Background

Jordan is located in the Middle East, about 80 kilometers east of the Mediterranean Sea, with the Dead Sea on its western border. Its climate varies from dry to sub-humid to desert conditions. With insufficient supplies of water, oil, and other natural resources, Jordan imports 96% of its energy needs, accounting for 20% of GDP. Also, demand for electricity has been growing at a steady annual rate of 10%. These statistics emphasize the need to integrate a Green Economy in its planning and political agenda. In 2010, the launch of a green economy initiative was approved by the Ministry of Environment.

Overall Fiscal Profile

Like many countries, Jordan was adversely impacted by the global financial crisis of 2007-2008. In particular, there was a reduction private capital flows, which were a major source of growth for Jordan in years before the crisis, lower exports and remittance receipts. The government responded to restore confidence – the Central Bank guaranteed all bank deposits for instance – and thereafter, Jordan began to focus on its medium term progress through subsidy reform. This reform entailed liberalizing fuel pump prices while introducing cash transfers to the population .

None the less, fiscal consolidation will remain integral to address high unemployment (11.8% in 2014) within the country. Though economic activity has been gradually recovering, amounting to 2.8 per cent GDP growth in 2013, growth has been hindered by shocks from regional conflict, including the Syrian conflict and the after-effects of the Arab Spring..

Core inflation has increased due to local demand, amounting to 4 percent year-on-year as of February, 2014, The current account deficit peaked recently in 2012 as a result of subsidy reform and high energy prices, as well as extra-budgerary spending to secure additional energy supplies after natural gas flows from Egypt were disrupted after the Arab Spring.  Since 2012, the fiscal position has improved owing to lower energy imports, higher current transfers, as well as private receipts.

Policy and Legal Framework

Jordan’s National Agenda (2005-2015) adopts environmentally sustainable economic development as a critical policy goal as reflected in a wide range of sectors, including transport, energy, and waste management. These were translated into a National Executive Programme (2011-2013), highlighting specific goals, policies, projects, programs, and indicators. Among the National Execuitve Programme’s goals are developing water resources and upgrading their management efficiency; achieving security in energy supplies and diversifying energy sources. Reflecting the gravity of water scarcity in Jordan, the Programme allocates the biggest proportion of funding – 16.5% of the total – to the water and wastewater sector..

Other relevant strategies include the Ministry of Energy and Natural Resources National Energy Strategy (2007-2020), which outlines ways to develop conventional, renewable and alternative resources such as wind, solar, oil shale and nuclear. Moreover, it sets a goal of increasing the contribution of renewable energy to the overall national energy mix from 1% in 2007 to 7% by 2015, and 10% by 2020. In addition, the Renewable Energy and Energy Efficiency Law Number 13 was a law implemented in 2010 to promote private sector investment in renewable energy projects through the Renewable Energy Fund. This law paved the way for private sector investment in renewable energy projects in order to enhance energy security and efficiency. The National Water Strategy Plan (2008-2022) was also issued in 2009 to address Jordan’s water scarcity challenge. The Plan aims to develop cost reflective tariffs by 2022 in order to reduce water leakages and promote efficient distribution of water resources.

Fiscal Measures for a Green Economy

According to a Green Economy Scoping Study of Jordan conducted by UNEP in 2011, there is significant opportunity for a shift to the green economy in a variety of sectors in Jordan. For example, investment in water systems (330 JD million) is expected to create 31,000 jobs. Additionally, investment in energy efficiency of 195 million JD annually for 10 years can save the nation one-fifth of its energy usage over the next 12 years. Total estimates suggest that greening the economy in Jordan could result in 51,100 new jobs and stimulate about JD 1.321 (US$1.86) billion in new investment in ten years.

Public spending on the environment is less than 0.5% of the government budget and greater amount of public financial resources will be necessary, including through fiscal reforms.

In 2010, food subsidies were JD 75 (US$ 105.87) million while 48 per cent of the total household water bill was subsidised. These subsidies have resulted in overconsumption and inefficiencies.

None the less, efforts in energy reform trace back in 2005. The National Energy Efficiency Strategy sought to introduce a number of incentives. For example, 100% exemption from income tax over 10 years was introduced to encourage independent power producers to generate electricity on a Build Own Operate (BOO) and Build Own Transfer (BOT) basis. Additionally, other measures were highlighted including the progressive removal of oil and electricity subsidies (to reflect their true costs), the establishment of an energy data bank, the elimination or reduction of a sales tax and customs duties on relevant materials, and the provision of renewable energy grants and loans.

As a result of the 2009 oil price shock, the government created additional fiscal incentives. For example, all renewable energy and energy efficiency imports were exempted from customs and sales taxes. Grants and tax exemptions were also utilized to  promote energy efficient vehicles, and sales taxes on solar water heaters were removed.

The Jordan Renewable Energy and Energy Efficiency Fund (REEEF)under Law No. 13 also works in favor of the Green Economy. For example, customs duties and sales taxes were exempted on all renewable energy sources and energy conservation systems and equipment and its production inputs (manufactured locally or imported). Additionally, Law No. 13 outlines the creation of the Jordan Renewable Energy and Energy Efficiency Fund. The Fund will facilitate renewable energy subsidies to privately owned and operated facilities, as well as interest rate subsidies on loans. Additionally, a Public Equity Fund will be established by the REEEF . The Public Equity Fund seeks  to support private investment, and ease credit access for relevant projects developers; while also providing technical cooperation grants for relevant programs and studies.

In 2012, ceilings  on tariff rates were set for the sale of electricity generated by renewable energy facilities at 85, 135, 120, 90 and 60 fils/kWh for wind, solar, thermal, PV, biomass and biogass based electricity, respectively.  These incentives will be available to winning bidders of the direct proposals for RE projects. Moreover, if the facility is installed in Jordan, a 15 per cent increase of the aforementioned price will be added to the tariff.

Other funding mechanisms have been established including the Environmental Protection Fund, as well as the Green Investment Fund. The National Environmental Protection Fund will seek to address environmental priorities in Jordan and will focus on pollution, waste management, and maintaining natural heritage.  These forthcoming mechanisms will have the capacity to support Jordans transition.

Fossil Fuel Subsidy Reform

Jordan attempted to deregulate the fossil fuel industry  in the late 1980s and early 2000’s with little success due to public opposition. However, 2005 marked a shift in Jordan’s energy policy. Jordan implemented measures to entirely phase out fuel subsidies over a three year period in order to reduce its vulnerability to international oil price fluctuations. In order to compensate for increasing energy prices (65% for fuel oil used in the power sector) fuel prices  were set to reflect international prices and freight allowance. IMF reports that domestic fuel product prices increased by 25-33 per cent.  Fuel subsidies decreased from JD 214 million to JD 22 million (US$ 302 million to US$ 31.06 million) from 2006 to 2010 respectively.  Subsidies declined from 5.8% of GDP in 2008 to 0.4% in 2010.  With mitigation measures – such as an increase in minimum wage, maintenance of an electricity lifeline tariff, tax exemptions for low-income groups – the government succeeded in reducing the value of energy subsidies. Both public and private sectors have been involved in the safety net program. None the less, in 2011 rising living costs reversed some of benefits realized in the earlier stages of reform.

Additional Reading

IEA, 2014. IEA/IRENA Joint Policies and Measurements Databases. Retrieved from: http://www.iea.org/policiesandmeasures/renewableenergy/?country=China

IMF 2010. The Unequal benefits of fuel subsidies: A review of evidence for developing countries.  Retrieved from: http://www.imf.org/external/pubs/ft/wp/2010/wp10202.pdf

International Monetary Fund. (2012a). Jordan: 2012 Article IV Consultation. Retrieved from: http://www.imf.org/external/pubs/ft/scr/2012/cr12119.pdf

Ministry of Planning and International Co-operation, Jordan National Executive Development Program (2011 -2013), http://www.mop.gov.jo/uploads/Overview-Ex%20%20Development%20Program%202011-2013-March%202011.pdf

National Environmental and Economic Development Study for Climate Change. Retrieved from: https://unfccc.int/files/adaptation/application/pdf/jordanneeds.pdf

UNEP in Partnership with the Ministry of Environment of Jordan (2011). Towards a Green Economy in Jordan. A Scoping Study. Retrieved from: http://www.greengrowthknowledge.org/sites/default/files/downloads/resource/Green_Economy_Jordan_UNEP.pdf

USAID & National Association of Regulatory Utility Commissioners. Best Practices in Renewable Energy: A Workshop on Policy Incentives and Enabling Environment. Retrieved from: http://www.naruc.org/international/Documents/CRONIN-%20FINAL%20Best%20Practices%20Workshop%20Presentation%2010%202%2011.pdf

World Economic Forum, 2013. Lessons Drawn from Reforms of Energy Subsidies. Retrieved from: http://www3.weforum.org/docs/GAC13/WEF_GAC13_LessonsReformsEnergySubsidies_Report.pdf