabilize revenue.
- Congestion and mileage-based options:
  - Electronically collected congestion fees could manage traffic around Castries and stabilize transport revenues as fuel-tax base declines.
  - Complementary measures: more frequent, reliable, and extensive bus service.

### ADAPTATION — Current State, Priorities, and Public Investment
- NDC adaptation gaps:
  - Adaptation strategy in the NDC lacks articulation of priority investments and specific supportive reforms; filling this planning gap is high priority and work is underway.
- Current adaptation spending:
  - St. Lucia allocates about one-quarter of its capital budget to adaptation spending.
  - Recent capital budget range: EC$250–300 million (US$92–111 million) annually.
  - Rough estimate of allocations to resilience and adaptation: between EC$80–90 million (US$30–35 million) a year, or around 2 percent of GDP.
  - Capital budget execution: around 50–60 percent, suggesting actual spending on adaptation of around 1 percent of GDP a year.
- Key planned capital expenditures to mitigate natural disasters (2017–18, estimated EC$ million; TOTAL = 82.3):
  - Dennery Water Supply Redevelopment 10.6
  - Vieux Fort Water Supply 5.9
  - Disaster Recovery Programme 14.9
  - Disaster Vulnerability Reduction Project-DVRP 27.5
  - Capital Contingency 14.0
  - (Other smaller items listed; TOTAL 82.3)
- Sectoral priorities for new adaptation projects:
  - Infrastructure (roadways and bridges): public investment on road construction and rehabilitation estimated at US$91 million (including bilateral and multilateral partners), with US$11.8 million in 2016–17.
  - Water supply systems (Dennery project expected to give 8,000 people in Dennery North access to high-quality water).
  - Land use planning and management (including coasts).
  - Agriculture and fisheries: disaster risk reduction to maintain food security.
- Housing and resilience:
  - Climate Adaptation Financing Facility (CAFF) pilot: US$4.5 million allocation to be managed by the Saint Lucia Development Bank to provide concessional loans for structural retrofitting and pre-emptive investments for homeowners.
- Regulatory and legislative actions recommended (selected):
  - Enact the Sustainable Building Code.
  - Review and approve the Coastal Zone Management Policy and Strategy.
  - Verify approval of the National Waste Management Strategy.
  - Consider rezoning flood areas.

### FINANCING — Needs, Paths, and Macroeconomic Consistency
- Mitigation financing needs (NDC):
  - US$241 million by 2030 equals EC$651 million, or around 14 percent of FY2016 GDP.
  - If spread evenly over 13 years, implies investment needs of 1.1 percent of GDP a year.
  - Government’s intention to finance 90 percent of the cost from private sources implies budget burden of about 0.1 percent of GDP a year.
- Private mitigation investment estimate:
  - Mitigation investment of an estimated US$218 million by 2030 (US$183 million by 2025) in energy-efficient buildings and appliances; geothermal, wind and solar generation; grid distribution and transmission efficiency; water distribution and network efficiency; efficient vehicles; expanded public transit.
- Adaptation and overall feasible investment path:
  - St. Lucia could sustain investment at "1.8 percent of GDP a year on a commitments basis (less in execution), with possibly one-third or more grant-financed."
  - Maintaining this level would allow substantive advances in resilience-building using historically feasible financing levels.
  - Scaling-up beyond roll-over financing requires grant financing or packaging adaptation investments to be bankable for private investors.
- Macro-fiscal implications and scenarios:
  - Annual fiscal costs of relief and reconstruction estimated at "c.1 percent of GDP."
  - Baseline with insufficient investment: public debt grows steadily above ECCU target of "60 percent of GDP through 2030."
  - Adequate-resilience illustrative scenario staff estimates:
    - GDP growth could be permanently higher by "0.3 percent."
    - Grants of "0.5 percent of GDP through 2023" could finance additional adaptation investment.
    - Demand effect of investment would add temporary boost of "0.3 percent" to GDP growth.
    - Baseline growth would return to potential of "1.5 percent" after 2023 without these measures.
- Balance of payments:
  - Net oil import bill nearly "3 percent of GDP" at current low oil prices; nearly "6 percent of GDP" during oil price boom.
  - Full implementation of renewables strategy would strengthen balance of payments.
- Actions to mobilize grants:
  - St. Lucia seeking accreditation to the Green Climate Fund (GCF); Ministry of Finance reviewing institutional framework to meet GCF requirements and undertaking steps under the GCF Preparatory Support Programme with CDB support.
- Financing recommendations (selected):
  - Articulate a strategy for raising climate-change financing; use the NDC forum as a catalyst.
  - Rely as much as possible on private sector and grant financing to ensure fiscal and debt sustainability.
  - Prioritize success with the renewables strategy to strengthen St. Lucia’s balance of payments.

### RISK MANAGEMENT — Assessment, Buffers, and Transfer
- Historical disaster losses and vulnerability:
  - Annual average loss from wind-related events and floods averages just under US$49 million, or 3.4 percent of GDP.
  - Once every 100 years, costs expected to exceed US$882 million, or more than 61 percent of GDP (1 percent probability in any year of costs >61 percent of GDP).
  - St. Lucia ranks 5th at risk for natural disasters among small states; in top 10 percent for losses to climate-related natural disasters during 1997–2016 and top 15 percent for climate-related disaster fatalities.
- Current contingency and insurance arrangements:
  - Member of CCRIF; pays annual premium of US$2.42 million for a potential maximum payout of US$66.6 (close to 4 percent of GDP).
  - CCRIF payouts to date: US$1 million (earthquake 2007) and US$3.2 million (Hurricane Tomas 2010).
  - Contingency instruments being pursued: Cat DDO under negotiation with the World Bank (proposed US$20 million).
- Immediate buffer recommendations:
  - Increase contingency reserves to at least US$7–10 million in the short term, ensuring reserves can only be disbursed for disaster-related expenditure.
  - Recommended savings fund capitalization:
    - Medium-term savings fund of around 5 percent of GDP, replenished on a rolling basis, would give St. Lucia a 95 percent probability of covering fiscal costs of disasters without incurring additional debt.
    - Simulation: if savings fund sole source, "capitalization of 8 percent of GDP" and annual budget savings of "0.9 percent of GDP" required to sustain; a layered approach suggests "capitalization of 5 percent of GDP" and annual budget savings of "0.6 percent" could provide sufficient buffer when combined with CCRIF.
  - Immediate capitalization suggested: USD 5–7 million (selected recommendation).
- Insurance and under-insurance:
  - Majority of residential property stock (80 percent) not insured against natural disasters.
  - Most public assets, including hospitals and schools, are not insured.
  - Parastatal premiums rose by 800 percent after Hurricane Thomas in 2010.
- Innovative and social insurance:
  - Livelihoods Protection Policy (LPP): weather-index based insurance; 31 individuals received payouts totaling US$102,000 due to Hurricane Matthew.
- Recommended risk-management actions (verbatim selection):
  1. Develop a fiscal risk statement to strengthen capacity to assess risks.
  2. Increase contingency disaster financing immediately to US$7–10 million and build a savings fund capitalized at 5 percent of GDP.
  3. Use revenues from the Citizenship-by-Investment program to capitalize disaster funding.
  4. Explore mandatory insurance for key public buildings and buildings in flood-risk areas.
  5. Support strengthening the domestic insurance market and regional insurance initiatives.
  6. Strengthen contingency financing (Cat DDO and related instruments).

### NATIONAL PROCESSES AND PUBLIC FINANCIAL MANAGEMENT
- Budget system strengths:
  - Relatively unified budget, TSA cleared nightly, donor funds included in nightly cash balance management.
  - All borrowing must be authorized by Minister of Finance.
- Gaps in climate-resilience integration:
  - No system in PSIP or the budget to identify climate-change related projects other than by project title; no criteria for evaluating mitigation and adaptation impacts.
  - Line ministries not required to consider adaptation impacts or costs in budget submissions.
  - FY17/18 budget contains 10 budget lines dedicated to disaster-risk management, but progress reporting is incomplete and sporadic.
- Program budgeting and procurement reforms:
  - Program budgeting exists but enforcement of reporting required to sustain benefits.
  - Public Procurement and Asset Disposal Act (revised, under review) aims to strengthen emergency procurement efficiency.
- PIMA findings (selected institutional questionnaire highlights):
  - No permanent fiscal principles or rules protecting capital spending; capital spending allocations are second priority to recurrent spending.
  - No published national or sectoral public investment strategies; project appraisal not systematic; no standard methodology centrally published for appraisal.
  - Capital spending mostly undertaken through the budget; external financing included in budget documentation but often held in commercial bank accounts outside TSA.
- Recommended process actions (enumerated):
  1. Ensure responsibilities for climate action logically assigned to relevant ministries with clear responsibilities for sectoral strategies and costed investments.
  2. Revive the PSIP while addressing problems that made it inadequate.
  3. Establish a standard framework and process for integrating climate-change mitigation and adaptation into public investment management with clear evaluation criteria.
  4. Ensure climate-related objectives are systematically identified in the budget; consider climate change expenditure classification methodology and climate ‘tags’.
  5. Build capacity for effective public investment appraisal and monitoring in the Ministry of Finance and other ministries.

### PRIORITY NEEDS — Financing, Investments, and Capacity-Building (Box 1 and indicative tally)
- Government financing or external support needs (selected):
  - Completion of the disaster-preparedness strategy.
  - Government program costs to support private investment in mitigation: US$23 million.
  - Public investment in road construction and rehabilitation: US$91 million.
  - Backing for contingent financing (emergency contingency fund and savings fund).
- Private investment needs:
  - Mitigation investment estimated at US$218 million by 2030 (US$183 million by 2025) across energy efficiency, geothermal, wind and solar, grid improvements, water network efficiency, efficient vehicles, and public transit.
  - Adaptation investment: water supply systems; land use planning and management including coasts; agriculture and food security.
- Capacity-building needs:
  - Completion of disaster-preparedness strategy.
  - Integration of climate-related activities into costed sectoral plans.
  - Carbon taxation capacity (to rationalize fuel taxes and consider vehicle taxation and congestion pricing).
  - Support for investment promotion.
  - Revival of PSIP management skills.
  - Further strengthening of program budgeting and PFM skills.

### SUMMARY OF PRIORITY RECOMMENDATIONS (selected immediate actions)
- General Preparedness:
  1. Strengthen the NDC by adding costed adaptation plans.
  2. Update the National Vision Plan and Medium-Term Development Plan and develop supporting operational sectoral plans focused on costing and resource mobilization.
  3. Ensure enabling legislation and standards relevant to climate, environment and energy are in place.
- Mitigation:
  4. Introduce a carbon tax by applying the announced road fuel tax increase to other diesel products (including for power generation) and synchronizing future tax increases across all fuels.
- Adaptation:
  5. Enact the amendments to the OECS Building Code for Saint Lucia.
  6. Review and approve the Coastal Zone Management Policy and Strategy.
  7. Consider rezoning flood areas.
- Financing:
  8. Articulate a strategy for raising climate-change financing; use the NDC forum as a catalyst.
  9. Rely as much as possible on private sector and grant financing to ensure fiscal and debt sustainability.
  10. Fully implement the renewables strategy to strengthen St. Lucia’s balance of payments.
- Risk Management:
  11. Build a contingency funding buffer through:
     - immediate capitalization of a fund of USD 5-7 million; and
     - in the medium term, a savings fund with capitalization of 5 percent of GDP, replenished on a rolling basis, which would give St. Lucia a 95 percent probability of being able to cover the fiscal costs of disasters without incurring additional debt.
  12. Use revenues from the Citizenship-by-Investment program to capitalize disaster funding.
  13. Consider making insurance mandatory for key public buildings; study mandatory insurance for buildings in flood-risk areas.
  15. Support strengthening of the domestic insurance market and regional insurance initiatives.
- National Processes:
  16. Ensure responsibilities for climate action are logically assigned to relevant ministries with clear responsibilities for sectoral strategies and costed investments.
  17. Revive the PSIP while addressing problems that made it inadequate.
  18. Ensure climate-related objectives and activities are systematically identified in the budget and investment projects explicitly linked to these.
  19. Build capacity for effective public investment appraisal and monitoring in the Ministry of Finance and other relevant ministries.

*Source: cr18181 — IMF/World Bank Climate Change Policy Assessment for St. Lucia (EXECUTIVE SUMMARY, INTRODUCTION, and selected chapters).*

### EXECUTIVE SUMMARY  _____________________________________________________________ 7

### EXECUTIVE SUMMARY

### Overview
- St. Lucia has been a leader among vulnerable Caribbean states in prioritizing a response to climate change.
- The Nationally Determined Contribution (NDC) outlines a balanced mitigation strategy backed by costed investment plans, and a qualitative adaptation strategy with identified priority sectors.
- A National Adaptation Plan (NAP) process was launched in April 2018.
- This paper assesses St. Lucia’s climate plans from the perspective of macroeconomic implications, suggests macro-relevant reforms, and identifies policy gaps and resource needs.

### General Preparedness
- Strengths:
  - Strong government commitment and high public awareness.
  - Disaster preparedness is a relatively strong point.
- Key next steps:
  - Update strategic plans and legislation to align development framework with resilience-building goals (including the Development Strategy and Coastal Zone Management Strategy; passage of the Climate Change Bill and Sustainable Building Code).
  - Ensure national and sectoral plans specify costed priority projects for inclusion in the PSIP and the budget.
  - Better understand economic impact of disasters and ensure disaster-financing is available quickly when needed.

### Mitigation
- Planned measures:
  - Increase use of renewable energy (wind, solar and geothermal) and improve energy efficiency.
- Benefits:
  - Energy security, lower import bill, and reduced emissions.
- Risks and caveats:
  - Wind and solar plans considered feasible though grid-access reforms may be needed to attract private investors.
  - Geothermal development is less assured.
- Fiscal and policy tools:
  - Introducing a carbon tax would:
    - Make emission targets more likely by changing a wider range of behavior.
    - Help offset declining fuel tax revenue if emissions are contained successfully.
    - Impose the bulk of the burden on better-off households.
  - Reforms to vehicle taxation (a ‘feebate’ system) could lower vehicle emission rates efficiently without undermining fiscal objectives.

### Adaptation
- Current state:
  - The NDC’s adaptation strategy lacks articulation of priority investments and specific supportive reforms; filling this planning gap is high priority and work is underway.
  - St. Lucia already allocates about one-quarter of its capital budget to adaptation spending.
- Priority adaptation needs likely include:
  - Critical infrastructure.
  - Water supply (including desalination plants).
  - Land use (including coasts).
  - Food security.
- Financial-sector involvement:
  - The financial sector so far is involved little with climate change funding.
  - Automatic access to ECCB reserves in case of disaster is a helpful buffer.

### Financing
- Constraints and opportunities:
  - Financing options are limited by a high public debt, but there is a feasible way forward.
  - Well-designed renewables projects should attract private investors; some adaptation projects could be bankable.
- Fiscal implications:
  - Maintaining current financing levels (rolling-over) would support around 2 percent of GDP in future budgetary adaptation investment.
  - Successful resilience-building should generate a growth dividend and ease debt pressures by preserving capital stock and efficiency.
- Scaling-up needs:
  - Grant financing or equity would be needed for further scaling-up to keep the budget sustainable.
  - Efforts should focus on an investment promotion strategy and access to grants from climate funds.

### Risk Management
- Current status:
  - Some key elements of a disaster risk management strategy are established.
  - Participation in regional instruments: member of CCRIF and working with World Bank toward a Cat DDO.
  - Competitive insurance industry with innovative income protection for small farmers.
- Gaps:
  - Need for better risk assessment, more self-insurance, and more risk transfer.
  - Contingency buffers are too small given historic disaster costs and expected intensification.
  - Public and private assets are under-insured.
- Recommended buffer targets:
  - Immediate disaster-specific savings of US$7–10 million.
  - Medium-term savings fund of around 5 percent of GDP to provide adequate coverage for disasters with low probability of depletion.
  - Combination of savings, insurance, and resilience-strengthening investment could achieve coverage.
- Citizenship-by-Investment:
  - Revenues should contribute to building disaster funding because their temporary and unreliable nature makes them unsuited to financing the current budget.

### National Processes and Public Financial Management
- Strengths:
  - Traditional PFM processes have been relatively transparent and disciplined.
- Challenges:
  - Climate-related responsibilities are diffuse across ministries, impeding coordination.
  - Recent sidelining of the PSIP, with investments budgeted before PSIP screening and prioritization.
- Recommended process actions:
  - Set clear criteria for including climate-related projects in the budget.
  - Enforce program budgeting elements to set climate-related targets and track progress.
  - Assign clear responsibilities to ministries for sectoral strategies and costed investments.

### Priority Needs (Box 1 highlights)
- Government financing or external support needs:
  - Completion of the disaster-preparedness strategy.
  - Government program costs to support private investment in mitigation: US$23 million.
  - Public investment in road construction and rehabilitation: US$91 million.
  - Public investment needed to supplement private involvement in adaptation projects (see list below).
  - Backing for contingent financing (e.g., emergency contingency fund and savings fund).
- Private investment needs:
  - Mitigation investment of an estimated US$218 million by 2030 (US$183 million by 2025) in:
    - Energy-efficient buildings and appliances.
    - Geo-thermal, wind and solar energy generation.
    - Improvements to grid distribution and transmission efficiency.
    - Water distribution and network efficiency.
    - Efficient vehicles.
    - Expanded public transit.
  - Adaptation investment in water supply systems; land use planning and management, including coasts; agriculture and food security.
- Capacity-building needs:
  - Completion of the disaster-preparedness strategy.
  - Integration of climate-related activities into costed sectoral plans.
  - Carbon taxation (especially to spread fuel tax hikes across a broader base, and possibly for vehicle taxation and congestion pricing).
  - Support for investment promotion.
  - Revival of PSIP management skills.
  - Further strengthening of program budgeting and other PFM skills.

### Summary of Priority Recommendations (selected immediate actions)
- General Preparedness:
  1. Strengthen the NDC by adding costed adaptation plans.
  2. Update the National Vision Plan and Medium-Term Development Plan and develop supporting operational sectoral plans focused on costing and resource mobilization.
  3. Ensure enabling legislation and standards relevant to climate, environment and energy are in place.
- Mitigation:
  4. Introduce a carbon tax by applying the announced road fuel tax increase to other diesel products (including for power generation) and synchronizing future tax increases across all fuels.
- Adaptation:
  5. Enact the amendments to the OECS Building Code for Saint Lucia.
  6. Review and approve the Coastal Zone Management Policy and Strategy.
  7. Consider rezoning flood areas.
- Financing:
  8. Articulate a strategy for raising climate-change financing; use the NDC forum as a catalyst.
  9. Rely as much as possible on private sector and grant financing to ensure fiscal and debt sustainability.
  10. Fully implement the renewables strategy to strengthen St. Lucia’s balance of payments.
- Risk Management:
  11. Build a contingency funding buffer through:
    - immediate capitalization of a fund of USD 5-7 million; and
    - in the medium term, a savings fund with capitalization of 5 percent of GDP, replenished on a rolling basis, which would give St. Lucia a 95 percent probability of being able to cover the fiscal costs of disasters without incurring additional debt.
  12. Use revenues from the Citizenship-by-Investment program to capitalize disaster funding.
  13. Consider making insurance mandatory for key public buildings.
  14. Study the value of making insurance mandatory for buildings in flood-risk areas.
  15. Support strengthening of the domestic insurance market and regional insurance initiatives.
- National Processes:
  16. Ensure responsibilities for climate action are logically assigned to relevant ministries with clear responsibilities for sectoral strategies and costed investments.
  17. Revive the PSIP while addressing problems that made it be considered inadequate.
  18. Ensure climate-related objectives and activities are systematically identified in the budget and investment projects explicitly linked to these.
  19. Build capacity for effective public investment appraisal and monitoring in the Ministry of Finance and other relevant ministries.

*Source: cr18181 - EXECUTIVE SUMMARY*

### INTRODUCTION

### cr18181 - INTRODUCTION

### Purpose and scope
- This report for St. Lucia is the second pilot Climate Change Policy Assessment for Small States.
- The CCPA is a joint initiative by the IMF and World Bank to assist small states to understand and manage the expected economic impact of climate change, while safeguarding long-run fiscal and external sustainability.
- The joint World Bank-IMF Climate Change Policy Assessment was prepared in collaboration with the Government of St. Lucia. It:
  - Reviews the government’s plans for mitigating and adapting to the effects of climate change, in line with St. Lucia’s Nationally Determined Contribution (NDC).
  - Gives recommendations on how to strengthen policies while maintaining a sustainable macroeconomic framework.
- The CCPA pilot program supports development of Bretton Woods institutions’ analytical toolkit and draws on:
  - A World Bank macro-fiscal model that simulates effects of climate-change policies and Bank estimates of the distributional impact of implementing the NDC.
  - The IMF’s spreadsheet tool for assessing the implications of mitigation policies on emissions; IMF estimates of optimal disaster funds; and IMF efforts to reflect feedback effects from resilience-building policies to growth and debt sustainability.

### National engagement and leadership
- St. Lucia led CARICOM negotiations for the Paris Accord, and was the first Caribbean country to sign an NDC (St. Lucia Intended Nationally Determined Contribution Under the UNFCCC).
- St. Lucia is organizing the 2018 NDCs Forum with the UNFCCC to help mobilize climate financing for OECS countries, and is piloting the Eastern Caribbean Energy Regulatory Agency initiative (ECERA).
- The report broadly replicates the NDC structure: general preparedness; mitigation commitment and strategy; adaptation needs and strategy; national processes; and financing, with a focus on macroeconomic challenges and policy recommendations.

### Expected climatic developments and consequences (Table 1 highlights)
- Temperatures:
  - St. Lucia is projected to be warmer by up to 1.1⁰C–1.5⁰C between 2020 and 2039, with more pronounced increase in warm/wet seasons (June–November).
  - Sea surface temperatures in the Caribbean are projected to go up by as much as 2 degrees Celsius by the end of the century.
  - Rising temperatures could exacerbate both the activity of and the damage caused by tropical cyclones. Average annual damages in the Caribbean could increase between 22 and 77 percent by 2100.
  - Disruption to marine ecosystems (including coral bleaching, seaweed invasion, and fish populations), with cost to the tourism and fisheries sectors.
- Precipitation:
  - General Circulation Models (GCMs) predict a median decrease of up to 22 percent for annual rainfall between 2020 and 2039.
  - Changes in rainfall patterns are projected to increase the likelihood of water shortages and heighten the risk of drought.
- Sea level rise:
  - A 1 m rise in sea level would put one of the two airports, all ports, and 7 percent of the major tourism properties at risk. Low-lying agricultural areas would also be affected.
  - 100 m of beach erosion would affect 30 percent of all major tourism resorts and 53 percent of sea turtle nesting sites.
- Extreme weather events:
  - Projections show increased inter-annual variability, with more intense effects of each severe weather event.
  - Greater intensity could accelerate soil erosion, leading to contamination of groundwater, salinization of water sources, and sedimentation of dams and reservoirs, adversely impacting the quality of the country’s water resources.

### St. Lucia’s climate change risks and expected impacts (summary)
- St. Lucia lies in a hurricane belt and would suffer human and output losses if extreme weather intensifies, as well as likely damage to tourism and fishing from rises in sea level and temperature.
- Fiscal costs would worsen in a country already threatened by unsustainable debt.

### Vulnerability and historical disaster record (Table 2 highlights)
- St. Lucia is exceptionally vulnerable to climate change and its associated costs; it faces high risks of cyclones and landslides, and a medium risk of coastal floods.
- Among small states, St. Lucia ranks 5th at risk for natural disasters.
- Of the 182 countries in the Climate Risk Index, St. Lucia was in the top 10 percent for losses to climate-related natural disasters during 1997–2016 and in the top 15 percent of climate-related disaster fatalities.
- St. Lucia’s annual average loss from wind-related events and floods averages just under US$49 million, or 3.4 percent of GDP.
- Once every 100 years, on average, these costs are expected to exceed US$882 million, or more than 61 percent of GDP—i.e., there is a 1 percent probability in any year that a natural disaster will impose national costs of more than 61 percent of GDP.
- Primary climate-change concerns: damage from intensified extreme weather (floods and landslides, with associated loss of life, infrastructure, housing and output); threats to water supply; and economic costs to tourism and primary sectors from rises in temperature and sea level.

### Impact on the macro-framework / long-term outlook
- Intensified natural disasters would reduce output and worsen fiscal performance, and climate change more generally would:
  - Increase expected capital depreciation and uncertainty of investment returns, depressing output.
  - Reduce tax revenues and necessitate additional expenditure for social support, infrastructure rehabilitation, and reconstruction.
- Simulations (Figure 1) of a natural disaster impact on St. Lucia’s output and fiscal aggregates:
  - Without further global warming (based on historical patterns), output would decline by 3.5 percent (i.e., a one-time level loss) on average when St. Lucia is hit by a hurricane or a tropical storm.
  - In a scenario with extensive climate change, output would decline by over 5 percent on average after a hurricane, assuming the impact on public and private infrastructure is in line with the predicted increase in damages.
  - Fiscal performance would worsen commensurately, mitigated only by a possible increase in grants if historical patterns continue to hold.
  - The simulations reflect increased intensity of natural disasters but do not include an increase in frequency; the impact of global warming is based on estimates for the RCP8.5 greenhouse emissions scenario.

### General preparedness for climate change
- St. Lucia’s commitment to resilience-building is strong and its NDC has a fully specified mitigation strategy. However:
  - Adaptation plans remain to be fully articulated and legislation needs updating.
  - Disaster planning is well underway but funding remains inadequate.

### The NDC and other national resilience-building strategies
- The NDC:
  - Has a fully-specified and costed mitigation strategy, including a commitment to emissions reduction and an (indicative) quantified mitigation strategy to meet the reduction target.
  - Provides only general information on adaptation; sector-specific adaptation strategies and priority adaptation projects are not yet specified.
  - Identifies financing needs only for mitigation.
- Consistency with development goals:
  - The climate change strategy is consistent with priorities in national strategic documents (National Vision Plan 2007; Strategic Program for Climate Resilience 2011; Medium-Term Development Strategy 2012–16).
  - Two of six pillars in the 2016 government program are building capacity in renewable energy and adapting to climate change.
- Updates underway:
  - Government is preparing a new National Vision Plan and drafting a new Climate Change Bill covering both mitigation and adaptation, and revising the Environmental Management Bill, expected to be completed in 2018.

### Disaster planning and contingency arrangements
- Institutional and legal framework:
  - Emergency Powers Disaster Act (1995); Disaster Preparedness and Response Act No. 13 (2000) and Amendment Act; Disaster Management Act No. 30 of 2006.
  - National Emergency Management Organization (NEMO) set up in 2006, under the prime minister’s office, responsible for disaster-risk management across planning, mitigation, response, damage assessments, and reconstruction.
  - 2007 National Disaster Management Plan guides risk assessment, prevention and post-disaster response activities.
- External support and recent focus:
  - World Bank, Caribbean Development Bank (CDB), Japan International Cooperation Agency (JICA) and others have funded projects to strengthen emergency preparedness, enhance early warning systems, and build community capacity.
  - Recent support emphasizes making infrastructure resilient (e.g., school buildings and bridges).
- Damage assessment:
  - Eighteen district-level Damage Assessment and Needs Analysis (DANA) teams are coordinated by NEMO; local DANA teams feed a national DANA team.
  - The Government needs a national assessment methodology to quantify the economic impacts of all disasters consistently.

*Source: INTRODUCTION, cr18181 - INTRODUCTION (IMF/World Bank Climate Change Policy Assessment for St. Lucia).*

### 12.      Advance funding for disasters remains inadequate. Historically, St. Lucia has depended

### 12.      Advance funding for disasters remains inadequate. Historically, St. Lucia has depended

### Disaster financing: current situation and gaps
- Historically dependent on ex-post financing from partners such as Australia, Canada, China, Kuwait, the EU and New Zealand.
- Paying for a disaster burdens the national budget for several years, without ever achieving full replacement.
- Budgetary provisions are limited:
  - Small contingency fund and allocation to NEMO are insufficient (see Chapter VII).
  - St. Lucia partners with CDEMA and is a member of CCRIF.
  - A Cat DDO (contingency credit line with drawdown in the event of an emergency) is under negotiation with the World Bank.
- World Bank financing history (examples cited):
  - US$7.65 million Emergency Recovery and Disaster Management Program (ERDMP–P070430), 1998–2003.
  - US$8.9 million Second Disaster Management Project (DMP II-P086469), 2004–2011.
  - US$15 million Hurricane Tomas Emergency Recovery Loan (HTERP–P125205), 2011–2014.
  - Ongoing US$68 million Disaster Vulnerability Reduction Project (DVRP-P127226), co-financed with IDA and PPCR Grant funds.

### Institutional strengthening and National Disaster Risk Financing Strategy (2018)
- Approved Cabinet National Disaster Risk Financing Strategy (2018) priorities:
  - Streamline and institutionalize damage and loss data collection and reporting systems across ministries for all severities of events.
  - Publish damage and loss information, with sectoral disaggregation, in a public online database that is updated after each assessment.
  - Build capacity to ensure that institutional knowledge is preserved.
  - Assure financing is immediately available and accessible for early disaster response:
    - Increase contingency reserves to at least US$7–10 million in the short term, and ensure the reserves can only be disbursed for disaster-related expenditure.
    - Account for disaster-related contingent liabilities based on IPSAS standards.
    - Support development of parametric, indemnity and/or hybrid instruments in the private insurance market (including CCRIF) and build sovereign buffers (the Imprest Fund, the Contingency Fund, the Emergency Disaster Fund).
  - Prepare a Manual for post-disaster financing, covering actors, systems, the sources of financing and the process to disburse to the Government of St. Lucia.

### Recommendations for general preparedness (selected)
- Strengthen the NDC to provide a comprehensive strategy of St. Lucia’s climate-change-related effort—particularly by adding costed adaptation plans.
- Update the National Vision Plan and Medium-Term Development Plan, and develop supporting operational sectoral plans, with focus on costing and resource mobilization.
- Put in place all enabling legislation relevant for climate change, environment, and energy.
- Reduce vulnerability to natural disasters and climate change by:
  - Investing in disaster risk reduction measures, combining physical investments with improved regulations, planning, and enforcement.
  - Introducing a national assessment methodology to quantify the economic impact of disasters consistently.
  - Operationalizing a disaster risk financing strategy, including own reserves and insurance.

*This section draws heavily on Advancing a National Disaster Risk Finance Strategy in St. Lucia, World Bank, February 2018.*

---

### CONTRIBUTION TO MITIGATION

### Overview of mitigation strategy and targets
- Mitigation focus: promoting renewable energy, energy efficiency, and low emission cars; consideration of a carbon tax and other tax reforms.
- NDC pledges (conditional on some external finance):
  - Limit GHGs to 634 and 628 kilo-tons (or Gg) of CO2 equivalent in 2025 and 2030 respectively.
  - These are reductions of 16 and 23 percent below projected ‘business as usual’ levels in those years.
- NDC estimated cost: US$241 million by 2030, including US$23 million in government program costs.
- Current renewable power generation: 0.2 percent of installed capacity.
- Renewable targets:
  - 35 percent of installed capacity by 2025.
  - 50 percent of installed capacity by 2030.
- Expected implication: Meeting the 50 percent renewables target for 2030 would reduce CO2 emissions about 25 percent below business-as-usual (BAU) levels in 2030.
- Contextual figures:
  - Imported fuel bill currently about 8 percent of GDP.
  - US$241 million by 2030 equals EC$651 million, or around 14 percent of FY2016 GDP.

### Clean energy measures envisioned
- Primary measures to cut emissions:
  - Expand renewable power generation (see targets above).
  - Improve energy efficiency (buildings, appliances, lighting).
  - Promote fuel-efficient vehicles (including hybrid and electric).
  - Improve power grid efficiency and expand public transport.
- Feasibility challenges:
  - LUCELEC is progressing with renewable projects (a 3 megawatt (MW) solar plant and a 12 MW wind farm planned for commercial operation).
  - Geothermal scope uncertain (appropriate sites, costs, ability to attract investors unclear).
  - Solar generation limited by land constraints.
  - Cleaner vehicles taxed at lower rates but electric vehicles remain expensive and alternatives to driving are limited.
  - Geothermal potential: more than 75 MW relative to 60.3 MW of peak demand in 2016; with sufficient financing St. Lucia could develop a 30 MW geothermal facility operational by 2023.
  - Total investment needed for geothermal development in St. Lucia is US$66 million, based on 2015 estimates.

### Legislative and regulatory needs
- Supporting legislation required to implement mitigation measures:
  - National Environmental Management Strategy (NEMS) revised in 2014 but not yet approved by Cabinet.
  - Amendment of the Electricity Supply Act to allow independent power producers to access the grid (completed).
  - An Electricity Services bill is in draft.

---

### Carbon pricing

### Rationale and administrative feasibility
- Carbon taxes exploit full range of behavioral responses across households and firms and reinforce renewables by raising diesel generation costs.
- Administratively simple to implement as surcharges integrated into existing fuel taxes.
- IMF and World Bank staff advice favors price-based instruments for environmental objectives while providing revenue.

### Current carbon-related taxation and yields
- Road transport accounts for about 40 percent of current CO2 emissions.
- Power generation accounts for 50 percent of emissions and is taxed more lightly.
- Direct fuel consumption by households and firms accounts for a further 10 percent.
- Road fuel excise raised EC$43 million in revenue in 2016 (about 1 percent of GDP).
- Road fuel excise rates increased from EC$2.50 per gallon in 2016 to EC$4 per gallon in July 2017.
- A price cap on road fuel exists at EC$12.75 per gallon; when binding the excise is lowered to meet the cap (November 2017 example resulted in excises of EC$3.02 and EC$3.60 per gallon respectively for gasoline and diesel).
- Fossil fuels outside the road sector are subject to a lower levy of EC$1 per gallon.
- Note: Higher diesel taxes encourage switching to renewable generation fuels and reductions in electricity demand.

### Assessment of current fuel tax system
- The recent increase in road fuel excises would (if the fuel price cap does not become binding) reduce projected (fuel-related) CO2 emissions by around 2 percent.
- Comprehensive fuel tax reform would be needed for larger emissions reductions envisaged in the NDC.
- Distortions to remove:
  - Electricity and road fuels are not subject to VAT; ideally VAT should be reflected in prices of all consumer products to avoid distorting household choices.
  - Vehicle taxes rise with engine capacity and age; hybrids and electric vehicles have favorable rates, but these taxes are weaker deterrents than a carbon tax.

### Proposed carbon-tax strategy and scenarios
- Strategy example: extend the recent EC$1.50 per gallon increase in road fuel excises to all diesel products, and then repeat the same increase across all fuels.
  - “Modest carbon tax” (includes recent increase): would raise diesel fuel prices for non-road purposes by 16.5 percent.
  - “High carbon tax” (further $1.50 increase): road fuel prices would rise by about 12.5 percent above current levels, and diesel prices for non-road purposes would exceed current levels by 33 percent.
- Removal of road fuel price cap is assumed in scenario to enable effectiveness.

### Effectiveness, revenues, and distribution
- Emissions impacts in 2030:
  - Modest carbon tax alone reduces CO2 emissions by 7 percent in 2030.
  - High carbon tax alone reduces CO2 emissions by 12.5 percent in 2030.
  - Renewables policy is essential; emissions reduction target could not be met without success of renewables strategy.
- Revenue gains by 2030:
  - Modest carbon tax raises additional revenues of 1.3 percent of GDP.
  - High carbon tax raises additional revenues of 2.5 percent of GDP.
  - These are about 3–5 times as much revenue as will be raised from the transport tax increase (with no price cap).
  - Extending VAT to road fuels and electricity would yield nearly 1 percent of GDP.
- Distributional effects:
  - Road fuel tax imposes a burden on households of about 1.2 percent of their total annual consumption in 2030 on average.
    - Burden on bottom and top income quintiles is 1.3 and 1.2 percent of consumption respectively (road fuel tax scenario).
  - High carbon tax scenario burdens bottom and top income quintiles by 5.2 and 4.2 percent of total annual consumption in 2030 respectively.
  - Simulation indicates 94 percent of the burden is borne by households other than those in the bottom income quintile.
  - Compensating the bottom income quintile would need only about 6 percent of the revenues raised.
  - The loss in annual household consumption faced by households in the poorest quintile is US$94 while the per capita loss averaged across all households is US$307 (high carbon tax scenario context).

*Source: IMF staff calculations and related program/project descriptions as presented in the provided text.*

### 27.      Reform of the vehicle tax system, although less powerful than a broad-based carbon

### 27.      Reform of the vehicle tax system, although less powerful than a broad-based carbon

### Vehicle tax reform and feebates
- Current vehicle tax system does not provide significant incentives to shift to low-emission vehicles; it only rewards smaller engine size and does not reward smaller vehicle size, lighter body materials, or cleaner vehicles within a given tax bracket.
- As people shift to low-tax vehicles, excise collections decline.
- Proposed design: combine a "feebate" with an ad valorem tax:
  - Feebate: sliding scale of surcharges or rebates for cars with above/below average emissions to provide comprehensive and continued rewards for cleaner vehicles.
  - Uniform ad valorem rate: chosen to meet fiscal needs and stabilize revenue.
- Examples: Denmark, France, Mauritius, Netherlands and Norway have recently adopted feebate systems.

### Other macro-relevant green tax possibilities — congestion and fuel taxes
- Traffic congestion around Castries is frequently severe and worsening with growth in the vehicle stock.
- Higher road fuel taxes do not encourage off-peak driving or avoidance of congested routes and the tax base erodes as people shift to hybrid and more fuel-efficient vehicles.
- Electronically collected congestion fees (modeled on other cities, with schedules designed to smooth traffic flows) could:
  - More effectively manage road congestion around Castries.
  - In the longer term, applying these charges nationwide could stabilize transportation revenues and manage pressure across the road network.
- Complementary measures: more frequent, reliable, and extensive bus service.

### Carbon-pricing strategies and recommendations
- Carbon taxation is identified as the most promising practical way for St. Lucia to price carbon.
- Emissions trading systems:
  - Typically apply downstream to large stationary sources and omit about 50 percent of emissions from vehicles, buildings, and small firms.
  - Require extensive trading markets and new monitoring capacity.
  - Tend to forego revenue (through narrower tax base and possible free allowance allocation) and have volatile prices.
- Recommendations for Mitigation (listed verbatim):
  1. Introduce a carbon tax by applying the recent road fuel tax increase to other diesel products (including for power generation), then synchronizing future tax increases across all fuels, and removing the fuel price cap to allow these measures to work. Use a small portion of the revenues to compensate low-income households.
  2. Supplement the carbon tax with flexible incentives for renewable generation fuels.
  3. Change vehicle taxation to an ad valorem rate plus ‘feebate’ system.
  4. Explore congestion fees and mileage-based tolls to keep traffic sustainable and maintain revenue (in light of progressively declining bases for fuel taxes relative to GDP).

### Macro-modeling and distributional analysis (Box 3)
- A macro-structural model of the St. Lucian economy was built to analyze implications of meeting climate commitments; it:
  - Explicitly models the energy sector and allows investment allocation changes to affect the economy, wages, and employment.
  - Uses an input-output table to capture intermediate inputs, such as fuel, and price changes.
  - Calibrated scenarios for renewables and carbon tax policies yielded similar CO2 emissions reduction results to the spreadsheet model.
  - Converts estimated macro-level price changes into consumer price changes and links CPI items to household budget allocations (2016 Survey of Living Conditions and Household Budgets) to estimate losses in household per capita income related to mitigation policies.
  - Includes a microsimulation module to analyze distributional impacts and mitigation mechanisms.

### Adaptation plans — policy framework and sectoral strategies
- Policy framework:
  - Climate Change Adaptation Policy (CCAP, 2015) sets goals for 2022 under three pillars: facilitation, financing, and implementation.
  - Third National Communication (submitted) includes vulnerability and adaptation assessments and will help operationalize measures in the Second National Communication (SNC, 2012).
- Recent cabinet-approved policies to mainstream disaster and climate risk analysis:
  - National Land Policy (risk-informed land use planning).
  - Urban Transformation Policy (revitalization of urban centers with resilient infrastructure).
  - National Healthcare Quality Policy (mandatory resilience and energy efficiency design compliance for health facility licensing).
- Sectoral strategy developments:
  - Ten-year National Adaptation Plan (NAP 2018) completed; outlines immediate, medium, and long-term needs.
  - Development of sectoral strategies and costed investment plans has commenced for Water, and Agriculture and Fisheries; monitoring/evaluation plan under way.
  - Tourism adaptation plan developed in 2015; subject to funding, sectoral strategies for infrastructure, spatial planning, natural resource management, education, and health are intended.

### Public investment in adaptation — spending and projects
- Recent capital budget range: EC$250–300million (US$92–111million) annually.
- Rough estimate of allocations to resilience and adaptation: between EC$80–90million (US$30–35million) a year, or around 2 percent of GDP.
- Capital budget execution: around 50–60 percent, suggesting actual spending on adaptation of around 1 percent of GDP a year.
- Implication: completing ongoing adaptation investment will free fiscal space for new projects; net cost of scaling up will be less than gross new project sums.

- Table 4: St. Lucia: Adaptation Projects in the Capital Program of the 2016–17 Budget (in EC$ millions and %)
  - Capital Project Grants: All (1) = 97.2; Adaptation Related (2) = 22.8; (2)/(1) = 27%
  - Capital Project Loans: All (1) = 170.8; Adaptation Related (2) = 50.1; (2)/(1) = 60%
  - Government-financed: All (1) = 57.9; Adaptation Related (2) = 10.9; (2)/(1) = 13%
  - Total: All (1) = 325.9; Adaptation Related (2) = 83.8; (2)/(1) = 1.9% of GDP
  - Source: 2016–17 Expenditure Estimates (National Budget Document).

- Table 5: Key Planned Capital Expenditures (2017–18) to Mitigate the Impact of Natural Disasters (Estimated Amount in EC$ million)
  - Construction of Retaining Wall-Police 0.16
  - Rehabilitation of Farms Post Tropical Storm Matthew 3.9
  - Dennery Water Supply Redevelopment 10.6
  - Vieux Fort Water Supply 5.9
  - Disaster Recovery Programme 14.9
  - Sea Defense and Coastal Management 0.7
  - Slope Stabilization 2.0
  - Desilting of Rivers and Drains 2.0
  - Capital Contingency 14.0
  - Disaster Vulnerability Reduction Project-DVRP 27.5
  - Colombette Vending and Viewing Facility 0.3
  - Gaboo Lands Rationalization Project 0.37
  - TOTAL 82.3
  - Source: Discussion with national authorities.

- Housing and resilience:
  - Government reforms aim to make housing more affordable and resilient to reduce implicit public disaster-related contingent liabilities.
  - Climate Adaptation Financing Facility (CAFF) pilot: US$4.5 million allocation to be managed by the Saint Lucia Development Bank to provide concessional loans for structural retrofitting and pre-emptive investments for homeowners.

### Sectoral priorities for new adaptation projects
- Main priority sectors for new projects:
  - Infrastructure (roadways and bridges): climate-proofing and retrofitting; planned public investment on road construction and rehabilitation estimated at US$91 million (including bilateral and multilateral partners), with US$11.8 million in 2016–17.
  - Water supply systems: redevelopment in Vieux Fort and Dennery (Dennery project expected to give 8,000 people in Dennery North access to high-quality water supply); further drainage and desalination strengthening likely needed.
  - Land use planning and management (including coasts).
  - Agriculture and fisheries: disaster risk reduction to maintain food security; agricultural technique modifications under Agricultural Transformation Program.

### Regulatory and legislative gaps to support adaptation
- Recommended legislative and regulatory actions:
  - Expedite completion and adoption of outstanding legislation, including:
    (i) development and adoption of a Sustainable Building Code;
    (ii) review and approval of the Coastal Zone Management Strategy and Action Plan;
    (iii) revision of the National Waste Management Strategy.

### Financial sector preparedness and reserves
- ECCU financial system: limited involvement in climate change strategy; awareness relatively low.
- Local banks could support resilience investments via SME engagement, innovative financing, and disaster preparedness; current focus is mainly consumer lending; nonbanks do not participate in big-project financing.
- St. Lucia’s net reserves at the ECCB:
  - Amount to four months of imports and almost 30 percent of broad money.
  - Benchmarks: 3 months of imports and 20 percent of broad money (reserves are deemed adequate against these benchmarks).
- Recommendation for adaptation (listed verbatim):
  1. Create and maintain a database that provides information on the progress in the implementation of adaptation projects as well as other projects that have a climate component.
  2. Adopt the following plans, which incorporate disaster risk management and climate adaptation:
       a. The revised National Environmental Management Strategy
       b. The National Coastal Management Policy
       c. The National Spatial/Land Use Plan
  3. Enact the Sustainable Building Code, and review and adopt the Physical Planning Regulations to integrate disaster risk management and adaptation considerations.
  4. Verify that the National Waste Management Strategy has been approved.
  5. Consider rezoning of flood areas.

### Financing strategy for mitigation and adaptation
- St. Lucia faces significant financing challenges due to high debt and limited fiscal space, but a feasible financing strategy can be identified with international support.
- Financing needs for mitigation projects identified in the NDC amount to around 14 percent of FY2016 GDP between now and 2030.
  - If spread evenly over 13 years, this implies investment and funding needs of 1.1 percent of GDP a year.
  - Government’s intention to finance 90 percent of the cost from private sources implies the budget would have to bear only about 0.1 percent of GDP a year.
- GDP ( FY2016) 4514
- Note: staff estimates for adaptation are referenced; further breakdowns and totals are presented in the source’s Table 6 and accompanying text.

*Source: IMF staff report content provided in the supplied content unit.*

### 1.8 percent of GDP a year on a commitments basis (less in execution), with possibly one-

### cr18181 - 1.8 percent of GDP a year on a commitments basis (less in execution), with possibly one-

### Climate-change investment needs and financing options
- St. Lucia could sustain investment at "1.8 percent of GDP a year on a commitments basis (less in execution), with possibly one-third or more grant-financed."
- Maintaining this level of investment would:
  - Allow substantive advances in resilience-building using levels of financing shown to be historically feasible.
  - Require continued effort to obtain roll-over financing without worsening the fiscal stance.
- Unmet adaptation needs:
  - Chapter V points to significant unmet needs for adaptation; sectoral strategies and costed priority projects are likely to exceed financing available from rolling over existing levels.
  - Scaling-up will require grant financing or packaging adaptation investments to create bankable projects for private investors.
  - Carbon taxation would generate additional revenues.
- Current actions to mobilize grants:
  - St. Lucia is seeking accreditation to the Green Climate Fund (GCF).
  - The Ministry of Finance is reviewing the institutional framework to meet GCF requirements and is undertaking steps under the GCF Preparatory Support Programme, with support from the Caribbean Development Bank.
- Potential fiscal easing from resilience-building:
  - A growth dividend from successful resilience-building could reduce the burden of financing as a share of GDP and make investments more compatible with debt sustainability.
  - Strong climate change policies may catalyze international support and make grant financing more accessible.

### Consistency with fiscal and external debt sustainability
- Starting point:
  - "St. Lucia’s starting point for fiscal sustainability is poor, but successful spending on resilience-building should improve rather than worsen it."
  - IMF staff estimates annual fiscal costs of relief and reconstruction are "c.1 percent of GDP."
- Scenario analysis (Figure 6 summary):
  - Baseline scenario with insufficient investment: growth is eroded and public debt grows steadily above the ECCU target of "60 percent of GDP through 2030."
  - Illustrative alternative scenario with appropriate climate change policies:
    - Gradual increase in resilience and adequate fiscal buffers reduce negative impacts on capital stock and efficiency, boosting growth.
    - Strong climate change policies likely improve access to grant finance, allowing capital spending to expand and further increase growth.
    - Mitigation policies increasing energy efficiency could yield a further growth dividend.
  - Staff estimates for an adequate-resilience scenario:
    - GDP growth could be permanently higher by "0.3 percent."
    - Grants of "0.5 percent of GDP through 2023" could finance additional adaptation investment.
    - The demand effect of this investment would add a temporary boost of "0.3 percent" to GDP growth.
    - In the baseline scenario, growth would return to potential of "1.5 percent" after 2023.

### Other macroeconomic considerations
- Balance of payments:
  - Net oil import bill is nearly "3 percent of GDP" at current low oil prices; during the oil price boom it was nearly "6 percent of GDP."
  - Shifting to renewable energy and improving energy self-sufficiency would substantially reduce the import bill, reduce exposure to oil price volatility, and enhance competitiveness.
  - Successful adaptation would help limit adverse impacts on tourism (for example, by containing coastal erosion).
- Revenue:
  - Gradual implementation of a broad carbon tax could bring significant additional revenues to help achieve fiscal objectives.
- Inflation and overheating:
  - Risks of overheating and inflation are unlikely given high unemployment ("24 percent in 2015"), openness, and the exchange rate peg.

### Institutional issues and accessing finance
- Fundraising and capacity:
  - A climate-change or disaster-related fundraising initiative should be a priority to mobilize grant financing and private investors.
  - The government needs strengthened capacity and vision; the NDC forum could catalyze investment if objectives and targets are well-specified.
- Innovative financing:
  - The Department of Sustainable Development is exploring climate-change-related instruments (similar to debt-for-nature swaps) to finance marine conservation.
  - Such instruments have succeeded in Seychelles but must be value-for-money; care needed to avoid swapping an old liability for a more costly obligation.
- Access hurdles and regional coordination:
  - St. Lucia faces difficult hurdles accessing climate financing (GCF, Adaptation Fund); coordination with regional efforts (OECS or CARICOM) is likely helpful.
  - Example: In January 2017 the Caribbean Community Climate Change Centre mobilized a US$25 million project for ten Eastern and Southern Caribbean states, with USAID financing.
- Contingent financing:
  - Contingent financing instruments (e.g., Cat DDO under discussion with the World Bank) can support disaster preparedness by ensuring immediate liquidity for relief and recovery; Cat DDOs are not designed for long-term reconstruction.

### Recommendations for financing
- Develop a comprehensive picture of financing needs to execute the NDC and address adaptation challenges, including contingency financing.
- To ensure continued fiscal and debt sustainability while responding to climate change challenges, rely as much as possible on private sector and grant financing (and where possible on revenue mobilization).
- Articulate a strategy for raising climate-change financing; use the NDC forum as a catalyst.
- Prioritize success with the renewables strategy to strengthen St. Lucia’s balance of payments.

### Risk management strategy — assessment, self-insurance, and transfer
- Risk assessment:
  - St. Lucia needs to develop risk assessment capacity and a framework defining government contingent liabilities when a disaster occurs.
  - The government does not quantify risks associated with climate-related hazards nor prepare a fiscal risk statement.
  - It tracks realized risks with a damage and loss reporting system and has started a public asset registry to inform PSIP.
- Self-insurance and buffers:
  - A National Disaster Risk Management Strategy has been approved to provide a comprehensive framework using multiple instruments to strengthen financial capacity for disaster financing.
  - Existing contingency provisions are small:
    - Contingency Fund established in 1997 with a balance of around "US$300,000" (less than "0.02 percent of GDP"), used once for a prison fire.
    - NEMO imprest account receives about "US$240,000 a year (0. 01 percent of GDP)", with provision for additional allocation for initial disaster response.
    - The 2009 DRM Policy Framework required an Emergency Disaster Fund (EDF), which was enacted but never became operational.
  - Current PFM practices:
    - Do not facilitate rapid disbursement or easy tracking of disaster expenditures; ad hoc reallocations are accounted for as Advances, not reconciled later through a supplementary budget.
  - Proposal for a savings fund:
    - A savings fund for natural disasters would permit immediate financing and support reconstruction investments, reducing the need to issue public debt post-disaster.
    - Simulation results:
      - If the savings fund were the sole source, "capitalization of 8 percent of GDP" would be needed to keep it sustainable with a low probability of depletion.
      - Annual budget savings of around "0.9 percent of GDP" into the fund would be required for replenishment in years with no disasters.
      - A risk-layered approach combining instruments suggests "capitalization of 5 percent of GDP" and annual budget savings of "0.6 percent" could provide a sufficient buffer, taking into account CCRIF coverage.
    - As the fund should be kept in liquid assets, the cost is equivalent to the opportunity cost of reducing public debt at an average interest rate of "5 percent", higher than the "4 percent" premium paid to CCRIF.
    - Increasing CCRIF coverage may be preferable but is limited by CCRIF capital and St. Lucia’s already high coverage.
  - Financing the fund:
    - Preserve windfall gains from the Citizenship by Investment program by capitalizing the savings fund with those revenues; lock these one-off revenues into a revolving savings fund with strong governance, transparency, and verifiable withdrawal rules.
- Risk transfer:
  - St. Lucia scores highly on participation in risk-transfer schemes (e.g., CCRIF), but faces hurdles accessing larger climate funds.
  - Regional coordination can be used to overcome access barriers.

*Source: IMF country report content (cr18181).*

### 53.      St. Lucia has been innovative in utilizing some risk transfer instruments.

### cr18181 - 53.      St. Lucia has been innovative in utilizing some risk transfer instruments.

### Risk transfer instruments in use
- St. Lucia is a member of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which offers parametric insurance providing immediate post-disaster liquidity when triggered by pre-defined thresholds for hazards such as hurricanes, earthquake and excess rainfall.
  - St. Lucia pays an annual premium of US$2.42 million for a potential maximum payout of US$66.6 (close to 4 percent of GDP).
  - To date, St. Lucia received payouts of US$1 million for an earthquake of magnitude 7.4 in 2007 and US$3.2 million for Hurricane Tomas in 2010.
- The Government can access up to US$1 million immediately after declaration of a state of emergency, as part of the Contingency Emergency Response Component (CERC) of the World Bank’s Disaster Vulnerability Reduction Project (DVRP) in St. Lucia.
- St. Lucia is working with the World Bank to devise a Development Policy Loan with a catastrophe deferred drawdown option (Cat DDO) of US$20 million.
  - The proposed Cat DDO provides immediate liquidity in relief and response phases, is an ex-ante financial instrument with a “soft” trigger (funds available after declaration of a state of emergency), and is similar in purpose to CCRIF products but triggered differently.

### CCRIF and Cat DDO characteristics (as described in source boxes)
- Box 4: CCRIF
  - Regional catastrophe risk pooling mechanism for hurricane and earthquake risk using parametric insurance (payouts based on parameters such as wind-speed).
  - Sixteen current members listed (including St. Lucia).
  - Coverage remains relatively narrow to keep premia affordable; basis risk has led to some disappointing payouts.
- Box 5: Cat DDO
  - Contingent credit line providing immediate liquidity up to US$500 million or 0.25 percent of GDP (whichever is less).
  - Soft trigger: funds available after declaration of a state of emergency due to a natural disaster.
  - Revolving feature; three-year drawdown period renewable up to four times, maximum of 15 years.
  - Requires implementation of a disaster risk management program monitored by the Bank.
  - Charges a LIBOR-based interest rate on disbursed outstanding amounts; front-end fee of 0.50 percent and a renewal fee of 0.25 percent on the loan amount.

### Insurance landscape and under-insurance
- St. Lucia has a well-developed insurance industry, but under-insurance is the norm.
  - All mortgaged properties must carry property and life insurance.
  - Most insurers issue natural catastrophe coverage as extensions or endorsements of existing fire and allied perils policies.
  - The majority of the residential property stock (80 percent) is currently not insured against natural disasters, given the perceived high cost.
  - Under-insurance is also likely significant for businesses, given the relatively low median income of local entrepreneurs.
- Under-insurance of public assets slows reconstruction after disasters.
  - Most public assets, including hospitals and schools, are not currently insured against natural disasters.
  - St. Jude hospital (which was not insured) required seven years of reconstruction before it opened again after a fire in 2009.
  - A sampling of 10 parastatal insurance premium payments shows that premium payments rose by 800 percent after Hurricane Thomas in 2010.
  - Parastatals purchase insurance outside the oversight of the central government and there is no centralized body that monitors the insurance of public assets.

### Innovative schemes for low-income individuals
- Livelihoods Protection Policy (LPP)
  - Weather-index based insurance policy launched by the Munich Climate Insurance Initiative (MCII) in partnership with CCRIF in 2013.
  - Low-income individuals in St. Lucia eligible for insurance from wind and excess rain.
  - Thirty-one individuals in St. Lucia received payouts totaling US$102,000 on their Livelihood Protection Policies due to Hurricane Matthew.
  - Available via local distribution channels: co-operative banks, credit unions, and farmer associations.
- Index insurance offers swift cash payouts following extreme weather events (high winds and heavy rain), enabling quick recoveries for policyholders.

### Fiscal and financing analysis highlights (extracted figures and model assumptions)
- Suggested contingency financing and savings fund targets:
  - Contingency disaster financing should be increased immediately to US$7–10 million.
  - A savings fund with capitalization of 5 percent of GDP, replenished on a rolling basis, would give St. Lucia a 95 percent probability of being able to cover the fiscal costs of disasters without incurring additional debt.
- Model assumptions and references in the source figures:
  - Assumes a probability threshold of natural disasters of 25 percent and annual budget savings of 1.05 percent of GDP in years with no ND (note: ND = natural disasters).
  - Assumption: annual probability of a ND = 0.2 (used in probability of Fund depletion figure).
  - ECCU commitment by 2030 is shown in public debt dynamics charts in the source.
  - Probability thresholds used to calibrate the frequency of simulated natural disasters include scenarios where ND occurs every 3, 4, 5, 7, and 10 years (presented in the source figures).

### Risks and limitations noted
- Parametric instruments like CCRIF pay based on predefined events rather than actual losses, which can create basis risk and lead to disappointing pay-outs relative to losses.
- CCRIF coverage remains relatively narrow to maintain affordable premia; expansion must balance affordability and price discovery as climate change intensifies.
- Under-insurance creates fiscal risk by generating contingent liabilities for government reconstruction and borrowing (example: government borrowed, including a US$20 million loan in 2014 from the Export Import Bank of Taiwan, Republic of China, repaid over 20 years, for St. Jude hospital reconstruction).

### Recommendations for Risk Management (verbatim listing from source)
1. St. Lucia should give priority to developing a fiscal risk statement, as part of a general effort to strengthen capacity to assess risks and put plans in place to manage them.
2. Larger contingency funding is needed (even before climate change), given the size of the natural disasters facing St. Lucia.
   - a. Contingency disaster financing should be increased immediately to US$7–10 million.
   - b. A savings fund with capitalization of 5 percent of GDP, replenished on a rolling basis, would give St. Lucia a 95 percent probability of being able to cover the fiscal costs of disasters without incurring additional debt.
3. Revenues from the Citizenship-by-Investment program would be an appropriate source of capital for a savings fund (though other fiscal savings may also be necessary).
4. Over the medium term, explore the cost-effectiveness of insurance as a supplementary buffer, for instance, to insure key government buildings.
5. Consider making insurance mandatory for buildings in flood-risk areas, and/or other measures (housing and land use policy) to limit settlements in these areas.
6. Develop the domestic insurance industry (expertise and size), while ensuring that capital and liquidity keep pace with needs to cover intensified natural disasters.
7. Regional initiatives for insurance are likely to be the most cost-effective, given St. Lucia’s diseconomies of scale. Collaboration with CCRIF and other OECS efforts to deepen the insurance industry is a promising path forward.
8. Strengthen contingency financing.

*Source: IMF staff report text in cr18181 - St. Lucia chapter on risk transfer instruments and disaster risk management.*

### 62.      St. Lucia’s budget system is relatively disciplined and transparent compared with that

### St. Lucia’s budget system is relatively disciplined and transparent compared with that

### Budget system: current status and gaps
- The budget is relatively unified, follows some transparent procurement practices, and has a TSA which is cleared nightly.  
- Donor funds are included in nightly cash balance management though are separate from the TSA; donor funds appear to be reasonably well-protected following the regular commitments process.  
- All borrowing must be authorized by the Minister of Finance.  
- A PEFA was undertaken in 2009 and an update has been completed; preliminary results suggest substantial progress in some PFM areas since 2009 but:
  - Need to develop competitive practices in procurement.
  - Concerns remain about complete capture of donor funds, particularly outside central government.
- The budget system does not adhere to international accounting standards.

### Climate-resilience integration in budgeting
- No system in the PSIP or the budget for identifying climate-change related projects other than by project title; no criteria for evaluating mitigation and adaptation impacts of proposed investments.
- Line ministries are not required to explicitly consider adaptation impacts or costs of proposed adaptation proposals in their budget submissions.
- FY17/18 budget has 10 budget lines dedicated to disaster-risk management.
- Some line ministries have included disaster-management and adaptation goals within existing program-budgeting formats, but:
  - Reporting on progress is incomplete and sporadic.
  - Some agencies (e.g., Department of Infrastructure) indicate they consider resilience in investment planning and design standards; others have not (e.g., no goals for streetlighting reform noted for the Department of Infrastructure).

### Program budgeting and procurement reforms
- Program budgeting introduced starting in the 1990s; agencies must specify objectives and report the following year on success meeting them.
- Enforcement of reporting requirements is important to sustain program budgeting benefits (articulating priorities and tracking spending).
- Public Procurement and Asset Disposal Act (revised, currently under review) provides for streamlined procurement procedures to:
  - Strengthen efficiency of emergency public procurement for effective disaster response.
  - Allow flexible procurement systems adaptable to post-disaster circumstances to ensure timely delivery of goods, rehabilitation works and services.
  - Generate expenditure efficiencies and fiscal savings over the medium term.

### Recommendations for National Processes (enumerated)
1. Ensure responsibilities for meeting climate-change objectives are logically grouped in relevant ministries, including responsibilities for developing appropriate sectoral strategies with costed investment projects.  
2. Revive the PSIP, addressing problems that made it inadequate for pursuing government investment priorities.  
3. Establish a standard framework and process for integrating climate-change mitigation and adaptation into the public investment management cycle, with clear, uniform criteria for evaluating, appraising, and allocating resources to climate-change and disaster-resilience initiatives.  
4. Ensure climate change objectives and activities are systematically identified throughout the budget, and investment projects explicitly linked to these.
   - a. Short run: include climate change objectives into budget circulars to help line ministries identify and prioritize climate related budget items and capital investments.
   - b. Long run: consider introducing climate change expenditure classification methodology, assigning climate ‘tags’, and incorporating these in the economic and functional classifications of the budget.
5. Build capacity for effective public investment appraisal and monitoring in the Ministry of Finance and other relevant ministries.  
6. Continue development of program budgeting, particularly by enforcing reporting requirements and introducing climate change objectives.

- Footnote guidance: “An expenditure should be identified as supporting climate change action whenever it finances activities whose outcomes and results can be measured in climate terms—such as reduced climate vulnerability, or reduced emissions. The classification methodology should therefore be robust and evidence-based, and uniformly applied to all financial flows.”

### Priority resource needs to achieve climate-change strategy (indicative tally)
- General preparedness
  - Updates of planning documents and legal drafting for legislative revisions (capacity-building).
  - Completion of the disaster-preparedness strategy (financial support and capacity-building).
  - Integration of climate-related activities into costed sectoral plans (capacity-building).
- Mitigation
  - Private investment of US$218 million by 2030 ($183 million by 2025) in:
    - Energy-efficient buildings and appliances
    - Geo-thermal, wind and solar energy generation
    - Improvements to grid distribution and transmission efficiency
    - Water distribution and network efficiency
    - Efficient vehicles
    - Expanded public transit
  - Supporting government program costs of US$ 23 million by 2030 ($19 million by 2025) (primarily government financing or external support).
  - Carbon taxation (follow-up capacity-building, especially to rationalize base-broadening of fuel taxes to pricing of power, and possibly vehicle taxation and congestion pricing); capacity-building to support general revenue mobilization.
  - Support for investment promotion (capacity-building; external support).
- Adaptation
  - Public investment on road construction and rehabilitation (US$91 million).
  - Water supply systems (not costed; some private investment should be possible).
  - Land use planning and management, including coasts (not costed; some private investment should be possible).
  - Agriculture and food security (not costed; private investment would be most appropriate).
- National processes
  - Further development of public investment management skills (capacity-building).
  - Further strengthening of public financial management skills (capacity-building).

### Renewable energy: context, potential, and targets
- In 2014:
  - 25 percent of all merchandise imports were fuel.
  - More than 16 percent of GDP is spent on fuel imports, of which more than half for the transport sector.
- St. Lucia has large technical potential for geothermal, wind and solar energy; geothermal is particularly feasible and relatively low-cost given the island’s volcanic nature.
- Biomass and hydroelectric generation are infeasible due to scarcity of large tracts of agricultural land and a small base flow rate in rivers and waterfalls.
- National targets and strategies:
  - National Energy Policy (2014 revision) target: penetration of renewable energy of 35 percent by 2020. Meeting this target could imply:
    - a 22 percent reduction in oil imports,
    - an 11 percent reduction in the national electricity bill,
    - and a 1 percent increase in the level of long-term GDP.
  - National Energy Transition Strategy (NETS), developed in 2016, provides a roadmap to transition from almost 100 percent diesel generation to include indigenous renewable sources without compromising grid stability.
- LUCELEC monopoly and competition:
  - LUCELEC has a monopoly in fossil fuel energy generation until 2045; a 2016 revision of the Electricity Supply Act allows competition in renewable energy generation.

### Geothermal energy specifics
- Technical potential:
  - More than 75 MW of geothermal energy potential compared with total peak demand of 60 MW in 2016; excess could be exported.
- Development timeline and financing:
  - Geothermal Resources Development Bill introduced in 2011.
  - Surface exploration from 2014 to 2016 suggested existence of a geothermal reservoir; further exploration drilling needed.
  - Plans to use grant and concessional financing worth US$21 million from the World Bank to mitigate early-stage risks.
  - If a high-quality resource is confirmed, Government plans to collaborate with the private sector.
  - Envisaged 30 MW geothermal facility to be operational by 2023 would move renewables closer to 65–70 percent generation (well beyond 35 percent target).

### Regulatory and policy framework for energy
- Challenges: land acquisition, obtaining permits, policy adjustments from changes in political administrations, and further development of the regulatory regime.
- Ownership and regulation:
  - Government controls 46 percent of LUCELEC’s shares (12 percent direct, 33 percent through National Insurance Corporation and Castries City Council).
  - LUCELEC’s concession governed by the Electricity Supply Act of 2001; in practice LUCELEC is mainly self-regulatory with little oversight of adherence to standards.
  - National Utility Regulatory Commission (NURC) set up January 2016 replacing Government as regulator for electricity and water; primary legislation introduced but other supporting regulations deferred.
  - Eastern Caribbean Energy Regulatory Agency (ECERA) launched April 2017 with World Bank support as a supra-national regulatory authority for the OECS (pilot launch in Grenada and Saint Lucia).
- Sector policies and incentives:
  - From 2015, Government allowed Independent Power Producers (IPPs) and implemented net metering.
  - Fiscal incentives:
    - 1999: import duties and consumption taxes on renewable energy equipment eliminated.
    - 2001: purchase of solar water heaters made tax-deductible.
  - No direct government subsidies to the electricity sector; residential consumers consuming less than 180kW are cross-subsidized by those with consumption higher than 180kW.
  - LUCELEC is exempt from paying import duties and benefits from an indirect subsidy.

### IMF spreadsheet model assessing mitigation policies (model features and assumptions)
- Model scope:
  - Distinguishes three sectors: power generation, transportation, and an “other” energy sector representing direct fuel use in industrial, commercial and residential sectors.
  - Kerosene and LPG not modeled; non-fossil GHGs not modeled.
- Power sector assumptions:
  - Electricity demand rises with GDP based on IMF forecasts; income elasticity for electricity assumed to be unity.
  - GDP expands by 23 percent between 2015 and 2030.
  - Electricity use assumed to decline autonomously by 0.5 percent a year due to gradual retirement of older, less efficient capital.
  - Electricity prices rise by about 5 percent between 2015 and 2030 due to gradually rising crude oil prices.
  - Each 1 percent increase in crude oil prices raises retail prices for diesel fuel used by the power sector by about 0.4 percent; this increases electricity prices (at least initially) by 0.2 percent.
  - Each 1 percent increase in electricity prices reduces overall demand by 0.4 percent, with 60 percent of the response from efficiency improvements and 40 percent from reduced product use.
- BAU scenario:
  - Renewables share in power generation assumed to reach 5 percent by 2020 through gradual, cost-effective switching.
  - A 1 percent increase in diesel fuel prices reduces diesel fuel use in the power sector by approximately 0.55 percent, with three quarters of the response from fuel switching and one quarter from reduced electricity demand.
- Road transport sector:
  - Each 1 percent increase in GDP increases demand for fuel use by 0.75 percent.
  - Fuel use autonomously falls over time at 0.75 percent a year due to improvements in vehicle fuel economy.
  - Fuel prices affect fuel use through changes in average fleet fuel economy and vehicle use.

*Source: St. Lucia — INTERNATIONAL MONETARY FUND.*

### 0.4 percent, with 60 percent of the response due to improvements in fuel efficiency and 40 percent

### cr18181 - 0.4 percent, with 60 percent of the response due to improvements in fuel efficiency and 40 percent

### Data and key parameter assumptions
- Fuel prices per (imperial) gallon provided by the MOF include base CIF prices, margins for wholesalers and retailers, excises or levies, and service charges (currently 6 percent of the CIF price).
- Excises and levies:
  - Excises for road fuels: $2.5 per gallon (scheduled to increase to $4 per gallon).
  - Levies for diesel use for the power and other energy sector: $1 per gallon.
- Road fuel excise revenues for 2016: $42.6 million.
- Road fuel use (aggregate gasoline and diesel) is computed by dividing MOF road fuel excise revenues for 2016 ($42.6 million) by the excise rates ($2.5 per gallon).
- CO2 emission rates:
  - Diesel: 0.0123 (metric) tons per gallon.
  - Road fuels (averaging over diesel and gasoline): 0.0114 tons per gallon.
- Revenues are computed by fuel use times the relevant excise tax or levy and aggregated over fuels. Revenues from service charges are not included.
- Power sector data (2016 electricity sales by residential, commercial and industrial sectors, use of diesel fuel for generation, and the share of diesel fuel in operating costs) taken from LUCELEC. Tariffs vary very little across consumers and are set to approximately recover operating and capital costs.
- Diesel use in the other energy sector source: IDB.

### Policy scenarios modeled (transport and power sectors)
- BAU scenario:
  - Projects future fuel use and electricity demand to 2030 starting with 2016 levels.
  - Tax rates and prices, aside from the crude oil price, fixed at current levels.
- Road fuel tax scenario:
  - Incorporates the slated $1.50 per gallon excise tax increase for road fuels into future fuel prices.
  - Calculates changes in fuel use, emissions, and revenue relative to BAU.
- Carbon tax scenario:
  - Includes the road fuel tax and applies the same tax increase ($1.50 per gallon) to diesel fuel use in the power and other energy sector.
  - Increase implemented progressively, rising by a fixed annual amount each year to reach $1.50 by 2030.
- Vehicle fuel economy policy:
  - Measures (e.g., excise taxes promoting fuel-efficient vehicle purchase) modeled by a ‘shadow price’ that increases the price in the equation determining average fuel efficiency but not vehicle miles travelled.
  - Shadow price phased in progressively to reach $1.50 per gallon by 2030.
  - Shadow price is not an actual tax and does not generate new revenues.
- VAT reform:
  - Applies the standard VAT rate of 12.5 percent to road fuels and electricity consumption at the residential level.
  - Reduces road fuel use similarly to higher excises but has only a very blunt effect on power-sector emissions because it applies only to final consumption and does not affect commercial and industrial demand or promote switching from diesel to renewables.
- Electricity efficiency policy:
  - Modeled analogously to vehicle fuel economy policy via a shadow price with the same level of incentive as in the carbon tax scenario.
- Renewables policy:
  - Forces an extra amount of renewable generation so the renewable share reaches 50 percent by 2030 (diesel fuel generation share falls accordingly).
- High carbon tax:
  - Same as the carbon tax policy but with all tax increases doubled (i.e., an increase in fuel tax of $3 per gallon introduced immediately for road fuels and gradually for non-transport fuels).

### World Bank macro-fiscal model (St. Lucia) — structure and climate block
- Model type: Structural econometric macro-fiscal model with a climate-change block (hybrid macro/CGE features) and Excel interface for policy analysis.
- Core features:
  - Equations derived from first-order conditions (household/firm optimization) and linearized to a system of linear reduced-form equations.
  - Expenditure components of GDP split into household consumption, government consumption, exports, and imports; linked to production/value added.
  - Equilibrium achieved through prices; model is dynamic with demand shocks seen as temporary.
  - Government block: revenues (income taxes, customs, VAT, grants); expenditures (wage bill, goods and services, acquisition of non-financial assets, interest payments, transfers, other).
  - Climate component uses an input-output table to capture intermediate input use and sectoral energy mixes.
- Climate change block components:
  - Carbon taxes targeting carbon content of non-renewable energies (standard conversion factors convert liters of diesel to kilograms of carbon emission).
  - Energy efficiency measures:
    - Housing (e.g., solar).
    - Transport (diesel and gasoline).
  - Alternatives:
    - Share of gasoline in transport services.
    - Share of renewable energy in electricity production (e.g., geothermal).
- Pricing mechanisms:
  - Model accounts for different pricing mechanisms on fuel: diesel at pump is charged at a different rate than diesel used by the national power provider (LUCELEC), which receives a discount.
- Policy objectives quantified by the model:
  1. Carbon reduction.
  2. Efficiency (carbon taxes as additional budget revenue).
  3. Welfare (incidence analysis).
- Model estimation: most equations estimated with state-of-the-art macro-modelling techniques; some parameters calibrated where data are insufficient.

### NDC-based scenarios examined (design and assumptions)
- NDC targets and baselines:
  - Baseline reference: 643 GgCO2eq emissions in 2010.
  - NDC emission-reduction targets: 16 percent reduction by 2025 and 23 percent reduction by 2030 relative to BAU.
  - NDC renewable objectives: increase renewables from less than 1 percent in 2016 to 35 percent by 2025 and 50 percent by 2030.
- Renewables scenarios:
  - NDC Renewables:
    - Gradual increase in renewable share to a maximum level of 50 percent reached in 2030.
    - Share rises by a bit less than 4 percentage points per year from 2018 onwards.
  - Full Renewables:
    - Key NDC projects simulated:
      - Solar farm: 3MW (US$ 2.2 million).
      - Wind farm: 12 MW (US$ 37 million).
      - Geothermal power plant: 30MW (US$ 147 million, of which US$ 22 million of public financing).
    - Beginning in 2019, one-third of energy is sourced from renewables, climbing to 100 percent in 2023 in this scenario.
- Carbon taxation scenarios:
  - Road Fuel Tax scenario:
    - Raises the fuel excise by EC$1.5 per gallon (equivalent in the model to a carbon tax on transport fuels of US$ 45 per ton of carbon emission).
    - Shock imposed by calculating an equivalent carbon tax only in the transportation sector.
  - Moderate Carbon Tax scenario:
    - Applies the same excise fuel increase to all diesel products in the economy.
    - Application to non-transport sectors introduced gradually so the tax in 2030 is equivalent to the excise applied to the transport sector in 2017 and 2018.
  - High Carbon Tax scenario:
    - Applies an excise fuel twice as large for the transport sector throughout the period, with tax on non-transport sectors rising gradually to EC$3 per gallon by 2030.
  - Variants: scenarios modified to simulate using additional tax revenues from carbon to finance public investment that reduces emissions.

### Findings — GHG emission reductions, macro, and public finance impacts
- Renewables scenarios:
  - NDC Renewables: carbon emission reduction of 24 percent in 2030 compared to the baseline (just enough to meet the NDC target).
  - Full Renewables: carbon emissions around 48 percent lower in 2030 than in the baseline.
  - Assumption: no change in consumer prices from the switch to renewables.
- Carbon taxation simulations (impacts on prices, emissions, and revenue):
  - Road Fuel Tax scenario:
    - Household price inflation increases by around 0.87 percentage points in the year of the excise increase (mostly driven by transportation prices).
    - Carbon emissions estimated to be around 2 percent lower in 2030 than in the baseline without the excise increase.
    - Excise estimated to generate additional revenue of around 0.4 percent of GDP by 2030.
  - Moderate Carbon Tax scenario:
    - Broader application (including electricity sector) produces a much greater impact on carbon emissions than in the Road Fuel scenario.
    - In 2030, carbon emissions estimated to be around 5.6 percent lower than in the baseline.
    - Revenue generated: almost 1 percent of GDP by 2030.
  - High Carbon Tax scenario:
    - Household price inflation increases by around 2 percentage points in the year of the excise increase.
    - In 2030, carbon emissions estimated to be around 10 percent lower than in the baseline.
    - Revenue generated: almost 1.8 percent of GDP by 2030.
  - Real GDP impacts:
    - Negative effects of carbon pricing could be counter-balanced by increases in private investment related to renewable energy projects and in public investment supported by carbon tax revenues.
- Policy complementarities and risk buffer:
  - Full Renewables would provide larger carbon emission reductions than NDC targets and could buffer against risks (project delays, uncertain renewable costs, relative price shifts favoring fossil fuels, higher car imports, or difficulties attracting renewable investors).
  - A similar logic supports consideration of more ambitious carbon taxation.

### Distributional impacts (macro-micro simulation approach and results)
- Methodology:
  - Macro-micro simulation links sectoral macro results to household-level budget effects using the 2016 household survey.
  - Three steps in the simulation:
    1. Convert macroeconomic price deflators at sectoral level into consumer prices for 105 economic activities.
       - Macroeconomic price deflators initially obtained for 7 sectors: Agriculture, Industry, Construction, Electricity, Transport, Hotels, and Other services.
       - St. Lucia Supply and Use Table (SUT) distributes broad sectoral price changes into 105 activities to obtain effects on purchaser prices, margins, and final consumer prices.
    2. Map changes in consumer prices for 105 activities to corresponding household budget items.
       - A concordance table between ISIC Rev. 3 and COICOP was constructed using CPC Ver 1.0 as bridge.
    3. Using household budget shares, calculate losses in household per capita income due to changes in consumption prices.
       - Prices affect each household based on budget shares.
       - Household behavior is not affected (no substitution effect between commodities).
       - Long-term distributional effects presented as percent changes in household per capita income by quintile.
- Scenarios evaluated in distributional analysis:
  1) Road Fuel Tax.
  2) Moderate Carbon Tax.
  3) High Carbon Tax.
- Sensitivity analysis:
  - Two assumptions tested: a) only tax; and b) tax + revenues used for public investment.
  - Including revenues for public investment can augment losses only marginally, less than 1 percentage point in all cases.

*Source: IMF staff compilation from the St. Lucia macro-fiscal assessment and World Bank model inputs as presented in the chapter.*

### Annex IV. PIMA Institutional Questionnaire—Interview Responses

### Annex IV. PIMA Institutional Questionnaire—Interview Responses

### A. Planning Sustainable Levels
- 1. Fiscal Principles or Rules: Are there permanent fiscal principles or rules that support sustainable levels of capital spending?
  - 1.a Is fiscal policy guided by one or more permanent fiscal principles, or rules?
    - No.  Over the past years, debt and deficit targets have been set (MTFF in place).
  - 1.b Do fiscal principles or rules protect capital spending over the short term or medium term?
    - No. Capital spending is included under a target or limit for the overall fiscal balance or aggregate expenditure. Capital spending allocations are second in priority to recurrent due to fiscal constraints. Capital spending is not limited to physical assets.
  - 1.c Is there a target or limit for government liabilities, debt, or net worth?
    - Target for public debt ratio to GDP
- 2. National and Sectoral Planning: Are investment allocation decisions based on sectoral and inter-sectoral strategies?
  - 2.a. Does the government publish national and sectoral strategies for public investment?
    - There are no national development and sectoral development strategies and no national or sectoral public investment strategies. When there was a PSIP in prior years, these were not adhered to. Investment planning and prioritization are decentralized. Investment allocation decisions are largely driven by ODA financing.
  - 2.b. Are the government’s national and sectoral strategies or plans for public investment costed?
    - No
  - 2.c. Do sector strategies include measurable targets for the outputs and outcomes of investment projects?
    - They are being enhanced as program budgeting practices are slowly undertaken
- 3. Central-Local Coordination: Is there effective coordination of central and sub-national governments' investment plans?
  - 3.a. Are there limits on subnational government (SNG) borrowing?
    - n.a.
  - 3.b. Is capital spending by SNGs coordinated with the central government?
    - n.a.
  - 3.c Does the central government have a transparent, rule-based system for capital transfers to SNGs, and for providing timely information on such transfers?
    - n.a.
- 4. PPP: Is there a transparent framework for the scrutiny, selection and oversight of PPP projects?
  - 4.a. Has the government published a strategy for PPPs and issued standard criteria for entering into PPP arrangements?
    - No. There is a Government Policy Paper which was approved by the Cabinet in March 2015.
  - 4.b. Are PPPs subject to value for money review by a dedicated PPP unit prior to approval?
    - Yes. Implementation has just been initiated and led by the Ministry of Finance.
  - 4.c. Is the accumulation of explicit and/or contingent PPP liabilities systematically recorded and controlled?
    - Yes. (This applies to a very few prior PPP-type of transactions in the past called DFC/1)
- 5. Regulation on Infra Companies: Is there a favorable climate for the private sector and SOEs to participate in infrastructure provision?
  - 5.a. Does the regulatory framework support competition in contestable markets for economic infrastructure (e.g., power, water, telecoms, and transport)?
    - Provision of economic infrastructure is restricted to domestic monopolies
  - 5.b. Are there independent regulators who set the prices of economic infrastructure services based on objective economic criteria?
    - (There is not enough information to assess)
  - 5.c. Does the government oversee the investment plans of infrastructure SOEs and monitor their financial performance?
    - (There is not enough information to assess)

### B. Allocation to the Right Sectors and Projects
- 6. Multi-Year Budgeting: Does the Government prepare medium-term projections of capital spending on a full cost basis?
  - 6.a. Is capital spending by ministry forecasted over a multiyear horizon?
    - No. (Though it is being considered, currently, the Government does not have a medium-term expenditure projections for capital spending.)
  - 6.b Are there multiyear ceilings on capital expenditure by ministry or program?
    - No
  - 6.c. Are projections of the full cost of major capital projects over their life cycles published?
    - No
- 7. Budget Comprehensiveness: To what extent is capital spending undertaken through the budget?
  - 7.a. Is capital spending mostly undertaken through the budget?
    - Yes. Capital spending is undertaken through the budget financed by own source revenues, ODA, and PPPs.
  - 7.b. Are externally funded capital projects included in the budget documentation?
    - Yes
  - 7.c. Is information on PPP transactions included in the budget documentation?
    - Yes (based on a few DFC/1 practices so far in country)
- 8. Budget Unity: Is there a unified budget process for capital and current spending?
  - 8.a. Are capital and recurrent budgets prepared and presented together?
    - Yes but not in line with international standards.
  - 8.b. Does the budget include appropriations of the recurrent costs associated with capital investment projects?
    - Yes, but due to fiscal constraints the O & M budget is systematically underfunded
  - 8.c Does the budget classification and chart of accounts distinguish clearly between recurrent and capital expenditure, in line with international standards?
    - No, the COA is not in accordance with international standards (some LMs do not use it)
- 9. Project Appraisal: Are project proposals subject to systematic project appraisal?
  - 9.a. Are capital projects subject to standardized cost-benefit analyses whose results are published?
    - Cost-benefit analyses are usually conducted for major projects but not systematically published
  - 9.b. Is there a standard methodology and central support for the appraisal of projects?
    - There is no published methodology or central support for project appraisal. Project appraisal is not systematic and usually adopts the specific appraisal processes of the donors involved.
  - 9.c. Are risks taken into account in project appraisals?
    - A risk assessment covering a range of potential risks is included in the project appraisal, but budgets do not include contingency reserves to cater for possible cost overruns
- 10. Project Selection: Are there institutions and procedures in place to guide project selection?
  - 10.a. Does the government undertake a central review of major project appraisals before decisions are taken to include projects in the budget?
    - Major projects are reviewed by Ministry of Finance (MoF) staff prior to inclusion in the budget (but not necessarily for all local revenue financing by loans and bonds).
  - 10.b. Does the government publish and adhere to standard criteria for project selection?
    - No. There are institutions and procedures but these are not systematic and could benefit from having clear and consistent criteria.  The investment planning function is supposedly decentralized at the ministry/department level.
  - 10.c. Does the government maintain a pipeline of approved investment projects for inclusion in the annual budget?
    - The government maintains a pipeline of approved investment projects but other projects may be selected for financing through the annual budget

### C. Ensuring Productive and Durable Public Assets
- 11. Protection of Investment: Are investment projects protected during budget implementation?
  - 11.a. Are total project outlays appropriated by parliament at the time of the project’s commencement?
    - No. Outlays are appropriated on an annual basis
  - 11.a. Are in-year transfers of appropriations (virement) from capital to current spending prevented?
    - Yes but the MOF may allow them under very extreme conditions, which are very rare according to officials.
  - 11.c Can unspent appropriations for capital spending be carried over to future years?
    - No
- 12. Availability of Funding: Is financing for capital spending made available in a timely manner?
  - 12.b Are ministries/agencies able to plan and commit expenditure on capital projects in advance on the basis of reliable cash flow forecasts?
    - For the most part yes particularly for donor financed projects. Donor financed projects are allowed flexibility since source of financing is guaranteed by a loan/grant agreement.
  - 12.b Is cash for project outlays released in a timely manner?
    - Cash for project outlays are normally released in a timely manner according to the appropriation
  - 12.c Is external (donor) financing of capital projects integrated into cash management and the TSA?
    - External financing is largely held in commercial bank accounts outside the central bank’s government accounts/TSA
- 13. Transparency of budget execution: Are major investment projects executed transparently and subject to audit?
  - 13.a Is the procurement process for major capital projects open and transparent?
    - Many major projects are tendered in a competitive process, but the public has only limited access to procurement information unless required by donors.
  - 13.b Are major capital projects subject to monitoring during project implementation?
    - For all major projects, total project costs as well as physical progress, are centrally monitored (as well by donors for ODA projects) during project implementation
  - 13.c Are ex post audits of capital projects routinely undertaken?
    - No unless required by donors.
- 14. Management of Project Implementation: Are capital projects well managed and controlled during the execution stage?
  - 14.a. Do ministries have effective project management arrangements in place?
    - Capital project are not systematically managed and controlled during execution stage. And practice varies with ministry
  - 14.b. Has the government issued rules, procedures and guidelines for project adjustments that are applied systematically across all major projects?
    - There are no standardized rules and procedures for project adjustments
  - 14.c. Does the government systematically conduct an ex post review and evaluation of a project that has completed its construction phase?
    - No
- 15. Monitoring of Public Assets: Is the value of the assets properly accounted for and reported in financial statements?
  - 15.a Are surveys of the stocks, values, and conditions of public assets regularly conducted?
    - No
  - 15.b Are nonfinancial asset values recorded in the government balance sheets?
    - No
  - 15.c Is depreciation of fixed assets captured in government operating statements?
    - No

### Appendix I. CCPA Template
- 1. Climate Change Risks and Expected Impacts
  - Impact of climate change risks on the macro-framework/long-term outlook
    - How vulnerable is the economy to climate change?
    - What impact could climate change have on macro-sustainability?
    - Table of recent and expected climatic developments
- 2. General Preparedness for Climate Change
  - The NDC and other national resilience-building strategies
    - Does the NDC present a comprehensive and costed strategy for climate change response?
    - Is the climate change strategy consistent with broader development goals?
  - Disaster planning and other contingency plans
    - How well-prepared is the country to cope with possible intensified disasters?
- 3. Contribution to Mitigation
  - Statement of NDC pledge
    - How does the country plan to meet its emissions reduction target?
  - Clean energy plans
  - Carbon taxation and fuel subsidy policies
    - Does the current tax/subsidy system deliver appropriate carbon pricing?
    - What would the tax system look like with recommended carbon pricing?
  - Other carbon pricing strategies
    - What other carbon-pricing strategies could usefully contribute to mitigation?
  - Other macro-relevant policies for mitigation
    - Are any further large-scale mitigation policies relevant to the country?
- 4. Adaptation Plans
  - Has the country developed an adequate strategy to adapt to climate change?
  - Public investment plans
  - Table of Costed Climate Change Projects (if costing has been done)
    - US$  million  %GDP
    - Total
    - Mitigation
    - Adaptation
  - What, if anything, is missing from the adaptation investment strategy?
  - Other public programs (regulation reform, zoning...)
    - Adaptation isn’t just a matter of investment spending; what regulations support it?
  - Financial sector preparedness
    - How is the financial sector contributing to the climate change effort?
- 5. Financing Strategy for Mitigation and Adaptation Programs
  - Current state of financing
    - Does the country have adequate financing to meet the needs of its climate change strategy?
  - Consistency of climate change spending and financing plans with fiscal and external debt sustainability
    - Are the country’s climate changes plans consistent with fiscal and external debt sustainability?
  - Other macro-considerations
    - Would implementation of the climate change plans have any (good or bad) spillover effects to the macro-economy?
  - Institutional issues
- 6. Risk Management Strategy
  - Risk assessment procedures (e.g., fiscal risk statement)
    - How well does the government assess risk?
  - Self-insurance (government financial buffers including contingency provisions, rainy-day funds, NIR)
    - To what extent does the government self-insure against risks?
  - Risk reduction and transfer (other insurance, pooling arrangements, ...)
    - To what extent does the economy transfer risk?
- 7. National Processes
  - Integration of climate change into national planning processes
    - Have climate-related projects been mainstreamed into national planning?
  - Adequacy of public investment management system (effectiveness of procedures for identifying, evaluating, selecting, and implementing projects)
    - Are adequate public investment management systems in place, to ensure climate-related investments will be well-spent?
  - Adequacy of PFM systems for managing CC financing and outlays (transparent on-budget treatment of CC activities, multi-year budgeting, etc.)
    - Are adequate public financial management systems in place, to protect climate-related funding?
- 8. Taking Stock: Priority Needs to Be Met
  - What resources does the country need to mobilize, to achieve its climate-change strategy?

*Annex IV. PIMA Institutional Questionnaire—Interview Responses (St. Lucia)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18181.pdf_