Lao PDR Country Climate and Development Report

The Country Climate and Development Report provides analysis and recommendations on how Laos can achieve sustained development while responding to climate change. Climate change, through rising temperatures and increased natural disasters, is adding to Laos' economic and development challenges. Lowering vulnerability to climate change would help restore macroeconomic stability and diversify the economy, boosting growth and job creation. This report identifies targeted and cost-effective measures to adapt to climate change and help achieve the country's pledge of net-zero emissions by 2050.

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The report identifies the following top ten priority actions to steer the economy to a more sustainable development path with lower climate and macroeconomic risks.

1. Raise fiscal revenues by lowering exemptions and reforming excise taxes, including fully restoring fuel excise taxes and reforming natural resource tax incentives.
2. Incorporate good practice principles for minimizing fiscal risks into the legal framework for Public Private Partnerships.
3. Strengthen operational arrangements for more efficient and transparent use of disaster risk financing resources.
4. Conduct a catchment-level integrated flood management approach that includes zoning, stricter building standards, wetlands restoration, and riverbank protection.
5. Protect forests by implementing the Action Plan for the Recognition of Land-use Rights in Forestland.
6. Improve standards for dam safety, operations and management, and strengthen their implementation.
7. Improve maintenance and cleaning of urban drains and canals and strengthen regulations on the discharge or urban waste.
8. Develop an integrated program to improve water resource efficiency and modernize irrigation dams.
9. Incorporate physical climate risks into energy-system planning at national and project levels.
10. Improve maintenance of roads and expand road paving in high flood-risk provinces, prioritizing National Road 13 in Champassak.

Laos contributes minimally to global climate change, but its per capita emissions are high due to deforestation, power exports, and low efficiency. The country has made ambitious emissions pledges, but recent coal investments may jeopardize these goals.

Several actions that would lower emissions would also result in cost savings over their lifetimes, and would have important benefits in terms of climate adaptation and lowering macroeconomic risks.

Macroeconomic model simulations suggest that on aggregate, a low emissions development pathway could result in a slight boost to GDP and employment. A low-emissions development scenario that includes 37 key actions could result in a boost to GDP growth of 2.5% by 2030 and 2.6% by 2050. The low-emissions development pathway would also increase total employment by 0.9% by 2030, mainly through jobs in the forestry sector.

Cross-cutting reforms to restore macroeconomic stability and diversify the economy are crucial for the climate response in Laos. Broad reforms are needed to enable the emergence of a private sector that can create jobs and contribute to revenue generation and productivity. These would lower vulnerability to climate change.

• Raise fiscal revenues by lowering exemptions and reforming excise tax structures.
• Incorporate good practice principles for minimizing fiscal risks into the legal framework for public-private partnerships.
• Expedite debt renegotiations and strengthen public debt management.
• Enhance bank supervision and emergency arrangements.

Laos has experienced rapid and unplanned urbanization, which has exacerbated climate risk and lowered the productivity and livability of cities. Without preventive measures, the rising frequency and intensity of floods could result in high economic losses and damage to critical infrastructure. A spatially targeted approach to riverine flood prevention could effectively reduce asset losses at a lower cost.

• Strengthen the implementation of the law on urban planning.
• Supplement the new building code with regulations to increase the resilience standards for new buildings in the highest flood risk areas.
• Improve maintenance and cleaning of urban drains and canals and strengthen regulations on discharge of industrial waste.
• Conduct a catchment-level integrated flood management approach in highly exposed areas.
• Improve maintenance of roads and expand paving of national roads in high-risk provinces.
• Harmonize the standards and coordination of early warning system observation networks and expand early warning systems' population coverage.

Laos is water rich, but availability varies temporally and spatially, and water use efficiency is a challenge. Issues associated with dam safety have become increasingly important. The country is already experiencing increased pressure on water resources and the impacts of climate change on water resources are projected to increase. Hydropower production is likely to be significantly affected.

Laos has large areas of forest remaining, but they are being lost at a rapid rate. Forest loss reduces valuable ecosystem services that improve water retention and lower soil erosion, and the loss of these services has exacerbated the severity of floods and droughts.

• Improve water resource efficiency and modernize irrigation.
• Gradually increase investment in water storage.
• Improve dam safety, operations and management.
• Adopt an integrated approach to landscape management, including developing targeted reforestation projects in critical areas
• Implement the Action Plan for the Recognition of Land-use Rights in Forestland.

Agriculture faces considerable challenges including low productivity, limited mechanization and low quality infrastructure. Climate change will likely negatively affect rice cultivation and disrupt livestock production. Changes in crop production would disproportionately affect the poor and farmers will need considerable support to adapt to climate change.

• Increasing irrigation could enhance yields and resilience.
• Climate-smart agricultural technologies could help farmers adapt to climate change and the private sector could play a significant role.

Climate change could compound the energy sector's existing challenges. Both seasonal and annual hydropower production are becoming more volatile, and rising heat, floods, and storms pose risks to energy distribution grids. Variable renewable energy offers a way to complement the seasonality of hydropower, while a carefully managed e-mobility transition could lower import dependence and make use of excess hydropower capacity.

• Incorporate physical climate risks into energy systems planning.
• Invest in targeted grid resilience in highly exposed areas.
• Promote competitive processes to attract private sector capital to solar and wind energy projects.
• Develop a support program to incentivize a shift to clean cooking.
• Work with private providers to expand EV charging infrastructure and gradually increase low-cost incentives for EVs and disincentives for diesel vehicles.

Building human capital is one of the most important ways to adapt and build resilience to climate change as higher-skilled workers have greater coping capacity and can better contribute to new economic activities.

• Include climate resilience standards in the 2009 guidelines for school construction and improve flood resilience measures for schools.
• Expand WASH standards and conduct hazard contingency planning for health facilities.
• Leverage existing social protection delivery systems for disaster response.
• Gradually expand regular social protection programs.
• Develop cash assistance programs for disaster response.

The climate response is expected to require additional investments equivalent to 3% of GDP cumulatively over the next 25 years-these investments would have positive returns. The response to climate change identified in this report would require an estimated investment of $21 billion from 2025-50 in discounted net present value terms.

The investment needs for public sector/international financing for priority actions amounts to 0.6% percent of GDP over the next 25 years. Around two thirds of investment in climate response are expected to be made by private firms and households. In transport, e-mobility investments are expected to be made by individual vehicle owners and companies. Investments in building resilience and energy efficiency are also expected to be made by firms and households. Investment in low carbon and resilient agriculture is expected to be primarily financed by farmers and commercial enterprises. Financing for forest protection and restoration is expected to be partially financed by the private sector and partially through public sector initiatives.

Even though these investments are expected to generate positive returns, acute financing constraints in both private and public sectors will need to be addressed to enable them. Key fiscal reforms could both raise revenues and address climate goals-Laos will need to mobilize the private sector and improve access to finance.

• Developing a more dynamic private sector is critical for accelerating job creation and supporting broad-based growth, which would help to lower climate vulnerability.
• Disaster risk financing needs to be expanded and improved to lower fiscal risks while funding for disaster response should be addressed to avoid diverting public funds at times of need.

Establishing a monitoring and evaluation system for climate change interventions would enable the government to undertake a systematic and regular assessment of the impact and cost effectiveness of climate interventions, to better coordinate development partner support, inform resource allocation, and manage climate change projects and actions.

Reactivating the National Environmental Committee and extending its mandate would help elevate the importance of climate change informed development across the government.

An integrated five-year climate implementation plan should specify initiatives with secured financing, and the other priority initiatives requiring financing (with costing). Macro-fiscal climate risks could be integrated into economic forecasts and public investment appraisals following systematic estimates of the fiscal and macroeconomic costs of climate change.

Accelerating the accreditation process of local agencies to access the Green Climate Fund, would allow the Environmental Protection Fund and the Bank of the Lao PDR to mobilize resources from this fund.

All recommendations made in the report are categorized by

1. Urgency, reflecting the extent to which not implementing them could lead to irreversible effects or long-term lock-ins.

2. Fiscal need: do they consume fiscal budget, generate it, or have neutral impact.

3. Impact on development, climate resilience and lowering or avoiding GHG emissions.

Actions are then prioritized according to urgency and fiscal cost.