## 2. The Delta Programme ## Source details **Canonical URL:** [2. The Delta Programme](https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023022.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023022.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2023/english/sipea2023022.pdf.json) --- ### A. Introduction and context - Netherlands commitments and vulnerabilities: - Committed to EU targets of 55 percent emission reduction in 2030 relative to 1990 levels and climate neutrality in 2050. - About one-quarter of the country is below sea level; a large part of the lowlands are in a delta. - Climate impacts summary: - Impacts of higher temperature and changes in frequency of extreme events appear modest by mid-century but are highly uncertain depending on warming scenarios and global mitigation actions. ### B. Mitigation: recent measures and assessments - Key national measures: - Revisions to the carbon dioxide (CO2) levy for industry. - Energy tax reform. - CO2 price floor for power generation. - Car tax reform. - Increase in the air passenger departure tax. - Expansion of SDE+ into SDE++ (funding renewable electricity, renewable heat, renewable gas, low-carbon heat, low-CO2 production across power generation, industry, transport, agriculture). - Recovery and EU context: - Dutch Recovery and Resilience Plan complements tax and regulatory measures with public investments in clean technology infrastructure. - EU Fit for 55 target: reduce EU GHG emissions 55 percent below 1990 levels by 2030; net zero GHGs by 2050. - EU ETS aligned with reducing combined emissions from power generation and industry 61 percent by 2030 below 2005 levels. - Netherlands non-ETS sector target: reduce emissions 48 percent below 2005 by 2030. ### C. Household energy price shocks and government support - Price shock facts and household burden: - Consumer prices for electricity and natural gas more than tripled between January 2020 and November 2022; pump prices for gasoline increased about 5 percent (IEA finding). - These shocks imposed a burden on the average Dutch household of 12 percent of their consumption. - Government measures: - VAT lowered to 9 percent (from 21 percent) on natural gas, electricity and heat from district heating effective July 1, 2022 (temporary). - Excise duty reductions on gasoline and diesel by 17.3 and 11.1 cents/liter respectively, bringing rates to 65.1 and 41.8 cents/liter from April 1, 2022. - Cap on household electricity and natural gas prices starting January 1, 2023: - Gas maximum rate: €1.45 per cubic meter (m3) up to consumption of 1,200 m3. - Electricity maximum rate: €0.40 per kilowatt hour (kWh) up to consumption of 2,900 kWh. - Usage above thresholds: contract rates apply. - One-off support: - Lump-sum energy allowance of €1,300 for lower-income households (in 2022 and 2023). - €190/month rebate on energy bills for small-scale consumers in November and December 2022. - Energy tax refund (per electricity grid connection) increased from €560 to €785. - Policy note: - Assistance should ideally be targeted and unrelated to energy consumption to limit fiscal costs and preserve conservation incentives; authorities might emphasize the temporary nature of the price cap. ### D. Rationale for accelerating transition away from fossil fuels - Energy price surge strengthens case for accelerating transition to reduce dependence on insecure energy sources and address climate crisis. - Higher energy prices produced only modest global CO2 emissions reductions due to fuel-switching (e.g., gas to coal) and expectations of partial reversal of the surge. - Example projection referenced: an additional €75 per tonne increase in carbon prices on top of predicted international energy prices for 2030 would still result in international natural gas prices that are 30 percent lower than recently experienced levels. ### E. EU-level instrument developments - ETS II for distributors supplying fuels to buildings, road transport and certain other sectors expected to start in 2027. - Entry arrangements: total allowances auctioned in the first year will increase by 30 percent. - Stabilization mechanism: automatically releases additional allowances if allowance price exceeds €45 per tonne of CO2 over a certain period. ### F. Public investment programs (Dutch Recovery and Resilience Plan) - Two public investment sources: - National climate and transition fund: will mobilize €35 billion over the next ten years. - Dutch Recovery and Resilience Plan: allocates €846.9 million across four climate-related programs: - Wind at Sea: €693.7 million — seeks to double wind energy in the North Sea to 21 gigawatts by 2030; financing for integration costs. - Green Hydrogen: €68.5 million — funds demonstration projects, R&D, and training through 2028. - Zero Emission Services: €56 million — funds batteries, 45 fully electric inland vessels, and charging stations (with green electricity). - Aviation in Transition: €28.7 million — promotes decarbonization of aviation by 2050 through breakthrough technologies and long-term research. ### G. CO2 Industry Levy: design, targets, and evaluation - Design and coverage: - Introduced January 2021 as a levy/target price on industrial CO2 emissions. - Charge equals positive difference between escalating target price (levy rate) and prevailing EU ETS price. - Applies to large industrial companies under EU ETS, waste incineration plants, and companies emitting large quantities of nitrous oxide. - Levy applies only to emissions over firms' "dispensation rights" computed as: - production × CO2 related to this production based on EU ETS benchmarks × reduction factor. - EU ETS benchmark: emission rate from the cleanest ten percent of firms in the industry at EU level. - Reduction factor: set at 1.2 for 2021, declining to 0.69 by 2030. - Rate schedule and targets: - Initial levy rate: €30 per excess tonne of CO2 in 2021, rising in a straight line to €125 per excess tonne in 2030. - This schedule aligned with an emission reduction target of 14.3 million tonnes in 2030 compared with BAU 2030 projections by PBL. - Reduction target increased to 18.3 million tonnes; rate schedule to be re-assessed in 2023 and 2025 with PBL monitoring via the Climate and Energy Outlook. - Example: if EU ETS price is €75 per tonne in 2030, levy would impose €50 per excess tonne for ETS installations and €125 per tonne for covered non-ETS installations. - Assessment: - Levy promotes reductions in emissions intensity where binding; balances efficiency and competitiveness/leakage concerns relative to a pure tax. - Quantitatively, a €50 tax (on top of prevailing EU ETS price) in 2030 would increase production costs for selected Dutch industries by 2 percent or less. - Based on recent EU ETS price projections, the CO2 industry levy may not be binding under current schedule. ### H. Policy refinement: converting the levy into a feebate - Feebate proposal: - Firms pay fee = CO2 price × {CO2/production ─ pivot point CO2/production} × production. - Firms above pivot point pay fees; firms below receive subsidies. - CO2 price could match that envisioned for the levy. - Pivot point design and outcomes: - Pivot point equal to average domestic industry emission rate in previous year (updated annually) yields approximate revenue neutrality over time. - For sectors dominated by few firms, pivot point can be set exogenously and made more stringent progressively to avoid erosion of incentives. - Advantages: - Generalizes SDE++ subsidies by directly linking support to observed emission rates. - Slightly more effective and efficient than levy because all firms face ongoing and certain rewards for cutting emissions regardless of current status. ### Energy and transport tax reforms; climate-related taxes (sections 15–34) - Energy tax reform features: - Shift taxation away from electricity consumption onto natural gas; termination of Opslag Duurzame Energie (ODE). - ODE revenues previously financed SDE+; SDE++ to be funded with general taxation and energy taxes. - Natural gas and electricity tax rate changes: - Natural gas tax increased by 4 cents per m3 in 2020. - Planned increase in the 1st bracket of gas: further 5.23 cents per m3 a year during 2023–2028 (planned). - Planned reduction in the 1st bracket for electricity: reduced by 5.23 cents per kWh during 2023–2028 (planned). - Implementation caveat: 2022–2023 changes differ from initial plan due to energy price shock; review scheduled for 2023. - Emissions intensities and CO2 charging examples: - Natural gas combustion: 0.055 tonnes CO2 per GJ. - Present power generation: 0.09 tonnes CO2 per GJ (expected to decline). - Example CO2 charge on residential gas: €25/tCO2 would increase retail price to approximately €1.27/m3. - CO2 price floor for power generation: - Came into effect April 5, 2022. - Target rate: €14.9 per tonne in 2022, rising to €31.9 in 2030 (described as far from binding). - Recommendation: convert price floor into a feebate harmonized with industry levy to avoid pass-through and promote cost-effective reductions. ### Tax rates on natural gas and electricity (preserving table figures) - Natural Gas, €/m3 by consumption bracket: - Consumption Bracket, m3: 0 – 170,000 | 170,001–1 million | 1–10 million | > 10 million - 2021: 0.349 | 0.065 | 0.024 | 0.013 - 2022: 0.363 | 0.066 | 0.024 | 0.013 - 2023: 0.49 | 0.096 | 0.051 | 0.04 - Electricity, €/kWh by consumption bracket: - Consumption Bracket, kWh: 0–10,000 | 10,001–50,000 | 50,001–10 million | > 10 million (household) | > 10 million (business) - 2021: 0.094 | 0.052 | 0.014 | 0.001 | 0.0006 - 2022: 0.037 | 0.044 | 0.012 | 0.001 | 0.0006 - 2023: 0.013 | 0.1 | 0.039 | 0.002 | 0.001 - Note: Tax rates exclude VAT. ### Car tax reform and road-pricing - Reform features: - Transition to nationwide per-km tax for passenger cars and delivery vans to replace declining vehicle and fuel tax revenues with EV uptake. - Exemptions for internal combustion engine commercial vans phased out 2024–2026; exemption for electric delivery vans continues. - Revenue and rates: - To maintain current fuel/vehicle tax revenue as percent of GDP requires projected charge of 4.5 cents per vehicle km in 2030. - Emissions and externalities: - Km-based tax projected to reduce CO2 emissions by 2.5 million tonnes in 2030. - Marginal external congestion cost (MECC) estimated at around 8–16 cents per vehicle km; an average charge upwards of 8 cents per km is warranted but should vary by location and time. - PAYD insurance could raise marginal driving cost by about 5 cents per km (on average) and be promoted with fiscal incentives. ### Air passenger tax - Departure tax triples January 1, 2023 from €7.95 per trip. - Projected annual revenues: €600 million from 2023 (up from €200 million). - Environmental equivalence: - Increase equivalent to about €90 per tonne of CO2 from air travel out of the Netherlands (above current EU ETS price, below cited SCC). - Social cost of carbon (SCC) cited: $185 per tonne. - Design notes: - Tax levied per trip disproportionately raises prices on short flights; suggested alternatives include linking fees to CO2 emissions per passenger trip or aircraft fuel economy; address airport congestion via peak-period landing fees. ### Climate trends, scenarios, and adaptation - Observed climate baselines: - Winter average temperature 1991–2020: 3.9°C. - Summer average temperature 1991–2020: 17.3°C. - Average precipitation: 67 mm/month. - Average annual temperature in 1991–2020 about 1°C higher than 1901–1990. - Future temperature projections (additional warming in 2041–2060 relative to 1995–2014): - SSP1-2.6: 1.0 °C. - SSP2-4.5: 1.2 °C. - SSP3-7.0: 1.4 °C. - Precipitation uncertainty: - Possible ~10 percent decline in summer and similar increase in winter; large natural variability and model differences. - Adaptation stance: - Netherlands has strong adaptation capacity; recommendation to mainstream climate adaptation at all government levels and continue efficient adaptation strategies, particularly for coastal and river flooding. ### Projected changes in extremes: heat, precipitation, drought, and floods - Heat and precipitation extremes: - Hot Days (max > 35 °C) historically rare but expected to increase without strong mitigation. - Heavy precipitation events projected to increase slightly with large uncertainty; models tend to underestimate extreme hot day trends and struggle with convective thunderstorms. - KNMI projects high confidence in increased heavy precipitation on sub-hourly and daily timescales; significant increase in thunderstorms under highest warming scenarios in summer. - Drought projections: - SPEI Drought Index shows no significant trends across scenarios. - Models project increase in maximum consecutive dry days in a year, especially in summer, with considerable uncertainty. - KNMI projects increase of mean highest precipitation deficit during growing season in all scenarios. - Flood risk and hydrology: - Approximately 55 percent of land exposed to potential flood risks; about one-quarter below sea level; 29 percent susceptible to river flooding. - Projected increase in river discharge (notably Meuse); Summer 2021 Meuse peak discharge was record high since 1911. - KNMI’14: in all scenarios high water discharges in 2050 will increase sharply. ### Scenarios referenced - SSP1-2.6: lowest warming with strong mitigation. - SSP2-4.5: intermediate warming, continuation of present trends. - SSP3-7.0: highest warming, no effort to curb emissions. ### Macroeconomic risks and sectoral impacts - Channels to macro-economy: - Productivity shocks, destruction of capital from extremes, lower capital accumulation, negative household welfare impacts (health, mortality, relocation), and potential positive effects (extended growing season, reduced heating costs). - Near-term impacts may be limited and hard to distinguish from variability; intensification of extremes could cause less frequent but more severe losses. ### Estimates of economic impacts for the Netherlands - Top-down econometric estimates (based on Kahn et al, 2021): - Percent change in GDP per capita (staff calculations): - 2030 / 2050 / 2100: - SSP1-2.6: 0.11, 0.25, 0.43 - SSP2-4.5: 0.02, 0.05, 0.11 - SSP3-7.0: -0.11, -0.31, -0.89 - Estimates assume slow adaptation and exclude sea-level rise and changes in extreme event frequency/intensity. - IMF Staff estimates of extreme-event frequency changes: - Annual total losses of GDP (ranges): - €0.5-1.5 billion in 2030. - €2.2-6.2 billion in 2050. - Methodology: machine learning selects key climate variables among hundreds; analysis limited to domestic weather shocks and excludes cross-border river flows. - Historical reference: European Environmental Agency estimates total weather/climate-related extreme event damage 1980–2020 = €9.3 billion (1.2 percent of 2020 GDP); annual average loss = €0.2 billion. - National bottom-up estimates (Climate Damage Atlas; Jacobs et al., 2019; IMF staff calculations): - Estimated total damages 2018–2050 assuming no further adaptation: - Cumulative: €54.3–122.3 billion (7.0–15.8 percent of 2018 GDP). - Annual average: €1.7–3.8 billion (0.2–0.5 percent of 2018 GDP). - By hazard (cumulative and annual ranges): - Drought: €15.3–72.7 billion; 0.5–2.3 billion per year. - Flooding: €31.9–41.5 billion; 1.0–1.3 billion per year. - Heat: €7.1–8.1 billion; 0.2–0.3 billion per year. - Updated drought estimates: €38.5–€124 billion (annual €1.1–€3.9 billion), raising total damages to €77.5–€173.6 billion (annual €2.4–€5.4 billion). - Annualized total losses remain less than 0.5 percent of GDP. - Flood risk management and land-use restrictions greatly reduce flood losses and financial stability risks. - Banking sector resilience: banks sufficiently capitalized to withstand floods in unprotected areas with little real estate, but capital depletions could increase quickly if severe floods hit densely populated areas. - PESETA IV (Szewczyk et al., 2020) comparative static results: - Welfare change as share of GDP (%) for Central Europe North (includes Netherlands) and EU + UK at +1.5 ºC and +3.0 ºC (selected sectors and sums): - Inland Floods: Central Europe North -0.03 (1.5 ºC), -0.13 (3 ºC); EU + UK -0.04, -0.16. - Coastal Floods: Central Europe North -0.01, -0.08; EU + UK -0.02, -0.16. - Agriculture: Central Europe North 0.09, 0.05; EU + UK 0.03, -0.03. - Droughts: Central Europe North 0.01, -0.02; EU + UK -0.01, -0.08. - Mortality: Central Europe North -0.17, -0.43; EU + UK -0.29, -0.96. - Sum of Sectors: Central Europe North -0.11, -0.61; EU + UK -0.33, -1.39. - Finding: Impacts for the Netherlands tend to be small and may be positive in low-warming scenarios due to sectoral balances. ### Fiscal and public finance implications - Public finances adversely affected only if climate change is drastic. - RCP2.6 and RCP4.5: average temperature increases not expected to significantly affect productivity growth per capita. - RCP7.0 (more severe) and no policy change illustrative calculation: - By 2100, debt-to-GDP could be 10 percentage points higher compared to baseline. - Annual buildup toward the 10 percentage point difference could be offset by modest annual budgetary adjustment. - Illustrative debt-to-GDP calculations assume: GDP deflator 2 percent, 2.3 percent interest rate on government debt, nominal GDP growing in line with total population, revenue constant as percent of nominal GDP, and high expenditure rigidity. ### Key uncertainties, tipping points, and scenario approach - Empirical evidence indicates macro-economic risks may be small but with large uncertainties; some impacts (cross-border spillovers, compounded risks) may be missed. - Scenario development recommended to explore tail risks; uncertainty cannot be objectively quantified. - Climate tipping points: - Rapid disintegration of Greenland and West-Antarctica Ice Sheets poses challenging threat but low risk this century. - More imminent threat: acceleration of warming due to methane hydrate release and intensification of extremes. - Abrupt AMOC collapse unlikely before 2100 but would cause abrupt cooling and water-cycle shifts if it occurs. ### Adaptation policy framework, governance, and institutional roles - Governance instruments: - National Climate Adaptation Strategy (NAS) published 2016; implementation program (UP NAS) published 2018. - 2020 National Climate Adaptation Perspective reviews accomplishments and provides working program for 2020+. - Government updating NAS based on 2023 KNMI climate scenarios; update will include adaptation monitoring framework. - Delta Programme (implemented since 2010) focuses on flood protection, freshwater availability, spatial adaptation; 2023 Delta Programme provides latest assessment and budget. - National Knowledge Programme on SLR: six-year study on effects of SLR up to 5 meters. - Roles and principles: - Match governance to geographic/sectoral scope; stimulate national, regional, local governments to integrate adaptation into investment and policy plans. - Water district boards: flood risk management; municipalities: local adaptation; coordination via Delta Programme or union of water boards. - Central government should embed adaptation principles in national legislation, policy, and public finance management. - Gaps: - Ex-post climate-informed impact assessments are at early stage; no legally enshrined accountability mechanism to ensure implementation of adaptation considerations. ### Effective government focus and market/distortion issues - Priorities for government action: - Adaptations with large positive externalities (research, building codes, infrastructure reinforcement, early warning systems). - Remove barriers to efficient private adaptation (legislative obstacles, market imperfections). - Address equity issues (compensate vulnerable populations negatively affected by adaptation policies). - Market distortions: - UP NAP should highlight costs of distortions and distributional impacts (e.g., subsidies to fresh- and groundwater use causing inefficient water use and reduced irrigation investment). - Recommendation: assess market inefficiency impacts on adaptation costs/benefits and consider compensations when pursuing reforms. ### Insurance, financing, and mutuality principles - Insurance for residual risks: - UP NAP highlights insurance but should emphasize reforms for efficient risk pricing: competitive market access, complete information for pricing, avoid distorting subsidies unless paired with building code upgrades or land-use restrictions. - Financing principles: - Flood protection financing based on cost-sharing and mutuality principles; without strong institutional constraints mutuality may encourage inefficient risk taking. - Deltacommission 2008 Recommendation 2 referenced: grant permits to new development in flood-prone areas based on cost-benefit analysis so protection costs fall on beneficiaries. ### Flood exposure, Delta Programme budgeting, and planned protection adequacy - Exposure: - Around 55 percent of country susceptible to flooding; 26 percent below sea-level; 29 percent susceptible to river flooding. - More than half the population and two-thirds of economic activity potentially affected by coastal and river floods. - Delta Programme financing and activity: - Delta Programme annual budget: on average EUR 1.5 billion between 2023 and 2036; 55 percent for new investment, remainder for maintenance/upkeep/management (The Delta Fund). - Water authorities expect average investment EUR 2 billion per year, of which EUR 915 million on flood defenses. - 2021 combined spending by national government, water authorities, provincial and municipal authorities and drinking water companies on flood defenses, sewage purification, water systems, water quality and sustainable freshwater supply: EUR 1.7 billion. - Protection adequacy and risks if delayed: - Planned protection adequate at least until 2050, but upgrades needed for evolving risks. - If planned upgrades delayed: - Urban flood damages until 2050 could rise to EUR 33 bln–87 bln under continuation of present climate trends. - Urban flood damages until 2050 could increase to EUR 55 bln–EUR 124 bln if climate change intensifies (The Delta programme, 2021; p.18). ### Sea-level rise (SLR) monitoring and scenarios - KNMI’14 SLR estimates for 1986–2005 (RCP/SSP alignments noted): - Moderate warming scenario (similar to SSP2–4.5): between 15 and 30 centimeters. - Fast-warming scenario (similar to SSP5–8.5): between 20 and 40 centimeters. - Projections for 2085: - Moderate scenario: 30 to 60 cm. - Fast-warming scenario: 45 to 75 cm. - Extreme scenarios with SLR of 100 centimeters or more cannot be excluded if Greenland/Antarctic melting faster than predicted. - Strategy note: - Current protection expected to minimize losses up to 2050; acceleration of SLR in second half of century requires contingency plans. ### Cost-benefit analysis (CBA) practice and recommendations - CBA tradition in flood/water governance should be maintained and reinforced. - Standard CBA good practices: - Assess range of alternatives including business-as-usual. - Calculate adaptation costs under range of SLR scenarios against no-SLR counterfactual. - Consider regional interdependencies and combinations of protection across regions. - Monetize non-market impacts using best evidence; use Value of Statistical Life consistent with national standards; monetize disutility from relocation. - Model-based CBA: - IMF staff used CIAM (Diaz, 2016) for stylized CBA of SLR strategies; model useful for trade-offs though with limitations (e.g., excludes riverine floods, assumes no baseline SLR protection). - Recommendation: develop more accurate national models for efficient protection strategy CBAs. ### Box 3 — Stylized CIAM CBA of SLR (2050–2079) — key quantitative findings - Model and inputs: - CIAM divides coastline into 128 segments; exercise uses median local SLR for RCP 4.5 (Kopp et al, 2014) and 5th/95th percentiles to illustrate uncertainty. - CIAM considers coastal erosion, coastal flooding, wetland change, saltwater intrusion and expected value of storm surges; two adaptation strategies simulated: protection and retreat. - Quantitative results (2050–2079): - Full protection: - EUR 862 million needed annually between 2050 and 2079 to eliminate contemporaneous and future inundation risks from SLR. - Total cost: EUR 25.9 billion. - Optimal (protection + retreat): - EUR 656 million annually between 2050 and 2079. - Total cost: EUR 19.7 billion. - Land and capital losses due to inundation: EUR 2.31 billion cumulatively during same period. - Interpretation: - Full protection eliminates permanent inundation risk but entails higher total costs. - Protection + retreat mix is most cost-effective in CIAM. - Due to model coarseness and uncertainties in costs/benefits, estimates should not be interpreted as exact investment needs. ### Adaptation policy summary recommendations - Integrate climate adaptation holistically into long-term government planning. - Focus government action on adaptations with large positive externalities, remove barriers to private adaptation, and address equity implications. - National Adaptation Plan could better highlight costs of market distortions for adaptation and refine insurance, pricing, and financing approaches. *Source: IMF Selected Issues Paper section "2. The Delta Programme" (excerpt).* ### 2. The Delta Programme __________________________________________________________________________ 31 ### 2. The Delta Programme ### A. Introduction and context - Climate change is an important consideration in Dutch national policies. The Netherlands committed to EU targets of 55 percent emission reduction in 2030 relative to 1990 levels and climate neutrality in 2050. - The country is vulnerable to sea-level rise (SLR) and flood risks: about one-quarter of the country is below sea level and a large part of the lowlands are in a delta. - Impacts of higher temperature and changes on the frequency of extreme events appear modest for the Netherlands by mid-century, but highly uncertain depending on warming scenarios and global mitigation actions. ### B. Mitigation: recent measures and assessments - Key recent national measures: - Revisions to the carbon dioxide (CO2) levy for industry. - An energy tax reform. - A CO2 price floor for power generation. - A car tax reform. - An increase in the air passenger departure tax. - Expansion of SDE+ into SDE++ (funding for renewable electricity, renewable heat, renewable gas, low-carbon heat and low-CO2 production for entities in power generation, industry, transport and agriculture). - The Dutch Recovery and Resilience Plan complements tax and regulatory measures with public investments in clean technology infrastructure (Box 1). - International and EU context: - Fit for 55 Plan target: reduce EU greenhouse gas (GHG) emissions 55 percent below 1990 levels by 2030. - Net zero GHGs by 2050 pledge. - EU ETS aligned with reducing combined emissions from power generation and industry 61 percent by 2030 below 2005 levels. - Non-ETS sector target for the Netherlands: reducing emissions 48 percent below 2005 by 2030 (as presented in the Annex to the Proposal amending Regulation (EU) 2018/842). ### C. Household energy price shocks and government support - IEA finding (as cited): consumer prices for electricity and natural gas more than tripled between January 2020 and November 2022; pump prices for gasoline increased about 5 percent. - These price shocks imposed a burden on the average Dutch household of 12 percent of their consumption. - Dutch government measures to assist households: - VAT rate on natural gas, electricity and heat from district heating temporarily lowered to 9 percent (from 21 percent) effective July 1, 2022. - Excise duty reductions on gasoline and diesel by 17.3 and 11.1 cents/liter, respectively, bringing respective rates to 65.1 and 41.8 cents/liter; reductions applicable from April 1, 2022. - Cap on electricity and natural gas prices for households and other low-volume users at the level of January 2022, starting on January 1, 2023: - Gas maximum rate: €1.45 per cubic meter (m3) up to a consumption of 1,200 m3. - Electricity maximum rate: €0.40 per kilowatt hour (kWh) up to consumption of 2,900 kWh. - For usage that exceeds thresholds, rates remain as in energy contracts. - One-off financial support: - Lump-sum energy allowance of €1,300 for lower-income households (in 2022 and 2023). - €190/month rebate on energy bills for small-scale consumers in November and December 2022. - Energy tax refund (per electricity grid connection) increased from €560 to €785. - Policy note: Ideally household assistance should be targeted and unrelated to energy consumption to limit fiscal costs and preserve incentives for energy conservation. Authorities might emphasize the temporary nature of the cap on electricity and natural gas prices. ### D. Rationale for accelerating transition away from fossil fuels - Energy price surge strengthened the case for accelerating transition to reduce dependence on insecure energy sources and address the climate crisis. - Higher energy prices caused only a modest reduction in global CO2 emissions due to switching effects (e.g., gas to coal) and expectations that the surge will be partly reversed. - Example projection referenced: an additional €75 per tonne increase in carbon prices on top of predicted international energy prices for 2030 would still result in international natural gas prices that are 30 percent lower than recently experienced levels. ### E. EU-level instrument developments - ETS II: a separate emissions trading system being developed at the EU level for distributors that supply fuels to buildings, road transport, and certain other difficult-to-decarbonize sectors; expected to start in 2027. - Entry arrangements: total allowances auctioned in the first year will increase by 30 percent. - Stabilization mechanism: automatically releases additional allowances if the price per allowance exceeds €45 per tonne of CO2 over a certain period. ### F. Public investment programs (Box 1: Climate-related investments in the Dutch Recovery and Resilience Plan) - Two sources of public investments: - National climate and transition fund: will mobilize €35 billion over the next ten years. - Dutch Recovery and Resilience Plan: allocates €846.9 million across four climate-related investment programs (see Table 1 in source): - Wind at Sea: €693.7 million — seeks to double wind energy in the North Sea to 21 gigawatts by 2030; financing for integration costs. - Green Hydrogen: €68.5 million — funds demonstration projects, R&D, and training through 2028. - Zero Emission Services: €56 million — funds batteries, 45 fully electric inland vessels, and charging stations (with green electricity). - Aviation in Transition: €28.7 million — promotes decarbonization of aviation by 2050 through breakthrough technologies and long-term research. ### G. CO2 Industry Levy: design, targets, and evaluation - Design: - Introduced January 2021 as a levy/target price on industrial CO2 emissions. - Charge equals any positive difference between an escalating target price (levy rate) and the prevailing EU ETS price. - Applies to large industrial companies that fall under the EU ETS, waste incineration plants, and companies emitting large quantities of nitrous oxide. - Levy applies only to emissions over and above firms' "dispensation rights" calculated as: - production × CO2 related to this production based on EU ETS benchmarks × reduction factor. - EU ETS benchmark: emission rate from the cleanest ten percent of firms in the industry at EU level. - Reduction factor: set at 1.2 for 2021, declining to 0.69 by 2030. - Rate schedule and targets: - Initial levy rate: €30 per excess tonne of CO2 in 2021, rising in a straight line to €125 per excess tonne in 2030. - This schedule aligned with an emission reduction target of 14.3 million tonnes in 2030 compared with business-as-usual (BAU) 2030 projections by PBL. - Reduction target increased to 18.3 million tonnes; rate schedule to be re-assessed in 2023 and 2025 with PBL monitoring via the Climate and Energy Outlook. - Example: if EU ETS price is €75 per tonne in 2030, levy would impose a charge of €50 per excess tonne for ETS installations and €125 per tonne for covered non-ETS installations. - Assessment: - The levy promotes reductions in emissions intensity of production for firms with emissions exceeding dispensation rights, if binding. - The levy balances efficiency and competitiveness/leakage concerns relative to a pure tax on all industry emissions. - Quantitatively, a €50 tax (on top of prevailing EU ETS price) in 2030 would increase production costs for selected Dutch industries by 2 percent or less (see Figure 3; differences exist at finer industry disaggregation). - Based on recent EU ETS price projections, the CO2 industry levy may not be binding under the current rate schedule. ### H. Policy refinement: converting the levy into a feebate - Proposal: - Convert the levy into a feebate to provide more robust incentives for relatively clean firms. - Under a feebate, firms pay a fee given by: - CO2 price × {CO2/production ─ pivot point CO2/production} × production - Firms with emission rates above the pivot point pay fees; firms below receive subsidies. - CO2 price could be same as currently envisioned for the levy. - Pivot point design: - If pivot point set equal to average emission rate for domestic industry in previous year and updated annually, the feebate would be approximately revenue neutral over time. - For sectors dominated by a few firms, pivot point could be set exogenously and made progressively more stringent to avoid erosion of incentives. - Advantages: - Feebate generalizes SDE++ subsidies by directly linking support to observed emission rates. - Slightly more effective and efficient than the levy because all firms face the same ongoing and certain reward for cutting emissions, regardless of current fee/subsidy status. *Source: IMF Selected Issues Paper section "2. The Delta Programme" (excerpt).* ### 15. This reform includes a shift in taxation away from electricity consumption (and onto ### 15–34: Energy and Transport Tax Reforms; Climate Risks and Adaptation ### Energy tax reform: design and implementation - Reform features: - Shift taxation away from electricity consumption (and onto natural gas) and termination of the renewable energy tax (Opslag Duurzame Energie, ODE). - ODE revenue used to finance SDE+ (now SDE++); SDE++ will be funded with revenues raised through general taxation and energy taxes. - Natural gas and electricity tax rate changes: - Natural gas tax rate increased by 4 cents per cubic meter (m3) in 2020. - Planned increase in the rate in the 1st bracket of gas: further 5.23 cents per m3 a year during 2023–2028 (planned). - Planned reduction in the rate for the 1st bracket for electricity: reduced by 5.23 cents per kilowatt hour (kWh) during 2023-2028 (planned). - Implementation caveats: - Changes implemented in 2022 and 2023 differ from initially announced reform; due to the energy price shock the natural gas tax is not increasing as much as planned. - A review scheduled for 2023 to examine whether the proposed increase in natural gas tax is still necessary for mitigation objectives. - Distributional implications: - Planned reductions in electricity taxation would benefit households—especially low-income households—more than businesses. ### Natural gas, electricity taxes, and emissions impacts - Emissions intensities: - Natural gas combustion: 0.055 tonnes of CO2 per gigajoule (GJ). - Present power generation in the Netherlands: 0.09 tonnes of CO2 per GJ (expected to decline progressively with decarbonization). - Behavioral responses targeted: - Raising the relative price of natural gas to reinforce switching to electricity (adoption of electric space heating) and conservation (e.g., turning down heating). - CO2 charge on residential natural gas: - Introduction example: €25/tCO2 would increase the retail price moderately to approximately €1.27/m3. - Note: €25/tCO2 is cited as the current price in the German emissions trading system for heating and road transport fuels in force since January 2021; full alignment with EU ETS prices would raise retail price further. - CO2 price floor for power generation: - Floor came into effect on April 5, 2022. - Target rate: €14.9 per tonne in 2022, set to rise to €31.9 in 2030 (targets described as far from binding). - Policy design recommendation: - Convert the power sector price floor into a feebate (fees for above-average emission rates, rebates for below-average) and harmonize it with the industry levy to avoid pass-through to electricity prices and to promote cost-effective emissions reductions across building and ETS sectors. ### Tax rates on natural gas and electricity (Table 2) - Natural Gas, €/m3 by consumption bracket - Consumption Bracket, m3: 0 – 170,000 | 170,001–1 million | 1–10 million | > 10 million - 2021: 0.349 | 0.065 | 0.024 | 0.013 - 2022: 0.363 | 0.066 | 0.024 | 0.013 - 2023: 0.49 | 0.096 | 0.051 | 0.04 - Electricity, €/kWh by consumption bracket - Consumption Bracket, kWh: 0–10,000 | 10,001–50,000 | 50,001–10 million | > 10 million (household) | > 10 million (business) - 2021: 0.094 | 0.052 | 0.014 | 0.001 | 0.0006 - 2022: 0.037 | 0.044 | 0.012 | 0.001 | 0.0006 - 2023: 0.013 | 0.1 | 0.039 | 0.002 | 0.001 - Note: Tax rates exclude VAT. ### Car tax reform and road-pricing - Reform features: - Transition to a nationwide system of taxing driving in passenger cars and delivery vans in proportion to vehicle kilometers (km) driven. - Replace revenues from vehicle and fuel taxes declining with EV penetration. - Exemptions from vehicle purchase taxes for internal combustion engine commercial vans phased out from 2024–2026; exemption for electric delivery vans will continue. - Revenue and rate projections: - Maintaining current fuel/vehicle tax revenue as a percent of GDP requires a projected charge of 4.5 cents per vehicle km in 2030. - Projected revenues are only slightly sensitive to alternative assumptions about price responsiveness of vehicle km travelled. - Emissions and externalities: - Km-based tax projected to reduce CO2 emissions by 2.5 million tonnes in 2030. - Important remaining externalities: traffic congestion, accidents, and (for trucks) road damage. - Efficient congestion pricing: - Nationwide marginal external congestion cost (MECC) for the Netherlands estimated at around 8–16 cents per vehicle km (region- and time-sensitive). - A charge averaging upwards of 8 cents per km is warranted by congestion, but should vary by location and time of day. - PAYD (pay-as-you-drive) vehicle insurance: - PAYD could be promoted voluntarily with fiscal incentives. - PAYD would raise the marginal cost of driving by about 5 cents per km (on average). - PAYD could use existing insurance rating factors as proxies for external accident risk to set per-km charges. ### Air passenger tax - Reform details: - Departure tax for passenger flights set to triple on January 1, 2023, from €7.95 per trip. - Projected annual revenues: €600 million from 2023 (up from €200 million). - Environmental effectivity: - Increased tax equivalent to about €90 per tonne of CO2 from air travel out of the Netherlands (above current EU ETS price, below recent estimates of the social cost of carbon). - Social cost of carbon (SCC) cited: $185 per tonne. - Design notes: - Tax is levied per trip rather than by flight distance, imposing disproportionately large price increases on shorter flights (which has some environmental justification). - Aviation fuel taxation would be more effective but may be constrained by international agreements; alternatively, vary fee with a metric related to CO2 emissions per passenger trip or link fees to aircraft fuel economy and default load factors. - Airport congestion should be addressed through peak-period landing fees varying by expected congestion. ### Climate trends, scenarios, and adaptation - Climate and observations: - Climate: temperate oceanic; mild temperatures and evenly spread precipitations across seasons. - Winter average temperature during 1991–2020: 3.9°C. - Summer average temperature during 1991–2020: 17.3°C. - Average precipitation: 67 mm/month. - Average annual temperature in 1991–2020 was about 1°C higher than in 1901–1990. - Future projections and uncertainty: - Future scenarios indicate additional warming in 2041–2060 of 1.0 °C, 1.2 °C, and 1.4 °C with respect to the period 1995–2014. - Warming will be stronger during summer months in all scenarios. - Precipitation scenarios are more uncertain: possible modest seasonal shift with approximately 10 percent decline during summer months and an increase of similar magnitude during winter months, but large natural variability and model differences mean precipitation changes are not robust. - Adaptation stance: - Netherlands has well-developed climate adaptation strategy and strong institutional capacities, financial resources, and knowledge supports. - Recommendation to mainstream climate change adaptation at all government levels and to continue efficient adaptation strategies, particularly for coastal and river flooding given the country’s exposure and long-standing flood management practices. *Source: IMF staff, "KINGDOM OF THE NETHERLANDS—THE NETHERLANDS" (selection of sections 15–34).* ### 35. Climate models project increased frequency of extreme heat and heavy precipitation. ### 35. Climate models project increased frequency of extreme heat and heavy precipitation. ### Projected changes in extremes: heat and precipitation - Dangerously hot days with maximum temperature above 35 °C (Hot Days) are historically rare but are expected to increase without strong global mitigation action. - Heavy precipitation events are projected to increase slightly, but uncertainty is large; a substantial invariance of present trends cannot be ruled out. - Model limitations and regional findings: - Models tend to underestimate trends in extreme hot days in the Netherlands. - Models are unable to describe convective processes that give rise to thunderstorms responsible for heavy precipitation events. - KNMI combines observations, simulations, conceptual models and physical principles to project with high confidence an increase of heavy precipitation on a sub-hourly and daily timescale (KNMI, 2014). - A significant increase in thunderstorms is found using the highest warming scenarios during the summer season. ### Drought projections and uncertainties - SPEI Drought Index (accounts for temperature and rainfall effects on soil moisture) does not show any significant trends in all scenarios. - Models project an increase in the maximum number of consecutive dry days in a year—an alternative indicator of drought-like conditions—especially during summer months, but with considerable uncertainty. - KNMI projects an increase of the mean highest precipitation deficit during the growing season in all scenarios (KNMI, 2014). ### Flood risk and hydrological projections - The Netherlands is a delta country with approximately 55 percent of the land exposed to potential flood risks. - Geographic and exposure facts: - About one-quarter of its total area is below sea-level. - The country is at the delta of major rivers and has long coastline relative to its area. - As sea-level rise and intense precipitations will intensify over the next decades, risks will increase if planned upgrades to the flood protection system will not be in place. - River discharge projections and recent events: - Projected increase in river discharge, particularly from the Meuse, can add further stress if adequate measures are not put in place. - Summer 2021 peak discharge of the Meuse reached the record high since 1911 and was highly unusual because conditions that can lead to floods usually occur in winter. - Climate scenarios point to further intensification of extreme rainfall events in the major catchment basins in the Netherlands. - KNMI’14 scenarios: in all scenarios high water discharges in 2050 will increase sharply. - Uncertainty about the medium-term has declined with new evidence. ### Climate scenarios referenced - SSP1-2.6: lowest amount of warming associated with strong climate mitigation action. - SSP2-4.5: intermediate warming scenario assumes continuation of present trends. - SSP3-7.0: highest amount of warming assumes no effort to curb emissions. ### Macroeconomic risks and sectoral impacts - Climate change channels to the macro-economy: - Productivity shocks (e.g., losses of labor productivity or low crop yields). - Direct destruction of physical and human capital from extreme events such as floods. - Lower capital accumulation from damage and lower investment. - Negative household welfare impacts via higher health risks, increased mortality, higher hospital admissions, lower income prospects, and potential need for relocation. - Potential positive effects: extended growing season, reduced heating costs, reduced winter-related mortality and morbidity. - Near-term impacts may be limited and not easily distinguishable from normal variabilities; intensification of extreme events may produce less frequent but potentially more severe losses. ### Estimates of economic impacts for the Netherlands - General assessment: - Estimates are highly uncertain; several studies indicate losses may be relatively small by mid-century. - Contributing factors to relatively low sensitivity until mid-century: high level of development, effective risk-management, agriculture/forestry/fishing share less than 2 percent of GDP, and relatively mild summer temperatures. - Top-down econometric estimates (Kahn et al, 2021): - Extrapolating relationships between GDP per capita growth and temperature trends with adaptation implies: - GDP per capita in 2050 does not change under a fast warming scenario, and modest gains are possible with a low warming scenario. - Table: Percent Change in GDP per Capita (Staff calculations based on Kahn et al. (2021)) - 2030 / 2050 / 2100: - SSP1-2.6: 0.11, 0.25, 0.43 - SSP2-4.5: 0.02, 0.05, 0.11 - SSP3-7.0: -0.11, -0.31, -0.89 - Notes: Estimates assume slow but gradual adaptation and exclude impacts from sea-level rise or changes in frequency/intensity of extreme events. - IMF Staff estimates of impacts from changes in frequency of extreme events: - With slow (SSP1-2.6) and fast warming (SSP3-7.0), IMF Staff estimates a very small reduction of annual real GDP per capita growth rates between 2020 and 2050 from changes in the frequency of extreme heat, severe droughts, and moderate temperature. - Annual total losses of GDP (ranges): - €0.5-1.5 billion in 2030. - €2.2-6.2 billion in 2050. - Methodology note: machine learning methods select the most important climate variables among hundreds of candidates; analysis limited to weather shocks occurring within the country and excludes cross-border river flow impacts. - Comparative historical reference: European Environmental Agency estimates total economic damage caused in the country by weather and climate-related extreme events between 1980-2020 equal to €9.3 billion, or 1.2 percent of 2020 GDP. Annual average loss equal to €0.2 billion. - National bottom-up estimates (Climate Damage Atlas; Jacobs et al., 2019; IMF Staff calculations): - Estimated total damages for 2018–2050 under assumption of no further adaptation measures: - Cumulative: €54.3–122.3 billion (7.0–15.8 percent of 2018 GDP). - Annual average: €1.7–3.8 billion (0.2–0.5 percent of 2018 GDP). - By hazard (cumulative and annual ranges): - Drought: €15.3–72.7 billion; 0.5–2.3 billion per year. - Flooding: €31.9–41.5 billion; 1.0–1.3 billion per year. - Heat: €7.1–8.1 billion; 0.2–0.3 billion per year. - Updated Climate Damage Atlas estimates for droughts: €38.5–€124 billion (€1.1–€3.9 billion annual average), increasing total damages to €77.5–€173.6 billion (€2.4–€5.4 billion per year). - Annualized total losses are less than 0.5 percent of GDP. - Flood risk management, including land-use regulations that prohibit building in unprotected areas, greatly reduces losses from floods and helps reduce financial stability risks. - Banking sector resilience: Caloia and Jansen (2021) find the banking sector is sufficiently capitalized to withstand floods in unprotected areas where there is relatively little real estate, but capital depletions could increase quickly if more severe floods hit densely populated parts of the country. - PESETA IV (Szewczyk et al., 2020) comparative static EU analysis: - Welfare change as share of GDP (%) for Central Europe North region (includes the Netherlands) and EU + UK for +1.5 ºC and +3.0 ºC warming relative to pre-industrial: - Inland Floods: Central Europe North -0.03 (1.5 ºC), -0.13 (3 ºC); EU + UK -0.04, -0.16. - Coastal Floods: Central Europe North -0.01, -0.08; EU + UK -0.02, -0.16. - Agriculture: Central Europe North 0.09, 0.05; EU + UK 0.03, -0.03. - Droughts: Central Europe North 0.01, -0.02; EU + UK -0.01, -0.08. - Energy: Central Europe North 0.00, 0.00; EU + UK 0.00, 0.00. - Mortality: Central Europe North -0.17, -0.43; EU + UK -0.29, -0.96. - Sum of the Sectors: Central Europe North -0.11, -0.61; EU + UK -0.33, -1.39. - Findings: Impacts for the Netherlands tend to be small and may even be positive in a low warming scenario, driven by mild climate and sectoral balances (e.g., agriculture improvements vs mortality changes). ### Fiscal and public finance implications - Public finances could be adversely affected by lower productivity growth only if climate change were drastic. - In the RCP2.6 and RCP4.5 scenarios, average temperature increase is not expected to significantly affect productivity growth per capita. - In the more severe RCP7.0 scenario and in the absence of policy change, illustrative calculations indicate: - By 2100, debt-to-GDP could be 10 percentage points higher compared to the baseline scenario. - The annual buildup of debt-to-GDP towards the 10 percentage point difference by 2100 could be offset by modest annual budgetary adjustment. *Source: sipea2023022 - 35. Climate models project increased frequency of extreme heat and heavy precipitation.* ### 47. While the available empirical evidence indicates that macro-economic risks for the ### sipea2023022 - 47. While the available empirical evidence indicates that macro-economic risks for the ### Key uncertainties and scenario approach - Empirical evidence indicates macro-economic risks for the Netherlands may be small, but uncertainties are large. - Some impacts may be missed, such as cross-border spillovers from neighboring countries or global upheaval due to extreme weather conditions in vulnerable nations. - Observation-based evidence may fail to capture compounded effects of multiple new risks occurring simultaneously or in rapid sequence. - These risks can be explored only by developing scenarios; uncertainty cannot be quantified objectively. - IMF staff estimates for the impact of higher average temperature on productivity growth are based on empirical data generated by IMF Staff in accordance with the Kahn (2019) methodology. - Debt-to-GDP illustrative calculations assume: a GDP deflator of 2 percent, 2.3 percent interest rate on government debt, nominal GDP growing in line with total population, revenue remaining constant as percent of nominal GDP, and high expenditure rigidity. ### Climate tipping points and abrupt risks - Impact estimates do not account for global climate tipping points. - Quick disintegration of the Greenland and West-Antarctica Ice Sheets may pose the most challenging threat due to very high sea-level rise, but risks are low during this century (Dietz et al, 2021). - More imminent threat: acceleration of warming due to release of methane hydrates, increasing intensification of extreme events. - An abrupt collapse of the Atlantic Meridional Overturning Circulation (AMOC) does not appear likely before 2100, but if it occurs it would cause abrupt cooling in the Netherlands and shifts in the water cycle (IPCC AR6, TS, Box TS.3). ### Adaptation policy framework and governance - Climate adaptation policy is governed by the National Climate Adaptation Strategy (NAS) and the Delta Programme. - NAS published in 2016; implementation program (UP NAS) published in 2018. - 2020 National Climate Adaptation Perspective reviews accomplishments and contains guidelines for a NAS working program for 2020 and beyond. - Government updating NAS based on the 2023 KNMI climate scenarios; update will include a climate change adaptation monitoring framework. - The Delta Programme (implemented since 2010) focuses on protecting the Netherlands from high water and flooding, freshwater availability, and spatial adaptation; the 2023 Delta Programme provides the most recent assessment of risks, adaptation measures, and budget. - National Knowledge Programme on SLR: six-year study programme to gain information on effects of SLR up to 5 meters. ### Roles and institutional principles - Optimal governance should match geographic or sectoral scope of climate risks; national, regional and local governments are stimulated to integrate adaptation into investment and policy plans. - Water district boards responsible for flood risk management in their district; municipalities responsible for local climate adaptation; coordination through the Delta Programme or union of water boards. - Central government should ensure adaptation principles embedded in national legislation, policy and public finance management. - UP NAS aimed to integrate adaptation considerations into government investment programs, medium- and long-term planning, budgets, public investment management, and assets and liabilities management. - Gaps: ex-post reviews such as climate informed impact assessments are at an early stage; no legally enshrined accountability mechanism to ensure authorities are held accountable for implementation of adaptation considerations. ### Effective government focus for adaptation - Government action should prioritize: - Adaptations with large positive externalities (e.g., research, updating building codes, reinforcing infrastructure, early warning systems). - Removing barriers to efficient private adaptation (e.g., legislative obstacles, market imperfections). - Dealing with equity issues (compensating vulnerable populations negatively affected by adaptation policies). ### Market distortions and distributional impacts - UP NAP would benefit from highlighting costs of distortions and distributional impacts in markets for inputs and outputs. - Example: implicit or explicit subsidies to fresh- and groundwater use may lead to inefficient water use by farmers, discouraging efficient irrigation investment and causing welfare losses. - Recommendation: assess impact of market inefficiencies on adaptation costs and benefits and consider compensations to those adversely affected when pursuing reforms. ### Insurance and residual risks - UP NAP highlights insurance for residual climate risks but could emphasize reforms for efficient risk pricing. - Key points: - Ensure competitive market access to insurance providers that satisfy financial requirements. - Ensure complete information for competitive risk pricing. - Subsidies can reduce insurance costs but distort private behavior and shift costs to public budgets; without countermeasures (upgraded/enforced building codes or land-use restrictions) subsidies induce sub-optimal aggregate risk levels and have efficiency costs that should be assessed. ### Financing and mutuality principles - Present financing of flood protection is based on cost-sharing and mutuality principles; without strong institutional constraints mutuality may lead to inefficient risk taking. - Recommendation referenced: Deltacommission 2008 Recommendation 2—to grant permits to new development in low-lying flood-prone areas based on cost-benefit analysis so protection costs fall on beneficiaries rather than other administrative levels. ### Flood exposure, preparedness, and the Delta Programme - Around 55 percent of the country is susceptible to flooding. - 26 percent is below sea-level and 29 percent is susceptible to river flooding. - More than half of the population and two-thirds of economic activity can be potentially affected by coastal and river floods (OECD, 2014). - The Netherlands is uniquely prepared due to strong institutions, financial resources, experience, and cooperation across government levels. - Delta Programme overview (Box 2): - Continuous monitoring, maintenance, and upgrade of protection and freshwater management managed through the Delta Programme overseen by the Delta Commissioner. - Delta Programme embedded in legal framework and administrative functions; receives funding from the Ministry of Infrastructure and Water Management in conjunction with other authority investments. - Total estimated annual budget of the Delta Programme: on average EUR 1.5 billion between 2023 and 2036, 55 percent of which are dedicated to new investment and the rest for maintenance, upkeep, and management, according to The Delta Fund. - Water authorities expect to invest on average EUR 2 billion per year, of which EUR 915 million on flood defenses. - For 2021, national government, water authorities, provincial and municipal authorities and drinking water companies together have spent EUR 1.7 billion on flood defenses, sewage purification, water systems, water quality, and sustainable freshwater supply. ### Planned protection adequacy and projected damages - Planned level of protection adequate to deal with expected flood risks at least until 2050, but upgrades needed to address evolving climate risks. - If planned upgrades are delayed: - Flood damages in urban areas until 2050 can increase to between EUR 33 bln and 87 bln with continuation of present climate trends. - Flood damages in urban areas until 2050 can increase to between EUR 55 bln and EUR 124 bln if climate change intensifies (The Delta programme, 2021; p.18). ### Sea-level rise (SLR) monitoring and scenarios - Faster than expected SLR can lead to more flooding, saltwater intrusion, coastal deterioration, and habitat loss. - KNMI’14 SLR estimates for the period 1986–2005: - Moderate warming scenario: between 15 and 30 centimeters (similar to SSP2–4.5). - Fast-warming scenario: between 20 and 40 centimeters (similar to SSP5–8.5). - Projections for 2085: - Moderate scenario: 30 to 60 cm. - Fast-warming scenario: 45 to 75 cm. - Extreme scenarios with SLR of 100 centimeters or more cannot be excluded if melting of Greenland and Antarctica is faster than predicted. - While current protection strategy is expected to minimize losses up to 2050, acceleration of SLR in the second half of the century requires contingency plans. ### Cost-benefit analysis (CBA) practice and recommendations - Long-standing tradition of CBA in flood risk management and water governance should be continued and reinforced. - Standard CBA good practices to apply consistently: - Assess a range of policy/investment alternatives, including no incremental protection (business-as-usual). - Calculate cost of adapting to rising sea levels under a range of SLR scenarios against a counterfactual with no SLR. - Consider regional interdependencies (positive and negative spillovers) and assess combinations of protection options across regions. - Monetize non-market impacts using best-available evidence; monetize loss of life using the Value of Statistical Life consistent with national CBA standards; monetize disutility losses from relocation. ### Model-based CBA and protection strategy trade-offs - IMF staff used the CIAM model (Diaz, 2016–Box 3) for a stylized CBA of alternative protection strategies. - Findings: - Implementing an efficient protection strategy can significantly reduce overall protection costs while minimizing residual damage; aligns with national studies. - Comparison between full protection (zero permanent inundation) and “optimal” protection (minimizes total costs of SLR including protection costs, residual damage, and non-market loss of wetlands) suggests: - “Optimal” protection entails slightly elevated inundation risk but much lower total costs than full protection. - Model limitations and caveats: - Potentially underestimates climate change damages by excluding riverine flood risks. - Potentially overestimates adaptation costs by assuming no protection against SLR in the baseline scenario. - Numerical findings should be taken with caution, but the model is useful to compare trade-offs between costs and benefits under alternative strategies. - Recommendation: develop more accurate national models to facilitate efficient protection strategy CBAs. *Source: IMF Staff estimates* ### Box 3. A Stylized Cost-Benefit Analysis of SLR Using CIAM from 2050 to 2079 ### Box 3. A Stylized Cost-Benefit Analysis of SLR Using CIAM from 2050 to 2079 ### Model, inputs, and scenarios - The Coastal Impact and Adaptation Model (CIAM) is a global optimization model for cost-benefit analysis of adaptation to SLR (Diaz, 2016). - For the Netherlands the coastline is divided in 128 segments of varying length. - The exercise uses the median increase of local sea-level in the Netherlands for the RCP 4.5 scenario in Kopp et al (2014). - The 5th and the 95th percentiles of the distribution of SLR for the RCP 4.5 scenario are used to illustrate uncertainty. - CIAM starts from coastal characteristics on 12,000 coastal segments from the Dynamic Integrated Vulnerability Assessment model (DIVA) and considers SLR impacts including coastal erosion, coastal flooding, wetland change and saltwater intrusion; on top of SLR, CIAM considers the expected value of storm surges to include rare high-impact events. - Two adaptation strategies are simulated: protection (building dikes, flood barriers, reinforcing coastal dunes, etc.) and retreat (progressively relocating population and assets). ### Key quantitative findings (2050–2079) - Full protection scenario: - EUR 862 million are needed annually between 2050 and 2079 to eliminate contemporaneous and future inundation risks from SLR. - Total cost: EUR 25.9 billion. - Optimal (protection + retreat) scenario: - EUR 656 million annually in investment needs between 2050 and 2079. - Total cost: EUR 19.7 billion. - Land and capital losses due to inundation: EUR 2.31 billion cumulatively during the same period. - Interpretation: - Full protection eliminates permanent inundation risk but entails higher total costs. - A policy combination of protection and retreat is the most cost-effective in the CIAM results. - Protection is highly effective at reducing potential damages from SLR; comparing alternatives that mix protection and planned inundation while including monetary and non-monetary costs and benefits is essential for CBA. - Uncertainty and model limitations: - Due to the coarse nature of the model and large uncertainties in costs of protection and avoided damages, scenario estimates should not be interpreted as exact investment needs. ### CIAM cost categories and measurement (Annex I, Table 1) - Protection Cost - Explanation: Constructing and maintaining protection (generalized as sea walls) to shield the land behind the sea walls from the SLR-caused inundation. - Measurement: A function of the coastline length, the height of the sea walls, and the value of the land occupied by the sea walls. - Retreat Cost - Explanation: Relocation of population and assets from the affected areas, including the forced emigration and the planned retreat. - Measurement: The cost of relocating population and mobile capital in the incremental area of retreat, as well as the cost of demolishing the immobile capital. - Inundation Cost - Explanation: The loss of land and assets due to the SLR-caused inundation. - Measurement: The cost is based on the extent of land endowment lost and the associated value of the land and the capital stock. - Wetland Cost - Explanation: The loss of wetland due to the inability to migrate inland naturally, constrained by the rate of SLR and the lack of space. - Measurement: (1) the total service value of the wetland occupied by the sea walls; (2) the service value of the wetland lost related to the rate of SLR. - Flood Cost - Explanation: The damage to population and asset due to extreme surge. - Measurement: The expected damage associated with the risk of the extreme surge. The likelihood of the extreme events follows the generalized extreme value distribution by using the local surge frequency data from the DIVA tool, while the total land affected by the extreme surge depends on the elevation exposed to a given flood water height. - Note: The model optimizes adaptation strategies over 20 periods; costs are measured per period. ### Adaptation policy summary recommendations (from D. Summary of Policy Recommendations) - Climate adaptation could be further strengthened by holistically integrating it into long-term planning frameworks of the government. - Government action could further focus on adaptation with large positive externalities, removing barriers to private adaptation, and dealing with equity issues. - The National Adaptation Plan could also benefit from highlighting the cost of market distortions for adaptation. *Source: IMF staff calculation utilizing the Coastal Impact and Adaptation Model (Diaz, 2016); CIAM inputs from Kopp et al (2014) RCP 4.5 scenario, as presented in Box 3 of the IMF Selected Issues Paper.* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023022.pdf_