Joint UNDP/ World Bank EnergySector ManagementAssistance Programme ENERGYAND THEENVIRONMENT ESMAP BEYOND UNCED ? October 1992 JOINT UNDP/WORLDBANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) ENERGY AND THE ENVIRONMENT E S W BEYOND UNCED October 1992 ENERGY AND THE ENVIRONMENT ESMAP BEYOND UNCED CONTENTS I. INTRODUCTION .......................... 1 I1 . ENERGY AND THE ENVIRONMENT: A REMEW OF LINKAGES. STRATEGIES. AND INSTRUMENTS ...................... 4 Strategies for Addressing Energy-Environment Issues .... 5 Policy Instruments for SustainableEnergy Supply and Use ................................... 6 Subsectoral Energy-Environment Issues and Policy Options ................................ 6 rn.UNCW AGREEMENTS ON ENF;RGY AND THE ENVIRONMENT .................... 10 Framework Convention on Climate Change ......... 10 Global Environment Facility ................... 11 Agenda 21 ............................. 12 N . ACHIEVING ENERGY AND ENVIRONMENTAL OBJECTIVES: ESMAP'S AGENDA . . . . . . . 13 Expanding the Focus on Environmental Issues . . . . . . . . 14 Institutional Linkages ....................... 25 I. INTRODUCTION 1 This paper discusses ESMAP's present and potential role in helping to respond to the global "reform agendawfor the environment, particularly in the contexts of the United Nations Conference on Environment and Development (UNCED) at Rio de Janeiro and of ESMAP's overall country- and sectorwide focusas presented in theESMP Strategyand Work Plan,1992-93. This section of the paper briefly suggests why the issues Nsed by UNCED are relevant for ESMAP and its donor and recipient countries. The second section reviews a range of current concerns about energy and environment, and the third section details agreements to cope with these concerns taken at Rio, as embodied in the Framework Convention on Climate Change and Agenda 21. The last section discusses the role ESMAP has played in addressing environmental issues and ESMAP's potential to support the UNCED agreements. 2 An important outcome of UNCED is Agenda 21, which "seeks to give practical expression to the acceptance of a shared but differentiated responsibility for the future of humanity and its habitat, and focusses on linkages particularly between environmental and development issues, and identifies programs that address both sets of issues simultaneously. "'Agenda 21 has broadly defined the objectives and activities that both ESMAP's client and donor governments have adopted as the basis for ensuring environmentally sustainable devel~pment.~It is thus incumbent on ESMAP to work within this framework to build on its own comparative advantage in its traditional activities and to adapt as necessary to complement the work of other organizationsand programs. As a result of the Rio conference, other organizations are also defining their own programs, and it is important that ESMAP establish a clear agenda to avoid duplication of efforts. 1. Preparatory Committee for UNCED, Ow?rview of Agenda 21 and lmpkmcntatwn Mechanisms,Report of the Secretary General of the Conference (February 1992). 2. The term sustainable development was brought into common use by the Brundtland Commission (see World Commission on Environment and Development, Our Common Future, Oxford,U.K.: Oxford University Press,1987)and was definedas "meeting the needs of the present generation without compromising the needs of future generations.' Making the concept of sustainability precise is more difficult, however. The World Bank's WorkiDewlopmerat Rtport 1992 points out that in the past benefits fromhuman activity have oftra been exaggerated and the costs of environmental loss ignored. In addition to taking into acc~untthe environmental cost of development, the uncertainties and irreversibilitiesassociated with environmentalprocesses must be considered. Not aU environmentalresourcescan or shouldbeassignedmonetary values,but trade-offsshould be as explicit as possible. 3 With regard to the specificlinkages between energy and the environment, emphasis is given in Agenda 21 to the reduction of greenhouse gas (GHG) emissions and to climate change, transboundary air pollution, and the need to promote sustainable energy development. It is clear that developing countries must increase their use of energy to achieve economic growth (see Box 1 for energy demand projections by country group). Nonetheless, the Agenda urges countries to adopt strategies both to achieve economic growth and to ensure environmentalprotection. 4 The combination of economic and environmental goals with regard to energy wiIl require careful analysis of joint energy sector and economic development strategiesat the national level. Trade-offswiIl be required in terms of policies, technology choices, and institutional structures to achieve economic goals while meeting national and international environmental obligations. Moreover, attention to environmental issues needs to extend beyond technical initiatives (e.g., investmentin pollution control) to sectoral policy issues such as pricing (to encourage efficiency and to reduce energy consumption); to the substitution of cleaner fuels (e.g., natural gas to reduce GHG emissions from combustion of petroleum and coal); and to institutional issues. Most if not all of these needs represent areas in which ESMAP has experience or is developing capacities in connection with its mandate to emphasize strategic, sectorwide technicalassistance strategiesand to meet demands for assistance in institutional restructuring and reform. The question remains, however, of how ESMAP should evaluate and prioritize its energy-environment activities. Some background for an analysis of the Programme's optimal s-trategiescan be found in a review of-the hkages between energy and environmental concerns and of strategies and instruments in the current agenda. BOX 1: Energy Consumption by Country Group: an "EneqgyEffaent"Scenario, 1970-2030 Millionsofbarrelsofoilequivalentperday 400 I Percapitaconsumption Bwelsofd equivalentperyear 1970 1980 lsso m 2010 2020 2030 0 OECDownhies 61 EasternEurope and formerUSS.R Developingabunhiu N o k Thescenarioassumesgrowthin total consumption done totwoperantage pointsbelow theh n d rate. Source: WortdDcwbpnunr Report 1992. 4 ENERGY Am 7HEENVIROMNT '. ENERGY AND THE ENVIRONMENT: A REVIEW OF LINKAGES, STRATEGIES, AND INSTRUMENTS 5 L i e s with environmental concernsareapparentin all phasesof energy production (coal mining, petroleum production); transformation (oil refining, electric powec generation); and end-use (automotive transportation, domestic heating, and cuoking). Atmospheric, ground, and water pollution from mining, combustion, and waste disposal cause the well-known problems of smog, acid rain, and possibly global warming. Each technology engenders a different set of environmentaland economic trade-offs that can be optimized only within a broad range of constraints to meet a set of objectives, however specified. 6 Energy-environment linkages extend in a continuum from the highly localized household level to the global level. At the local level, the most serious energy-environment problems facing developing countries are the effects of emissionsof particulatematter (dustand smoke),indoor airpollution arising from the use of biomass fuels, and the use of leaded petroleum-based fuels3 In an increasing number of countries, particularly in Eastern Europe and the former Soviet Union (FSU), the problems of smog and acid rain caused by interactions of sulfur dioxide (SW, nitrogen oxides (NO3, unburned hydrocarbons, and carbon monoxide are severe. Transport, industry, and domestic energy use are sources of these emissions that impose serious costs for health and productivity. 7 Energy-related global problems include the potential for worldwide warming caused by the increased accumulation of greenhousegases (GHGs) such as CO, and methane in the atmosphere; high-altitude ozone depletion caused by the release of chlorofluorocarbons (CFCs), used mainly in refrigeration devices; and the pollution of oceans by oil spills. Although the rate and impact of global warming are the subjectsof considerableuncertainty, it has been agreed under the Framework Convention on Climate Change that the issue must be addressed as a global "no regrets" policy. 3. World Bank, WorldDewloplmcnt Report 1992. E S W BEYOND UNCW 5 Strategies for A d d d i g Energy-Environment Issues 8 The primary strategy for reducing the environmental impact of energy supply and use is to reduce the energy intensity of economic activity and future economicdevelopment. Theprincipal means to achievethis objective is through increased efficiency in the broadest sense, including rational resource allocation based on economiccosts. At a minimum, energy costs should not only reflect the full costsof production but should alsointernalizeenvironmentalcosts. Improved technical efficiency (i.e., lower energy input, greater end-use benefit or output, or both) is necessary but not'sufficientto reduce energy intensity. Institutional development is also needed to plan, operate, and maintain energy systems and to formulate policies that will lead to the rational use of energy with minimal environmental impact. 9 Technological development and innovation will be required. For many countries this will mean using alternative fuels in place of coaland oil (notably natural gas, where a~ailable).~It will also mean designing and implementing energy conservation and demand side management programs to reduce total energy demand. 10 Many componentsof energy strategies are in the national self-interest of countries and would not require a significant shift in policies to justify their environmental benefits. In these cases, the economic benefits to the country of improvingenergy efficiency or implementingenvironmentallysustainableenergy programs would exceed thecostsof such measures. In other instances, however, costs to the country concerned may be greater than the direct national benefits received. Nonetheless, the additional global benefits might justify the modification of national energy development strategies. To encouragecountries to undertake such actions,developedcountrieshave agreed, under Agenda21 and the Climate Change Convention, to financeagreed incremental coststhrough the Global Environment Facility (GEF). Much work is still needed to determine workabledefinitionsand the modalitiesfordesigningand implementing programs to fulfill the goals of UNCED. 4. Whereas the wmbusrion of natural gas in place of coal or oil would reduce CQ emissions, unburned methane from natural gas leakage would have an impact about 11 timesgreaterthan CO,. Gasleakage must thereforebe reducedsubstantiallybelowlevels currently considered acceptable to ensure a net reductionin equivalent GHG emissions. 6 ENERGY Ah?D TIYE EMrlRONUENT Policy Instruments for SustainableEnergy Supply and Use 11 Acombination of market-based and command and control policies will be required in each country depending on the degree of developmentof markets and on institutionaland social development. Several broad lessons regarding policy choices can be drawn from recent experience, however: a. A combinationofpolicies will oflenbe required. Becauseaparticular type of environmentaldamage is frequently caused by different actors and for differentreasons, a singlepolicy may not be enough. An effectivepolicy for reducing emissions in badly polluted cities, for example, will require mandated emissions standards for vehicles and industries, improvements in fuel quality, and gasoline taxes. Encouraging energy conservation is helpful but would not solve the problem alone. b. Standards should be realisricand enforceable. Manydevelopingcountries have set unrealistic standards and enforce them selectively at best. c. Controls must be consistent with the overall policy framework. Many well-intentioned policies have been thwarted by other policies that pull in the opposite &tion. For example, both China and Poland instituted pollution taxes a number of years ago but without significant effect because the taxes were not high enough or the state-owned enterprises were not sufficiently accountable for profitability to give them the incentive to reduce taxes through pollution abatement as intended. Subsectoral Energy-Environment Issues and Policy Options 12 Power Sector. About 30 percent of fossil fuel consumption, which includes more than half of the world's consumption of coal, is used to generate electricity. In the 1980s, electric power generation rose more than 110percent in developingcountries, where demandhas been expandingatabout 8percent per year. Under a "businessas usus .mnario, in v.hich pollution technologies are ' not widely deployed, emission aollutants willincreaser than fourfold in the next forty years. This prc ,isavoidable,however;..,-dgationmeasures include the following: E S W BEYOND UNCED 7 a. Economic and institutional refonn. Such activities would encompass substantialprice adjustments (elqtricityprices in developingcountriesare on averagebarely more than one-third of the supply costs, not including environmental costs). The need to introduce a transparent regulatory framework that would also embody environmental policies in the power sector isa cornerstoneof thepower sector policy paper recently presented to the Board of the World Bank. b. Energy conservtrrionand eficiency improvements. Energy pricing is the necessary but not sufficient basis for programs in demand side management to reduce both peak load (megawatts) and energy consumption (kilowatt hours) for lighting, heating, cooling, and motive power. c. Fuel substitution and improved technologies. By providing strong incentives to generate and use electricity more efficiently, prices and institutionalreforms have the advantages of encouraging reduction of all emissions. However, to curb significantly the negative environmental impacts,improved technologiesand practices shouldbeadopted, including fuel substitution. These technologies include natural-gas-fired combined cycle plants (where gas is available) and flue gas desulfurization equipment. Reduction in C02emissions will also require an increasing use of renewable technologies, including solar and wind energies. 13 Tmnspoe Sector and Vehicle fiels. Transport fuels account for more than 55 percent of the developing countries' total oil consumption, which has grown by 50 percent since 1980compared with 10percent in OECD countries. Pollution from .vehiclesin developing countries is more seriousthan in industrial countries because many vehiclesare in poor conditionand lower quality fuels are used, motor vehicles are concentrated in few large cities, and a larger percentage of the population moves and Iives in the open air and is thus more exposed to automotivepollutants including lead. 14 Household Energy. About half of the world's population cooks all or some meals with biomass fuels. Biomass (wood and agricultural and forestry residues) provides about 14percentof the world's energy demandsand morethan 80 percent is consumed in developing countries. The use of biomass fuels for cooking gives rise to high levels of indoor air pollution and causes ecological 8 ENERGY AN45 iiE ENVIROMNT damage; for example, the use of dung and crop residues depletes soil productivity, and deforestation contributes to soil erosion. Finally, the low thermal efficiency of biomass use helps to explain the relatively high energy intensities of many developing countries and their relatively high C@ and particulate emissions. 15 The transition to commercial fuels would improve energy efficiency and reduce emissions; however, this strategy has proved slow and difficult. One promising and complementary strategy is to deviselesspollutingways of burning biomass. Several countries have developed and disseminated improved biomass cookstoves, although with mixed success. ESMAP's Improved Stovesproject in Rwanda, however, has been particularly successful and is regarded as a highly replicable model (see Box 2). 16 A cas-sectional review of ESMAP work in household energy indicates that therapid growth in thenumbers of urban poor is exacerbatingthe breakdown of traditional energy systems. Furthermore, the transition from traditional to modem energy has been characterized by unserved demand, high costs, and accelerated environmental degradation. There is a growing consensus, based on ESMAP's intensiveinvolvementin householdenergy strategy studiessince 1987, that the most critical issues for strategy formulation emanate from the ongoing trmsition by low-income households from the use of traditional fuels to elternatives such as kerosene, LPG,and electricity. 17 To formulate policies to support sustainable energy development and reduce environmental degradation in the contextof the energy transition of urban householdsand nualcommunities, it is necessary to gain a better understanding of interfuel substitution and the social impact of energy pricing reforms. The following issues and questions are crucial: At what stage do the externalities caused by significant harvesting of woodfuels to supply urban markets justify intervention to encourage households to switch to other fuels? At what level of incomeis it realistic to expect that householdswill switch from traditional to modern fuels? What zi. a e costs and benefits to the poor of various energy pricing policies, including subsidies to assist the poor? ESMAP BEYOhD UNCED 9 HO& efficient are traditional woodfuel markets in regulating prices in urban areas? Is there a role for government policy to direct the pace of the transition between fuels? What is the social impact of various energy policies, and how will the impact be affected by pricing reforms? These issues and questionslie at the heart of the ESMAP Strategy for Household Energy Paper presented in April 1992. 10 ENERGY AND 7HE EN 3NMEhT 18 The Framework Convention on Climate Change sets out in broad terms the agreements of all countries in recognizing the need to reduce GHG emissions-particularly C02to reduce the risk of global warming and climate change. Agenda 21 covers a broader spectrum of environmental issues and programs. A summary of these agreements is presented below. Framework Convention on Climate Change 19 TheClimateChange Conventionhas not set specifictargets for reductions in GHGs: however, countnt-.that ratify the convention will commit themselves to a number of actions. The Convention itself, when ratified by 50 nations, will commit them to the following steps: a. Pr~parationof a national strategy that includespolicies and measures to deal with the threat of global wannznnzng. The national strategies must be presented within six months after the Convention enters into force. The measures must be designed with theaim of returning to someprevious-as yet unspecified-level of emissions of CQ and other GHGs. This represents a besteffort commitmentto stabilizenon-CFC greenhouse gas emissions at the 1990levels targeted by many countries. b. Development, sharing, and updanng of national GHG emissions inventories. c. Technologicaldevelopment and innovation to reduce GHG emissions. d. Education, training, and public awareness campaigns. These would include participation of groups outside of government including environmental organizations, business coalitions, and citizens' groups. e. De:rloped cowtt~ fofimd the agreec' *xrementalcosts of meeting the GhG abatemenr turgets in developing cL~wttries. E S W BEYOhD UNCED 11 Global Environment Facility 20 As just noted, the Climate Change Convention obligates developed countries to provide new and additional financial resources to help developing countries to prepare national reports and implement the corresponding measures. At Rio, it was agreed that the Global Environment Facility (GEF) would be the interim fundingmechanismtoassistdevelopingcountriesto meet theirobligations under the Climate Change Convention. The GEF was established in 1990as a three-year $1.3 billion pilot program to providefundingfor investmentprojects, technical assistance, and-to a lesser extent-research in climate change, ozone depletion, pollution of internationalwaters, and biodiversity. Responsibility for implementing the GEF is shared among the U.N. Development Programme (UNDP), the U.N. Environment Programme (UNEP),and the World Bank. Each institution has its own area of responsibility. The World Bank administers the GEF, acts as the repository of the Trust Fund, and is responsible for investmentprojects. UNDP is responsible for technicalassistance activities, and UNEP provides the secretariat for the Scientificand Technical Advisory Panel (STAP) and addresses scientificissues concerning the environment. As of May 1992,the GEF was consideringmore than 70 projects worth some $600 million, of which 47 percent were for biodiversity; 36 percent for global warminglozone depletion; and 17percent for international waters. 21 Provision was alsomadeby UNCED for thepossible creation of a funding mechanism under the Conference of the Parties to be established by the Convention; however, it was the desire of the UNCED participants that no new international funding institutions be created at this time. Several countries supported a two- to threefold increase in resources for GEF once its pilot phase ends in 1993. 22 Some of the issues currently facing the GEF include better definition of the full incremental abatement costs for different emissions from different sources; abatement technology assessment; cost of abatement technologies for different type of country; and preparation of GHG Abatement Strategy Papers (GASPS; see paras. 49-50 below).' 5. Work in definition of abatement wsts will be carried out under the Progiam for Incremental Costs for the Environment, 'PRINCE.' Agenda 21 23 The main operational product of UNCED, Agenda 21, is an ambitious action plan for environment and development covering more than a hundred program areas (e.g .,climate, marine pollution, desertification, human resources, sustainableagriculture) to be supportedby new and additional financialresources, improved access on favorable terms to environmentally sound technology, and strengthened institutionalcapacity in developing countries. Stateswere called on to prepare sustainable development plans outlining national environmental problemsas well as strategies,programs, and priorities forimplementingAgenda 21. UNCED agreed that external financing should be assembled to support these programs through a variety of existing funding mechanisms, rather than new ones. These funding sources include the multilateral development banks, including regional development banks; a restructurd GEF;bilateral assistance programs, including debt relief; and voluntary contributions through nongovernmental organization channels (which currently represent about 10 percent of total overseas development assistance). Agenda 21 also calls for exploring innovativeways to generate new public and private flows, in particular various ' m s of debt relief, including greater use of debt swaps; economic and fiscalincentives; the feasibility of tradablepermits; new schemes for fund-raising through private and nongovernmental channels; and reallocation of military resources to development. Development organhtions were asked to support these programsby integratingenvironmentand developmentassistance strategies, making more effective use of existing resources, mobilizing new resources, and adjusting their memberships and operations. 24 Agenda 21 sets out the following specificenergy efficiencyobjectivesand activities (most of them are already focal points in ESMAP activities): a. Promotion of the development, transfer, and use of improved energy- efficient technologies b. Coordination of energy plans regionally and study of the feasibility of efficient distribution of energy from new and renewable sources c. Cooperation to increase the capability of relevant technologies of renewable energy sources d. Developmentof energy production and consumptionpolicies that improve energy efficiency e. Promotion of the application of economic and regulatory measures that take into account environmental and other social costs f. Building of energy efficiency and renewable energy issues into energy planning and management activities g. Development and strengthening of energy efficiency and emission standards h. Support to educational programs on efficiency at the local, state, and national levels I. Establishment and enhancement of product labeling programs to provide efficiency information. N. ACHIEVING ENERGYAND ENVIRONMENTALOBJECTIVES: ESMAP'S AGENDA 25 ESMAP will enhance its responsiveness to its mandate by actively assisting countries to meet the UNCED agreements and objectives, but the Programme also must also ensure that it continuesto address fully energy sector issues that are already critical for sustainable development. ESMAP has discussed these issues in its Strategy and Work Plan, 1992-93and else~here,~ and the present paper has outlined in previous sections the interaction of energy and environment in the macro context of economic and energy sector development. Although the principal issue that led to the creation of ESMAP in the early 1980s-high petroleum prices-has receded, the treatment of issues at a macro level remains an essential concern for ESMAP in addressing energy and environmentconcerns. No other technicalassistanceorganization operatesat this level with a comparablemandateto assess issues, propose strategies, and identify and carry out specificactivities in energy strategies. 6. A limiteddistributionpaperprepared forthe ESMAP ConsultativeGroupmeeting. Issues and OptionsFacingE S W (October 1992)discussesrecent developmentsin the energy sector and their implicationsfor Programme development, funding, and governance. 14 ENERGY ANE THE ENVIROWifENT 26 Agenda 21 and the Climate Change Convention have identified a number of activities, such asemissionsinventoriesand energy efficiency projects, that are importantin addressingenvironmentalissues. Theseactivitiesmust be considered in theoverallcontextof theissuesof macroeconomicand institutional framework, however, so that these activities themselves can be sustainable and have lasting value. ESMAP can play a key role to help put in place the necessary framework. 27 For ESMAP, increasing attention to the environment should not mean a major reorientation but rather an adjustment of the focus to ensure that full attention is given in each step of the EShlAP work program cycle. ESMAPYs traditional activities have been consistent with objectives of Agenda 21 and the Clim .= Change Convention. Indeed, all its activities have been designed to promote improvements in the efficiency in the operation, management, and planning of the energy sector that lie at the heart of reducing the environmental impact of energy supply and consumption. The degree to which the energy and environment linkageshave been explicitly addressed has varied in past activities but has increased as these issues have come to the forefront. Expanding the Focus on Environmental Issues 28 At all steps in the ESMAP work program cycle greater attention is now being given to environmentalissues. The steps x e elaborated upon below, after which some subsectoral and global considerations relating to ESMAPYs environmental focus are raised. 29 Initiating Country Brief. In formulating a work program for countries where a recent assessment or strategy paper is not available,an initiatingbrief is prepared to iden* the issues, priorities, need for technical assistance, and proposed role for ESMAP. In this step, energy-related environmental issues at the local, national,and global level and their severityare identified. Institutional responsibilities, government programs, and international support for abatement measures should also be identified to the extent possiblr.. The severity of environmentalissues relative to other energy sector issues should be established to determine if an energylenvironmentassessment is required. Lmison with the Environment Divisionsof theWorld Bankis criticalat this stage, since theWorld Bank is undertaking a program of assessments coveringall environmentalissues. ESMAP BEYOm UNCED 15 30 Energy Assessment. The decision to undertake an overall energy sector assessment or an energylenvironment assessment will depend on the state of knowledge in the country and the priority of environmental issues within the energy sector. Strategy studies are normally an extension of energy assessments and are carried out where issues and options have been identified but a need remains to define more clearly the priorities for the sector within the overall macro framework. Energy assessments and stktegy studieswill devotea chapter to environmental issues within the macro framework; individual subsector chapters will deal with specific issues relevant to household energy, electric power, and petroleum supply and end use in industry and transportation. Institutional roles and the interface between energy sector entities and the institutionsresponsible for environmentalpolicy, monitoring, and regulation will be examined. Energy-environment issues may be of such high priority that a distinct energylenvironmentassessment is warranted, as is being carried out in Indonesia (Box 3) and under preparation for Nepal (Box 4). 31 E S W Country Paper (ECP). Following the completion of an Energy Assessment or Strategy Study for a country, a multi-year program of ESMAP activities is proposed to assist in the implementation of the strategy. The draft ECP is reviewed with the World Bank's Regional Operating Divisions and the UNDP Resident Representativeconcerned. It is then discussed and agreed with the government and sent to donors for funding as a country program. Box 5 describesthe case of Bolivia, where the Netherlands is expected to provide about $2.3 million forfiveactivities. Although all five activitiesslated forBolivia (see Box 5) involve environmental issues, the last two (energy efficiency and rural energy supply) will have the greatest direct impact on environmentalprotection. 32 Hitherto, ECPs have identified only projects to be executed as ESMAP activities; however, it is evidentthat ESMAP cannot and should not undertake all activities or only activities relating to energy and the environment. It is proposed, therefore, that the ECP list these activities as identified during the preparationof the ECP, provide a brief description, an approximatecostestimate, and indicate the status of funding. Such projects might include inventories of emissions and air quality monitoring and assistance in drafting environmental legislation pertaining to the power or petroleum sectors, among others. Liaison with the World Bank and other agencies active in the country would be maintained to avoid duplication of effort. In this manner, the ECP would assist donors in identifying energy-environment activities that might not have been apparent in the context of their overall environment assistance programs. 16 ENERGY AND lHE ENWRONMENT ESMAP BEYOAD UNCED 17 18 ENERGY A I D 7HE ENK?RO&UENT 33 Implementation of Subsectoml Stmtegv Tasks. As previously noted, all ESMAP activities support environmental improvement to varying degrees. Subsectoral strategy implementation tasks that most directly address environmental issues include household energy, fuel substitution, natural gas development, and energy conservation on the supply and end-use sides.. 34 Nanrral GasDevelopment. TheNatural GasUnit, created withinESMAP in 1989, is the only technical assistance group in this subsector in any international cooperation agency. It has become an important source of policy advice to governments to foster the role of natural gas in many developing countries, including Eastern Europe and the Former Soviet Union. The availability of this expertise provides ESMAP with a unique capacity to assist recipients in developing energy strategies where natural gas-as one of the least environmentallydamaging sourcesof energy--can play a major role. In addition to development plans, the ESMAP gas unit has undertaken extensiveinstitutional and regulatory technical assistanceprograms in China, Indonesia, Mozambique, and Poland, for example, where emphasis was put on institution building, price reforms, and legal and contractual aspects. 35 The present work proposals of ESMAP include 12 gas-related projects covering high-priority issues faced during the development of natural gas including assessments of the potential to switch from coal and oil to natural gas. In substitutinggas, wherever possible, for more polluting sources of energy such as coal, many countries would be able to cut down the level of air pollution, in particular within large cities, and reach pollution levels compatible with most acceptable international pollution standards. (Carrying out the proposed projects and maintaininga critical mass within the Gas Unit of ten perso!;s willdepend on sustained donor funding.) 36 Alternative and Renewable Energy. ESMAP has had considerablesuccess in evaluatingthe sustainabilityof biomassuse, particularlyin Africa (Box 6), and biomass will necessarily remain a key fuel source in Africa for some time. Nonethe, . smoke from domestic cooking with biomass fuels is the main cause of indoor ~Alutionas well as an important source of outdoor air pollution. This situation argues for the need for accelerated rue1 substitution using kerosene, LPG, and natural gas. Fossil M price subsidies may be warranted on environmentalgrounds, but the policy issue and means of targeting the subsidies must be examined on a case-by-case basis. 37 The role of alternativeand renewable energies other than biomass, and to a lesser extent small hydro projects, has been limited sincethe drop of petroleum prices in 1986. Greater use of alternativeenergies including wind and solar may be warranted on the grounds of reduced GHG emissions, but there is a risk that the attention of governments and donors could be diverted from more urgent energy-environment issues because of unrealistic ex-tions concerning the contribution that alternative energies can make in the medium term to solving energy or environmental problems. 20 ENERGY AND lHE ENI lNUENT 38 ESMAP has evaluated the application of alternativeenergy technologies includingphotovoltaics(Pakistan, Yemen); minihydrousing irrigation canaldrops (India);and windpower (India). Severalprojectsarebeing financedby the World Bank and GEF following completion of the preinvestment work by ESMAP.' Nevertheless, the cost-effectiveness and priority of using these technologies as part of national GHG abatement strategies must be evaluated carefully. The cost per tonneof CO,abated using alternativeenergies would need to be less than the cost of abatement through efficiency improvement in power plants or demand reduction in electricity end-use or biomass use for cnoking before alternative energies would have a high priority in meeting national commitments for GHG abatement. With this perspective, greater attention to the trade-offs involved in the use of alternativesin place of conventionalenergy sourcewillbe made during the energy assessment to help prioritize alternative energies. 39 In the near term, ESMAP is planning no freestanding alternative energy projects but rather will evaluate these technologies as part of a broader strategy for GHG abatement and sustainableenergy development. ESMAP will continue to provide operational support to the World Bank (as in Rwanda for the photovoltaic component of the energy sector credit) and for h e technical evaluation of alternativeenergy investment projects to be funded by GEF. 40 Energy Eficiency Activities. On the supply side, activities have been completed in relation todistributionlossesreduction (Kenya,Tanzania)and diesel efficiency improvements (Indonesia). On the end-use side, activities have been cop-leted or are under way to improve energy efficiency industry (audits and sem...as in Ghana, Senegal, Pakistan, and Tanzania)and in commercialbuildings (audits, building codes in Colombia, C6te d'Ivoire, and Jamaica). Appliance testing and labeling programs are also under way in Jamaica. 41 An increasing number of energy efficiency componentsarebeing included as a matter of course in projects financed by multi- and bilateral financing agencies; hence, the role of ESMAP in preinvestment activities should be reexamined. As expesience has been gained both by the lending agencies, governments,and consultantsconcerningthedesignand implementationof energy 7. The IndiaRenewableEnergy Credit (IDA) is financingthe canaldrop minihydroproject, and the GEF is financing the photovoltaicand wind energy projects in India, the agar cane bagasse cog&on projed in Mauritius, and the biomass cogendon project in C6te d9Ivoire,all of which are the outcome of ESMAP activities. efficiency projects, the comparative advantage of ESMAP is reduced. Indeed, ESMAP has no comparative advantage in carrying out energy audit programs, which can be done with the assistance of consultants under investment project financing. Institutional design, pricing policy, and regulatory issues in establishing a workable energy conservation strategy, however, remain crucial areas where ESMAP has gained valuable experience that can be replicated. 22 ENERGY AID ZHE Ef 'IROAMENT . 42 In Pakistan, the energy conservation agency ENERCON was established in 1986 to design and implement a national program, as described in Box 7. Priorities for conservation have been reevaluated and a revised program prepared under the ESMAP Pakistan Energy Efficiency Technical Assistance (Phase I) project. ESMAP also assisted in mounting a donors' conferencein August 1992 in Islamabad to support ENERCON. The lessons learned from this project are replicableelsewhereto assist governmentsin designing and implementing energy efficiency strategies incorporating both economic and environmental objectives. 43 Energy use in commercial buildings can be reduced by up to 50 percent or even more through improved design. The energy efficiency building code project that pioneered the development of a building code has been replicated in Colombia and C6te dYIvoire,for example. Most importantly, sound experience has been gained in the organization and process required to bring together architects, engineers, government officials, and building financiers not only to develop a workable code but also to ensure its application. Having gained this experience, ESMAP should now seek other agencies such as NGOs and professional bodies of architects and engineers to accelerate technology transfer and capacity building in this area. A package of materials is being prepared that provides a model code, technical handbook for its application,and organizational guidelinesconcerning the process of implementation. This material will be made availableto abroad range of entitiesinvolved in energy efficiencybuildingcodes. 44 Transponuzion. ESMAP's role concerning the transport sector should be directed toward macro level issues during Energy Assessments and Strategy studies because energy and transport issues are very much interlinked with importation and fiscal policies, transportation and urban planning, and infrastructure de- .lopment. Pollution caused by vehicles cannot be dealt with solely from with;.. the energy sector. Nonetheless, matters such as fuel quality, phase-out of lead additives from gasoline, and vehicle fuel substitution through the use of LPG and CNG are matters that can and should be addressed by ESMAP from the point of fuel supply and policies to encourage the reduction of vehicle emissions. Measures to be considered include fuel pricing, vehicle taxation, and theanalysis of thecosts and benefitsof policiesto encouragevehicle replacement. Activities such as set: -.% up air quality or vehicle emissions monitoring programs would not be ca ..xi out by ESMAP. ESiU4P BEYOND U N m 23 24 ENERGY AND TEE EhWRONiUENT 45 Although environmentally linked activities clearly can permeate the steps in ESMAP's country strategies and its subsectoral activities, a thoroughgoing emphasis on environmental considerations has implications for the selection of ESMAP's core countriesthemselves and for the mix of activities the Programme undertakes. Forexample, onenvironmentalgrounds, China, EasternEurope,and the Former Soviet Union should feature prominently in the ESMAP work program. Donors so far have not shown strong support for activities in these countries, however, and the Programme will require guidance from the Consultative Group to ensure the coincidenceof ESMAP and donor priorities. 46 Following the Rio summit-as in the late 1970sand early 1980s, during the period of high energy prices-environmentally oriented projects have proliferated. Often they have had a narrow focus, in part as a result of . internationalpressure and a desire by donors to provide assistance. As a result, governmentsnow arereceiving a raft of proposals forprojects, each oneof which may have a role to play within an overall strategy for environmental protection and pollution abatement. Yet without an adequate assessment of the issues, requisite policies, and priorities, environmentalobjectives may not be realized at least cost. To help ensure leastcost solutions to environmental problems, ESMAP's work program will focus on the following activities: Assisting in establishing a system of energy pricing that encourages the rational use of energy, as in Bolivia and Peru Establishing a regulatory framework for the management of electric power, petroleum supply, and biomass that incorporates environmental issues Helpin; governments to develop appropriate environmental standards b a d on internationalexperiencefollowingtheidentificationof the extent and severity of the problems and recognizing the need for trade-offs in setting standards Reviewing the needs for and assisting in institutional strengthening and capacity building to address energy and environmentissues with regard to ESMAP BEYOND UNCED 25 the enforceability of standards and the elimination of duplication and overlap of mandates among national institutions8 Developing subsector strategies to reduce pollution at the local, national, and global levels including an assessment of the role of fuel substitution and alternative energies Providing technical assistance in energy conservation including power sector rehabilitation and loss reduction, and industrial, commercial, and household energy analysis, program design, and implementation. Institutional L i i g e s 47 As in other aspects of its work, ESMAP has established linkages with a number of multilateral and bilateral organintions. These linkages must be broadened as additional funding to be provided under the UNCED agreements becomes availableand as other organizationsadapt their programs to support the UNCED objectives. At present, the GEF, World Bank,UNDP,and bilateral organizations have environment programs with which ESMAP will increase its liaison. In the past, linkageswith NGOs have been limited; however, in keeping with the UNCED agreements and in accordance with the policies of the World Bank,ESMAP will deliberately seek closer coordination. 48 Global Envimnment Facility. ESMAP has assisted the GEF through the technical review of proposals for project funding, in managing the prepration of two papers on the development of GHG abatement strategies, and through participation during the preparatory conferences on the Framework Convention on Climate Change. In the post Rio summitperiod, the respective managements have agreed to maintain close coordination to avoid duplication of efforts, since several ESMAP and GEF concerns overlapand both groups draw funds from the same donors. 8. Two ESMAP activities in capacity building are described in the paper prepared for the ESMAPConsultativeGroup,IssuesandOptionsFacingESMAP (October1992);seeBox 2: Capacity Building in China, and Box 3: ESMAPIESAMICollaboration to Deign a Regional Trnining Program. 26 ENERGY AND TEE EhnROWENT 49 ESMAP, with its overall knowledge of the principal energy issues facing many developing countries, can support the GEF in the preparation of its GHG Abatement StrategyPapers (GASPs)and can assistin evaluatingprojectproposals for GEF funding. ESMAP can also assist in identifymgprojects but should not become involved in project preparation, which can be done more cost-effectively by consultants or NGOs. 50 Regarding abatementstrategiesand the GASPs, it became apparentduring the course of preparing the GEF Working Paper Economic Costs of CO, Reduction Strategies, that the optimal abatement strategy would vary for each country, although country typologies are likely to be found. GEF will commission a number of GHG Abatement Strategy Papers (GASPs) in a variety of countries in order to develop broad strategiesby country type. The costs and priorities of various abatement strategies will be compared with a business-as- usual scenario to determine incremental costs of meeting increasing GHG abatement targets. During 1992-93, GEF intends to carry out GASP studies in a limited number of representative countries in order to establish a typology of abatement strategies, to develop marginal abatement cost curves, to assess technologies, and to definepriorities. An Action Plan should be finalized by the end of CY92, and studies could be initiated early 1993. Discussions are under way with GEF for ESMAP to prepare a GASP for Indonesia to take advantage of the analytical work now under way and to carry out similar studies in about six countries. The government of Pakistan has already requested assistance in preparing core elements of a national GHG abatement strategy as part of Phase I1 of the energy efficiency project (Box 8). As in Indonesia, this work can be extended to cover all elements needed to prepare a GASP. 51 WorId Bank. ESMAP provides support to the World Bank where it has the professional capacity to help energy-environment work by carrying out or participating in energy sector reviews and in all aspects of rural and household energy. Liaison is being increased with the Environmental Divisions in the Operating Regions concerning the role of ESMAP in the Bank's environmental assessmentprocess and to ensurea fullexchangeof informationin corecountries. ESMAP's participationin environmentalassessmentswouldoccur when it has the capacity and when requested. As with other support provided by ESMAP,work would be undertaken on a reimbursable basis. ESMAP BEYOND UNCED 27 52 Nongovemmerrlal Organizations. Many governments recognized that the UNCEDprocess has been energized by internationalpublicopinion mobilized by the independent network of NGOs and by the world's media and that these will play an important follow-up rolein monitoring the implementationof Agenda 21. Thegenerally constructiveand participatory role played by the NGO community was one of the most striking features of the UNCED preparatory process and of the Conference itself; more than 1,400NGOs were formally accredited to the UNCED process. 53 In keeping with the agreements under UNCED and the policy of the World Bank for increased involvement of local and international NGOs in environmental policy issues, ESMAP will deliberately seek closer links with NGOs to determine the potential synergies. Opportunities for cooperation are particularly apparent in research and in dissemination at the local level, where ESMAPhasnocomparativeadvantage,theactivityisbeyond ESMAP's mandate, or both. The potential role in addressing energy-environment issues and in carrying out strategy implementation activities that may become part of the ESMAPworkprogram willbeidentified. International NGOs inparticular, such as the Stockholm Environment Institute, American Council for an Energy Efficient Economy, and the InternationalInstitute for Energy Efficiency, among others, have become increasingly involved in areas such as demand side management, transportationefficiencyimprovements, and household fuels. Their knowledgeand expertiseand perspective can be a valuable complement to that of ESMAP. 28 ENERGY Ah59 lHEENVIROh?MENT TheWorld Bank UNDP Headquarters Nar-Yo& 1818H Sheet,N.W. UnitedNationsDevelopmentPmgmnme Washington,D.C20433, USA 1UnitedNationsPlaza NewYo& N.Y. 10017 Telephone: (202)477-1234 T e k WUI 64145WORLDBANK Telephone: (212)=I234 RCA 248423WORLDBK Telex 125980'(domestic) CableAddress. 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