E N V I R O N ME N T D E P A R T M E N T _ *^t P A P E R S -PAPER NO. 060 TOWARD ENVIRONMENTALLY AND SOCIALLY SUSTAINABLE DEVELOPMENT Climate Change Series Toward Integrating Climate Change Externalities in Bank Sector Work Jens Rosebrock October 1997 -\ - - -Environmentally and Socially Sustainable Development The World Bank ESSD i u Global Environment Division Toward Integrating Climate Change Externalities in Bank Sector Work Jens Rosebrock October 1997 Papers in this series are not formal publications of the World Bank. They are circulated to encourage thought and discussion. The use and citation of this paper should take this into account. The views expressed are those of the authors and should not be attributed to the World Bank. Copies are available from the World Bank's Environment Department, Global Environment Division, Room S-2145. Acknowledgement This Paper was written while the author was a consultant to the Climate Change Unit of the World Bank's Global Environment Division. It has since been revised and updated to reflect later developments. The author is grateful to Charles Feinstein for valuable advice and guidance during the course of writing this paper. Particular thanks go to Samuel Fankhauser, Annika Haksar, Todd Johnson, Louise Scura and Noreen Beg for commenting on earlier drafts and for suitable revisions and extensions Climate Change Series Contents Introduction 1 1. Policy Framework 3 FCCC Requirements for GHG Mitigation Studies 3 Previous GHG Mitigation Work 3 Global Overlays 4 2. Typology of GHG Abatement Cost Studies 7 Top-down vs. Bottom-up 7 A Typology of GHG Abatement Cost Studies 8 3. Review of Previous GHG Mitigation Studies in Developing Countries 11 The UNEP Greenhouse Gas Abatement Costing Study Project 11 The World Bank/UNDP Study on China 17 4. Toward Best Practice 23 Four Conclusions from Previous Studies 23 Building Blocks for Global Overlays 24 Next Steps 25 Acronyms 27 References 29 Introduction Global climate change is becoming increasingly Integration Scheme has been completed, which important as a policy issue for World Bank may develop into a full Global Overlay. A client countries. While the Framework Conven- Phase 1 Global Overlay for the Russia Oil Sector tion on Climate Change (FCCC) is unlikely to has also been completed. The U.K., in co- impose legally binding limits on developing operation with the Bank, is funding a study on countries in the near future, it does require Greenhouse Gas Emissions from the India countries to "formulate, implement, publish Power sector in two provinces, which is nearing and regularly update national and, where completion. A study on Greenhouse Gas appropriate, regional programs containing emissions in the urban transport sectors of measures to mitigate climate change." These Mexico City and Santiago, examining how communication requirements will in turn lead control cost curves for local pollution reduction to a large number of climate-change related are altered by the presence of a globally moti- studies, including greenhouse gas (GHG) vated agent (e.g., the Global Carbon Initiative mitigation studies, which analyze and evaluate [GCII), is also nearing completion. abatement costs of measures and policies that reduce GHG emissions. This paper examines the methodological groundwork for Global Overlays in the climate The World Bank hopes to play a significant role change area. Chapter 1 describes the communi- in this effort through an analytical tool, the cation requirements of the FCCC for Bank client Global Overlay, which extends economic and countries and the implications these may have sector work (ESW) in relevant sectors such as for Bank Country Assistance Strategies (CAS). energy, transport, and forestry to include It also describes the Global Overlays concept climate change externalities, i.e. GHG emis- and outlines recent changes in the Bank's sions. This extension program is being spear- Operational Policy regarding the specification headed by the Climate Change Unit of the of global externalities. Chapter 2 lays out some World Bank's Global Environment Division of the conceptual and methodological problems (ENVGC). Global Overlays are undertaken as a behind GHG abatement costing. It describes modest extension of regular Bank ESW and do objectives, scope and limitations of the two not require any changes in the operational main conceptual approaches and the method- responsibilities for the sector work. ological components of previous mitigation studies. Chapter 3 reviews the two most Three Global Overlays have already been comprehensive mitigation studies completed so completed by the regions in collaboration with far and analyzes their strengths and limita- Bank clients (Argentina Carbon Sequestration, tions. Chapter 4 summarizes the findings from Ukraine Energy Options Global Environmental previous chapters and suggests building blocks Analysis, and Mexico Greenhouse Gas Assess- and a four-step analytical structure for Global ment). An initial study on the Mekong Power Overlays. Climate Change Series Toward Integrating Climate Change Externalities in Bank Sector Work 2 Environment Department Papers 1 Policy Framework FCCC Requirements for GHG cations. These national communications will Mitigation Studies likely be informed by preceding GHG country studies. It should also be noted that, under Art. Since the mid 1980s, climate change has 4.3 of the FCCC, developed countries committed evolved from an issue of scientific inquiry to a themselves to meeting the full costs of such global policy concern. The Framework Conven- studies. tion on Climate Change (FCCC) that was signed at the Rio Summit in June 1992 entered into Previous GHG Mitigation Work force in March 1994, and in the meantime has been ratified by more than 150 countries. While GHG mitigation studies are a subset of abate- the FCCC does not impose any legally binding ment cost studies for greenhouse gas reduction targets on emissions of greenhouse gases which identify and evaluate different techno- (GHG) on any of its contracting parties and any logical measures and policy options to reduce emission constraints on most developing GHG emnissions in the context of the FCCC (see countries are unlikely in the near future, the Chapter 2) 3. Such studies are carried out under Convention does have immediate effects different auspices. One of the first and largest through its communication requirements. GHG mitigation studies was coordinated by the These will contribute to a large number of United Nations Environment Programme climate-change related studies, including GHG (UNEP) Collaborating Centre on Energy and the inventories, vulnerability assessments and Environment in Denmark (see Chapter 3.1) and GHG mitigation studies. completed in May 1994. The Global Environ- ment Facility (GEF) financed an extensive study In its Art. 4 (b), the FCCC requires countries to on "Issues and Options in Greenhouse Gas "formulate, implement, publish and regularly Emissions Control in China" that was jointly update national and, where appropriate, implemented by World Bank staff and two regional programs containing measures to high-ranking Chinese ministries, under the mitigate climate change". According to Art. administrative guidance of the United Nations 12.1., all ratifiers shall communicate these DevelopmentProgramme (UNDP) (see Chapter programs, together with an inventory of green- 3.2). This project was completed in December house gas sources and sinks, to the interim 1994. An analysis of energy mitigation options secretariat. Developed countries and others in Ukraine prepared for the Kiev resident listed in Annex I, which includes most econo- mission of the World Bank by RCG/Hagler mies in transition', also have to present a Bailly was completed in December 1994 (RCG/ detailed description of the policies adopted to Hagler Bailly 1994). The GEF financed a study stabilize emission by 2000 at 1990 levels. Their on Greenhouse Gas Emissions and Mitigation first communication was due in September Strategies in Mexico in collaboration with the 19952. Universidad Nacional Autonoma de Mexico. A regional study called "Climate Change in Countries not listed in Annex I, i.e. most Asia", written by the Climate Change Institute developing nations, have not been given a and financed by the Asian Development Bank, deadline for submission of national communi- Clinate Change Series 3 Toward Integrating Climate Change Externalities in Bank Sector Work also contains some estimates of abatement * it uses an existing sector development costs. An earlier intercountry comparison was strategy for sectors with significant undertaken by the Lawrence Berkeley Laborato- greenhouse gas (GHG) emissions such as ries in 1991. energy, transport, forestry and agriculture and calculates the emissions associated More extensive attempts are currently under- with this strategy, and way, financed by the GEF or bilateral donors. A US$9.5m GEF-financed project * it outlines cost-effective sectoral mitigation designed to evaluate the costs and effec- options available to the country if it seeks tiveness of GHG mitigation measures in 12 to limit its GHG emissions in that sector. Asian countries started in mid-1994. In addition, bilateral donors are also financ- Overlay analyses for climate change quantify ing mitigation studies. The most extensive only climate change externalities, i.e. the program is the U.S. Country Studies emission or sequestration of greenhouse gases Initiative, which is guided by an interde- associated with a particular sector development partmental working group and comprises strategy. Sectoral analyses for other focal areas mitigation components for over 50 coun- (such as biodiversity losses or impacts on tries. Technical advice for its mitigation international waters) are being implemented work is coordinated by Lawrence Berkeley separately. Laboratory. The U.K., in co-operation with the Bank, is funding a study on It should be noted that an extension of Bank Greenhouse Gas Emissions from the India sector work is already called for by recent Power sector in two states, which is changes in its operational policy. Specification nearing completion. The Norwegin, of global environmental externalities is called Danish, German and Dutch governments for by Bank Operational Policy (OP) 10.04 have also been active in funding GHG (September 1994). The document notes that mitigation studies and projects. global externalities are "normally identified in the Bank's sector work or in its environmental Global Overlays assessment process". Hence, Bank sector studies should now specify the global environ- Bank experience and resources warrants mental implications of proposed sectoral significant involvement in the rapidly evolving development plans. OP 10.04 requires that field of GHG mitigation work. For example, the "global externalities [ ... ] are considered in the Bank's economic and sector work deals with economic analysis when (a) payments related to many of the same sectors, e.g energy, forestry the project are made under an international and transport, that are analyzed in GHG agreement, or (b) project and project compo- mnitigation studies. Extending this work to nents are financed by the Global Environment cover climate change externalities offers the Facility. Otherwise, global externalities are prospect of capturing analytical economies of fully assessed (to the extent tools are available) scale and scope as well as enhancing consis- as part of the environment assessment process tency between sectoral development strategies and taken into account in project design and and global environmental protection. Such an selection". extension has been spearheaded by the Global Environment Division (ENVGC) under the Sector work is generally a precursor for identifi- "Global Overlay" program4. cation of projects. Overlays may be used for identification of both regular Bank and bilateral Similar to a graphic overlay, which attaches a lending and GEF investment operations. For new layer to an already existing surface, a the GEF and similarly motivated donors, Global global overlay adds a global dimension to the Overlays are an investment screening tool that sector studies that the Bank undertakes on a allow reliable identification of cost-effective regular basis for its client countries. An overlay mnitigation options or important investments in for the climate change area is likely to consist of climate change mitigation, in addition to two components: 4 Enviromrnent Department Papers biodiversity conservation or the protection of Global Environmental Analysis, and Mexico international waters that are eligible for GEF Greenhouse Gas Assessment). An initial study funding. on the Mekong Power Integration Scheme has been completed, which may develop into a full To date, the World Bank has been actively Global Overlay. A Phase 1 Global Overlay for involved in the China GHG Emissions Control the Russia Oil Sector has also been completed. Study. In addition, three Global Overlays have A study on Greenhouse Gas emissions in the already been completed by the regions in urban transport sectors of Mexico City and coHlaboration with Bank clients (Argentina Santiago, examining how control cost curves for Carbon Sequestration, Ukraine Energy Options local pollution reduction are altered by the presence of a globally motivated agent (e.g., the Global Carbon Initiative [GCI]), is also nearing compietion. A study on GHG-friendly alterna- tives to 2-stroke engines in South Asia has just commenced. 1 Art. 4.6 grants economies in transition "a certain degree of flexibility" in meeting their requirements. 2 At this writing, five Bank client countries, Poland, Hungary, the Czech Republic, the Slovak Republic, Estonia, and Latvia, have presented their national communications to the interim secretariat. The Environment Department commissioned an external study to evaluate the consistency of Bank operations in the Czech Republic, Poland, and Hungary with the plans and measures outlined in the communications. The final report is available from ENVGC. 3 The expressions abatement and mitigation are often used interchangeably. Since mitigation is the term favored by the FCCC, mitigation studies is used here to denote efforts developed in relation to the FCCC process that are designed to inform national policymakers about different GHG reduction options. The cost imposed by implementing these options is termed abatement cost in line with the conventional use of the term in economic parlance. 4 Guidelines for Climate Change Global Overlays have now been developed, and are available from ENVGC. Overlays are not restricted to climate change externalities. Similar work has been developed for the biodiversity conservation area, and has been planned for international waters focal areas. Climate Change Series 5 Toward Integrating Climate Change Externalities in Bank Sector Work 6 Envirorunent Department Papers Typology of GHG Abatement ost Studies Top-down vs. Bottom-up Intermediate and long-term top-down models are intertemporal general equilibrium models of GHG mitigation studies form a particular class various degrees of complexity. Global models of abatement cost studies for GHG emnissions such as the Second Generation Model reduction5. The latter come in different types, (Edmonds et al. 1992) or GREEN (Burniaux et al shapes and sizes. They are also designed to 1992) focus on the broad impacts that different serve various and often very different objectives. policy options would have on world regions For example, some studies are used to evaluate and have limited sectoral or regional detail. the effects of a carbon tax on various sectors National models such as Jorgenson/Wilcoxen and quite often the entire economy, while others (1992) and Goulder (1993) for the US or Blitzer attempt to evaluate the cost-effectiveness of et al. (1993) for Egypt generally offer much more different technologies on a sectoral level. GHG sectoral detail. For example, Jorgenson/ abatement cost studies differ with respect to the Wilcoxen predict impacts of carbon taxes on the geographical and sectoral scope they cover, the output of 35 industries and the supply prices of timescale, the level of disaggregation and the their products. Following from their objective to modeling techniques. Perhaps the most impor- ascertain the impact of climate policy choices, tant distinction is between two different profes- top-down models concentrate on capturing the sional and methodological approaches, which links and feedbacks between the energy sector are aptly called top-down and bottom-up6. and the rest of the economy, with less emphasis on the dynamics of the energy sector itself. The top-down approach comprises short-run macroeconomic and long-run general equilib- A study taking a somewhat different approach rium models. Both model types look at the was completed in 1995, examining the macro- overall impact of changes in climate policy on economic impacts of direct subsidy elimination the economy - particularly changes effected by in the United States. The Jorgenson-Wilcoxen- the introduction of a carbon tax. In these Slesnick model, developed by Dale Jorgenson models, energy is treated as an input for the Associates for the U.S. Environmental Protec- production of a representative good. Since tion Agency, and reported in Shelby, et al. production is assumed to be efficient, any (1995), applies a computable general equilib- restriction of energy consumption is viewed as rium model of the U.S. economy to a policy a cost. entailing the elimination of US$15.4 billion in direct energy subsidies (about 3% of total Important distinctions within the top-down energy expenditures), including subsidies to models relates to their time horizon (long run non-carbon energy sources. Carbon emissions vs. short run) and their geographical scope drop by 4% annually over the base case for the (global vs. national). Short-run models such as period 1990-2050. Removing the subsidies DRI for the USA (Brinner et al. 1991) or MDM contributes 30% of the total reduction in (Barker et al. 1993) usually focus on the transi- emissions required to achieve stabilization of tional effects of policy changes on the economy, emissions from the U.S. overall. If the revenues often based on a Keynesian framework. are recycled via a decrease in capital income Climate Change Series 7 Toward Integrating Climate Change Externalities in Bank Sector Work taxes, Gross National Product will improve by The bottom-up approach is based on engineer- 0.2% over the base case due to the favorable ing estimates of costs for individual measures impacts of increased investment on the or combinations of measures, primarily within economy. If recycling occurs through a reduc- the energy sector. These models are generally tion in marginal labor taxes, growth increases, based on the least-cost planning approach that but only gradually to 0.1%, as the opportunity integrates the traditional supply perspective of cost of consuming leisure increases, causing energy planning with demand side manage- workers to supply more labor and produce ment measures in a consistent framework. more output. Finally, a change in the average Consistent with their use for energy planning, tax rate only results in an increase in consump- bottom-up analyses are used to evaluate tion, and no increase in labor supplied, result- individual mitigation options in the energy ing in a -0.3% change in growth. The model is sector. not capable of analyzing the impacts of a change in the budget deficit as a result of the There are two subgroups within the engineer- decrease in subsidies, so no "worst case ing/ bottom-up approaches, i.e. (i) partial scenario" is available.6 models and (ii) full energy system representa- tions which can be subdivided in (a) integrated In summary, top-down models have some simulation models, and (b) optimization limitations when applied to modeling green- models, mostly based on linear programming. house gas abatement costs. First, most models In partial models, abatement options are do not have enough. technological detail to analyzed separately and usually ranked in model energy sector options very carefully. One technological cost curves in order of their cost- reason for this is that they tend to focus on the effectiveness. Such cost curves can provide a effects of price changes rather than sector- comparison of the direct costs associated with specific investments. Second, the assumption of the implementation of individual measures, but efficient production may lead to an overstate- such a separate analysis ignores ment of GHG abatement costs for the given interdependences between different options structure of the energy system. Inefficient use of that are likely in a comprehensive mitigation energy may be due to a combination of market, scenario. Integrated energy system models can policy and information failures. Often cited overcome this shortcoming. examples are (i) high transaction and informa- tion costs relative to energy saving, (ii) unfavor- Simulation models such as LEAP offer a large able institutional arrangements (e.g. landlord/ degree of flexibility in representing particular tenant) and (iii) regulatory imperfections. To system characteristics and they also represent the extent that inefficiencies persist, energy individual technologies and subsectors in efficiency improvements - and associated GHG much detail. The high degree of complexity has emission reductions - could be achieved at a its drawbacks, however. It demands thorough cost lower than the gain from efficiency im- knowledge of the model system by the indi- provements. This is known as a 'negative' cost vidual user and the consistency of the system abatement option, and results in a net gain to has to be monitored since there is no built-in society. optimization procedure. Linear programming optimization models minimize discounted cost Many top-down modelers acknowledge that over some period, subject to infrastructural and such opportunities may exist, but are generally policy constraints. Frequently used models less sanguine about their size. In addition, they include WASP, EFOM and MARKAL. Such argue that such efficiency improvements should models have been found useful for designing be included in the baseline as well as in any optimal supply systems, but they also have abatement scenario. To a large measure, then, certain disadvantages imposed by the math- the divergence in results between top-down and ematical framework. bottom-up studies can be traced to different assumptions about the baseline rather than differences in methodology7. 8 Environrment Department Papers Typology of GHG Abatement Cost Studies Figure 2.1. Typology of Greenhouse Gas Abatement Cost Studies Top-Down Bottom-Up Short-run macro Long-run general Partial Modelling Integrated Sectoral models equilibrum modelsModel Models Global National Simulation Optimization Mtgtoni DRI (Brinner) SGM (Edmonda) Jorgenson/ WB/IUNDP UCCEE Wilcoxen China Examples MDM (Barker) GREEN Blitzer et al. LBU CSMT OGverays Objectives information on costs of large-scale information on cost-effectiveness of interventions and policies individual technological options/ investments There are general limitations of the bottom-up but in a wider sense also intangible costs approach as well, as has been repeatedly imposed by less than perfect substitution of pointed out. First, the feedbacks between the energy-consumning devices or underestimated energy system and the rest of the economy are time requirements for the implementation of generally ignored. Since the energy sector may individual measures. be of considerable significance for macroeco- nomic variables such as annual GDP growth, A Typology of GHG Abatement Cost inflation, or the trade balance, this shortcoming Studies is important, particularly for more aggressive mitigation scenarios. Second, hidden costs of Modeling approaches generally have to match abatement measures are often ignored. These are not only the more visible costs of informa- the obgri e of dysasgwelasits red tion campaigns and program administration, Climate Change Series 9 Toward Integrating Climate Change Externalities in Bank Sector Work quired. Figure 2.1. gives a broad overview of the top-down approach. Examples for mitigation types of studies (see also Grubb et al. 1993, studies at the national level are the WB/UNDP UNEP 1992 for more detailed typologies). study on China and work in the US country studies program on the basis of the Lawrence Figure 2.1 shows that the difference in method- Berkeley/CSMT methodology. Sectoral level ology and professional orientation between top- examples are global overlays (e.g., energy/ down and bottom-up approaches is matched by forestry) and the UCCEE studies, even though a difference in objectives. It also indicates that some examples in the latter also include non- mitigation studies combine a bottom-up ap- energy options. proach on a partial modeling basis or sectoral integration basis with a macroeconomic assessment component that is derived with a 5For a more comprehensive comparison of the two approaches see Grubb et al. 1993 and UNEP 1992. 6Shelby, M., R. Shackleton, M. Shealy, and A. Cristofaro. "The Climate Change Implications of Elimnating U.S. Energy (and Related) Subsidies." Paper presented at the Evaluating Energy Subsidies conference spon- sored by the U.S. EPA, Sept. 6-7, 1995, Washington, DC. 1995. See also: Jorgenson, Dale W. and Peter J. Wilcoxen. "Reducing US Carbon Dioxide Emissions: An Assessment of Different Instruments." Journal of Policy Modeling, Volume 15, pp.491-520, October-December 1993. Bohringer, Christoph, "Fossil fuel subsidies and environmental constraints: a general equilibrium analysis of German coal subsidies and carbon emission restrictions, Environmental and Resource Economics, 8:141-55, September 1996. Welsch, Heinz, "Recycling of carbon/energy taxes and the labor market: a general equilibrium analysis for the European Community", Environmental and Resource Economics, 8:141-55, September 1996. 7 The issue here is to what extent win-win options would be implemented in the absence of climate change concerns. If all profitable investnent options are realized, these win-win options would become part of the baseline. Further reductions would then have positive costs. This is also called an efficient baseline. Con- versely, if existing trends are simply projected into the future, the win-win potential in an abatement scenario often is considerable. This is called the business-as-usual baseline. 10 Environment Department Papers 3 2Review of Previous GHG Mitigation Studies in Developing Countries While there are quite a few GHG abatement (UNEP 1994b) and accompanied by a main studies both for the global and the national report that explains the methodology and level in developed countries, there is a paucity compares the results (UNEP 1994a). of such studies for developing countries and for economies in transition. Of this set, only a few Methodological framework are GHG mitigation studies - studies that analyze and evaluate individual mitigation The proposed UCCEE methodological frame- measures and GHG reduction opportunities. work consists of three elements: (i) a definition Probably the most extensive mitigation studies of key concepts, (u) a set of common quantita- are the UNEP Greenhouse Gas Abatement tive assumptions (international fuel prices, Costing Study Project that comprised 10 discount rates, reduction targets), and (iii) an countries and the study entitled "Issues and analysis procedure with essentially four steps: Options in Greenhouse Gas Control in China", 1) Definition of baseline or reference undertaken jointly by UNDP, the World Bank scenario; and two Chinese ministries. These two studies 2) Identification and ranking of mitigation are reviewed below, with a focus on their options; methodological framework. 3) Construction of two abatement scenarios; 4) Macroeconomic assessment and subse- The UNEP Greenhouse Gas quent political and social evaluation. Abatement Costing Study Project A graphical and more comprehensive represen- The UNEP GHG Abatement Costing Project that tation of the analysis structure is displayed in was guided by a team of researchers from the Figure 3.1. UNEP Collaborating Centre on Environment and Energy (UCCEE) at the RISO National This procedure combines features from bottom- Laboratories in Denmark is one of the pioneer- up and top-down approaches. Step (2) is ing efforts to undertake a thorough analysis of equivalent to the partial modeling version of the GHG mitigation options and their costs in bottom-up approach. It consists of separate developing countries. In its first two phases, evaluations of costs and emission reduction the project has focused mainly on CO2 emis- potentials for different mitigation options. The sions from the energy sector, but extensions to ensuing steps (3) and (4) correct some of the other sectors and gases are planned. drawbacks associated with that method. Phase Two encompasses 10 country studies, Step (3) sets up a consistent abatement scenario including developed countries such as Nether- that integrates the technological options lands, France, Denmark and developing outlined in (2), but accounts for possible countries such as Brazil, Venezuela, Egypt, interdependencies between these options. For SenegaL Zimbabwe, Thailand and India. The example, calculations of emission reductions results of these 10 studies are published from demand-side savings are calculated with separatelys, but summarized in one volume current structures of the energy supply system, but they may be inaccurate if they are part of a Clinate Change Series 11 Toward Integrating Climate Change Externalities in Bank Sector Work SOCIAL, POLITICAL AND DATA ANALYSIS MODEL ECONOMIC ASSESSMENT Macroeconomic forecast __________ I____forecast _ Reference scenaro for energy sector, _ agriculture, etc. | Technology and emission data Sector models Technical options tor Ranking of technical __l GHG abatement 4 options for GHG Multicriteria assessment and abatement judgement. Criteria: -complementary environmental effects GHG abatement -secondary economic effects / scenanos -technology preference -social and political considerations | | ~Macroeconomic Marocnoi V / ~~assessment !model Figure 3.1 Structure of applied abatement analysis procedure comprehensive GHG abatementprogramthat Common Results would imply changes in the energy supply system. There are two scenarios in the UCCEE study-a 20% reduction relative to the baseline in the Similarly, step (4) evaluates the feedback of short term (2005/10) and a 50% reduction in sectoral changes on the economy in a macroeco- the long run (2025/30). Figure 3.2 shows nomic assessment. The eventual GHG abate- marginal abatement costs for six out of the ten ment strategy also has to undergo a social and countries in the study. On the x-axis are CO2 political evaluation with multiple criteria, as emnission reductions in the abatement scenario commonly provided by political processes. relative to the baseline. On the y-axis are These extensions seek to avoid the shortcom- marginal abatement costs in the target year. ings of sectoral models with insufficient representation of the linkages to the general Figure 3.2. shows two similarities of the cost economy. curves for developing countries. First, there is a considerable potential of abatement measures A very similar procedure was suggested by with 'negative' costs - or costs that are lower Lawrence Berkeley Laboratory and the US than the gain from efficiency improvements - Country Studies Management Team (CSMT/ which ranges from around 7% in Brazil and LBL 1994). Senegal to 35% in Egypt. The only exception is 12 Environment Department Papers Review of Previous GHG Mitigation Studies in Developing Countries Figure 3.2 Marginal abatement cost in the long-term target year. 300 Reduction costs in USD Zimbabwe 250 200 Thailand 150 U 100 50 -Venezue O~ ~ ~~~* -r . . . . .j= . . . i, -50 CO2 reduction in -_ _ * - Senegal Egypt percentage of baseline emission -100 0 5 10 15 20 25 30 35 40 45 50 55 % Reduction Venezuela, where the baseline scenario includes reductions are often fairly expensive, which all efficient investments so there is no possibility makes the marginal cost curve rise steeply of obtaining further gains in efficiency. again from that point on. Second, there some similarities in the shape of In comparison, a win-win reduction potential the curves. Roughly, a steep part for the most of 10-35% in developing countries is compa- cost-effective option(s) is followed by a flat part rable in magnitude to that estimated for representing about 20% reduction potential, developed countries, both within the UCCEE which is either slightly above or below zero project and outside of it. In a thorough review abatement cost per tonne of CO2. Further Climate Change Series 13 Toward Integrating Climate Change Externalities in Bank Sector Work Table 3.1. Main categories of CO2 reduction and related marginal abatement cost (MAC) in the participating developing countries for the long-term target. Country CO2 reduction option reduction MAC (%) (US$) Brazil Electricity savings (industry, services and residential) 7 -66 Solar uses in agriculture 1 22 Fuelwood and charcoal for afforestation programmes 21 24 Ethanol, bagasse and electricity generation from bagasse 19 29 Total CO2 reductions 48 Egypt Fuel switching in households 6 -21 Efficient industrial equipment and maintenance 10 -12 Transportation 2 -12 Heat recovery and new industrial processes 9 -8 New raw materials 5 -3 Efficient household appliances 5 -3 Electricity generation 8 -I Efficient stoves 7 2 Total CO2 reductions 52 Senegal Early hydropower implementation 0.1 -210 Agriculture intensification 5 -28 Energy conservation in industry 0.4 -4 Dissemination of improved stoves II 0 Improve carbonisation efficiency 13 1 LPG-charcoal substitution 15 2 Biomass from afforestation 6 3 Total CO2 reductions 50 Thailand Efficient air conditioners 2 -36 Electronic ballast 1 -27 Compact fluorescent lamps (service sector) 6 -14 Compact fluorescent lamps (residential sector) 2 -9 Nuclear electricity 18 20 Highly efficient gasoline cars 1 92 Total C02 reductions 30 Venezuela Reduced flaring and leakage of methane 7 3 Efficient boilers and kilns 10 10 Freight transport 1 13 Efficient electric motors in the industrial sector 2 17 Passenger transport 4 21 Electric sector 0.6 35 Other energy savings in the industrial sector 2 39 Efficient electrical appliances 0.4 52 Total CO2 reductions 27 Zimbabwe Efficient boilers 23 -9 Energy savings in the industrial sector 4 -2 Efficient motors and power factor correction 2 -2 Increased hydropower 5 5 14 Environrment Department Papers Review of Previous GHG Mitigation Studies in Developing Countries of abatement cost models, both of the top-down options is likely to produce a smoother shape of and the bottom-up variety, Grubb et al. (1993) the marginal cost curve. This might be most estimated a reduction potential for developed relevant for the intermediate cost range that is countries of around 20% at very low or negative usually covered in less detail, while the ranking costs. of the most cost-effective options may not be affected. Still, the unevenness of the coverage of An issue slightly different from the overall cost technological options makes comparisons of an abatement scenario are the individual between countries even more uncertain. mitigation options that comprise these sce- narios. Table 3.1 summarizes the main C02 Modeling tools: Studies also differed with respect reduction options, their reduction potential and to the modeling techniques they employed. All the respective (average) marginal abatement studies used some sectoral integration model to cost. develop the abatement scenario, but as Table 3.2 shows, some teams use simulation models, Table 3.1 shows some similarities across the while others preferred optimization models. developing countries in the study. The least Some country teams developed their own expensive measures are usually energy end-use spreadsheet models, while others used interna- savings in households or industry. By compari- tionally available products such as MARKAL son, electricity supply options tend to be much or LEAP. more expensive and tend to appear only at the high end of long-term abatement efforts. Output: There are considerable differences between the studies in content and presentation Differences between studies of results. For example, a macroeconomic assessment as proposed in the methodology At the same time, there are significant differ- was undertaken only by the France and Egypt ences between the country studies, with respect country teams. While the Egypt study provided to their results and their assumptions and both macroeconomic assessments and the analysis structure. Some of these differences are abatement cost for individual measures, the unavoidable, such as time or resource con- French country study reports only overall costs straints, expectations about the penetration of from different levels of carbon taxes, without new technologies, or those distinctions intro- explicitly listing the abatement costs of the duced by differences in data availability and chosen mitigation options. The India study comprehensiveness. Some other, less inevitable also did not report abatement costs for indi- differences are listed below. vidual options and due to a limited range of options considered, the maximum reduction Range of options considered: The mitigation their model could achieve was below 30%. As a options considered extend from less than 10 in consequence, the India study was not used at the Brazil, Thailand and Senegal studies to 57 all and the France study was only marginally options in Egypt. Clearly, a larger range of useful for international comparison, despite its Table 3.2. Energy Sector Modeling Tools Used in UNEP Country Studies Simulation Optimization Brazil MARKAL (dynamic) Denmark BRUS Egypt L ENPEP France NEXUS India TEESE (static) Netherlands MARKAL (dynamic) Senegal LEAP Thailand own spreadsheet model Venezuela LEAP Zimbabwe own spreadsheet model Climate Change Series 15 Toward Integrating Climate Change Externalities in Bank Sector Work analytical sophistication. Similarly, the Thai- multiple baselines. For example, the three land and the Venezuela studies did not exhaust options (efficient, most-likely, business-as- all abatement options and, as in the case of the usual) could be developed separately. This India study, did not reach the 50 % reduction would provide a range for the baseline, with a objective. central estimate to be chosen by the research team. A somewhat simpler version would be to Baselines: The study teams varied considerably develop two baseline scenarios (high/low). in their assumptions about the changes that would occur in the energy system without an Independent of these options is the question of explicit GHG abatement strategy9. For example, whether the focus on the 'degree of efficiency' of the Egypt team assumed that an adjustment the baseline, i.e. to what extent profitable program with energy price increases of 200- energy-saving investments should be assumed 300% would be successfully implemented over to be taken up without an abatement policy, is a 5-10 year timeframe. As a response to these really adequate. As the WB/UNDP study on price changes, some efficiency improvements China study indicates, factors unrelated to would be undertaken and are integrated into investments in specific energy-saving technolo- the baseline, but a lot of the present inefficiency gies such as structural changes may be of is assumed to continue even in the long run, considerable importance for energy consump- which opens up room for profitable and energy- tion, particularly in rapidly growing economies. saving investments resulting from a GHG These aspects seemed to have received scant abatement strategy. In contrast, the Venezuela attention both from UCCEE and the country team assumed similar price changes as a result teams. of an adjustment program which the country has been undergoing, but the study assumes MacroeconomicAssessment. The UCCEE team that all profitable efficiency inprovements are acknowledges that their methodological design realized under the baseline. Most other coun- was over-ambitious regarding the linkage tries took a position somewhere in between. between bottom-up energy supply and top- down macroeconomic assessment. While all Limitations studies used macroeconomic projections to estimate energy demand, only France and Egypt The UCCEE report lists three issues for further had a formalized macro model they could use to methodological improvement, namely (i) the assess macroeconomic effects of the abatement development of baselines, (ii) the macro- scenario. They note that "a more practical and econornic assessment and its link to the bottom- helpful guideline for macroeconomic assess- up study, and (iii) the issue of implementation ment would have been advice on the assess- costs. ment of a few key macroeconomic indicators on the basis of available national economic Development of baselines. The UCCEE report lists statistics" (UNEP 1994a: 91). in some detail the above-mentioned differences in baseline development across the country Implementation Costs. The implementation cost studies. It is less clear what lessons the team issue is raised most often with respect to draws from these divergences and how they energy-saving programs in the household and could be avoided. industrial sectors, where suspected high implementation or other transaction costs may One possibility would be to align baseline prevent seemingly profitable projects from being development more closely through collabora- implemented. While the report flags the tion between the Coordination Center and the development of a "formalized procedure for the national teams. Even though there are some assessment of implementation costs and guidelines for baseline construction, the report barriers" (UNEP 1994a:124) as an area for emphasizes that the decision rested with the further research, it is not clear how they could national country teams. Closer coordination be measured on a sectoral basis. Similar issues may allow consistent assumptions behind are currently under study in the GEF's PRINCE baseline development. A second and perhaps program for the project level, and some indica- more promising option wouId be to develop tion could perhaps be taken from these results once they are available. 16 Environment Department Papers Review of Previous GHG Mitigation Studies in Developing Countries The World Bank/UNDP Study on This study put particular emphasis on baseline China development. Future emissions are calculated from an 18-sector energy demand model that This study is a comprehensive two-year analy- allows fairly precise representation of expected sis titled: "Issues and Options in Greenhouse technological developments in each sector. For Gas Control in China". It was funded by the the High Efficiency scenario, energy coefficients GEF, administered by UNDP and executed by for sectoral production were taken from indus- the Industry and Energy Division in the China trialized countries to simulate a transition to and Mongolia Department at the World Bank in currently available technologies. a joint effort with the Environmental Protection Agency and the State Planning Commission in Steps (3) to (5) are based on a partial mode3ing China (National Environmental Protection framework. Abatement costs are calculated as Agency et al. 1994). The sumnmnary report came direct costs from the investment, i.e. investment out in November 1994. and operating costs, relative to the baseline. The evaluated measures for each sector are then Its objectives included an inventory of GHG aggregated for each sector. There is no inte- emissions and sinks, the estimation of future grated energy systems model, however, so that baseline emnissions until 2020, as well as the the alternative energy supply component identification and evaluation of emissions cannot easily complement the High Efficiency reduction options in four sectors: energy use, scenario. alternative energy supply, forestry and agricul- ture. Significantly, they also included the The case studies are geared more towards the identification of potential barriers to the imple- identification of possible implementation mentation of least-cost GHG reduction options barriers rather than the estimation of sectoral and the steps that governments and interna- abatement costs. Since the cases under consid- tional financing institutions could take to eration had been proposed by an expert panel overcome these barriers, including recommen- as the most promising ones and may therefore dations for future GEF funding in China. not be representative of the entire sector, the findings from the case studies were not Methodological framework sectorally aggregated. This affects the ranking of these measures: while individual mitigation In keeping with the various study objectives, the options can be ordered regarding their cost- methodology employed by the joint study team effectiveness, they cannot be aggregated into consisted of different - though partly inter- abatement cost curves since the quantitative connected - components: dimension is missing. 1) Estimation of two baseline scenarios (high/low growth); Baseline Scenarios 2) Estimation of High Efficiency Abatement 2)Escenarion of High Efficiency Abatement hIn order to provide a realistic estimate of the 3) Senar future path of GHG emnissions in China and to 3 agrat sectoral analyses for gyrstry, identify the key factors affecting this path, the agriculture, alternative energy supply; joint study team setup a GHG model that 4) Identification and evaluation of energy use consisted of three components: (i) a macro- reduction opions in various sectors; model to project final demand for goods and 5) Ranking of cost estimates from energy usemoetopjctfnldadfrgosad case studies and sectoral analyses in order services; (ii) an 18 sector input-output table to of cost-effectiveness, represent the structure of the economy; the table includes energy coefficients to determine the This methodology blends elements from top- energy inputs needed for the production of down and bottom-up approaches. Steps (1) and sectoral outputs; and (iii) an emission coeffi- (2) represent top-down procedures, while steps cient matrix to estimate the resulting emissions (3) to (5) are based on a bottom-up partial of GHGs as well as local pollutants. modeling framework. Climate Change Series 17 Toward Integrating Climate Change Externalities in Bank Sector Work The input-output coefficients were projected to intensity falls from 2.7 kilotonnes of coal the years 2000, 2010 and 2020 on the basis of equivalent per doIlar in 1990 to 0.9 ktce/$ in historical data for China and under consider- 2020, in comparable prices. The main reason ation of the I-0 coefficients for industrialized for this shift is structural change, as Figure 3.3. countries in earlier decades. The energy shows. coefficients are of particular importance for the resulting GHG emissions. Their projections According to this estimate, only 21% of the total were based on four factors: (a) expected eco- decline in energy intensity results from techni- nomic growth, (b) scale of new plants relative to cal efficiency gains. The remainder is the existing ones, (c) rate of adoption of new consequence of structural change. The most technologies, (d) increases in product diversity. important change is the shift in the product mix These findings were corroborated by case study within subsectors, which contributes 37% of the results. total decline. This change represents the improvement in product quality and the shift The studies produced two baseline scenarios. A into higher value added products, mainly in the High-Growth scenario expects real economic chemical, machinery, building materials and growth to be 8% p.a. for the period 1990-2020. light industry sectors. Saturation effects among This scenario is not unrealistic given China's residential consumers and the shift from direct historical record and the experience of the East coal use to electricity in this sector contribute Asian economies. The Slower-Growth scenario 12% of the total, and structural changes be- expects 6.6% p.a. real growth. Under the High- tween industry and other sectors as well as Growth scenario, GHG emissions will rise to among industrial subsectors contribute 7% and 2400 mtC equivalent by the year 2020, which is 9%, respectively. These numbers indicate the a threefold increase over 1990 levels. This enormous impacts that structural changes have baseline scenario already implies a consider- on energy intensity. Thus macroeconomic and able drop in China's energy intensity, which is other policies that affect some of the structural one of the highest in the world. In the baseline energy demand scenario, Chinese energy Figure 3.3. Sources of Projected Energy Intensity Decline in China, 1990-2020 37% 1 3 %~~~~11 9°/% 71/6 E Technical improvements 0 Changes in macro structure 13 Changes in residential energy use * Changes in shares of subsectors 0l Changes of product mix * Other structural changes Source: China: Issues and Options in GHG Emissions Control, December 1994 18 Envirorunent Departrnent Papers Review of Previous GHG Mitigation Studies in Developing Countries changes are likely to have a larger impact on Sectoral Scenarios: Alternative Energy energy demand and associated GHG emissions Supply, Forestry and Agriculture than many mitigation options considered in a mitigation analysis. The sectoral scenarios for agriculture, forestry and alternative energy supply are separate In the High-Efficiency scenario, the China bottom-up analyses of the GHG mitigation GHG Model is used to estimate the potential for options in these three sectors. For all three additional efficiency gains from technical scenarios, energy savings and emission reduc- improvements above baseline assumptions. tions were caiulated relative to the baseline The scenario involves a model re-run with assumptions in the macro scenario. lower sectoral energy coefficients. The coeffi- cients are calculated on the basis of energy The High Substitution scenario with a focus on savings from the adoption of new technologies altemnative energy supply was based on the and processes. Table 3.3 compares unit energy maximum amount of alternative (low carbon) consumption levels for baseline and high energy sources that could be developed in efficiency scenarios with 1980 Japanese levels. China by the year 2020 under current develop- ment trends, given the long lead times for some Overall, the High-Efficiency scenario reduces of these energy sources. The scenario also primary energy consumption by 460 mtce or includes direct substitution of coal by fuelwood 14% and GHG emissions by 330 mtC or 13.75%. and the use of coal-bed methane. Total GHG There are no cost estimates for this scenario, but emission reduction from the High Substitution the results from the case studies suggest that the scenario relative to the baseline is 237 mtC or direct net cost for such a scenario may well be 10%. Table 3.4. compares the power supply negative. However, the case studies also point results from this scenario with the baseline. to significant implementation barriers and, in some cases, high information and transaction costs. Table 3.3. Comparison of selected unit energy consumption levels, baseline and high- efficiency (HE) scenarios, 1990-2020 China Japan 1990 2020 2020 1980 (baseline) (HE) Steela (kgce/t) 1,610 1,284 857 - Cement (kgce/t) 208 196 135 135 Ammonia (kgce/t) 2,066 1,665 1,258 1,000 Thermal power (kgce/MWh) 427 348 345 338 Caustic soda (kgce/t) 1,790 1,325 1,000 1,000 Ethylene (kgce/t) 1,580 1,450 800 872 Industrial coal-fired (average efficiency, 60 70 73 73b boilers %) Electric motors (average efficiency, 87 90 92 92c mean size, %) aComprehensive consumption (not directly comparable with international statistics). bAverage U.K. efficiency for comparable size ranges. cAverage efficiency for U.S. high-efficiency models. Climate Change Series 19 Toward Integrating Climate Change Externalties in Bank Sector Work Table 3.4. shows that fossil fuels, particularly Case Studies in Industrial Energy coal will dominate China's power supply even Efficiency under an ambitious development and imple- mentation scenario for alternative energy. All The study team analyzed 25 projects with renewables together would supply 40 % of potential for energy savings in 7 sectors. These China's electricity by 2020. Most of this maxi- projects were pre-selected by industry experts. mum supply is expected to come from tradi- All of them had rates of return, both financial tional sources such as hydro-electric and and economic, above the social discount rate, nuclear energy and only 5% of the total supply ranging from 15% to 84%. The study team would come from a new generation of differentiated between three dasses of projects: renewables such as wind and solar energy1°. (i) industrial restructuring, (ii) energy conserva- The incremental cost for implementing the tion and (iii) high-efficiency equipment. High-Substitution scenario was estimated at US$159 billion in 1990 yuan at an exchange Industrial restructuring projects tend to have high rate of 4.7 yuan/US$. This is equivalent to an investment costs and a high financial signifi- average incremental cost of US$ 670 per tonne cance to the company. Energy savings are of carbon. incidental to these projects and usually only one component of overall lower operating costs. The forestry sector analysis showed that man- The study findings suggest that implementation aged plantations and open forest management barriers to such projects are not based on a lack have considerable potential for carbon seques- of incentive, but come mainly from financing tration. A large-scale afforestation program that constraints. Continued enterprise reform, would include these components and also particularly in the banking sector, would be fuelwood plantations could sequester between essential to the success of restructuring projects. 2.4 and 4.6 billion tonnes of carbon from 1990- 2020. At the high estimate, an afforestation Energy conservation investments tend to be much program could sequester 221 mtC in 2020, or smaller in size. They typically focus on energy 9.2% of basehne ernissions in that year. A savings, often offering high financial rates of similar analysis for the agricultural sector return (25-71 % for the sample). Likely imple- concludes that a program consisting of im- mentation constraints are a weak cost-con- proved cattle breeds and feed programs and sciousness, a lack of information and high modified rice cultivation practices could reduce transaction costs relative to the comparatively GHG emissions from the agricultural sector by low NPV. 15-20%. This represents only 0.8% of total GHG emissions in 2020, however. Table 3.4. Electricity supply scenarios, 2020 (TWh) High- 1990 Baseline substitution (TWh) % (TWh) % (Twh) % Hydro 126 20 601 16 719 19 Nuclear 0 0 208 5 568 15 Other renewables 0 0 45 1 208 5 Fossil fuels 495 80 2,996 78 2,355 61 Total 621 100 3,850 100 3,850 100 20 Environment Department Papers Review of Previous GHG Mitigation Studies in Developing Countries High-efficiency equipment. Two case studies for according to net costs of reducing GHG emis- the manufacturing of variable-speed motors sions per tonne of carbon. Net costs are calcu- showed a potential for high rates of return lated by subtracting all classes of benefits, under current product prices. Aside from including local environmental benefits, from uncertainty associated with product innova- project costs. On the benefit side, the green- tions, the study team also found additional house gas reductions are discounted by the constraints arising from the problems to license project discount rate11. The ranking according foreign technology. Adoption by users seems to this measure is shown in Figure 3.4. It often bound by the same problems that afflict should be noted that this is a partial ranking, classic energy conservation projects. which is not based on an integrated energy sector scenario. Ranking The results emerging from Figure 3.4 have clear The study team selected ten mitigation options similarities to the UCCEE findings. In both from the sectoral studies and the industrial cases energy efficiency investments emerge as energy efficiency case studies and ranked them least-cost GHG mitigation options with large Figure 3.4. Estimated net cost of reducing GHG emissions in China with commercial technology (1990 Y/tC) 500 T 1. Energy conservation 400 - 2. Improved cattle production 3. Industrial restructuring 300 4. High-yield fuelwood plantations (South China) 5. Coal-bed methane 200 6. High-yield commercial timber plantations -400 4 0 ~~~~~~~~~10. Solar photovoltaics -500 1 2 3 4 5 6 7 8 9 10 Notes and sources: Net costs of reducing GHG emnissions have been calculated using extended cost-benefit analysis. 1. Energy conservation: Average cost per ton reducton for the seven classic energy conservation projects evaluated. See Energy Efficieny in China: Case Studies and Economic Analysis, December 1994. 2. Improved catle production: Average cost per ton for improved cattle breeding and feed progra 9s. See Greenhouse Gas Control in the Agricultural Sector, September 1994. 3. Industrial restructuring Average cost per ton reduction for the six industrial modernization projects evaluated. Ibid. 4. High-yield fuelwood plantations: See Greenhouse Gas Emissions Control in the Forestry Sector, November 1994. 5. Coal-bed methane: Calculated from economic cost-benefit analysis data provided by the GEF China coal-bed methane project. 6. High-yield commercial timber plantations: Average cost per ton of intensive and extensive timber plantations. See Greenhouse Gas Emissions Control in the Forestry Sector, November 1994. 7. Wind-powered electricity generation: See Alternative Energy Supply Options to Substitute for Carbon-Intensive Fuels, December 1994. 8. Incremental hydropower: Hydroelectric capacity beyond levels currently part of China's power expansion plan. Ibid. 9. Nuclear power Ibid. 10. Solar photovoltaics: Ibid. Climate Change Series - 21 Toward Integrating Cimate Change Externalities in Bank Sector Work negative net costs. In addition, forestry sector The link between the top-down and bottom-up options such as fuelwood plantations and components is not well developed. Bottom-up commercial timber plantations are also listed as data are used to confirm the detailed sectoral low-cost options. By contrast, power supply representation in the I-0 table, but there seems mitigation options tend to be more expensive. no other link between the two components. For example, wind energy as the least expensive This is particularly clear regarding the model- renewable energy technology costs on average ing of energy efficiency improvements. For around 120 yuan or US$25 per present tonne of example, it is not clear to what degree industrial carbon. restructuring or certain kinds of energy savings programs would contribute to the High Effi- Limitations ciency scenario outlined in the macroeconomic analysis. Bottom-up analysis. While the individual mitigation options from different sectors were Macroeconomic assessment. Despite the elaborate ranked according to their cost-effectiveness, the structure of the China GHG model, it was not lack of a quantitative basis allows no judgment used to model the abatement costs of GHG on the overall GHG reductions possible and mitigation strategies, be they sectoral or cross- their direct costs. In addition, the cost estimates sectoral. In the High Efficiency scenario, lower for the energy sector are not developed from an energy coefficients show the potential for integrated energy sector model and are thus not energy efficiency improvements, but the costs directly comparable because of their interdepen- associated with such a strategy are not esti- dence in a large abatement scenario, mlated. These issues may, however, be taken up in a follow-up study. 8Results from some of the studies are also published in the November 1994 issue of Energy Policy. 9See footnote 7. 101t should be noted that the supply constraint stems from long lead times and applies mainly to nuclear and hydro, but not to wind and solar. Modeling future costs for the latter is difficult since they are in an intermediate stage of technological development. llNote that this procedure differs from the methodologies employed by UCCEE - where local environmental benefits are not taken into account at all - and the incremental cost concept used by the GEF (see GEF 1995 for details). A second difference is that both UCCEE and GEF do not discount GHG emission flows. 22 Environment Department Papers 4 Toward Best Practice The Framework Convention for Climate Change Four Conclusions from Previous (FCCC) implies communication requirements Studies for its more than 160 ratifiers, which will produce a large number of climate change- Four key experiences emerged from the review related studies in the coming years. One such of the two most comprehensive mitigation product will be GHG mitigation studies, which studies: analyze and evaluate the cost-effectiveness of 1. The bottom-up partial modeling methodol- various technological measures and policy opton t rdue renhus ga emsn. ogy employed in both studies reviewed here opthens WorlduBn willnlaysa iasingl worked well, given its limitations. The UCCEE Tme World Bank will play an ir creasingly studies looked at a variety of options to mitigate important role in this effort through sectoral GHG emissions, which differed considerably paper outlines the methodological groundwork across countries. Overall, the estimates fall for GlobaliOes in clmat changeoby within a range that confirms earlier studies for foreviewnGlan alalyzing resuls cande metho- developed countries. The UCCEE results reviewing and analyzing results and method- suggest that the win-win potential in develop- ologies from the most important previously ing countries is at least as great as in the undertaken mitigation work. developedworld. Mitigation studies are a class of abatement cost The WB/UNDP study used bottom-up studies for GHG em-Lission reduction. The latter modeling successfully as a screening tool for differ in many respects, but the most important potential GEF investments. Some of the oppor- one is a conceptual and methodological divide tunities identified in the study have been between what has been called top-down and developed into project proposals now under bottom-up approaches. The top-down ap- consideration by the GEF. proach is used by macroeconomic analyses 2. The UCCEE studies succeeded in which estimate economic costs and the emis- integrating these measures in two different sion reduction potential of large-scale poicy consistent abatement scenarios for the short and changes such as the imposition of carbon taxes. the long run with the use of integrated energy The bottom-up approach is employed by models. This methodology seems well suited to engineering studies that compare costs of the objective of GHG mitigation studies, i.e. the individual technological measures which identification of the most cost-effective options would reduce net enmissions of greenhouse for the reduction of GHG emissions, while gases, mostly within the energy sector. Mitiga- avoiding shortcomings of a partial modeling tion studies to date have used a bottom-up framework, methodology with some form of macroeconomic assessment component, reflecting their focus on 3. Baseline development is done very an evaluation of individual measures and carefully in the WB/UNDP study. Two aspects technological options to reduce GHG emis- deserve particular attention. First, establishing sions. two baselines with different economic growth Climate Change Series 23 Toward Integrating Climate Change Externalities in Bank Sector Work assumptions indicates very well the range of emissions, Global Overlays should allow uncertainty associated with long-range macro- sufficient flexibility to focus either on an economic predictions. Second, the study analysis of specific investment measures or on demonstrates the impact of structural and policy changes and their effects. macroeconomic changes on energy demand along with the more sector-specific issues Identif"y win-win options at the macro related to baseline efficiency. It should be and sectoral level. added, however, that the China study required very extensive empirical work that may be Structural changes and other policy issues difficult to match with the resource constraints unrelated to energy sector-specific measures of a sector study. turned out to have a large impact on green- house gas emissions. A focus on macroeco- 4. The link between bottom-up cost estimates nomic policies that promote efficiency also and top-down macroeconomic assessment as reduces global externalities, a finding that proposed in the UCCEE methodology is promis- reinforces a focus on overall efficiency improve- ing, but turned out to be very difficult to ments at the macro level. Similarly, mitigation operationalize. While such a link was included studies confirmed the existence of a large in its methodological guidelines, only two of the potential for energy efficiency improvement UCCEE country teams did in fact make such an measures at net gains to society. Concern about assessment of the impacts of an abatement climate change thus provides additional scenario on the general economy. The main arguments for tapping this potential for win- challenge was the development of a formal win projects and policies at the sectoral level. macro model which could represent these impacts. Adopt a broad four-step analytical Careful analysis of macroeconomic impacts structure. from an abatement scenario requires consider- The analytcal structure used b revious able macro modehng skllls and extensive t empirical research. Both aspects make itvery mitigation studies has proved fairly robust. It difficult to develop within the budgetary consists of four steps, adjusted for the purposes confines of mitigation studies alone. These of extending regular sector work: issues are perhaps better addressed in collabo- * Establish one (or two if possible) sectoral rative efforts with macroeconomists in research reference scenario(s) and estimate associated institutes, planning and statistics ministries. GHG emissions. The reference scenario is The significance of macroeconomic assessments identical to the sector development sce- depends also on the scope of the abatement nario. Only the calculation of GHG scenario considered. For mitigation studies that emissions is truly additional. look at small emission reductions, 'back-of-the- envelope' calculations should provide reason- * Identify and evaluate mitigation options. The ably good estimates. number of options under the scope of study should be determined in discussions Building Blocks for Global Overlays with sector economists. Together with the findings from earlier chap- * Formulate abatement scenario. The percent- ters, these conclusions suggest a few key age reduction from the reference scenario elements that are essential for successful Global to be achieved must be specified. Its Overlay application. timeframe should be guided by regular economic and sector work perspectives. Establish a link between objective and method o logy. * Estfimate macroecono0mic im pacts friom an abatementscenanio. Following from their objective to help client countries identify investment opportunities and policy priorities for reducing greenhouse gas 24 Environment Department Papers Towards Best Practice In addition, there should be common defini- * A theme paper detailing the conceptual tions of abatement costs and the discount rate frameworkfor climate change Global Overlays applied to GHG emissions over time across in the transport sector has been commis- studies. sioned, and will be completed in October 1997. Next Steps A series of consultations with sector econo- This paper provides an overview of the analyti- mists in the regional and central depart- cal foundation for climate change Global ments as well as with NGOs and other Overlays. In addition to the Global Overlays external constituencies is ongoing. already underway (and described in Chapter 1), the following steps are being taken to further * Funding from the Danish and Norwegian develop the Global Overlay program as an Governments has been obtained, and is integral part of ESW in the Bank. supporting methodology development and * Best practice guidelines for climate change country applications. Additional financ- Global Overlays in the energy and forestry ing for the overlay studies and the appli- sector was published by ENVGC in cation of its results is being sought. February 1997. * A Handbook on Greenhouse Gas Assessment Methodologies to be used by Bank project teams is expected to be completed in 1997. Climate Change Series 25 Toward Integrating Climate Change Externalities in Bank Sector Work 26 Environment Department Papers Acronyms FCCC Framework Convention on Climate Change GHG Greenhouse Gases ENVGC Global Environment Division, World Bank ESW Economic and Sector Work UNEP United Nations Environment Programme GEF Global Environment Facility UJNDP United Nations Development Programme GDP Gross Domestic Product UCCEE UNEP Collaborating Centre on Energy and the Environment MAC Marginal Abatement Cost PRINCE Programme for Incremental Cost and the Environment Climate Change Series 27 Toward Integrating Climate Change Extemalities in Bank Sector Work 28 Environment Department Papers References Asian Development Bank (1992), Regional Study on Global Environmental Issues: Bangladesh, prepared by The Climate Change Institute, Washington D.C. Ahmed, Kulsum (1994), Renewable Energy Technologies. A Review of the Status and Costs of Selected Technologies. World Bank Technical Paper No. 240. 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