Climate Change Initiative Brazil Country Dialogue

Climate Change Initiative: Brazil Country Dialogue 17-27 October 2005 Introduction • Bank has agreed to consult with key client countries on the G8 climate change initiative • Climate change poses risks to developing countries, but there are also opportunities… • How to lower the carbon intensity of development in the short and medium term and the financial implications • Carbon market is taking off but faces 2012 constraint • What analytical needs can World Bank assist with? Topics • Science of climate change and potential impacts • Alternative future scenarios • From Rio to Gleneagles: international responses to climate change • Role and opportunities for Brazil The Science of Climate Change & Potential Impacts Historical Emissions of CO2 LULUCF Annex 1 Fossil C Annex 1 5000 4000 Mt C / year 3000 2000 1000 0 -1000 1850 1900 1950 2000 LULUCF Non Annex 1 Fossil C Non Annex 1 ! World Energy-Related CO2 Emissions 20 000 16 000 Mt of CO2 12 000 8 000 4 000 0 1970 OECD 1980 1990 2000 2010 2020 2030 Transition economies Developing countries 70% of the increase in global CO2 emissions comes from developing countries Why is LAC vulnerable? – Large endowment of vulnerable natural resources: – Largest stocks of freshwater worldwide (water and power supply, agriculture, ecosystem integrity) – Large tracks of forests, (wood, fiber, environmental services) – Major reservoirs of biodiversity (150,000 vascular plants; rate of extinctions) – Varied climatic and ecosystem composition – Large coastal areas (fisheries, tourism, environmental services) – Vulnerable population – More than 60% lives in coastal areas and trend is increasing – Large dependence on environmental services – Poor first to lose access to natural resources Regional Impacts Caribbean Basin Mexico Tropical Andes Orinoco Savanna Caatinga Mid- Pacific Cerrado Humid Pampa/Chaco El Nino • Basics – Cause • Shifts in pressure systems across the equitorial Pacific • “Originates” off the Peruvian coast • Impacts – Wetter than normal summers (late spring) along most of western South America and southern Brazil – Drier conditions in Amazon region, central America and Mexico – Flooding, land slides (wetter) and forest fires (drier) – Reduced fish catch – Secondary health effects via vector borne diseases and air quality Frequency • Doubled since 1980s • Consistent with models Frequency of El Nino/La Nina (1865-2000) 5 4 La Nina 3 2 1 SOI 0 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 -1 -2 -3 -4 -5 El Niño El Nino Climate Change Impacts Human-induced climate change is projected to: Decrease water availability and water quality in many aridand semi-arid regions – increased risk of floods and droughts in many regions, retreating glaciers, higher sea levels Decrease the reliability of hydropower and biomass production in some regions Increase the incidence of vector- (e.g., malaria and dengue) and water-borne (e.g., cholera) diseases, as well as heat stress mortality, threats to nutrition in developing countries, increase in extreme weather event deaths Water Energy Health Agriculture Decrease agricultural productivity for almost any warming in the tropics and sub-tropics and adverse impacts on fisheries Adversely effect ecological systems, especially coral reefs, and exacerbate the loss of biodiversity 12 Biodiversity 14 12 10 8 6 4 2 0 -100 DEVELOPED -80 -60 -40 -20 0 20 40 60 80 >95 25 Distribution of cultivated land according to climate impact on cereal production capacity, ECHAM4 2080s, Rain-fed multiple cropping DEVELOPING 20 15 10 5 0 -100 Vertical: percent of cultivated land Horizontal: cereal impact (percent) -80 -60 -40 -20 0 20 40 60 80 >95 Source: Fischer et al., 2002 Change in annual runoff Importance of Hydropower by Country LAC: Installed Hydro Share 80% 70% 60% 50% 40% 30% 20% Argentina 10% 0% Brazil Colombia Chile Venezuela Other Mexico Frequency of natural disasters The Santa Catarina Storm Mystery 28th March 2004 Waters “too cold” Moved East to West – wrong direction No similar landfall on record Worldwide: Economic Losses and Insured Losses from Natural Disasters (US$b 2004) Economic losses (2004 US$) Of which insured losses Average economic losses per decade Alternative Future Scenarios Emissions Abatement • The reduction of greenhouse gas (GHG) emissions relative to current practices and (“business-as-usual) projections • GHGs include carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), fluorocarbons (HFCs, PFCs); and indirect GHGs such as carbon monoxide, nitrogen oxides, volatile organic carbons and black carbon (CO, NOx, NMVOC, BC) • Abatement options include energy efficiency, renewable energy, municipal and agricultural methane, industrial gases, forests and land-use “sinks” Cumulative Reduction in CO2 Emissions in the Alternative vs Reference Scenario 2002-2030 Rest of the world 22% OECD North America 19% Russia 7% OECD Europe 17% India 7% OECD Pacific 7% China 21% Developing countries account for almost half the reduction in emissions What target? (How is it set?) Some decisions How are the emission allowances allocated? (per capita?) Who pays? (HM is normal development? What about benefits of clean energy?) For what? Who pays for adaptation? What is “adaptation”? There are many paths leading to the stabilization of atmospheric concentrations of carbon dioxide. All require significant global emissions reductions Stabilization Level Emissions Current Levels Date for Global Date for Global (ppm) Emissions to Peak to be Below 450 550 650 750 1000 2005-2015 2020-2030 2030-2045 2040-2060 2065-2090 2000-2040 2030-2100 2055-2145 2080-2180 2135-2270 Other greenhouse gases, which are increasing, need to be taken into account when deciding the appropriate stabilization level of CO2 (other gases already equiv to about 100ppm of CO2) Investment - a large and growing gap Financing Required for the Power Sector In Emerging Markets 1990-2020 2 5 0 .0 Cumulative Sum ($Bn) $4,300 Bn Total Power Investment ($Bn) 2 0 0 .0 1 5 0 .0 Gap covered by public financing self-financing, donor funding, and rationing High Investment Demand Scenario (3%) $3,800 Bn 1 0 0 .0 Low Investment Demand Scenario (2%) 5 0 .0 Private Investment in the Pow er Sector 0 .0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: World Bank, IEA, Deloitte Touche Tohm atsu Emerging Markets Group Historic Emerging Markets Group Future 3 2020 Investment – Needs and Shortfall Electricity infrastructure in developing countries needs about $130 billion of new investment p.a. until 2010 i.e. between 2 and 3% of GDP However investment lags resulting in shortages, system failure and slow system expansion Under investment in the sector slows economic growth Energy Security: Shortages, Poor System Reliability & Slow System Expansion Economically-feasible hydropower potential 100 80 Europe North America % of potential developed 60 40 20 0 0 0.5 1 1.5 2 2.5 South America China Africa Asia (excl China) Potential in million GWH/year Energy is back on the Bank agenda Lending has recovered but WBG can do more in middle-income countries Energy - Economic & Sector Work IBRD/IDA Lending Approvals for Energy projects (supervised by all SBs) 4500 4000 3500 3000 2500 2000 1500 1000 500 0 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 3500 60 3000 50 Costs Number of AAAs 40 2000 30 1500 20 1000 10 500 0 FY00 FY01 FY02 FY03 0 N u m b e r o f A A A P ro d u c ts IBRD Commit Amt IDA Commit Amt C o s ts (U S $ '0 0 0 ) 2500 Global CO2 Emissions Electricity Generation 18 16 14 PROSPECTS FOR AND [Gton CO2] CO2 CAPTURE STORAGE 12 10 8 6 4 2 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Energy Technology Scenarios 0$ 10$ 25$ 25$ NoCCS 50$ 50$ NoCCS From Rio to Gleneagles: International Responses to Climate Change Framework Convention on Climate Change (UNFCCC) • Agreed at the Earth Summit in Rio in 1992, ratified in 1994. • Global Environment Facility (GEF), to help developing countries address climate change, launched in 1992. • Kyoto Protocol and the “flexible mechanisms” adopted in 1997. • Entered into force in February 2005 after Russian ratification. The Kyoto Protocol 38 Developed Countries and Economies in Transition agree to: reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 20082012 Total demand created for GHG Reductions: ~5.0 to 5.5 billion tonnes CO2e 32 Kyoto Targets to be Achieved through: • GHG Reductions by the 38 countries • Afforestation and Reforestation (carbon sinks): (limited to ~330 Mt/C02e) • International Emissions Trading • Clean Development Mechanism: certified projects in developing countries can sell avoided GHG emissions to industrial countries OECD “Gap” in meeting Kyoto Compliance Targets • Kyoto-Ratifying OECD countries cumulative target reductions will be 5-5.5 billion tons of carbon dioxide below 1990 levels by 2012 based on their Kyoto obligations If half emissions reductions are achieved domestically the “compliance gap” to be met through trade with developing countries and transition economies through 2012 would be 2.5 – 3.0 billion tons This compliance gap is over 10 times the current carbon purchase contract volumes reported in the 2005 market intelligence report for project-based trade! • • The Carbon Market • Carbon market is based on – Greenhouse gas effect being a global phenomenon => location of abatement is irrelevant; and – difference in cost of abatement between OECD and developing countries – short run marginal cost of abatement in OECD is $10-50 per ton of carbon dioxide, versus about $5 per ton in developing countries • OECD private sector and governments – invest in less greenhouse gas (GHG) or “carbonintensive” project/ technology in developing country and – receives credit for GHG (“carbon”) emission reduction • Developing country receives increased development investment and cleaner technology 35 World Bank Carbon Finance: Strategy and Business Development Successive Phases in Carbon Finance Business Development • • • Learning-by-Doing Addressing Market Distortion – Failure to serve small/poor and sinks Developing CDM and Compliance Market Carbon Funds MultiConvtnCF 1400 1200 1000 800 600 400 200 0 Expected Growh in CY2005 Funds under management in February 2005: $850 million Europe CF Danish CF Spanish CF Dutch JI Italian CF BioCF CDCF NCDF PCF Q 2 Q 3 Q 1 Q 4 04 00 01 02 20 20 20 20 03 04 04 04 20 20 80% of funds are from governments (non-ODA) 20 20 20 05 36 Volume Traded Through Projects Growing (in million tCO e) 2 120 100 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 (Jan-Apr) European Allowance Market Exploding (in million tCO2e) 40 35 30 25 20 15 10 5 0 2002 2003 2004 2005 (Jan.-March) CDM Market Segmentation and Delivery Potential ? 200-300 million tons by 2012 1 billion tons by 2012 High Demand on Project Finance High Delivery Risk Long Lead Times High Contribution to long term lowcarbon infrastructure and adaptation Clean-Coal Coal-to-Gas Large Hydro 5yrs 4yrs 3yrs Urban and Agri-waste to Energy Industrial Energy Efficiency 2yrs 1yr Perflourocarbons N2O, HFC23, PFCs 6months Negligible Demand on Project Finance Low Delivery Risk Short Lead Times Low Contribution to long term lowcarbon infrastructure and adaptation BioCarbon sinks Repowering Medium Hydro Wind, Biomass Cogen/CHP Small-Scale Energy Efficiency and Renewable Energy Projects 40 G8 Climate Change Initiative • Objective: to raise the profile of climate change within the context of the G8 and to expand the participation of key countries. • Calendar of events leading up to Gleneagles – March G8 meeting of Energy and Environment (London) and Environment and Development Ministers (Derbyshire) • Meetings with industry (energy and reinsurance) and IFIs in Sept 2005 • Climate change discussed at Annual Meetings of the IMF and World Bank in Sept 2005 (Development Committee Communique) • Investment Framework launched by Messrs. Wolfowitz and Benn with G8 +5 Finance Ministers September 24th, IMF/Bank Annual Meetings, Washington • Nov 1 meeting in London of Energy and Environment ministers. • Spring Meetings of IMF/WB – Investment Framework Joint Statement of +5 at Gleneagles on Climate Change • Climate change will have a profound impact on developing countries… • Industrial countries should take the lead in reducing emissions… • Economic and social development and poverty eradication are the fundamental priorities of developing countries… • G-8 leaders should devise innovative mechanisms for the transfer of technology and the provision of new and additional resources to developing countries (under UNFCCC and KP-CDM). G8 Requested Role of the World Bank Dialogue Initiative Objective: To build a consensus among all of the OECD countries and major developing countries on the policies, instruments and strategy for long term climate management (mitigation and adaptation) Investment Framework Initiative Objective: to greatly accelerate investment in energy efficiency and clean energy, notably efficient coal-fired power plants in China and India, coal-to-gas shifts, and in leading edge long term technologies for coal gasification and coal power plant emissions sequestration Increased Bank Lending Initiative Objective: to increase Bank lending for low carbon climate friendly economic development (energy/infrastructure, NRM/agriculture/forestry, climate risk management, and expanded carbon finance and GEF programmatic assistance Investment Framework Initiative The Issues • • • • $8 trillion is required for energy sector investment in developing countries the next 25 years; The efficiency of this new energy infrastructure has major implications for our ability to mitigate climate change long term, as well as for local atmospheric pollution; Private sector financiers view the current investment climate as unfavorable: OECD private investment in energy sector assets in the developing countries declined from $40bn in 1997 to below $10bn in 2002 No attempt to create synergy between and within public and private sources of finance for low carbon infrastructure and adaptation. GEF, Carbon Finance, Export Credit, MDB product line uncoordinated and underleveraged. Carbon finance is an important new and additional source of development finance, potentially exceeding one billion per year over the next 2-3 years, $50-120 billion/year long term, but current growth constrained by deep uncertainty over continuity in carbon trade beyond Kyoto. There is no integrated lending program for Adaptation in the World Bank or any MDB/Bilateral donor and the GEF/UNFCCC Adaptation Funds are small and not yet functional • • Investment Framework Initiative “We will invite the World Bank and other multilateral development banks (MDBs) to increase dialogue with borrowers on energy issues and put forward specific proposals at their annual meetings to: (a) make the best use of existing resources and financing instruments and develop a framework for energy investment to accelerate the adoption of technologies which enable cleaner, more efficient energy production and use; (b) explore opportunities within their existing and new lending portfolios to increase the volume of investments made on renewable energy and energy efficiency technologies consistent with the MDBs’ core mission of poverty reduction; (c) work with interested borrower countries with significant energy requirements to identify less greenhouse gas intensive growth options which meet their priorities; and ensure that such options are integrated into Country Assistance Strategies (China, India, Mexico, Brazil, South Africa) (d) develop local commercial capacity to develop and finance cost-effective projects that promote energy efficiency and low-carbon energy sources.” G8 Request to the World Bank on Adaptation “35. We will: (a) invite the World Bank to develop and implement 'best practice' guidelines for screening their investments in climate sensitive sectors to determine how their performance could be affected by climate risks, as well as how those risks can best be managed, in consultation with host governments and local communities; and (b) invite other major multilateral and bilateral development organisations to adopt the World Bank guidelines, or develop and implement similar guidance.” An initial screening tool has been developed in ESSD and is being applied through a piece of sector work on the challenges for adaptation to climate change in India. Expanding investment in forestry and agriculture to increase resilience to climate risk and to expand weather related disaster risk insurance to the poorest is the adaptation “twin” to the “mitigation” arm of the investment framework (on efficient fossil fuel use, RE etc) Role and Opportunities for Brazil Brasil: Geracao de Energia Eletrica 1400 1200 1000 800 TWh 600 400 200 0 2000 2004 2010 Ye ar 2020 2030 Importacaos Liquidas Eolica Biomassa Carvao Mineral Nuclear Gas Natural Petroleo Hidraulica Source: Pietro Erber e Luiz Eyer Carbon Finance: Opportunities for Brazil Petrobras Fertilizer project (US$ 700 M.) : Fuel switch and rural development EletroBras ProInfa Program (US$ 150 M.) 3,300 MW in renewable energy Banco do Brasil, Caixa Econômica Federal Combine Carbon finance with underlying finance for renewable energy and waste management projects Other large projects (above US$ 20 M. per year each): Fertilizer projects (reduction of N2O) Deactivating hydro dam in the Amazon Electrification of the Amazon Aluminum industry Ethanol “learning curve” for Brazil Source: Goldemberg, J., et alii, 2004 100 (Oct 2002) US$ / GJ 1980 10 1986 1990 1993 1996 2002 1999 1 0 50000 100000 150000 200000 3 Ethanol Cumulative Production (thousand m ) 250000 Ethanol prices in Brazil trend (Rotterdam gasoline prices) Rotterdam regular gasoline price trend (Ethanol prices) Possible Issues for Brazil • Climate variability on GDP growth • Energy supply investment needs (BAU) vs financial implications of lower-carbon energy supply (larger dams, repowering, more renewables) • Potential finance needs for low-carbon development path in Brazil – Energy efficiency, renewables, urban waste management, industrial gases, agriculture, forestry • Trade implications • Analytical needs? Trade Possibilities for Brazil Ethanol and ethanol technology Flex-fuel vehicles Hybrid buses Opportunities and constraints for exports of climate-friendly products and technologies • Opportunities and constraints for import of climate-friendly products and technologies • • • • Potential Analytic Work: Mitigation • Examination of constraints and opportunities by sector • Annual estimate of potential for carbon market sales from Brasil • Additional finance required to make lowcarbon technologies financially viable Potential Analytic Work: Adaptation • Scenarios of climate change impacts on: – Infrastructure (e.g., hydro output) • Impacts on agriculture Questions for Brazilian Officials • What are Brazil’s priorities and concerns regarding the G8 climate change initiative? • How can the Investment Framework best support Brazil’s needs? What financing tools and instruments are most needed to stimulate increased investment? • What kind of macroeconomic and sectoral analysis is needed by the Bank and other IFIs?