copy the linklink copied!1. Setting the scene for a green public investment programme

copy the linklink copied!1.1. What are the main air pollution and climate change challenges?1

Since gaining independence from the Soviet Union in 1991, the Government of Moldova has committed to promoting sustainable development. National policies, programmes and action plans have been developed and approved in the main sectors affecting the Moldovan economy and environment – including energy, industry, transport, agriculture, forestry or waste.

However, the country’s energy intensity is much higher than the average of the countries of the European Union (EU), the Organisation for Economic Co-operation and Development (OECD) or the world average. In 2014, Moldova’s energy use stood at about 195 kilogramme of oil equivalent (koe) per 1 000 USD of gross domestic product (GDP), using 2011 prices, compared with about 88 for the EU, 110 for the OECD countries and 126 for the world as a whole (see Section 6.1.3).2 These high intensities are likely to continue as the share of the energy and industrial sectors in total national greenhouse gas (GHG) emissions is expected to increase significantly by 2030.

At less than 5%, transport makes a small contribution to the country’s GDP. Yet the sector is responsible for 22% of the country’s GHG emissions, and is the second biggest contributor after the energy sector. The transport sector is the main source of air pollution, in particular in urban areas, accounting for 86% of total emissions (GoM, 2018[1]). According to the latest available data (2018) from the National Bureaus of Statistics of Moldova (NBS), the share could in fact be as high as 96%.3

Within the transport sector, the vast majority of fuel is consumed in road transport (over 90% in 2017), although Moldova has rail, air and water transport as well (NBS, 2018[2]). The number of road vehicles increased in the period 1990-2013: by 93% for buses and minibuses, 101% for trucks and 193% for passenger cars. However, due to the population’s low purchasing power, new registrations are mainly imported used vehicles. These, combined with a weak technical inspection system, are contributing significantly to air pollution – especially in urban areas where inadequate infrastructure causes frequent traffic jams (MoE/UNEP, 2016[3]).

Analysis shows that around 75% of the more than twofold increase in sulphur dioxide (SO₂) emissions in the period 2005-2011 (from 2 400 to 5 800 tonnes annually) can be attributed to transport (UNECE, 2014[4]). World Health Organization (WHO) data suggest that the number of deaths caused by ambient air pollution in Moldova have more than tripled since 2004.4 The WHO statistics also show that diseases of the circulatory system – which air pollutants (especially particulates) are increasingly known to contribute to – constitute the main causes of death in Moldova.5 The Municipality of Chisinau in particular is experiencing a substantial increase in air pollution-related diseases (GoM, 2013[5]).

While the basic policy and regulatory framework to adopt clean (public and private) transport is in place (see below), Moldova still lags behind given its outdated passenger cars as well as heavy-duty truck and bus engines. In 2017, about 40% of all vehicles failed to comply with any EU emission norm (and only about 6% complied with Euro 5/V or 6/VI emission norms – see Annex B for more details). The advanced age and high wear rate of the bus fleet increase environmental pollution, health costs and maintenance costs and reduce road safety. Upgrading the bus fleet is a vital issue for Moldovan transport operators but would require significant financial resources, both private and public.

At the same time, Moldova’s economy and natural resources are significantly vulnerable to climate change impacts. Agriculture and water availability are important issues in a country where more than half of the population lives in rural areas. According to Moldova’s Climate Change Adaptation Strategy by 2020, the country’s average annual economic losses due to natural disasters were about USD 61 million in the period 1984-2006. The 2007-12 droughts and 2008-10 floods alone cost the country a total of USD 180 billion (GoM, 2014[6]).

copy the linklink copied!1.2. What steps have already been taken?

In the recent past, Moldova has taken a number of concrete steps to mitigate the negative impacts of transport on its citizens (especially in urban areas). Since 2002, Moldova has been part of a policy knowledge-sharing platform called the Transport, Health and Environment Pan-European Programme (THE PEP), jointly serviced by the WHO Regional Office for Europe and the United Nations Economic Commission for Europe (UNECE). Moldova also traditionally participates in European Mobility Week that promotes the importance of the issue and the severe (environmental but also economic and social) consequences of motor transport among the population and local public authorities.6

Moldova is also committed to tackling air pollution and climate change. In 1994, it joined the United Nations (UN) Convention on Environmental Impact Assessment in a Transboundary Context, and in 1995 it joined the UN Convention on Long-Range Transboundary Air Pollution (LRTAP Convention). Since 1992, Moldova has been a party to the United Nations Framework Convention on Climate Change (UNFCCC, ratified in 1995) and the Kyoto Protocol since 2003 (as a non-Annex I country). In 2016, Moldova signed the Paris Agreement on Climate Change, adopted at the 21^st Conference of the Parties (COP21) in Paris in 2015 (which it ratified in 2017).7

National legislation and strategic documents on environmental policy and climate change have also been developed to address the challenge. The Government of Moldova has approved the Low-Emission Development Strategy (LEDS) until 2020 (MoE, 2011[8]) and adjusted the strategy’s targets to the year 2030 (GoM, 2016[9]). The LEDS effectively consolidated the various GHG mitigation objectives stipulated in a number of national policies and legislative acts, including the National Development Strategy "Moldova 2020" (GoM, 2012[10]) , the Energy Strategy until 2030, including a roadmap for implementation (GoM, 2013[11]), and the National Energy Efficiency Programme 2011-2020 (GoM, 2011[12]). The action plan annexed to the LEDS 2030 Strategy includes a list of prioritised national appropriate mitigation actions as provided for non-Annex I Parties to the UNFCCC.

Amendments have also been introduced to Moldova’s laws on environmental protection (adopted 1993 and last amended 2018), atmospheric air protection (adopted 1997, last amended 2018), energy efficiency (adopted 2010), and renewable energy sources (adopted 2016, last amended 2018).

Moldova’s LEDS 2030 Strategy and the NDC consider different scenarios for reducing emissions and adapting to future expected climate changes. In order to achieve its ambitious mitigation and adaptation targets, Moldova will have to make significant investments, including infrastructure projects in energy, transport, buildings, industry, agriculture, land use, land-use change and forestry and waste sectors. Implementing the “conditional” targets identified in the NDC would cost about USD 4.9-5.1 billion (about USD 327-340 million per year) until 2030 (GoM, 2015[7]). Although the costs of the scenarios vary, achieving low-carbon economic growth will require significant public domestic and international support in either case.

The Environmental Strategy of Moldova 2014-2023 aims to further align national legislation with EU directives. It puts a particular emphasis on promoting various measures to reduce the emissions of air pollutants and GHGs generated by road traffic, both by improving the technical condition of vehicles as well as adopting fiscal measures or special programmes that would encourage the replacement of old polluting vehicles (GoM, 2014[13]).

In the same vein, the Association Agreement with the EU – which Moldova signed in June 2014 – sees transport co-operation as a necessary tool for Moldova’s integration into the EU’s internal market, and an efficient, safe and secure (road) transport system as one of the key elements for the country’s modernisation efforts.

The concerns over climate change in Moldova are particularly linked to energy security. In fact, Moldova imports around 96% of its energy needs (see Chapters 3 and 6).8 As identified in the Energy Strategy 2030, the Government of Moldova plans to diversify the energy mix with more renewable energy resource development – this will require substantial investments in the medium and long term. Moldova also adopted its National Renewable Energy Action Plan in 2013 with targets to be achieved by 2020 (GoM, 2013[14]).

copy the linklink copied!1.3. What does the country aim to achieve?

A key document that sets out targets for Moldova in the area of transport is the Programme on Promotion of Green Economy in the Republic of Moldova for 2018-2020 and the Action Plan for its Implementation (GoM, 2018[1]), approved recently by Government Decision No. 160 of 21 February 2018. The programme emphasises effective, efficient and ecological (urban) public transport, including a focus on larger public transport means and its prioritisation over private transport in urban centres. It also advocates for the adoption of clear environmental objectives – e.g. the use of alternative fuels and new technologies in all modes of transport – in current transport policies.

Among the major challenges to the “functioning of the institutional, management and implementation systems in the field of green economy promotion”, the programme cites “emissions from transport” that “have an increasing impact on environment and public health.”

At this point, activities are planned up to the end of 2020 to implement the programme, in order to achieve specific objectives. Those related to the transport sector include:

1. 1. reduce air pollution by 30% by 2020 through the development of sustainable transport

2. 2. ensure the promotion of measures to implement the green economy in construction by 15% by 2020

3. 3. increase the level of public awareness about the green economy and sustainable development by at least 30% by the year 2020.

Under the first objective, the following actions are foreseen:

• gradual elimination of old cars through a state programme in collaboration with private companies

• creating fiscal incentives for importing cars with electric or hybrid engines, as well as developing the national infrastructure necessary for electric cars

• applying restrictions on the use of vehicles (of all types, including for public transport and industrial/commercial purpose) older than 15 years

• modernising outdated public transport means by replacing them with ecological means (electric)

• regulating the entrance of vehicles into cities and city centres (to reduce traffic jams and air pollution)

• developing regulations to promote the use of public transport, significantly reducing (by 30%) the number of minibuses, creating routes (ring roads) around urban centres

• organising and promoting European Mobility Week

• integrating transport policies to encourage the use of alternative fuels and new technologies in all types of transport.

Under the second objective, the following actions are foreseen that are relevant to transport:

• promotion of the green cities principles and application of the European Green City Index9

• monitoring the development of general urbanisation plans that integrate sustainable transport infrastructure (bus lanes, electric transport, bike lines, parking and charging stations for electric transport units).

And finally, under the third objective, the following actions are foreseen that are relevant to transport:

• conducting information and awareness campaigns on the green economy in the areas of energy efficiency, cleaner production, resource efficiency, sustainable public procurement, sustainable transport

• organisation a biannual national conference on the green economy.

The programme also includes an action plan with deadlines and budget estimates for the implementation of the various activities and measures. While the programme provides a much-needed policy framework for sustainable urban transport, the targets it sets out are very ambitious.

copy the linklink copied!1.4. What needs to be done?

In order to achieve its ambitious emissions reductions, Moldova will have to make significant investments across all sectors of economy. For example, achieving the “conditional” GHG emissions reduction targets identified in the NDC (Box 1.1) would cost around USD 5 billion by 2030. Although the costs of the two proposed scenarios (“conditional” and “unconditional”) vary, achieving low-carbon economic growth will require significant public domestic and international support.

As the global climate regime is evolving, donors and international financial institutions have already started to invest significant resources to support non-Annex I countries, including Moldova. International carbon finance mechanisms, such as the Green Climate Fund, are known to rely to a great extent on country-based systems for programme and project identification and implementation. Those countries that develop the necessary skills to prepare sound public expenditure programmes and identify a pipeline of cost-effective projects will be more competitive and will stand better chances of benefiting from international support.

In order to be successful in attracting international climate finance, Moldova needs to put in place economically sound climate and air pollution-related investment programmes that identify the most cost-effective projects that can be supported by public funds. Such public investment programmes can effectively leverage funds from both budgetary and donor sources. Strengthening Moldova’s administration capacities to manage its public environmental expenditure in line with good international practices is key to accessing both budgetary and international carbon finance sources and gaining support for climate change measures that will be vital for the further economic and social development of the country.

These programmes need to be integrated into national development strategies and medium-term budgetary processes, such as medium-term expenditure frameworks (MTEFs). In addition, government administrations need to be willing to apply good practices in public expenditure management, such as accountability, transparency and efficiency. Indeed, Moldova is among the first countries in the EECCA region to introduce a medium-term perspective to its annual budget process. Although the Moldovan Government has accumulated significant experience with MTEF design, including in the environmental sector, more efforts are needed to implement these provisions in practice.

copy the linklink copied!1.5. What is this report about?

In 2016, the OECD and Moldova joined forces to analyse how a country-wide public investment programme could spur the development of cleaner public transport and reduce air pollution and GHG emissions from the sector in the country’s large urban centres. The foundations for this work were laid in 2011 when the OECD provided targeted training on designing and managing environmental investment programmes to Moldovan environmental experts.

The preparation for the programme involved four main activity areas and outputs: 1) an initial scoping and analytical stage; 2) development of a programme costing methodology; 3) design of a programme in line with international good practices; and 4) preparation of an analytical report and training.

Activity areas 2 and 3 constituted the backbone of the project, which aimed to demonstrate in practice how to use scarce public funds to encourage the private sector to invest in environmentally and socially important projects.

This report is the culmination of the investment programme preparation process (henceforth, the “project”), and presents the results of the scoping analysis. It is organised as follows:

• Chapter 2 describes the proposed Clean Public Transport (CPT) Programme, and provides estimates of its costs and expected environmental and socio-economic benefits. The chapter also lays out the financing strategy and optimal co-financing levels.

• Chapter 3 presents an economic assessment of the viability of the investment programme. It includes market analyses of clean technologies and fuels in the bus transport sector in Moldova, and of the domestic production versus import of buses for meeting the need for bus replacements.

• Chapter 4 discusses the institutional arrangements for managing the CPT Programme.

• Chapter 5 presents an overview of the project cycle management (PCM) procedures for each project pipeline identified as part of this programme.

• Chapter 6 briefly describes the main demographic, macro-economic and environmental issues in Moldova of relevance to the transport sector. It also presents an overview of the urban public transport system in the country, levels of GHG emissions and air pollution in the main urban centres and the major health risks associated with the main air pollutants.

• Chapter 7 describes the current policy and regulatory framework in the transport sector.

• Annex A presents an overview of clean technologies and fuels in the transport sector, while Annex B explains the use of the OPTIC (Optimising Public Transport Investment Costs) model. Annexes C-E contain sample project application and appraisal forms.