Report No: AUS5495 . Romania Component C3 of Romania Climate Change RAS Report on the simulation of low carbon green growth policies, including the results of impact assessment and final policy recommendations . NOVEMBER 2015 . GEN03 EUROPE AND CENTRAL ASIA . Document of the World Bank . . . Standard Disclaimer: This report is a product of the International Bank for Reconstruction and Development / the World Bank. The findings, interpretation, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. . This report does not necessarily represent the position of the European Union or the Romanian Government. Copyright Statement: . The material in this publication is copyrighted. Copying and/or transmitting portions of this work without permission may be a violation of applicable laws. For permission to photocopy or reprint any part of this work, please send a request with the complete information to either: (i) the Ministry of Environment Waters and Forests, 12 Libertatii Blvd, Postal Code 040129, 5 Bucharest, Romania or (ii) the World Bank Group Romania (Vasile Lascăr Street, No 31, Et 6, Sector 2, Bucharest, Romania) This report has been delivered under the Advisory Services Agreement, Romania: Climate Change and Low Carbon Green Growth Program. Project co-financed by the European Regional Development Fund through OPTA 2007 – 2013 Romania Climate Change and Low Carbon Green Growth Program Output C 3.2 Report on the simulation of low carbon green growth policies, including the results of impact assessment and final policy recommendations NOVEMBER 2015 [ 3. 1. [Type a quote from the document or the summary of an interesting point. You can7. 2. [ 5. [ 4. [ [ [ 6. This report corresponds to Output C3.2 “Report on the simulation of low carbon green growth policies, including the results of impact assessment and final policy recommendations” in the Advisory Services Agreement on “Romania: Climate Change and Low Carbon Green Growth Program” signed between the Ministry of Environment and Climate Change 1 and the International Bank for Reconstruction and Development on July 23, 2013. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. 1 Now, Ministry of Environment, Waters and Forests ACKNOWLEDGEMENTS This report is a synthesis of extensive sector and topical analysis carried out under the Romania Climate Change and Low Carbon Green Growth Reimbursable Advisory Services (RAS) Program, at the request of the Government of Romania, through the Ministry of Environment, Waters and Forests. The project is co- financed by the European Regional Development Fund through Operational Program Technical Assistance 2007-2013 (OPTA) and has been conducted by a World Bank team led by Erika Jorgensen (Task Team Leader). This synthesis report was authored by Erika Jorgensen and Maria Shkaratan, with support from Ka-Yee Ivy Lau, drawing on the analyses under the Program. Sector and topic analysis was carried out by teams as follows:  Leszek Kasek, leading a macroeconomic modeling team of Pantelis Capros, Leonidas Paroussos, Nikos Kouvaritakis, Kostas Fragkiadakis, Pelopidas Siskos, Alessia De Vita, Panagiotis Karkatsoulis, and Stella Tsani (ICCS), Jan Gaska, and local consultants Andrei Dospinescu, Manuela Unguru, and Viorel Gaftea.  Sanjay Pahuja, leading a water team of James Neumann, Kenneth Strzepek, Brent Boehlert, Alyssa McCluskey, Richard Swanson, Charles Fant, Jacqueline Willwerth, and Lisa Rennels (Industrial Economics), Thierry Davy, Adina Fagarasan, and local consultant, Catalin Simota (National Research and Development Institute for Soil Science, Agrochemistry, and Environment – ICPA Bucharest);  Hans Kordik, leading agriculture, with inputs from Catalin Simota (National Research and Development Institute for Soil Science) and based on technical analysis by Industrial Economics;  Govinda Timilsina, leading an energy team of consultants, including Amit Kanudia, Sunil Malla and Femi Faleye;  Carolina Monsalve, leading a transport team of Robin Kaenzig (Integrated Transport Planning), Cosmin Buteica, and local consultant, Otilia Nutu;  Stephen Hammer, leading an urban team of Tatiana Peralta Quiros, Oliver Kerr and Silpa Kaza, and consultants Edward Leman (Chreod Ltd.), Gabriel Simion (University of Bucharest), and Octavia Stepan (Ion Mincu University of Architecture and Urban Planning). The team also benefited from the assistance of Cristiana Croituru (Technical University of Civil Engineering, Bucharest);  Diji Chandrasekharan Behr, leading forestry, with inputs from local consultants, Bogdan Popa (Transilvania University of Brasov) and Marian Dragoi (Stefan cel Mare University, Suceava). The work was carried out under the overall supervision of Kulsum Ahmed and the supervision of sector and topic analysis by Kulsum Ahmed, Juan Gaviria, Ivailo Izvorski, Ranjit Lamech, and Dina Umali- Deininger. Advice and support was provided by Mamta Murthi, Country Director, and Elisabetta Capannelli, Country Manager. Thierry Davy, Cosmin Buteica, and Adina Fagarasan have served energetically and effectively as the focal points for the Program in the Bucharest office and managed relations with the Romanian Ministry of Environment, Waters and Forests. The work benefited from comments and suggestions from peer reviewers:  For the overall report: Jane Ebinger, Claus Kondrup and Michael Toman;  For macroeconomic modeling: Ulrich Bartsch;  For water: Anju Gaur, Harshadeep Rao, Amal Talbi and Habab Taifour;  For agriculture: Holger Kray and William Sutton;  For energy: Morgan Bazilian Feng Liu, and Kari Nyman;  For transport: Sameer Akbar and Andreas Kopp;  For urban: Toshiaki Keicho, Josef Leitmann, and Victor Vergara;  For forestry: Stig Johansson and Andrew Mitchell. The country assessment benefited significantly from the ongoing interest, guidance, and support of Narcis Jeler, PIU Head of the World Bank Climate Change Program at the Romanian Ministry of Environment, Waters and Forests, and the extensive collaboration with local technical experts for each sector or topic report. We thank the numerous government officials for their collaboration throughout the Program, and we look forward to ongoing engagement on implementation of low carbon and green growth sustainable development recommendations. Contents EXECUTIVE SUMMARY .................................................................................................................................... 12 CHAPTER 1. HOW GREEN IS ROMANIA? A BENCHMARKING EXERCISE .......................................................... 20 CHAPTER 2. WHERE IS ROMANIA HEADING? ECONOMIC EVELOPMENT TO 2050 AND THE IMPACTS OF CLIMATE ACTION............................................................................................................................................. 21 CHAPTER 3. HOW CAN ENERGY SUPPLY AND DEMAND BE TRANSFORMED? ................................................ 47 CHAPTER 4. HOW CAN TRANSPORT BE LOW CARBON?.................................................................................. 73 CHAPTER 5. CAN URBAN AREAS LEAD ON GREENING?................................................................................... 90 C HAPTE R 6. HOW WILL WAT ER AVAILAB ILITY AFFEC T G ROWTH? ...................................................... 111 CHAPTER 7. CAN AGRICULTURE FLOURISH IN A CHANGING CLIMATE? ....................................................... 124 CHAPTER 8. CAN FORESTRY REALIZE ITS MITIGATION AND ADAPTATION POTENTIAL? ................. 140 CHAPTER 9. A LOOK AT MITIGATION ACROSS SECTORS: A MARGINAL ABATEMENT COST CURVE ............. 160 ACRONYMS AND ABBREVIATIONS ANCA National Agency for Agricultural Consultancy AquaCrop an agricultural (crops and water) yield model BIMR Bucharest-Ilfov Metropolitan Region CAP Common Agricultural Policy of the European Union CCS carbon capture and storage CLIRUN Climate Runoff Model CNP Comisia Nationala de Prognoza, Romania’s National Commission for Prognosis CO2 carbon dioxide, the main greenhouse gas carbon dioxide equivalent, a metric used to compare the emissions from various greenhouse gases based upon their global warming potential, using the functionally equivalent amount of CO2e carbon dioxide as the reference. CSP concentrated solar power CURB Climate Action for Urban Sustainability EAFRD European Agricultural Fund for Rural Development EARDF European Agriculture and Rural Development Fund Eastern Europe and Central Asia region as designated by the World Bank which includes the following thirty countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Turkmenistan, Ukraine, and ECA Uzbekistan. EFI European Forest Institute EFISCEN European Forest Information Scenario Model Environmental Performance Index, a joint project of Yale Center for Environmental Law & Policy EPI and Center for International Earth Science Information Network of Columbia University ESDA end-use service demand analysis (of energy demand) ESIF European Structural and Investment Funds ETS Emissions Trading System of the European Union EU European Union 15 EU member states before May 2004: Austria, Belgium, Denmark, Finland, France, Germany, EU15 Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom. 13 new EU member states: Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary, Latvia, EU13 Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia FDI foreign direct investment FMP forest management plan GAMS General Algebraic Modeling System computer programming language Gcal giga (billion) calorie Gcal gram-calorie GCM general circulation models GDP gross domestic product GHG greenhouse gases GIS geographic information system Global Trade Analysis Project database, a global database of bilateral trade patterns, GTAP production, consumption and intermediate use of commodities and services, and CO 2 emissions GTMP Romania’s General Transport Master Plan GVA gross value-added GW gigawatt (equal to one billion or 109 watts) GWh gigawatt hour (of electricity, equal to one billion or 109 watt hours) ICT information and communications technology IEA International Energy Agency INDC intended nationally determined contribution to the UNFCCC INS Romania’s National Institute of Statistics IPCC Intergovernmental Panel on Climate Change ISIC international standard industrial classification IUDP integrated urban development plan IUS Innovation Union Scoreboard JRC Joint Research Centre of the European Commission kgoe kilograms of oil equivalent km kilometer ktCO2 thousand tons (metric) of carbon dioxide ktoe kilotons (thousand tons (metric)) of oil equivalent kWh kilowatt hour (of electricity, equal to one thousand watt hours) LCS low carbon scenario LULUCF land use, land use change and forestry m2 square meters 3 m cubic meters MACC Marginal Abatement Cost Curve MAED model for analysis of energy demand MARD Romanian Ministry of Agriculture and Rural Development MARKAL Market Allocation Model for energy supply, developed by the IEA MBtu millions of British thermal units MECC Romanian Ministry of Environment and Climate Change (through 2014) MEWF Romanian Ministry of Environment, Waters and Forests (from 2015) MJ mega (millions of) joules MtCO2e million tons (metric) of carbon dioxide equivalent Mtoe million tons (metric) of oil equivalent MW megawatt (equal to one million watts) NC6 Romania’s Sixth National Communication NEMS national energy modeling system NFA Romanian National Forest Administration, Romsilva NMA Administratia Nationala de Meteorologie (Romanian National Meteorological Administration) NMT non-motorized transport NOx nitrous oxide Romania’s National Rural Development Program under the “second pillar” of the EU’s Common NRDP Agricultural Policy OECD Organization for Economic Cooperation and Development PACE Property Assessed Clean Energy pkm passenger kilometer PM particulate matter PPP purchasing power parity PUG Plan Urbanistic General PV present value PV solar photovoltaic R&D research and development RACE Rapid Assessment of City Emissions RATB Regia Autonoma de Transport Bucuresti (Bucharest) RCP reference concentration pathway SCF Structural Cohesion Funds SCI Sites of Communitarian Interest SEAP Sustainable Energy Action Plan SEM Sustainable Ecosystem Management SFM Sustainable Forest Management SMEs small and medium scale enterprises SO2 sulfur dioxide SOE state-owned enterprise SOP Structural Operational Program SOPT Strategic Operational Program for Transport SUMP Bucharest’s Sustainable Urban Mobility Plan tCO2 tons (metric) of carbon dioxide TIMES The Integrated MARKAL-EFOM System model for energy supply, developed by the IEA TJ tera (trillions of) joules tkm ton (metric) kilometers TPD tons (metric) per day (of solid waste) TRACE Tool for the Rapid Assessment of City Energy TRANSEPT Transport Strategic Emission Prediction Tool terawatt-hours. One terawatt-hour is equal to a sustained power of approximately 114 TWh megawatts for a period of one year. UAA Utilized Agriculture Area UE useful energy ULEV ultra-low emissions vehicles upper middle-income countries, a World Bank global country group by income, which includes UMC Romania UN United Nations UNEP United Nations Environment Program UNFCCC United Nations Framework Convention on Climate Change WEAP Water Evaluation And Planning model WUO Water User Organizations ROMANIA: A CLIMATE CHANGE AND LOW CARBON GREEN GROWTH COUNTRY ASSESSMENT POLICY BRIEF Romania faces requirements to cut its greenhouse gas (GHG) emissions as a member of the European Union and also opportunities for adapting to coming climate change. Like most countries, Romania has already set out on a greener path than in the past, and the European Union has been both supporting and mandating ongoing greening of its member states. A lower carbon and greener growth path for Romania through 2050 has been developed through extensive multi-sector modeling and analysis, to provide advice on how Romania might implement current, imminent, and prospective mitigation obligations and undertake needed adaptation while preserving growth and employment. This assessment will serve as an input to the government’s Climate Change and Green Growth Strategy and a related Action Plan. Even with no additional policy actions by the government, Romania is already on a declining carbon path because of the current EU climate and energy package. The EU’s mitigation targets and complementary EU emissions trading from now until 2020 will help bring Romania’s GHG emissions down by some 11 percent compared to 2005 (when emissions trading began)2. Keeping current policies in place will continue pushing emissions downwards compared to where they would have been, such that emissions in 2050 will stand 4 percent lower despite a near-tripling of incomes. Central to this lower carbon path is the ongoing decarbonization of the energy sector, which today contributes near 60 percent of emissions. A low carbon path in energy will require Romania to abandon plans for new coal-based power generation capacity and life-extension of existing plants. It will also require a significant additional renewable generation capacity that would replace fossil fuel-fired plants. This implies a heavy investment burden, which is further augmented because the variability of wind and solar requires significantly increased peak load capacity. Ongoing participation in the current arrangements for EU emissions trading are estimated to drive power emissions down by 45 percent by 2050, as new generation focuses on renewables and nuclear power in the face of rising carbon prices in EU emissions trading. Investment requirements for the power sector are estimated at an average annual 0.8 percent of 3 GDP during 2015-50 (or about €28 billion of which €7.4 billion is needed before 2020). European Union carbon targets are tightening further with the imminent 2030 framework for climate and energy policies. The EU proposes that region-wide GHG emissions decline by at least 40 percent by 2030 compared to 1990 (equivalent to -34 percent compared to 2005). Considering possibilities for mitigation from the key energy and transport sectors and considering economy-wide impacts and responses, Romania is found able to meet these more stringent targets with only modest costs to growth and employment. Output would be lower by 1.1 percent and employment by 1.7 percent, but emissions could be reduced by one-fifth by 2030 (an additional 17 percentage points beyond that achieved by current policies). A greener energy sector needs to accelerate the transition towards low carbon fuels and away from coal while improving energy efficiency. To push emissions even lower to meet the EU’s 2030 targets, energy efficiency improvements will be critical to a cost-efficient path, offering means for containing the growth 2 All emissions reduction (within this report) are compared to 2005 unless noted 3 In net present value terms using a five percent discount rate. of energy demand, limiting investment requirements to meet the growing demand, and reducing GHG emissions. With demand contained, the level of investment in power generation equaling €37 billion in total over the period 2015-50 (or 1.1 percent of GDP on average annually) can add additional solar and nuclear, and electricity generation from fossil fuel-based sources decreases rapidly. This would include aggressive energy efficiency investments (or an additional €19 billion of which an additional €3 billion will be needed before 2020). Limiting the growth of emissions is a tough challenge for the fossil fuel-dependent transport sector, especially as Romania’s motorization rate converges with the EU average. Transport emissions are likely to grow under current policies by 15 percent by 2030 and 44 percent by 2050, and national policies have a leading role in pushing transport to contribute to the likely 2030 EU target for such sectors of -20 percent. An efficient set of measures additional to the national general transport master plan can cut transport emissions to nine percent growth by 2030 and 33 percent by 2050. A greener transport sector can be fostered through new taxes and charges, programs for better travel choices, effective and efficient public transport, and good walking and cycling facilities. This set of new policies generate an investment requirement of just €135 million through 2050, with about €61 million needed before 2020. Urban areas, especially capital cities such as Bucharest, are often leaders on greening and can contribute to long-term mitigation through more compact city design, transport-oriented development, and more efficient vehicles and buildings. A low carbon pathway for Bucharest would require proactive measures to promote smart urban development through a mixture of land-use planning and action to reduce emissions from buildings, transport and solid waste, especially given the 30 percent growth in local population and building stock expected by 2050. Such a policy shift can lead to less sprawl, higher densities, mixed-use, and a coordination of transit and spatial planning. In turn, better spatial development will generate significant improvement in energy use, energy spending and emissions, with GHG emissions projected at more than 40 percent below baseline levels in 2050, PM10 emissions 20 percent lower, and nearly €500 million in thermal energy savings that will accrue to the municipal budget. At the same time, Romania has opportunities to adapt to coming climate change, especially in the water and agriculture sectors. A warmer dryer climate will threaten water availability in many river basins in Romania in summer when irrigation demands are high and rising, also threatening supply reliability for industrial and domestic use and posing constraints on new hydropower. Also, changes in precipitation and temperature will undermine crop yields directly. Modest and affordable adaptation actions include investment in enhanced fertilizer application and in increased crop varieties and would cost about €2 billion over 2015-50. Romania’s forests warrant a greater role in climate action. Romania’s expansive forests are critical to removing emissions, but a changing climate threatens forests’ ability to sequester carbon. Although EU climate policy does not currently consider forestry, the sector presents a very attractive option to reduce GHG emissions as additional voluntary action, especially given other benefits of afforestation and strong public support. A greener path for the forestry sector would include afforestation, intensive management, and increasing sustainable harvesting, focusing on both state and private forest lands. The upcoming EU 2030 framework for climate policy is affordable although challenging for Romania, but the prospective EU Roadmap 2050 will prove expensive and demanding. Aiming for GHG emissions reduction of two-thirds by 2050 (or 80 percent compared to 1990) would likely push GDP about four percent lower than otherwise and employment down by five percent. Going to zero in the power sector requires energy efficiency measures complemented by expensive new renewables and nuclear, with required investments of an average annual 1.7 percent of GDP during 2015-50 or a total €54 billion over this time period. The transport sector, through measures such as electric vehicles, can cut its emissions to five percent growth by 2030 and 27 percent by 2050, but with a required investment requirement of €1.7 billion through 2050. Last, more ambitious water sector adaptations add investment in irrigation rehabilitation, pushing total costs to over €11 billion for the period. An overview of the costs of this low carbon green growth path may assist with government planning. Drawing together the investment costs for the period 2015-2050 across four key sectors–electricity, energy efficiency, water, and transport--elicits an average annual 1.5 percent of GDP in the less ambitious Green scenario (built on the basis of the EU 2030 targets) and 2.4 percent of GDP in the more ambitious Super Green scenario (built on the basis of the prospective 2050 targets). Investments needed before 2020 total €11 billion in the Green scenario and €14 billion in the Super Green scenario. The corresponding investment for the period 2015-2030 constitutes 1.3 percent of GDP in the Green and 2.0 percent of GDP in the Super Green scenario. Across sectors, the highest share of the total investment is required for the power sector. Importantly, the likely share of public investment is modest, at less than ten percent of the total under the 2030 targets and just over one-quarter for the 2050 targets. EXECUTIVE SUMMARY This assessment presents a synthesis of analysis to contribute to the definition of a lower carbon and greener growth path for Romania to 2050. The objective of Romania’s green growth path is to implement mitigation actions and undertake needed adaptation while preserving growth and employment. Sectoral analysis of energy, transport, urban, water, agriculture, and forestry is complemented by economy-wide modeling. To bring together the findings, three multi-sector scenarios for Romania’s economic development to 2050 are developed: the first without any additional greening actions but including current European Union (EU) climate policy—the Baseline; the second with modest effort at further action framed around implementation of the imminent EU 2030 low carbon targets and modest adaptation efforts— Green; and the third with ambitious action to align Romania with the EU’s prospective Roadmap 2050 accompanied by ambitious adaptation—Super Green. Despite its technical depth, this report takes a practical approach to identifying specific challenges and opportunities Romania faces in building its green growth future and to present them in a form useful for decision makers. (See Table on the methodology followed for each sector or approach.) Romania has maintained a steady growth in output while containing the growth of its greenhouse gas (GHG) emissions. The country grew faster than the rest of Europe during 2000 to 2008 and recovered quickly from the international financial crisis. Meanwhile, Romania’s greenhouse gas emissions continued on their steady long-term path of decline. While emissions per capita are currently the lowest in the EU, Romania has among the highest levels of energy and emissions intensity (the energy or emissions per euro of GDP) in the European Union (EU) despite ongoing improvements; and the energy sector4 in Romania is 5 responsible for near 60 percent of emissions in the country. Energy is, therefore, an obvious and necessary sector to lead on mitigation action (See Figure ES.1). 4 The energy sector is the standard IEA/IPCC definition and includes electricity and heat production and energy sector own-use. 5 Excluding LULUCF (land use, land use change, and forests). Figure ES.1: Growth and energy consumption have been decoupling and energy intensity continuously declining since the early 1990s Trends in growth, energy use, and energy intensity. Source: calculations based on WB data from 2015. From now to 2050, real incomes in Romania are expected to continue to grow, and its carbon emissions are expected to continue declining. Romania’s per capita income is converging towards EU averages albeit at a modest pace. Growth overall will be dampened by the ongoing decline in Romania’s population and labor force, but continuing improvements in total factor productivity will keep growth positive. Expanding output and incomes will be sufficient to bring about higher energy demand, which in turn will support rising per capita and overall emissions. Compliance with the current EU ‘2020 climate and energy package’ and participation in the EU Emissions Trading Scheme (ETS) will offset this trend, with total emissions rising only slowly after 2020. Pressure to reduce energy intensity going forward will hasten the underlying momentum towards service sectors and away from heavy industry. At the same time, it is assumed that the country will tackle the many inefficiencies that keep it off its best possible growth path by pursuing reforms and investments to improve the overall performance of key sectors, apart from moving to greener growth paths (See Figure ES.2). Figure ES.2: Steady but modest total factor productivity improvements can keep growth positive Solow decomposition of GDP growth in Romania, 1997-2050 Note: The chart is based on the standard Solow analysis with a Cobb-Douglas production function ( Y = AK α L1−α ). Consequently, GDP growth can be decomposed as ∆ln(Yt ) = ∆ln(At ) + α ∆ln(K t ) + (1 − α) ∆ln(Lt ). The first component is contribution of TFP, the second-capital and the third – labor. Capital is calculated on the basis of investment data, labor force comes from employment statistics. TFP was calculated implicitly, assuming that share of capital in GDP (α) is equal to 40 percent and depreciation rate (δ) is equal to 6 percent. Source: World Bank staff calculations based on CNP (Romania Commission for Prognosis) forecast and ROM-E3 model. Romania can meet the targets of the Green scenario with only modest costs to growth and employment, EU emissions trading for energy-intensive sectors sets a uniform price for GHG allowances, which generates an efficient allocation across countries of mitigation actions in those sectors. (See Figure ES.3). Even with no additional policy actions by the government, Romania is already on a declining carbon path because of the current EU climate and energy package. The tighter (likely) targets of the Green scenario will reduce greenhouse gas (GHG) emissions in all sectors further, by more than one-fifth by 2030 compared to 2005 (an additional 17 percentage points beyond that achieved by current policies) at a cost of only 1.1 percent of output. The Super Green scenario, in contrast, seems likely to prove expensive and demanding at the economy- wide level. By 2050, emissions could be more than two-thirds below 2005 levels, but at a likely cost of GDP four percent lower than otherwise. Employment impacts are similar. Importantly, the cost to Romania of either greener path is higher than the EU average. This outcome reflects that fact that Romania is already on a downwards trend for carbon emissions, and modest additional mitigation is not overly burdensome despite Romania’s starting point of relatively high energy intensity. However, mitigation as dramatic as that under the Super Green 2050 scenario is difficult and expensive. Moreover, since the shift to lower carbon will not be uniform across the economy, it will be important for the government to monitor sectoral, regional, and social impacts of the green transition, as labor and capital move across sectors, and stand ready with safety nets as warranted. Figure ES.3: EU emissions trading allocates needed mitigation efficiently across countries Total GHGs under each scenario for Romania and the rest of the EU, as % change from 2005 Source: World Bank ROM-E3 model developed under this project. A greener energy sector needs to continue the transition towards low carbon fuels and away from coal. Achieving emission reduction targets beyond the EU 2020 targets-the Green (likely EU 2030 targets) and the Super Green (possible EU 2050 targets)–will require Romania to abandon plans for new coal-based power generation capacity and life-extension of existing plants. It will also require a significant additional renewable generation capacity. Replacement of obsolete fossil-fuel electricity plants poses a heavy investment burden irrespective of mitigation targets; and switching to renewable power to reduce energy sector emissions at the same time will augment those costs, especially because the intermittency of wind and solar requires additional peak load capacity. Ongoing participation in EU emissions trading will drive power emissions to 45 percent below 2005 levels by 2050, without any new policies (the Baseline scenario), as new generation focuses on renewables and nuclear power in the face of rising carbon prices. (See Figure ES.4(a) on how the structure of baseline power generation evolves.) Figure ES.4: Electricity Generation is increasingly dominated by renewables with demand contained by energy efficiency Source: World Bank TIMES/MARKAL modeling outcomes as developed under this project. The difficulty of meeting the tighter targets for mitigation set out in the Green and Super Green scenarios will be eased significantly by improvements in energy efficiency. Improving energy efficiency across the board in all economic sectors, but especially in the residential sector and district heating, offers the most effective and also viable means for containing the growth of energy demand, limiting investment requirements to meet the growing demand, and reducing GHG emissions. Major measures include use of more efficient lighting and electric appliances, retrofitting buildings with wall, window and roof insulation, heating system improvement in residential, commercial and public buildings, and use of efficient electric motor and thermal energy equipment in the industry sector. These energy efficiency measures can reduce energy demand for space heating in buildings, promote energy efficiency in industry, and moderate household demand for electricity. Residential energy consumption can be reduced by more than one-quarter by 2050 (compared to Baseline levels); service sector energy use by almost one-third (because of the impact of efficiency measures in non-residential buildings); and more than one-sixth decline in industrial sector energy consumption. The investment costs for these measures is substantial, totaling €19 billion through 2050;6 however, they deliver significant abatement, are cost efficient, and require a modest implementation effort. Investment in lower carbon power generation is the most expensive part of either green scenario. Under the Green scenario, in which power emissions are pushed to 45 percent of the 2005 level by 2030 (rather than by 2050 as in the Baseline), aggressive energy efficiency measures contain demand such that a nearly unchanged level of investment in power generation can add additional solar and nuclear, and electricity generation from fossil fuel-based sources decreases rapidly. Investment costs would rise from an average annual 0.8 percent of GDP of investment for the power sector in the Baseline scenario during 2015-50 to 1.1 percent for supply-side capital as well as demand-side energy efficiency measures under the Green scenario 6 Discounted at five percent. (or €28 billion of investment to €36.540 billion7). Going to zero in the power sector— as in the Super Green scenario--requires energy efficiency measures complemented by expensive new electricity generation from renewable sources and nuclear, which would eliminate electricity generation from coal-based sources by 2030. Romania’s power sector emissions could be driven close to zero by 2050 by investing an average annual 1.7 percent of GDP in the power sector during 2015-50. (See Figure ES.7 and ES.8). Critically, for a successful shift towards low carbon energy, today’s government must accelerate needed sector reforms in several areas: pricing, restructuring of lignite and coal power- generating companies, and support mechanisms for energy efficiency, renewable energy, and shale gas investment. Figure ES.7: The share of renewables grows, mostly at the expense of lignite and coal, especially in Super Green scenario a. Renewable energy b. Lignite and coal Source: World Bank TIMES/MARKAL modeling outcomes as developed under this project The challenges for mitigation in the fossil fuel-dependent transport sector are significant, especially as Romania’s motorization rate converges with the EU average. Transport emissions are likely to grow under current policies by 15 percent by 2030 and 44 percent by 2050 as more people drive more cars more kilometers, and national policies have a leading role in pushing transport to contribute to the likely 2030 EU target for such sectors of -20 percent (compared to 2005). Policies for the transport sector face the challenge of containing the pressure on emissions coming from continuing growth in vehicle ownership and road travel and the fossil fuel dependence of the sector. The ongoing shift towards road transport for both passenger and freight traffic derives from pricing that does not reflect the full costs of transport, technologies that are fuel inefficient, and the influences of spontaneous transition of the urban form (due to relaxation of land development controls, encouraging low-density development). Intertwined challenges are traffic congestion, poor parking management, declining public transport patronage, increasing private vehicle usage, an old taxi fleet, and lack of pedestrian and cycling infrastructure in urban areas. (See Figure ES.9) 7 In net present value terms using a five percent discount rate Figure ES.9: Passenger car use is expanding quickly Passenger Transport Mode Share (land-based modes) Source: Eurostat. A greener transport sector will require new and coordinated national policies and investments and will yield many additional benefits beyond GHG reduction. Since transport is not part of European emissions trading, mitigation policies are the responsibility of national governments. Romania already has a national transport plan which includes commitments to rail investment, as well as an existing set of taxes and incentives and traffic management measures. A greener transport sector can be fostered through new taxes on fuel and vehicles, and programs for eco-driving and ‘smarter choices’ in personal travel planning. The disincentive of high parking charges should be combined with an effective and efficient public transport system, and good walking and cycling facilities. Transport service provision needs to be addressed holistically to ensure that public transport is able to attract new users and realize the full climate and economic benefits. As shown in the marginal abatement cost analysis, transport options have very high calculated net costs in the absence of inclusion of important co-benefits such as reduced air pollution, diminished congestion, and fewer road accidents. Although challenging given the underlying trends, the growth in transport emissions can be slowed by implementing Green or Super Green packages. (See Figure ES.10 and ES.11) Figure ES.10: Transport emissions under Figure ES.11: Transport GHG Emissions and Real alternative carbon abatement scenarios GDP Trends, 2010-2050 (2010 = 100) Source: TRANSEPT. Source: TRANSEPT. Urban areas, especially Romania’s largest city of Bucharest, have the potential to lead on many green issues, starting with energy efficiency. Urban areas represent a concentration of population, economic activity, energy use, and GHG emissions, especially Bucharest. Low density development on the periphery of Bucharest with no integrated transport and land use planning has contributed to more inefficient urban form. Today, buildings account for the largest share of energy consumption, and residential buildings in particular use the majority of energy for heating. (See Figure ES.12). Figure ES.12: The Bucharest-Ilfov region dominates the landscape and the economy a. Population Distribution in Romania, 2011 b. Bucharest-Ilfov Region’s share of Romania’s GDP and population Source: Urban technical paper calculation based Source: Urban technical paper calculation. on 2011 Population and Housing Census Proactive measures to promote smart urban development in Bucharest and other urban areas, including more compact city design, transport-oriented development that changes modal-split, upgrades to a more efficient vehicle stock, and policies promoting building efficiency upgrades, can deliver sizable reductions in annual energy spending and emission levels. Such a package of urban low carbon measures would consist of a mixture of land-use planning and action to reduce emissions from buildings, transport and solid waste, especially given the 30 percent growth in local population and building stock expected by 2050. Promotion of mixed land use, up-zoning and transit-oriented development are part of the recommended policy package, along with congestion pricing and district heating upgrades. Preferential land space for public transport, creation of pedestrian-only zones, parking policies and completion of ring roads are complementary transport actions. At the same time, energy efficiency can be fostered through various financing support and capacity-building programs. Such a policy shift can lead to less sprawl, higher densities, mixed-use, and a coordination of transit and spatial planning. In turn, better spatial development will generate significant improvement in energy use, energy spending and emissions, with GHG emissions projected at more than 40 percent below baseline levels in 2050, PM10 emissions 20 percent lower, and nearly €500 million in thermal energy savings that will accrue to the municipal budget. The solid waste sector, currently mostly landfills, can achieve the highest proportional emissions reduction, with 80 percent below the baseline possible by 2050 if Bucharest-Ilfov meets all EU targets on recycling and biodegradable waste diversion. Finally, a successful shift to a low carbon pathway for Romania’s capital city, and then for other municipalities as the lessons of Bucharest’s experience emerges, demands strong local leadership to steward Bucharest to a low carbon future. (See Figure ES.13). Figure ES.13: Smart urban development can save energy and emissions Carbon emissions reductions under low carbon scenario relative to BAU, 2050 (metric tons of CO2e) Source: World Bank staff calculations. Romania Climate Change and Low Carbon Green Growth Program, 2015 A changing climate will affect water and water-using activities and sectors in Romania, but there are numerous adaptation actions that make sense. Water demand for agriculture has decreased in correspondence to the long trend of reduction in irrigated area, but water scarcity is serious in many basins during summer droughts, and climate change will threaten water availability during the primary growing months while raising irrigation water demand. At the same time, crop yields will be affected by climate-driven changes in soil moisture, direct temperature effects on crop growth, and changes in the evapotranspiration requirements of the crop, among other effects. Similarly, supply reliability for industrial and domestic use is most challenged for basins with lower endowment during summer months. A possible increase in hydropower generation as part of a lower carbon energy sector will both constrain and be constrained by changes in river runoff. (See Figure ES.14). Figure ES.14: Climate change leads to changes in river runoff Sum of mean monthly runoff across the 91 sub-basins, baseline (1961-2000) versus the three climate projections (2031-2050) Source: World Bank staff calculations. A greener water sector should pursue adaptation investments with the greatest potential. These investments include optimizing agronomic inputs, including fertilizer inputs, and rehabilitating irrigation infrastructure to restore irrigation production to currently rainfed areas. Expanded irrigation should be targeted to the Southeast and South-Muntenia regions. These measures would require complementary investment in high-quality extension services, as well as increased and/or subsidized availability of fertilizers, with the payoff being a significantly increased crop yield. To ensure consolidation of the smallest farms is encouraged while also avoiding an unnecessary subsidy to the largest farms which are already quite productive, fertilizer programs should be targeted for farms of medium size (roughly 10 ha), Recommendations also include encouraging windbreaks and soil management to reduce soil erosion, promoting renewable energy sources, promoting organic farming, improving good farming practices, improving awareness of climate change and the need for adaptation, and strengthening policy and institutional capacity is vital to support the recommended interventions. Modest adaptation actions in the water sector under the Green 2030 scenario, including investment in enhanced fertilizer application and in increased crop varieties, would cost about €2 billion over 2015-50 while more ambitious water sector investments in the Super Green 2050 scenario add investment in irrigation rehabilitation, pushing costs to over €11 billion for the period.8 Romanian agriculture requires adaptation actions, and the sector can also contribute to mitigation goals. Agriculture has average crop yields 30-50 percent below the EU average and labor productivity four times lower than the EU average, at least partly due to the large share of subsistence agricultural holdings. The ageing farm population and out-migration of the younger generation could trigger a significant change in the structure of the sector in the next 15 years. Effective policies will be essential to address the risk of land abandonment and address the issue of land fragmentation. As noted above, the main adaptation actions in Romanian agriculture include a reliable irrigation infrastructure, adjusted crop varieties, and improved fertilizer application, all of which will improve revenues more than sufficiently to cover costs. Emissions from the agriculture sector can be addressed through a number of mitigation actions. Currently supported mitigation measures are minimum tillage and manure management. Financing needs for these measures are low, although small farms are ineligible for the related EU support. The measures are also highly beneficial from the point of sector efficiency. Moderating methane emissions from livestock through changes in feed may also prove important, especially if this part of the agricultural sector continues to expand into the future at recent rates of growth. (See Figure ES.15). Figure ES.15: Agricultural trade balance is recovering, but production is flat Agricultural output and trade balance Source: calculations based on data from Eurostat and Food and Agriculture Organization, 2015 8 In net present value terms using a five percent discount rate Romania’s forests warrant a greater role in climate action. Romania has the largest intact tract of contiguous natural and naturally regenerated forests in Europe. LULUCF9 activities (and mostly forestry activities) removed more than one-quarter of Romania’s emissions during 2000-11. Climate change, however, is negatively affecting forest health and growth through drying and biological risks such as pest infestation and increased frequency of forest fires. This compromises forests’ ability to sequester carbon, unless they are appropriately managed. Romania’s forest holdings are a mix of private, public, small and large, and have uneven road accessibility, requiring concerted efforts to promote sustainable management of forests. With investments, forestry appears a very attractive option for Romania to reduce its emissions. Although, EU climate policy does not currently consider forestry, investments are warranted as additional voluntary action given the co-benefits they can generate and the level of public support. A greener path for the forestry sector would include afforestation, shorter rotations for harvesting timber, and conservation actions. To ensure the long-term health of forests, sustainable management has to occur on both state and private forest lands and a simplified regulatory regime for forest management is required. Intensive sustainable management of forests and increasing afforestation can increase the level of CO2 sequestered. Romania’s forests can provide significant mitigation contributions at low cost, particularly through afforestation, but some public financing and good use of EU funds will be needed. (See Figure ES.16). Figure ES.16: Forestry is an important contributor to mitigation Emissions removal by LULUCF Source: Chandrasekharan Behr and Popa, 2014 An overview of the costs of this low carbon green growth path for Romania is informative for government planning. Drawing together the analysis of investment costs during 2015 to 2050 elicits an average annual 1.5 percent of GDP of additional investment needed for the Green 2030 scenario during 2015-50 and 2.4 percent for the Super Green 2050 scenario across four key sectors–electricity, energy efficiency, water, and transport. 9 Land use, land-use change and forestry sectors. These numbers are equivalent to €3.5 and €5.2 million per year in the period 2015-50, in the Green and the Super Green scenarios respectively.10 The estimated costs from now until 2020 are €11 billion under the Green scenario and €14 billion under the Super Green 2050 scenario. The costs of building new power plants dominates investment needs in both scenarios. Funding from the EU could prove key for financing some of these investments, in particular in energy efficiency and in forestry (the costs for which are additional to these aggregates). Importantly, the likely share of public investment is modest, at less than one-sixth of the total and less than one-quarter for the Green 2030 and Super Green 2050 scenarios respectively. Figure ES.17 provides an estimate of the sector contribution to the overall abatement and also of the cost each sector would have per unit of CO2 abated. (See Figure ES.17). Marginal Abatement Curve for Romania (Figure ES.18) shows abatement potential and unit costs of each of the evaluated measures, across sectors. In year 2050, when all measures will be implemented in full, actions across the four mitigation sectors in this assessment will reduce emissions in the country by 38 Mt CO2 eq./year. It should be kept in mind that such costings are snapshots based on available data and the technology set that today is considered practical for such assessments. New technologies will certainly emerge over coming decades that will change these costs and benefits, providing an important reason why governments need to update such analysis periodically. Figure ES.17. Mitigation possible by 2050 requires measures across many sectors Emissions reduction by sector, 2050, Super Green scenario, and average cost of the green measures, 2015-2050 Source: MAC Curve Technical Paper, Romania Climate Change and Low Carbon Green Growth Program, 2015 10 In net present value terms using a five percent discount rate. Figure ES.18. A Marginal Abatement Cost Curve for Romania Cross-sectoral, cost per ton of CO2e abated and abatement potential, 2050 Note: How to read the MACC. The height of each column shows the average cost of abating one ton of CO 2 by 2050. The chart is ordered from left to right from the measures with the lowest cost to the ones with the highest cost. The width of each column shows the GHG emission reduction potential of the measure in year 2050, when all the measures have been fully implemented. Sources of data: Sector Technical Reports; calculations are done using a tool developed at the World Bank. Executive Summary Table. Methodologies for the Green Growth Country Assessment Analytic Framework Sector or issue Objective Models used and modeling framework Modeling outcomes To capture complex The Romania Energy-Environment-Emissions (ROM-E3) model), a Growth, employment, fiscal, and Macroeconomic linkages between recursive stochastic general equilibrium model, was developed, investment impacts of mitigation Modeling mitigation and drawing on the well-known GEM-E3 model, and applied to simulate actions, as well as impact on sectoral adaptation policies green scenarios. Sector as well as macro outcomes, in particular, structure. and economic carbon prices from emissions trading, were then used in sector Serves as the baseline scenario for other performance; and to analysis to ensure consistency. As a global model, ROM-E3 can sector and macroeconomic analysis. set out a detailed simulate the economic interactions of Romania with the rest of the economic baseline Mitigation options: To EU and the rest Supply-side of the (TIMES modeling world. EU climate and MARKAL), energy policies demand-side can be scenario. modeling represented Capacity in detail and generation fuelcomplexity byand source in the model. Energy find optimal solutions (ESDA), coordinated with the macroeconomic model (ROM-E3). in power generation under different for power supply mix The ROM-E3 model projected basic economic indicators which drive scenarios. Emissions from the energy to cover demand at a energy demand: GDP, energy sector value-added, and energy prices and power sectors. Required investment minimum cost while as well as emissions allowance prices needed to attain the green and other costs for each scenario. reducing emissions of scenarios. TIMES MARKAL found a least-cost mix of power sources the power sector. to meet power demand projections (using ESDA), while accounting Included potential for constraints such as resources, technology, user constraints and a reduction in power cap on GHG emissions (the allowance prices). The ESDA modeling demand as a result of estimates energy sector end-user service demand and projected the energy efficiency penetration of a set of green technologies that could reduce energy measures in industry, demand. household, and non- residential sectors. Mitigation options: To TRANSEPT (Transport Strategic Emission Prediction Tool) Road travel demand and road transport Transport estimate the cost of developed. Included Romanian General Transport Master Plan in the fleet composition and performance (fuel proposed green baseline scenario, as well as certain existing pricing instruments and consumption and emissions) as a result investments and regulations. TRANSEPT model evaluated the impact of various of green policy implementation. emissions reduction. transport and environmental policies on the transport sector Sectoral indicators (vehicle population outcomes. and age, vehicle-kilometer traveled, ton- kilometer transported, volume of rail travel). Sectoral outcomes used to Analytic Framework Sector or issue Objective Models used and modeling framework Modeling outcomes Applied multi-criteria analysis to select transport measures for project the level of fuel consumption scenarios. and emissions including CO2, NOX, and PM10.8 To assess the impact Rapid Assessment of City Emissions (RACE) model is a geospatial Population and development patterns Urban of urban green model that compares population and development patterns for a and the implications for emissions under policies and region under different scenarios, in order to develop technical different scenarios. Energy demand, investments under estimates of how they differ in terms of energy use, energy spending GHG emissions, PM10 and other two green growth levels, air quality emissions, and GHG emissions. By changing emissions for each scenario. Fiscal scenarios. assumptions about current and future land use patterns, the design savings for municipal government. and location of different public transport system options, the energy and emission factors assigned to different land use patterns in a city, and the solid waste management system design, it is possible to compare a “baseline” scenario with one or more alternative scenarios in terms of energy demand, energy spending, energy- related air Adaptation options: qualityCirculation Global Models emissions (PM10 (GCMs), and NOx), Water Evaluation And and energy-related CO2Planning emissions. Intermediate outcomes: Water and To assess the impact (WEAP) model, CLImate and water RUNoff model (CLIRUN) and a - Climate projections on competing uses of Agriculture of a changing climate crop water productivity model (AquaCrop). - Water runoff 1. GCMs produced climate projections, which were used as inputs in water, especially by - Irrigation water demand CLIRUN to estimate streamflow runoff and in AquaCrop to estimate the agriculture and crop yield and irrigation water demand. - Crop yield power sectors. - Water availability 2. Runoff and irrigation demand estimates from CLIRUN and AquaCrop were used as inputs in the WEAP tool, where water - Hydropower potential storage, hydropower potential, and water availability were modeled. - Water storage 8 3. To refine the AquaCrop estimates of crop yield in irrigated areas, outcomes: Mainand NOx is a generic term for mono-nitrogen oxides, in particular, NO2. NO2 forms quickly from emissions from cars, trucks buses, power plants, and off-road the unmet demand for irrigation water from WEAP , together with equipment. In addition to contributing to the formation of ground-level ozone, and fine particle pollution, NO2 is linked with a number of adverse effects on the respiratory system. NOx are distinct from nitrous oxide (N 2O), a greenhouse gas emitted from agricultural lands. PM10 is atmospheric particulate matter smaller than 10 microns. Analytic Framework Sector or issue Objective Models used and modeling framework Modeling outcomes statistical data on irrigated crop sensitivity to water availability, was - Projected revenues from crop fed back into Aquacrop. production and hydropower generation 4. Finally, the WEAP hydropower generation and AquaCrop crop - NPV of investments yield results are analyzed to produce estimates of their economic Financial evaluation of infrastructure implications: projected revenue from crop production and investment options for water and hydropower and NPV of investments in these sectors. agriculture: - Net present value of the cash flow of Forestry Mitigation: options for MAC curve analysis was undertaken for 3 mitigation measures: afforestation, sustainable management of benefits and costs GHG removal production forests, and sustainable management of protection forests. Benchmarking To provide an initial Using a broad set of indicators of green growth available for most countries to identify important elements of portrait of the green growth for Romania. Key areas for indicators are: (i) Sustainable use of natural resources, including country’s status, minerals, water and clean air, and biodiversity; (ii) mitigation of greenhouse gas emissions; (iii) adaptation to a prospects, and changing climate, and (iv) innovation and green jobs. For any individual country, endowments and history challenges with matter for current ‘greenness’ and potential greening of growth paths. A framework of key questions with three respect to green aspects: (i) “how green?”, (ii) “going green,” and (iii) “riding a green wave,” is used to guide a benchmarking growth. exercise in which Romania is mapped against comparator countries and country groups using a dataset of more than 100 indicators for 69 countries for 1990 to 2009. Marginal Mitigation options: Marginal abatement cost (MAC) analysis is commonly used as a tool in evaluating emission reduction Abatement Cost effectiveness of each technologies in terms of their potential mitigation impact (emissions abated) and unit cost (cost per ton of CO2e Curve proposed abatement abated). They are also considered to be a most efficient communication instrument used in discussions of the measures by abatement policies. MACC charts are designed to be a “brief”: they compare technologies to be considered for measuring its marginal implementation in a simple (easy to comprehend in a limited time) but informative way. The technologies can net cost (present be presented one by one or at various levels of aggregation, including by blocks of technologies, by economic value of net cost per sector, or even by groups of sectors. In the MACC, each technology has two characteristics: the level of unit of CO2e abatement, Mt CO2e, which equals to the difference in emissions produced by the new technology as compared abatement) and the to the technology it replaces (abatement potential) and the cost of the technology per unit of abatement, €/t related abatement CO2e. Electricity supply, energy efficiency, forestry, agriculture and water, and transport green measures were potential. used in the MAC analysis. CHAPTER 1. HOW GREEN IS ROMANIA? A BENCHMARKING EXERCISE CHAPTER SUMMARY Using a broad set of indicators of green growth, Romania is compared to international and regional benchmarks to provide an initial portrait of the country’s status, prospects, and challenges with respect to green growth. Green growth starts with a traditional concern about sustainable use of natural resources, including minerals, water and clean air, and biodiversity, and then adds consideration of mitigation of greenhouse gas emissions, attention to adaptation to a changing climate, and more focus on innovation and green jobs. For any individual country, the nature of a greener growth path will depend on endowments and history, which position countries quite differently with respect to current ‘greenness’ and potential greening of their growth paths. A framework to define a list of questions key to understanding how Romania or any country compares in an international context is constructed with three aspects — “how green?”, “going green,” and “riding a green wave,” and used to guide a benchmarking exercise in which Romania is mapped against comparator countries and country groups using a dataset of more than 100 indicators for 69 countries for 1990 to 2009. This benchmarking exercise aims to define, “What is green growth, and how green is Romania?” Romania is endowed with several types of natural resources, which, if used productively, can support economic growth: fuel and mineral deposits; hydropower resources; wind power resources, and agricultural land. However, management of water resources requires improvement; including water resource management, significant reforms in agriculture aimed at increased productivity, and improved management of the forests. While both emission intensity of the economy and energy intensity of the economy have been decreasing since 1990, they are still among the highest in the EU. However, within the comparator country list selected on economic development grounds for this Benchmarking analysis 11 , Romania’ emission intensity and energy intensity are moderate. The energy sector in Romania is 12 responsible for 58 percent of emissions in the country and is therefore most important sector for mitigation. Romania’s growth model needs to be strengthened: in the past, it was based on consumption and short-term capital inflows rather than on sustained productivity increases in tradable sectors, which led to a stagnant growth. Romania is moving closer to the rest of the EU in economic development: per capita GDP is closer to the EU average as a result of institutional reforms and market liberalization; increased FDI inflows and other financial inflows supported growth in manufacturing and pushed up demand; increasing investments in education have led to growth in tertiary education enrollment. However, Romania still needs to remove constraints to productivity gains and growth; to re-start the convergence process, it 11 See a detailed description of the comparator list and the selection approach in the methodology section in this chapter and in the Benchmarking technical paper. 12 Energy sector statistical definition in this chapter is based on the standard IEA/IPCC definition and includes electricity and heat production and energy sector own use. should increase productivity in areas where it has comparative advantage. Romania’s outcomes in innovation and knowledge economy are one of the weaknesses the country has. Romania is ranked last in the EU by the EC’s Innovation Union Scoreboard (IUS). However, when Romanian innovation performance is considered within a wider set of countries, the picture is not so grim. According to the Global Innovation Index 2014, Romania ranks 55th within 143 countries evaluated. CHALLENGES FOR GREENER GROWTH Overview Green Growth Benchmarking is a country green growth diagnostics, which helps define the country’s strengths and vulnerabilities in assuming the path to greener growth. Green growth is growth in economic output that preserves the ability of natural assets to provide the resources and services on which human welfare depends.13 While most countries agree that such growth is a worthy goal, determining what a green growth path might mean for a particular country is a significant challenge. A starting point in the process of defining the country’s green growth path should be analysis aimed at mapping the country’s current position on a multi-dimensional chart of green growth, with each dimension defined by a green growth indicator. The purpose of such analysis is to understand what the country needs to do to pursue green growth and what policy decisions, investments and institution building need to be made to support green growth. Green growth benchmarking is a methodology proposed here for such analysis. Green growth starts with a traditional concern about sustainable use of natural resources. The efficient exhaustion of nonrenewable resources such as energy and mineral deposits and the sustainable use of renewable resources such as forests and fisheries, water and clean air have been considered part of a sustainable growth agenda for decades. Natural resources are necessary to economic activity, providing raw materials and environmental services essential for production to continue. Some components of natural resources have become of greater concern in recent years, among them freshwater resources affected by overexploitation, pollution, and climate change; and biodiversity under threat from habitat alteration and pollution. Mitigation of greenhouse gas emissions is a critical additional component of environmental sustainability, with rising prominence and particularly difficult challenges for countries . The growing imbalance of greenhouse gases (or ‘carbon’) in the atmosphere is a clear example of the breeching of planetary boundaries and of a global public good. As such, individual countries can reap only local co- benefits such as reduced suspended particulates in the air if fossil fuel burning is reduced. Since the bulk of the benefits do not accrue to an individual country, a decision to move to low carbon generally must be motivated by other considerations, including access to carbon finance and other external funding, in response to regional standards and requirements such as those of the European Union, or driven by a decision to lead on global issues and prepare for an eventual global agreement. 13 Green Growth Knowledge Platform website. Developed in partnership between the Global Green Growth Institute, the OECD, UNEP, and the World Bank: www.ggkp.org. Adaptation to a changing climate must also be part of a country’s sustainable growth path. Regardless of future greenhouse gas emissions, climate is already changing, with more extreme weather events, rising sea levels, and overall warming. Some countries, sectors, and populations will be strongly affected, although with major impacts in most places not materializing for some decades. For many countries, it makes sense to consider how adaptation needs can be incorporated into decisions about long-lived infrastructure such as new hydropower plants. More generally, countries that will face significant impacts need to factor such shifts—in frequency of droughts, in crop yields, in coastal and riverbank flooding— into thinking about sustainable and greener development paths. The newest element of the green growth agenda is the strong emphasis on innovation and green jobs. This dimension of green growth proposes that a shift towards greener growth will spur technological innovation, especially in the energy sector, promote the emergence of new industries and increase the number of jobs in green industries. Innovation can help decouple growth from natural resource depletion and greenhouse gas emissions by shifting out global production possibilities and allowing more production with fewer and more environmentally- friendly inputs. Environmental considerations don’t necessarily constrain growth, but, to the contrary, a dynamic technical change towards low carbon and low pollution technologies could drive growth and generate jobs at all skill levels (Figure 1.1).14 Figure 1.1. Elements of environmental sustainability that together constitute green growth Source: Benchmarking Technical Paperș Romania Climate Change and Low Carbon Green Growth Program, 2015 14 Such an argument is consistent with mainstream economic thinking if there is close substitutability between clean and dirty technologies. In that case, temporary government subsidies or other supportive policies can push the economy towards a clean solution, causing the sector with clean technology to become large enough to be self- sustaining. In such a situation, the shift to greener technologies will support growth rather than limiting it. See Aghion, Philippe, Daron Acemoglu, Leonardo Bursztyn and David Hemous. 2011. The Environment and Directed Technical Change. Growth and Sustainability Policies for Europe (GRASP) project of the European Commission (EC). Working Paper 21. Brussels: EC. See also the quick overview in Jamus Lim. May 23, 2010. “Environmentally- Friendly Growth Without the Pain.” Prospects for Development. Washington, DC: World Bank. Available at: http://blogs.worldbank.org/prospects/environmentallyfriendly-growth-without-the-pain#1. Where Should Countries Start? A greener growth path must address these four aspects and balance greening with growth of output and incomes, but the details of a country’s path will depend on country specific conditions and policy choices. Each country starts with a set of endowments, natural and man-made. While some aspects of any country’s current condition are driven by recent policy choices, much derives from exogenous characteristics such as geography or endowments of fossil fuels, hydropower potential, or forests; and the myriad of distant policy decisions that drove national development to where it is today. These characteristics position countries quite differently with respect to the current ‘greenness’ and potential greening of their growth paths. In considering the complex task of assessing green growth at the country level, the starting point is fundamental to the costs and tradeoffs the country faces in choosing a greener path forward. One holistic approach to sustainability is national wealth accounting and the measurement of natural capital, which aims to capture a good part of the green challenges to orthodox growth measurement. Part of the determination of an optimal green growth path for a country involves proper valuation of environmental costs and benefits, an approach which has been part of the sustainability agenda for many years. Recent international agreement to support wealth accounting or green national accounts is moving this effort into the mainstream. A correct costing of depreciation of natural resources such as mineral deposits and of externalities such as air and water pollution will take countries who adopt such an approach a good distance to maximizing a greener type of GDP. However, some elements of greenness are not easily costed, among them greenhouse gas emissions, biodiversity and the non- income benefits (or happiness) that comes from living in a country with a healthy and well-protected natural environment. A simpler starting point in such assessment is benchmarking against comparator countries— using indicators that measure various dimensions of green growth. This quick mapping can help identify challenging areas, as well as easy wins. It can create a balanced portrait of a country’s green issues, and, as set out below, it can have an analytic rather than monitoring objective. METHODOLOGY The scheme below (Figure 1.2) helps to define a list of questions key to understanding how Romania or any country compares in an international context. Firstly, how important are natural resources to current growth, and how productively has the country made use of them? Is pollution a major problem? Has Romania made any progress in decoupling economic growth and greenhouse gas emissions? Is the country preparing for the impacts of a changing climate? Secondly, is Romania’s economy flexible enough to succeed in the transition towards green growth? Is Romania’s economy well-diversified and ready to reap emerging opportunities? What will be Romania’s greatest challenges in greening its economy, and what will be its biggest payoffs from ‘going green’? Thirdly, how can Romania be ready for a surge of innovation and be competitive in new and growing green industries? These three aspects of measuring ‘green-ness’ capture a country’s status, prospects, and challenges with respect to the four elements in Figure 1.1. Romania was benchmarked against comparator countries using a specially-constructed database. Information on more than 100 indicators across 69 countries for 1990 to 2009 was collected. Romania was compared to a subset of these countries selected based on economic, social and policy criteria and also against three country groups: the European Union (EU), the ECA region, and all upper middle income countries (UMC).15 Acknowledging that attempting to measure green growth is not a new effort, the design of the database draws on lessons from recent OECD and Environmental Performance Index (EPI) publications.16Data is derived from a variety of sources, including the World Bank’s Development Data Platform. The selection of relevant indicators balanced data availability and reliability. Some indicators are proxies or correlated variables such as using life expectancy to capture environmental health impacts. Unfortunately, there are important areas of environmental performance where reliable, internationally comparable data is missing, e.g., waste production and management, toxic substance concentrations, and water and soil quality. Figure 1.2. A framework for green growth benchmarking Riding a How Going • Natural • Structure of • global • use • Labor market natural • Getting ready the and human • • Business and capital • Green and • Energy green and • to changing • Global links: emissions embodied 15 For more detailed analysis and comparisons to selected comparator countries, see the Benchmarking technical paper. The ECA region is the Eastern Europe and Central Asia region and includes the following thirty countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kosovo, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, Montenegro, Poland, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Turkmenistan, Ukraine, and Uzbekistan. 16 One of the best known approaches to country environmental performance is the Columbia-Yale Environmental Performance Index. For the newly-emerging area of green growth, the OECD, the EU, and the UN have pioneered work on indicators, and the World Bank’s new Green Growth Knowledge Platform, a joint effort with OECD, UNEP, and the Global Green Growth Institute, will focus on further development and harmonization of indicators of green growth MAIN FINDINGS How green? Romania is endowed with several types of natural resources, which, if used productively, can support economic growth: fuel and mineral deposits (including oil, gas, lignite, iron ore, copper, bauxite, manganese, lead, and zinc), which now comprise shale gas; hydropower resources; wind power resources, and agricultural land. The fuel and mineral resources support energy security and are used as industrial inputs. However, the oil and gas resources have been declining over time and Romania now is a net oil and gas importer; and extraction of shale gas is discussed, but has not started yet. Agricultural land in Romania is a valuable resource and the sector can potentially create significant value added – after all, Romania used to be considered “the bread basket of Europe”. However, currently agriculture is highly inefficient - a sector with almost 30 percent of employment accounts for 5 percent of GDP, resulting in the lowest farm labor productivity and the lowest agricultural income in the EU – and the country imports 17 70 percent of its food. The direct reason for inefficiency is land fragmentation and prevailing subsistent farming. Reviving agriculture will involve, among other efforts requiring significant investment and considerable policy measures, increased irrigation, which will put additional pressure on Romania’s limited water resources. Production of food in the country also suffers from dilapidated stocks of fish – Romania’s fish resources are in the worst condition within the comparator sample. On the positive side, Romania implements policies to protect its resources and is characterized by productivity of their usage: it has a very high share of marine protected areas, a low level of PM pollution, and a low level of water withdrawals. Benchmarking analysis shows the main Romania’s strengths and weaknesses in the area of natural resource endowment, usage, and productivity of natural resource usage relative to the comparator countries and country groups (Figure 1.3). According to the conceptual framework of the benchmarking analysis, the indicators used here concern four basic natural assets –land, water, air, and sources of energy. Natural resource usage include the consumption of the resource – e.g., water withdrawals, air pollution, forest loss – and productivity of usage is measured by resource consumption per unit of GDP or, in a reverse format (depending on indicator availability), by GDP per unit of resource consumption. The main strengths of Romania in this area are significant endowment with agricultural land, low level of water withdrawals, moderate level of air pollution (PM10), and moderate level of forest loss. The main weaknesses are low productivity of agriculture reflected in cereal yields, dilapidated seafood resources (fish stocks collapsed) and low water resources per capita. These indicators need to be interpreted with caution, within a broader context, to avoid assigning a positive meaning to essentially negative events, which seem positive when just one indicator is observed (e.g., see indicator of agricultural land described below, which should be considered in the context of productivity of land usage) and vice versa. 17 World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. Available at: http://documents.worldbank.org/curated/en/2013/06/18028709/reviving-romanias-growth-convergence- Water withdrawals are close to the lowest point in the comparator sample and are much lower than the international benchmark for pressure on available water resources (water stress is defined at 10 percent of water withdrawal as share of water resources and Romania’s level is 3.2 percent). This indicator needs to be interpreted in the context of the country endowment with water resources because the importance of water resource management is higher in countries with limited water availability. Romania’s water resources are far from being abundant – their level of 1,969 m3 per capita is only slightly above the international benchmark for water stress of 1,700 m3 per capita. Considering this relatively low level of water availability, Romania’s current overall rate of water withdrawals is reasonable. Particulate matter (PM10) air pollution in the Romanian large cities is average for the comparator sample. Romania’s performance according to this indicator is better than the average performance of the ECA countries and worse than the average EU performance. Considering Romania’s status as an EU member and the EU environmental requirements, Romania is aiming at reducing the air pollution level and at moving closer to countries like Finland, Estonia, Ireland, UK and Sweden, which have the lowest levels of the PM 10 pollution in their large cities among the EU countries. However, currently Romania is close to the bottom of the EU ranking in PM10 pollution, just behind Poland and performing better than only five countries: Greece, Latvia, Bulgaria, Malta, and Cyprus. Romania has significant share of agricultural and forest land. Forest loss in Romania averaged a low 4 percent of forest stock over the period 2000-2010, significantly below the EU average of 10 percent during the same time and below the comparator sample average of 5.4 percent. Romania’s forest covers 28 percent of its land area and the total growing stock is estimated at 1,413 million cubic meters. The annual allowable cut is 22.3 million hectares, but forest cuts are much lower -- in 2012, they amounted to 15.3 million hectares or 48 percent of the growing stock.18 Agricultural land occupies 59 percent of the country’s area and almost two-thirds of it is arable. Romania has one of the highest shares of rural population and of agricultural employment within the EU: rural population amounts to 45 percent of the total population (compared to the 26 percent in the EU) and agricultural employment constitutes 29 percent of total employment (compared to 5 percent employment in the EU). Despite its high share of employment, agriculture in Romania adds only 5 percent to GDP, making Romania the lowest ranking in the EU in farm labor productivity. It also has the lowest agricultural income, which amounts to only 22 percent of the average EU farm income per unit of full time employment. Forty-five percent of the agricultural land in Romania is used for subsistent agriculture and another 21 percent – for semi- subsistent agriculture. The country, which used to be considered “the bread basket of Europe”, now imports 19 70 percent of its food . Low productivity of agriculture in Romania reflects in its cereal yields, which are significantly below the ones in the EU comparator countries: while Romania produces 2.8 tons of cereal per hectare, the 18 World Bank. 2013. Romania: Climate Change and Low Carbon Green Growth Program. Forest Sector Rapid Assessment. 19 World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. EU average production is 5.0 tons per hectare and the top EU levels are 7.2 tons per hectare (Germany) and 6.1 tons per hectare (Denmark); the only countries in the comparator sample that rank below Romania according to the indicator of cereal yield are Turkey, Azerbaijan, Russia and Kazakhstan. However, these numbers have to be interpreted in the context of the farm size (this is specifically relevant for cereal production): while two-thirds of the agriculture are subsistent and semi-subsistent farms with very low productivity, there is a small number of large and efficient farms with higher yields; the national number is therefore the average of the two extremes. Figure 1.3. Natural resource endowment and productive use of natural resources a. Romania’s strengths b. Romania’s vulnerabilities Note: How to read the chart: the higher the indicator value, the better the outcome with respect to green growth. This is a result of data rescaling to make indicators measured in different units comparable and of the data sign (+, -) adjustment to reflect the interpretation of the indicator. See footnote 17 for details. Sources: (1) WB DDP (agricultural land, PM10, water resources, water withdrawals, cereal yield, forest land); (2) EPI (forest loss, pesticide regulation, SO2 per capita). Within the comparator sample, Romania is characterized by moderate level of both emission intensity of the economy and energy20 intensity of the economy, it falls behind most of the EU countries and is ahead of most of the ECA countries in its performance according to these two indicators (Figure 1.4); there is room for improvement. Comparison with the mostly high income EU and OECD countries shows that emissions intensity of the Romanian economy in 2010, while having dropped 3.3 times from its 1989 level, was still 2.8 times above the EU level and 2.1 times above the OECD average. While Romania has a relatively large share of low carbon generation, ranking 14th among the EU’s 29 countries according to the share of zero-carbon generation and 13th according to the share of renewable generation, fossil-based generation, still dominates its electricity production. Carbon intensity of the Romanian economy is close to the median level for the comparator sample and below the sample mean. However, because there are a few countries in the sample with very high emission intensity levels (Kazakhstan, Serbia, Russia and Ukraine are the top of the list) and many countries with low to moderate emission levels, averages hide national differences. Romania falls between the good and the bad performers: it has twice as high emission intensity as such countries as Sweden and Switzerland and less than one-third of emission level of Serbia and Kazakhstan. The same applies to the energy intensity of the Romanian economy: it is slightly below the sample average and falls exactly between the energy intensive group and the group of countries that have achieved low energy intensity; it constitutes one-half of the ECA average and twice the EU average. Figure 1.4. Energy and emission intensity of the economy Note: How to read the chart: the higher the indicator value, the better the outcome with respect to green growth. This is a result of data rescaling to make indicators measured in different units comparable and of the data sign (+, -) adjustment to reflect the interpretation of the indicator. See footnote 17 for details. Sources: World Bank databases: Development Data Platform, Poverty and Inequality Database, and Worldwide Governance Indicators. 20 Energy sector statistical definition in this chapter is based on the standard IEA/IPCC definition and includes electricity and heat production and energy sector own use. Currently, the energy sector in Romania is responsible for 58 percent of emissions in the country (excluding LULUCF)21 and is therefore most important sector for mitigation. While emissions per capita are the lowest in the EU, economic growth will bring about higher energy demand, accompanied by increased per capita and overall emissions. In fact, the growth in power demand is already significant. Since increasing demand will require building new supply capacities, this is an opportunity for “greening” the energy sector by increasing the share of less emission intensive sources of energy in primary energy supply, particularly in power sector. While Romanian energy sector has already lowered the share of lignite, oil and gas in primary supply and diversified toward hydro, nuclear and renewable energy (mostly biomass), there is still room for improvement. On the demand side, energy efficiency measures will bring high benefits, especially in the industry. On the supply side, a further increase in renewable generation, including hydro and wind (the country has a high hydro potential and the best potential for wind generation development in Southern Europe), to achieve the target of 38 percent of renewable in power supply by 2020, will support mitigation. Going green: structure of the economy and labor market Romania’s growth model needs to be strengthened: in the past, it was based on consumption and short- term capital inflows rather than on sustained productivity increases in tradable sectors, which led to a stagnant growth. Reversing this pattern will be challenging. Romania is making progress moving closer to the rest of the EU in economic development: per capita GDP is moving closer to the EU average as a result of institutional reforms and market liberalization; increased FDI inflows and other financial inflows supported growth in manufacturing and pushed up demand; increasing investments in education have already led to growth in tertiary education enrollment. However, the 2008 crisis led to slower growth and stagnant progress. Currently, Romania needs to remove constraints to productivity gains and growth to be able to reverse its current stagnation and resume its convergence with the EU. In particular, it needs to attract significant amounts of FDI to further develop manufacturing, IT, transport, food, and energy industries, as well as services, such as tourism; to reverse high level emigration of the working age and capable population, including highly skilled professionals; to promote production of high-technology tradable goods, to reverse the drop in ratio of exports to GDP; and to invest in its labor force through better quality education.22 To re-start the convergence process, Romania should increase productivity in areas where it has comparative advantage: exports of sophisticated manufacturing products (building on, for instance, the automobile value chain that was created by FDI inflows in the past, as well as the food and beverage industries), key tradable services (including those related to the transport logistics and the information, communication and technology industries), and different energy products (such as gas and electricity). 21 World Bank. 2013. Romania: Climate Change and Low Carbon Green Growth Program. Energy Sector Rapid Assessment: Low-Carbon Investment Priorities and Policy Support. The starting areas of focus would be removing constraints to private sector growth in the following areas: (i) macroeconomic and public-sector policies for growth, which have a crucial role in mitigating external shocks and ensuring that price, wage and interest rate signals are clear to investors and, thus, induce reallocations of labor and capital from lower to higher productivity uses; (ii) capital and labor markets policies for growth, where key issues are to ensure that a sound business and investment environment is created and it facilitates competition, entry and exit, to increase labor market flexibility, to promote improvement in labor quality, and to improve safety nets. In Romania, three regulated sectors are key for restoring growth - energy, transport, and agriculture, and policy attention to these sectors can rapidly attract private investments.23 Figure 1.5a reflects the main strengths and vulnerabilities of the Romanian economy and labor market reflecting the level of flexibility of its economy. The signs of flexibility of Romania’s economy are a high level of Gross Capital Formation, a high share of manufacturing in industry, a low rate of unemployment, a moderate tariff rate, and a moderate share of energy imports in energy use, as compared to other countries in the comparator sample. The weaknesses include a low trade to GDP ratio and a low level of urbanization. Riding the green wave: innovation and knowledge economy Data show that Romania’s outcomes in innovation and knowledge economy are one of the weaknesses the country has: Romania significantly underperforms, as compared to the EU, on such indicators as broadband subscribers as share of the population, percentage of researchers as share of the population, R&D expenditures to GDP, and high-tech exports in manufacturing exports. At the same time, Romania is slightly above the ECA average according to the same indicators (Figure 1.5b). More so, two of the innovation and knowledge economy indicators place Romania in the middle of the comparator country ranking: patent applications per mln population residents and share of green and close to green exports in total exports. The polarization of performance of the EU countries and the non- EU ECA countries in innovation and knowledge economy makes it difficult to do analysis of this particular area of Benchmarking using the entire comparator list. Since Romania is part of the EU and is aiming at converging with the EU countries on a wide range of performance indicators including those reflecting innovation, it is reasonable to compare it in this area with the EU. Romania is ranked last in the EU by the EC’s Innovation Union Scoreboard (IUS). Research has been consistently underfunded for twenty years, which, together with “brain drain”, caused a crisis in Romania’s research. R&D expenditures currently constitute only 0.6 percent of GDP, compared with 1.51 percent EU average and 3.7 percent of GDP in Sweden, 3.0 percent of GDP in Switzerland and 2.9 percent in Denmark (top levels in the comparator sample), which indicates that the prospects for improvement are bleak. As a result, Romania’s gap with most of the EU countries in innovation has been increasing and in 23 World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. 2014 Romania was the worst performer on the IUS innovation index in the EU. Most of individual IUS innovation indicators (the ones that form the innovation index) place Romania either last or second to last in the EU ranking; this relates to the following indicators: research and innovation policy, non- public R&D spending24, and patent applications.25 Figure 1.5. Structure of the economy and labor market. Innovation and knowledge economy. a. Romania’s strengths b. Romania’s vulnerabilities 24 Romania ranks third from the bottom in public R&D spending. 25 Bertelsmann Stiftung: Sustainable Governance Indicators (SGI). 2014. Georgy Ganev, Vesselin Dimitrov, Frank Bönker (Coordinator). Romania Report. Gutersloh, Germany Note: How to read the chart: the higher the indicator value, the better the outcome with respect to green growth. This is a result of data rescaling to make indicators measured in different units comparable and of the data sign (+, -) adjustment to reflect the interpretation of the indicator. See footnote 17 for details. Sources: (1) WB DDP (agricultural land, PM10, water resources, water withdrawals, cereal yield, forest land); (2) EPI (forest loss, pesticide regulation, SO2 per capita). However, when Romanian innovation performance is considered within a wider set of countries, the picture is not so grim. According to the Global Innovation Index 201426 Romania ranks 55th within 143 countries evaluated, with the Innovation Input sub-rank of 65 and the Innovation Output sub-rank is 44. The indicators that drive the ranking down include ICT & organizational model creation (rank 111); ICT & business model creation (rank 100); intensity of local competition (rank 109); FDI net inflows as percent GDP (rank 105); ease of paying taxes (rank 99); market capitalization as percent GDP (rank 90); government effectiveness (rank 88); ease of resolving insolvency (rank 88); growth rate of PPP$GDP/worker (rank 84); and expenditures on education (rank 83). The indicators driving the total up include ease of getting credit (rank 13); cultural & creative services exports as percentage of total trade (rank 17); creative goods exports as percentage of total trade (rank 28); high- and medium-high-tech manufactures as percentage of total (rank 27); ease of starting business (rank 33); press freedom (rank 37); and high-tech imports less re-imports (rank 39). 26 The Global Innovation Index (GII) 2014 is the 7th publication by Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO, an agency of the United Nations). The Index ranks 143 world economies, accounting for 92.9% of the world’s population and 98.3% of the world’s Gross Domestic Product (in US Dollars), in innovation capabilities and results. The GII is the average of two sub-indices: Input Sub-Index and Output Sub- Index. The Input Sub-Index evaluates five elements of the economy that enable innovative activities: Institutions, Human capital and research, Infrastructure, Market sophistication, and Business sophistication. The output index captures evidence of innovation: Knowledge and technology outputs and Creative outputs. Indices are composed of 81 individual indicators. CHAPTER 2. WHERE IS ROMANIA HEADING? ECONOMIC EVELOPMENT TO 2050 AND THE IMPACTS OF CLIMATE ACTION CHAPTER SUMMARY The focus for Romania’s low carbon green growth path is to implement mitigation actions and undertake needed adaptation while preserving growth and employment. Thinking through this path at the macroeconomic level can be simplified into three main scenarios for analyzing the impact of green interventions. The necessary horizon to assess the costs and impact of a new growth path is long, and 2050 is chosen as the endpoint for assessment. The backbone of the analysis is macroeconomic modeling, which provides both a consistent foundation for sector analysis and an overarching analysis of impacts economy- wide. Romania’s recent history of economic performance provides important clues about future directions but climate action will become more prominent, requiring both mitigation and adaptation measures. The country grew faster than the rest of Europe during 2000 to 2008 and recovered quickly from the international financial crisis. Meanwhile, Romania witnessed its greenhouse gas (GHG) emissions decline by almost one- third. Since Romania’s economy does not yet match the typical pattern in the rest of the EU, the path to 2050 is likely to feature convergence towards Europe in income levels and economic structure. The path is also likely to include intensified climate action. Although the country’s GHG emission levels are not large on a global scale, Romania faces current, imminent, and prospective limits on emissions of GHGs. Reducing these emissions will both require government action and affect Romania’s growth path. At the same time, newly-developed climate scenarios show rising temperatures and falling precipitation in future decades, increasing the likelihood of water shortages which will harm agriculture and other water users. The baseline scenario for Romania’s economy through 2050, generated by a newly-built macroeconomic model, indeed finds real incomes in Romania likely to converge towards European Union averages albeit at a modest pace. Growth is dampened by the ongoing decline in Romania’s population and labor force. The story the sector level is of divergence, rather than convergence. Part of those developments are driven by compliance with the current ‘2020 climate and energy package’ and participation in the European Union (EU) Emissions Trading Scheme (ETS), which generate pressure to reduce energy intensity going forward. This baseline scenario constitutes a critical first phase of the analysis, serving as a benchmark for comparisons of economic outcomes before and after policy actions or investments. A computable general equilibrium model was developed for Romania, in collaboration with local experts, designed to address the complex and overlapping elements of the EU’s climate and energy policy framework. Drawing on the well-known GEM-E3 model, the ROM-E3 model is capable of quantifying the first and second round effects of the many regulations related to multiple sectors as well as the feedback and spillover effects within Romania and across countries through the trade channel. The model has been applied to assess a Green and Super Green scenario against the baseline. The Green scenario imposes compliance with the main features of the EU climate and energy package, while the Super Green assumes the Roadmap 2050 will be implemented. (See Box 2.1). Implementing the imminent EU 2030 climate framework imposes only modest costs on Romania’s economy, but fulfilling the prospective EU Roadmap 2050 will impose a heavy burden. EU emissions trading allocates mitigation efficiently across EU member states via a uniform carbon price (the emissions allowance price that clears the ETS market). Likely 2030 obligations will require cutting GHGs by 34 percent by 2030 compared with 2005 at a cost of 1.1 percent of GDP overall, but with high variability across sectors. By contrast, meeting the EU’s proposed 80 percent mitigation goal in 2050 would leave Romania’s output four percent lower. Policymakers should find this analysis of interest. The analysis recommends that the government be prepared to monitor the cross-sectoral impacts of the green transition, as labor and capital move across sectors. Policymakers should consider, within the boundaries set by EU rules, a reduction in labor taxes funded by rising revenues from the auctions of emissions allowances, thereby reaping a ‘double dividend’. Further, Romania has much to gain through the inclusion of stronger equity considerations into EU-wide climate policy discussions. Last, the macroeconomic model constructed for this analysis remains available for further development and application by the government for current and future policy questions related to low carbon and green growth. CHALLENGES FOR GREENER GROWTH Overview Although green growth can be a broad concept, the main concern for Romania is moving onto a low carbon growth path while addressing key adaptation deficits. Romania already has obligations on mitigation of greenhouse gas emissions as a member of the European Union (EU), and upcoming and likely future obligations further render mitigation action an inevitable part of Romania’s future. The impacts on Romania’s economy for the years to come, some negative and some positive, merit investigation. This chapter summarizes analysis from the application of a macroeconomic model to provide important insights about the achievement of the EU’s proposal for climate action for 2030 and also for 2050, as well as a framework for the sector analysis presented in subsequent chapters (in particular, energy, transport, forestry, and urban analysis). The other key element in Romania’s greener future is understanding possible climate damages and what adaptation actions warrant analysis (in sectors such as water, agriculture, and forestry). To assess the costs and impact of a lower carbon and green growth path for Romania, economic developments over a long horizon (to 2050) need to be considered despite the uncertainty inherent in such scenarios. For climate mitigation actions, such as building power plants with cleaner fuels or improving energy efficiency through new building standards, the benefits of action will materialize over decades. For climate adaptation actions, the horizon must be at least as long. Climate damages for most countries become more significant 30 and 40 years into the future although the appropriate adaptive response may require action today. The horizon for the scenarios and analysis for Romania extends to 2050—40 years is just about long enough to consider long-lived infrastructure needed for either mitigation or adaptation. Thinking so far into the future is inevitably associated with large uncertainty; but sensitivity analysis around key assumptions, transparency in methodology, and close collaboration with the client and local experts can all act as counterweights. Macroeconomic modeling constitutes the backbone of the analysis, providing a consistent picture of economic impact, taking into account domestic sectoral inter-linkages and international trade flows. General equilibrium models set up a coherent economy-wide framework and allow economic decision making to be the outcome of decentralized optimization by producers and consumers. They simulate the functioning of a market economy, including markets for commodities, for labor, and for capital. They provide a detailed look at how changes in economic conditions are mediated through prices and markets while assuring that all economy-wide constraints are respected. They also enable quantitative examination of how shocks or policies move through the economy and influence its performance and structure. Dynamic processes can be captured, which is important if the time horizon of the modeling is long (as is required for low carbon and green growth analysis). The modeling emphasizes the key economic relationships within Romania and with the EU and the rest of the world. As such, the CGE (computable general equilibrium) model constitutes a backbone for the harmonization of the sectoral work in a consistent and rigorous manner, providing key economic variables needed for sector analysis while assessing multi-sectoral impacts of low carbon and green actions on growth, sectoral output, employment, and fiscal revenues and expenditures. A baseline scenario serves as a benchmark for comparisons of economic outcomes before and after policy actions or investments--a hypothetical path that envisages what would happen under ‘business- as-usual’ or no policy change. Business-as-usual projections are often based on extrapolation of historical trends or adoption of steady-state GDP growth. The simplest of baselines would be a steady-state baseline, in which all physical quantities grow at an exogenous uniform rate while relative prices remain unchanged; this scenario would have the virtue of providing a transparent reference path for the evaluation of policy options. However, such a path is unrealistic, especially over a long time period, limiting the usefulness of the scenario results to policymakers, who need more realistic comparisons. For example, when a country decides on a target for mitigating greenhouse gases, the target is generally defined against a base year, as a certain percent reduction compared to that year. But such a definition provides little indication of the degree of challenge involved in meeting the target. What matters is the size of the reduction compared to the level of emissions in the target year, which lies in the future. This expected level is a matter for projections, determined by assumptions about the growth rate of emissions in the absence of additional policy--the business-as-usual emissions baseline. Faster expected growth translates to faster rising emissions, and the higher is the future emission level in the absence of climate policy, the more stringent are the effective reduction targets and, thus, the costs of abatement. (See Box 2.1 comparing the baseline scenario to the alternative low-carbon green scenarios used in this analysis). Box 2.1. Two low-carbon scenarios provide choices about a greener development path 27 Main scenarios for analyzing the impact of green interventions A macroeconomic model for economy-wide analysis generated scenarios for Romania’s economy through 2050. Sectoral modelling for six overlapping sectors--water, agriculture, forestry, energy, transport, and urban—identified baseline paths for each sector and explored mitigation and adaptation actions. An initial scenario (or baseline) and then two green policy scenarios have been constructed for the analysis, generated by the macroeconomic model and then confirmed by a bottom-up formulation based on sectoral analysis. Energy and transport are the key sectors for mitigating GHGs, along with urban areas, agriculture, and forestry. Adaptation needs were examined at the sectoral level in water, agriculture, and forestry. Baseline scenario. A baseline (or business-as-usual) scenario extrapolates current economic development trends and current policies for Romania to 2050, generating a consensus economic growth path that does not consider any additional mitigation obligations beyond the policies already in place nor the need for adaptation to climate change. Implementation of the EU 2020 Climate and Energy Package, which requires mitigation of greenhouse gas emissions by 20 percent by 2020 compared to 1990, and maintenance of the emissions trading system after 2020 are part of the baseline scenario. This scenario serves as a comparator for the green scenarios. Green scenario. This first low carbon and green growth scenario entails Romania’s meeting the (proposed) 2030 Framework for Climate and Energy requirements which include EU-wide GHG mitigation by 2030 of 40 percent compared to 1990. The sector analysis sets out government policies and investments to meet the targets of the 2030 Framework. This scenario also includes modest adaptation actions (investments and policies) to counter future climate damages. The Green actions constitute a package of ambitious but practical policies and investments to abate emissions and counter climate change. Super Green scenario. The second green scenario requires that Romania contribute appropriately to the (tentative) Roadmap 2050 EU-wide mitigation target of 80 percent compared to 1990. Both mitigation and adaptation actions are examined The Super Green actions are very ambitious and more expensive packages, generally requiring more aggressive implementation of green measures or wider coverage of such measures. Romania’s economy today and looking ahead to 2050 Romania grew faster than the rest of Europe between 2000 and 2008, and from 2010 its economy bounced back following the international financial crisis. Per capita GDP (measured in purchasing power parity) rose from 26 to 47 percent of the EU average in the years preceding EU accession in 2007. Markets opened and institutions were reformed. Legal and institutional reforms were advanced through the process of adopting the acquis communautaire. Generous foreign direct investment and other financial inflows contributed to consumer demand, built up key industries, modernized wholesale trade, and spurred the movement of labor from low-productivity activities like agriculture towards high- productivity activities like manufacturing. Public and private investment in education pushed tertiary education enrollment from 12 to 23 percent. The income of the bottom 40 percent of the population grew by 5.5 percent on average during the 2000-2011 period, a pace slightly above the 4.8 percent growth in the income of all households 27 Most of the comparisons for GHG reductions in this report are reported against 2005 levels because that is the year European emissions trading was established; thus, all practical rules and targets are formulated against 2005. 1990 is cited in the original broad policy statements because it is the EU’s base year for Kyoto and other international obligations and the 4.1 percent average growth. After plunging by near 7 percent in 2009, growth had recovered by 2013, as robust industrial output and an abundant harvest led to double-digit export growth. GDP is 29 expected to expand by more than 3 percent in 2015. 28 (See Figure 2.1) Figure 2.1. Romania’s growth in the 2000’s was strong while GHG emissions declined GDP and GHG emissions, in billions of 2010 euros and Mt CO2e, 1990-2014 Source: GDP 1995-2014 from Eurostat: GDP 1990-1995 staff calculations from ESA 1995 data and ESA 2010 data. GHGs from European Environment Agency (via Eurostat). Economic growth has been boosted since 2000 by the shift in output and employment toward more productive sectors. Romania has experienced a major change in allocation of workers--the proportion of the workforce in agriculture, which is comparatively unproductive, fell from 35 percent in 2002 to 26 percent by 2010. Workers tended to move to sectors that drove economic growth: between 2002 and 2010, the share of employment increased from 4 to 9 percent of GDP in construction and from 16 to 21 percent of GDP in the wholesale/retail sector. These sectors continued to absorb labor through 2010 despite steep declines in output, and workers continued to leave agriculture. Between 2002 and 2010 labor reallocation contributed an average of about 2 percent a year to total growth; the rest was generated by increases in 28 World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. Available at: http://documents.worldbank.org/curated/en/2013/06/18028709/reviving-romanias-growth-convergence- challenges-opportunities-country-economic-memorandum 29 World Bank. 2015. Strengthening Recovery in Central and Eastern Europe - EU11 Regular Economic Report. July 2014 output per worker within sectors.30 Figure 2.2. Services are not yet as important as is typical in the EU Sector shares of production in Romania, 2010 Notes: Sectoral production includes value added plus intermediate consumption. Services: Market Services, Non Market Services; Transport: Transport-Air, Road-Freight, Road-Passenger, Rai–Freight, Rail–Passenger, Water–Freight, Water–Passenger; Other industries and extractives: Coal, Crude Oil, Gas Extraction, Metal products, Electrical goods, Transport equipment, Other Equipment goods, Consumer goods industries, Electric Vehicles; Energy intensive Industries (ETS): Ferrous metals, Non-ferrous metals, Chemical products, Paper products, Non-metallic minerals; Energy (ETS): Oil, Gas, Electricity Supply. Source: World Bank ROM-E3 model data. Romania: Climate Change and Low Carbon Green Growth Program, 2015 Yet the structure of Romania’s economy remains more concentrated in less productive and more energy- intensive sectors than the EU and the OECD despite success in reducing greenhouse gas emissions. Comparing Romania’s structure of value-added to other groups of countries, the biggest difference is the weight in total value-added of agriculture--almost double compared to other EU new member states and three times higher than the EU15.31 The services sector (including both market and non-market services) is relatively small in Romania, below 40 percent of output while, for example, the EU15 has more than half of output from services. Production from energy-intensive sectors exceeds that of the OECD average by some 50 percent. Nevertheless, between the mid-1990s and the late 2000s, greenhouse gas emissions in Romania declined by almost one-third (see Figure 2.1). The country’s success in mitigation was mainly driven by changes in the structure of output towards less polluting sectors as well as sectoral improvements in energy efficiency. Figure 2.3: decomposes the decline in emissions according to the well-known Kaya identity.32 30 World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. Available at: http://documents.worldbank.org/curated/en/2013/06/18028709/reviving-romanias-growth-convergence- challenges-opportunities-country-economic-memorandum 31 The EU15 are the 15 member countries in the European Union prior to the accession of ten candidate countries on 1 May 2004. The EU15 comprise Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom 32CO emissions = Population x GDP/Population x Energy/GDP x CO2Emissions/Energy; Derived from Kaya, Yoichi and Keiichi Yokoburi. 1997. Environment, Energy, and Economy: Strategies for Sustainability. Tokyo: United Nations University Press A decline in the carbon intensity of energy, from fuel switching away from fossil fuels, contributed to a lesser extent. These three factors fully offset the increase in emissions stemming from increased output. As a result, overall carbon dioxide emissions fell during 1995 to 2009 by almost over 40 million metric tons. Figure 2.3: Romania’s carbon emissions fell sharply in the past because of structural shifts Decomposition of reduction in carbon dioxide emissions in Romania, 1995-2009 Notes: Decomposition uses the logarithmic mean Divisia index (LMDI) approach. Source: World Bank staff calculations based on World Input Output Database (WIOD) database, www.wiod.org). The path for Romania’s economy to 2050 is likely to feature growing similarity in income levels and economic structure to the rest of Europe. Such a path continues the trends of the past two decades and the convergence processes observed across the EU. Since 1990, as noted above, Romania’s economy has transformed its sectoral structure, moving strongly towards services, and it has become far less energy- intensive. Going forward, the shift away from agriculture and energy-intensive and polluting heavy industry towards lighter manufacturing and services should continue. Energy intensity should decrease in line with the shifting structure of the economy. Although there is no agreement over whether economic convergence of nations holds overall, the European Union has demonstrably fostered strong convergence among its members and also, to some extent, on candidate countries. The ‘catch-up’ hypothesis is driven by the assumption that productivity growth rates vary inversely with productivity levels. Then it follows that the convergence process stems from lower initial income levels, higher returns on capital, and substantial potential to improve labor participation and productivity, while the country benefits from a diffusion of global technological progress. Over a long forecasting period, such as the 40-year horizon used in this analysis, convergence is a convincing and practical approach to predicting what any individual economy might look like in the distant future. Romania’s mitigation obligations Romania contributes only marginally to the global carbon footprint with a share in GHG emissions of less than one-half of one percent (See Figure 2.4). The EU as a whole is responsible for about 13 percent of global emissions, while China and the US, the largest emitters, are responsible for almost 40 percent of global emissions between them. However, production in Romania is energy intensive, and energy used for each unit of output is the high compared to Europe. The average energy intensity in the EU was 142 in 2013, close to the world average, while Romania stands at 335.22 However, irrespective of Romania’s own carbon footprint, as a member of the European Union, it faces three sets of emissions mitigation obligations: one current; one imminent; and one prospective. Figure 2.4. Romania provides a small contribution to world GHG emissions Global GHG emissions by country, % of total Mexico, 1.7 Other, 28.9 Czech Rep, 0.4 Canada, 2.0 Estonia, 0.1 Brazil, Hungary, 0.2 2.7 Latvia, 0.0 EU15, 11.0 Lithuania, 0.1 EU10 Poland, 1.0 , Japan, 3.6 2.4 Poland, 1.0 India, 5.0 China, 19.2 Slovakia, 0.1 Slovenia, 0.1 Bulgaria, 0.2 Russia, 5.2 Romania, 0.3 US, 18.4 Source: WRI. Total GHG Emissions in 2005 (excludes land use change) (CO 2, CH4, N2O, PFCs, HFCs, SF6) The ‘2020 climate and energy package’ is under implementation until 2020. Approved in December 2008, the EU’s current policies on GHG emissions require comprehensive action by EU members on overall emissions reduction across all sectors in the economy. The 2020 targets include a 20 percent reduction in emissions compared to 1990 levels (a 14 percent reduction compared to 2005); a 20 percent renewable energy target as a percent of gross final energy consumption, including a 10 percent share of biofuels in the transport fuel market; and a 20 percent indicative reduction in primary energy use compared to projected levels under a business-as-usual scenario, to be achieved through energy efficiency improvements. Large installations in energy-intensive sectors are covered by the EU-wide Emissions Trading System (ETS), a cap and trade arrangement33. The overall target of -14 percent for emissions is further divided into a target of - 21 percent for the ETS sectors and -10 percent for all other sectors (non-ETS). The non-ETS targets were 33 Energy intensity is measured as gross inland consumption of energy divided by GDP, or kg of oil equivalent per €1000 of GDP at 2005 prices. Data is from Eurostat. translated into differential national targets varying by income level. Romania is under obligation for emissions from the non-ETS sectors to grow by no more than 19 percent relative to 2005. (See Box 2.2 for details of the ETS).34 The 2030 framework for climate and energy policies was approved in October 2014. The new policy package proposes a binding target to reduce EU domestic greenhouse gas emissions by at least 40 percent below 1990 levels by 2030. This target aims to ensure that the EU is on the cost-effective track towards meeting its objective of cutting emissions by at least 80 percent by 2050. To achieve the overall 40 percent target, the sectors covered by the EU ETS would have to reduce their emissions by 43 percent compared to 2005. Emissions from sectors outside the EU ETS would need to be cut by 30 percent below the 2005 level, and this EU-wide target will need to be translated into Member State targets. A 43 percent greenhouse gas reduction target in 2030 in the ETS translates into a cap declining by 2.2 percent annually from 2021 onwards, instead of the rate of 1.74 percent up to 2020. Table 2.1. The EU plans to cut emissions dramatically by 2050 Proposed emissions reduction for the EU under the 2050 Roadmap GHG reductions compared to 1990 2005 2030 2050 Total -7% -40 to -44% -79 to -82% Sectors: Power (CO2) -7% -54 to -68% -93 to -99% Industry (CO2) -20% -34 to -40% -83 to -87% Transport (incl. CO2 aviation, excl. maritime) 30% +20 to -9% -54 to -67% Residential and services (CO2) -12% -37 to -53% -88 to-91% Agriculture (Non-CO2) -20% -36 to -37% -42 to -49% Other Non-CO2 emissions -30% -72 to -73% -70 to -78% Source: http://ec.europa.eu/clima/policies/roadmap/perspective/index_en.htm The European Union has laid out a vision for mitigation through 2050. A “Roadmap for moving to a competitive low carbon economy in 2050” was published in March 2011 by the European Commission.35 Scenarios were created by combining the four main decarbonization options – energy efficiency, renewable energy, nuclear and carbon capture and storage. Overall emissions for the EU are to drop by 79 to 82 percent, while emissions in the power sector are to disappear (-93 to -99 percent reductions). The Roadmap remains a long-term vision, not a policy proposal, although the 2030 package is consistent with an emissions path that could get the EU to -80 percent by 2050. (See Table 2.1) 34 As noted above, most of the comparisons for GHG reductions in this report are reported against 2005 levels because that is the year European emissions trading was established; thus, all practical rules and targets are formulated against 2005. 1990 is cited in the original broad policy statements because it is the EU’s base year for Kyoto and other international obligations 35 European Commission (EC). 2011. A Roadmap for Moving to a Competitive Low Carbon Economy in 2050. COM/2011/0112 final. Brussels. Available at: http://eur-lex.europa.eu/legal- content/EN/TXT/?uri=CELEX:52011DC0112 Box 2.2. The centerpiece of EU climate policy is European emissions trading The EU Emissions Trading System (EU ETS) The ETS provides an EU-wide limit on greenhouse gas emissions. First launched in 200536, the EU ETS system is an international system for trading GHG emission allowances. It is the first and largest greenhouse gas (GHG) trading scheme in the world, now covering about 45 percent of the EU’s GHG emissions. The system works on the “cap and trade” principle, in which a limit is set on the total amount of GHG emissions and the 11,000 or so heavy energy-using installations, who are required to participate, must secure emission allowances to cover their own emission and can trade with one another as needed. The EU ETS system is divided in three trading periods. The first period covered the period 2005-2007 and constituted ‘learning by doing’ by establishing national caps and mostly free allocation of allowances. In phase two (2008-2012) which coincided with the first commitment period of the Kyoto Protocol, three additional countries (Iceland, Liechtenstein and Norway) joined. Additional greenhouse gases were included. The system was extended to the aviation sector (in 2012). More auctioning of allowances occurred. The third phase of EU ETS runs from 2013 to 2020 and cuts allowances to reduce GHG emissions by 2020 by 21 percent compared to 2005. More harmonized rules have been put in place, in particular: i) a single, EU-wide cap on emissions (replacing national caps); ii) for each year after 2013, the overall cap decreases annually by 1.74 percent of the average total quantity of allowances issued annually during 2008-2012; iii) auctioning (rather than free allocation) as the default method for allocating allowances (and up to half of allowances are expected to be auctioned during phase three); and iv) about 90 percent of allowances will be distributed to EU member states (based on emissions shares in 2005), and at least half of auctioning revenues must be used by member states for climate and energy related purposes such as energy efficiency, renewables, research, and sustainable transport. Source: European Commission (2015), “The EU Emissions Trading System (EU ETS)”, Climate action,http://ec.europa.eu/clima/policies/ets/index_en.htm. Projections of climate change in Romania to 2050 Future climate scenarios were developed, showing rising temperatures and falling precipitation. Climate baselines were developed using climate data for each of Romania’s river basins, derived from daily historical temperature and precipitation observations provided by the Romanian National Meteorological Administration (NMA, or Administratia Nationala de Meteorologie). NMA has developed a gridded 10km x 10km dataset using the 160 stations of Romania. These gridded meteorological data are available from 1961 to 2013 and were developed using a model to fill in spaces between stations. The baseline climate data are combined with projections of changes in temperature and precipitation obtained from GCMs to 36 The ETS was set out in Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community create daily and monthly time series of future climate from 2015 to 2050. In this assessment, three climate scenarios are developed (low impact, medium impact, and high impact). These climate scenarios were developed for Romania based on the most positive, the median, and most negative changes in irrigation water requirements for maize, estimated by running the crop model through 2050 across 17 available combinations of GCMs and Reference Concentration Pathway (RCP) scenarios employed by the Intergovernmental Panel on Climate Change (IPCC). The climate scenarios are presented in Table 2.2 and the impact on precipitation and temperature is shown in Figures 2.5 and 2.6. All three scenarios show rising temperatures over coming decades. The pattern for precipitation is less clear. But it is important to remember that annual national averages are not what matter for water availability and agricultural production. Table 2.2. Climate Scenarios Used to Develop Future Climate for Romania CLIMATE GLOBAL GENERAL CIRCULATION MODEL BASIS FOR THE RELEVANT IPCC SCENARIO SCENARIO EMISSIONS SCENARIO Model for Interdisciplinary Research on Climate High Impact RCP 8.5 (MIROC) ESM Medium Geophysical Fluid Dynamics Laboratory (GFDL) ESM2M RCP 4.5 Impact Low Impact Geophysical Fluid Dynamics Laboratory (GFDL) ESM2G RCP 8.5 Notes: RCP is a Representative Concentration Pathway as used in the fifth Assessment Report from the Intergovernmental Panel on Climate Change. AN RCP is gas concentration trajectory, and each is named after a possible range of radiative forcing values in the year 2100 relative to pre-industrial values. RCP 8.5 is a ‘business-as-usual’ pathway with no mitigation so emissions continue to rise throughout the 21st century. Emissions in RCP 4.5 peak around 2040, then decline. Source: Water sector technical paper. Figure 2.5: Average temperatures under three climate scenarios through 2050 Source: Water sector technical paper. Figure 2.6: Average precipitation under three climate scenarios through 2050 Source: Water sector technical paper. Baseline scenario for economic development to 2050 The likely path for Romania’s economy through 2050 before considering low carbon and green growth actions is generated by a macroeconomic model. Baseline scenarios can be created in different ways. Here the baseline relies mainly on the official long-term forecasts prepared by the government’s National Commission for Prognosis (CNP, Romanian acronym). It also draws on economic convergence theory and utilizes information from empirical studies, reviews of sector strategies, and consultations with experts and stakeholders. A consistency framework is provided by the computable general equilibrium model, including consideration of Romania’s links to the rest of the world. (The methodology section that follows provides details about the model.) Real incomes in Romania are expected to converge towards the European Union average but at a modest pace, averaging 3 percent annual growth during 2010-2050. These growth rates are higher in earlier year and then moderate, from just below 3 percent during 2010-20 to 1.6 percent during 2040 - 2050. But Romania’s rate of expansion remains twice as fast as the EU as a whole and ahead of those of the OECD although below those in the rest of the world (non-OECD countries). (See Figure 2.7). Projected growth comes from the official long term forecasts of the National Commission for Prognosis (CNP, Romanian acronym), which reflect a broad consensus that income per capita in Romania is set to catch up gradually to EU levels. Total factor productivity gains and capital accumulation are expected to be the main growth drivers, consistent with the Solow model. Romania’s total factor productivity (TFP) growth is projected to decline from 1.7 percent annually at the beginning of the period towards 1.5 percent at the end, higher rates than in the EU because Romania farther from the technological frontier, making it easier to adopt innovations from abroad and to benefit from foreign direct investment which will bring both organizational and technological innovations. (See Figure 2.8). Figure 2.7: Romania’s growth projected to outpace the EU and the OECD through 2050 GDP growth rates in the baseline during 2010-2050 Source: Projections in ROM-E3 model. Figure 2.8: Steady but modest total factor productivity improvements keep growth positive Solow decomposition of GDP growth in Romania, 1997-2050 Note: The chart is based on the standard Solow analysis with a Cobb-Douglas production function ( Y = AK α L1−α ). Consequently, GDP growth can be decomposed as ∆ln(Yt ) = ∆ln(At ) + α ∆ln(K t ) + (1 − α) ∆ln(Lt ). The first component is contribution of TFP, the second-capital and the third – labor. Capital is calculated on the basis of investment data, labor force comes from employment statistics. TFP was calculated implicitly, assuming that share of capital in GDP (α) is equal to 40 percent and depreciation rate ( δ) is equal to 6 percent. Source: World Bank staff estimates based on CNP forecast. Romania’s population and labor force are continuing to shrink. Population, depleted by emigration, is projected to decline by 11.8 percent by 2050 (compared to 2010).37 The labor force, affected by aging, will receive only a small boost from improving labor force participation from its current low levels but not enough to offset the shrinking number of workers. The unemployment rate is forecast to remain close to 7 percent. Labor productivity is estimated to grow by more than 3 percent annually up to 2040 and more than 2 percent thereafter. In the baseline, almost all economic sectors are projected to grow, but their growth rates will be quite diverse. These projections took into account the constraints imposed by possible developments in global markets (both in the EU and outside the EU). Overall, the trend away from energy-intensive sectors and towards higher productivity sectors will continue. Agriculture’s share will fall due to reallocation of resources to low-end services such as trade and transport. According to CNP forecasts, services will gain about 3 percentage points during 2010- 2050 period, remaining much below the EU average. Meanwhile, industry is to maintain its value-added share due to existing comparative advantages. The economy should follow the general historical growth pattern observed in more advanced EU countries alongside rising incomes. However, since sectoral transformation is a slow process, sectors such as agriculture and industry will continue to have a higher share in the Romanian economy than in the EU, and this will also be reflected in employment. Romania is to keep its specialization in selected primary sectors in comparison to the EU. (See Figure 2.9). 37 2015 Ageing Report prepared by DG ECFIN (DG ECFIN, 2014). Figure 2.9. Output shifts from agriculture to services to 2050 Romania’s production by sector in the baseline scenario Notes: Notes: Sectoral production includes value added plus intermediate consumption. Services: Market Services, Non Market Services; Transport: Transport-Air, Road-Freight, Road-Passenger, Rai–Freight, Rail–Passenger, Water–Freight, Water–Passenger; Other industries and extractives: Coal, Crude Oil, Gas Extraction, Metal products, Electrical goods, Transport equipment, Other Equipment goods, Consumer goods industries, Electric Vehicles; Energy intensive Industries (ETS): Ferrous metals, Non-ferrous metals, Chemical products, Paper products, Non-metallic minerals; Energy (ETS): Oil, Gas, Electricity Supply. Source: ROM-E3, using CNP projections on Value added at basic prices. Under the baseline scenario, EU countries comply with the 2020 climate and energy package, which requires participation in the EU Emissions Trading Scheme (ETS). The package sets a target of 20 percent reduction in GHG emissions for the EU as a whole from 1990 levels (equal to a 14 percent reduction compared to 2005 levels). Also, an increase to 20 percent in final energy consumption produced from renewable resources is required, and an indicative target was put in place for improvement of energy efficiency by 20 percent compared to the EU baseline level for 2020. Post-2020, the rules underlying the third phase of the EU ETS are assumed to continue (although they are only legally binding until 2020, the probability of the ETS disappearing completely after 2020 seems low). These rules include: a harmonized single EU-wide cap instead of national caps, harmonization of monitoring and reporting, and full auctioning of allowances within the EU ETS. Post-2020, the emissions cap decreases annually by 1.74 percent of the average annual total quantity of allowances issued by the Member States in 2008-2012.38 As a result, 38 For non-EU countries, in the baseline scenario, they commit to their 2020 emission pledges. There have been several actions at global level with the aim to commit countries to emission reductions. In 1992, countries joined the United Nations Framework Convention on Climate Change, to cooperatively consider what can be done to limit average global temperature increases and the resulting climate change, and to cope with whatever impacts were, by then, inevitable. In 1995, countries launched negotiations to strengthen the global response to climate change, and two years later, adopted the Kyoto Protocol. The Kyoto Protocol legally binds developed countries to emission reduction targets. In greenhouse gas emissions related to ETS entities declines to 21 percent below 2005 levels in 2020 to 34 percent lower in 2030 and 53 percent in 2050. (See Figure 2.10). The main policy assumptions on climate and energy in the baseline scenario are summarized in Table 2.3: Table 2.3: Overview of the main assumptions in the baseline scenario Regions Targets 2020 2030 2040 2050 GHG/Renewable Energy Sources/Energy Efficiency targets in the EU compared to 2005 ETS -21% 1.74% annual reduction in CAP of 2020 Other EU GHG 14% Non - ETS -10% Constant carbon value of 2020 (if any) Romania GHG Non - ETS +19% Constant carbon value of 2020 (if any) Other EU RES 20% constant share 20% Romania RES 24% constant share 24% Energy EU Efficiency no requirement GHG targets outside of the EU Non-EU GHG Copenhagen COP-15 pledges constant carbon tax (if any) Other assumptions Fossil Fuel Prices Fossil fuel World prices 2014 IEA World Energy Outlook - Current Policies scenario Recycling Carbon Revenues Recycling EU Carbon Rev. Reduction of general taxes (GT) Source: World Bank staff. 2009 the Copenhagen Accord was drafted. Countries submitted emissions reductions pledges or mitigation action pledges. Figure 2.10: The European Union’s GHG emissions will continue to fall with no additional policy action ETS GHG emissions relative to 2005 during 2020-2050 in the baseline scenario Source: ROM-E3 model simulations. Over the 40-year horizon, the energy intensity of the Romanian economy is projected to continue to decline, offsetting expanding output such that GHG emissions are close to stable. The energy intensity of production and the carbon intensity of energy are projected to decline. The reduction of energy intensity of GDP can be attributed to autonomous energy efficiency gains, structural changes of the economy away from energy intensive activities and sectors (such as ferrous and non-ferrous metals, chemicals, and cement industries), take-up of more efficient energy equipment by consumers, and the reaction of energy consumers to higher energy prices. The next most important factor is the ongoing shift in the structure of value-added towards less energy-intensive sectors—away from agriculture and industry to services--which was the main driver of emissions decline in the EU over the last two decades. Third is the reduction in energy-related CO2 emissions compared to final energy demand, which corresponds to a higher penetration of carbon-free energy sources into the energy mix and substitutions within the fossil fuel mix towards less carbon-intensive fossil fuels, for example, natural gas substituting for coal or oil (that are more carbon- intensive and have lower energy efficiencies when used in final demand sectors and for electricity production). Figure 2.11 provides a decomposition of energy-related CO2 emissions during 2010-2030 and 2030-2050. Figure 2.11: Romania’s carbon emissions will be close to stable going forward Decomposition of reduction in carbon dioxide emissions in Romania, changes in 2010-2030 and 2030- 2050, in MtCO2e Notes: Decomposition uses the logarithmic mean Divisia index (LMDI) approach. Source: World Bank calculations based on projections from ROM-E3 model. METHODOLOGY AND MAIN FINDINGS Methodology The macroeconomic modeling was undertaken using a customized CGE model, built on the blueprints of the GEM-E3 model39 and in collaboration with the Romanian Government. The “ROM-E3” model (Romania Economy-Energy-Environment model) is a recursive dynamic computable general equilibrium model that covers the interactions between the economy, the energy system and the environment. The model is Romania-specific but also captures the interaction of the country with international markets--aggregated into five countries/regions (Romania, the EU-15 and other EU new member states, other industrialized countries, and developing countries). The international features allow it to analyze both the impact of EU policy choices on global markets and international spillovers triggered by emission abatement policies of other major industrialized regions.40 The model contains 28 economic activities or sectors. While in standard global CGE models only CO2 from combustion is modeled, in 39 For detailed documentation, see Capros P., Van Regemorter D., Paroussos L., Karkatsoulis P., Fragkiadakis C., Tsani S. and Charalampidis I. The GEM-E3 Model Reference Manual. Available at: http://www.e3mlab.ntua.gr/manuals/GEMref.PDF 40 The non-EU regions do not participate in carbon trading or offsets but rather set a uniform domestic carbon tax. ROM-E3 all greenhouse gases are modeled, including process-based emissions from agriculture and industry. The model’s horizon stretches to 2050, and institutional settings and policy instruments for climate policy implementation are included, including the complex rules for the EU Emissions Trading System (ETS) and non-ETS sectors. Key sectors driving emissions are energy and transport, and a detailed bottom-up representation of each is included in the model.41 Power supply is modelled by ten representative generation technologies whose market shares and cost structures are consistent with energy balances. The market shares and capital costs of power generation technologies have been harmonized with the results of energy modeling (see Chapter 3). For transport, major categories of transport 42 are represented, with two different categories distinguished by purpose: i) private, including households’ expenditures for transport equipment (cars, motorcycles) and for public transportation (leisure trips, commuting trips), and ii) business, including firms’ expenditures for transportation of goods (freight transport) and employees (passenger transportation paid by business). Data sources and main assumptions are important to note, and the model includes some key market imperfections. The ROM-E3 model is calibrated to a base year (2010) dataset that includes full Social Accounting Matrices for each country/region represented in the model.43 The key exogenous variables of the model are: total factor productivity, technical progress, fossil fuel prices, labor force, minimum consumption of households (adjusted based on population changes), public consumption, taxes and subsidies, shares of different technologies in power generation, and sectoral growth expectations. The labor market includes involuntary unemployment and fiscal instruments such as indirect taxes, subsidies, duties, and income taxes are modelled. Figure 2.13 explains how the baseline and policy scenarios are run. 41 In the macroeconomic model, only electricity generation is modelled in detail, rather than the entire energy sector which also includes heat production and energy sector own-use (under the standard IEA/IPCC definition). 42 Public road transport (for passengers), road transport (for freight), rail transport (for passengers), rail transport (for freight), maritime transport (inland), and air transport. 43 The model is calibrated on the GTAP v8.1 database, with a base year of 2007. The Input-Output tables for Romania were updated to 2010 using national statistical data, and 2010 was the base year used in ROM-E3. GTAP is Purdue University’s Global Trade Analysis Project database Figure 2.13. Modelling scenarios follow a careful and detailed procedure The modeling steps for the baseline and policy scenarios in ROM-E3 model Source: Macroeconomic modeling technical paper. Romania: Climate Change and Low Carbon Green Growth Program, 2015 Baseline scenario Policy scenarios 1. Data and software 5. Policy measures • GTAP8.1, Eurostat, and shocks • NSO, CNP, UNFCCC • Emissions constraints and carbon taxes • Programmed in GAMS • Taxes, subsidies, transfers • Exogenous shocks 2. Algebraic formulation of ROM-E3 model 6. Policy scenarios • Dimensions: sectors, regions • Changes in model parameters, policies or • Markets, agents, bottom up exogenous assumptions • Production functions and nests • New optimal paths • Green 2030 and Super Green 2050 as reference scenarios 3. Calibrations to the base year 2007 (2010) • Reflection of the base year 7. Sensitivity analysis data, especially I-O flows • Fiscal scenarios • Deriving parameters from • Equity scenarios data • Fossil fuel shocks • Sensitivity to external parameters e.g. elasticities 4. Dynamic calibration to the of substitution future (2050) • Based on external projections • Optimal path, given constraints from adopted policies The ROM-E3 model has been used to evaluate alternative GHG emission reduction scenarios-- the Green and Super Green scenarios, in addition to the baseline. The baseline was presented above. The two green scenarios are defined below. The Green package aims to quantify what is already agreed about EU commitments for mitigation in 2030, specifically the 40 percent emissions reduction by that year, but numerous details remain to be decided, in particular the national targets that will aggregate to the overall non-ETS abatement effort. The Super Green package aims to quantify implementation of the Roadmap 2050, which is a broad strategy document with no legally binding power. The Green scenario imposes compliance with the main features of the 2030 framework for climate and energy policies. As determined in the October 2014 decision of the European Council, the 2030 framework sets an all-EU target for emissions reduction of 40 percent compared to 1990. For ETS sectors, EU-wide carbon trading ensures equal prices of emissions abatement across the EU in all scenarios. The sectors covered by the EU emissions trading system (EU ETS) would have to reduce their emissions by 43 percent compared to 2005.44 Emissions from sectors outside the EU ETS would need to be cut by 30 percent below the 2005 level on average. While the EU ETS operates as a single market, differential emission reduction targets are to be imposed for the non-ETS segments of the respective EU economies. For non-ETS sectors, the model assumes that each EU country imposes a domestic CO2 tax which equalizes marginal abatement costs only across each country’s domestic non-ETS emission sources. This assumption is a shorthand for the most efficient possible way for each EU member state to meet its individual non-ETS target. In reality, countries will likely use a mix of policy tools, including taxes, subsidies, standards and other regulation, and other measures. In the Green scenario, the revenues from auctioned ETS allowances and domestic taxation of non-ETS emissions are recycled through general taxes (because no restrictions on use of auction revenues have yet been set; however, it is likely that the EU will restrict use of revenues as it does under the 2020 climate package.)45 A more ambitious mitigation scenario--Super Green --reflects the reduction of emissions by almost 80 percent compared to 1990 levels for developed economies. In order to stabilize GHG concentrations at safe levels (i.e., 450 ppm according to the UNFCCC), there is a need for global action. The Super Green scenario imposes an emissions constraint on richer countries (the EU and OECD) for 2050 while emissions are allowed to increase in line with the baseline path for developing countries. According to the milestones set in the March 2011 “2050 Roadmap for the EU”, the EU should prepare for reductions in its domestic emissions by 80 percent by 2050 compared to 1990. Further, all reductions of EU emissions should come from within the EU itself and not result from carbon offsets. 44 2005 was the first year of ETS trading and so is the year against which emissions reductions are measured 45 Under the current 2020 package, at least 50 percent of auctioning revenues are to be used by Member States for climate and energy related purposes. Table 2.5. GHG mitigation for the EU under the alternative scenarios quantified by the ROM-E3 model % changes from 2005 Target for 2020 Target for 2030 Target for 2050 Baseline 34% (ETS only) Green 14% (EU28 target) 43% (ETS only) Super Green 78% (EU28 target) Note: The 78% GHG reduction target relative to 2005 is equivalent to 80% relative to 1990. Source: World Bank staff based on EU documents. Main Findings The Green scenario imposes only modest costs on Romania’s economy . EU emissions trading in the model determines how the overall EU ETS reduction of 43 percent compared to 2005 will be most efficiently allocated across countries. (See Figure 2.14). For Romania, energy-intensive sectors must reduce emissions by 24 percent by 2030 or about 12 percentage points more in 2030 compared to the baseline pattern of ETS emissions. Total emissions for Romania will decline by 21 percent by 2030. Together, this additional mitigation compared to the baseline will reduce GDP by 1.1 percent in 2030 compared to baseline. (See Table 2.6). Employment is harmed more, with a reduction of 1.7 percent. Figure 2.14: EU emissions trading allocates needed mitigation efficiently across countries Total GHGs under each scenario for Romania and the rest of the EU, as % change from 2005 Source: ROM-E3 model; Romania: Climate Change and Low Carbon Green Growth Program, 2015 Moderate effects at the economy-wide level mask significant output, employment, and trade effects at the sectoral level, but energy-intensive and trade-exposed industries are not devastated by emissions abatement. Energy, extractive and energy-intensive sectors lose in output terms, while services and light industry win. Declines in output of over 10 percent are recorded for fossil fuel extraction, agriculture, oil products, and power supply. The higher costs of production for those sectors in which (fossil fuel) energy inputs represent a significant share of direct and indirect costs leads to a loss in competitiveness, depressing production. The strongest boost comes to production of electrical goods, other equipment, transport equipment, and non-ferrous metals. In the new equilibrium, real wages are lower, and unemployment rises. Two alternatives within the Green scenario generate positive differences in GDP and employment impact, but their scale is not sizeable. Table 2.6. Macroeconomic impacts of the green scenarios compared to the baseline, in % of GDP Green Super Green in 2030 in 2050 in 2030 in 2050 Impact on GDP: -1.1 -2.1 -1.4 -4.0 w/ Double Dividend w/ Low -1.0 -2.0 -0.7 -3.2 Fuel Price -1.0 -1.8 -1.3 -4.0 Impact on Employment: -1.7 -1.4 -2.2 -5.3 w/ Double Dividend w/ Low -1.5 -1.3 -0.9 -4.1 Fuel Price -1.2 -1.0 -1.7 -5.3 Source: ROM-E3 model. Romania: Climate Change and Low Carbon Green Growth Program, 2015 If the revenues from auctioning ETS allowances in Romania were recycled through a reduction in labor taxes, the output and employment impacts would be smaller, but the improvement would be moderate. The standard tax recycling option used in the Green scenario is that public revenues are used to reduce general taxation. A variant has been quantified—Double Dividend--where tax revenues are used to reduce social security rates for employers. This implies lower labor costs, which partly offsets the cost impacts of carbon prices on production costs and mitigates upward pressure on prices overall. Thus, loss of competitiveness is partly offset, and domestic demand is less depressed. The decrease in the cost of labor sustains demand for labor and, as a consequence, the reduction in wage income is less. Together, the impact of the Green emissions targets on private consumption is lower than in the alternative taxation case. This option also slightly benefits employment, by 0.2 percentage points when compared to the Green scenario. Importantly, any such recycling option would have to follow EU guidelines and rules, which are not yet determined for the 2030 framework. Romania benefits only slightly from halving of oil prices through 2030 as compared to the baseline scenario. The gains of the Low Fuel Price alternative relative to the Green scenario are much bigger outside Romania—for the other new member states or for the EU15. This is because terms-of-trade effects are more pronounced for larger net energy importers. If Romania were to perform the same emissions reduction effort in 2030 under lower fossil fuel price, the country would benefit from access to low cost energy resources. However, product prices in other countries would decrease and so Romania will increase its imports, hence reducing the positive effect of low fossil prices on its GDP. The positive effects for private consumption are much more significant (a difference of 1.5 percentage points). Maintaining the 2030 framework through 2050 allows assessment of the continuing impact of unchanged 2030 policies. Overall emissions for Romania will continue to decline, reaching 26 percent below 2005 levels by 2050 while the EU as a whole would reduce emissions by 44 percent. Romania’s emissions from ETS sectors would shrink by 60 percent by 2050 with no additional actions but only the maintenance of the 2030 framework (and the ongoing reduction of ETS allowances by 2.4 percent each year). The cost to Romania in GDP in 2050 is estimated at 2 percent while employment will be lower by 1.7 percent. The Super Green scenario imposes distinctly larger costs on Romania’s economy. For the EU overall to cut emissions by 78 percent by 2050, Romania’s contribution will be similar: -72 percent. By 2030, Romania’s GHGs will need to be 37 percent below 2005, (See Figure 2.14) and its energy-intensive sectors must reduce emissions by more than 50 percent below 2005 or 26 percentage points below the baseline pattern of ETS emissions in 2030. In 2050, GDP losses for decarbonizing the EU economy are around 1.6 percent and almost four percent for Romania. Employment losses for Romania come to above five percent. Romania suffers a much larger adjustment cost than the EU average mainly because: i) it provides larger potential for cost-effective abatement options, and ii) in the baseline scenario, the energy sector of Romania is still dominated by fossil fuels; hence, it must be restructured more thoroughly than the EU average. At the same time, a large part of the equipment required to decarbonize the Romanian economy is to be imported. In the Super Green scenario, lower fossil fuel prices could marginally mitigate the adverse impacts of rising carbon prices. Compared to the Super Green scenario with higher fuel prices, lower energy costs do not affect GDP, while private consumption could gain around one percent as consumers would benefit from lower energy bills for imported fuels. In the Super Green scenario, it has been assumed that developed countries globally undertake intense GHG mitigation action consistent with a 450 ppm target. It can be expected that this action will have an impact on fossil fuel prices. The reduction of fossil fuel prices due to global climate action decreases overall prices and costs, allowing consumers to maintain demand and compensate for the additional investment costs needed for energy restructuring purposes. Thus, lower fossil fuel prices mitigate the adverse impacts of carbon prices and can even offset the depressive demand effect due to decarbonization. This holds mainly in developed countries which have high fossil fuel prices and less so in developing countries where fossil fuel prices are subsidized and taxation is low. The Double Dividend scenario for 2050 lightens the impact of the Super Green scenario by around one percentage point on growth. Instead of recycling back to the economy through reductions in general taxation, carbon tax revenues are used to reduce labor costs (through reduction in employers’ social security contributions). Labor cost reductions result in net competitiveness gains for labor intensive industries (e.g. services), and they support employment delivering a solid 1.4 percentage points of improvement. CONCLUSIONS AND RECOMMENDATIONS After accounting for economy-wide impacts and feedback as well as interactions globally, the costs of implementing the imminent EU 2030 climate framework are modest for Romania’s economy. EU emissions trading allocates mitigation efficiently across EU member states via a uniform carbon price (the emissions allowance price that clears the ETS market). Romania can meet the 2030 obligations by cutting GHGs by 34 percent by 2030 compared with 2005 or by 10 percentage points compared to baseline emissions at a cost of 1.1 percent of GDP and 1.7 percent of employment. Simply maintaining likely 2030 policies until 2050 will reduce emissions to about one-third below 2005 levels by 2050 for Romania and to near 45 percent lower for the EU. Importantly, the relatively modest overall cost masks highly variable impacts across sectors, with more energy-intensive sectors suffering much higher dislocation. The same approach to assessing the prospective EU Roadmap 2050 finds a heavy burden in costs for Romania’s economy. Reducing overall emissions by more than 70 percent and ETS emissions by near 80 percent by 2050 will leave Romania’s output four percent lower and employment almost five percent lower. This path represents a radical shift compared to the current EU 2020 policies or even the upcoming 2030 framework. The government needs to be prepared to monitor the cross-sectoral effects of the green transition and consider measures aimed at facilitating the reallocation of labor and capital from one sector to another. Mitigation measures induce differing economic repercussions across sectors, and the costs of adjustment are borne mainly by energy-intensive and trade-exposed sectors. The estimated value-added patterns in energy-intensive sectors, such as power and heavy industry, reveal higher declines in output and employment than in the rest of the economy through 2030/2050. These sectors play an important role in a small and open economy such as Romania, and the government may wish to consider appropriate measures to assure targeted assistance for displaced workers. A reduction of labor taxes seems to be a smart option to channel rising revenues from auctioning of ETS allowances, given its positive impact on GDP, sectoral output, and employment, if such a policy falls within EU rules. While economy-wide models are designed to focus on real sector developments over long horizons, they also offer insights on fiscal issues. The ROM-E3 model assumes fiscal neutrality so that the impact of mitigation options on fiscal expenditures or revenues must be financed by offsetting changes in spending or taxes. However, a choice can be made of which taxes to reduce. A reduction in social security contributions (labor taxes) is supportive of job creation and a reduction of the unemployment rate. This phenomenon is referred to as the ‘double dividend,’ i.e., that a tax on a ‘bad’ (GHG emissions) allows the reduction of a tax on a ‘good’ (employment). However, the government’s ability to recycle revenues is likely to be constrained by upcoming EU guidelines and rules under the 2030 framework. Such rules, if similar to those under the EU 2020 climate policy, will require revenues to be invested in low-carbon urban mobility, energy efficiency measures and renewables support. From the viewpoint of cost efficiency and economic performance, Romania has much to gain through the inclusion of stronger equity considerations into EU-wide climate policy discussions. Because the Romanian economy is projected to expand faster than the EU and because Romania remains one of the poorest EU countries, the constraints on emissions in its non-ETS sectors for 2030 should be looser on equity grounds. Last, the macroeconomic model constructed for this analysis remains available for further development and application by the government for current and future policy questions related to low carbon and green growth. The ROM-E3 model was built in collaboration with Romanian government experts, and it is being transferred to the National Commission for Prognosis. The government has the opportunity to apply this model to numerous questions about EU, global, and national policies related to emissions mitigation and other green growth issues. The model also can be applied to a large set of policy questions not related to green growth. There is also the possibility of developing this model further to strengthen its ability to answer questions of interest to the government. CHAPTER 3. HOW CAN ENERGY SUPPLY AND DEMAND BE TRANSFORMED? CHAPTER SUMMARY Romania’s emissions have dropped significantly from their peak in the late 1980s as a co-benefit of structural transformation and due to the growth in the share of low carbon energy sources. The energy sector in Romania46 is characterized by a relatively high share of zero-carbon sources, which constitute one-quarter of primary energy supply and 45 percent of electricity generation and include hydro- generation, nuclear, wind, biofuels, and solar photovoltaic. Romania participates in EU emissions trading (the Emissions Trading System, EU-ETS) for energy-intensive sectors which is designed to secure mitigation across the EU of 21 percent compared to 2005 for those sectors, as the centerpiece of the European Union’s (EU) current climate rules. Those rules are expected to tighten for 2030 and further for 2050. In addition, while the energy intensity of Romania’s economy has been decreasing, it is still one of the highest in the EU. However, continuing de-carbonization of Romania’s energy sector is a challenging process and will requires further transformation of power generation: 46 percent of primary energy and 40 percent of generation still depend on coal47 and oil. As a result, the energy sector remains responsible for almost 60 percent of Romania’s total emissions (excluding LULUCF48), and climate change mitigation targets beyond EU2020 cannot be achieved without significant action in the energy sector. Moreover, the country faces substantial investment needs irrespective of mitigation obligations to replace obsolete fossil-fueled electricity plants; and switching to renewable power to reduce energy sector emissions at the same time augments those costs. Nonetheless, with good policies and appropriate investments, the energy sector in Romania has the potential to become an engine of economic growth. Analysis and modeling aimed to find the best solutions for Romania’s energy supply mix given the country’s current, imminent, and prospective mitigation obligations. Such solutions were modeled as satisfying future energy demand at a minimum cost while meeting emissions mitigation requirements. A TIMES/MARKAL model was used for energy supply modeling while the potential for reduction of energy demand in end-use services through energy efficiency measures was estimated using a tool--Energy Service Demand Analysis (ESDA)--developed for this purpose. Green policy measures were evaluated under three scenarios: Baseline (current EU policy with 2020 targets), Green (likely EU 2030 targets), and Super Green (possible EU 2050 targets). The findings identify optimal power generation and energy efficiency measures to meet the emissions mitigation requirements of the Green and Super Green scenarios. Under the Baseline scenario, energy sector emissions are found to fall to two percent below 2005 levels by 2050, while this reduction is 26 percent in the Green scenario, and 43 percent in the Super Green. Within the energy sector, electricity emissions will drop by 36, 72, and 97 percent respectively. Inclusion of a set of selected energy efficiency measures is critical for the implementation of both the Green and Super Green scenarios, as these 46 The energy sector is defined here based on the standard IEA/IPCC definition and includes electricity and heat production and energy sector own-use. Note that the energy sector model applied to Romania includes both energy supply and energy demand (or end-users). 47 Note that coal includes lignite (or brown coal), sub-bituminous, bituminous, and anthracite (hard coal). 48 Land use, land-use change and forestry measures deliver significant abatement, are cost efficient, and require a modest implementation effort. Romania can meet the mitigation obligations likely under the EU 2030 framework in energy and electricity at moderate costs; but the prospective requirements of the EU 2050 Roadmap, which requires at least 80 percent reduction in emissions and the virtual elimination of emissions from the power sector, are likely to be both expensive and challenging to implement. The investment effort in the power sector (including demand management) required for the implementation of the Green scenario (to meet 2030 requirements) is estimated at €37 billion (present value) 49 or an average annual 1.1 percent of GDP through 2050, while the investment costs of the Super Green scenario (to meet 2050 requirements) are projected to amount to €54 billion (present value) or an average annual 1.7 percent of GDP. The required investments shift upwards after 2030 in both green scenarios, as remaining fossil-based plants are replaced with renewable and nuclear capacity. A lower carbon path for Romania’s energy sector will impose significant costs and complex planning challenges on the sector, in particular on power generation. Achieving emission reduction targets beyond the EU 2020 targets will require Romania to abandon plans for new coal-based power generation capacity and life-extension of existing plants. It will also require significant additional renewable generation capacity and, therefore, a regulatory environment that would promote it. Nevertheless, the government cannot be distracted from critical near-term sector reforms, many of which lay essential conditions for the success of the long-term green transition. Although the costs of greening are projected to rise significantly over time and as requirements for emissions reduction tighten, a lower carbon energy sector needs to be part of Romania’s long-term planning. In support of that enduring objective, the TIMES MARKAL supply model and the Energy Service Demand Analysis tool constructed for this analysis remain available for further development and application by the government. CHALLENGES FOR GREENER GROWTH Overview Romania's economic growth and energy consumption have been decoupling since the early 1990s, and the energy intensity of the economy50 has been continuously decreasing. However, a significant increase in energy demand is expected to accompany future growth. After the large contractions of the economy and energy consumption in the 1990s, Romania’s GDP recovered, expanding by 53 percent during 2000 to 2011, while energy demand remained flat. This slow growth of energy demand was in large part due to structural shifts of the economy toward higher-value-added manufacturing and services and away from energy-intensive industries, as well as significant improvements of energy efficiency within industries. As a result of these two factors, energy intensity of the economy has been continuously decreasing for more than two decades and is now 240 percent below its 1989 level (Figure 3.1). In the medium- to long-term, energy consumption patterns are expected to converge toward those of high-income EU countries and energy demand will increase, in particular, due to growth in demand for transportation and services. These changes 49 At a five percent discount rate. The discount rate was selected as a mid-range social discount rate (the typically used social discount rates range from 4 to 6 percent). 50 Energy intensity is measured as primary energy consumption (g of oil eq.) per $1 GDP (constant 2005 US$). are already occurring: from 2000 to 2011, energy used in transport grew by 25 percent and in the services sector by 260 percent (although from a relatively small base), while residential and industrial demand declined by 6 and 21 percent, respectively.51 Figure 3.1. Growth and energy consumption have been decoupling and energy intensity continuously declining since early 1990s Trends in growth, energy use, and energy intensity Source: calculations based on WB data from 2015. At present, primary energy consumption is characterized by a relatively high and growing share of zero- carbon energy sources, leading to a shrinking carbon footprint of the energy sector. This trend has been supported by Romania’s high renewable energy potential and production, as well as by nuclear power production. From 1990 to 2012, the share of primary energy supply from the zero-carbon sources (nuclear, hydro, wind, solar, and geothermal) increased from under two to 12 percent, and the share of renewable sources grew from 2.5 to 15 percent of the total. At the same time, natural gas declined slightly, from 46 to 31 percent of the total (Figure 3.2.a). This trend continues to be supported by the country’s rich renewable energy potential: hydropower technical potential of 36 TWh per year, wind generation potential of 23 TWh per year (the highest in Southern Europe),52 high solar potential with an average solar radiation level of 1,400 kWh/m2/year, and rich forestry resources promising to cover 19 percent of total demand. Electricity production also uses, to a large extent, zero-carbon sources and a growing share of renewables. Total installed capacity at the end of 2013 was 22,947 MW, and total production was 59,045 GWh, consisting of 55 percent fossil fuel-based generation, 19 percent nuclear and 26 percent renewables 51 Total energy supply needs to satisfy total energy demand in the economy including the transport sector; however, transport GHG mitigation measures are not addressed as part of the energy sector since separate transport sector modeling was undertaken (see Chapter 4). 52 World Energy Council, 2013 (Figure 3.2.b). Romania has one of the largest wind capacities in Eastern Europe. It ranks 14th among the EU’s 29 countries according to the share of zero-carbon generation and 13th according to the share of renewable generation. However, fossil-based generation, still dominates electricity production. About one- third of the fossil fuel-fired capacity is co-generation. The fossil fuel-fired plants consist of predominantly obsolete, high-emission coal and gas-fired generation units, most of which need to be decommissioned or modernized. Over the period 2005-2011, Romania decommissioned 3,000 MW of thermal generation capacity. Further decommissioning is expected because many plants do not meet EU requirements. Overall, many generation assets are beyond their useful life: 30 percent are approximately 40 years old.53 Figure 3.2. The share of non-fossil sources of energy is large and fossil fuels are dominated by gas a. Primary energy supply by fuel, 2012 b. Electricity generation by source, 2012 Source: IEA Romania is a net exporter of electricity, with a fast growing volume of power exports. In 2013, it exported 4.7 TWh of electricity, about 8.5 percent of its electricity production, transporting it to Bulgaria, Serbia, and Hungary. Electricity exports, after dropping in the first years of transition and reaching its lowest point in 1995, surged almost eleven-fold between 1995 and 2011, when the power sold abroad amounted to 5.3 TWh, while imports increased 3.3 times over the same period. However, the trend is characterized by variability, reflecting economic and climatic conditions. Going forward, the country is planning to further increase its power exports, responding to the growing demand in neighboring countries. Romania is a significant producer of oil and natural gas, and most of gas consumption is covered by domestic sources; it uses domestic coal entirely for heat and power generation. It has the fifth-largest proven natural gas reserves in Europe, 3.9 trillion m3, and the fourth-largest proven crude oil reserves in Europe, 600 million barrels.54 A significant proportion of gas demand is met from domestic supplies. 53 Jorge Morales Pedraza. Electrical Energy Generation in Europe. Springer. 2015 54 As of the end of 2012. BP Statistical Review of World Energy. June 2013. http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy.html However, production of these fuels has been declining.55 Romania also holds 51 trillion cubic feet of technically-recoverable shale gas resources, and there are plans to develop the domestic shale gas industry. 56 However, these plans remain uncertain because of public concerns regarding related environmental issues and perceived potentially high costs of production. Currently, all imported natural gas comes from Russia and is delivered via Ukraine. Romania is exploring the possibility to diversify and import natural gas from other producers (mainly, Azeri gas) and is discussing various transporting options. Importing LNG (liquefied natural gas) is also a possibility, depending on how global LNG prices evolve over time. Romania's total hard coal (anthracite) resources are estimated at near 2,500 million tons, of which about 11 million tons are commercially exploitable reserves. Lignite resources amount to 9,640 million tons, including reserves of 280 million tons.57 Romania has achieved significant progress in reforming energy sector pricing in recent years. One achievement is completing the regulatory reform in relation to non-residential electricity and gas prices, which happened in January 2014 and January 2015, respectively. Resulting gas price increases to industries have contributed to a significant reduction in gas consumption. While the regulatory reform in concerning the residential electricity prices is progressing, the same process with respect to residential gas prices stalled in mid-2014. Pricing of district heat is the second remaining pricing issue in the energy sector. Heat prices are defined by the regulator, and municipalities can either charge these prices to the consumers or reduce them using subsidies from local budgets. However, non-payment of subsidies by municipalities is common. A law allowing the Ministry of Public Finance to deduct non-payments from the municipalities’ allocation of central transfers was enacted in 2011 but proved politically unfeasible to implement. Romania has also undertaken important reforms that promote good governance, managerial and operational efficiency, and financial improvements in the power and gas sectors. Following restructuring and privatization measures taken during the previous decade, several measures were implemented recently: the Government Emergency Ordinance on State-Owned Enterprise Governance in 2011, a new Electricity and Gas Law, and new regulator (ANRE) Law in 2012, initial public offerings of shares of Nuclearelectrica, Romgaz and Electrica and secondary public offerings of the shares of Transelectrica and Transgaz during 2012-2014, as well as mandatory competitive electricity trade by the generators through OPCOM (the electricity and gas exchange). Romania’s support mechanism for renewable energy (a Green Certificate System, with centralized trading at OPCOM) was implemented, but later scaled back because it pushed up end-user tariffs. The support mechanism attracted substantial investment (estimated €7-8 billion), resulting in construction of approximately 5,200 MW of renewable energy capacity, mostly during the last four years and including 3,221 MW of wind, 1,293 MW of solar, 586 MW of mini-hydro, and 102 MW of biomass. Originally 55 From 1990 to 2012, crude oil production in Romania declined from 169.1 thousand to 83.1 thousand barrels per day and natural gas production decreased from 2.74 billion to 1.06 billion cubic feet per day. The reserve to production ratio is estimated at 6 years (BP 2014: http://www.worldenergy.org/data/resources/country/romania/gas/). 56 Technically Recoverable Shale Oil and Shale Gas Resources. http://www.eia.gov/analysis/studies/worldshalegas/ 57 EURACOAL, 2012. envisioned support levels were doubled when the support system was approved by the Parliament, making the system highly attractive to investors – and very expensive to electricity consumers, triggering protests. The energy regulator (ANRE) concluded that the system over compensated producers and scaled it back in 2013. These measures have put Romania’s coal power-generating companies under operational and financial stress, depressing their share in total power generation and bringing Romania closer to its emissions and renewable energy targets. Electricity price liberalization, mandatory use of OPCOM for trading, and the renewables support scheme, against a backdrop of subdued demand for electricity following the 2008- 2009 crisis, led to a drop in the market share of coal power-generating companies. In some European electricity markets, most notably in Germany, the increase in renewable energy at a time of flat electricity demand has led to a decrease in gas-fired power generation and the shutdown of gas-fired generating units. In Romania, this impact was softened by the country’s rising electricity exports, and coal power plants have largely absorbed it, losing competitiveness against existing hydro and nuclear power plants.58 However, they are provided financial support by the government. As a result of the decreased coal power production, Romania now expects to exceed its EU-mandated renewable energy target of 20 percent renewable energy in gross final energy consumption. Challenges The energy supply sector is the largest contributor to the country’s carbon footprint, being responsible for 58 percent of total greenhouse gas (GHG) emissions (excluding LULUCF)59, and the emissions intensity of the economy significantly exceeds the EU average. Romania’s total and per capita emissions60 have dropped significantly from their peak in the late 1980s as a co-benefit of structural transformation, a pattern typical for transition economies, and the growth in the share of non-emitting energy sources. Total CO2 emissions in Romania amounted to 78.7 million metric tons in 2010, accounting for a modest 2.1 percent of total European Union emissions and 0.23 percent of the world emissions. Per capita CO2 emissions were also low, at approximately half of the EU average and just over one-third of the OECD average. However, the emissions intensity of the economy61, while dropping 3.3 times from its 1989 level, 58 Use of gas in power is concentrated in municipal power and heating plants. 59 Emissions from electricity and heat production, the sum of three IEA categories: (1) emissions from electricity generation, combined heat and power generation and heat plants (emissions from own use of fuel in power plants are included), supplying the public; (2) emissions from generation of electricity and/or heat by auto -producers (in whole or partly for their own use as an activity which supports their primary activity), these emissions would normally be distributed between industry, transport and "other" sectors; (3) Other: emissions from fuel combusted in petroleum refineries, for the manufacture of solid fuels, coal mining, oil and gas extraction and other e nergy- producing industries. (IEA Statistics © OECD/IEA, http://www.iea.org/stats/index.asp), International Energy Agency electronic files on CO2 Emissions from Fuel Combustion; Catalog Sources World Development Indicators). 60 Total emissions include emissions from the following sectors: energy (electricity and heat production and energy sector own use), transport (all transport activity regardless of the economic sector), residential (fuel combustion in households), and “Other” (commercial/institutional activities, fishing and emissions not specified elsewhere) (IEA/IPCC definition). 61 Kg CO2 per $1 GDP (constant 2005 US$). was still much higher in 2010 than in many other countries: 2.8 times above the EU level, 2.1 times above the OECD average, and seven percent higher than the world average. The expense of reducing energy sector emissions comes on top of already high investment needs to address obsolete fossil-based plants and is further augmented by the intermittency of the renewable plants that are replacing them. Eighty percent of existing fossil fuel-fired generation plants and 60 percent of the power distribution networks in the country are already old; and retrofitting of fossil fuel- fired power plants in the last 20 years has yielded scant returns. Replacing such massive existing capacity with new capacity is financially challenging. This capacity will be partially replaced by renewable energy, which creates another challenge. Expansion of wind and solar is expensive but also technically difficult. Since wind and solar are variable resources and do not provide capacity commitments against peak load, increase in their penetration will require complementary peak load capacity. The continued deterioration and decline of district heating systems is particularly wasteful of existing assets and undermines the quality of life in Romanian cities . Many of the remaining operators are no longer economically viable because a substantial number of dissatisfied customers have disconnected from the systems and chosen alternative heating options. Inefficiency and high losses in the district heating systems also make them among the most costly to operate in the EU. A multi-year comprehensive program is needed to modernize those district heating systems that are economically viable: improve efficiency and service quality on the one hand and implement sector reforms to restore district heating company financial sustainability on the other, while ensuring that subsidies are well targeted to poor households. Despite substantial progress, Romania still lags significantly behind most EU countries in the broadest measure of energy efficiency and in key end-user sectors. Its energy intensity was 40 percent higher than the EU average62 in 2011. The efficiency gap is most pronounced for residential space heating where specific heat consumption (kgoe/m2) is 32 percent higher than comparable best EU practice. For the two dominating industrial energy users, chemicals manufacturing has a value-added energy intensity over 4 times higher than the EU average (indicating structural issues), and steel making has an energy intensity per ton of steel that is 70 percent higher than the EU average. These three areas of end-use together account for roughly 40 percent of Romania’s final energy consumption. Thermal retrofit of residential buildings is both a financial and an implementation challenge. Only about one percent of the 150 million m2 of apartment buildings which were determined in need of thermal retrofit had been retrofitted as of 2012. Despite very high capital subsidies (up to 80 percent) provided by the national and local governments, many low income households are still reluctant to participate. Subsidized energy prices create disincentives. In addition, a lack of incentives, information, necessary skills upgrades, and administrative improvements such as strategic planning, prioritization, systematic evaluations and coordination between different levels of government are to blame. 62 Measured in GDP US$. When energy intensity of the economy is measured using GDP in PPP terms, the Romanian energy intensity exceeds that of the EU by 5.3 percent only METHODOLOGY AND FINDINGS Methodology The analysis in this study aims at understanding how energy supply and demand can contribute to Romania’s current, imminent, and prospective obligations under the EU to reduce GHG emissions. How would meeting EU and global obligations alter Romania’s overall energy63 and electricity supply mix over the next 35 years? What would be the costs of meeting these obligations? The main objective of the analysis is to find best solutions for Romania’s energy supply mix that would satisfy future energy demand at a minimum cost under the different scenarios that represent EU mitigation obligations. Complementary to the supply analysis, the study also investigates the possibility of reducing energy demand in end-use services (such as space heating, lighting, and electrical machines) through energy efficiency measures in the household, non-residential, and industry sectors. The analysis was done in three steps: demand-side modeling, supply-side modeling, and Marginal Abatement Cost Curve (MACC) analysis.64 Green policy measures were evaluated using three scenarios: the Baseline scenario, the Green scenario, and the Super Green scenario. The outcomes of Green and Super Green scenarios were compared with the outcomes of the Baseline scenario to assess the cost of green measures and their emission-reducing impact. For each of the three scenarios, demand side modeling projected the level of overall demand through 2050 and calculated related emissions. Detailed demand modeling was done for three sectors--residential, non-residential, and industrial—for which the level of investment needed to implement proposed green demand side measures was estimated. Supply- side modeling provided the best solution for the electricity supply mix at the minimum possible cost for all three scenarios, ensuring that the volume of power supplied should be sufficient to meet the level of overall demand projected in the demand-side analysis and that the GHG emissions reduction target should be met. The supply and demand modeling was linked to macroeconomic modeling and to the Marginal Abatement Cost analysis. The analysis was implemented in the following sequence (Figure 3.3):  Step 1. The Macroeconomic model produced projections for basic macro indicators, which are considered the key factors of energy demand: GDP, energy sector value added, and energy prices. These projections were used as input in the Excel-based model which projects energy demand.  Step 2. The demand model used macroeconomic projections from Step 1, together with other input data, to project Baseline energy demand for three sectors—residential, non-residential, and industrial—over the period from 2015 to 2050 using the end-use demand model described below. The demand model also estimated potential energy efficiency reductions for various end-uses. Two demand cases were developed—demand without considering energy efficiency improvement and 63 In this analysis, energy sector includes electricity supply, non-electric energy supply, and end-use sectors (residential, industry, services/non-residential, and transport). Detailed transport modeling was undertaken separately (see Chapter 4) 64 The outcome of the MACC analysis is described in Chapter 9. demand with energy efficiency improvement. Figure 3.3. Energy modeling of supply and demand was linked to macroeconomic analysis Overall analytic framework for energy analysis Source: Energy supply technical paper; Romania: Climate Change and Low Carbon Green Growth Program, 2015  Step 3. To meet power demand projected at Step 2 and using macroeconomic variables from Step 1, the energy supply model, TIMES/MARKAL, develops an energy supply plans for the Baseline scenario and the Green and Super Green scenarios, with considerations for relevant green measures on both the energy demand and supply sides. The incremental costs under the green energy supply plans on top of Baseline plans are calculated. Also, reductions of GHG emissions under the green scenarios are derived.  Step 4. At the last step of the analysis, a marginal abatement cost curve is developed for all generation sources included in the Green and Super Green scenarios and for selected energy efficiency measures. Energy Demand side modeling A tool, Energy Service Demand Analysis (ESDA), was developed for demand projections. This easy to implement, Excel-based bottom-up framework serves the purpose of estimating long-term energy sector end-user service demand (see Figure 3.4). It makes use of key demand variables such as sectoral outputs, household income, and GDP, the projections of which are provided by the macroeconomic model (see Chapter 2). These variables are linked with energy consumption through parameters such as specific end- use energy consumption, intensity of energy services (e.g., liters of hot water per person; joules of heat needed per square meter of living area for space heating), and utilization factors of energy service appliances.65 The demand modeling exercise can assess energy efficiency options in different end-uses. 65 See the Energy Sector Demand Technical Report for details The energy efficiency analysis is designed to reflect the EU’s energy and climate strategies, including the 2030 framework for climate and energy policies and the Roadmap 2050 for moving to a low carbon economy. Major energy efficiency improvement measures include use of more efficient lighting and electric appliances, retrofitting buildings with wall, window and roof insulation, and heating and air conditioning system improvements. Figure 3.4. The demand analysis tool addressed key elements of all end-users and energy efficiency options Demand model: simplified sector and end-use service classification Note: For residential, services/nonresidential, and industry, demand and emissions were modeled. For transport, detailed modeling was undertaken separately and is reported in Chapter 4. Source: Energy Demand Technical Report. Romania: Climate Change and Low Carbon Green Growth Program, 2015 Supply side modeling With the end-use energy demand forecasts, TIMES66/MARKAL, the energy supply model, determines the optimum mix of final energy (e.g., coal, gas, LNG, electricity, district heat) to meet the end-use energy service demand. To meet the projected final energy demand, TIMES then optimizes the energy supply system accounting for all potential resources (such as coal, crude oil, natural gas, and hydropower), production/transformation facilities and transportation/transmission/distribution networks, satisfying various resource, technical, socio-economic, environmental and other constraints. Figure 3.5. Supply modeling selects optimum mix of final energy and power generation The structure of the supply side model, TIMES MARKAL 66 The Integrated MARKAL-EFOM System INPUT VARIABLES DEMAND SUPPLY PN IRO ICI OL& SE EEL TS TECHNO-ECONOMIC •Drivers • Existing • Taxes • Commodity •Demand curves energy • Subsidies transformation • Sectorial demand sources • Limitation on technologies: • Energy services • Potentials installed capacities electricity consumption • Imports generation, services • Costs consumption • Availability of • Costs resources • Efficiencies • Storage OUTPUT Installed capacities for each supply and demand technologies, energy fluxes, final energy prices, total system cost, GHG emissions Source: Energy Supply Technical Paper; Romania: Climate Change and Low Carbon Green Growth Program, 2015 The following characteristics of TIMES/MARKAL are of essence to understanding its functioning:  It is an optimization model. It computes the least cost (optimized) path of an energy system for the specified time frame. It aims to supply energy services at minimum global cost (more accurately, at minimum loss of surplus) by simultaneously making equipment investment, operating primary energy supply, and making energy trade decisions by the region.  It is an equilibrium model. It is important to note that the TIMES energy economy is made up of producers and consumers of commodities such as energy carriers, materials, energy services, and emissions, and, like most equilibrium models, it assumes competitive markets for all commodities. Thereby, it ensures that there is a supply-demand equilibrium that maximizes the net total surplus: based on prices, suppliers produce exactly the quantities demanded by consumers, in each time period.  It uses a scenario approach that consists of a set of coherent assumptions about the future demand trajectories and their determinants, leading to a coherent organization of the system under study. A scenario typically consists of four types of inputs: energy service demands, primary resource potentials, a policy setting, and a descriptions of the set of technologies. The structure of TIMES is defined by the data input provided by the user. Qualitative data includes lists of energy carriers, the technologies that the modeler feels are applicable (to each region) over a specified time horizon, as well as the environmental emissions that are to be tracked. Quantitative data contains the technological and economic parameter assumptions specific to each technology, region, and time period (Figure 3.5). The study considered three scenarios for energy system optimization: a Baseline, a Green scenario, and a Super Green scenario. The scenarios, consistent with those used in macroeconomic analysis (see Chapter 2), were defined in the following way:  The Baseline scenario is an extrapolation of the current state of the energy sector including already planned or implemented mitigation measures, in particular ongoing implementation of the current EU 2020 climate and energy package, which sets an EU-wide target to reduce GHG emissions by 21 percent in energy-intensive sectors, which participate in EU emissions trading, compared to 2005. However, it does not include broader reforms that the energy supply system needs to implement in line with the EU’s long-term plan to reduce carbon emissions.67  The Green scenario models implementation of the proposed EU 2030 framework for climate and energy policies, which sets overall GHG mitigation at 40 percent compared to 1990 levels. For the power sector and other ETS participants, EU 2030 target corresponds to the reduction of GHG emissions of 43 percent for the EU as a whole compared to 2005.  The Super Green scenario is driven by the EU’s prospective 2050 Roadmap which aims for the EU to reduce GHG emissions by at least 80 percent below 1990 levels by 2050, to a large extent by almost total decarbonisation of the power sector. Marginal abatement cost analysis A marginal abatement cost curve (MACC) for electricity supply and energy efficiency is estimated in addition to the demand and supply modeling. The measures examined are presented according to two parameters of the MACC: potential mitigation impact (kilotons of CO2e68 abated) and the unit cost of abatement (cost per metric ton of CO2e abated). The MACC calculations for energy demand measures were done using the ESDA model described above and include end-use energy efficiency measures for the household sector, as these measures bring the most immediate and effective results. The MACC 67 Emissions reduction in this chapter are generally cited against 2005 because that is the year EU emissions trading was established; thus, all practical rules and targets are formulated against 2005. 1990 is cited in the original broad policy statements because it is the EU’s base year for Kyoto and other international obligations. 68 Carbon dioxide equivalent calculations for electricity supply were done using the TIMES/MARKAL model, also described above. Generation options included in the Super Green scenario are used: solar photovoltaic (PV), hydro, wind, biomass, natural gas plants with installed carbon capture and storage (gas CCS, carbon capture and storage), and nuclear. The TIMES model constructed the best (minimum cost) mix of generation sources to achieve a desired abatement level in eight different cases, corresponding to eight green generation technologies. This meant six scenario runs, one for each of the green generation options. Abatement level was set as a constraint, and each scenario maximized generation from one out of the eight generation sources, considering many other variables/constraints in the model: production/transformation facilities; transportation, transmission, and distribution networks; various resource, technical, socio-economic, environmental and other constraints (including the size of the plants, their capacity factor, and the need for back-up capacity). For example, in scenario 1, solar PV was set to be maximized in the electricity supply system, and the rest of the generation technologies were selected by the model. The model also calculated the cost of such a system and the cost of the baseline system. The difference between these two costs constituted the marginal cost, which was then converted into net present value. Findings This section presents the main finding of modeling. It aims at demonstrating the impact of green measures on the sector outcomes by comparing the trends in the sector development under the three scenarios: Baseline, Green and Super Green. The sector outcomes include projections of primary energy supply, structure of electricity generation capacity and electricity generation mixes, required investment and total (investment and O&M, operations and maintenance) costs, and the level of emissions. Primary energy supply Under the Baseline scenario, Romania's total primary energy supply in 2050 is projected to increase by approximately 49 percent from the 2015 levels, from about 38,184 ktoe to about 56,779 ktoe. The structure of primary energy supply reflects only a moderate increase in the share of cleaner energy sources. The share of renewable energy (hydro, wind and solar) increases from 17 percent in 2015 to 22 percent in 2050. While oil and natural gas continue to be the most important sources of primary energy, the contribution of gas to the mix increases and the share of oil decreases over time: oil’s share in the Baseline scenario drops slightly from 29 percent in 2015 to 26 percent in 2050, while the share of gas increases by eight percentage point, from 22 percent in 2015 to 30 percent in 2050. The share of coal drops from 16 percent in 2015 to eight percent in 2050 in the Baseline. The share of biomass stays at nine percent. To move further in the direction of a greener energy system, the Green scenario exhibits further expansion of renewable/non-fossil energy supply and contraction of fossil energy supply. In the Green scenario, the share of renewables (hydro, wind and solar) in 2050 is higher than in the Baseline: in 2050, it equals 24 percent or two percentage points higher than in the Baseline. The share of biomass is three percentage points higher in the Green scenario than in the Baseline in 2050. The reverse happens with natural gas: its share in 2050 in the Green scenario is 19 percent or five percentage point lower than in the Baseline. The Super Green scenario assumes no GHG emissions from power generation and a significant reduction of non-power sector energy emissions; therefore, the measures in this scenario are much more aggressive than in the Green scenario. While the RE share stays at the same level as in the Green scenario, the share of biomass is higher (22 percent) and the share of gas is lower (15 percent). Coal almost disappears from the mix, falling to two percent. Also, nuclear energy increases to nine percent of the total (from six percent in the Green and five percent in the Baseline scenarios). (Figure 3.6) Figure 3. 6. Low carbon sources replace fossil fuels in energy supply in all scenarios Primary energy supply by source: 2020 and 2050 a. 2020 b. 2050 Source: Energy Supply Technical Paper. Romania: Climate Change and Low Carbon Green Growth Program, 2015 Generation capacity To meet increasing demand in the face of rising prices for emissions allowances under the ETS in the Baseline scenario, total installed capacity for power generation increases from 23 GW in 2015 to 30 GW by 2050 or 29 percent growth. This increase will be largely covered by new wind, hydro, solar, and also gas capacities, which replace coal and oil sources in the mix. From 2015 to 2050, oil declines from two GW to 0.2 GW (from seven percent to one percent of total capacity), and coal from seven GW to one GW (from 30 percent to four percent of total capacity). The share of wind and solar PV will increase tremendously: together they constitute four GW in 2015 and 12 GW in 2050. Nuclear capacity is unchanged: Romania's two nuclear power plants, Cernavado Plant 1 and 2, currently account for about six percent of the country's total installed capacity, and there will be no installation of new nuclear capacity under the Baseline through 2050. The higher share of intermittent or variable generation resources (wind and solar) creates a challenge for load balancing. The Baseline scenario would have ten GW of new wind and solar capacities over the next 35 years. This high penetration of variable generating sources creates a challenge in balancing generation and load. To meet peak load, installed capacity should also have sources that provide constant, non-variable, generation (e.g. coal, gas, and nuclear). At present, Romania has a ratio of 20 GW of installed capacity versus 10 GW of peak load. Adding more variable sources would require a higher ratio of total installed capacity to peak load, because the risk of insufficient generation for peak load increases faster than the growth in the share of intermittent sources. However, because non-variable generation involves economies of scale, electricity generation from all non-variable sources will not be fully utilized domestically. Exporting the excess generation could be a solution. The need for zero-emission sources for power generation is higher in the Green and much higher in the Super Green scenario than in the Baseline. Fossil fuel-based generation resources (i.e., coal, gas) will decrease in the Green scenario and be completely eliminated by 2050 under the Super Green scenario. On the other hand, nuclear power capacity would increase by 1 GW in the Green and 3 GW in the Super Green scenario, as compared with the Baseline, providing non-variable generation to the system dominated by variable sources of electricity. It will raise the share of nuclear in the 2050 capacity mix from 5 percent in Baseline to 13 percent in Green and 15 percent in the Super Green scenario. Wind, solar, and hydro have approximately the same capacity level across scenarios in 2050. Biomass is not part of the capacity mix in the Baseline but is present in both the Green and Super Green scenarios at a level of one GW. (Figure 3.7) Figure 3. 7: Generation capacity in 2050 is cleaner in the green scenarios with demand contained by energy efficiency measures Total Installed capacity by fuel, 2050, GW Source: Energy Supply Technical Paper; Romania: Climate Change and Low Carbon Green Growth Program, 2015 Energy efficiency measures on the demand side can significantly contribute to lower the capacity need for electricity generation. Large-scale energy efficiency improvements on the demand side (in energy end-use sectors such as the residential and commercial sectors) are considered in the Green and Super Green scenarios. Major energy efficiency improvement measures include use of more efficient lighting and electric appliances, retrofitting buildings with wall, window and roof insulation, heating system improvement in the residential, commercial and public buildings, and use of efficient electric motor and thermal energy equipment in the industry sector. The implementation of such measures leads to a 26 percent reduction of residential sector energy consumption by 2050 from that in the absence of these measures. The energy efficiency measures in the non-residential buildings sector (e.g., more energy efficient space heating and space cooling) results in a 30 percent reduction in services sector energy demand. In the case of the industrial sector, the introduction of more energy-efficient technologies, especially electric motors and boilers, leads to a 16 percent reduction in industrial sector energy consumption. If the energy efficiency measures considered in the analysis are implemented successfully, it would save three GW and four GW of installed capacity under the Green and Super Green scenarios respectively (see Figure 3.7). The impact of the energy efficiency measures is also clearly visible in the demand for new generation capacity; addition of new capacities under the Green and Super Green scenarios would be two and one GW lower as compared to that under the Baseline scenario (see Figure 3.8). The new installed capacity (constructed during 2015-2050) is constituted by wind, solar PV, hydro, natural gas, biomass, and nuclear. The structure of new capacity differs by scenario. Only wind and hydro play the same role (in terms of the capacity level) in all three scenarios: wind capacity exceeds 6 GW (note that Romania has 12-14 GW of economically exploitable wind potential and the current capacity is 3 GW), and hydro capacity amounts to 3 GW. The new hydro capacity is assumed to operate at a very low capacity factor of 34 percent thereby incorporating any adverse potential climate change impacts on catchment areas and run-off. Solar PV has importance in all scenarios, but to a different extent: the capacity is higher in Green and Super Green (3 GW in each), while amounting to 2 GW in Baseline. Nuclear capacity of 3 GW would be added in Super Green scenario while natural gas capacity is built under Baseline (4 GW) and Green (2 GW). Under the Super Green, no fossil fuel plants, old or new, will exist by 2040; and in this scenario power sector in Romania would be emission free by 2050. (Figure 3.8) Figure 3.8. New capacity is dominated by RE and nuclear in green scenarios, with demand contained by energy efficiency New installed capacity, 2015 -2050, GW Source: Energy Supply Technical Paper. Romania: Climate Change and Low Carbon Green Growth Program, 2015 Generation The electricity generation mix changes significantly across scenarios (Figure 3.9 and Figure 3.10). While the share of non-fossil fuel based electricity generation equals near 60 percent under the Baseline in 2050, it exceeds 85 percent under the Green scenario and 100 percent under the Super Green scenario. Under the Green and Super Green scenarios, electricity generation from fossil fuel-based sources decreases rapidly. For example, there would be no electricity generation from coal, gas, or oil by 2040 under the Super Green scenario. Electricity generation from nuclear power generation facilities under the Green and Super Green scenarios would be almost three times as high as that of the Baseline scenario. The impact of demand side energy efficiency measures on saving electricity generation is significant. If the demand side energy efficiency measures are implemented successfully, it would reduce the need for electricity generation by 20 and 11 percent in the Green and Super Green scenarios respectively. The lower reduction in generation under the Super Green scenario as compared to the Green scenario is explained by base load conditions of nuclear capacity, which has a much bigger presence in Super Green. Figure 3. 9: Generation is increasingly dominated by renewables with demand contained by energy efficiency Total generation by fuel, 2050, TWh Source: Energy Supply Technical Paper. Romania: Climate Change and Low Carbon Green Growth Program, 2015 Despite the focus on the electricity portion of the energy sector, because of its critical role in energy sector mitigation, other parts of the energy sector were also considered. Heating, oil refineries, and households as providers of energy services for own use were reviewed. This analysis found that demand for space heating is likely to grow in the future despite energy efficiency improvements due to increasing residential and office space. Currently, heat is produced mainly by combined heat and power (CHP) plants that use natural gas or biomass. Modelling demonstrated that final demand for heat increases by 20-23 percent in 2050 compared to 2015 if energy efficiency measures are not implemented. However, with the implementation of energy efficiency measures, the situation reverses: heat demand decreases by 10-14 percent in 2050 from the 2015 level. While natural gas remains the main fuel source in heat production during 2015-50 in all scenarios (because there is no obvious alternative source), mitigation is achieved by improved (cleaner) technologies used for heat production and the decentralization of the heating sector. Figure 3.10: The share of renewables grows, mostly at the expense of lignite and coal, especially in Super Green scenario a. Renewable energy b. Lignite and coal Source: TIMES/MARKAL modeling outcomes. Report developed through the “Romania: Climate Change and Low Carrbon Green Growth Program”, 2015, World Bank Total Supply Costs: energy sector and electricity sector69 Total energy supply costs decrease from Baseline to Green scenario but rebound in the Super Green scenario, as investment costs are offset by the savings to operational costs induced by energy efficiency measures. In the Baseline scenario, energy supply costs (including capital, fuel and operational costs) over 2015-2050 total €336 billion (present value),70 but would decrease to €326 billion in the Green scenario due the implementation of energy efficiency measures on the demand side. Total energy supply costs under the Super Green scenario would increase to €356 billion, as the reduced operational costs from energy efficiency implementation is offset by expensive new nuclear power and CCS-equipped gas plants for power generation. Energy efficiency measures that reduce energy demand and thereby lower required energy supply require additional investment of €19 billion over the 2015-2050 period (or about 0.6 average annual percent of GDP) but save €29 billion in fuel and operational costs on the supply side. Energy sector investment costs are the biggest contributor to total costs, and the Super Green scenario has especially heavy additional investment needs. Romania is facing a substantial replacement of existing coal- based power plants by gas and renewable energy-based power generation: existing fossil-based plants are quickly becoming obsolete, and the switch to lower emissions supply is present even in the Baseline. In the Baseline, the retirement of coal and lignite plants happens mostly early on: 1.5 GW of coal capacity retires by 2025, an additional 3.7 GW by 2035, and another 0.3 GW by 2040. Since the costs of replacing these 69 As noted above, the energy sector model applied to Romania includes both energy supply and energy demand (or end-users). 70 At a five percent discount rate. The discount rate was selected as a mid-range social discount rate (the typically used social discount rates range from 4 to 6 percent). plants come relatively soon, their discounted value is higher. In addition, other plants retire over the years: overall, the Baseline involves a newly built capacity of 17 GW, while Green includes 15 GW of new plant capacity (with demand contained by energy efficiency measures). Therefore, the incremental (to Baseline) cost under the Green scenario is not significant, because the heaviest financial burden is already imposed in the Baseline. The incremental cost of Super Green as compared to Green is high because less expensive generation sources are replaced by more expensive ones (in particular, three GW of nuclear are built in the Super Green while only one GW is built in the Green scenario), and this happens earlier, increasing the discounted costs. Also, Super Green requires more generation than Green, pushing up both capital as well as fuel and operations and maintenance costs. The electricity system will require €28 billion in investment costs in the Baseline during 2015-2050 to meet demand or about average annual 0.8 percent of GDP. Required investment increases to €37 billion (present value) in the Green and to €54 billion in the Super Green scenario, or average annual 1.1 and 1.7 percent of GDP respectively. The additional costs of the green scenarios above baseline costs come partly from investment in those energy efficiency measures that contain the growth of demand for electricity (€8 billion). In addition, the Super Green scenario almost eliminates power sector emissions by 2050, and this is costly: almost all fossil plants are replaced by 2050 by more capital-intensive renewable energy- based generation. As a result, investment needs in the power sector double from the level needed in the Baseline. Investment needs for the electricity sector are substantial in all cases but rise significantly as requirements for emissions reduction tighten. Until 2020, investment needs in electricity supply and demand total about €7 billion (discounted) in the baseline to over €10 billion in the green scenarios. In all three scenarios, the burden of investment rises over time, with 40-45 percent of the total in the last decade 2040-2050, partly because most of the fossil-based plants retire at that time. In the Green scenario, new wind, solar, nuclear, hydro, and gas is added, and coal and oil-based generation almost disappears by 2050. In the Super Green scenario, new electricity generation from renewable sources and nuclear sufficient to eliminate electricity generation from coal-based sources by 2030 is constructed. Nuclear plant investment after 2030 further contributes to high investment costs in the Green and Super Green scenarios. Energy efficiency measures require rising and significant investments of their own. For both these categories, financing will come from the private sector, although the public sector may need to establish programs of support for energy efficiency, with some financing available from the European Union (See Table 3.1). Table 3.1: Electricity investment requirements jump after 2030 Schedule of electricity investments and energy efficiency by scenario, billions of 2010 Euros 2010-2050 2015-2020 2020-2030 2030-2040 2040-2050 (discounted)* Scenario Electricity supply: Baseline 7.4 14.2 17.5 27.6 27.6 Green 7.4 12.5 19.5 31.6 28.2 Super Green 7.3 22.5 38.3 51.9 45.3 Energy efficiency: 3.1 11.1 15.2 19.0 19.1 Electricity** 1.6 5.3 5.9 6.8 8.3 Other*** 1.4 5.8 9.3 12.2 10.8 Total electricity investment:*** Baseline 7.4 14.2 17.5 27.6 27.6 Green 9.0 17.8 25.5 38.4 36.5 Super Green 9.0 27.8 44.2 58.7 53.6 Total energy investment:**** Baseline 7.4 14.2 17.5 27.6 27.6 Green 10.4 23.6 34.8 50.6 47.3 Super Green 10.4 33.6 53.6 70.9 64.5 Notes: * using a five percent discount rate. All other columns are in constant prices but not discounted. **electricity energy efficiency is more efficient electrical appliances in residential and nonresidential buildings. **other energy efficiency is residential and nonresidential space heating and cooking measures. ***electricity supply investment and investments in electricity-saving efficiency measures. ***electricity supply investment and investments in all energy efficiency measures. Source: Energy Supply Technical Report and Energy Demand Technical Report. Emissions: energy sector and electricity sector71 Romania’s energy sector GHG emission return to near the 2005 level by 2050 under the Baseline scenario, but the green scenarios secure dramatically lower levels (Figure 3.10). In the Baseline scenario, 2030 emissions stand at nine percent lower than 2005 emissions while 2050 emissions are just two percent below 2005. Emissions in the Green scenario are about 25 percent below 2005 by 2030 and hold steady through 2050, while the Super Green scenario pushes energy sector emissions to almost half of 2005 by 2030, and they rise only slightly by 2050. While the absolute level of emissions in all three scenarios decreases throughout 2015-2050, the pace of emission reduction exhibits different trends across scenarios. It decreases steadily in the Baseline scenario because growing demand is not restrained in the Baseline and 71 As noted above, the energy sector model applied to Romania includes both energy supply and energy demand (or end-users). because of only moderate action toward the replacement of fossil fuels with renewable energy. When more aggressive actions on energy efficiency and lowering carbon are taken in the Green scenario and when more aggressive replacement of fossil fuels is implemented in the Super Green scenario, the pattern of emission reduction changes. In these two scenarios, during 2015 to 2020/2025, the pace of emission reduction slows because many of the measures that have been taken require time for implementation (e.g., electricity plant construction). After this phase, the pace of emission reduction increases through 2030 or so and then holds steady. Figure 3.11. Energy sector emissions drop in all scenarios, but at different paces GHG emissions reduction in energy sector, compared to 2005, in % Source: Energy Supply Technical Paper. Report developed through the “Romania: Climate Change and Low Carbon Green Growth Program”, 2015, World Bank The electricity sector experiences a large reduction of CO2 in all scenarios over time, and the pace of reduction increases in all three scenarios in later years. This pattern emerges in the green scenarios due to a combination of aggressively implemented energy efficiency measures that significantly constrain demand growth and as a result of aggressive actions on the supply side–an increase in the share of non- fossil sources of electricity. In the Baseline scenario, emissions in 2030 are 20 percent below 2005 and 36 percent below 2005 in 2050, while the respective outcomes in the Green scenario are 45 percent in 2030 and 72 percent in 2050. The biggest reduction is in the Super Green scenario: 92 percent emission reduction in 2030 and 97 percent in 2050. In this scenario, the electricity sector almost completely eliminates emissions. Both the absolute level of emissions and the pace of its drop increase in all three scenarios throughout 2015-2050, although the pace of emission reduction initially slows while the measures are in the process of implementation during 2015-2020/2025, a typical delay in outcomes when measures require time for implementation. (Figure 3.11) Figure 3.12. Electricity sector demonstrates a significant and increasing emissions reduction GHG emissions reduction in electricity sector, compared to 2005, in % Source: Energy supply technical paper. Report developed through the “Romania: Climate Change and Low Carbon Green Growth Program”, 2015, World Bank Marginal Abatement Cost Curve The Marginal Abatement Cost Curve shows that the proposed measures provide a significant potential abatement level totaling 30 Mt CO2 per year in 2050. (See Figure 3.13). The demand side measures mostly have negative net costs or positive benefits. Also, when applied on a large scale, they will deliver a significant level of mitigation. Therefore, they are the first candidates for implementation. The most cost- efficient electricity supply options are solar PV and wind, followed by hydro generation, S C P , biomass and nuclear. Gas CCS would require higher expenses reaching €20 per tCO2e abated, the highest estimated unit cost in the energy sector. The measure delivering the highest abatement potential in energy demand is building insulation, followed by the usage of efficient lighting. In electricity supply, the highest abatement can be achieved from the development of electricity generation using natural gas plants with installed carbon capture and storage (gas CCS). Among renewable energy options, the highest abatement potential is in wind, followed by biomass, then solar photovoltaic (solar PV), then hydro generation. Figure 3.13. Marginal Abatement Cost Curve for the energy sector, Super Green scenario Source of data: MACC Technical Report. Conclusions and Recommendations Romania can meet the mitigation obligations likely under the EU 2030 framework in energy and electricity at moderate costs. With an energy sector responsible for almost 60 percent of total GHG emissions, Romania clearly cannot achieve climate change mitigation targets beyond those of the current EU 2020 policy without significant action in the energy sector. The Green scenario compels substantial emissions reduction in the power sector which requires moderate incremental investment as compared with the Baseline. The Green scenario will achieve 45 percent emission reduction by 2030 (and 72 percent reduction by 2050) as compared with 2005. The investment cost of the Green power sector scenario through 2050 is €37 billion (present value),72 equal to an annual average 1.1 percent of GDP through 2050. The prospective requirements of the EU 2050 Roadmap, which requires at least 80 percent reduction in emissions and the virtual elimination of emissions from the power sector, are both expensive and challenging to implement. The Super Green power sector scenario will provide 92 percent emissions reduction between 2005 and 2030 and 97 percent reduction by 2050, achieving an almost complete elimination of emissions from power. This scenario also delivers abatement on a faster schedule than the Green scenario. The investment cost of the Super Green scenario to 2050 is €54 billion (present value) or an average annual of 1.7 percent of GDP. Implementation of the same set of aggressive energy efficiency measures is a key part of the Green and the Super Green scenarios, as these measures deliver low cost abatement in the short term, require moderate upfront investment, and have modest implementation barriers. Improving energy efficiency across the board in all economic sectors, but especially in residential and nonresidential sectors, offers the most effective and also viable means for containing the growth of energy demand, limiting investment requirements to meet the growing demand, and reducing GHG emissions. Beyond the climate agenda, improving energy efficiency is also critical for Romania’s competitiveness in the European Union. While the energy intensity of Romania’s economy has been decreasing for the past two decades, it is still one of the highest in the EU, and greater efficiency will go hand in hand with modernized and more competitive companies and sectors. A lower carbon path for Romania’s energy sector imposes significant costs and complex planning challenges on the sector, in particular on power generation. Achieving emission reduction targets beyond the EU 2020 targets--the Green (likely EU 2030 targets) and the Super Green (possible EU 2050 targets)– will require Romania to abandon plans for new coal-based power generation capacity and life- extension of existing plants. It will also require significant additional renewable generation capacity and, therefore, a regulatory environment that would promote it. While this assessment included a set of generally-agreed technologies at costs based on today’s best analysis, both technologies and costs will surely evolve, and updated analysis will be needed. The TIMES MARKAL supply model and the Energy Service Demand Analysis tool constructed for this analysis remain available for further development and application by the government for current and future policy questions related to the energy sector, in particular questions related to low carbon. The Ministry of Energy, Small and Medium Enterprises and Business has already taken on these models to apply to critical questions in support of the country’s new energy strategy. The usefulness of such tools and models will only increase into the future as Romania begins to take a more active role in contributing to EU climate and energy policy, as well as implementing it. 72 At a five percent discount rate. The discount rate was selected as a mid-range social discount rate (the typically used social discount rates range from 4 to 6 percent) At the same time, it should be noted that the energy sector in Romania has the potential to become an engine of economic growth. Romania’s endowment of energy resources is significant and diversified well beyond coal, including hydro and other renewable resources, natural gas, and even uranium to fuel its nuclear power industry. Romania has the potential to satisfy its own needs and export electricity and gas into the regional and European energy markets (even without the use of coal), to energize the economy and create jobs and prosperity. While long-term sector development to 2030 and 2050--the subject of this assessment—is important, the government cannot be distracted from critical near-term sector reforms. Implementation of the energy reform program jointly supported by the European Commission, the IMF and the Bank should continue. The measures recommended here under the Green and the Super Green scenarios to allow Romania to meet various GHG mitigation obligations require long-term implementation. In the short- term, it is critical that the sector continues with current reform efforts, many of which lay essential conditions for the success of the long-term green transition. These reforms includes completion of the ongoing liberalization of residential electricity and gas prices; adoption and implementation of the Minimum Social Insertion Program (social safety net which inter alia will help secure access of low income households to basic energy services); restructuring of the Hunedoara and Oltenia energy complexes; and adoption and implementation of the Law on Corporate Governance for further improvements in the corporate governance of state- owned energy enterprises. Along with energy security, competitiveness and fiscal benefits, these measures are key for Romania achieving emission reduction targets. Greening of the energy sector implies substantial costs, which rise significantly over time and as requirements for emissions reduction tighten, but a lower carbon energy sector needs to be part of Romania’s long-term planning. Careful modeling of the power sector provides a detailed assessment of low carbon possibilities. A need for 30 percent more installed power capacity between now and 2050, along with existing mitigation obligations, push even baseline investment costs to a very high level of €28 billion through 205073 or an average annual 0.8 percent of GDP. Lower carbon scenarios economize on supply costs by pushing energy efficiency to contain demand, such that power emissions can be 31 percentage points below baseline in 2030 with about €9 billion of additional investment and 56 percentage points lower in 2050 for €26 billion over baseline investment costs. Until 2020, investment needs in electricity supply and demand total about €7 billion in the baseline to just over €10 billion in the green scenarios. These costs jump after 2030, as remaining fossil-based plants are replaced with renewable and nuclear capacity and aggressive energy efficiency actions continue. Financing for these investments, whether power generation or energy efficiency, will be the responsibility of the private sector, although the public sector may need to establish programs of support for energy efficiency, with some financing available from the European Union. 73 In present value terms using a 5 percent discount rate CHAPTER 4. HOW CAN TRANSPORT BE LOW CARBON? CHAPTER SUMMARY The challenges for mitigation in the transport sector are significant, especially as Romania’s motorization rate converges with the EU average, and both passenger and freight activities are on an upward trajectory. As a result, the energy demand for transport is projected to grow, and GHG emissions are estimated to increase. The Romanian transport sector is emissions-intensive and, considering continuing growth in vehicle ownership and road travel, is expected to be increasingly polluting, unless transport policies change. In both passenger and freight segments, Romania experienced a marked increase in the share of road transport and a significant decrease in the share of rail. High and growing road transport share is a major source of total transport emissions. The emissions from air transport make up a small proportion of overall emissions in the transport sector, but are projected to increase in absolute terms over time at a slightly faster rate than overall travel activity. Other drivers of sectoral emissions include traffic congestion, poor parking management, declining public transport patronage, increasing private vehicle usage, and old taxi fleet, pedestrian and cycling infrastructure in urban areas in Romania. The strategic mitigation model that has been developed is the Transport Strategic Emission Prediction Tool (TRANSEPT). The Romanian General Transport Master Plan (GTMP) is included in Business as Usual (BAU) scenario, so are certain existing pricing instruments and regulations. In terms of pricing instruments, Romania’s fuel duty rate and parking fees are low compared to the rest of Europe. To change the age and characteristics of the vehicle fleet, Romania introduced an “Environment Stamp” tax on new vehicle registrations in 2003. Moreover, the uptake of the scrappage scheme peaked in 2010, and has since fallen to much lower levels. Romania has also put in place some intelligent traffic management measures, access restrictions and speed restrictions. Given the growth in vehicle ownership and road transport, decoupling GHG emissions from the transport sector and economic growth, or at least lowering the GHG intensity of future transport growth, represents the key challenge. Inefficiencies of the road transport sector can be grouped into the following three types: pricing inefficiencies, fuel inefficient technology, and those that come with spontaneous transition of the urban form. At present pricing does not reflect the full costs of transport. Relaxation of land development controls in transition countries has led to inefficiencies associated with low-density development. Transport service provision needs to be addressed holistically to ensure that public transport is able to attract new users and realize the full climate and economic benefits. Reducing GHG emissions—as opposed to reducing GHG emission growth rate—is difficult in the transport sector. Based on the multi-criteria analysis, the following measures are selected for inclusion in the Green Scenario: (a) fuel price taxation increase; (b) new vehicle registration tax; (c) eco-driving program; (d) smarter choices/personal travel planning programs; (e) investment in walking and cycling infrastructure; (f) parking pricing; (g) air travel taxation. Best practice examples typically combine the disincentive of high parking charges with an effective and efficient public transport system, and good walking and cycling facilities. Lastly, it is important to address needs for transport services holistically to ensure that public transport is able to attract new users and realize the full climate and economic benefits. CHALLENGES FOR GREEN GROWTH Overview With continuing growth in vehicle ownership and road travel, emissions from the transport sector are expected to increase, unless transport policies change. Annual GHG emissions from the domestic transport sector has increased since 1990,74 and has grown faster than the EU average. (Figure 4.1) In 2002, the transport sector accounts for 12.7 percent of Romania’s total GHG emissions. While it is lower than the EU average of 19.7 percent (Figure 4.2), it is rising more quickly, driven in part by the declining modal share of rail and increased motorization. Road transport accounts for 93 percent of domestic transport emissions, similar to the EU average.75 Source: EEA. Source: EEA Figure 4.1. Trends in Romania’s Transport Figure 4.2. Transport GHG Emissions Emissions Compared to the EU (% of total GHG emissions) (1990=100) 130 25 120 110 20 percentage percentage 100 90 15 80 70 10 60 5 2000 2003 2006 2009 2012 1990 1994 1998 2002 2006 2010 Romania EU 28 EU 28 Romania 74 This includes emissions from transport (road, rail, inland navigation and domestic aviation) of the GHG regulated by the Kyoto Protocol. Only three gases are relevant in the context of transport (carbon dioxide, methane, and nitrous oxide) and these have been aggregated according to their relative global warming potentials. 75 European Environment Agency data, as of June 2013 Romania experienced a significant decrease in the share of rail and a marked increase in the share of road transport. High and growing road transport share is a major source of total transport emissions. Figure 4.3 shows the modal split for passenger between the three main land-based modes of domestic travel – private car, rail and bus/coach since 2000. While the mode share of private cars in Romania has been increasing and approaching the EU average, the mode share of passenger rail dropped from being higher than to lower than the EU average. On the other hand, the modal split for freight movements, in terms of percentage of ton-km travelled, has experienced similar trends, but to a less extent. 76 (Figure 4)The mode share of rail freight has declined, although it is still higher than the EU average. Road freight has increased in mode share, despite being below the EU average. The decline in rail and transfer to road in passenger and freight segments can be attributed to underinvestment and poor maintenance of the Romanian railway system, resulting in slow and unreliable train services.77 76 Eurostat data at http://epp.eurostat.ec.europa.eu. The amount of freight moved by air (which is excluded from the modal split figures shown above) is very small - 28,523 tons in 2011, up from 19,229 tons in Romania’s first year of EU membership in 2007. For comparison, some 65 million tons of freight were transported on Romania’s railways in 2007. 77 European Commission (EC). 2012. Position of the Commission Services on the Development of Partnership Agreement and Programs in Romania for the Period 2014-2020. Ref. Ares (2012)1240252 - 19/10/2012. The emissions from air transport make up a small proportion of overall emissions in the transport sector, but are projected to increase in absolute terms over time at a slightly faster rate than overall travel activity. Domestic air passenger transport activity (internal within Romania) forms a small part (7 percent) of total passenger movements through Romanian airports, which is a relatively low level compared to other EU countries (the EU-27 average is 18 percent). It has slightly increased in recent years (Figure 5), despite the international economic downturn in 2007. Passengers flying to and from other EU countries form the great majority of passengers using Romanian airports (81 percent), with the remainder (12 percent) flying to and from destinations outside the EU. There are a number of industry initiatives to reduce emissions. Other drivers of sectoral emissions include traffic congestion, poor parking management, declining public transport patronage, increasing private vehicle usage, and old taxi fleet, pedestrian and cycling infrastructure in urban areas in Romania. With 54 percent of the country’s population living in towns and cities, urban transport forms a major part of the overall sector activities in Romania.78 The carbon dioxide emissions intensity from road transport in Bucharest (833 kt/year) is higher than that of the 19 next largest cities combined (596 kt/year),79 reflective of the high levels of traffic concentration and congestion pressure. The start-stop driving cycle in congested traffic increases greenhouse and other gaseous emissions. The problem of traffic congestion is likely to worsen with increased private vehicle ownership, which also puts pressure on the supply of designated parking spaces in Romanian cities, leading to “informal” parking arrangements, with vehicles parking on footways, cycle tracks and public spaces. Urban public transport, which includes a combination of metro systems, tram networks, trolley buses, and bus networks, requires modernization and maintenance that are often cost-prohibitive for cities, resulting in the decline of public transport patronage. For example, ridership in Ploiesti fell from 7 million trips per month in 2011 to 6.7 78 Institutul National de Statistica (INS). 2011. Census. Available at: http://www.recensamantromania.ro/rezultate- 2/ 79 To date, there are only four countries in the EU that have spatially disaggregated emissions inventories at a national level, namely, the UK, the Netherlands, Denmark and Sweden. This data has been analyzed to better understand the distribution of emissions between urban and non-urban areas. The largest 20 cities (with populations over 100,000) were identified and their respective emissions levels analyzed. E-PRTR: The European Pollutant Release and Transfer Register: Welcome to E-PRTR. EEA; Copenhagen. Available at: http://prtr.ec.europa.eu million in 2012. 80 Many of the taxi vehicles in Romania are old and fuel-inefficient. The age limit for taxi vehicles varies greatly across cities (five years in Brasov and twelve years in Cluj-Napoca), as do the quantity and quality of pedestrian and cycling infrastructure.81 Local co-benefits of a more efficient transport sector —such as reduced traffic congestion and noise, improved air quality and road safety, or enhanced energy security—are likely to drive the development of transport policies.82 The challenges for mitigation in the transport sector are significant, especially as Romania’s motorization rate converges with the EU average. The General Transport Master Plan projects rapid growth in car ownership, with the motorization rate exceeding 350 cars per 1,000 inhabitants by 2030, which would represent an increase in excess of 50 percent increase over the 2012-2030 period.83 Although mode share of car in Romania is at a similar level to the EU average, the car ownership rate in Romania is the lowest in the EU at 224 cars per 1000 inhabitants in 2012 (Figure 6)), but has grown significantly in recent years, up from 152 cars per 1000 inhabitants in 2006. Figure 7). Without intervention to provide better transport alternatives, as car ownership grows, car use is also likely to grow. Transport activities, related energy demand, and resulting emissions are all expected to grow in a baseline scenario (with continuation of current polices but no new policies on climate). According to the European Commission’s Trends to 2050 Model and the emissions model developed under this study, both passenger and freight activities are on an upward trajectory, the energy demand for transport is 80 Improving energy efficiency in Ploiesti, Romania: TRACE city energy efficiency diagnostic study. World Bank (under the Romania Regional Development Program), undated. 81 There are examples of improvement of pedestrian areas. In Brasov in 2008, the Municipality developed a pedestrian area in the historical center with 10 streets closed to car traffic and streets repaved with cobblestones, using funding from the 2007-2013 Regional Operational Program. In Ploiesti, an EU-supported CIVITAS project promoted walking and a pedestrian zone was created in the city center, backed by a campaign to encourage behavioral change. As a consequence, there has reportedly been a 20 percent improvement in public transport speed, in addition to a 15 percent reduction in pollution in the central zone of the city 82 James Leather and the Clean Air Initiative for Asian Cities Center Team (2009), Rethinking Transport and Climate Change, Asian Development Bank Development Working Paper Series No.10, December 2009 83 The draft version of the GTMP of October 2014 was used for the purposes of the modelling. The GTMP is in process of approval by the European Commission and the major infrastructure projects could be revised accordingly. The TRANSEPT model can be used to modify the underlying assumptions once the GTMP is finalized and approved projected to grow (Table 4.1), and GHG emissions are estimated to increase (Figure 4.8).84 The differences in projections between the two models result from the differences in the assumptions of trends for different modes, with the emissions model forecasting a greater growth in vehicle activities, energy demand and growth in GHG emissions. The Romanian General Transport Master Plan (GTMP) is included in Business as Usual (BAU) scenario, so are certain investments in urban planning, operational efficiency measures, pricing instruments and regulations. In order to ensure complementarity, the country-specific strategy should be coherent with the EU-level transport strategy, which focuses on assuring sustainable mobility for people and goods and contributing to ambitious GHG emissions reduction targets. The Romanian GTMP was developed under the guidance of the European Commission as a condition for its approval of the Strategic Operational Program for Transport (SOPT). The GTMP includes very significant investment in public transport infrastructure (including the national rail system. Also, the Sustainable Urban Mobility Plans are under development for a number of cities, involving integrated land use and transport planning in the capital city (Bucharest and Ilfov County) and seven larger cities that are designated as growth poles. In terms of measures to improve operational efficiency, there are well established eco- driving programs in the freight sector to reduce fuel consumption and emissions, and freight and logistics hubs (as part of the GTMP). Pricing instruments that are in use in Romania include fuel taxation, vehicle scrappage scheme, parking pricing and new vehicle registration tax. Until 2014, Romania’s fuel duty rate was one of the lowest in EU at 32 euro cents/liter for diesel and 35 euro cents/liter for gasoline, but a 7 euro cents/liter was applied in April 2014. Nevertheless, gasoline and diesel prices remain significantly below the EU average in April 84 For more details about the models and comparison of the projections, please refer to the Appendix of the Transport Technical Paper 2015 (Figure 9). Similarly, parking fees in Bucharest are low compared to other EU-12 cities. (Figure 10) A policy of high parking pricing, particularly in relation to mass transit public transport, can be an effective mechanism to discourage the use of private vehicles. A vehicle scrappage scheme has been in place in Romania since 2005, known as the ‘Rabla’ (clunkers). Approximately 500,000 ageing and high-polluting vehicles have been scrapped, and the purchase of around 250,000 more efficient vehicles has been subsidized. Uptake of the scrappage scheme peaked in 2010, with almost 190,000 cars scrapped, and has since fallen to much lower levels. Whilst the impact of the scrappage scheme to date are reflected in the baseline emissions forecasts, the BAU does not project a return to the high levels of new vehicle purchase achieved by the scrappage scheme in its top performing years. Romania introduced another pricing mechanism to change the age and characteristics of the vehicle fleet - an “Environment Stamp” tax on new vehicle registrations. The broad regulatory framework has been in place since 2013, with flexibility to adjust rates to encourage greener vehicle technology uptake. Currently Romania has no aviation travel tax. Figure 4.9. Gasoline and Oil Prices as of April 13, 2015 Source: European Commission (EC). 2015. Consumer Prices of Petroleum Products Including Duties and Taxies. Available at: https://ec.europa.eu/energy/sites/ener/files/documents/2015_04_13_with_taxes_1747.pdf. Figure 4.10. Daily Parking Rate 35 30 25 20 US$ 15 10 5 0 Tallinn Sofia Tirana Riga Podgorica Kyiv Bratislava Warsaw Istanbul Vilnius Zagreb Prague Bucharest Budapest Belgrade Source: Colliers International. 2011. Global Central Business District Parking Rate Survey. Available at: http://downtownhouston.org/site_media/uploads/attachments/2011-07- 19/Colliers_International_Global_Parking_Rate_Survey_2011.pdf Regulatory interventions include traffic management measures, access restrictions and speed restrictions. The Bucharest Urban Traffic Control Center delivered introduced an adaptive urban traffic control and public transport management system, which is estimated to have reduced travel times by about 20 percent and achieved a 10 percent reduction in CO2 within the area.85 Bucharest does not have Low Emission Zones, but it already has access restrictions that apply to vehicles over 5 tons. They are banned from the central area of Bucharest at certain times, and only allowed to circulate outside of these times with a permit. Vehicle fuel consumption increases rapidly when speed progresses beyond the optimally efficient speed of around 90 km/hour. Romania’s speed limits are currently set at 130 km/hour on motorways, 110 km/hour on expressways, 90 km/hour on other non-urban roads for cars and motorcycles; trucks and buses are limited to 110 km/hour, 90 km/hour and 80 km/hour respectively. A lowering of the speed limit for all vehicle types to a speed of 100kph on all road types could be implemented to increase fuel efficiency levels and reduce emissions. Challenges Given the growth in vehicle ownership and road transport, decoupling GHG emissions from the transport sector and economic growth, or at least lowering the GHG intensity of future transport growth, represents the key challenge and will require departure from the business-as-usual policies in the transport sector.86 The main challenge the transport sector faces is how to reduce the system’s 85 SWARCO MIZAR. Urban Traffic Management, Romania, Bucharest 2007-2014. Available at: http://www.swarco.com/mizar-en/Projects/ITS-References/URBAN-TRAFFIC-MANAGEMENT,-Romania,-Bucharest- City-of-Bucharest 86 International Transport Forum (ITF) and Organization for Economic Co-operation and Development (OECD). 2008. Greenhouse Gas Reduction Strategies in the Transport Sector: Preliminary Report. Available at: http://www.internationaltransportforum.org/pub/pdf/08ghg.pdf/ dependence on oil, limit GHG emissions and minimize externalities, without compromising efficiency, mobility and economic growth. 87 Figure 11 presents real GDP growth and GHG emissions from the transport sector in Romania over the 2000-2012 period, suggesting that they move in tandem, with an inflexion in 2009 when real GDP started growing more rapidly than transported related GHG emissions. The close interdependence between transport and economic development is evident over the 2000- 2012 period - GHG emissions rose by 54 percent while real GDP rose by 55 percent. To mitigate GHG emissions, growth in demand needs to be either limited, managed or targeted on low emission travel modes, coupled with reducing GHG rates (g/km emitted) from vehicles. Figure 4.11. Real GDP Growth and GHG Emissions from Transport Sector (2000=100) Sources: IMF, World Economic Outlook, April 2015; EEA. Inefficiencies of the road transport sector can be grouped into the following three types: pricing inefficiencies, fuel inefficient technology, and those that come with spontaneous transition of the urban form. At present pricing does not reflect the full costs of transport, failing to include costs of negative externalities and to invest beyond roads. Adequate pricing policies are critical to support transport investments, change demand and existing behaviors, allocate resources more efficiently, and raise funds to invest in more sustainable forms of transport. Both fuel tax and parking fees in Romania are low compared with other EU countries. There is room to adjust these pricing mechanisms, and other instruments, including the new vehicle registration fees, urban congestion fees and others. Increasing the use of renewable energy and the uptake of low carbon vehicle technology can reduce energy intensity of the transport sector, but the lack of infrastructure for alternative fuels is an issue that needs to be addressed. At present, there are only 20 electric vehicle charging stations,88 constraining the use of alternative fuel vehicles. In 2014, only 7 electric or hybrid electric vehicles were registered in Romania. By comparison, a total of over 75,000 were registered across the EU. Moreover, relaxation of land development controls in transition countries has led to inefficiencies associated with low-density development. In Romania, there has been a decrease of residential use in the urban core, an increased rate of residential suburbanization, and subsequently increased personal vehicle ownership, travel time and congestion. Integrating land use and transport planning in urban areas is key to minimizing GHG 87 Andreas Kopp, Rachel I. Block, and Atsushi Iimi. 2011. Turning the Right Corner: Ensuring Development through a Low-Carbon Transport Sector. World Bank: Washington D.C. Available at: http://www- wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/05/31/000445729_20130531125005/Re ndered/PDF/780860PUB0EPI0050240130right0corner.pdf 88 Association for Promoting Electric Vehicles in Romania (AVER). Available at: www.aver.ro. emissions in the future. Failure to consider land use and transport in an integrated manner in Romania’s towns and cities will inevitably lead to unnecessary motorized travel and higher GHG emissions in the future. Transport service provision needs to be addressed holistically to ensure that public transport is able to attract new users and realize the full climate and economic benefits. A modal shift from road to much less emission intensive rail transportation could help contain road transportation demand and emissions, while also resulting in a co-benefit of reduced road congestion. But the impact of investments should be monitored through changes in occupancy rates. Low emission rail transport or public transport can be more emission intensive per passenger-km or ton-km than use of private cars and trucks, if ridership remains low or declines further. The GTMP report argues that Romanian railways “are in a crisis situation.” For all public transport service, maintenance, vehicles or rolling stock, customer service, operational efficiency and service prices need to be considered as part of an attractive package offer to customers. METHODOLOGY AND FINDINGS The objective of the analysis was to assess the impact of green policies and investments on transport emissions. The strategic mitigation model that has been developed for Romania is the Transport Strategic Emission Prediction Tool (TRANSEPT). It includes four modules which produce the input matrices for calculation of the GHG emissions: (a) transport demand; (b) vehicle stock; (c) vehicle and driving efficiency; and (d) fuel consumption. Each module takes a number of baseline datasets as input and applies the effect of the policy interventions under three scenarios – Business as Usual (BAU), Green and Super Green - to them. The adjusted datasets are then used as input matrices to the final module of TRANSEPT, which calculates the resulting GHG emissions for all three scenarios. The process is outlined in Figure 12. The impact of the green policies is assessed by comparing the outcomes of Green and Super Green scenarios against the BAU scenario. The outcome of the analysis is a range of potential interventions, their cost (investment and operational), and their abatement potential. TRANSEPT is a bottom-up engineering model and models the measures individually (as opposed to using a system approach). Figure 4.12. Overview of TRANSEPT Model Process Source: World Bank. The measures which have the potential to deliver the greatest absolute carbon savings over the course of the modelled period are as follows: (a) the lowering of speed limits (speed restrictions); (b) increasing the fuel tax (as a substitute to more sophisticated road user charging); (c) the implementation of a more progressive first registration tax (Environmental Stamp) promoting the adoption of low emission vehicles; and (d) eco-driving programs which encourage more efficient driving patterns, with advertising campaigns targeted at private car users and training programs focused on the freight and public transport sector. Figure 13 provides a summary of the cumulative abatement results for each intervention over 2015-2050, while the table below provides a comparison of the abatement potential of the proposed intervention in three different time periods: the period 2015-2022 corresponds to the timeframe of the Government Action Plan, the period 2015-2030 parallels the time horizon of the Government Transport Strategy, and the period 2015-2050 is the timeframe of the analysis presented in this report. Table 4.2. Carbon Abatement from Interventions (MtCO2e) Intervention 2015-2022 2015-2030 2015-2050 % of Total Emissions Fuel Price 1.03 4.14 14.37 2.08 Scrappage Scheme 0.24 0.33 0.35 0.05 Vehicle Registration Tax 0.07 0.57 6.79 0.98 Parking Pricing 0.19 0.64 1.85 0.27 Urban Cong Pricing 0.05 0.60 2.73 0.39 Air Travel Taxation 0.27 0.76 2.44 0.35 Ultra-low Emission Vehicles 0.02 0.12 1.08 0.16 Public Sector Electric Vehicles 0.02 0.13 1.15 0.17 Bus Electric Vehicles 0.04 0.23 1.68 0.24 Speed Restrictions 2.17 6.29 21.36 3.09 Eco Driving 1.06 2.69 7.14 1.03 Low Emissions Zones 0.23 0.72 2.92 0.42 Investment in Walking Cycling 0.46 1.20 2.77 0.40 Smarter Choices/Soft Measures 0.22 0.58 1.37 0.20 Source: TRANSEPT. Note: The periods in this table are selected to represent three timeframes: of the Government’s Action Plan, of the Government’s Strategy, and of the analysis presented in this report. Having identified the abatement potential for each of the modelled interventions, consideration needs to be given to the most effective areas of investment to achieve emission reduction. The implementation and ongoing costs of delivering the identified schemes have been estimated using case study evidence, and a variety of sources of estimated costs applied to the Romanian context. The scope of the estimated costs are limited to those borne directly by the Government of Romania, including both investment costs and operational and maintenance costs.89 The decision on which interventions to include in the Green Scenario were derived from a multi- criteria analysis that took into account the following: (a) scheme investment cost to the government; (b) cumulative emission savings; (c) carbon reduction cost effectiveness; (d) deliverability and economic importance; and (e) wider benefits. The wider benefits considered included local air quality, decongestion, noise, safety, equity and health benefits.90 Table 3 summarizes the performance of each abatement intervention in terms of investment value, required investment cost and potential implementation barriers. As an example, the measure “speed restrictions” was not included in Green scenario while it has a significant impact on emissions. The reason is challenging implementation of this measure, which require a high level of coverage and enforcement. Another measure not included in Green scenario is the new vehicle registration tax – it was identified as a tool which can bring significant carbon savings, but is politically difficult to implement. Some other measures did not make the Green scenario list because of their high cost (e.g., urban congestion pricing) or low abatement potential (e.g., parking pricing). Table 4.3. Abatement Intervention Performance Intervention Discounted Absolute Carbon reduction Deliverability/ Wider Benefits Investment Emissions cost-effectiveness economic impact Cost, Euro Savings, Euro/ton million MtCO2e Fuel Price Taxation 0.9 14.37 0.06 Challenging Very high Vehicle Registration Tax 0.9 6.79 €0.13 Moderate Moderate Speed Restrictions 22.6 21.36 €1.1 Challenging Very high Air Travel Taxation 3.5 2.44 €1.4 Moderate Moderate Eco-Driving 34.4 7.14 €4.8 Good Very High Parking Pricing 10.7 1.85 €5.8 Moderate Moderate Smarter Choices/ Soft 18.8 1.37 €13.7 Good Very High Measures Investment in Walking 56.3 2.77 €20.3 Good Very High Cycling Low Emissions Zones 60.4 2.92 €20.7 Moderate Moderate Public Sector EV 28.2 1.15 €24.6 Good Moderate Bus EV 222.2 1.68 €133 Moderate Moderate Ultra-low Emission 163.2 1.07 €152 Moderate Moderate Vehicles Urban Congestion 792.8 2.73 €291 Politically Moderate Pricing Challenging Scrappage Scheme 146.3 0.35 €413 Good Very High Note: Costs are discounted, using a 4 percent discount rate, while emissions are undiscounted. Sources: World Bank, TRANSEPT. 89 Costs—capital and operational and maintenance costs —are discounted at a rate of 4 percent to provide the net present value (NPV). The abatement cost is cost (NPV) divided by total undiscounted cumulative carbon reduction over 2015-2050. 90 These were considered at a qualitative level, but not included in costs Key transport measures were selected, with a modest investment cost for the green package but significant financing needs for the super green package. Based on the multi-criteria analysis, the following measures are selected for inclusion in the Green Scenario: (a) fuel price taxation increase; (b) new vehicle registration tax; (c) eco-driving program; (d) smarter choices/personal travel planning programs; (e) investment in walking and cycling infrastructure; (f) parking pricing; (g) air travel taxation. As for the Super Green Scenario, all interventions have been included in order to assess an upper bound for slow GHG emission growth from the transport sector. No specific pre-defined GHG saving targets were used to constrain the choice of interventions, as a bottom-up approach was adopted. It is important to note that non-inclusion within the Green Scenario does not mean that the schemes have no value or that these should not be considered for implementation in Romania, based on wider appraisal criteria such as economic impact or local air quality. For example, with high implementation and operating costs, technological and enforcement barriers and potential political resistance, the promotion and acquisition of Ultra Low Emission Vehicles (ULEVs) in the short/medium term is not considered cost effective as a means of carbon emissions saving. However, considering its very poor air quality standards, Bucharest would potentially benefit most significantly from the promotion and acquisition of ULEVs, and the intervention should be considered within this context. The combined discounted capital investment totals €135 million over the period 2015-2050 under the Green Scenario, but rises sharply to €1687 million for the Super Green Scenario (Table 4). Table 4.4: Investment Costs of Green and Super Green Scenarios (Euro millions) Undiscounted Investment Cost Discounted Investment Cost Model Scenario Action Plan Strategy Model Period Action Plan Strategy Period (2015-2022) (2015-2030) (2015-2020) (2015-2022) (2015-2030) (2015-2050) Green 93 136 194 79 108 135 Scenario Super Green 885 1,477 2,811 748 1,136 1,687 Scenario Note: A 4 percent discount rate was used. Source: TRANSEPT. The scale of abatement potential achievable in the Super Green Scenario, in comparison with the Green Scenario and the BAU scenario, is presented in Figure 14. Under the BAU scenario, emissions grow by 34 percent over period 2015-2050, while under the Green Scenario, emissions growth slows to 24 percent. Emissions growth slows further to 17 percent under the Super Green scenario. Note that the impact of the bundle of measures is not identical to the sum of the individual measures due to the inter- relationship between certain policies. In all cases, GHG emissions from the transport sector will rise, with different rates of growth. These results are in line with many studies which suggest that reducing GHG emissions—as opposed to reducing GHG emission growth rate—is difficult in the transport sector. However, as shown in Figure 15, GHG emissions from transport are projected to grow more slowly than the real economy under a Green Scenario. At the last step of the analysis, a marginal abatement cost curve (MACC) provides a framework to present the outcomes of the transport sector analysis in a form useful for policy discussions. Cost and abatement potential of the proposed interventions, calculated in TRANSEPT, are used as input into a tool developed at the World Bank to calculate MACC parameters.91 The outcomes are presented in Figure 16. The most cost efficient measures are fuel price tax, scrappage scheme, vehicle registration tax, parking pricing, and urban congestion pricing; the measures delivering maximum abatement are speed restrictions, vehicle registration, and fuel price taxation. Figure 4.16. Transport measures vary in their abatement potential and their unit cost Marginal Abatement Cost Curve, 2015-2050 Source: calculations using the World Bank MACC methodology. 91 See Chapter 9 in this report, which describes the MACC approach used in this study across sectors in detail CONCLUSIONS AND RECOMMENDATIONS As Romania’s motorization rate converges with that of the EU, transport emissions are expected to grow even if green measures in the sector are implemented. Unlike in other sectors, where the objective is to reduce emissions, the goal of green growth development in transport is to decouple growth of emissions from the sector growth or, in other words, to lower GHG intensity of the transport sector going forward. The proposed mitigation action plan recommends a set of actions on the basis of estimated benefits. The main areas of concern coincide with the top drivers of emissions, and many of them – such as the old vehicle fleet and increasing private ownership of vehicles – should be addressed using policy or behavioral incentives such as taxes, regulations, fees and pricing aimed at encouraging replacement of old vehicles and discouraging driving. Fuel pricing is a particularly effective policy instrument that discourages vehicle usage and encourages the purchase of more fuel-efficient vehicles, thereby reducing vehicle-fuel intensity. Fuel taxes are relatively inexpensive to collect, easy to administer and reasonably equitable. The New Vehicle Registration Tax (Environment Stamp) is levied according to a vehicle’s Euro standard, CO2 emissions, engine displacement, with a discount rate applied depending on the age of vehicle. A gradual pre-announced increase of the most polluting cars has been a means of influencing purchasing decisions. The cost of changing the rates under the existing regulatory framework would be negligible. It is assumed that the change in tax rates is fiscally neutral as higher taxes for high polluting vehicles are offset by lower taxes for more efficient vehicles. Parking pricing, in conjunction with tightened parking regulation and enforcement, may be considered to be a more cost effective more readily implementable solution to in town congestion, instead of urban congestion charging. Parking pricing is a market-based measure which offers the potential for emissions savings with a high level of cost effectiveness. Indeed, the measure would be expected to offer a stream of revenue which could facilitate some of the investment measures in the transport sector. Air travel taxation presents a mechanism for exerting some control over the growing demand for air travel at the margins, and also offers a revenue stream which may be put to useful purpose. The implications for the economy need to be considered, but there is are potentially positive equity impacts in what may be expected to be a strongly progressive form of taxation. Best practice examples typically combine the disincentive of high parking charges with an effective and efficient public transport system, and good walking and cycling facilities. Smarter choices programs, combined with investment in walking and cycling infrastructure, have been demonstrated to lead to modal shift, achieving not only a reduction in emissions levels but also significant wider benefits including health and wellbeing, and decongestion. Smart choices programs are “soft” behavioral change programs that provide better information to travelers on available choices and highlight the potential benefits of sustainable transport modes. Smart choices schemes and policies include workplace and school travel plans, personalized travel planning, awareness campaigns, public transport information and marketing, car sharing schemes, teleworking and teleconferencing. In cost-benefit analysis, these schemes typically perform strongly, with cost-benefit ratios in excess of 20 by comparison with highway and public transport schemes in the low single figures. Concerted and sustained investment can realize emissions savings at a reasonable level of cost effectiveness. The investment in infrastructure required to achieve modal shift from private cars towards public transport depends on local circumstances and the extent of the targeted shift. It is important to address needs for transport services holistically to ensure that public transport is able to attract new users and realize the full climate and economic benefits. Low-emission rail transport or public transport can be more emissions-intensive per passenger-km or ton-km than use of private cars and trucks, if ridership remains low or declines further. A modal shift from road to much less emission-intensive rail transportation, or to public transport (national rail system, local bus, tram, or trolleybus systems) could help contain road transportation demand and emissions, while also resulting in a co-benefit of reduced road congestion. Institutional arrangement and coordination are also critical. Actions should start with collaborations between transport stakeholders, such as Government ministries, the rail sector the City of Bucharest, municipalities, bus operators, and parking management organizations. More complicated but also necessary actions in this area should aim at creating clear governance structures and contractual arrangements, as well as increasing administrative and technical capacity to support strategy development and project implementation. Financing needs for the recommended measures in transport rise sharply between the Green and Super Green scenarios but still remain modest, as incremental investments within a large sector. Under the Green scenario, additional investments total about €135 million over 2015-5092 but over €1.7 billion in the more ambitious Super Green scenario. Most of the costs are incurred in the first fifteen years, during 2015-2030. In the first five years, 2015-2020, the implementation of the recommended transport measures will require just above €60 million in the Green scenario but about €608 under the Super Green scenario. 92 Discounted at five percent rate CHAPTER 5. CAN URBAN AREAS LEAD ON GREENING? CHAPTER SUMMARY This chapter sets out a development scenario analysis for the Bucharest-Ilfov Metropolitan Region (BIMR), to provide insights on opportunities to change the greenhouse gas emission trajectory of Romanian cities, using BIMR as an example. The BIMR dominates Romania’s population, economic landscape and land use development patterns. The motorization rate has been rising due to suburbanization. Traffic congestion is increasingly part of daily life, despite the fact that the City of Bucharest is served by one of the most comprehensive public transport networks in Europe. Romania has the lowest per-capita energy consumption in the EU but significant growth in electricity demand is already occurring, driven mainly by residential and commercial sectors. In addition to being among the most polluting service suppliers in the EU, district heating has become a serious drain on public finances in many cities, because tariffs for residential consumers are highly subsidized. As for waste management, Romania overwhelmingly relies on landfilling. Buildings account for the largest share of energy consumption (44 percent of total demand), followed by industry (30 percent) and transport (23 percent). Approximately 80 percent of buildings- related energy demand occurs in residential buildings. Heating constitutes 57 percent of all energy use in buildings, though the ratio is even higher in residential buildings. The financial resources available to upgrade major infrastructure systems have been limited by the regional economic slowdown and Romania’s difficulty in absorbing EU funds. Low carbon urban actions have been impeded by institutional challenges, including the lack of formal roles in planning and implementing, policy-planning disconnects between different government entities, and the lack of transparency. Also, subsidized energy prices for households and selected energy- intensive state-owned enterprises have led to low energy prices and an immature market for energy efficiency-focused firms. The Rapid Assessment of City Emissions (RACE) model is a geospatial model that compares population and development patterns under different scenarios. In contrast to the Business as Usual scenario, spatial development in BIMR under the Low Carbon Development scenario exhibits less sprawl, higher densities, mixed-use, and a coordination of transit and spatial planning. Unsurprisingly, proactive spatial planning leads to significant improvement in energy use, energy spending and emissions, even though the gross building area remains relative to BAU. In addition to congestion pricing and district heating upgrades, several cross-sectoral measures are recommended, including data collection training, dissemination and use; guidance; improve metropolitan governance and management; and improving management of urban growth. Recommended land use policies include promotion of mixed land use, up-zoning and transit- oriented development. When considered together with transportation, preferential land space for public transport, creation of pedestrian-only zones, parking policies and completion of ring roads are recommended. Building efficiency-related recommendations include the Property Assessed Clean Energy (PACE) finance; green mortgages; point of sale efficiency upgrades/audits; energy efficiency capacity- building programs. OVERVIEW93 Rising suburbanization is not captured in Romanian urban statistics. The official urbanization rate in Romania is roughly 55 percent, which is low compared to other parts of Europe and has been fairly constant for the past two decades. Migration out of rural areas has been to the outskirts of major cities, which are still categorized as rural. For example, population levels in Ilfov County (on the periphery of Bucharest) has increased 69 percent between 1977 and 2011, jumping from 230,000 to 389,000 people. (See Figure 10.1 on the expansion of built up areas). Other Romanian cities are experiencing a similar phenomenon. (See Table 10.1). Figure 10.1: Expansion in Built Up Areas around Bucharest 1984 to 2010 Source: B Mihai, C Nistor, & G Simion, “Post-socialist urban growth of Bucharest, Romania – a change detection analysis on Landsat imagery (1984–2010),” Acta Geographica Slovenica, (forthcoming). 93 For more details on the analysis and discussion, please see the full technical report of the urban sector, Please add: Report developed through the “Romania: Climate Change and Low Carbon Green Growth Program”, 2015, World Bank Table 10.1: Changes in Built Up Area of Romanian Growth Pole Cities 1992-2012 Source: World Bank, Enhanced Spatial Planning as a Precondition for Sustainable Urban Development. 2013. p 18 Romanian cities have shown some interest in reducing greenhouse gas emissions, and some have undertaken assessments to identify low carbon options. Sixty communities, together representing 25 percent of Romania’s population, have signed on to the European Commission’s Covenant of Mayors program, which requires development and implementation of an energy action plan. The World Bank’s Tool for the Rapid Assessment of City Energy (TRACE) has been deployed in seven Romanian cities (Brasov, Cluj-Napoca, Constanta, Craiova, Iasi, Ploiesti, Timisoara) to support local energy efficiency planning efforts, by assessing energy use in six key sectors, benchmarking against peer cities, and evaluating which interventions might be most appropriate. TRACE is most useful in addressing sectors over which a local authority has the greatest control – the public bus system, for example, rather than private automobiles – but it does not address other options important to lower carbon emissions, such as renewable energy or other fuel switching. Urban Transport:94 The motorization (car ownership) rate in Romania is low compared to the rest of the EU, but it has been rising, exacerbating existing traffic congestion problems in most cities. Many cities have public transport systems (including buses, trams and trolleys), but declining ridership has made it difficult for system operators to finance those upgrades which might bring riders back to the system. Taxis are plentiful in most cities, but many of the vehicles are old and fuel-inefficient, mirroring the make- up of the nation’s vehicle fleet. Some cities have an age limit for taxi vehicles, but this varies significantly from city to city. Finally, the pedestrian and cycling infrastructure varies greatly in quality and quantity between different towns and cities, and within different city areas. Responsibility for urban transport investment generally sits with the municipalities in Romania. Sustainable urban mobility plans are currently under development in Romania’s seven growth pole cities and Bucharest/Ilfov. 94 A detailed discussion of the transport sector can be found in chapter 4 of this report Urban Energy Systems:95 Romania has the lowest per-capita energy consumption in the EU. Per capita consumption of electricity is particularly low, but significant growth in electricity demand is already occurring, driven mainly by residential and commercial sectors. Some of this growth is occurring as households move away from their reliance on district heating. District heating systems were once a prominent feature of many Romanian cities, but the 300 systems operating in 1995/96 had declined to 83 by 2011. In 16 of the 31 district heating systems with more than 10,000 customers, the number of customers has dropped by more than 50 percent. In many cities, district heating has become a serious drain on public finances because tariffs for residential consumers are highly subsidized, on average by 50 percent. Service quality, cost, and concern over high pollution levels are among the primary reasons for declining demand. Most of the old inefficient cogeneration units and heat-only boilers have not been upgraded or replaced with modern generation equipment, nor are they equipped with adequate burning equipment, resulting in SO2 and NOX emissions that exceed EU norms. With an average of 275 tons of CO2 per Gcal, Romania’s district heating producers rank among the most polluting service suppliers in the EU. Heat distribution networks suffer an average of 30 percent heat and water losses, compared to 5-10 percent for newer networks. As a result of those inefficiencies, the cost of district heating is about 18-20 percent higher than some other EU countries. Urban Waste Systems: The GHG emissions associated with municipal solid waste disposal in Romania total approximately 2 percent of the country’s overall emissions. The majority result from the country’s overwhelming reliance on landfilling as its primary waste management strategy. Organic waste entombed in a landfill decays anaerobically, produces methane, a GHG with 25 times the heat trapping potential of carbon dioxide. BASELINE DEVELOPMENT CONDITIONS IN THE BUCHAREST-ILFOV REGION With a population of 2.3 million, the Bucharest-Ilfov Metropolitan Region ranks 37th in size among all of the metropolitan regions in wider Europe. Bucharest is the capital of Romania, its financial center, the leading industrial and cultural hub, and home to many of Romania’s top universities. Located in the south-eastern part of Romania, Bucharest is approximately 100 km south of the Carpathian Mountains, 200 km to the west of the Black Sea, and 60 km north of the Danube River. The region’s climate is temperate, with hot summers and cold winters. Although formerly known as the Municipality of Bucharest, administrative and political powers are shared between the Municipality and local sector councils in Bucharest, with little overlap in authority. The city government is headed by a mayor (Primar General) and city council (Consiliu General). The city is further subdivided into six administrative sectors (Sectoare), each with their own mayor and city council. In general, the Municipality is responsible for major city infrastructure systems such as the public transport network, major roadways, and the water and sewage system. Sector town halls manage secondary roads, parks, schools, and street cleaning. 95 A detailed discussion of the energy sector can be found in chapter 3 of this report Ilfov County is managed by a County Council that is responsible for basic public services and the road and transport network outside of the administrative limits of each of the 32 communes located within the County. As is the case with District government above, Communes are responsible for local infrastructure and other government service issues within their boundaries. While Bucharest’s population has declined over the past two decades, Ilfov County – the nearly 1600km2 administrative district that completely envelops Bucharest – grew by 35 percent from 1992 to 2011. Ilfov County now accounts for more than 17 percent of the metropolitan area’s population, up from 12 percent in 1992 (Table 10.1). This population shift has largely resulted from Bucharest residents moving from urban areas into new, single-family residences in suburban areas in Ilfov. The Bucharest-Ilfov Metropolitan Region (BIMR) dominates Romania’s population, economic landscape and land use development patterns. BIMR accounted for over 27 percent of the country’s GDP in 2011, up from 11 percent in 2000 (See Figure 10.2). The region’s share of Romania’s population increased by 10.2 percent in 2000 to nearly 11.4 percent in 2011, a pattern that will likely continue over the next few decades. This increase is in stark contrast to other cities around the country, where the population has declined significantly. (See Figure 10.3). Figure 10.2: Population Distribution in Romania, 2011 Source: World Bank team calculation based on 2011 Population and Housing Census Suburban development pressures are strong. Population distribution within the study area reflects three historical conditions typical of many eastern European cities: (i) lower population densities in the historical core area; (ii) high densities in outer clusters of high-rise apartment complexes adjacent to industries, built during the Communist era following the Soviet model; and (iii) scattered, low-density suburban sprawl that has evolved since Romania’s Revolution in 1989 and the subsequent privatization of land. Many of the high-rise, prefabricated panel apartment blocks in Bucharest have small units. Public spaces have deteriorated over the years due to poor maintenance. With the privatization of land, suburban farmers are now able to sell individual plots for the development of single family homes. Growing incomes enable many Bucharest residents to move to the suburbs, even though they continue to have weak public services in terms of schools and commercial facilities. Figure 10.3: Bucharest-Ilfov Region’s Change in Share (%) of Romania’s GDP and Population Source: World Bank team calculation Overall, the distribution of total building stock shows a radial pattern driven by proximity to major roads. The distribution of residential building stock clearly shows these spatial patterns:96 Suburban low-rise development is occurring at very low densities, generally at 6 dwellings/hectare. Medium-rise residential is largely comprised of 3-5 story walkup apartments in central areas. High-rise residential stock is principally panel blocks built during the Communist era. Other salient characteristics of Bucharest’s building stock are the low quantity of commercial offices and their central location, the 96 Using the RACE model, building areas have been calculated in all 500 m cells within the study area large quantity of large-scale retail (big-box) in suburban areas, and the distribution of industrial buildings, clustered around older industries in the inner urban area and more recently scattered in the suburbs. The Bucharest-Ilfov region’s economy is still in transition, with an ongoing dramatic shift in ownership. Only 8 percent of employees worked for the state-owned enterprises in 2012, in contrast to 25 percent in 2000. Approximately 13 percent worked for foreign-owned firms in 2011, in contrast to only 5 percent in 2005. Services currently account for more than 76 percent of employment, with higher value-added producer services accounting for 31 percent of total employment. Manufacturing is still the largest employer (159,800 employees in 2011), but numbers have decreased by almost 23,000 from 2008 to 2011. BIMR’s manufacturing sector is gradually innovating, but traditional industries (food, apparel, metal fabrication, printing machinery, furniture, tanning/dyeing) still provide the largest share of employment. Exports grew by 69 percent from 2005 to 2011. Per capita GDP in BIMR is 2.5 times the national average. The region has several major comparative advantages that will continue to drive its economic growth over the coming decades. The GDP of BIMR grew by 12.3 percent between 2010 and 20116, and has been high for most of the past 15 years. Its economic hinterland is large: within a one-day drive by truck from the center of Bucharest is a population of 11 million; within a two-day drive, the hinterland reaches Budapest, Vienna, Athens, Istanbul and Kiev, a market of 83 million. BIMR has the most educated human capital in Romania: 33 percent of its working age population has vocational and tertiary education attainment, compared to less than 15 percent in other regions. Supplementing these advantages are labor costs, which are the third lowest in wider Europe. Traffic congestion is increasingly a part of daily life in the Bucharest-Ilfov region, despite the fact that the City of Bucharest is well-served by one of the most comprehensive public transport networks in all of Europe. Approximately 38 percent of trips in the region are made via automobile. Traffic congestion is becoming a serious problem, particularly in the urban core, at intersections along the main ring roads, and on the main thoroughfares traveling through the city along a north-south axis. A primary contributor to the congestion problem is rapid growth in vehicle ownership rates, which have risen from 152 vehicles per 1000 inhabitants (2006) to 224 vehicles per 1000 inhabitants (2012). Also, insufficient off- street parking facilities in the central area led many drivers to use illegal “parasite” spaces on the roadway, narrowing lane space and further inhibiting the flow of vehicles. Bucharest is served by a dense transport network, consisting of the 51-station metro system, and the RATB’s (Regia Autonoma de Transport Bucuresti) network of 120 bus lines, 24 tram and light rail lines, and 15 trolleybus lines. Non-motorized transport (NMT) is the second most utilized means of transport for daily trips: 31 percent of trips are made by walking, while 2 percent of trips are made on a bicycle. The bus is the most-utilized form of public transport, followed closely by the metro. Metro stations are located approximately every 1.4km. A 5th metro line is expected to open in 2017. The majority of the bus and tram fleet has been overhauled in recent years to improve passenger comfort and vehicle efficiency. Circumstances in Ilfov County are quite different. Nearly one quarter of roadways in Ilfov County consist of high speed motorways. Access to Bus system is virtually non-existent, as there are just a few lines serving Ilfov County residents commuting into Bucharest. There are 2.6 trips per capita per day in the BIMR, with Bucharest residents travelling approximately 6.3 km on average and Ilfov residents travelling longer distances. (Figure 10.4) The average trip distance for the entire Bucharest-Ilfov region is approximately 6.8km. Figure 10.4: Travel Distance for Trips over 1km for Bucharest and Ilfov Buildings account for the largest share of energy consumption in Romania, at 44 percent of total demand, followed by industry (30 percent) and transport (23 percent). Energy use in buildings is influenced primarily by the thermal efficiency of the building, its size, its age, and its level of use. Approximately 80 percent of buildings-related energy demand occurs in residential buildings. Romania’s building stock is fairly old, with nearly 90 percent of the residential buildings built before the 1989 Revolution. In other words, there were constructed at a time when there were no specific thermal performance standards. Such buildings are unlikely to have much insulation, and have mechanical systems that would be considered unacceptable under today’s modern energy or building codes. The level of compliance with EU’s Building Performance Directive in Bucharest is unclear. Heating constitutes 57 percent of all energy use in buildings, though the ratio is even higher in residential buildings. Building heating systems around Bucharest typically involve freestanding boiler units inside the building, or in larger buildings, a connection to a large district heating system. Bucharest’s district heating system is vast – the second largest urban system in the world – involving more than 4,000 km of distribution pipes and satisfying 72 percent of the city’s thermal energy needs. The number of customers linked to the system has declined over the years, as has often been the case elsewhere in Romania. Service quality, cost, and concern over high pollution levels have been the primary reasons for declining demand. The RADET district heating system is fired by natural gas (54 percent), fuel oil (26 percent), and coal (20 percent). The electricity consumed in buildings in Bucharest and Ilfov is assumed to have the same characteristics of the national grid picture, meaning it is heavily dominated by coal and hydropower. Coal use in Romania is considerably higher than in many other European countries. Energy prices for selected industrial customers and all residential customers are subsidized. Nationally, Romania is reported to recycle only 5 percent of its total waste stream, with virtually all of the remaining material ending up in landfills. Data from the National Institute of Statistics in 2011 disclosed that Bucharest-Ilfov generated a total of 881,000 tons of municipal solid waste, with Bucharest responsible for approximately 86 percent of that total. Approximately 45 percent of the region’s waste is considered biodegradable (meaning it could be composted and converted into a useful soil amendment), while another 30 percent of the waste stream is made up of commonly recycled materials. None of these landfill facilities currently have any methane gas recovery system in place, which is problematic because organic waste entombed in a landfill decays anaerobically and produces methane gas. Unless the landfill is properly designed, capturing or flaring the methane via a series of pipes embedded in the landfill, the gas will slowly leak out of the landfill for many years, including long after it is formally closed. Proposals have been floated to develop a large waste-to-energy facility that would convert the waste heat into electricity. The status of this project is unknown. THE CHALLENGES OF LOW CARBON GROWTH IN THE BUCHAREST-ILFOV REGION The financial resources available to upgrade major infrastructure systems have been limited by the regional economic slowdown and Romania’s difficulty in absorbing the EU funds. Foreign direct investment (FDI) has generally been good for the BIMR: 60 percent of the country’s total FDI went to the region 10 years ago. However, by 2010, FDI levels had dropped by nearly 80 percent, a situation from which Bucharest is still recovering.97 The slowdown in the real estate market also has obvious implications in terms of the tax resources available to the Municipality for major infrastructure projects. Another critical factor has been Romania’s difficulty in absorbing European Union Regional Operating Program Fund. As of the end of March 2015, the absorption rate for the period 2007-2013 was 49 percent. Between 2007 and 2009, however, the absorption rate was 0 percent, as there was considerable ramp-up time to train staff, prepare portfolios of projects, develop the necessary legal framework and regulations, focus on strategies and the analytic foundation. Low carbon urban actions have been impeded by institutional challenges, including the lack of formal roles in planning and implementing, policy-planning disconnects between different government entities, and the lack of transparency. Compelled by the problems of traffic congestion, diminished air quality, and excessive energy spending, 60 Romanian communities have voluntarily opted to create Sustainable Energy Action Plans under the auspices of the city- focused Covenant of Mayors program. However, Romania lacks a formal urban climate strategy and action plan, and clarity regarding the formal role of local authorities in crafting and implementing changes that are necessary to reduce urban GHG emissions. High-level climate policy statements typically speak only in terms of sectoral or infrastructure changes, but do not specify who is responsible for planning or implementing these changes. The ambiguity around the role of local authorities is an obstacle to their engagement in ways that are more reflective of local considerations rather than national or global imperatives. Moreover, policy and 97 CJ Pen and M Hoogerbrugge, Economic Vitality of Bucharest. European Metropolitan Network Institute (EMI). 2012. planning disconnects between different tiers of government or Ministries with overlapping functions have proven to be a major impediment to the resolution of several major infrastructure challenges. Examples can be found in all sectors: Two different regulatory agencies are responsible for policies relevant to district heating systems. The metro system in Bucharest is operated by METROREX under Ministry of Transport control, while the surface transport system (trams, bus and trolley) is managed by RATB (Regia Autonoma de Transport Bucuresti), which is under city control. Lack of transparency by different government agencies has made it hard to plan and set priorities. For example, public access to information about the building stock in Romanian cities is limited, and there are no reports published to date comparing the Energy Performance Certificate scores across cities, despite the fact that the law has been fully implemented as of 2011. 98 Were such information available, local authorities could more easily compare building upgrade strategies or set priorities among different types of buildings. Subsidized energy prices for households and selected energy-intensive state-owned enterprises lead to low energy prices and in turn an immature market for energy efficiency-focused firms. As part of its accession into the European Union, Romania agreed to move away from tightly regulated and heavily subsidized energy prices to a market-based system. As of early 2015, businesses must now pay market rates for electricity and gas, but energy prices for selected industrial customers and all residential customers remain subsidized. Energy-intensive state- owned enterprises (SOEs) continue to receive preferential electricity and gas prices. State and local subsidies for residential district heating cover roughly 50 percent of residential customer costs. Household energy prices will not be fully liberalized until January 2018 (electricity) and January 2019 (gas) respectively, reducing the incentive to adopt energy saving measures. No timeline has been given for removing district subsidies. In addition to influencing energy demand, low prices have meant the market for energy efficiency-focused firms and expertise has been slow to develop. That should change in the coming years, either through firms in other European countries targeting the Romanian market, or through more home-grown endeavors. Trade groups such as the Romania Green Building Council are becoming more active, although membership rates remain quite low.99 METHODOLOGY: RAPID ASSESSMENT OF CITY EMISSION (RACE) MODEL Rapid Assessment of City Emissions (RACE) model is a geospatial model that compares population and development patterns for a region under different scenarios, in order to develop technical estimates of how they differ in terms of energy use, energy spending levels, air quality emissions, and GHG emissions. By changing assumptions about current and future land use patterns, the design and location of different public transport system options, the energy and emission factors assigned to different land use patterns in a city, and the solid waste management system design, it is possible to compare a 98 Required by the EU Energy Performance of Buildings Directive 2002 2002 (2002/91/EC) and its Recast (2010/31/EU 99 Interview with Steven Borncamp, Romania Green Building Council. July 2014. “baseline” scenario with one or more alternative scenarios in terms of: a) Total energy demand b) Total energy spending (in real terms) c) Total energy-related air quality emissions (PM10 and NOx) d) Total energy-related CO2 emissions Figure 10.5: Overview of the RACE model Source: Chreod Ltd. Step 1: Compile Baseline Inventory of Metropolitan Elements. Without the legacy of GIS- analytics or data tracking in the Bucharest-Ilfov region, digitized information on local land use patterns, the location of roads or highways, population data, and building stock data was obtained from a variety of sources, and in many cases, manually generated based on high resolution satellite imagery. A comprehensive land use map with information on shape, dimensions and uses of individual buildings was developed by leveraging data through OpenStreetMap, satellite imagery, field studies and geo-referenced photographs. Population data was obtained from census data of 2011. The digital representation of road networks, local rail network and the public transport network was obtained from the work on the Bucharest Sustainable Urban Mobility Plan (SUMP) and OpenStreetMap, and manually created using GIS and digital images. The 2012 Bucharest Statistical Yearbook provided the enterprise address and employment data, which was used to develop maps of different types and locations of business activity around the Bucharest-Ilfov region. Once the spatial model was fully developed, population, land use, and business activity information was then reallocated by superimposing a 500m x 500m grid scale over the entire Bucharest-Ilfov region.100 Data attached to an individual cell or to an aggregation of cells is more easily extractable for analysis in a relational database or a spreadsheet, as is the case with the RACE model. Step 1 is completed once the data is transferred into the RACE spreadsheet model, and energy and emission factors are applied to develop Baseline estimates of current energy demand, energy spending, and GHG and air quality emission levels for BIMR. Solid waste management system parameters are also entered into the analysis at this point, as the various disposal options are not necessarily spatially linked. This information serves as the starting point for the scenario analysis. Step 2: Prepare 2050 Development Scenario. The future development scenarios modelled in RACE posit assumptions about future demographic and economic conditions likely to exist in the city/region. In making these calculations, the scenario must explicitly address the pace of expected growth and shifts in the city’s reliance on manufacturing value chains (i.e. from low to high value-added manufacturing) and in consumer and product services. Collectively, these assumptions drive estimates of future demand for industrial, commercial, and residential building stock, which RACE then uses to calculate emissions. Moreover, transport infrastructure assumptions are necessary to construct “accessibility indices” for each 500m grid cell, which measure the relative accessibility of each cell to the city center or other areas of anticipated economic growth, thereby defining areas most likely to attract development activity. At least two different spatial growth options can be constructed to accommodate the projected population and building stock requirements: a Business-as-Usual option and a Low Carbon option. These options articulate different visions for the location of growth, the density of growth, the land use mix of growth, and the extent to which these land uses are integrated with the city’s transport infrastructure. Step 3: Model Business-as-Usual (BAU) Option. The BAU Option reflects recent spatial patterns of development: the land use mix is assumed to remain relatively segregated. In other words, large residential areas with little or no formal employment spaces; growth driven by changes in population levels and/or economic expansion continues to focus on suburban and peri‐urban areas (with little, if any growth distributed to the core and inner city areas), based on the assumption that land values and resettlement costs are lower in the suburbs. Grid cells with building densities higher than the city average are also excluded as growth areas. Finally, the BAU option assumes little attempt is made to link development growth to public transport systems in the region. With these assumptions in mind, growth is then distributed around the city using GIS, factoring in accessibility indices that prioritize available marketable land and recent growth trends. Once this is done, it is possible to recalculate energy demand, energy spending, and emissions for the region. Any changes in the solid waste management system structure (compared to the baseline period) are also accounted for at this time. Step 4: Model Low Carbon (LC) Option. The Low Carbon option presumes very different growth parameters than the BAU Option. High-density clusters of mixed use development are proposed, minimizing the need for travel to places of work, education, commerce, and recreation. Because growth is concentrated in areas with the best accessibility, there is tight integration of land uses with transport 100 This technique is commonly employed in GIS analyses to help remedy the fact that data is often available at wildly disparate scales (e.g. building scale vs. census tract vs. specific addresses, etc.) infrastructure. The LC option can propose changes to transport routes or the creation of new transit nodes to improve land use-transport integration and facilitate even higher density development. Solid waste management system options known to increase a city’s carbon performance are also changed in the model. Energy demand, energy spending (in real terms), and emission levels are then calculated for the new configuration. Step 5: Compare Development Options. The models employed in this analysis have been used to estimate the technical potential for change in energy demand, emissions, and other variables, but not the cost-effectiveness of different interventions. It highlights indicative changes that can be attributed to different policy decisions or estimates of how and where growth will manifest itself around a city. By comparing the energy and emission impacts of different development options, local and regional authorities can identify the types of policies that affect the long term economic and environmental sustainability of their city. Action plans can then be prepared to comprehensively review and where appropriate, adjust these policies to minimize emissions. KEY FINDINGS Option 1: Business-as-Usual (BAU) The BAU option assumes the continuation of low-density growth of residential, office and industrial development. For residential development, which accounts for the majority of both floor space and energy use, residents in high-rise Communist-era apartment blocks are assumed to continue the recent market trend of moving to single-family homes in the suburbs around Bucharest. Consequently, low- rise’s share of total residential building stock grows from 42 percent in 2014 to 60 percent in 2050. The BAU scenario involves extensive suburbanization in the ring 10-15 kms from the center of the city, since there is insufficient land to accommodate low density residential growth within Bucharest (Figure 6.1). Given the absence of public transport in this outer ring, residents would need to rely on private vehicles for journeys to work, education, shopping, and recreation. Indeed, the BAU scenario is notable for its lack of integration between new development and public transit (trams, buses and metro). Figure 10.6: Distribution of New Building Stock under BAU Option Source: Scheme developed within “Romania: Climate Change and Low Carbon Green Growth Program”, 2015, World Bank. In the business-as-usual (BAU) scenario, overall energy use and associated emissions continue to increase out to 2050. While this is to be expected given the low density development and lack of coordination with transport planning, what is most surprising is the slow rate of growth in GHG emissions. Even as demand for energy continues to increase between 2014 and 2050 as a result of the demographic and spatial trends—including an 30 percent increase in population and building area— carbon emissions grow much less rapidly (9 percent) over the same period. This is explained by a number of positive trends in building (anticipated improvements in building efficiency; changes in carbon intensity of electricity grid; and reduction in technical loses in the district heating system), transport (fuel efficiency gains and cleaner fuel mix), and solid waste management (rates of recycling and biodegradable waste diversion). Under the BAU scenarios, efficiency gains in buildings can be attributed to several current trends: renovation of the existing building stock at current pace of 1 percent per year, energy savings from retrofits at a conservative 15 percent, new buildings with moderate energy savings of 45 percent under EU policies, compared with existing building stock.101 Total GHG emissions from buildings are also affected by changes in the carbon intensity of the electricity grid, as coal-fired plants are largely 101 These assumptions on the rate and depth of change are informed by Building Performance Institute Europe (BPIE). 2014. Renovating Romania: A Strategy for the Energy Renovation of Romania’s Building Stock. Available at: http://bpie.eu/renovating_romania.html#.VWxEQzLGVyU. replaced by natural gas facilities. The thermal efficiency of buildings in the Bucharest-Ilfov region is also expected to increase thanks to anticipated reductions in technical losses from the district heating system (from 15 percent to 13 percent). Increasing vehicle kilometers travelled are somewhat offset by efficiency gains and cleaner fuel mix. As people move to the suburbs, the number and average length of trips, and speeds decrease as a result of increased congestion (speed is an important determinant of emissions). Under the BAU, the number of trips is projected to increase by 30 percent and average trip length by 8 percent from 2014 to 2050. However, all vehicle classes will also experience efficiency gains (40 percent in private vehicles and almost 20 percent in buses) as a result of current EU directives on fuel efficiency, and natural replacement of vehicles (an increase in Euro III/3 and up vehicles and a decrease in less-efficient older models). In the absence of coordinated land-use and transit policy, it is assumed in the BAU scenario that modal split will stay the same, but there is a trend towards a cleaner fuel mix, with particularly notable growth in LPG consumption in private cars. It is anticipated that rates of recycling and biodegradable waste diversion in Bucharest would reach half the levels mandated by EU targets. In the solid waste sector, emissions increase along with population and income growth. While waste composition is assumed to remain constant over the time period, management of waste is expected to change in line with current trend of improvement. Option 2: Low Carbon Development Compared to the BAU option, spatial development in BIMR under the Low Carbon Development scenario option exhibits less sprawl, higher densities, mixed-use, and a coordination of transit and spatial planning. It assumes proactive local action to reduce energy consumption in buildings and transport, and to change local solid waste practices, and ambitious national initiatives to promote clean power and cleaner vehicles. Spatially, growth is concentrated in a number of strategic areas (Figure 6.3). The LC Option creates two major new sub-centers with high densities and a mix of residential, office, and retail uses. Very high density residential is distributed in the immediate vicinity of metro stations, reflecting a strong coordination of transport and land use planning. Figure 10.7: Distribution of New Building Stock under Low Carbon Option, 2050 Source: World Bank The efficiency gain of urban land use and reduction in travel distances can be achieved by the following developments in the LC scenario. In terms of residential development, the LC option halves the share of low rise development, doubles the share of high rise development, and more than doubles the share of very high density development in 2050, compared to BAU. Retail becomes more dispersed in high density communities, reducing the need to travel to shops. Similar to BAU, the Low Carbon Option assumes that 100 percent of industrial development is in industrial estates; spatially, these are concentrated in 2 large industrial parks strategically located close to rail and expressways. For space of institutional buildings, the LC scenario assumes a drop in government buildings’ share, accounting for e- government reforms that reduce the need for building space. Education’s share increases, reflecting a qualitative improvement in space per student. The amount of land allocated to healthcare facilities increases, reflecting a growing demand from an aging population. Transportation’s share grows only slightly, reflecting an increase in the number of metro stations and hubs by 2050. Unsurprisingly, proactive spatial planning leads to significant improvement in energy use, energy spending and emissions, even though the gross building area remains the same as the BAU option. The scenario leads to carbon emissions reductions of 37 percent relative to a BAU pathway, with buildings- related energy use delivering three-quarters of savings. (Figure 10.8) The biggest difference between the LC and BAU scenarios is the attention to land use planning. In particular, development of high density buildings and mixed uses around transit nodes is reflected in a changed modal split, with a 9 percent increase in public transportation and 3 percent increase in non-motorized transit. Figure 10.8: Carbon Emissions Reductions under Low Carbon Scenario Relative to BAU, 2050 (metric tons of CO2e) Source: World Bank Reduced energy use cuts total energy spending by $1.4 billion USD per year in real terms. In the buildings sector alone, energy savings amount to $956 million USD per year by 2050. Thermal energy savings, relative to the BAU scenario, amount to as much as $632 million USD. Given that retail prices for heating are set by the government, it is likely that most of these savings will accrue to the municipal budget—an important saving given the large burden of subsidizing thermal energy use in Bucharest. Figure 10.9: Comparison of Buildings, Transport and Solid Waste Emissions in BAU and Low Carbon Scenarios (metric tons of CO2e) Percentages refer to reduction from 2050 BAU -38% -23% -80% Source: World Bank Under the Low Carbon scenario, reductions in building-related emissions will come from reductions in fossil fuels for electricity generation and improvement in transmission and distribution efficiency, in addition to increase in the proportion of higher density buildings, and actions by both local and national governments to increase the rate and depth of building energy efficiency above and beyond the BAU path. Building-related emissions are 38 percent lower relative to the BAU scenario. As for transport, new spatial patterns will lead to reductions in the number and length of trips, and traffic congestion. Combined with measures to improve vehicle stock and efficiency, transport emissions are 23 percent lower than the BAU scenario, with a total (real) saving in energy spending amounting to $440 million USD per year by 2050. Moreover, particulate matter (PM10) emissions will decline by 39 percent and nitrous oxide (NOx) emissions by 16 percent, relative to the BAU scenario. These improvements in local air quality, along with improvements in urban mobility, can make Bucharest a much more attractive and healthier place for people to live and work. While its relative contribution to region-wide emissions is low, the solid waste sector under the LC option shows a greater reduction proportionate to its BAU development trajectory than any other sector. An 80 percent reduction in emissions relative to BAU is achieved if Bucharest-Ilfov meets all EU targets with regards to recycling and biodegradable waste diversion. Emission reductions are driven primarily by a reduction in methane, via a combination of composting and the capture of 100 percent of the methane emissions from local landfills. CONCLUSIONS AND RECOMMENDATIONS This study provides local authorities with insights into how policies affect the speed and location of growth, the density of urban growth, the type, mix and location of transport infrastructure, the local waste infrastructure, and the degree of integration between different land uses and transport services can have on the long-term economic and environmental sustainability of a city. Delivering changes that lead Romania to a low-carbon future will take considerable financial resources and strong political leadership on the part of a range of stakeholders. The following table presents different categories of recommendations that focus more directly on initiatives Bucharest Municipal Government, District governments in Bucharest, and Ilfov County and Commune officials should consider. Other Romanian cities interested in this type of assessment are encouraged to evaluate the quality of data, go through modelling training, and consider the fundamental limitations of the model. RACE should be used to obtain knowledge into indicative changes in energy demand, energy spending, and emission levels that can be attributed to different policy decisions or strategic changes in how and where growth should be directed around a city. The RACE highlights the value of strategic planning in promoting more compact city design, transport-oriented development (and other policies resulting in changes in modal- split), upgrades to more efficient vehicle stock, and policies promoting building efficiency upgrades can deliver sizable reductions in annual energy spending and emission levels. Table 10.2. Policy Recommendations Sector Type of Policy Policy Recommendations Focus Initiative Data collection training, dissemination, and use : Expand the amount of land Administrative use, building stock, and building and transport-related energy use data and policy systematically collected and made available for public use. Local authority staff reform should be trained on data collection strategies and methods of analysis (including GIS). Guidance: Convene multi-stakeholder coordinating group to ensure policy Administrative coordination on land use and transport policies and investments and policy reform Improve metropolitan governance and management : Evaluate, with all Administrative affected stakeholders, mechanisms to improve coordinated and integrated strategic and policy Cross-sectoral planning, development monitoring and control, and delivery of metropolitan public reform services at the scale of the metropolitan region (including land use planning, public transport, and environmental management.) Improve management of suburban growth : Design, enact as a statutory Administrative instrument, and enforce a growth management strategy for the metropolitan and policy region that limits uncontrolled suburban sprawl, and subsequent reform consumption of agricultural land and forests. Promote mixed land use: Adopt mixed land use policies, where different Land use policy types of land use (housing, shops, offices, other urban amenities) are reform interspersed rather than segregated, thus providing more convenient access to goods/services and employment opportunities. Mixed land use policies are recognized for their ability to reduce the use of motorized transport. Up-zoning: Change the floor-to-area (FAR) ratio allowed on certain land Land use policy parcels or in certain neighborhoods, thus increasing the level of population or reform economic activity that can be accommodated. Note: these changes must be made to take into account the carrying capacity of local streets, sidewalks, and parking areas to ensure they do not become overloaded. Transit-oriented development: A variation on upzoning by specifically Land use policy targeting these changes in the vicinity of high-capacity transit nodes, thereby reform increasing the size of the population likely to make use of the mass transport Land use system. Note: these changes must be made in close coordination with relevant transport agencies to ensure that transit system capacity (overall, or at specific nodes) does not become overwhelmed by higher rates of usage. Preferential lane space for public transport/high occupancy vehicles : Roads policy Dedicated lane can ensure that high occupancy vehicles are not adversely reform affected by slow moving vehicles. Interest in public transport use typically increases if it is seen as a time-saving option compared to private vehicles. Creation of Pedestrian-only zones: Designating core city areas as pedestrian- Land use and only zones can reduce demand for motorized vehicles. roads policy reform Parking policies: On-street parking takes up scarce lane space that could be Roads policy used to facilitate vehicle movement around the city. Different parking policies (e.g., variable rate pricing with higher rates during peak travel period, on- street parking bans or time-based restrictions) should be considered for Land use and Transportation important thoroughfares. Land use policies can also be amended to promote the creation of more off-street parking. On the periphery of the city, Park and Ride facilities should be established at the end of high capacity transit lines to encourage the use of public transportation when entering Bucharest. (Such systems are critically needed if congestion pricing programs are established in the urban core. See below.) Completion of Ring road(s): The incomplete nature of the ring roads around Roads policy Bucharest leads through traffic to drive through the city center, competing with local traffic and increasing congestion levels. Congestion pricing: Congestion pricing is a mechanism whereby users of Roads policy Traffic management scarce public goods, such as road space in the center of a large city, are charged for their use of that good. The pricing strategy seeks to influence demand by dissuading individuals unwilling to bear this cost burden. Typically, congestion pricing in cities is limited to heavily trafficked areas; drivers entering must pay a toll to enter that area. Congestion pricing programs presume that effective alternatives (such as public transit) exist to allow individuals to enter that area at no or low charge. District heating system upgrades: Conduct or require strategic reviews of Engineering local district heating systems to identify cos- effective efficiency upgrade analysis heating District opportunities. Systems can also be analysed for the possible use or integration of low(er) carbon energy sources. Property Assessed Clean Energy (PACE) finance: PACE systems create a Public finance revolving loan fund that can be tapped to support energy efficiency upgrades. Property owners can apply for these funds, which are then paid off via a surcharge on their energy bill (typically at a rate equivalent to the energy savings the upgrades deliver to the building.) Because the loan is attached to an individual property rather than the owner of the property, when the property is sold/transferred the loan obligation is immediately transferred as well. PACE programs can be capitalized by private investors or other municipal finance strategies. Green Mortgages: Green mortgages typically enable borrowers to obtain Public finance larger mortgages (or preferred rates) because their properties have been certified as meeting minimum efficiency standards. The monthly savings on energy spending can thus be transferred to allow the borrower to afford higher monthly mortgage payments. Local authorities can partner with and promote the Romania Green Building Association’s new green mortgage program that provides preferential rates to property owners buying or investing in more efficient buildings. Point of Sale Efficiency Upgrades/Audits: These requirements seek to bring Energy policy older buildings closer to the energy performance of new buildings. These requirements must be satisfied before a property can be sold, transferred from one occupant to another, or renovated beyond a certain limit. To ensure that the retrofit burden does not become excessive, such policies typically cap the total cost of required improvements at some fraction of the sale or rental price. These requirements mesh well with EU-imposed building performance disclosure requirements, because underperforming properties can easily be identified. Building efficiency Energy Efficiency capacity-building programs: Local authorities can create Energy policy/ programs to improve local knowledge of building efficiency upgrade education opportunities. These programs can be run centrally out of City Hall, or support can be given to relevant community-based organizations in a strong position to influence/inform the public. C H A P T E R 6 . H O W W I L L WAT E R AVA I L A B I L I T Y A F F EC T G R O W T H? C H A P T E R S U M M A RY Romania’s water sector is vulnerable to climate change, and adaptation efforts are essential for its continued ability to meet demand for water from the end-use sectors – households, industry, agriculture, and hydropower. The water sector in Romania is facing a dual challenge: water availability is dropping and demand for water increasing, both due to climate change. Irrigation supply is constrained by the inadequate irrigation infrastructure, while irrigation availability is becoming critical for agriculture due to climate change. Similarly, supply reliability for industrial and domestic use is most challenged for basins with lower water endowment during summer months. Hydropower generation will both constrain and be constrained by water demand in other sectors in Romania. It is also sensitive to water scarcity in basins during the dry seasons. Adaptation efforts are therefore important. Two sets of models were used to analyze the impact of climate change on water availability and demand and the offsetting impact of adaptation measures: climate change models and adaptation scenario models. The latte compared two green (adaptation) scenarios – Green and Super Green - to the outcomes in the Baseline scenario. Climate change will lead to a decreased river runoff, which in turn will negatively affect water demand-supply balance. In agriculture, water availability will be threatened during the primary growing months, while demand for irrigation will increase due to rising temperature and decreasing and more variable precipitation. Unmet municipal demands will be modest but industrial activities may be more seriously affected if no adaptation efforts are undertaken. Climate change is projected to have a negative impact on meeting water demand, and demand management (including investing in improved efficiency of irrigation and municipal and industrial delivery and use efficiency) provides only a limited solution; increase in basin storage is needed. The greatest green growth investment potential exists for optimizing agronomic inputs, including fertilizer inputs, and rehabilitating irrigation infrastructure to restore irrigation production to currently rainfed areas. The highest investment payoffs for these measures are in the South-Muntenia, Northeast, and Northwest Development Regions. A targeted approach to new varieties – focused on the South Muntenia region, but also on maize production in selected southern regions – is likely to be most successful. It is also clear that expanded irrigation has a very high potential for a positive investment payoff, provided water is available for the irrigation sector. The highest NPV results for irrigation investments are indicated in the Southeast and South-Muntenia regions; high NPVs were also found for the Northeast and West regions. The required investment in Green (which includes modest adaptation actions) amounts to €1.8 billion (discounted value102) or 0.05 percent of GDP, while a Super Green scenario (with very ambitious and more expensive adaptation actions) requires €11.0 billion in investment costs (discounted value) or 0.32 percent of GDP. The schedule of investments generates a higher burden for 2015-2030 when approximately 65 percent of the total 102 At five percent discount rate required investment is made. CHALLENGES FOR GREENER GROWTH Overview Romania’s water resources are moderate, but sufficient with prudent resource management that would ensure conservation and sustainability; regional and inter-annual variation is, however, significant. The utilizable level of water resources (surface and ground) in Romania, as defined by the existing capacity to extract and use water, is 40 billion cubic meters (BCM) per year, while the total water demand stands at 8 BCM per year. With a current population of 20.2 million, per capita water availability in Romania amounts to approximately 2000 cubic meters per capita per year. This value is lower than the Europe’s average of 4,500 cubic meters per capita per year and only slightly above the international threshold for water stress, 1,700 cubic meters per capita per year. Water withdrawals, however, stay at a very reasonable level, substantially below the international benchmark for pressure on available water resources - water stress is defined at 10 percent of water withdrawal as share of water resources and Romania’s level is 3.2 percent. At the same time, the challenge is a significant inter-basin and inter-annual variation in water resources availability. In the driest years, water availability has fallen to 20 BCM. Water availability is also varied across the basins, and the basins of Jiu, Arges-Vedea, Buzua-Ialomita, Siret, Prut- Barlad, and Dobrogea-Littoral are facing water scarcity. There is a degree of overcapacity in the water supply system, due to the steady decrease in water demand caused by structural changes in the economy in the 1990s. The current water demand comprises of industry (67 percent), agriculture (18 percent), and municipal (15 percent). The water demand has steadily decreased since the 1990s, because of reduction in industrial activity and shut-down of economically unviable irrigation schemes, as well as due to the introduction of water metering and tariffs and reduction of system losses in domestic water supply. The total demand, in terms of volume of water made available to users, decreased from approximately 20 BCM per year in the early 1990s to 8 BCM in 2012, while water consumption in the same year equaled 6.5 BCM. Challenges Romania water sector is vulnerable to climate change and adaptation efforts are essential for its continued ability to satisfy demand for water from the end-use sectors – households, industry, agriculture, and hydropower. The water sector in Romania is facing a dual challenge: water availability is dropping and demand for water increasing, both due to climate change. Water availability is decreasing due to the warmer and shorter winters, lessened snow volume and early and fast snow melting, lowering of the groundwater table in summer months and lower precipitation. Water demand is increasing due to higher summer temperatures and higher evapotranspiration, pushing up demand for water not only from agriculture, but also from the industry and municipalities. Water quality will degrade due to higher summer temperatures, through decreases in dissolved oxygen, eutrophication and algae growth. Wastewater sector will suffer from more frequent floods, storm-water infiltration in sewer systems, and direct inundation of treatment facilities. The hydropower capacity factor, and therefore hydro generation output, will be adversely affected by decreased water availability. The hydropower facilities and the storage reservoirs will be also affected by the increased flooding. Irrigation supply is constrained by the inadequate irrigation infrastructure, while irrigation availability is becoming critical for agriculture due to climate change. Irrigated area in Romania has decreased from 2 million ha in the early 1990s to approximately 0.8 million ha that is currently considered irrigable with functional infrastructure, as economically unviable schemes were closed down. Moreover, the actual land under irrigation has remained below 300,000 ha for the past five years. The irrigation volume reduced from 8 BCM per year in the early 1990s to 1 BCM per year in 2012 according to MARD. There are areas of water scarcity in many basins, where summer droughts are a significant concern. This situation is becoming more serious with the increasing impacts of climate change including rising temperatures and reduced rainfall across Romania. Addressing this challenge will require adopting climate-resilient agriculture and updating the river basin management plans - while taking climate change impacts into account - to re-assess the sustainable levels and modes of irrigation in the water-scarce basins. Similarly, supply reliability for industrial and domestic use is most challenged for basins with lower water endowment during summer months. The majority of the basins in Romania have no serious problems in ensuring sufficient volume of water to meet the municipal and industrial demands. However, the basins with lower endowment of water (Jiu, Arges-Vedea, Buzau-Ialomita, Siret, Prut-Barlad, and Dobrogea-Litoral) face supply reliability challenges during the summer months, especially in dry years. The Dobrogea-Litoral basin is the most severely affected in this regard: as a result, almost 95 percent of the supply for the city of Constanta is being sourced from groundwater, which is being pumped from significant depths of 300-700 meters. A number of cities in Banat and Moldova regions also face water scarcity in summer months. These cases, however, stand apart from the situation in most of the urban areas in Romania, especially Bucharest, which have multiple sources of water and offer significant buffer supplies and a high degree of reliability. Hydropower generation will both constrain and be constrained by water demand in other sectors in Romania. It is also sensitive to water scarcity in basins during the dry seasons. Romania’s hydropower potential is estimated at 36 TWh per year, and the generation in 2012 was 19 TWh (using 6 GW of generation capacity). Hydropower generation accounts for 33 percent of Romania’s total electricity generation. While coal and other fossil fuels remain the primary source of energy and electricity generation for Romania, the share of renewable sources of energy is large and increasing. The Government intends to decommission and modernize some of the high-emission and obsolete thermal power plants and is considering options for promoting growth of renewable capacity, including support of small- and micro-scale hydropower generation.103 While hydropower is not a consumptive user of water, operations rules for hydropower facilities constrain and are constrained by water uses in other sectors. Therefore the proposed new hydropower 103 Energy sector modeling in this assessment projects adding 3 GW of new hydropower capacity by 2050 (see Energy chapter). facilities would need to be planned taking into account the existing and anticipated future water uses in all sectors. In the basins where scarcity already arises in summers of dry years, hydropower production will be adversely affected for a short duration. These constraints can be alleviated to a large extent by careful systems planning and operations optimization accounting for climate change impacts. Furthermore, the development of new hydro infrastructure will need to ensure that the environmental and hydro-morphological impacts are managed in compliance with the requirements of the EU Water Framework Directive. METHODOLOGY AND FINDINGS Methodology The objective of the analysis was to assess how climate change affects water availability and how green (climate change adaptation) policies and investments can offset the impact of the changing water availability on sectoral outcomes in the water consuming sectors, with the emphasis on agriculture. The analysis also provided financial evaluation of the proposed green measures. The analysis was based on scenario modelling involving two kinds of scenarios. First, climate scenarios were used for water availability projections and crop yields and hydropower impact estimates. Second, three scenarios were used to assess the impact of green policies and investments: the Baseline scenario and two adaptation scenarios, Green and Super Green. The Green scenario required a moderate adaptation effort, while the Super Green involved an ambitious intervention necessitating significant investment. All three scenarios account for the impact of climate change on water availability and irrigation water demand. Table 6.1 provides details of the green measures - policies and investments included in each scenario – that are being evaluated. The emphasis is on the measures in agriculture, making the modeling findings important for both water and agriculture sectors.104 Water sector outcomes were measured using indicators of annual water availability and the water demand-supply gap in agriculture (irrigation), in the combined demand from municipalities and the industrial sector, and in the energy sector (hydropower demand). Agriculture sector outcomes were measured by crop yields in irrigated and rain-fed areas, before and after the implementation of green measures, and related revenues. Hydropower production outcomes were estimated by the indicators of annual generation of hydropower and related revenues. 104 Relevant findings are discussed in the Agriculture chapter. Table 6.1. Summary of water and agriculture sector green growth policy scenarios Scenarios Scenario characteristics including policies and investments  All current and planned thermal and nuclear plant deployment or retirement; Baseline (no  All current and funded or in construction future hydropower plants and associated storage; CC  Current but no additional reservoir construction; adaptation)  Irrigation capacity, use, and efficiency at current levels.  Improved fertilizer application in the agriculture sector. Green  Improved varieties of crops in agriculture and extension to support farmer training in their Scenario use. (modest CC  Measures are applied over approximately 530,000 ha, a portion of the land area identified as adaptation areas of current medium agricultural production with potential for high production. effort) Super Green  Application of fertilizer and improved varieties measures designed as in the Green scenario, Scenario but applied over approximately a larger area of 2.1 million ha identified as areas of current (ambitious medium agricultural production with potential for high production. CC  Expand the currently irrigated area by approximately 430,000 ha, a 5 times increase, in areas adaptation identified as viable for irrigation expansion. effort) The following models were used for the analysis: General Circulation Models (GCMs), the Water Evaluation And Planning (WEAP) model, a water run-off model (CLIRUN) and an agricultural yield model (AquaCrop). The models were implemented in the following sequence (Figure 6.1):  Step 1. The General Circulation Models of future climate produced climate projections as a function of initial conditions and projected quantities of greenhouse gases emitted.  Step 2. Climate projections from GCMs were used as inputs in the CLIRUN model to estimate streamflow runoff and also in the AquaCrop model to estimate crop yield and irrigation demand.  Step 3. The runoff and irrigation water demand estimates from CLIRUN and AquaCrop, along with other hydrologic system inputs and non-irrigation water demand estimates, were incorporated into the WEAP tool, where water storage, hydropower potential, and water availability were modelled.  Step 4. To refine the AquaCrop estimates of crop yield in irrigated areas (see (2) above) by adjusting it to water availability modeled in WEAP (see (3) above), the unmet demand for irrigation water from WEAP, together with statistical data on irrigated crop sensitivity to water availability, was fed back into Aquacrop.  Step 5. Finally, the WEAP hydropower generation and AquaCrop crop yield results were analyzed to produce estimates of their economic implications. The main outcomes at this step were projected revenue from crop production and hydropower and net present value (NPV) of investment in these sectors. In addition to modelling, analysis involved evaluation of infrastructure investment options for water and agriculture. It was designed to provide ranking, based on financial assessment, of several water and agriculture sector investments used in modeling. The financial assessment calculated the benefit-cost ratio and the net present value of the cash flow of benefits and costs. Costs included both capital and annual operating and maintenance costs. Benefits were calculated as direct financial flows that result from the investment. Evaluated investment options were related to water-use efficiency in irrigation; construction and rehabilitation of irrigation infrastructure and optimization of its usage; fertilizer enhancement; and improvement of crop varieties. The water and agriculture sector analyses address four policy-relevant issues: (1) the possible adaptive responses by farmers to climate change and the resulting marginal impact on agricultural production and incomes; (2) projected impacts on energy (mainly hydropower) production under the modelled development and climate scenarios; (3) trade-offs between alternative water uses (for irrigation, hydropower, and municipal and industrial use); and (4) economic implications of climate change and green growth investments suitable for incorporating in economy-wide modelling of Romania’s macroeconomic future. Figure 6.1 presents the sequencing of models and other analyses employed to achieve this goal. Figure 6.1. Overall analytical framework for the water study Source: Water technical paper. Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. Findings Unmet water demand Climate change will have a negative impact on water availability 105 in all climate scenarios. Falling runoff during the growing season suggest an increase in the unmet demand for all types of water users. In the 2020s, the projected changes in annual runoff, as compared with the base year 2014, range from a decrease of 7 percent to an increase of 20 percent. By the 2040s, the changes are dampened somewhat when summarized at the national scale, but universally negative, ranging from a reduction of 0.7 percent to 8 percent. Figure 6.2 shows total mean monthly runoff across the 91 sub-basins under both the 1961-2000 baseline and under the three climate change scenarios between 2031 and 2050. During the primary growing season months (April to September), runoff changes range from a 30 percent reduction to a 30 percent increase. Importantly, the majority of months under two of the scenarios show falling runoff throughout the growing period, suggesting threats to irrigation water availability. Figure 6.2. Various uses of water are interlinked in Romania Twelve river basins and 91 subbasins, 26 hydrological stations, used and viable irrigated areas, and major hydropower facilities in Romania Source: Water technical paper. Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. 105 Measured as mean annual runoff Climate change will threaten water availability during the primary growing months, while raising irrigation water demand, and as a result unmet irrigation needs will increase for a majority of months for all climate scenarios. Water availability is measured as mean annual runoff. Climate change will have a mostly positive effect on runoff under the low-impact climate scenario, but a generally negative effect under medium- and high-impact climate scenarios, particularly in the 2040s. During the primary growing months (April to September), runoff changes within a range from a 30 percent reduction to a 30 percent increase. Also, the majority of months under 2 of the 3 climate scenarios show falling runoff throughout the growing period, suggesting threats to irrigation water availability. On the other hand, all climate change scenarios show a rising irrigation water demand due to the uniformly increasing temperature effect. Under the high-impact scenario, there is more than a doubling of demand of irrigation water in the more arid months between the baseline and the 2021-2050 period. Although demands fall in the Eastern part of Romania under the low-impact scenario, all sub-basins show increasing irrigation water demand of between 10 and 100 percent under the medium- and high-impact scenario. As a result, unmet irrigation increases in the majority of months for all scenarios, starting at between 5 and 14 percent under the baseline between April and September, and rising to between 9 and 17 percent under the climate change scenarios. The majority of unmet irrigation water demands occur in the Western part of Romania, and severe unmet water demands are confined to only a few sub-basins. (Figure 6.3) Figure 6.3. Climate change will threaten water availability during the primary growing months Sum of mean monthly runoff across the 91 sub-basins, baseline (1961-2000) versus the three climate projections (2031-2050) Source: Water technical paper. “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. Unmet municipal demands are modest but irrigation and industrial activities may be adversely affected by climate change without adaptive efforts. Figure 6.4 presents the percentage of mean monthly irrigation, municipal and industrial demand that is unmet, under the baseline and each of the climate change scenarios. Unmet municipal demands are fairly modest, ranging from zero to approximately 1 percent under the medium-impact scenario. On the other hand, unmet industrial demands are more significant, particularly considering that they constitute approximately 75 percent of the total water withdrawals of Romania. Under baseline conditions and unmet industrial demands are fairly constant over the year, and remain under 5 percent. Under the low-impact scenario, unmet demand reaches nearly 15 percent in September, suggesting that many industrial activities may be adversely affected by climate change without adaptive efforts. Unmet demands are as high as 25 percent in some sub-basins, and increase significantly between the baseline and three climate scenarios. Figure 6.4. Unmet municipal demands are modest but irrigation and industrial activities may be adversely affected by climate change without adaptive efforts Percentage of irrigation (top), municipal (middle) and industrial (bottom) demand that is unmet under the baseline (1961-2000) and three climate scenarios (2021-2050) Source: Water technical paper. “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. Hydropower will also be affected by the decreased river runoff. At 19 TWh in 2012, hydropower generation accounts for approximately one third of total electricity generation in Romania, and is therefore an essential component of energy security. Mean annual hydropower generation is projected to increase in the 2020s and 2030s under the low-impact scenario, due to the projected increases in river runoff. 106 However, hydropower generation declines under the other seven scenario-decade combinations, most significantly in the 2030s and 2040s under medium-impact scenario where hydropower production falls by nearly 10 percent. Also of significance is that hydropower generation decreases in the 2040s under all three climate scenarios. Within individual river sub-basins, decadal average hydropower generation is projected to fall by a maximum of 50 percent, and increase by a maximum of 30 percent. While water sector modeling shows decrease in water availability for all types of use including hydro generation, it did not aim at evaluating whether expansion of hydropower in the future would be beneficial. Such analysis requires considering all sources of power generation as a system, taking into account available energy resources. The energy supply analysis (see Energy chapter) aimed to find the least cost solutions for the future structure of power supply taking into account multiple constraints, including resource limitations. This analysis was done using an optimization system model, TIMES/MARKAL. The findings showed that hydro plants will still be producing power to satisfy approximately one-third of the total power demand in Romania in 2050 under all three scenarios – Baseline, Green, and Super Green. In each of the three scenarios, nine MW of new hydro capacity would be constructed by 2050. This analysis took into account Romania’s current hydro potential and applied a low capacity factor of 35 percent, which accommodates the water sector modeling projections of decreased river runoff. The focus of the water sector investments was primarily on water demand management, rather than on available augmentation alternatives. The investment options include improved irrigation efficiency, municipal and industrial delivery efficiency, and municipal water use efficiency. Irrigation efficiency options included both conveyance improvements (e.g., lining irrigation canals), and field level improvements, such as converting from flood to sprinkler irrigation. Municipal and industrial efficiency improvements would focus on repairing leaking delivery systems and potentially installing leak prevention systems. However, the reductions in unmet demands resulting from these investments were minimal because the existing unmet demands in the system occur during years when extremely low flows occur and are dedicated wholly to meet minimum environmental flow requirements. If little or no water is 106 Note that hydropower results are only presented under the “no investment” policy scenario, as differences in generation under the ‘no investment’ and under the Super Green policy scenario were minimal. The effect of the Super Green irrigation expansion is minor because (a) most of the expansions are anticipated to occur in basins with lower levels of existing hydropower capacity and (b) the consumptive use of projected irrigation represents a s mall portion of the overall water budget of Romania. The future development of hydro generation capacity was modeled using an energy system model, TIMES / MARKAL (see Chapter 3 on energy). The outcomes show that hydro generation will constitute approximately 30 percent of total generation capacity in Romania by 2050 in both the Green and Super Green Scenarios. There are no investments envisaged under either Scenario available to be used consumptively, then decreasing withdrawal requirements through efficiency improvements will have limited effect. More effective alternatives may include increased basin storage, inter-basin transfers, conjunctive use between surface water and groundwater, improved reservoir management practices, or potentially allowing periodic relaxation of environmental flow requirements as needed. Impact of climate change on crop yields In the agriculture sector, analysis considered impact of climate change on yields of irrigated and rainfed crops across basins and by type of crop. It is clear that rainfed crops will be negatively affected by higher temperatures and lower precipitation, and the analysis of green scenarios aims at evaluating how to target adaptation efforts geographically and by crop. Climate change affects crop yields through changes in soil moisture, direct temperature effects on crop growth, and changes in the evapotranspiration requirements of the crop, among other effects. Under the medium-impact climate scenario (which is considered to be the most likely one), rainfed yields will generally decline but irrigated yields will tend to improve with climate change and that the effect is exacerbated over time. The yields of rainfed crops differ significantly by crop and by basin. Certain rainfed crops such as maize, barley, and winter wheat tend to perform well in some regions. Some crops, such as rainfed winter wheat in northern and some western mountainous regions, stand to gain as much as 20 percent in yield increases from climate change in the 2040s owing to more mild and damp winters. The most sensitive crops to forecasted climate change, with forecast yield reductions of 10 percent or greater are rainfed sugar beets, particularly in the Southeast, South Muntenia, and Bucharest development regions (up to 35 percent yield reductions); rainfed potatoes and tomatoes in all regions (up to 19 percent yield reduction in southern regions); rainfed alfalfa (lucerne) in southern and western regions (up to 13.5 percent yield reductions); and rainfed maize in South Muntenia and Bucharest (about 10 percent yield reduction). In economic terms, the maize reductions are a great concern (the reductions occur in the southern regions).107 (Figure 6.5) There are substantial crop yield benefits from expanding irrigation. Irrigated yields will tend to improve under climate change. This finding indicates that if water stress is removed by irrigating, then the direct temperature effects of climate change may have a positive effect on future crop yields. Climate change expands the differential between rainfed and irrigated yields for almost all regions and for almost all crops. The largest positive gains are in winter wheat, alfalfa, maize, and barley, while sugarbeets and tomatos are projected to experience the largest declines. As a result of this general finding, the primary investment option considered in Super Green was a signicant expansion of irrigated areas. By moving from rainfed to irrigated hectares, farmers become much more resilient to the effects of climate change. (Figure 6.5) 107 These results coincide well with previous climate change analyses for the agriculture sector conducted jointly by the National Meteorological Administration and the National Research and Development Institute for Soil Science Agro-chemistry and Environment - ICPA Bucharest Figure 6.5. South is affected more by climate change and enjoys significant benefits from irrigation; crops differ in reaction to irrigation in the North Percentage increase in rainfed and irrigated crop yields in 2040-2050: North and South* a. North b. South *"North" includes the basins where yields are affected less by climate change: North-West, Center, North-East, West. *"South" includes the basins where yields are affected more by climate change (all located in the south of the county): South-East, South-Mutenia, Bucharest-Ilfov, South-West Oltenia. Note: results for the medium-impact climate scenario. Source: Water technical papers “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. Off-setting climate impact on crop yields with the help of climate change adaptation measures The most promising green growth investments for yield improvement were (1) optimizing agronomic inputs, including fertilizer inputs, and (2) rehabilitating irrigation infrastructure to restore irrigation production to certainly currently rainfed areas. The first two are at the center of the Green investment policy, and all three options are the focus of the Super Green policy. Improved rainfed crop varieties generate between 0 and 10 percent yield benefits, whereas optimizing fertilizer application can produce anywhere from a 4 percent to a 70 percent yield improvement, depending on crop, region, and whether the farm is rainfed or irrigated. A number of farm-level investments were evaluated for their potential yield improvements, including adopting improved drought tolerant crop varieties, converting from rainfed to irrigated, improving soil drainage, improving soil aeration, optimizing fertilizer application and optimizing the timing of irrigation water application. The yield improvements generated from improved varieties and fertilizer application for each crop and administrative region (for 2040s) are presented in Figure 6.6. Impact of improved crop varieties are presented for rainfed crop sonly, while optimized fertilizer application is shown for both rainfed and irrigated crops. Figure 6.6. Optimized agronomic inputs, including fertilizer application, is a most promising adaptation measure The range* of percentage changes in yields as a result of the adaptation measures, 2040-50 a. North** b. South*** *Range across crops within the North and South **"North" includes the basins where yields are affected less by climate change: North-West, Center, North-East, West. ***"South" includes the basins where yields are affected more by climate change (all located in the south of the county): South- East, South-Mutenia, Bucharest-Ilfov, South-West Oltenia. Note: results for the medium-impact climate scenario. Source: Water technical paper. “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. Financial assessment of the proposed CC adaptation measures Financial assessment estimated financial benefits from the implementation of the identified adaptation measures. Benefit-cost calculations suggest that the largest gains for these investment would be in the Southeast and South-Muntenia regions; the next tier of good investment potential is found in the Northeast and West regions. The highest investment payoffs for optimized fertilizer application programs are in the South-Muntenia, Northeast, and Northwest Development Regions. In general, fertilizer programs show strong returns to investment throughout Romania, and for best results could be targeted for those farms of medium size (roughly 10 ha), to ensure that the measures encourage consolidation of the smallest farms while also avoiding provision of an unnecessary subsidy to the largest farms, which are already quite productive. These investments are consistent with those being considered as part of Romania’s National Rural Development Plan, but would likely require a larger investment in CC adaptation measures than is currently contemplated if they are to be deployed at sufficient scale to counter-act the negative risks of climate change. The overall agriculture revenues see a slight downward trend over time when no additional green growth investments are made. Green and Super Green investments will compensate for the decline and increase the revenue under the medium-impact climate scenario during the 2020s. However, it is also important to note that although Green and Super Green investments will produce higher yield revenue than the baseline in 2030s and 2040s, the revenue will still be lower than the average of observed baseline revenue. (Figure 6.7) Figure 6.7.Baseline, Green and Super Green investment revenues Note: results for the medium-impact climate scenario. Source: Water technical paper, Report developed through the “Romania: Climate Change and Low Carbon Green Growth Program”, 2015, World Bank Green investments will push up revenues relative to baseline revenues, across all regions and during all time periods. However, the costs of investing in improving crop varieties tend to outweigh the benefits in most regions. The NPV of investments in enhanced fertilizer application and rehabilitated irrigation investments is positive, while the NPV of improved crop varieties is negative for both Green and Super Green Investment packages. The overall NPV values for Romania under the Green and Super Green investment options are projected to be positive at $1.8 billion and $11.0 billion, respectively in all regions. With Super Green investments, agricultural revenues increase more dramatically due to the broader set of investment options that are considered. (Table 6.8) Table 6.9 presents the benefit-cost ratio of the investments in each region. Investments to enhance fertilizer and rehabilitate irrigation in across all regions, and investments to improve crop varieties in some regions, have benefit-cost ratios above 1 (benefits outweigh the costs). On the other hand, it is clear that investments to improve varieties have the lowest ratios across regions. Table 6.8. Percent change in value of Romania’s crop production in each region under Green and Super Green scenarios, by time periods108 REGION 2020S 2030S 2040S BASE PERCENT BASE PERCENT BASE PERCENT REVENUE CHANGE REVENUE CHANGE REVENUE CHANGE ($USD GREE SUPER ($USD GREE SUPER ($USD GREE SUPER MM) N GREEN MM) N GREEN MM) N GREEN Nord-Vest $1,108.5 3.44% 15.06 $1,024.7 3.03% 13.42 $1,125.2 3.11% 13.70 5 % 7 % 5 % Centru $1,068.9 1.20% 4.74% $946.31 1.09% 4.63% $1,040.2 1.13% 4.64% 8 0 Nord-Est $1,607.1 2.77% 8.91% $1,520.3 2.45% 8.35% $1,562.8 2.54% 8.67% 0 4 5 Sud-Est $1,615.0 0.32% 5.95% $1,567.0 0.32% 7.17% $1,523.5 0.35% 8.35% 7 0 6 Sud-Muntenia $1,894.9 4.33% 16.98 $1,750.1 4.49% 18.40 $1,679.7 5.15% 21.21 7 % 5 % 1 % Bucuresti-Iflov $89.48 1.62% 2.12% $81.01 1.75% 2.38% $77.85 1.83% 2.54% Sud-Vest $1,076.0 0.69% 12.17 $953.68 0.62% 12.73 $1,032.9 0.60% 11.71 Oltenia 5 % % 2 % Vest $1,088.6 4.90% 16.06 $966.71 4.22% 14.79 $1,101.1 4.48% 14.96 1 % % 6 % TOTAL $9,548.8 2.56% 11.38 $8,809.9 2.39% 11.45 $9,143.5 2.57% 12.13 0 % 7 % 0 % Note: Value in constant 2012 $USD Note: results for the medium-impact climate scenario. Source: Water technical paper. “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. 108 Table 4-3 reports the present value revenues and costs above baseline (at a 5 percent discount rate), and the net present value (NPV) of the investments for each region under the Green and Super Green scenarios, by investment option Table 6.9. Benefit cost ratio for agricultural investments under the green growth scenarios, 2015- 2050 REGION GREEN SUPER GREEN ENHANCED IMPROVED TOTAL ENHANCED IMPROVED REHABILITATED TOTAL FERTILIZER VARIETIES FERTILIZERS VARIETIES IRRIGATION Nord-Vest 2.71 0.45 2.40 2.71 0.45 2.57 2.41 Centru 2.80 0.41 2.47 2.80 0.41 2.55 2.49 Nord-Est 2.58 0.43 2.28 2.58 0.43 2.05 2.18 Sud-Est 1.92 1.10 1.80 1.92 1.10 2.44 2.36 Sud-Muntenia 2.05 1.41 1.96 2.05 1.41 3.15 2.25 Bucuresti-Iflov 2.61 2.78 2.64 2.61 2.78 3.47 2.84 Sud-Vest Oltenia 2.00 0.66 1.81 2.00 0.66 2.87 2.19 Vest 2.62 0.65 2.34 2.62 0.65 3.07 2.49 TOTAL 2.38 0.89 2.17 2.33 0.86 2.59 2.30 Note: results for the medium-impact climate scenario. Source: Water technical paper. “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. The required investment in Green amounts to Euro 1.8 billion (discounted value109) or 0.05 percent of GDP, while a more aggressive Super Green scenario requires Euro 11.0 billion in investment costs (discounted value) or 0.32 percent of GDP. The schedule of investments puts a higher burden on the period 2015-2030 when approximately 65 percent of the total required investment is made. Table 6.10. Water investment put higher burden on the first half of the modelled period Schedule of water investments by scenario, billions of 2010 Euros 2015- 2020- 2030- 2040- Total 2010- 2020 2030 2040 2050 2050 not discounted discounted Euro billion: Green 541 614 377 231 1,763 Super Green 2,917 4,077 2,503 1,537 11,034 Percent of GDP: Green 0.07 0.05 0.04 0.04 0.05 Super Green 0.45 0.36 0.29 0.24 0.32 Source: World Bank staff calculations 109 At five percent discount rate Conclusions and Recommendations Climate change can potentially present a substantial risk to agricultural production, irrigation, municipal and industrial water uses, and hydropower generation at current facilities in Romania, but those effects can be addressed, at least partially by following a green growth investment plan at national level. Implementing a program for Romanian irrigation infrastructure, in particular, can counteract the effects of climate change in most places and provide additional benefits to increase productivity beyond current levels. These investments do not eliminate climate change risks to water-dependent sectors, but the combined effect of multiple investments has great potential for supporting green growth in Romania. In addition, the analysis and findings presented here demonstrate that it is critical to consider climate change when choosing among investment options and green growth development pathways. The following is a summary of green investment packages that provide the best return for Romania, and a series of additional steps that should be taken by the Government of Romania water resource institutions as follow-up to this work, in order to refine the investment plan. Recommended Priority Green Growth Investment Packages The greatest investment potential exists for optimizing agronomic inputs, including fertilizer inputs, and rehabilitating irrigation infrastructure to restore irrigation production to currently rainfed areas. The agricultural productivity measures would require a significant investment in high-quality extension services, as well as increased and/or subsidized availability of fertilizers, with the payoff being a significantly increased crop yield. The highest investment payoffs for these measures are in the South- Muntenia, Northeast, and Northwest Development Regions. In general, fertilizer programs show strong returns to investment throughout Romania, and for best results could be targeted for those farms of medium size (roughly 10 ha), to ensure that the measures encourage consolidation of the smallest farms while also to avoid providing an unnecessary subsidy to the largest farms, which are already quite productive. A targeted approach to new varieties – focused on the South Muntenia region, but also on maize production in selected southern regions – is likely to be most successful. The results for enhanced varieties are interesting, as in many basins the modeled response to enhanced varieties is low, yielding negative net present values and benefit-cost ratios less than 1 for this investment. The exceptions are in South Muntenia and Bucharest-Ilfov, where net present values for investment in varieties are positive, and where benefit-cost ratios for this investment are between 1.4 and 2.7. The South Muntenia region crops, which are characterized by a high concentration of maize, are most responsive to an investment in new varieties. Wheat in these regions are also highly responsive to new varieties, increasing yields by approximately 10 percent. Other regions’ crops (and crop mixes) are far less responsive to a change in varieties. It is also clear that expanded irrigation has a very high potential for a positive investment payoff, provided water is available for the irrigation sector. The highest NPV results for irrigation investments are indicated in the Southeast and South-Muntenia regions; high NPVs were also found for the Northeast and West regions. The NPV results largely track with the spatial distribution of areas found to be “economically viable” for irrigation system restoration and rehabilitation, a determination that was made in a prior study. What this study adds, however, is an assessment of the potential revenue gains to irrigated agriculture, relative to current rainfed yields, with full consideration of the effects of climate change over time. The method reflects no spatial differentiation of rehabilitation costs – detailed analysis is left to subsequent project-scale feasibility studies. Yet both the NPVs and the benefit-cost ratios do reflect spatial variation in the returns to irrigation investment. The returns are likely to be strong in all regions. The lowest benefit-cost ratio of 2.05 is in the Northeast region, which reflects good investment potential, but the best returns are likely in the South Muntenia, Bucharest-Iflov, and West regions, which all indicate benefit-cost ratios of more than 3 for irrigation investments. Further analysis can be readily conducted to assess the robustness of this result across a range of climate scenarios (the findings in this chapter focus on the medium-impact climate scenario), or using alternative climate input such as those from Regional Climate Models, to which NMA has access. Realizing the Best Green Growth Outcomes: Some Suggested Next Steps As a result of this study, a set of transferable tools for water sector investment analyses has been developed and will be delivered to local counterparts in the Ministry of Environment, as well as ANAR, INHGA, and other nominated local stakeholders. This tool can be usefully applied to further assess the irrigation and other water and agriculture investment options, both individually and in combination with water use efficiency options. It can also be used to assess multi-sectoral strategies that may have water use implications – for example, as described further below, a shift from fossil fuel-based thermoelectric power generation to wind power has the likely implication of reduced water use, an implication which could be assessed within the scope of this study, but which could be both consistent with Romania’s energy sector planning and important to the future of Romania’s water sector. The tools developed here are appropriate and well-suited for the types of analyses conducted and the recommendations made, but additional work is needed if the tools are to be used for both ongoing water resource planning and to assess more specific agriculture, irrigation, and water use efficiency investments. Some important limitations need to be recognized in interpreting the results, especially the WEAP results, as indicated below, and some data gaps should be addressed to support further work:  Planning scale of the WEAP analysis: The WEAP tool is a planning tool, which means it reflects a spatial, temporal, and management resolution that is less granular than tools that focus on the operation of individual elements of water infrastructure, such as hydropower dams, irrigation schemes, or municipal water supply systems. The planning scale is particularly appropriate for identifying potential conflicts for water use, incorporating forecasts of demand and supply, and setting priorities among alternative investments. However, a planning scale analysis cannot reflect the full range of complexities in national water systems. For example, the unmet demands forecasted for the industrial sector are based on highly aggregated industrial sector data. A clearer picture of persistent unmet demands might be demonstrated with more highly resolved data inputs, which could be tested in the context of capacity building activities.  Water allocation priorities: The WEAP system, as configured in this analysis, reflects relatively course schemes for setting priorities for water allocation among potentially competing uses. The priority scheme operates as a decision-rule, and does not reflect the possibility of more refined management approaches that have a seasonal, temporary or conditional nature, and that might therefore be deployed to better optimize the allocation of water in basins where supply is insufficient to meet the full range of competing demands. In particular, the level and seasonal timing of environmental flow requirements need to be carefully considered in all future work.  Forecasting versus current situation: When interpreting the WEAP and other results in this paper, it is important to note that this study is focused on forecasting the future water system in Romania. All scenarios analyzed here – the baseline, Green, and Super Green investments incorporate the effects of future climate change. As a result, the findings presented here regarding the supply-demand water balance and allocation of water among water use sectors may differ from information that characterizes the current situation of water availability.  Evaluation of model and results uncertainties. Any modeling exercise involves some degree of uncertainty. A forecasting exercise, in particular, can only be evaluated based on comparison or calibration of the models to current conditions. Additional thinking will be needed on several fronts to better manage water. For example, addressing unmet water demands in the baseline under the Super Green investment scenario will likely require additional water efficiency measures, if water-dependent industries are to continue to grow. Unmet industrial demands, in particular, are quite significant, and overall industrial demands constitute approximately 75 percent of the total water withdrawals of the country. Investment in reducing abstractions in the industrial sector is a potential option for meeting the unmet demands. These abstractions could potentially be reduced by shifting from using once-through systems to the closed cycle water cooling systems in thermal power plants, since closed cycle technology would lead to a decrease in water withdrawals but an increase in water consumption.110 A systems approach is needed to assess the tradeoff between decreased abstraction and increased consumption related to implementation of these types of technologies in Romania. The WEAP system, however, can also be used to assess multi- sector strategies. Moreover, compared to the nonrenewable fossil-based technologies (gas, coal, nuclear), renewable technologies (geothermal, retrofitted coal, solar, wind) are generally less water- intensive, leading to overall reductions in water abstraction.111 An interesting extension of the WEAP system used in this report would be to assess the tradeoff between water abstraction and consumption 110 Baker, Jonathan, et al. "Quantifying the impact of renewable energy futures on cooling water use." JAWRA Journal of the American Water Resources Association 50.5 (2014): 1289-1303 111 Baker et al with increased use of renewable technologies, especially wind. A better understanding of these tradeoffs can move the country toward a better rationalization and allocation of water use that supports green growth and development for decades to come. The required investment in Green amounts to Euro 1.8 billion (discounted value112) or 0.05 percent of GDP, while a more aggressive Super Green scenario requires Euro 11.0 billion in investment costs (discounted value) or 0.32 percent of GDP. The schedule of investments puts a higher burden on the period 2015-2030 when approximately 65 percent of the total required investment is made. It is also worth noting that the Green investments would be a manageable increase from 2013 levels of agricultural sector support of €1 billion direct payments, and €1.3 billion of rural development expenditures. By contrast, Super Green investments would represent a substantial increase from current spending and would quickly exhaust the National Rural Development Plan (NRDP) 2014-2020 financial allocation for irrigation infrastructure, which is over 400 million EUR, or about €65 million annually. 112 At five percent discount rate CHAPTER 7. CAN AGRICULTURE FLOURISH IN A CHANGING CLIMATE? CHAPTER SUMMARY Romania is endowed with high quality agricultural resources and has a history of being “the bread basket of Europe.”113 However, Romanian agriculture is characterized by low productivity, and the county is importing food. An important factor of low productivity is a large share of subsistence agricultural holdings. The ageing farm population and out-migration could trigger commercialization of the sector, but effective policies will be essential to address the risk of land abandonment and the issue of land fragmentation. Both mitigation and climate change adaptation are important. The main adaptation needs include a reliable irrigation infrastructure, adjusted crop varieties, and improved fertilizer application. Agriculture accounts for 17.4 percent of the total GHG emissions in the country, but is at the bottom of the EU ranking in agriculture emission intensity, due to the low productivity of the sector; this will be reversed once agriculture becomes more efficient, unless mitigation measures are taken. The objective of the analysis was to assess the impact of green (adaptation) policies and investments on sectoral outcomes through joint modeling of water and agriculture sectors and to provide financial evaluation of the proposed infrastructure investment options. The models used are General Circulation Models (GCMs), the Water Evaluation and Planning (WEAP) model, a climate runoff (CLIRUN) model and an agricultural yield model (AquaCrop). The green scenarios include the following measures: rehabilitation of irrigation infrastructure, adjustment of crop varieties, and improvement of fertilizer application. Analysis was concluded with the Marginal Abatement Cost Curve, where two measures, currently supported by the EU using National Rural Development Plan 2014-2020, were considered: minimum tillage and manure management. The outcomes of modeling show the negative impact of climate change under Baseline scenario on yields and the improvement in yields that can be achieved using green measures. Irrigation was found to provide the largest gains in yields. Less ambitious Tier 1 scenario will require an expenditure of US$2,003 million (present value (PV)) and will bring revenue of $US4,345 million (PV).114 In the more ambitious Tier 2, the costs are $US13.304 million (PV) and the revenues are $US30,663.9 million (PV). In both cases, benefits outweigh costs by more than twice. The recommendations emphasize the importance of a rehabilitated and modernized irrigation, specifically in the rainfed areas, and optimization of agronomic inputs, including fertilizer inputs. Fertilizer programs show strong returns to investment throughout Romania, and for best results could be targeted for those farms of medium size (roughly 10 ha), to ensure that the measures encourage consolidation of the smallest farms while also avoiding providing an unnecessary subsidy to the largest farms, which are already quite productive. Recommendations also include encouraging forest belts115 and soil management to reduce soil erosion, promoting renewable energy sources, organic farming, good farming practices, improving awareness of climate change and of the need for adaptation, and 113 1 In particular, it was known for having very high quality wheat prior to World War II 114 At 5 percent discount rate; costs include green investment and O&M 115See a detailed discussion of the importance of forest belts in the Forestry chapter strengthening policy and institutional capacity. Financing needs for the two recommended measures– no tillage agriculture and manure management - equal Euro 516 million (discounted value116) or 0.01 percent of GDP. Most of the financing will be needed in the last two decades of the modeling period, in 2030-2050. CHALLENGES FOR GREENER GROWTH Overview Romania is endowed with high quality agricultural resources, has a history of being “the bread basket of Europe”, and tops the EU ranking by the share of the agriculture sector in the economy. Romania is among the best endowed European countries in terms of its agricultural land117, fertile chernozem soils, and water resources, and agriculture has been traditionally the backbone of the Romanian economy. While the share of agriculture in total gross value added (GVA) decreased over the last decade by more than 50 percent, to 6 percent of GVA in 2012, it is the highest in the EU, where it averages at 1.8 percent. By total agricultural output in absolute terms, Romania ranks eighth in the European Union. 118 Agricultural employment constitutes 28.6 percent of Romania’s total employment (after dropping by 25 percent in the last decade), compared to the average of 5.3 percent in the EU. Romanian agriculture is crop- oriented: 73 percent of the agricultural output is derived from crop, the highest share in the EU, where the average is 52 percent. Agricultural land occupies almost 62 percent of Romania’s total land area, and nearly two-thirds of the 13.3 million hectares, which are considered highly-productive arable land, are mainly used to grow maize and wheat119. Despite the high quality land resources, Romanian agriculture is characterized by low productivity. The rural areas have much higher poverty incidence than the country’s average. As described above, Romanian agriculture constitutes 6 percent of the total GVA and 28.6 percent of the total employment, while the EU averages are 1.8 percent and 5.3 percent respectively (Figure 7.1). This points to a low productivity of the sector. In fact, average crop yields in Romania are 30-50 percent below the EU average and the labor productivity per full time equivalent in farming is four times lower than the EU average. The country, which used to be considered the bread-basket of Europe, was importing 70 percent of its food in 2011120 and consistently had a negative agriculture trade balance (i.e., imports 116 At four percent of GDP). 117 Although the quality of the famous fertile chernozem soils worsened after introducing intensive agriculture practices, which sharply decreased the soil organic matter content. After 1990, due to poor and unbalanced fertilization, the soils have serious deficiencies in macro and microelements, mainly in the phosphorus soil content (Source: Prof. Catalin Simota, Research Institute for Soil Sciences, Bucharest)) 118 Total agricultural output in Romania amounted to Euro 15.48 million in 2014. Eurostat. 2014. Agriculture, Forestry and Fishery Statistics 119 Eurostat. Agricultural Census 2010 120 World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. Available at: http://documents.worldbank.org/curated/en/2013/06/18028709/reviving-romanias-growth-convergence- challenges-opportunities-country-economic-memorandum exceeded exports) over the period 1990-2012. While the 2013 trade balance was positive and there are preliminary estimates that it will stay positive in 2014, it is unclear if this represents a stable trend, especially considering the continued flat trend in agricultural production through 2013 (Figure 7.2). Also, the structure of agriculture trade shows a prevalence of commodities in export and domination of final products in imports.121 Agricultural incomes are low and the rural population is poor. Romania has the lowest agricultural income in the EU, amounting to only 22 percent of the average EU farm income per unit of full time employment.122 Romanian rural population is poorer than the rest of the country: more than 70 percent of Romania’s poor live in rural areas, while the share of rural population is 45 percent. Figure 7.1. Agriculture is a significant part of the Romanian economy Percentage in total GVA and in total employmen1231, by sector, 2012 Source: ARD Strategy, using data from Eurostat Note: Agriculture includes agriculture, forestry, and fishing. 121 Eurostat data; Gavrilescu, Camelia. 2014. Agricultural Commodities and Processed Products Ratio in the Romanian International Agrifood Trade. Institute of Agricultural Economics, Romanian Academy, Bucharest 122World Bank. 2013. A Country Economic Memorandum. Romania: Reviving Romania’s Growth and Convergence Challenges and Opportunities. Available at: http://documents.worldbank.org/curated/en/2013/06/18028709/reviving-romanias-growth-convergence- challenges-opportunities-country-economic-memorandum 123 NACE 2 is Eurostat's statistical classification of economic activities used since January 2008 Figure 7.2. Agricultural trade balance is recovering, but production is flat Agricultural output and trade balance Source: World Bank authors’ calculations based on data from Eurostat and Food and Agriculture Organization, 2015 An important factor of low productivity is a large share of small and inefficient agricultural holdings. Romania has the lowest average farm size in the EU equaling to 3.4 ha, placing it only ahead of Malta and Cyprus according to this indicator124. It has a large number of very small agricultural holdings: its 3.7 million farms account for a one-third of the total number of farms in the EU. Behind the averages is a dual farm structure: a very large number of subsistence and semi-subsistence farms and a small number of large commercial agricultural holdings, with the medium size farms almost non-existent. The dualistic farm structure is a result of the redistribution of the agricultural land after the collapse of the communist regime. Currently, more than 93 percent of the Romanian agricultural holdings, managing over 40 percent of the utilized agriculture area (UAA), are subsistence and semi-subsistence farms, while less than 0.4 percent of the farms, averaging over 421 ha, are large-scale commercial units125 (Figure 7.3a). 124 Eurostat. Agriculture, forestry and fishery statistics. 2014 edition. 125 Eurostat. Agriculture, forestry and fishery statistics. 2014 edition Figure 7.3. Romanian agriculture is dominated by subsistence farms; the aging farm population can trigger a change in the sector structure in the next 15 years Farm structure in Romania, by size of land and age of holder, 2010 a. by size of holdings (ha) b. by age of holder Source of data: Eurostat, October 2013 The ageing farm population and out-migration of the younger generation could trigger a significant change in the structure of the sector in the next 15 years. Today, already 40 percent of the farm population is 65 and older and by 2030, this share will grow to 60 percent (Figure 7.3b). Rural out- migration is also high. It is estimated that the population of rural areas in Romania is declining by an average of 4.5 percent per year, while the range of this indicator at the county level is from 1.0 to 11.6 percent126. Within the next 15-20 years, over 2 million Romanian farms occupying 75 percent of the utilized agricultural area will be subject to inter-generational transfer. Considering the high rate of rural out-migration by the younger generations over the last two decades, this transfer will mean that the land will be owed, in many cases, by non-farmers. Whether this will lead to a transformation of the agriculture sector to a modern commercial one, requiring larger consolidated holdings, is, to a large extent, a matter of policy: this demographic shift could trigger modernization of the Romanian agriculture sector. Effective policies will be essential to address the risk of land abandonment and counter further land fragmentation. The incomplete land reform is a major hindrance and transaction costs for land registration an almost impossible hurdle to overcome. Policy-makers will be challenged to tailor the various instruments under the Common Agricultural Policy (CAP), as to promote the transformational process without negative social impacts. Romania’s agricultural agenda is connected to the Common Agricultural Policy of the EU (CAP), which provides a framework for mainstreaming climate change mitigation and adaptation activities. Since the EU accession and implementation of the two pillars of the CAP (direct payments and the rural 126 National Institute of Statistics. Statistical Yearbook 2011. Available at: http://www.insse.ro/cms/files/Annuar%20statistic/14/14%20Agricultura%20silvicultura_ro.pdf. development program), Romanian agriculture received access to the financial support from the CAP.127 With the reform of the CAP in 2013, climate change mitigation and adaptation has become one of the cross-cutting objectives to be pursued by all member states through all agricultural support measures. The new direct payment scheme obliges member states to spend a minimum of 30 percent of their national envelope for “greening” activities: crop diversification, maintaining permanent grassland and maintaining the ecological focus areas. Romania’s National Rural Development Program (NRDP 2014-20) provides a strategy and measures for mitigation and adaptation in agriculture. The NRDP is eligible for co-financing under the European Agricultural Fund for Rural Development (EAFRD). Within rural development measures, a minimum of 30 percent of the total expenditure in Romania has to be earmarked for mitigation and adaptation128. Direct payments are available for holdings with a minimum size of the farm at 1 ha or the minimum size of the crop parcel at 0.3 ha, and over 70 percent of the farms in Romania do not qualify for it. Only 46 percent of the national envelope for direct payments has been secured by 99 percent of the qualifying farms. Challenges Climate Change Adaptation Climate change will be a significant factor of the future agricultural development in Romania. The negative impact of climate change is already a reality. The farming sector is most vulnerable to climate change. Romania’s agricultural production is heavily dependent on the climatic conditions during the vegetation period of the crops. It has been estimated that from 1980 to 2011, Romania suffered average annual weather related losses of $US 8,452 million, or 0.26 percent of GDP, of which 34 percent was linked to drought. The crops that experience the most severe impacts are typically rain-fed crops grown in the traditional summer season, such as maize, sunflower, sunflower, fruits and vegetables. On the other hand, some crops may benefit from the direct effects of climate change (as well as elevated CO2 levels) – notably those that will benefit from a longer, warmer growing seasons such as autumn-sown winter wheat or pastures (see section Findings in this chapter) (Figure 7.4). The extent of vulnerability also depends on farm size. Large-scale crop farms commonly have very specialized production, and low diversification increases the risk of crop loss due to weather variability129 and extreme weather for 127 During the first programming cycle of implementing the EU CAP, Romania was entitled to receive Euro 13.7 billion, of which Euro 5.6 billion were primarily used to support farmers by direct payments (Pillar I of CAP) and Euro 8.1 billion - for a co-financed National Rural Development Program (NRDP 2007-13). For the current programming cycle 2014-20, the financial allocation increased to Euro 19.8 billion. European Commission (EC). Multiannual Financial Framework 2014-20. Available at: http://ec.europa.eu/budget/mff/index_en.cfm 128 European Commission (EC). Overview of CAP Reform 2014-20. December 2013. Prepared by Directorate Generale Agriculture and Rural Development, Unit for Agricultural Policy Analysis and Perspectives. Available at: http://ec.europa.eu/agriculture/policy-perspectives/policy-briefs/05_en.pdf 129 Weather variability from year to year is very high – notably in South, South-East and South-West, - making it very individual farms, as crops vary in climate sensitivity. At the same time, large scale farmers have better resources to adapt: they have access to financing, and economies of scale allow for the installation of the irrigation systems and climate resistant farming practices and technologies. Small-scale subsistence farmers are socially and economically vulnerable to climate change. However, in some cases, intrinsic resilience can be found within communities of small farmers due to their low inputs and recycling of resources, existing low carbon economies, diversity of the overall production within the community, strong social relations and (in some regions) alternative sources of off-farm income. The resilience and adaptive capacity of these more diverse communities has the potential to be further developed130. Figure 7.4. Yields of some crops increase with climate change Yields of main cereals in Romania, 2000-2012 Source: ARD Strategy, using data from Eurostat The vulnerability of Romanian agriculture to climate change is strengthened by lacking agricultural extension and inadequate information flow from results of research. The dissolution of the National Agency for Agricultural Consultancy (ANCA) has disabled the effective delivery of advisory services. This deprived the ARD (agriculture and rural development) administration of its most important information dissemination instrument, while farmers lost access to knowledge and support services. Especially the subsistence farmers should be object of policy focus that entitles their fullest attention and continuous communication. In addition, farmers benefit only marginally from the results of research, due to deficiencies in advisory services, which increases their vulnerability. The research network needs to provide advice to subsistence farmers that is relevant for the specifics of small scale agriculture. To adapt to the changing climate, Romanian agriculture will need to have a reliable irrigation difficult to have a farm business plan and increasing the risks, more so for small farms. 130 Weather variability from year to year is very high – notably in South, South-East and South-West Romania series of good years succeeded by bad years making very difficult to have a farm-business plan increasing the risks for economic failure mainly for small farms infrastructure. The existing irrigation systems are old and only those owned by the water user organizations (WUO) were recently partially rehabilitated. The infrastructure was built in the pre- transition years for the non-market rural economy based on large state farms and is not fully relevant for today’s irrigation demand and farm structure. Also, the infrastructure was built without taking into account climatic characteristics of the rural areas and the cost of water and electricity (for pumping); much of it, for example, is in the semi-arid areas of south and south-east, where non-subsidised irrigation can be unaffordable for farmers. The irrigated area significantly declined in the 1990s and in the first decade of the 21st century and covered only 75,000 ha or 0.6 percent of the total UAA in 2010. A governmental emergency decree in 2013 led to an increase of the irrigated area to 180,900 ha. Mitigation Agriculture is a significant contributor to the overall GHG-emissions in Romania. Romanian agriculture accounts for 17.4 percent of the total GHG emissions in the country and is the third biggest emitter after energy and transport sectors. This level exceeds the EU average of 10 percent131. Romanian agricultural emissions are closely connected with the management of soils, livestock numbers, and rural biomass usage: the main components are nitrous oxide (N2O), which comes from soil nitrification and manure management, methane (CH4) from enteric fermentation by ruminants, and carbon dioxide (CO2) from fuel used mainly for heating and for operating machinery (the composition is 50 percent, 45 percent, and 5 percent respectively) (Figure 7.5). Figure 7.5. Agriculture contributes significantly to the overall emissions in Romania Breakdown of GHG-emissions from Romanian agriculture Source: European Environmental Agency By the overall emission intensity, Romanian agriculture is at the bottom of the EU ranking, which is explained by the low productivity of agriculture and thus will be reversed once agriculture becomes more efficient, unless mitigation measures are taken. The country ranks the 5th lowest in the EU by 131 Eurostat. Agriculture – Greenhouse Gas Emission Statistics. October 2013. emission intensity of its agriculture132 (Figure 7.6). It also has relatively low emission intensity by the main components: it ranks 6th lowest in the EU by carbon dioxide (CO2), 10th lowest by nitrous oxide (N2O), and 11th lowest by methane (CH4). This outcome is mainly explained by a high share of subsistence farms (see a discussion above), which rarely use non-organic nitrogen fertilizers and have low mechanization level, by a limited area of rice cultivation (a source of CH4), and by a low share of livestock production. Decreasing livestock numbers show a strong correlation with the reduction of agricultural GHG emissions (Figure 7.7), and a potential recovery of livestock farming will be accompanied by a rise in emissions. The livestock farming in Romania declined during transition. However, there are signs of recovery: while the cattle numbers are still declining (and are projected to decline for the next 10 years), the number of other ruminants (sheep and goats) have been increasing since 2005133. Once livestock economy improves, the agricultural GHG emissions will increase, unless measures are taken to control them: in particular, changes in feed need to be implemented to mitigate methane emissions. Figure 7.6. Romania ranks fifth lowest in the EU by emission intensity of agriculture GHG emissions from agriculture as percent of agriculture value added Source: World Bank staff calculations using data from European Environmental Agency and Eurostat 132 The overall GHG emissions from agriculture reduced by 53 percent in the period 1989-2011 133 Source: The National Research and Development Institute for Soil Sciences, Dr. Catalin Simota Figure 7.7. Decreasing livestock numbers have been correlated with emissions GHG emissions from agriculture and evolution of animal stock (1989-2011) Source: ARD Strategy, using data from Eurostat METHODOLOGY AND FINDINGS134 Methodology The objective of the analysis was to assess the impact of green (CC adaptation) policies and investments on sectoral outcomes in agriculture through joint modeling of water and agriculture sectors; and to provide financial evaluation of the proposed infrastructure investment options for water and agriculture. The models used are General Circulation Models (GCMs), the Water Evaluation And Planning (WEAP) model, a climate runoff (CLIRUN) model and an agricultural yield model (AquaCrop). The models forecasted yields and prices of the crops that account for more than 50 percent of Romania’s total agricultural production: maize, barley, potatoes, soybeans, sugar beets, sunflower, wheat, tomatoes, and alfalfa. AquaCrop (Figure 7.8) was used to model crop yields and irrigation demand. Last, the Water Evaluation and Planning System (WEAP) model was applied, using the inputs from CLIRUN to analyze potential basin-level shortages in water available to agriculture. Any estimated water shortage from the WEAP model was fed back to the biophysical step to estimate the net effect of the shortage on irrigated crop yields. (See Chapter Water for more details) The agriculture sector modelling addresses the issue of the possible adaptive responses by farmers to climate change and the resulting marginal impact on agricultural production and incomes. Modeling outcomes were measured by crop yields in irrigated and rain-fed areas, before and after the implementation of green measures, and related revenues. Evaluated green investment options included 134 Note that agriculture sector was included in the water sector modelling produced for this study and the methodology and outcomes reflected in this section of the Agriculture chapter are mainly from Water sector analysis (see details in the Water chapter), with the exception of the MACC curve. the following:  Adopting improved, drought tolerant, crop varieties;  Converting from rainfed to irrigated crops;  Improving soil drainage;  Improving soil aeration;  Optimizing fertilizer application;  Optimizing the timing of irrigation water application. The most promising options from a yield improvement perspective were: (1) improving crop varieties, (2) optimizing fertilizer application, and (3) converting from rainfed to irrigated. The first two options are included in the Green scenario and all three options are the focus of the Super Green scenario. Importantly, investment in improved irrigation systems was included in the Super Green scenario. Modeling started with a Baseline scenario for agriculture through 2050 . This baseline scenario assumes that the economy of today would evolve over the next 35 years according to the pattern of West European countries, while policies would gradually align with regional norms, no significant new infrastructure investments would be made in agriculture beyond those already funded and/or under construction. The Baseline scenario incorporates the expected impact of climate change on the demand for irrigation water and the impact of climate on water supply for all demand sectors including irrigation. The two green scenarios for agriculture – Green (modest adaptation effort) and Super Green (ambitious adaptation effort) were formed. While the Baseline scenario involves no green improvements, the Green and Super Green scenarios include the following adaptation measures:  Green: the measures are applied over 530,000 ha, identified as medium productivity areas that have potential for high productivity, and include (i) improved fertilizer application, which results in yield increases in primarily rainfed crops and (ii) improved, drought tolerant, crop varieties (irrigated and rainfed), a measure supported by farmer training in their use.  Super Green has the following measures: (i) extended application of improved fertilizer and varieties as in Tier 1, but applied over 2.1 million ha, also identified as areas of medium productivity with potential for high productivity, and (ii) expanded irrigation area, by 430,000 ha or 5 times above the existing level, in areas identified as viable for irrigation expansion. Figure 7.8. AQUACROP model Source: Water sector technical chapter and Water technical paper. “Romania: Climate Change and Low Carbon Green Growth Development Program”, 2015, World Bank. In addition to modeling, analysis involved evaluation of infrastructure investment options for agriculture. It was designed to provide ranking, based on financial assessment, of several water and agriculture sector investments used in modeling. The financial assessment calculated the benefit-cost ratio and the net present value of the cash flow of benefits and costs. Costs included both capital and annual operating and maintenance costs. Benefits were calculated as direct financial flows that result from the investment. The analysis is concluded with the Marginal Abatement Cost Curve (MACC), which evaluates costs and abatement potential of two mitigation measures included in the NRDP: manure management and no- tillage agriculture. The analysis is done using an Excel-based simple tool. Findings Projected decrease in water availability due to climate change (temperature increase) will push up the demand for water for irrigation, thus increasing the already existing demand-supply gap.135 The green actions address this issue through several measures. The first set of measures is aimed at increased efficiency of irrigation: e.g., lining irrigation canals and replacing flood irrigation by sprinklers. These measures help reduce losses, but are insufficient when not enough water is available for supply. In this case, measures to improve reservoir management, increase basin storage, transfer water from basin to basin, use surface and ground water interchangeably are applied. Water sector modeling conducted by this study involved analysis of the impact of climate change on 135 Source of projections: Water sector modeling conducted for this study and presented in the chapter on water in this report. yields of nine crops over 12 basins in the Baseline scenario.136 The outcomes show that rainfed yields mostly decrease under all climate scenarios, with a varying severity of such impact among types of crops and an increasing impact over time. In particular, maize, barley, and winter wheat will experience the lowest impact and will even have higher yields with climate change in some basins, while sugarbeets, potatoes, and tomatoes will have the highest yield loss due to climate change. The regions that are projected to have the largest declines in yields are South-East, South-Mutenia, and Bucharest- lifov. The pattern is different for the irrigated crops: their yields increase due to climate change because the impact of higher temperatures is positive if not accompanied by reduced water availability (see a more detailed discussion of the impact of climate on crops in the Water chapter). What are the best green measures (investments) for increasing yields? The findings described above show that irrigation will be necessary for the efficiency of crop farming for most of the crops and in all regions of the country. Irrigation was found to be most significant adaptation measure providing the largest gains in yields. Also, selecting climate change resistant crops would be important for productivity of agriculture. In addition, optimizing fertilizer application will help achieve even higher yields. Selection of climate resistant crops increases yields by up to 10 percent for rainfed crops and fertilizer application optimization pushes the yields up by 4 to 70 percent depending on irrigation availability, region (climate), and type of crop. What are the costs and benefits of the green scenarios? Water sector modeling assessed that in the period from 2015 to 2040, scenario Tier 1 will require an adaptation expenditure, additional to any expenditures in the Baseline, of US$ 2,003.3 (present value (PV)) and will bring revenue of $US 4,345 (PV). The resulting net income will be US$ 2,342 million (net present value(NPV)).137 Tier 2, applied over the same time period 2015-2040, requires a significantly higher investment, but also results in a much higher revenue that in Tier 1: the costs are $US 13,304 (PV), the revenues are $US 30,664 (PV) and the net income is $US 17,360 (NPV). In both cases, benefits outweigh costs by more than twice. The benefit- cost ratio is the highest for the rehabilitated irrigation and the enhanced fertilizer: the fertilizer ratio is 2.4 in Tier 1 and 2.33 in Tier 2; while irrigation ratio is 2.59 in Tier 2 (it is not part of Tier 1). In the agriculture analysis for the MACC, two mitigation measures are considered: minimum tillage and manure management, both supported by the EU and the NRDP. The NRDP program includes afforestation, no tillage or low tillage crop agriculture, crop rotation, manure management (incl. composting and storage), organic farming, and the promotion of renewable energy sources. Based on the available data, four of these measures are included in the Romania Marginal Abatement Curve: no tillage agriculture, manure management, afforestation, and renewable energy sources. While the analysis of the latter two measures is presented in Forestry and the Energy chapters of this report, the former two measures are presented in the chart below. The No tillage measure reflects the benefits of using no tillage as compared with the current practice of using full tillage in the fields. In the BAU scenario, 136 The full water sector analysis is presented in the chapter on water in this report 137 At 5 percent discount rate; costs include green investment and O&M the measure is applied to a limited area of 90,000 hectares. Under Green scenario, the area where no tillage is applied is expanded to 300,000 hectares in the first five years of project implementation and later to 900,000 hectares. The 300,000 ha are based on the arable land, which is susceptible to desertification. While desertification is the threat and motive of the minimum tillage scheme, the poor manure management (collecting, storage, treating, applying) of the past is the motive for the new measure "composting manure”. Farmers applying this measure undergo stringent practices in storage and treatment of manure, which impacts GHG savings per animal units (not per ha). The MACC analysis shows that the two evaluated measures have low cost of abatement and a reasonably high abatement potential amounting to 7.6 percent of the total abatement potential from the following sectors/subsectors: power supply, energy efficiency, transport, forestry, and agriculture (Figure 7.9).138 Financing needs for the recommended measures that were evaluated – no tillage agriculture and manure management - are presented in Table 3. The measures are relatively inexpensive, deliver high level of abatement and are beneficial for the sector development. The total discounted net cost of both measures in the period 2015-2050 equals Euro 516 million or 0.01 percent of GDP. The costs increase over the modeling period significantly, and almost half of the total financing will be needed for the last ten years of the period. The benefits appear with a very slight delay, almost immediately after the implementation of the measures. Figure 7.9. Measures evaluated for agriculture have low cost and relatively high abatement potential Romania Marginal Abatement Curve for agriculture no tillage Source of data: World Bank staff calculations using data from Prof. Catalin Simota, Research Institute for Soil Sciences, Bucharest 138 See cross-sectoral analysis in the MACC chapter and in MACC technical paper Table 7.1: Agriculture investments have low cost and are beneficial for the economy Schedule of agriculture investments by proposed measure, millions of 2010 Euros 2015- 2020 2030 2040 Total 2010- 2020 - - - 2050 2030 2040 2050 Not discounted Discounted* Euro million: No tillage 50 171 248 359 375 Manure management 19 64 94 136 141 Total 69 235 341 495 516 Percent of GDP: No tillage 0.005 0.009 0.011 0.013 0.008 Manure management 0.002 0.003 0.004 0.005 0.003 Total 0.008 0.012 0.015 0.018 0.011 *At four percent discount rate Source: World Bank Staff calculations and MACC chapter and technical report CONCLUSIONS AND RECOMMENDATIONS The recommendations emphasize the importance of rehabilitated and modernized irrigation to restore irrigated production to currently rainfed areas and optimization of agronomic inputs, including fertilizer inputs. These measures would require a significant investment in high-quality extension services, as well as increased and/or subsidized availability of fertilizers, with the payoff being a significantly increased crop yield. The highest investment payoffs for these measures are in the South Muntenia, Northeast, and Northwest Development Regions. In general, fertilizer programs show strong returns to investment throughout Romania, and for best results could be targeted for those farms of medium size (roughly 10 ha), to ensure that the measures encourage consolidation of the smallest farms while also avoiding providing an unnecessary subsidy to the largest farms, which are already quite productive. Recommendations also include encouraging windbreaks and soil management to reduce soil erosion, promoting renewable energy sources, promoting organic farming, improving good farming practices, improving awareness of climate change and the need for CC adaptation, and strengthening policy and institutional capacity is vital to support the recommended interventions. The agricultural productivity measures would require a significant investment in high-quality extension services, as well as increased availability of fertilizers, with the payoff being a significantly increased crop yield. A targeted approach to new varieties – focused on the South Muntenia region, but also on maize production in selected southern regions – is likely to be most successful. It is also clear that expanded irrigation has a very high potential for a positive investment payoff, provided water is available for the irrigation sector. Improvements in good farming practices, like manure management and minimizing erosion through afforestation139 can reduce vulnerabilities. Other measures, such as promoting organic farming and renewable energy from biomass, helping farmers and rural communities adapt to climate change, and improving awareness and better management of risks in the agriculture sector, would complement the key investments in adaptation. All the listed measures are aimed at modernization of agricultural holdings and at adaptation and mitigation. Therefore, sufficient investment support should be earmarked for these measures within the NRDP 2014-20. Strengthening policy and institutional capacity is vital to support the recommended interventions. The capacity of the current research and development should be broadened, as to strengthen applied sciences on new climate-resilient crop varieties, but also to improve systematic monitoring of soil, surface, groundwater and overall biodiversity. The EU- and national-funded support schemes should be revisited, so as to improve the uptake of all farmers participating in climate change mitigation and adaptation measures. Financing needs for the two recommended measures–no tillage agriculture and manure management- -are low and are highly beneficial from the point of view of sector efficiency. Emission reduction is also relatively high. The total discounted net cost of both measures in the period 2015-2050 equals €516 million or 0.01 percent of GDP. Most of the costs are incurred later in the modeling period, with 43 percent falling in the last decade of the period, 2040-2050. In the first five years, 2015-2020, the implementation of the measures will require only €69 million or six percent of the estimated financing need for 2015-2050. 139 See a detailed description and analysis of afforestation measures in the chapter on Forestry CHAPTER 8. CAN FORESTRY REALIZE ITS MITIGATION AND ADAPTATION POTENTIAL? CHAPTER SUMMARY Romania has the largest remaining intact tract of contiguous natural and naturally regenerated forests in Europe. Forests are important for sequestering (removing) emissions, thus mitigating climate change. In Romania, the Land Use, Land Use Change and Forestry (LULUCF) sector (mostly its forestry component) is significantly contributing to emission reduction: it was removing 27 percent of emissions produced by other sectors every year (annual average) in the period from 2000 to 2011 and 24 percent during 1990 - 1999. Forests are also negatively affected by climate change, and adaptation efforts are needed to preserve them and their ability to sequester carbon. In particular, changes in precipitation and temperature can cause the drying of forests, reduction in forest growth, biological risks including pest infestation, and forest fires. Shifts in ecozones suitable for particular tree species also require adaptation. As Romania transitioned from centralized to market economy, the forest sector underwent significant changes. The forest land restitution process modified the structure of forest land ownership: the holdings are now predominantly small and the forest system is fragmented, making sustainable forest management a challenging task. Incentives are not aligned for owners of small private holdings to comply with the forest regulatory framework. Limited road accessibility to forests is another constraint. Lack of adequate financial resources, especially to assist smallholders, is also a barrier to afforestation of agricultural land and establishment of forest belts. The analysis was based on modeling using a business as usual scenario and three green scenarios. It concluded that for the timeframe considered (2015-2030), the quantity of CO2 removals is highest under the most aggressive green scenario, which assumes a wide set of measures including intensive afforestation at a rate of 10,000 ha annually, improved forest management, creation of woody biomass at a rate of 5,000 ha per year, “no-till” practices for 40 percent of the arable land per year, among other measures. Additional evidence from forest conditions similar to Romania indicate that sustainable forest management enforced on both public and private lands, ensuring biomass regeneration and preventing degradation, can optimize emission reduction. In addition to the national and international modeling exercises, marginal abatement cost curves (MACC) were estimated for three measures: afforestation, sustainable management of protection forests, and sustainable management of production forests. The MACCs show that the proposed measures provide a significant potential abatement level of 1,828 kt CO 2 per year in 2050. The examined measures are evaluated as highly cost-efficient. Recommendations stress the importance of sustainable forest management and the need to acknowledge it within the country’s mitigation strategy. Adaptation measures in forestry, including those that benefit other sectors, namely agriculture and energy, should be supported. Policies related to forest fragmentation should be implemented, in particular those aimed at engaging smallholders in the sustainable forest management activities. Capacity for monitoring the contribution of forest management to mitigation should be improved. The system for forest fires detection, monitoring and management should be upgraded. It is critical to improve road accessibility. Investment in new technology, marketing and processing will support all the recommended actions. Financing needs for all three priority measures that were evaluated--afforestation, sustainable management of protection forests, and sustainable management of production forests--equal €115 million (discounted140) for the period 2015-2050 or just 0.002 percent of GDP. When the benefits are taken into account, the total discounted net cost is a negative €86 million. SECTOR BACKGROUND Romania has the largest remaining intact tract of contiguous natural and naturally regenerated forests in Europe. The forest volume is high, averaging at 218 m3/ha, above the European average of 147 m3/ha. Forests cover 6,539 million ha, or 27.4 percent, of Romania’s total land surface,141 below the EU average of 38 percent.142 Forest removals are below the allowed annual cut (AAC) level of 22.3 million ha: in 2013, only 19.06 million ha were removed (59 percent of the growing stock volume), mainly due to limited accessibility. Romania’s forest stock is young and therefore has a high potential to absorb CO2 (See Figure 8.1).143 Based on the provisions of the Forest Management Plans (FMP), 46.7 percent of the Romania forests have a production function and the remaining 53.3 percent are protection forests used for soil protection (43 percent), water protection (31 percent), flood protection (5 percent), recreation (11 percent), and science (10 percent).144 The Romanian Network of Protected Areas includes areas of national importance, reserves, parks and Natura 2000145 sites, covering approximately 23 percent of the forest area. Excluding the Danube Delta Biosphere Reserve, there are 13 national parks and 14 nature parks.146 These 27 large protected areas include 134 nature reserves and natural monuments, covering 1.17 million ha. 140 At a three percent discount rate. 141 National Environment Protection Agency (NEPA) of Ministry of Environment and Climate Change (MECC). 2014. Raport Național Privind Starea Mediului Anul 2013 (National Report Regarding the Environment Status). Romania: Bucharest. Available at: http://www.anpm.ro/documents/12220/2209838/RSM- 2013+fata+verso+final.pdf/76379d09-39c7-4ef9-9f04-d336406eda62 142 Data Development Platform, World Bank 143 The exception to this rule is the first two to three years of the tree life when the tree’s sequestration potential is still low 144 Ministry of Environment and Climate Change (MECC). 2012. National Strategy on Climate Change 2013 – 2020. Bucharest 145 Natura 2000 is an EU network of nature protection established under the 1992 Habitats Directive with the aim to protect Europe's most valuable and threatened species and habitats 146 Ioja CI, Patroescu M, Rozylowicz L, Popescu VD, Verghelet M, Zotta MI and Felciuc M. 2010. "The Efficacy of Romania’s Protected Areas Network in Conserving Biodiversity" in Biological Conservation 143:2468–2476 More than 693 nature reserves and natural monuments are outside the large protected areas and cover 102,534 ha.147 Romania is known globally for its wood products. The forestry sector in Romania, including industry, contributes between 1.9 percent and 4.5 percent to Romania’s GDP.148 It is also an important employer, especially in rural areas. A third of the harvested logs is used as energy source, mostly for heating. Export of logs is also a significant part of the forestry export, but it has been decreasing since 1990, while imports of logs from Russia and Ukraine have been on the rise. Wood products in Romania include sawn wood, lumber, pulp and paper, panel and veneer and furniture. The forestry sector constituted seven percent of national exports in 2011.149 The furniture manufacturing sector represented 1.6 percent of Romania’s GDP in 2009, and grew to 1.9 percent in 2011.150 There is a longstanding tradition of producing solid wood furniture, some of which are specialized furniture for foreign markets Mitigation 147 Borlea GF, Ignea G. 2006. Lucrările sesiuni ştiinţifice Pădurea şi dezvoltarea durabilă (The Present Forest Policy and the Market for Forest Products). Braşov, Romania: 2005-2006. 633-638 ; Abrudan, I.V., Marinescu, V, Ignea, G. and Codreanu, C. 2005. "Present situation and trends in Romanian forestry" in Legal Aspects of European Forest Sustainable Development: Proceedings of the 6th IUFRO 6.13.00 Group Meeting. Editura Universitatii Transilvania din Brasov, Romania:157–171 148 The estimates differ depending on the approach used in calculations: FAO estimates it at 1.6 to 2.1 percent in the period 2000-2011 (FAO. 2014. Contribution of the forestry sector to national economies, 1990-2011, by A. Lebedys and Y. Li. 2014. Contribution of the Forestry Sector to National Economies, 1990-2011. Forest Finance Working Paper FSFM/ACC/09. Food and Agriculture Organization (FAO), Rome, while another estimate is 4.5 percent (Abrudan, Ioan Vasile, Viorel Marinescu, Ovidiu Ionescu, Florin Ioras, Sergiu Andrei Horodnic, and Radu Sestras. 2009. “Developments in the Romanian Forestry and its Linkages with other Sectors” in Notulae Botanicae Horti Agrobotanici Cluj-Napoca: 37 (2): 14-21 149 FAO database 150 FAO database; FRD Center Market Entry Services. 2011. Romanian Furniture Sector - 2011 Market Overview. Report prepared for the Trade and Investment Promotion Section, Embassy of the Republic of Poland in Romania Forests are important for sequestering (removing) emissions, thus mitigating climate change 151 . In Romania, LULUCF sector (mostly its forestry component) is significantly contributing to emission reduction: it was removing 27 percent of emissions produced by other sectors every year (annual average) in the period from 2000 to 2011 and 24 percent during 1990 - 1999. This is shown in Figure 8.2, where Romania’s emissions calculated with the inclusion of LULUCF are compared with the emission level calculated without LULUCF contribution. Romania’s 2013 National G H G Inventory Report shows that in the period from 1989 to 2011, the GHG emissions calculated without taking LULUCF into account decreased by 54.9 percent; however, when factoring in LULUCF, they decreased by 61.1 percent. 152 A detailed analysis of both emissions and removals from the LULUCF sector reveals that emissions are largely a result of land conversion to settlements, industrial uses, and similar uses, while forest land is the largest contributor of emission removals. Converting land to forest (afforestation) also contributes significantly to sequestration (Table 8.1). In particular, afforestation of degraded lands with limited agricultural potential153 offers the opportunity to reduce GHG emissions while generating adaptation co-benefits and strengthening climate resilience. Every year, such tracts of agricultural land become classified as “lowest suitability” in spite of measures taken to ameliorate the agricultural potential of the area (e.g., irrigation, land reclamation and use of fertilizers). There is an estimated 2 million ha of such agricultural land every year. 154 151 On average, temperate forests, such as those found in Romania, store approximately 168 tC/ha (Gorte, 2009), both in the vegetative matter above and below ground, and in the forest soils 152 Ministry of Environment and Climate Change (MECC). 2013. Romania’s Greenhouse Gas Inventory 1989-2011. Bucharest. Estimated using methodology presented in Good Practice Guidance for LULUCF, IPCC, 2003 153 Agricultural land subject to adverse meteorological and climatic factors such as drought, flooding, landslides, low humus reserves or low supplies of key soil nutrients 154 Agricultural land scoring below 25 points in soil quality is not of economic interest for agriculture,b ecause production costs far exceed benefit from potential agricultural yields. (Bohateret VM. 2012. "Readjusting Romania’s Forestry Policy with a View to the Year 2050" in Journal of Settlements and Spatial Planning. mr. 1/2012 Figure 8.2. LULUCF sector (mostly its forestry component) is significantly contributing to emission reduction Emissions removals by LULUCF Source: Chandrasekharan Behr and Popa, 2014 Table 8.1: Converting land to forest contributes significantly to sequestration Net GHGs emissions for the LULUCF Sector in 1989, 2010 and 2011 Emissions (+) / Removals (-), Gt CO2e IPCC subcategories 2012 1989 2010 2011 5A1. Forestland remaining Forestland -18,863 -22,263 -20,384 -19,672 5A2. Land converted to Forestland -122 -2,498 -3,061 -3,048 5B1. Cropland remaining Cropland -5,784 -2,336 -3,223 -1,661 5B2. Land converted to Cropland -17 18 20 31 5C1. Grassland remaining Grassland NA NA NA NA 5C2. Land converted to Grassland -654 130 118 138 5D1. Wetlands remaining Wetlands NO NO NO NO 5D2. Land converted to Wetlands -215 -126 -130 -53 5E1. Settlements remaining Settlements NA NA NA NA 5E2. Land converted to Settlements 4,125 419 410 411 5F1. Other land remaining Other Land NA NA NA NA 5F2. Land converted to Other Land -30 789 835 767 Source: MECC (2013) and MEWF (2015): Ministry of Environment, Waters and Forests. 2015. Information on LULUCF Actions in Romania. Report under art. 10 of Decision 529/2013 of European Parliament and the Council, Bucharest, http://mmediu.ro/new/wp-content/uploads/2014/12/Report-LULUCFart.10Decision-529.pdf Climate Change Adaptation Climate change can cause the drying of plants and species and decrease the growth of forests. Projected changes in precipitation and temperature in Romania are anticipated to weaken forest systems and decrease forest growth. Already, approximately 1 million m3 of timber in Romania is lost annually to wind and snow, and approximately 130,000 ha of the designated forest areas in the lowland are affected by drying due to soil water deficit. Tree volume growth is already dropping due to climate related damage. For example, average defoliation of beech increased from 29 percent to 42 percent, since the damaging effect of the drying phenomena occurred between 2001 and 2004.155 Up to 30 percent reduction in tree population and a decrease in growth, especially for forests in the plain areas, has been projected.156 Climate change causes shifts in ecozones, and the new ecozones can be unsuitable for the existing trees. Climate change also causes and compounds biological risks to forests including pest infestation. With climate change, ecozones shift, and previously planted trees might now be in an ecozone not suitable for them. Tree species outside of their natural areas are more susceptible to negative biotic factors – pests, water stress, and so on. Also, regeneration patterns change. In the mountains, forests are invading pastures. In some places, the naturally regenerated areas at the border of forests and alpine pastures are afforested with resinous species (Juniperus sp. Pinus mugo, etc.) that now require special management. In the plains and southern Romania, non-native species are invading natural forests. Projected changes in temperature and precipitation will cause species such as beech to lose their competitive vigor in the Outer Eastern Carpathians.157 An example of climate change-related pest infestation is an increase in outbreaks of the bark beetle at higher altitudes and latitudes.158 Forest fires are intricately linked with forest pests and diseases –infested forest, with dying trees more susceptible to forest fire, and fire damaged stands more prone to pest infestation. Forest fires incidence in Romania under current climatic conditions is rather low. In the future, however, the occurrence of forest fire in the south and south west of the country is highly likely.159This area is similar to the area with the biggest incidence of forest fires in Europe (the Mediterranean region), where 85 percent of the forest fires are presently recorded, in its exposure to drought and level of management.160 Currently, Romania has a monitoring and intervention forest fires system that involves mainly the National Forest Administration (NFA) Romsilva and local authorities in charge of emergency events (County Inspectorates for Emergency Situations). This system is capable of coping with the present level of fire incidence, but its 155 Chira D., Danescu F., Geambasu N, Rosu C., Chira F., Mihalciuc V., and Surdu A. 2005. "Particularitati Ale Uscarii Fagului in Perioada 2001-2004" in Annals of Forest Research 48:3-20 156 ICAS, 2005 (not in rapid assessment either. There’s only ICAS, 2013. Unless the Chira et al in the Anal ICAS reference is 2005 157 Trombik J., Hlasny T., Dobor L. and Barcza Z., 2013. "Climatic Exposure of Forests in the Carpathians: Exposure Maps and Anticipated Development" in International Scientific Conference for PhD students 158 Hlásny T and Turčáni M. 2009. "Insect Pest as Climate Change Driven Disturbances in Forest Ecosystems" in Strelcová et al. (eds) Bioclimatology and Natural Hazards, Springer Nederlands pp. 165-178. 159 Adam, 2010 160 Barbosa et al., 2008 effectiveness is negatively affected by many issues including forest accessibility. Forests are important in ecosystem-based adaptation strategies for other sectors, such as agriculture (see Figure 8.3). Studies by The Economics of Ecosystems and Biodiversity (TEEB) illustrate the economic benefits from ecosystem based adaptation including using forests for adaptation to CC. Operationalization of this concept is increasing, although additional research is needed to better understand adaptation benefits. Examples from countries such as Germany, UK, and Belgium point to clear ecosystem benefits but offer less discussion on adaptation. Figure 8.3. Forests for Adaptation, Adaptation for Forests Diagram of forests’ role in ecosystems and adaptation Source: Locatelli, 2011. CHALLENGES OF GREENING AND LOW CARBON FOR THE SECTOR As Romania transitioned from centralized to market economy, the forest sector underwent significant changes. The restitution completely modified the structure of forest land ownership: the holdings are now predominantly small and the forest system is fragmented, making sustainable forest management a challenging task.161 By 2013, 36 percent of the forest land was privately owned, while only 64 percent remained in the public domain, including state and municipal ownership (Figure 8.4). There are an estimated 830,200 forest owners, and most of them (99.8 percent) own small forest parcels under 10 ha (Table 8.2). Private forest ownership spans both small and large, and individuals, indivisible communes, and churches. This is reflected in the structure of land ownership under the Natura 2000 protection network (Figure 8.5). 161 World Bank. 2011. Romania Functional Review: Environment, Water and Forestry. Vol 2: Forestry Table 8.2: The forest system is fragmented Distribution of forest land by size among private owners (without forests owned by local authorities) Size of forest land parcel Number of owners Total Area (million ha) Forest < 10 ha 828,000 0.85 Forest > 10 ha 2,200 1.35 Total 830,200 2.20 Source: Chandrasekharan Behr and Popa, 2014 Figure 8.4. Forests are mostly privately owned Forest ownership by land area, 2013 Source: MECC, 2014 The restitution process has fragmented the forest system and raised challenges for ensuring sustainable forest management. Currently, there is no national cadaster of forest lands. Providing incentives for sustainable forest management or enabling consolidation initiatives requires knowing where the forest parcels’ boundaries are and who owns each parcel. Currently this information is not available as there is no cadaster of forest lands. Approximately 1 million ha of forests, or 15 percent of the total forest area, are being administered with no management plans. Many of the smallholder lots fall in this category because of the high expense of complying with policy requirements for forest management planning. The parcels without management plans are scattered throughout the forest ecosystem, creating fragmentation and augmenting the challenge of implementing sustainable management of forests. Incentives are not aligned for owners of small private holdings to comply with the forest regulatory framework. A barrier to the creation of forest belts and afforestation of agricultural land is the lack of financial resources to support such activities, especially for smallholders. The main reason for poor performance of the afforestation programs was that the owners were not properly compensated. The forest regulatory framework, including technical norms that regulate compositions, schemes and forest regeneration technologies, are a challenge to implement under the new reality of diverse forest ownership types and a dynamic economy.162. The Romanian national forestry management norms and practices are in essence legacies of the past. The costs associated with complying with the technical norms and forest management planning requirements are unaffordable for small forest owners. As a result, logging activities often violate the law – some of them are sustainable, and some are not. Figure 8.5: Private forest ownership is diverse Forest ownership under the Natura 2000 protection network, 2012 Source: MECC, 2013; data from the national research agency for the forest sector (ICAS) Coupled with fragmented ownership, the lack of resources to approve and subsequently implement available management plans, is a serious challenge for sustainable forest management. There are 272 management plans covering the protected areas, of which only twelve have been approved. This also has consequences for flood management as investments in flood management in upper forested watersheds were traditionally done by the forest administrators within forested areas. Without approval and budget these areas cannot have flood management. Investments in implementing the management plans are important for decreasing the incidence of the flooding, water turbidity and regulation of debris. However, due to the changes in ownership and the lack of budgetary allocation to NFA Romsilva to continue those investments, the incidence of flooding and fast moving water is increasing.163 Limited road accessibility to forests is a significant constraint to sustainable forest management in Romania. As a result, harvesting levels are below the recommendations of forest management plans in inaccessible areas, while accessible forest stands are over harvested. Fire and pest control are inefficient due to lack of access. The average road density for Romania is 6.4 m/ha, which is significantly below other 162 Stancioiu, P.T. , Abrudan, I.V., Dutcha, I. Marinescu, V., Ionescu O., Ioras, F., Horodnic, S.A. and Sestras, R. 2010. "The Natura 2000 Ecological Network and Forests in Romania - Some Implications on Management and Administration" in International Forestry Review Vol.12(1). 163 Giurgiu, 2010 European countries with broadly similar topography.164 A low density of forest roads implies the lack of access to timber resources in inaccessible sites, and/or the need to skid logs for longer distances from the point where they are felled to roads where they can be loaded onto trucks. Exploitation costs are higher since they increase with the length of skidding. Longer skidding distance also results in erosion and soil compaction on arterial skidding trails. Forest belts should be used more to provide climate resilience and benefit agricultural systems . Forest belts can help improve microclimatic conditions of growth for protection of agricultural crops, up to a distance 25 times the height of belt in the sheltered areas and 5 times in the exposed areas, due to the reduction of wind speed by 31 to 55 percent in the sheltered area and by 10 to 15 percent in the exposed one. Belts are estimated to sequester 40 tCO2e/ha/year. Other benefits include increased humidity and level of ionization of air at soil level, which enhances soil fertility, reduces depth and duration of freezing, and decreases evapotranspiration. However, in Romania, forest belts are not used enough and are even being eliminated. In the lowland regions, frequent and lengthy dry periods have been associated with climate change, the systematic destruction of irrigation systems, and the cutting of trees and forests that were used as wind breaks. This is having a negative impact on crop production, the environment, and living conditions.165 In the face of climate change, Romanian forest managers need to improve and choose the appropriate management approaches for maintaining and increasing ecosystem services from forests. Romania has a national strategy for combating drought, land degradation and desertification. Activities included planting of trees to reduce soil erosion and restore degraded lands. The draft of the New Forest Development Strategy (2013) envisages a role for forests in climate change mitigation and highlights necessary measures for adapting forests. A new Forest Code was adopted by the Romanian Parliament in March 2015. The key changes include: (1) judicious administration of national forest on the principle of territoriality, with solutions for managing small forest properties which are currently not covered by forest management and services; (2) establishment of national targets for afforestation; (3) differentiation in the requirements for management planning based on the size of the property; (4) restrictions on the total quantity of wood (per species and varieties) that can be processed by companies to avoid monopolistic situations. Also, a new Government Decision seeks to improve the due diligence process and institutional capacity to prevent the introduction of illegally harvested wood on the market, by establishing a system for control and supervision of wood material traceability. Forestry measures in Romania are estimated to provide significant mitigation and adaptation benefits in meeting its 2030 and 2050 GHG emission reduction targets. The frameworks for achieving the EU wide mitigation target do not include forestry; therefore, implementation of these measures would be voluntary actions. Romania's other EU obligations, however, justify making the necessary investments in the measures - e.g., the EU obligations for Natura 2000, which occupies 32 percent of forests under 164 World Bank. 2011. Romania Functional Review: Environment, Water and Forestry. Vol 2: Forestry. Austria 36 m/ha,Switzerland 40 m/ha and France 26m/ha 165 Popovici et al., 2013 protection status (considering that 900kt CO2 can be abated from better management of Protected Areas). The necessary investments are also warranted based on the co-benefits they generate - e.g., co- benefits of afforestation to adaptation of agriculture and restoration of degraded and abandoned agricultural land. The EU funding available through the NRDP would not be adequate to cover the costs associated with these measures. However, necessary financing could be more closely met by mainstreaming some of the necessary forestry actions into other EU funded programs - those supporting ecological reconstruction, SMEs, education and extension, and other aspects of NRDP, -prioritizing interventions and making sustainable management of forests profitable by reforming the policy and regulatory requirements (the latter would also help bring in private funds). METHODOLOGY AND FINDINGS The analysis was based on modeling using the business-as-usual scenario and three green scenarios. Under the business-as-usual scenario and the assumptions used in the Joint Research Center of the European Commission and the Institute of Science and Atmospheric Sciences (ICAS) modeling exercise of 2012, a shift of trees to older age classes is expected under the current forest management norms and accessibility conditions. Therefore, there will be a decrease in the carbon sink for the period 2013-2020. The study states that an abrupt decrease in carbon sink (during the period 2013-2020) could happen if the technical norms and regulations that dictate forest management planning and harvesting wood are revised, if there is large-scale investment in forest infrastructure, or if there are large scale natural disturbances, which may imply larger concentrated cuttings in some years.166 The second study, led by ICAS, examines GHG projections for 2015-2030 under three scenarios (Figure 8.7):  Scenario 1 (S1) assumes the current practices of resource management for all types of lands. This scenario also includes afforestation of 2,000 ha annually.  Scenario 2 (S2) includes measures to improve land use by increasing annual harvest of wood to the pre-1989 levels, when there was excessive logging and allowable annual extraction levels were constantly exceeded by 15-30 percent.167 The other measures included in the scenario are afforesting degraded lands at the rate of 5,000 ha per year, including re-vegetation and forest belts, from 2012 to 2030; and implementing ‘no-till’ practices for 30 percent of the arable land per year, in rotation.  Scenario 3 (S3) includes measures to improve land use and additional financial incentives for 166 It should be noted that a recent submission on LULUCF actions to the European Commission (dated January 2015), it was noted that what has to be avoided is the lack of enforcement of laws that facilitate sustainable forest management across both private and public forest lands. The main concern is related to practices that delay biomass regeneration and larger emissions from bare forest soils, stand degradation by selective cuts and regeneration with native forest growing low wood density tree species 167 Bohateret VM. 2012. "Readjusting Romania’s Forestry Policy with a View to the Year 2050" in Journal of Settlements and Spatial Planning. mr. 1/2012 specific public good services. This will include measures to increase annual harvest of wood to pre-1989 levels through intensification of forest management; afforestation of degraded lands at a rate of 10,000 ha annually, including re-vegetation and forest belts; creation of woody biomass from fast growing crops at a rate of 5,000ha/year; implementation of “no-till” practices for 40 percent of the area of arable land per year from 2015 to 2030, in rotation; and increasing the protected area of nature conservation and biodiversity protection. This study concludes that for the timeframe considered (2015-2030), the highest benefit (most CO2 removal) is under S3. In contrast, the benefits under S2 and S1 are lower, i.e. less CO2 is removed each year (Figure 8.6). Figure 8.6. Green scenario S3 has highest sequestration potential Graphical representation of the removals of CO2 by lands converted to forestland in the three scenarios (y-Axis is in Gg Co2e) Gg CO2e Source: Forestry technical paper, developed through the “Romania: Climate Change and Low Carbon Green Growth Program”, 2015, World Bank. The rate at which the forest is growing and hence absorbing CO2 should be highest when the stand is young, with the exception of perhaps the first two or three years. Therefore, intensive management of forests and increasing sustainable harvesting of timber can increase the level of CO2 sequestered compared to maintaining forest stands168 (see Figure 8.7). The general evidence is that if forests remain unmanaged, there will be more mature trees. As the tree growth slows with maturity, they over-shade and suppress the growth of younger and more vigorous stems. The young stock provides a lower CO2 removal per ha at an early stage, but their sequestration potential is higher than in the mature stock. Increased management intensity would result in a greater proportion of older trees being removed, leading to a better growth of the younger trees and therefore CO2 removal ability of the remaining trees. 168 Analysis in Nabuurs, G.J., O. Masera, K. Andrasko, P. Benitez-Ponce, R. Boer, M. Dutschke, E. Elsiddig, J. Ford Robertson, P. Frumhoff, T. Karjalainen, O. Krankina, W.A. Kurz, M. Matsumoto, W. Oyhantcabal, N.H. Ravindranath, M.J. Sanz Sanchez, and X. Zhang. 2007. "Forestry" in Climate Change: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.; and growth curves in Kinderman et al. (2013) Also, trees removed can be used in such carbon beneficial processes169 as construction using lumber, manufacturing of various wooden products, e.g., chipboard or paper, or replacing fossil fuels with fuelwood. To implement any of the scenarios described above and ensure the long-term maintenance of forest health, sustainable management has to occur on both state and private forest lands. The private landholders will need to be provided with the necessary support to comply with the requirements including technical services, markets, and infrastructure. Many of these will require public investments or financial support to buffer the upfront cost. In Romania, climate-sensitive sustainable management of production and protection will require reversing existing constraints in terms of technology, infrastructure, knowledge, research, and other enabling conditions. Additional investments in afforestation would enable the Romanian Government to increase harvesting in production forest to the annual allowable cut while minimizing any associated reduction in CO2 sequestration. Figure 8.7: Forest grows faster when the stand is young Growth curves for central region of Europe with Picus model Source: Kinderman et al. A simplified regulatory regime for small privately owned forest areas that still requires sustainable forest management is required. Modifying the technical norms will allow owners to seize long-term opportunities in increased CO2 removal. The simpler regulation should enable owners of forests under 10 ha to adhere to good forest practice and sustainable forest management guidance with simplified requirements for planning, marking, harvesting and sale of timber and non-timber forest products. The 169 The benefit is carbon storage in the wooden products technical norms need to be revised and the revised norms should better reflect advances in forest management, forest operations and associated technologies (for example, nursery technology, seed quality, plant handling and site cultivation), and knowledge of climate change and its impacts on forests.170 Incentives will be important for successful afforestation initiatives. Of the 115,129 hectares of degraded area found suitable for restoration through afforestation in 16 counties (roughly 14 percent of the land area), more than 80 percent is under private ownership or community management of public lands. Afforestation is a cost-effective option for abatement of GHG emissions in Romania. The National Program for Afforestation projects a 422,000 ha increase in area under forest cover by 2035.171 Figure 8.8. Romania can improve forestry role in mitigation via various actions Projections of sequestration, forest emissions, forest conversions, and forest related activities Note: Projections of CO2 removals and GHG emissions for forest (5A1), forest conversions (5A2) and forest related activities (FM, AR, D) until 2020. Source: Ministry of Environment, Waters and Forests. 2015. Information on LULUCF Actions in Romania. Report under art. 10 of Decision 529/2013 of European Parliament and the Council, Bucharest, http://mmediu.ro/new/wp- content/uploads/2014/12/Report-LULUCFart.10Decision-529.pdf Romania has a high biomass potential and a tradition of using wood-based products, yet there is a decline in the wood industry and the country is importing wood. The biomass potential or Romania is estimated at 88,000 GWh per year. However, there has been a decline in the wood processing industry. The reasons include poor road accessibility, outdated technology and inefficient production processes, weak forest associations, and limited training and research in climate change. Also, an increasing part of 170 World Bank. 2011. Romania Functional Review: Environment, Water and Forestry. Vol 2: Forestry 171 Bohateret VM. 2012. "Readjusting Romania’s Forestry Policy with a View to the Year 2050" in Journal of Settlements and Spatial Planning. mr. 1/2012 the valuable wood resources has been used for heating. This problem could be reduced if wood waste from wood plantation and wood industry is utilized.172 Romania has long tradition in using wood based products for a range of purposes, including building constructions. Recently, the use of steel, concrete and bricks has increased replacing the use of wood. There is potential to reengage traditional knowledge and promote the use of wood in construction and other long lasting products. When considering a life cycle analysis, using wood products in place of steel, concrete and bricks (the production of which emit considerable amounts of CO2 and consume vast amounts of fossil fuels) can be an important opportunity for both climate change mitigation and sustainable growth by encouraging local traditions and economy.173 Afforestation of agricultural lands helps with both mitigation and adaptation to climate change: planted trees contribute to CO2 sequestration and, if established as forest belts, also support adaptation. Afforestation of degraded or abandoned lands is still the main option of mitigation in the forestry sector in Romania due to the large area where such measures are applicable. Afforestation represents over 26 percent of the total changed area in the period 1990-2006. In the mountainous and Subcarpathian regions, the expansion of the forest area is largely due to natural regeneration. Regeneration occurred on deforested areas and abandoned farm land and pastures, especially with the decline of livestock. In order to estimate the total cost of afforestation per hectare and the expected sequestration, four afforestation projects have been analyzed. The resulting growth of the carbon stock, assuming average site conditions, is reflected in Figure 8.9. The average cost, without transaction expenses, is €6,000 per hectare, which corresponds to the unit abatement cost of €120/tC/ha. Figure 8.9. Sequestration benefits of afforestation substantially increase with time Carbon stock trend for a native hardwood plantation (60% Oaks, 40% various other species) Source: Dr. Marian Dragoi, associate professor, University of Suceava, Romania Marginal abatement cost curves (MACC)174 for measures in the forest sector are estimated in addition to the national and international modeling exercises. The three main measures examined for the forest sector include afforestation, sustainable management of protection forests, and sustainable management of production forests. The measures examined are presented according to two parameters 172 BERD. 2011. Assessment of the Biomass Chains Including Technologies and Cost Structure. Bucharest. Recent studies show that the wood waste is an economically viable resource. 173 Börjesson, Pål and Leif Gustavsson. 2000. "Greenhouse Gas Balances in Building Construction: Wood versus Concrete from Lifecycle and Forest Land-Use Perspectives" in Energy Policy 28 (9), pp. 575-588 174 See chapter 9 for details and for a cross-sectoral MACC analysis of the MACC: potential mitigation impact (kt of emissions abated) and the unit cost of abatement (cost per ton of CO2e abated)175. The estimates were made on the basis of most recent local data, collected and validated by Romanian experts. 176 The outcomes are presented in Figure 8.10, which shows that the proposed measures provide a significant potential abatement level of 1,828 kt CO2 per year in 2050. The examined measures are evaluated as highly cost efficient: two of them – protection forest management and production forest management – have positive net benefits (negative net costs) and the third measure – afforestation – has negligible positive net costs. Afforestation measure addresses the problem of the lowering share of forest land and the on-going land degradation, therefore focusing on degraded lands. This focus means higher costs, but higher long- term benefits. An average annual growth of 10 m3 per ha is assumed and an average of 1,000 ha per year is afforested (a conservative assumption), resulting in the abatement (sequestration) of 10,000 tCO2 per year. The initial cost is €6,000 per hectare, in line with the actual current costs in Romania; it is assumed to decrease during the projected period 2015-2050 to €3,500 per hectare due to increased implementation efficiency and learning curves in technology. Revenues are also assumed, from fuelwood produced by clearings and non-commercial thinnings. The calculations were made using composition of species and soil conditions typical for degraded lands. For sustainable management of production forests, constraints and solutions are considered when estimating the MACC. For example, there is evidence that shorter rotations mean less disturbances, hence more valuable and healthy trees for harvest and a better CO2 accumulation in wooden construction materials. The measure was estimated for Norway spruce. Shortening its rotation from 110 to 100 years is assumed to result in a wood yield increase of 10 percent (a conservative estimate). The average growing stock in this period is about 650 m3 and we have assumed that 10 percent more wood will be graded for lumber, having this average growing stock. Having 65 m3/ha more wood, the abatement potential is 65 tCO2/ha. The measure would cover 50 percent of the Norway spruce forests, or 850,000 hectares. Considering a 10 percent higher carbon sink, the cost-effectiveness of the shortened rotations is estimated, considering average productivity, harvestable volumes from the yield tables, and operational costs (tending works, thinning and final harvesting operations). The revenues were estimated using data provided by the NFA, current prices for different grades of wood (obtainable from an average stand, with an average productivity), and the average assortment of grades estimated on the basis of yield tables. The operational costs were also documented by NFI Romanian harvesting companies. 175 Discount rate used is three percent 176 The estimates were made by Dr. Marian Dragoi, associate professor of the University of Suceava, Romania, in coordination with other local experts in the field Sustainable management of protection forests was the third measure considered for MACC . The measure is based on the assumption that Natura 2000 management plans will be enforced, resulting in compulsory environmentally-friendly harvesting operations, the reduction of timber harvested as salvage product, decreased damage to remnant trees, and less salvage products, in the long run. The impact on CO2 sink is assumed to equal the amount of timber currently harvested as salvage products from protection forests, which is 5 m3 per year per hectare. The measure is assumed to be applied on 5,000 hectares per year. Net baseline benefits were calculated based on average cost paid by the NFA for the protected areas. Green benefits (after the implementation of the measure) have two components: the EU level of €33 per hectare from the implementation of this measure and the compensation of €25 per year per hectare, to be paid through the Rural Development National Program.177 The cost and revenue data were provided by the NFA. Figure 8.10. The proposed forestry measures are highly cost efficient and provide a significant abatement potential Marginal Abatement Curve for Forestry Source: Staff calculations based on estimates and research provided by Dr. Marian Dragoi, associate professor, University of Suceava, Romania. Financing needs for the three priority measures were evaluated: afforestation, sustainable management of protection forests, and sustainable management of production forests. (See Table 8.3). The measures evaluated as highly cost efficient: two of them–protection forest management and production forest management–have positive net benefits (negative net costs), and the third measure– afforestation–has negligible positive net costs. The total discounted net cost of all three measures for the 177 To compensate the landowners for giving up harvesting operations for a period of 5 years period 2015-2050 is negative (or provides higher revenue than required costs) and equals -€86 million. If benefits are not taken into account, the cost is €115 million for the same period or just 0.002 percent of GDP. The schedule of costs requires approximately equal amounts of funding annually. The benefits, however, appear later in the projected period, mostly after 2030, because forestry measures require significant time to produce benefits. Table 8.3: Forestry green spending is beneficial for the economy Schedule of forestry green costs, millions of 2010 Euros 2015- 2020 2030 2040 Total 2010-2050 2020 - - - 2030 2040 2050 not discounted Discounted* Euros, million Gross costs 37 49 46 47 115 Net costs (net of benefits) 33 6 -116 -145 -86 Percentage of GDP: Gross costs 0.0040 0.0026 0.0020 0.0017 0.002 Net costs (net of benefits) 0.0036 0.0003 -0.0049 -0.0052 -0.002 *Discount rate is three percent CONCLUSIONS AND RECOMMENDATIONS Support Sustainable Forest Management. Forestry in Romania is a key sector for mitigating climate change, as it removes 27 percent of GHG emissions annually. Forest based mitigation measures can include conserving existing CO2 sinks, enhancing carbon sinks and reducing the trade-off between the sinks, and tangible and intangible benefits from other land uses. Adaptation measures in forestry will also benefit agriculture, and energy sectors enhancing efficiency of agriculture (forest belts) and providing a source of renewable energy for rural areas. Sustainable management of forests is instrumental for achieving Romania’s international obligations and EU directives. Policy measures that mitigate climate change and contribute to growth. First, Romania should update the technical norms and simplify regulations for smallholder forestry to make sustainable forest management financial and technically viable. Also, Romania should promote afforestation outside of forests and update the National Program for Afforestation. Afforesting agricultural and degraded lands should be sourced both from budgetary sources (e.g. Environmental Fund) and the EU, in line with the provisions of the National Afforestation Program and the New Forest Code. Moreover, to facilitate management of the Natura 2000 sites, it should be aligned with the overall forest management, the compensation process of Natural 2000 should be transparent, the regulations to implement Natura 2000 should be in place, and the available funds to purchase private land in areas designated for Natura 2000 should be used. Monitoring and analysis. Romania should improve capacity for monitoring the contribution of forest management to mitigation of climate change. Creating and implementing a transparent and updated monitoring system for CO2 removal together with a review of the modeling and analysis would help provide more accurate assessments of the contribution of forests to climate change mitigation. Forest fires. Romania should gradually improve the system for forest fires detection, monitoring and management. The potential increase in forest fire incidence should motivate improving the system for detecting, monitoring and managing all forest damaging phenomena, including fires, pests, drought and invasive species. Risk maps based on scientific evidence should inform the gradually establishment of an effective and efficient system, and should include the involvement of other relevant sectors. Forest road accessibility. To improve the contribution of forests to carbon sequestration, it is critical to improve road accessibility. To achieve it, financing provided for forest roads should be based on the economic rationale, including the contribution to climate change mitigation. The current distribution of markets and capacity for timber harvesting and processing should also be considered. Raising awareness for opportunities of financial support for road rehabilitation, maintenance and construction, including using the networks available to the forest associations, will contribute to the improvement too. Investment in new technology, marketing and processing. Priority should be given to co-financing environmentally friendly technologies. Imported technologies should be adapted to the local context. To encourage the development of new technologies, information regarding what “environmentally friendly” entails should be provided. Supporting small forest owners by adequate policy measures and incentives. Associations, several of which are already operating effectively, could increase the economies of scale. The support for small forest owners is specifically important within the Natura 2000 sites: it is necessary to assess the suitability of using compensation to improve compliance with Natura 2000 requirements. Strategic measures for CC adaptation. The technical norms for forest regeneration should include the latest scientific findings on species distribution and suitability in the context of climate change. Romania should introduce the silvicultural operations and forest regeneration that enhance adaptation. The Government should mainstream scientific research on adaptation in forestry and the silvicultural practices that enhance the resilience of forest stands to changing conditions. Moreover, it is important to invest in afforestation of degraded lands, create forest belts, and enhance management of forests in watersheds to reduce flooding, and to promote the necessary planning and to implement and enforce. Forests can provide significant mitigation contributions to Romania at low cost, but some public financing and good use of EU funds will be needed. Given the vast forests of Romania and opportunities for restoring degraded lands, measures associated with forestry offer significant gains for Romania on mitigation and adaptation in meeting its EU 2030 and 2050 targets and objectives. The frameworks for achieving EU-wide mitigation targets do not include forestry; therefore, implementation of these measures for mitigation would be voluntary actions. Financing needs for three priority measures that were evaluated--afforestation, sustainable management of protection forests, and sustainable management of production forests--equal €115 million (discounted178) for 2015-2050 or just 0.002 percent of GDP. The measures were evaluated as highly cost efficient: protection forest management and production forest management have positive net benefits (negative net costs), and the third measure– afforestation–has negligible positive net costs. When benefits are taken into account, the total discounted net cost of all three measures for 2015-2050 is a negative €86 million (benefits exceed costs). The schedule of costs requires approximately equal amounts of funding annually. The benefits, however, appear later in the projected period, mostly after year 2030, as forestry measures require significant time to produce benefits. A greener path for forest will require additional public spending. Financial support to landholders, especially private ones and in particular small landholders, will be necessary, likely in the form of public investments or financial support to buffer upfront costs. Other financing needs, which will fall primarily on the private sector, including for forest roads (although government can share information on possible financing assistance). Public investment and expenditures should focus on co-financing environmentally friendly technologies. EU funding available through the National Rural Development Program (NRDP) would not be adequate to cover the costs associated with these measures. However, necessary financing could be met by mainstreaming some of the necessary forestry actions into other EU-funded programs (such as ecological reconstruction, SMEs, education and extension, and other aspects of the NRDP), prioritizing where interventions are financed, and making sustainable management of forests profitable by reforming the policy and regulatory requirements for forest management, to help bring in private funds. 178 At three percent discount rate CHAPTER 9. A LOOK AT MITIGATION ACROSS SECTORS: A MARGINAL ABATEMENT COST CURVE CHAPTER SUMMARY Marginal Abatement Cost Curves (MACC) are commonly used as a tool in evaluating emission reduction technologies in terms of their potential mitigation impact (emissions abated) and unit cost (cost per ton of CO2e abated). They are also considered to be a most efficient communication instrument used in discussions of the abatement policies. MACC charts are designed to be a “brief”: they compare technologies to be considered for implementation in a simple (easy to comprehend in a limited time) but informative way. The technologies can be presented one by one or at various levels of aggregation, including by blocks of technologies, by economic sector, or even by groups of sectors. In the MACC, each technology has two characteristics: the level of abatement, Mt CO2e, which equals to the difference in emissions produced by the new technology as compared to the technology it replaces (abatement potential) and the cost of the technology per unit of abatement, Euro/tCO2e. The MACC analysis in the Romania Green Growth study presents a cross-sectoral outlook of the benefits and costs of the mitigation measures that are recommended in the Study on the basis of the sectoral modeling and analysis. It includes four sectors: energy, transport, forestry and agriculture sectors all have potential for abatement. Sector analysis conducted for the Romania Green Growth study resulted in a selection of a short list of measures that constitute green package in each sector. The mitigation measures from this list are evaluated in the MACC analysis. The timeframe of 2015-2050 is driven by Romania’s EU commitments: the current 2030 climate package, for which most details have been agreed, and the Roadmap 2050. The long run target of 2050 is crucial to the analytic work in the study, because the 2030 targets do not require much action from Romania. The Romania MACC ranks the selected measures from most cost effective to the least cost effective. The top measures in both cost effectiveness and abatement potential are in energy demand and electricity supply sectors, however, several other measures also provide significant benefits, this relates to forestry and agriculture. Measures in transport are more expensive and characterized by a limited abatement outcome. Green actions across the four sectors will reduce emissions in the country by 45 Mt CO2 eq. in 2050, an equivalent of a 25 percent decrease from the level projected for Baseline in 2050. The largest share of abatement – 48 percent of the total - is projected for electricity supply. Energy demand will provide a third of the overall abatement, agriculture one-tenth, forestry five percent and transport two percent. They range from the negative Euro -178 per ton CO2e abated in energy demand, to € 16/tCO2e abated in energy supply, to €-0.1/tCO2 abated in forestry, to €12/tCO2e abated in agriculture, and to €154/tCO2e abated in transport. CHALLENGES OF GREEN GROWTH ASSESSMENT AND MARGINAL ABATEMENT COST CURVES Marginal Abatement Cost Curves (MACC) have become a commonly used tool in evaluating emission reduction technologies, presenting them in terms of their potential mitigation impact (emissions abated) and unit cost (cost per ton of CO2e abated). They are also considered to be a most efficient communication instrument used in discussions of the abatement policies. In the 5th Assessment Report of the International Panel on Climate Change (IPCC), published in 2014179, MACCs are described as a standard policy communication tool in assessing emission reductions and their cost effectiveness and one of “major approaches to reveal the economic potential of mitigation measures”. In addition, they are an efficient way to present complicated mitigation data in a clear way and a concise format, accessible for all audiences, including non-technical stakeholders. MACCs are specifically useful for decision makers, who, due to time limitations, cannot study the details of research and analysis of green technologies and who usually make decisions on the basis of briefs and summaries. MACC charts are designed to be a “brief”: they compare technologies to be considered for implementation in a simple (easy to comprehend in a limited time) but informative way. (Figure 9.1) How can MACCs increase the quality of decisions regarding prioritizing abatement measures? Clearly, they support budgeting decisions by showing the cost per abatement unit of various measures and compare abatement potential of measures relative to each other and across sectors. However, MACCs support decision making regarding mitigation much more because they facilitate more detailed review of the mitigation measures. First, the way the measures are presented (ranked by unit cost and not grouped by sector) helps discussions of various combinations of measures cross-sectorally, increasing the efficiency of the resulting mitigation program (lowering its cost and maximizing abatement) and leading to budgetary savings. Second, MACCs produced for different time periods (e.g., 2020, 2030, 2040 and 2050) help to schedule the implementation of the measures, and this is especially important because green growth requires long term planning and also because the sequence of measures affects the level of the total effort needed, both in terms of the overall cost and institutional support. MACCs produced for different time periods help realize that some measures provide benefits faster than other measures, and the implementation should be scheduled accordingly. For example, energy demand actions provide swift returns, but energy supply actions require large up-front investments with benefits delivered years into the future. Forestry measures require a stable investment flow and benefits occur with a time lag, but increase over a long term. This is reflected in a set of MACCs produced for different periods. With this knowledge, investments can be scheduled in an efficient way to guarantee that the results are achieved sooner rather than later and to maximize the present value of the benefits long term, a standard approach for green growth and climate change studies (in our study, in the timeframe to 2050). However, MACCs also have several limitations. They do not reflect all costs of the abatement measures. A way to think about it is to rationalize the negative net costs of some of the measures that can be seeing 179 Mitigation volume, Chapters 3 and 7. in various MACCs. Such negative net costs are typical for energy efficiency and forestry measures, but can be appear as characteristics of abatement options found in other sectors as well. If the net costs are negative, does it means that benefits exceed costs and the measures should be implemented with a profit, making them an investment opportunity for the private sector. However, it does not happen because there are hurdles (both financial and non-financial) that are not captured by the MACC analysis. First, there is a cost of making an up-front investment. While such cost is lower for energy efficiency measures than for many other types of abatement interventions, it can be quite large for the household or business who would implement a measure. Second, there is a principal-agent problem (such as the owner, operator, occupant, and bill payer of a building are separate entities). Third, there is a problem with information about the measures, the benefits they bring and the ways to receive subsidies. Forth, there is a cost of implementation among a large number of small entities (households, businesses). In addition to these hurdles, MACCs do not support non-financial decisions related to implementation of the abatement measures, including capacity building, behavior change effort, reactions of non-governmental stakeholders, and other institutional considerations, and this has an implication for ease of implementation. While being useful for decision makers, MACCs do not supply complete information needed to select technologies, but rather provide a quick insight into the subject. More information is needed to make an implementation decision or have an informed discussion. Figure 9.1. Why are Marginal Abatement Cost Curves Used? MACCs are charts showing a set of technologies that would reduce emissions from economic activities. The technologies can be presented one by one or at various levels of aggregation, including by blocks of technologies within a sector (e.g., demand side energy sector technologies), by economic sector (energy, transport, etc.), or even by groups of sectors (e.g., ETS sectors). In the MACC, each technology has two characteristics: the level of abatement, Mt CO2e, which equals to the difference in emissions produced by the new technology as compared to the technology it replaces (abatement potential) and the cost of the technology per unit of abatement, Euro/tCO2e. The cost is computed in the following way. First, it is calculated as the net present value of the flow of investment and operational costs over the period of time from the base year (today or in the recent past) to a year in the future, which is selected as the final point of time for projections, e.g., year 2050 or year 2030.180 Second, the cost is calculated as marginal cost of technology replacement; as such, it equals the difference in cost between the new “green” technology and the current “non-green” options. Usually, the difference in cost is a positive number because new technologies tend to be more expensive than the old ones, but there are exceptions. Third, the cost is computed as net of benefits, which could also push the resulting net cost into negative numbers. In cases when the net marginal cost is negative, the technology is depicted on the left side of the chart, among the technologies that provide net benefits.181 (Figure 9.2) Figure 9.2. What is Marginal Abatement Cost Curve? The technologies in the MACC chart are ranked using the second characteristic, the unit cost of abatement. The abatement potential is usually presented for a year in the future, e.g., 2050. It is also common to present cumulative abatement potential, combining expected abatement for all the years between the present and the final year in the projections, e.g., 2015-2050. 180 MACCs usually have a long time frame because many of the measures require years and even decades to implement and the benefits are fully realized with a time lag from the conclusion of the implementation 181 This issue has been extensively discussed in literature. A commonly asked question is why the green options that presumably provide net revenue are not being implemented by the private sector. The answer is that they do not provide net revenue: the MACC costs only include direct costs of the technology (e.g., in electricity supply, it would be costs of building and operating a power plant), but do not include other costs, such as transaction costs, financing hurdles, high upfront costs, the costs of information failure, non-financial costs (e.g., in housing energy efficiency, the costs of inconvenience of moving out one’s house or tolerating construction noise), etc METHODOLOGY Overview of the MACC approaches The MACCs are created through modeling, which is used to calculate two characteristics of the technologies used in the MACCs: unit cost and abatement potential of technologies. Prior to modeling, the list of technologies should be created and the baseline defined, since both costs and abatement are calculated marginally to the baseline. Selecting “green” – adaptation and mitigation - technologies for the MACC. The aim at this stage is to select technologies that would replace the non-green ones. Technologies are selected within particular sectors, and sector selection comes first. The MACCs can be built at a sector (or sub-sector) level, for the economy overall, or even globally. It is recommended to involve stakeholders at this step to have in- country information regarding the barriers to technology transfer and the measures to address these barriers, such as regulations, fiscal and financial incentives and capacity building. Consultations at this stage are usually conducted in the form of the workshops. Also, it could be useful to increase awareness using dissemination of technology information, expert lectures, visits, and demonstration projects. Modeling to estimate marginal cost and abatement potential of each technology. There is a wide heterogeneity in the approaches to building MACCs. Each approach has its own benefits and deficiencies. In particular, there are three basic modeling approaches to constructing MAC curves: a bottom-up individual assessment of technologies/abatement measures, a bottom-up system modeling approach, and macro-economic modeling. In the individual technology approach, the abatement costs are defined at a technology level, commonly using cost-benefit models and often involving expert opinion. In this approach, the total cost depends not only on the way the costs are derived, but also on the set of abatement measures included in the analysis. Within this approach, each technology is evaluated separately, in terms of implementation costs and abatement level. Total abatement and abatement costs equal the sum of the individual technology characteristics. The problem with this approach is that in real life climate policies overlap, implementation costs vary, and sector-specific policies can interact with each other. As a result, this approach causes such problem as negligence of technical, behavioral, intertemporal and economic interactions, double counting, limited coverage of costs, path dependency, agency issues, and a limited treatment of uncertainty. Despite it, this approach has been widely used in various studies to estimate the abatement cost and potential for different economic sectors in many countries. For example, it was used by McKinsey and also by the UK Government. Even now, with significant international experience using sectoral system modeling and a combination of bottom-up engineering models and CGE models, individual technology approach is used most often, mainly due to its transparency, ease in understanding of the calculations and the outcomes, and lower costs. Model-based systems approaches are receiving increasing acknowledgement. Various bottom-up (e.g., MARKAL and TREMOVE) and top-down (CGE) system models have been used to generate MAC curves in order to include interactions among technologies and policies. The examples of the sector models used in the energy and transport sectors include TREMOVE and MARKAL. TREMOVE assesses overall impacts on costs and CO2 emissions, the ratio of which provides abatement costs that take account impacts of cost increases or reductions on vehicle ownership, and travelled distance. (rebound effects). The transport sector MARKAL includes energy demand, measured in vehicle kilometers, for various modes of transport: air, car, bus, heavy goods vehicles, light goods vehicle, rail transport and two-wheeler. It has fuel distribution networks to track fuel use by mode of transport. It includes different vehicle technologies: internal combustion engine, hybrid, plug-in, battery, E85 (fuel mix), methanol and hydrogen. Technologies are characterized by vehicle technical efficiency, capital cost, and lifetime. MACCs can also be derived using CGE models. In a CGE model, emissions are usually modeled through fuel used as input, using fuel emission coefficients and introducing constraints on emissions. The price of carbon (carbon tax or carbon shadow price) is used to balance demand and supply and to produce the cost of abatement. Deficiencies of MAC curves generated by the economy wide top-down models include the lack of technological detail, disregard of market distortions and the reliance on historic data for the calculation of future abatement costs. Costs of abatement are considered to be overestimated. To minimize the deficiencies, various approaches to including bottom-up data in the top-down models are used. For example, various mathematical approaches have been used to integrate detailed engineering data in the CGE models through Social Accounting Matrices by estimating the allocation of capital, labor, energy and material inputs among production activities in a way consistent with the engineering cost data. Another type of approaches includes a recently introduced method of generating MACCs by combining system modeling, decomposition analysis and uncertainty analysis. Another example of a combined top- down and bottom-up approach aiming at a better assessment of the abatement costs suggests that top- down models should include an explicit (not though fuel substitution) representation of abatement technologies with such pollution abatement options as production factor substitution, output demand reduction, and installation of abatement equipment other than fuel substitution. Romania Marginal Abatement Cost Curve: approach The MACC analysis in the Romania Green Growth study presents a cross-sectoral outlook of the benefits and costs of the green technologies/measures that are recommended in the Study on the basis of the sectoral modeling and analysis for the time period 2015-2050. The timeframe is driven by Romania’s EU commitments: the current 2030 climate package, for which most details have been agreed, and the Roadmap 2050. The long run target of 2050 is crucial to the analytic work in the study, because the 2030 targets do not require much action from Romania. The MACC analysis is the last step in the Romania Green Growth analysis and is connected and coordinated with the sector modeling. However, it is not part of the suite of models where the sectoral modeling is used as inputs into macro modeling. MACC is connected with the sector modeling through technology/green measure selection, which was done during the sector analysis (see Box 9.1), and through sharing the input data: MACC analysis uses the technologies/measures recommended by sectoral analysis and the same input data that was used for the sector analysis work. The process of sector selection was defined by the sector analysis within the overall Romania Green Growth study. First, the selection of sectors was done for the Romania Green Growth study overall, the main criterion was the sector’s importance for mitigation and/or adaptation. Availability of data and models was also taken into account. Second, out of the sectors selected for the study overall, we chose for the MACC those where mitigation measures were prevalent and eliminated the sectors where measures were limited to adaptation. This was done because MACCs are built to evaluate abatement measures and therefore adaptation measures are irrelevant, as they are not aimed at emission reduction, while mitigation measures serve exactly the abatement purpose. The adaptation sector that was included in the Study but excluded from the MACC analysis is the water sector. Another sector present in the Study, but not in the MACC analysis, is urban sector: the urban sector’s green measures are a combination of transport, energy, etc. interventions at the urban level. Therefore, including urban sector in the MACC, where energy and transport are already represented, would create double counting. Energy, transport, forestry and agriculture sectors all have potential for abatement. In the energy sector, while the country has a relatively high - approximately one-quarter - and growing (mainly due to wind power development) share of renewable sources in power generation, energy supply is dominated by fossils fuels, with more than a third of primary energy supply in coal and oil and another third in gas. The remaining third is almost equally divided between nuclear and biofuels. At the same time, the country has one of the best wind resources in Europe, which, combined with the low price of wind power, creates an opportunity for abatement. Also, bioenergy resources are significant and should be utilized to lower emission from the energy sector (emission factor of bioenergy is less than half of that of coal). Energy supply side measures take a long time to implement, but the time frame of the study, 2015-2050, provided enough time for the benefits to realize. In transport, regulatory measures could be used to create incentives for households and businesses to buy less emission intensive vehicles and reduce the frequency and length of driving. Afforestation is a central measure in forestry and, in fact, across sectors, promising to provide high level abatement at a negative cost (with benefits exceeding cost in the long term). Forest management is a critical preventive measure, aimed at keeping the trees healthy and therefore supporting the potential of the forest to sequester carbon. Agriculture measures would support the abatement of carbon dioxide, methane, and nitrous oxide; these are low cost measures with a high abatement outcome. Technology selection. The approach to building a MACC for Romania used in the Romania Green Growth study has some specifics, the main one is the way technologies/green measures were selected. The MACC is the last step in the multi-sector modeling and analysis conducted within the study, and this provided an opportunity for a technology/green measure selection for the MACC on the basis of an in-depth sector analysis and modeling. As a result, the MACC includes the measures that were selected, analyzed and recommended in the course of the analysis of each sector. Sector analysis conducted for the Romania Green Growth study resulted in a selection of a short list of measures that constitute green packages 2015-2050 in each sector. The mitigation measures from this list are evaluated in the MACC analysis (see Box 9.1 with a description of the selected measures). This approach is considered appropriate for the overall study because it provides for the consistency of the recommendations presented in sector analyses and in the MACC analysis. Also, this approach supports a more detailed discussion of the mitigation measures (the measures are described in detail in the sector chapters), as opposed to a more superficial overview of a broader set of available, but not necessarily recommended technologies. Some other studies, however, have a different approach and estimate the costs and the abatement potential of all globally available and potentially relevant for the country abatement technologies (e.g., McKinsey studies in a number of countries). Box 9.1. Selected technologies for the MACC analysis in transport, forestry and agriculture Transport sector. Unlike in other sectors in the Study, the transport sector analysis has an emphasis on policies as opposed to technological interventions. It identifies a wide range of measures including pricing instruments, technology, regulatory measures, operational efficiency measures, and investments. Since only the last type of measure is suitable for a MACC analysis, we have a limited number of transport sector green measures included in the MACC analysis. Three measures were included in the transport MACC: vehicle scrappage scheme, ultra-low emissions vehicles (ULEV) subsidy and electric vehicle infrastructure investment, and electric vehicle fleet. All transport measures included in the analysis have high costs, above Euro 150 per tCO2a abated. This high costs can be explained by the co-benefits that are not internalized in the total costs (see more on this subject earlier in this section). Forestry sector. Climate change mitigation in forestry is achieved through CO2eq sequestration. This requires planting more trees and supporting forest health through sustainable forest management. The main mitigation measures selected in the Romanian forestry sector as a result of the sector analysis are afforestation, sustainable management of production forests for timber, and sustainable management of protection forests.   Afforestation of agricultural lands helps with both mitigation and adaptation to climate change: new forests contribute to CO2 sequestration; they also, if established as forest belts, can support adaptation. Afforestation of degraded or abandoned lands is still the main option of mitigation in the forestry sector in Romania due to the large area where such measures are applicable. Degraded lands inventory, conducted by MARD in 2012, estimated that approximately 115,000 hectares or 14 percent of the degraded land is suitable for afforestation.  Enhancing Protected Area Management. Romania has an obligation to meet the directives associated with Natura 2000. To lift the current challenges to achieving Natura 2000 objectives, there is the need to develop a simpler way of compensating private property holders and also clarifying how compensation is determined. Identifying a way to compensate communities managing public lands under Natura 2000 is equally important.  Improving Sustainable Management of Production Forests. While modern forest management uses financial rotation of forests in many EU countries and globally, Romania is behind many of its comparators in this area: its forest rotation exceeds 100 years for most of indigenous species of forest trees. The proposed green measure is shortening the average rotations for the most important forest species. Shorter rotations mean less disturbances and more valuable and healthy trees harvested as main yield. The results could be significant: in ten years, the yield can increase by 10 percent. Agriculture. In the agriculture analysis for the MACC, two mitigation measures are considered: minimum tillage and manure management. The No tillage measure reflects the benefits of using no tillage as compared with the current practice of using full tillage in the fields. The area covered by the measure is based on the arable land, which is susceptible to desertification. While desertification is the threat and motive of the minimum tillage scheme, the poor manure management (collecting, storage, treating, applying) of the past is the motive for the new measure "composting manure”. Farmers taking up on this measure undergo stringent practices in terms of storage and treatment of manure, which impacts GHG savings per animal units (not per ha). Estimation of the MACC parameters. Romania’s MACC is a combination of sectoral curves, each of which was built using most appropriate approach for each sector. The approach used in each sector depends on data availability, accessibility and quality, as well as on the availability of the models. For the electricity supply, the specifications of the curve (potential abatement and cost of the generation technologies per unit of abatement) were calculated using a system model TIMES/MARKAL. For the energy demand, a bottom-up detailed engineering model was used (see Box 2 with a detailed example of the approach in the energy sector). In the forestry, agriculture, and transport, a bottom-up Excel-based approach was used, and the measures are evaluated individually. In both agriculture and forestry, the calculations are done based on detailed sector data provided by Romanian experts specifically for this Study. In transport, local data are not available for many of the measures because there is no experience with these measures in the country; therefore, data from the comparator countries were used. As a result, transport sector estimates are based on a combination of local and global data. In all sectors, the timeframe for the analysis was 2015-2050. Discounting was used for both net cost and emissions. The same discount rate as used in sector modeling was applied to the MACC calculations. It ranges from 3 percent in forestry to 5 percent in energy, a typical social discount rate. Costs (before discounting) are in real terms and the base year for discounting is 2015. The overall process of building a MACC for Romania is reflected in Figure 9.3. Box 9.2. Approach to the MACC modeling in the energy sector Energy demand The MACC calculations for the energy demand measures were done using an Excel-based bottom-up model and are based on very detailed data (see below). The MACC for energy demand includes end -use energy efficiency improvement to be applied in the household sector, as these measures bring most immediate and effective (with high potential abatement) results. The energy consumption in the household sector includes all energy- using activities except personal transportation. Common end-uses associated with this sector include space heating, water heating, cooking, lighting, air-conditioning, refrigeration and running a variety of electric and non- electric appliances. The future energy consumption in the residential sector are driven by various factors, including changes in population, urbanization rates, household income, dwelling size and type, dwelling floor area, energy-mix, energy efficiency of appliances, appliances diffusion rate and standards, and household preferences and behaviors. The approach used required collecting a wide range of data, which can be grouped into three categories: energy consumption data, socio-economic and demographic data (population, household size, housing stock attributes, etc.), and technology data (technology penetration, such technology attributes as emission intensity and unit costs, etc.). The data were collected from many different sources including several national, regional and international publications. In particular, Romania’s National Institute of Statistics (INS), EU’s Eurostat and the World Bank’s World Development Indicators are the primary sources of data. The household activity parameters were used to project the future end-use service demand. The base year is 2015. The projections of end-use service demand are made through the year 2050 with 5 years of interval. The model used a simple Excel-based bottom-up framework for projecting the penetration of each technology during the period of 2015-2050 under two scenarios - Baseline and Green. The Baseline scenario reflects a moderate view of the future energy demand based on a continuation of the current trends and provides a useful point of comparison for the impacts of choices and/or of changes in alternative low carbon policies. In the Baseline scenario, population increase and economic growth are the key driving factors that influence the outlook of energy demand in the household sector. The Green scenario is designed to reflect the EU’s energy and climate strategies, including the 2030 framework for climate and energy policies and the Roadmap for moving to a low carbon economy in 2050. The Green scenario includes two phases: the first one runs from 2015 to 2030 and follows the EU 2030 strategy. The second phase follows the EU’s 2050 roadmap to low carbon economy and runs from 2030 to 2050. The Green scenario involves increased (as compared with the Baseline scenario) energy efficiency improvements by households. Major energy efficiency improvement measures include use of more efficient lighting and electric appliances, retrofitting buildings with wall, window and roof insulation, and heating and air conditioning system improvements. Electricity supply The MACC calculations for electricity supply were done using an energy supply system model TIMES/MARKAL ,182 which is an optimization model. In the MACC analysis, the model helped determin e the marginal cost and abatement potential of each of the following eight green (renewable or low carbon) generation options: solar photovoltaic (PV), concentrated solar power (CSP), more hydro (as compared with the installed capacity), more wind, biomass, natural gas plants with installed carbon capture and storage (gas CCS), coal plants with carbon capture and storage (coal CCS), and nuclear. The model constructed the best (minimum cost) mix of generation sources to achieve a desired abatement level in eight different cases, corresponding to eight green generation technologies. This meant eight scenario runs, one for each of the green generation options. Abatement level was 182 TIMES (an acronym for The Integrated MARKAL-EFOM System) is an economic model generator for local, national or multi-regional energy systems, which provides a technology-rich basis for estimating energy dynamics over a long-term, multi-period time horizon. The model does multi-year optimization (computes the least cost path of an energy system for the specified time frame) and can be used at the global, multi-regional, national, state/province or community level to test a series of policy options, such as CO2 constraints, taxes or subsidies. The structure of TIMES is defined by variables and equations determined from the data input provided by the user. This information collectively defines each TIMES regional model database, and therefore the resulting mathematical representation of a Reference Energy System for the region. The database comprise both qualitative and quantitative data set as a constraint, and each scenario maximized generation from one out of the eight generation sources, considering many other variables/constraints in the model: production/transformation facilities; transportation, transmission, and distribution networks; various resource, technical., socio-economic, environmental and other constraints including the size of the plants, their capacity factor, the need in the back -up capacity, etc.). For example, in scenario 1, solar PV was set to be maximized in the electricity supply system, and the rest of the generation technologies was selected by the model. The model also calculated the cost of such system and the cost of the baseline system. The difference between these two costs constituted the marginal cost, which was then converted into the net present value. The model is data intensive, and the input data included a number of variables: those related to energy demand (GDP, population, households, etc., and elasticities of demand), primary energy and material resource potential and costs, policy settings (emission restrictions, emission taxes, subsidies to technologies, etc.), and a description of technologies (or processes) that transform commodities (fuels, materials, energy services, emissions). The key data sources were Eurostat, The World Bank, International Energy Agency, and World Energy Resources. In addition, the energy demand data from the bottom-up demand model developed in-house to compute energy demand by various types of energy consuming services was use (see Energy demand section above). Data. IPCC recommends using National Communications data for the MACCs. Since Romania is an Annex 1 country, the main climate change data are available in the 6th National Communications183. However, the Romania MACC in the Study required detailed data for particular measures, as well as interrelated abatement and cost data. Such data were not available from the National Communications. Therefore, it was necessary to use other sources, both local and global. Some of the local data were collected specifically for the MACC study; this relates to all data used for the agriculture and forestry MACC calculations. Transport and energy MACC analysis was based on a combination of the global and localdata, which were collected and used for sector modeling and then utilized again for the MACC calculations. This guaranteed consistency between the sector analysis and the MACC analysis. 183 UNFCCC, 2010: 6th National Communication of Romania to UNFCCC: https://unfccc.int/files/national_reports/annex_i_natcom/submitted_natcom/application/pdf/6th_nccc_and_1st_ br_of_romania[1].pdf Figure 9.3. Building a Marginal Abatement Cost Curve for Romania: steps of the process FINDINGS The outcomes of the analysis are presented in the cross-sectoral MACC chart (Figure 9.4 and table 9.1). The chart includes the main options for abatement in four sectors - energy, forestry, agriculture, and transport - and the two characteristics of these options: net present value of their cost over the period 2015-2050 and the abatement they are projected to provide in year 2050 when the implementation is completed and the benefits are fully realized. This longer time frame is necessary to capture the full benefits in the calculations. Total annual abatement in year 2050 reaches 45 MtCO2e. The chart shows that several household energy efficiency measures have negative costs (benefits are exceeding the costs), this includes energy efficient lighting, energy efficient air conditioning, and energy efficient household appliances (refrigerators and washing machines). Also, several technologies in power supply, forestry and agriculture have positive, but very low cost, this includes solar PV, wind, hydro and concentrated solar, as well as forest protection management and housing insulation. The least cost efficient technologies are in the transport sector. A review by sector shows that energy efficiency measures are most beneficial, they have both high abatement potential and low, mostly negative cost. Electricity supply measures also deliver significant abatement level at a relatively low (but positive) cost. Forestry provides large abatement potential. Agriculture measures – no tillage and manure management – are relatively cost efficient; they also promise to provide a significant abatement benefit. The transport measures, however, have very high costs and, at the same time, a limited abatement potential. This is consistent with the discussion of the transport MACCs in literature and is explained by the nature of the transport mitigation: the transport measures have multiple objectives, including, apart from abatement, reduced pollution, lowered traffic controlled noise, reduced number of accidents, and improved quality of life. Abatement is not necessarily the main objective or the main benefit of these measures; in some cases, such as with urban congestion control, the objective is not abatement, but economic and social development (urban growth and improved quality of life). Therefore, the transport measures have, by their nature, many co-benefits. However, including these co-benefits in the calculation of the net cost is difficult, as no precise estimates of many of such benefits are available and using the existing approximations would significantly reduce the level of precision of the MACC costs that we use in our calculations. The examples of the approximations that could be used in our calculations are the cost of a lost life or a traffic injury, the potential municipal budget revenue from developing urban business friendly infrastructure, etc. Energy sector provides most cost efficient measures and the highest overall abatement. The most effective measure (the one that has the highest abatement potential) in energy demand is building insulation, followed by the usage of efficient lighting. In electricity supply, the highest abatement can be achieved from the development of electricity generation using natural gas plants with installed carbon capture and storage (gas CCS), and a similar level of abatement will result from the expanded usage of the coal-based plants with carbon capture and storage (coal CCS). Among renewable energy options, the highest abatement potential is in wind, followed by biomass, then solar Photovoltaic (solar PV), then hydro generation and solar CCS. Development of nuclear generation would also reduce abatement, in the amount comparable with that of hydro generation. Cost-wise, the most efficient electricity supply options are Solar PV and wind, followed by solar CSP, biomass and nuclear. Gas CSP would require higher expenses, and coal CSP is the most expensive option reaching Euro 40 per tCO2e abated. Several demand- side measures provide absolute net benefits (or have negative net costs); this includes the recommended measures to expand the usage of efficient lighting, efficient air conditioning, efficient refrigerators and efficient washing machines. CONCLUSIONS AND RECOMMENDATIONS The MACC work derives from the analysis and modeling of all the relevant sectors in the study. The MACC chart is simply a presentation of the findings of the sector work, transformed to match the MACC approach. When the MACC data from all sectors is put in one chart, it creates a clear and simple picture comparing green measures by costs and benefits across sectors. The MACC analysis is based on a detailed sector analytic and modeling work that identified the areas where mitigation efforts would be most effective and proposed particular mitigation measures for implementation. Based on this outcome, the MACC analysis estimated the MACC parameters (the unit cost of abatement in the period 2015-2050 and the potential for abatement in 2050) for the MACC curve for each of the selected measures. The resulting MACC ranks the selected measures from most cost effective to the least cost effective. The top measures in both cost effectiveness and abatement potential are in energy demand and electricity supply sectors, however, several other measures also provide significant benefits, this relates to forestry and agriculture. Measures in transport are expensive and characterized by a limited abatement outcome. Green actions across the four sectors will reduce emissions in the country by 35 Mt CO2 eq. in 2050, an equivalent of a 23 percent decrease from the level projected for the Baseline in 2050. The average costs and abatement potential in each of the four sectors analyzed are also reflected in Figure 9.5. The largest share of abatement – 48 percent of the total - is projected for electricity supply. Energy demand will provide a third of the overall abatement, agriculture one-tenth, forestry five percent and transport two percent. They range from the negative Euro -178 per ton CO2e abated in energy demand, to € 16/tCO2e abated in energy supply, to €-0.1/tCO2 abated in forestry, to €12/tCO2e abated in agriculture, and to €154/tCO2e abated in transport. Costs of each measure are in Table 9.1. The Romania MACC can increase the quality of decisions regarding prioritizing the proposed abatement measures. In addition to supporting budgeting decisions by showing the cost per abatement unit of various measures and compare abatement potential of measures relative to each other and across sectors, it can support decisions regarding the implementation of the proposed green actions. MACCs help realize that some measures provide benefits faster than other measures, and the implementation should be schedules accordingly. In particular, the Romania MACC can help to schedule investments in an efficient way to maximize the present value of the benefits in the long term, a standard approach for green growth and climate change studies (in our study, in the timeframe to 2050). However, it cannot support non-financial decisions regarding capacity building, behavior change effort, reactions of non- governmental stakeholders, and other institutional considerations, which is quite important. In case of Romania, not surprisingly, the MACC shows that the scheduling of the green actions should start with energy efficiency measures because they have the lowest (negative) net cost, low investment cost, bring benefits very fast, and have low implementation barriers. Next, the measures in forestry also need to be scheduled to start early on. They have a relatively low annual cost, require no upfront investment, and, while benefits occur with a time lag, they accumulate in the future, so an early start is possible and desirable to maximize the benefits. These are no-regret measures. Measures in energy supply, vice versa, require large up-front investments with benefits delivered years into the future and the implementation requiring strategic, complicated, and politically charged decisions. In case of the energy supply measures, the MACC provides only one element of a very big and complicated picture needed to make decisions. In transport, the proposed measures have high unit cost and their implementation should be guided by co- benefits (benefits other than emission reduction); they should be implemented where and when they can bring important health benefits (by lowering pollution), reduction in the rate of traffic accidents, decrease of traffic congestion, and improved quality of life. Figure 9.4. Romania Marginal Abatement Curve, cross-sectoral, 2050 Note: How to read the MACC. The height of each column shows the average cost of abating one ton of CO2 by 2050. The chart is ordered from left to right from the measures with the lowest cost to the ones with the highest cost. The width of each column shows the GHG emission reduction potential of the measures in year 2050, when all the measures have been fully implemented. Sources of data: sector technical reports developed through “Romania: Climate Change and Low Carbon Green Growth Program”, 2015 ; calculations are done using a tool developed at the World Bank. Figure 9.5. The highest abatement potential is in energy supply, negative costs are in energy demand and forestry Emission reduction by sector, 2050, and average cost of the green measures, 2015-2050 Table 9.1. Abatement cost and potential, by measure Sector / Measures Abatement cost, Sector / Measures Abatement cost, Abatement potential, Super Green €/t CO2eq., 2015-2050 compared with BAU, kt CO2eq./year (2050) Energy demand Households, Efficient Lighting -161 3,790 Households, Efficient ACs -87 294 Households, Efficient Refrigerators -82 816 Households, Efficient Washing -71 2,445 machines Households, Insulation 9 5037 Electricity supply Solar photovoltaic (PV) 5.0 1,552 Wind 6.9 2,686 Hydro 12.5 896 Concentrated Solar Power (CSP) 14.2 854 Biomass 15.6 1,702 Nuclear 15.9 1,065 Gas with Carbon Capture and 19.7 4,357 Storage Coal with Carbon Capture and 36.1 3,884 Storage Forestry Protection forest management -0.23 900 Production forest management -0.04 568 Afforestation 0.11 360 Agriculture No tillage 14.4 2,172 Manure management 10.0 1,200 Transport Fuel Price 0.13 147 Scrappage Scheme 0.36 0 Vehicle Registration Tax 2.28 151 Parking Pricing 3.01 14 Urban Cong Pricing 9.60 36 Air Travel Taxation 11.84 26 Ultra-low Emission Vehicles 26.19 23 Public Sector EV 38.54 24 Bus EV 46.77 30 Speed 64.77 242 Eco Driving 337.97 61 Low Emissions Zones 402.72 40 Investment in Walking Cycling 533.24 18 Smarter Choices 683.31 9 Technical Papers Agriculture Sector Technical Report, Romania Climate Change and Low Carbon Green Growth Country Assessment, June 2015. 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