52458 Low-Carbon Development for MEXICO Todd M. Johnson Claudio Alatorre Zayra Romo Feng Liu Low-Carbon Development for Mexico Low-Carbon Development for Mexico Todd M. Johnson Claudio Alatorre Zayra Romo Feng Liu © 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 12 11 10 09 This volume is a product of the staff of the International Bank for Reconstruc- tion and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume 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. 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All other 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@world- bank.org. ISBN: 978-0-8213-8122-9 eISBN: 978-0-8213-8123-6 DOI: 10.1596/978-0-8213-8122-9 Library of Congress Cataloging-in-Publication Data Low-carbon development for Mexico / Todd M. Johnson... [et al.]. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8122-9 -- ISBN 978-0-8213-8123-6 (electronic) 1. Energy policy--Mexico. 2. Power resources--Mexico. 3. Carbon dioxide mitigation--Mexico. I. Johnson, Todd (Todd Milo), 1956­ HD9502.M62L69 2009 363.738'7460972--dc22 2009035879 Cover photograph: Andres Balcazar, ©iStockphoto.com/abalcazar Cover design: Critical Stages Contents Preface ix About the Authors xiii Acknowledgments xv Abbreviations xvii Overview 1 Benefits of Moving to a Low-Carbon Economy 1 Mitigation Options, by Sector 2 Emissions Reductions Associated with a Low-Carbon Scenario 6 Elements of a Low-Carbon Program 7 1: Introduction 11 Objectives of the Study 11 Strategic Significance to Mexico of Low-Carbon Development 13 Greenhouse Gas Emissions in Mexico 15 Mexico's Climate Change Actions 17 Overview of the Sector Analysis and Structure of the Report 18 2: Electric Power 23 The Baseline Scenario 25 The MEDEC Low-Carbon Scenario 27 Barriers to Mitigating Greenhouse Gas Emissions 30 Conclusions 31 3: Oil and Gas 35 The Baseline Scenario 37 The MEDEC Low-Carbon Scenario 38 Barriers to Mitigating Greenhouse Gas Emissions 41 Conclusions 43 v vi Contents 4: Energy End-Use 45 The Baseline Scenario 46 The MEDEC Low-Carbon Scenario 51 Barriers to Mitigating Greenhouse Gas Emissions 55 Conclusions 59 5: Transport 63 The Baseline Scenario 64 The MEDEC Low-Carbon Scenario 66 Barriers to Mitigating Greenhouse Gas Emissions 70 Conclusions 71 6: Agriculture and Forestry 73 The Baseline Scenario 74 The MEDEC Low-Carbon Scenario 74 Barriers to Mitigating Greenhouse Gas Emissions 79 Conclusions 81 7: A Low-Carbon Scenario for Mexico 83 The Carbon Path under the Baseline Scenario 83 The MEDEC Alternative Low-Carbon Path 85 The Net Costs (Benefits) of Emissions Reduction 87 Macroeconomic Impact of MEDEC Interventions 89 8: Elements of a Low-Carbon Development Program 93 High-Priority Areas 93 "Feasibility" and Barriers to Implementation 94 Financing Low-Carbon Interventions 97 Policies for Low-Carbon Development 99 The Importance of Co-Benefits 100 Near-Term Actions 102 International Support 103 Appendixes A: Summary of MEDEC Interventions 107 B: Summary of Benefit-Cost Analysis Methodology 109 C: Intervention Assumptions 113 Bibliography 143 Index 149 Boxes 1.1 Cost-Benefit Analysis Methodology 12 1.2 Criteria for Selecting Interventions 20 3.1 Financing Pemex Infrastructure Projects with High Environmental Benefits 42 4.1 Reducing Emissions, Saving Time, and Providing Health Benefits through Improved Cookstoves 53 4.2 Underpricing Electricity through Residential Subsidies 58 5.1 More Time and Better Health: Co-Benefits of Reducing Emissions in the Transport Sector 69 Contents vii 8.1 Policies to Support Low-Carbon Development 100 Figures 1 Projected Emissions Reduction by Sector under the MEDEC Low-Carbon Scenario 7 2 Marginal Abatement Cost Curve 8 1.1 Comparison of Per Capita Greenhouse Gas Emissions and GDP, G8+5 Countries, 2003 16 1.2 Greenhouse Gas Emissions Inventory, by Source 17 1.3 Greenhouse Gas Emissions from Energy Production and Consumption, by Sector 18 2.1 Electric Power Generation by Fuel Type in Selected Countries, 2005 24 2.2 Transmission and Distribution Losses in the Electric Power Sector for Selected Countries 25 2.3 Electricity Generation by Fuel Type in Mexico: Historical Trend and Projected Growth under the Baseline Scenario, 1965­2030 26 2.4 CO2e Emissions from Electric Power Generation: Baseline versus MEDEC Scenarios, 2008­30 27 2.5 Electric Power Generation by Fuel Type in Baseline versus MEDEC Scenarios 29 3.1 Pemex Debt and Earnings in Recent Years 36 3.2 Natural Gas Production in Mexico 37 4.1 Energy End-Uses in Mexico by Sector, 2006 46 4.2 International Comparisons of Energy Intensity Trends 47 4.3 Industrial Energy Use by Subsector, 2006 48 4.4 Energy End-Use by Sector: Baseline Scenario 51 4.5 Mitigation Costs of Improved Cookstoves 54 5.1 Motor Vehicle Ownership: Historical Trend and Projected Growth for Selected Countries 64 5.2 Gasoline and Diesel Fuel Prices in Mexico, 1980­2007 65 5.3 Transportation Fleet: Historical Trend and Projected Growth under the Baseline Scenario, 1980­2030 65 5.4 Baseline CO2e Emissions by Transport Mode 66 5.5 MEDEC Emissions Scenario for Transport 66 6.1 Geographic Distribution of Agriculture and Forestry Sector Interventions 75 6.2 LULUCF CO2e Emissions under the MEDEC Scenario 79 7.1 Greenhouse Gas Emissions under the Baseline Scenario, by Source 84 7.2 Projected Emissions Reduction by Sector under the MEDEC Low-Carbon Scenario 87 7.3 Marginal Abatement Cost Curve 88 7.4 Criteria for Selecting Low-Carbon Interventions 89 8.1 Marginal Abatement Investment Curve 96 C.1 Projected Vehicle Efficiency with and without Proposed Standard, 2010­30 130 Tables 1.1 MEDEC Interventions by Sector 21 2.1 Levelized Costs of Main Power Generation Technologies 28 2.2 Summary of MEDEC Interventions in the Electric Power Sector 29 2.3 Low-Carbon Development in the Mexican Electric Power Sector: Barriers and Corrective Actions 31 viii Contents 3.1 Pemex Cogeneration Potential 38 3.2 Potential for Compressor Seal Replacement in Mexico's Gas Processing Centers 40 3.3 Summary of MEDEC Interventions in the Oil and Gas Sector 41 4.1 Summary of MEDEC Interventions in the Energy End-Use Sectors 54 4.2 End-Use Efficiency: Barriers and Corrective Actions 55 5.1 Summary of MEDEC Interventions in the Transport Sector 70 6.1 Summary of MEDEC Interventions in the Agriculture and Forestry Sector 80 7.1 Key Assumptions and Indicators for Baseline Scenario 84 7.2 Results and Key Sector Developments under the MEDEC Scenario 86 7.3 Combined Effect of MEDEC Interventions on the Mexican Economy 90 8.1 MEDEC Investment Requirements to 2030 97 8.2 Low-Carbon Interventions by Financing Source 98 8.3 Potential Near-Term Interventions 104 A1 Estimated Investment, Emissions Reduction, and Net Abatement Cost of MEDEC Interventions 107 C.1 Fuel Cost Assumptions for MEDEC Interventions 114 C.2 Downstream and Upstream Emissions 114 C.3 Baseline Technology Characteristics of Coal and Natural Gas 115 C.4 Projected Energy Capacity and Generation under the Baseline Scenario 115 C.5 Costs and Savings for Utility Efficiency Actions 118 C.6 Scope for Energy Savings from Nonresidential Air-Conditioning and Lighting Interventions, by Type of Building 120 C.7 Technology Assumptions for Street Lighting 122 C.8 Technology Assumptions for Residential Lighting 124 C.9 Baseline Assumptions for Transport Sector 127 C.10 Assumptions for Vehicles and Passengers before and after BRT Intervention 129 C.11 Assumptions about Vehicles and Passengers before Nonmotorized Transport Intervention 129 C.12 Road and Railway Freight Transport Assumptions 132 C.13 Large-Scale Charcoal Production Costs 135 C.14 Assumptions about Traditional and Improved Charcoal Kilns 136 C.15 Baseline and Zero-Tillage Costs 139 C.16 Use of Raw Materials in the Production of Biodiesel 141 Preface O ne of the most compelling reasons for pursuing low-carbon develop- ment is that the potential impacts of climate change are predicted to be severe, for both industrial and developing countries, and that reducing green- house gas emissions can reduce the risk of the most catastrophic impacts. The challenge of reducing emissions is sobering: leading scientific models indi- cate that limiting the rise in global mean temperatures to less than 2oC will require that global greenhouse gas emissions peak within the next 10­15 years and then fall by 2050 to levels about 50 percent lower than in 1990. Although many countries recognize the need to curtail carbon emissions, there is considerable uncertainty about how much this will cost in individual countries, what measures can be undertaken in both the short and longer term, and how cost-effective specific interventions are in reducing emissions. "Low carbon" is quickly entering the lexicon of development, adding an important climatic dimension to the concept of economic sustainability. Low-Carbon Development for Mexico provides an economywide analy- sis of low-carbon options for mitigating greenhouse gas emissions in Latin America's largest fossil fuel­consuming country. The study is the first of several low-carbon studies to be produced by the World Bank in key devel- oping and middle-income countries. Mexico was a logical choice for a low-carbon study for several reasons. At the international level, it has demonstrated strong commitment to global actions to reduce greenhouse gas emissions, as reflected in its proactive stance in global climate discussions and the aggressive emission reduction target it announced at the United Nations Climate Change Conference in Poznan in 2008. At home, Mexico recently published the Programa Espe- cial de Cambio Climático (PECC), which sets out a broad program to address the impacts of climate change in Mexico and to reduce greenhouse gas emissions across all sectors. ix x Preface This volume, intended to complement the PECC and other Mexican studies, presents the results of a two-year effort by a team of Mexican and international researchers to identify and evaluate high-priority measures for reducing greenhouse gas emissions. The study makes use of two impor- tant tools for undertaking low-carbon assessments. The first is an economic methodology for estimating the costs of interventions across sectors. This methodology allows, for example, the costs of reducing emissions from introducing more efficient residential refrigerators to be compared with those achieved through afforestation or reforestation programs. A second tool is an integrated economic and emissions model that keeps track of annual emissions as well as needed investment costs over the coming two decades. The need to reduce emissions associated with energy production and consumption--including from transport and power generation--is often at the heart of discussions about low-carbon development. The fastest emis- sions growth in Mexico over the past three decades has occurred because of rising energy consumption in the road transportation sector, and the growth in private automobiles and light trucks is expected to continue to fuel this growth in the future. This study presents new research on low- carbon interventions in the transport sector, including measures to improve the efficiency of both new and used vehicles as well as measures to improve urban transportation. Because a large percentage of transportation energy use occurs in Mexico's cities, there is significant potential for lowering greenhouse gas emissions by modifying the spatial organization of cit- ies and improving the availability of public transportation infrastructure. Although major changes in urban design will take time to develop, other measures--such as investing in BRT-type systems, strengthening public transportation, and reorganizing freight transport systems--can be imple- mented in the near term. This study analyzes a range of energy efficiency options available in Mexico, including supply-side efficiency improvements in the electric power and oil and gas industries, and demand-side electricity efficiency measures addressing high-growth energy-consuming activities, such as air condition- ing and refrigeration. It also evaluates a range of renewable energy options that make use of the country's vast wind, solar, biomass, hydro, and geo- thermal resources. But low-carbon development is not only about energy production and consumption. In Mexico one of the most important sources of greenhouse gas emissions continues to be deforestation. The rate of deforestation has fallen steadily in Mexico over the past decades. Expanded programs for forest management, wildlife management, and efforts to increase the stock of forests can provide needed employment in rural areas and help make Mexican forests net absorbers of CO2 in the coming years. A fundamental question often asked about low-cost mitigation options is why they are not already being undertaken. As the study shows, the avail- ability of commercial technology and even low financial costs is often not Preface xi enough to overcome barriers related to institutional and knowledge gaps, regulatory and legal constraints, or societal norms. Inability to surmount these "transactions costs" is typically at the root of the problem of why supposedly low-cost actions are not undertaken. To partially overcome this dilemma, one of the explicit criteria used in this study for identify- ing low-carbon measures was that they had already been implemented on some scale in Mexico or in a similar economy outside of Mexico. In order to mainstream low-carbon development, a package of new stimuli will be needed, including public and consumer education and training, public dem- onstrations, standards and regulations, and financial incentives. The next few years will be critical for enacting a serious international climate mitigation program, beginning with major industrial countries and quickly involving large developing countries. A number of mitigation stud- ies have looked at the longer term, many of them focusing on the promise of new technologies to achieve significant reductions in carbon emissions. Although new technologies will be critical to meeting the longer-term emis- sions reduction goals needed to avoid the most severe impacts of climate change, many promising low-carbon technologies will not be commercially available for more than a decade, during which time the world will lose valuable degrees of freedom in stabilizing atmospheric concentrations, if short-term options have not been simultaneously and vigorously pursued. One of the explicit objectives of this study was to identify a range of options that could contribute to meaningful emissions reductions over the next two decades and that could begin almost immediately. As new technologies are developed and the costs of current technologies fall, the range of options for low-carbon development will become even broader. Although this study focuses on Mexico, many of the low-carbon options presented--such as specific energy-efficiency and renewable energy technol- ogies and urban transport or forestry programs--are likely to be applicable to other countries. It is our hope that both the methodologies and the find- ings presented in this volume will be of use to Mexico and other countries as they seek to define and implement low-carbon development. Laura Tuck, Director Sustainable Development Department Latin America and the Caribbean Region The World Bank About the Authors Todd M. Johnson is a lead energy specialist in the Sustainable Development Department of the Latin America and the Caribbean Region of the World Bank. Since joining the Bank in 1991, he has worked on a variety of energy- and environment-related topics, including acid rain control and climate change. He has coauthored numerous articles and reports, including China: Issues and Options in Greenhouse Gas Emissions Control (1994), Climate Change Mitigation in the Urban Transport Sector (2003), and Residential Electricity Subsidies in Mexico: Exploring Options for Reform and for Enhancing the Impact on the Poor (2009). He holds a PhD in economics from the University of Hawaii. Claudio Alatorre is an independent consultant with expertise in energy transition (energy efficiency, renewable energy, sustainable transport) and the design and implementation of enabling policy and institutional frame- works. He has worked with academic institutions, nongovernmental orga- nizations, private firms, the media, multilateral and bilateral agencies, and government institutions in Mexico and other countries. He holds a PhD in engineering from Warwick University, the United Kingdom. Zayra Romo is a power specialist in the Sustainable Development Depart- ment of the Latin America and the Caribbean Region of the World Bank. She provides technical and financial analysis for generation and transmis- sion infrastructure projects. Before joining the Bank, she was a technical analyst for Électricité de France, where she worked on improving the per- formance of power plants in Mexico. She holds an MSc in energy conver- sion from the University of Offenburg, Germany. Feng Liu is a senior energy specialist in the Energy Sector Management Assistance Program (ESMAP), a multidonor partnership administered by xiii xiv About the Authors the World Bank. For the past 10 years, he has been involved in the develop- ment and implementation of energy-efficiency and renewable energy invest- ment projects in the East Asia and Pacific Region, particularly in China, Indonesia, and Mongolia. Before joining the Bank, he spent five years con- ducting energy analysis and policy research at Lawrence Berkeley National Laboratory in California. He holds a PhD in environmental economics from Johns Hopkins University. Acknowledgments T his study was initiated by the World Bank as one of six low-carbon studies to be carried out in developing and middle-income countries. The study concept was discussed with Mexican government authorities in 2007; the decision to undertake the study was endorsed by the ministries of energy (SENER), environment (SEMARNAT), and finance (SHCP). This study was supported by the World Bank through funds made available from the Sustainable Development Network for regional climate change activities and through support from the United Nations Develop- ment Programme (UNDP)/World Bank Energy Sector Management Assis- tance Program (ESMAP). The financial assistance of the government of the United Kingdom (through the Department for International Development [DFID]) through ESMAP is gratefully acknowledged. This report was prepared by Todd M. Johnson (task manager and lead author), Zayra Romo, and Feng Liu, all with the World Bank, and by Clau- dio Alatorre, a consultant. Other contributors included the following: · Agriculture, forestry, and bioenergy: Javier Aguillón, Marcela Olguín- Álvarez, Tere Arias, Víctor Berrueta, Guillermo Colunga, Jorge Etchevers, Carlos Alberto García, Adrián Ghilardi, Rocío Gosch, Gabriela Guerrero, Ben de Jong, Omar Masera, Mauricio Pareja, Manuela Prehn, Oliver Probst, Enrique Riegelhaupt, Emilio de los Ríos, and Juan Angel Tinoco. Representing different organizations in Mexico, these experts are members of the Red Mexicana de Bioener- gia (REMBIO) (Mexican Network for Bioenergy). · CGE modeling: Roy Boyd, Ohio University, and María Eugenia Ibarrarán, Universidad Iberoamericana Puebla. · Electric power: Myriam Cisneros, Jorge Gasca, Moisés Magdaleno, Elizabeth Mar, Luis Melgarejo, and Esther Palmerín, Instituto Mexi- cano del Petróleo. xv xvi Acknowledgments · Coordination, modeling, energy efficiency, and oil and gas: Odón de Buen, Emmanuel Gómez-Morales, Genice Kirat Grande, Jorge M. Islas-Samperio, Paloma Macías-Guzmán, Fabio Manzini, María de Jesús Pérez-Orozco, and Mario Alberto Ríos-Fraustro, Centro de Investigación en Energía, Universidad Nacional Autónoma de México; and independent consultants. · Cost-benefit analysis: Carlos E. Carpio, Tomás Hasing, James B. Lon- don, Matías Nardi, William A. Ward, Gary Wells, and Samuel Zapata, Clemson University. · Transport: Amílcar López, Jorge Macías-Mora, Hilda Martínez, Gabriela Niño, Luis Sánchez-Cataño, and Juan Sebastián Pereyra, Centro de Transporte Sustentable de México, A.C. Members of the study team from the World Bank included Benoit Bos- quet (land use and forestry), Francisco Sucre (oil and gas), and Jas Singh (energy efficiency). The report benefited from comments and suggestions from Ricardo Ochoa, Secretaría de Hacienda y Crédito Público; Fernando Tudela and Juan Mata, Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT); Adrián Fernández, Instituto Nacional de Ecología (INE); Veronica Irastorza, Francisco Acosta, and Diego Arjona, Secretaría de Energía (SENER); Emiliano Pedraza, Comisión Nacional para el Uso Efi- ciente de la Energía (CONUEE); Vicente Aguinaco, Comisión Federal de Electricidad (CFE); Carlos De Regules, Petróleos Mexicanos (Pemex); and anonymous reviewers from a number of Mexican institutions. The report was prepared under the direction of Laura Tuck, Axel van Trotsenburg, and Philippe Charles Benoit. World Bank staff who provided comments and suggestions as part of the review process included Roberto Aiello, Jocelyne Albert, Amarquaye Armar, Juan Carlos Belausteguigoitia, Pablo Fajnzylber, Marianne Fay, Charles M. Feinstein, Christophe de Gou- vello, Ricardo Hernandez, Richard Hosier, Irina Klytchnikova, Kseniya Lvovsky, John Nash, Paul Procee, John Allen Rogers, Gustavo Saltiel, Ashok Sarkar, Gary Stuggins, Natsuko Toba, and Walter Vergara. Production assistance from Janina Franco, Aziz Gokdemir, Barbara Karni, Nita Congress, and Michael Alwan is gratefully acknowledged. Abbreviations APEC Asia-Pacific Economic Cooperation bcm billion cubic meters BOE barrel of oil equivalent BRT bus rapid transit CAFE corporate average fuel economy CDM Clean Development Mechanism CFE Comisión Federal de Electricidad (Federal Electricity Commission) CGE computable general equilibrium CICC Comisión Intersecretarial de Cambio Climático (Intersec- retarial Commission on Climate Change) CO2 carbon dioxide CO2e carbon dioxide equivalent CONAE Comisión Nacional para el Ahorro de Energía (National Commission for Energy Savings) CONAGUA Comisión Nacional del Agua (National Water Commission) CONUEE Comisión Nacional para el Uso Eficiente de la Energía (National Commission for the Efficient Use of Energy) DDG dried distillers grain E&D exploration and development ENACC Estrategia Nacional de Cambio Climático (National Climate Change Strategy) ESCO energy service company FCC fluidized catalytic cracking FIDE Fideicomiso para el Ahorro de Energía Eléctrica (Fund for Electricity Savings) GDP gross domestic product xvii xviii Abbreviations GHG greenhouse gas GJ gigajoule GJ/t gigajoules per ton GW gigawatt GWh gigawatt-hour I&M inspection and maintenance IEA International Energy Agency INEGI Instituto Nacional de Estadística, Geografía e Informática IPCC Intergovernmental Panel on Climate Change IPP independent power producer kWh kilowatt-hour LEAP Long-range Energy Alternatives Planning LNG liquefied natural gas LPG liquefied petroleum gas LULUCF land use, land-use change, and forestry LyFC Luz y Fuerza del Centro mbd million barrels per day mcfd million cubic feet per day MEDEC México: Estudio sobre la Disminución de Emisiones de Carbono (Mexico Low-Carbon Development Study) MEPS minimum energy performance standards MJ megajoule Mm³ million cubic meters Mt million tons Mtoe million tons of oil equivalent MW megawatt NOX nitrogen oxides PECC Programa Especial de Cambio Climático (Special Climate Change Program) Pemex Petróleos Mexicanos PIDIREGAS Proyectos de Impacto Diferido en el Registro de Gasto (Projects with Differed Expenditure Impact) PJ petajoule PM2.5 fine particles 2.5 micrometers in diameter or smaller PM10 fine particles 10 micrometers in diameter or smaller PND Plan Nacional de Desarrollo (National Development Plan) REDD reducing emissions from deforestation and forest degradation SEMARNAT Secretaria de Medio Ambiente y Recursos Naturales SENER Secretaría de Energía (Ministry of Energy) SO2 sulfur dioxide SO4 sulfate SUV sport utility vehicle t ton Abbreviations xix TDM tons dry matter TWh terawatt-hour UMA Unidades de Manejo para la Conservación de la Vida Silvestre (management units for wildlife conservation) UNFCCC United Nations Framework Convention on Climate Change WTP willingness to pay All references to $ are US$. All tons are metric tons. Overview M exico's Special Climate Change Program--the Programa Especial de Cambio Climático (PECC), published in August 2009--sets Mexi- co's long-term climate change agenda, together with medium-term goals for adaptation and mitigation. This study--known as México: Estudio sobre la Disminución de Emisiones de Carbono (MEDEC)--is intended to contrib- ute to the implementation of that long-term climate change agenda. The study evaluates the potential for reducing greenhouse gas emissions in Mexico over the next 20 years. It evaluates low-carbon interventions across key emission sectors in Mexico using a common methodology. Based on the interventions evaluated, it develops a low-carbon scenario through 2030. Benefits of Moving to a Low-Carbon Economy Reducing greenhouse gas emissions is critical in Mexico, not only to address climate change but also to facilitate economic development, a key emphasis of the country's climate change agenda. Moving to a low-carbon economy could benefit Mexico in at least four ways: · Because it is likely to suffer disproportionately from the impacts of climate change (drought, sea level rise, increased severity of tropical storms), Mexico has a strong interest in becoming a leading partici- pant in an international agreement to cap emissions. · Numerous "no-regrets" low-carbon interventions (interventions that have positive economic rates of return and should be undertaken irre- spective of climate change considerations) can contribute substan- tially to economic development in Mexico. · Many low-carbon interventions have important co-benefits for Mex- ico, including the enhanced energy security associated with energy 1 2 Low-Carbon Development for Mexico efficiency (on both the supply and demand sides) and renewable energy projects; the human health benefits from transport and other inventions that reduce local air pollutants; and the environmental protection benefits that can be achieved through forestry and natural resource management, waste-reduction programs, and reduced emis- sions of local pollutants from energy facilities. · Countries that pursue low-carbon development, including the trans- fer of financial resources through the carbon market and new public programs that support climate change mitigation, are likely to reap strategic and competitive advantages. Mitigation Options, by Sector The MEDEC study evaluated low-carbon interventions in five sectors: elec- tric power, oil and gas, stationary energy end-use, transport, and agricul- ture and forestry. Three criteria were used to select interventions: · Interventions had to have substantial potential for reducing green- house gas emissions. The threshold for including an intervention was 5 million tons of CO2­equivalent (Mt CO2e) over the 2009­30 imple- mentation period. · Interventions had to have low economic and financial costs. First pri- ority was given to no-regrets interventions. A second tier of projects-- with carbon costs of $25/t or less--was also included. · Interventions had to be feasible in the short or medium term. Ensur- ing that this criterion was met required investigation of information, regulatory, and institutional barriers that are keeping low-carbon interventions from being adopted on a large scale. Feasibility was first determined by sectoral experts; it was then discussed with govern- ment officials and international experts. All MEDEC interventions have already been implemented, at least on a pilot level, in Mexico or in countries facing similar conditions. Some interventions face barri- ers in the short term (next five years), but the barriers preventing their adoption are believed to be surmountable in the medium term. Electric Power The demand for electric power in Mexico has been growing faster than gross domestic product (GDP) over the past several decades, and this trend is likely to continue. Under a baseline scenario, meeting the increasing demand for power would increase total CO2e emissions from power gen- eration by 230 percent between 2008 and 2030 (from 142 Mt CO2e to 322 Mt CO2e). Both coal- and gas-fired power generation would increase under this scenario, with coal accounting for 37 percent of new installed capacity and natural gas accounting for 25 percent. Assuming a net cost of CO2e of as little as $10/ton, additional low- carbon energy technologies--small hydro, wind, biomass, geothermal, cogeneration (that is, the combined generation of heat and electricity in the Overview 3 same facility)--could replace much of the fossil fuel generation (principally coal but also natural gas) in the baseline scenario. Under the low-carbon MEDEC scenario, the share of power generated by coal would decline from 31 percent to 6 percent, and the contribution of low-carbon technologies would increase substantially, rising from 1.4 percent to 6.0 percent for wind, 2 percent to 11 percent for geothermal, 0.1 percent to 8.0 percent for biomass, and 14 percent to 16 percent for hydro. At net costs that are less than current marginal costs of power generation in Mexico, cogeneration would provide 13 percent of new power capacity under the low-carbon sce- nario. Abatement costs were calculated by comparing the net costs (including capital, energy, and operations and maintenance costs) of each low-carbon technology with the costs of the displaced coal and natural gas capacity. Several policy and regulatory changes are needed to expand the share of renewable energy and energy efficiency in the power sector. Although the costs of wind generation in Mexico are among the lowest in the world-- because of the high-quality wind resources in the isthmus of Tehuantepec, where some new wind projects are being developed--the country's enor- mous wind resources have not been widely developed. Factors inhibiting the development of wind and other renewables include low planning prices and the absence of externalities that Mexico's federal electricity commis- sion, Comisión Federal de Electricidad (CFE), has historically assumed for new fossil fuel­based power generation; the lack of recognition of the port- folio effect in power planning, which would increase the share of renew- able energy interventions based on their lower fuel risk; and the inability to adjust procurement procedures to the particularities of renewable energy projects. New contracting procedures are needed for cogeneration and other small-scale projects to reduce the risks and transaction costs of small power producers. Oil and Gas There is significant potential to reduce greenhouse gas emissions in Mexi- co's oil and gas sector through both no-regrets and low-cost interventions. In particular, significant cogeneration potential at Pemex facilities could provide more than 6 percent of Mexico's current installed power capacity. Specific interventions that can reduce greenhouse gas emissions and have good economic rates of return include reducing gas distribution leakage; increasing efficiency at Pemex oil, gas, and refining facilities; and realizing the cogeneration potential at Pemex's six refineries and four petrochemi- cal plants. Developing this potential will require a regulatory framework that enables and encourages the sale of excess energy and capacity to the electricity grid. Despite their excellent rates of return, investments in cogeneration and reductions in gas leakage are less attractive to Pemex than investments in oil exploration and development. Financing of investment is also difficult, for two reasons. First, Pemex's high debt--the highest of any oil company in the world in 2007--has made it difficult to tap commercial credit markets 4 Low-Carbon Development for Mexico at reasonable terms. This problem will become even more difficult given the recent international financial crisis, despite the recent passage of oil indus- try reform measures. Second, although the oil industry accounts for only about 6 percent of GDP, oil revenues account for more than one-third of Mexico's federal budget. This constrains the government from taking mea- sures that reduce tax payments from Pemex in the short term. Measures to allow contracting with the private sector to tap cogeneration and reduce gas flaring and leakage could reduce the need for public investment. Although the MEDEC scenario reduces the demand for natural gas com- pared with the baseline, MEDEC and other recent studies foresee a major increase in the absolute amount of natural gas consumption. The success of the government's plan to expand natural gas production is therefore extremely important. Energy End-Use Electricity demand in Mexico has grown by more than 4 percent a year since 1995. Managing this growth through energy-efficiency measures in the end-use sectors will be critical to mitigating greenhouse gas emissions. More than half of industrial energy use occurs in three subsectors: cement, iron and steel, and chemicals and petrochemicals. Many of Mexi- co's large-scale basic materials industries, including iron, steel, and cement, are among the most efficient in the world. The problem is that a large por- tion of the industrial sector is made up of small and medium enterprises that often use old equipment and lack access to technical know-how and financing for upgrades. These companies have relatively high energy inten- sity. The main sources of energy savings in the industrial sector come from energy-efficiency improvements in motor and steam systems and in kilns and furnaces, as well as from cogeneration--for which more than 85 per- cent of the industrial potential has not been utilized. Air conditioning, refrigeration, and electronics are expected to be the main growth areas of residential electricity demand in Mexico. Air con- ditioner saturation rates in Mexico were about 20 percent in 2005--far lower than the 95 percent rates in regions of the United States with similar cooling-degree days. The saturation rate of refrigerators is relatively high in Mexico, at 82 percent in 2006, but it is still expected to grow consider- ably. Recent efforts to promote compact fluorescent lamps notwithstand- ing, incandescent lamps account for about 85 percent of in-use residential light bulbs in Mexico, indicating large potential for scaling up replacement efforts. There is also significant mitigation potential through solar water heating in urban areas and improved fuelwood cookstoves in rural areas. Policies to improve efficiency in the residential, commercial, and public sectors--including tightening and enforcing efficiency standards for light- ing, air conditioning, refrigeration, and buildings--will be critical to limit greenhouse gas emissions. As the analysis shows, the investment required in all electricity-efficiency interventions is significantly less than the investment in power plants that would otherwise be needed. Overview 5 Transport Transport is the largest and fastest-growing sector in terms of both energy consumption and greenhouse gas emissions in Mexico, with road trans- port accounting for about 90 percent of the sector's CO2e emissions. Between 1996 and 2006, Mexico's vehicle fleet nearly tripled, increasing from 8 million to more than 21 million vehicles. Energy use by road trans- port increased more than fourfold between 1973 and 2006. The importa- tion of used vehicles from the United States has been an important factor behind the growth of the vehicle fleet, which has also led to an increase in the average fleet age and concerns about low gas mileage and high emis- sions of air pollutants. A number of interrelated interventions that reduce greenhouse gas emis- sions in the transport sector were evaluated. They included increasing the density of urban development, raising energy-efficiency standards for new vehicles, optimizing transportation routes, creating a bus rapid transit (BRT) system, encouraging nonmotorized transport, mandating the inspec- tion and maintenance of in-use vehicles in major cities, imposing import restrictions on vehicles through inspection, coordinating road freight, and promoting freight trains. Given the historical and projected urbanization pattern in Mexico, urban transport and related land-use planning issues will be a critical component of overall energy usage by the transport sector and associated emissions. The analysis reveals the importance of addressing transport issues in an inte- grated and programmatic approach rather than as individual measures. The interventions with the largest potential that are most cost-effective are those that increase the percentage of trips by public transportation and improve the efficiency of the vehicle fleet. Increasing the use of public transporta- tion--including through private concessions--will require the development of mechanisms that integrate public transportation and urban development efforts by both federal and municipal governments. Promoting more sus- tainable transport policies can provide numerous co-benefits in addition to climate change mitigation, including reductions in traffic congestion (and the associated time savings per trip) and improvements in public health as a result of reduced air pollution. Agriculture and Forestry Agriculture and forestry is one of the key sectors in which greenhouse gas emissions can be reduced in Mexico. The MEDEC interventions are based on a geographical model that determined the areas that can be devoted to various rural activities while minimizing possible negative impacts on food production and biodiversity conservation. The interventions in forestry-- including reforestation, commercial plantations, and measures to reduce emissions from deforestation and forest degradation (REDD)--account for 85 percent of the proposed mitigation in the agriculture and forestry sector. They are among the most important mitigation options for Mexico. The interventions in this sector that have the highest benefits are those that both 6 Low-Carbon Development for Mexico substitute fossil fuel use through the sustainable production of biomass energy and reduce deforestation and forest degradation. Many of the forestry interventions have unquantified environmental benefits, such as soil conservation, improvements in water quality, and preservation of ecosystems, in addition to the quantified benefits of income generation and employment for rural communities. Successful expansion of forestry sector interventions in Mexico depends on institutional changes in forest management, improved public financing mechanisms, and the devel- opment of a market for sustainable forest products. Cost-effective measures for reducing greenhouse gas emissions from the agricultural sector are more limited, partly because of the lack of research and development on low-carbon measures. However, minimum tillage for maize production--which requires less energy and appears to facilitate soil carbon sequestration--appears to be a promising technology. Sugarcane ethanol has significant greenhouse gas reduction potential, although the productivity of sugarcane production in Mexico is currently low (production costs are significantly above world market prices of sugar). Other liquid biofuels interventions--ethanol from sorghum and biodiesel from palm and jatropha--are estimated to have limited reduction poten- tial without impinging on land use for food crops, forests, or conservation lands. All liquid biofuels options have positive net economic costs when compared with the opportunity cost of selling the feedstocks for food or other nonfuel uses. Emissions Reductions Associated with a Low-Carbon Scenario The baseline scenario was generated using the LEAP (Long-range Energy Alternatives Planning) model, based on macroeconomic assumptions for GDP, population growth, and fuel prices that are in line with Mexican gov- ernment estimates made at the beginning of 2008. Under the baseline sce- nario, total CO2e emissions are estimated to grow from 659 Mt in 2008 to 1,137 Mt in 2030. Implementing the 40 MEDEC interventions that meet the criteria out- lined for inclusion would reduce CO2e by about 477 Mt in 2030 relative to the baseline (figure 1). Adopting these interventions would yield a level of emissions that is virtually the same as that in 2008, despite significantly higher GDP and per capita income. The emission reductions would come from agriculture and forestry (162 Mt), transport (131 Mt), electric power (91 Mt), energy end-use (63 Mt), and oil and gas (30 Mt). The emissions reduction potential of the MEDEC low-carbon scenario is conservative, in that only 40 interventions were considered and the analysis did not assume any major changes in technology. How much would low-carbon development cost in Mexico, and how do the costs of interventions compare across sectors? Nearly half of potential emissions reduction comes from interventions that have positive net ben- Overview 7 Figure 1 Projected Emissions Reduction by Sector under the MEDEC Low-Carbon Scenario 1,200 agriculture and forestry 1,000 ne oil and gas emissions (Mt CO2e/year) ba s e li energy end-use 800 transport electric power 600 400 MEDEC emissions 200 0 2008 2015 2020 2025 2030 year Source: Authors. efits (negative costs), meaning that their overall cost is less than the respec- tive high-carbon alternative (figure 2). Interventions that have both high potential and low cost include the following: · Public transport and vehicle efficiency · Most energy-efficiency measures, including electricity supply improve- ments, lighting, refrigeration, air conditioning, and improved cookstoves · A number of low-cost energy supply options, including industrial (and Pemex) cogeneration and solar water heating At a value of $10/t CO2e, a number of other large interventions, including reforestation and restoration, and afforestation, yield positive benefits. Fully 80 percent of the greenhouse gas reduction potential of the MEDEC inter- ventions lie below the $10/t CO2e level. Raising the cost threshold to $25/t CO2e allows more than 5 billion tons of CO2e to be avoided through 2030. Elements of a Low-Carbon Program Many high-priority interventions in the transport, electric power, energy efficiency, and forestry sectors have net costs that are low or negative. The fact that many of these interventions have not already been adopted on a large scale suggests that there are barriers to implementing them. Policies and Investments Required for Low-Carbon Development Two of the greatest challenges Mexico will face in moving to a low-carbon economy are financing the (generally higher) upfront costs of low-carbon 8 Low-Carbon Development for Mexico Figure 2 Marginal Abatement Cost Curve 100 net mitigation costs environmental services reforestation & restoration nonresidential air conditioning wildlife management residential air conditioning cogeneration in industry border vehicle inspection refinery efficiency bus system optimization fuel economy standards bagasse cogeneration nonmotorized transport sugarcane ethanol residential refrigeration cogeneration in Pemex nonresidential lighting gas leakage reduction fuelwood co-firing improved cookstoves palm oil biodiesel road freight logistics charcoal production sorghum ethanol forest management urban densification solar water heating biomass electricity residential lighting zero-tillage maize industrial motors geothermal 50 bus rapid transit afforestation small hydro utility efficiency I&M in 21 cities railway freight street lighting wind power biogas ($/t CO2e) 0 net mitigation benefits 50 100 0 1,000 2,000 3,000 4,000 5,000 cumulative mitigation 2009­30 (Mt CO2e) Source: Authors, based on MEDEC study results. investments and putting in place supportive policies and programs to over- come the regulatory, institutional, and market development barriers. Renewable energy investments generally have higher initial costs than other investments. These costs are often compensated for by lower operating costs, yielding a net economic benefit (in present value terms). Even where the discounted life-cycle costs are lower, however, higher upfront invest- ment costs often inhibit such investments. For some interventions, in par- ticular in energy efficiency, the initial investments are offset by the savings in new generating capacity, resulting in "negative" investment cost differ- ences when upstream effects are considered. The overall new investment required to achieve the MEDEC low-carbon scenario is about $64 billion between 2009 and 2030, or about $3 billion a year, equivalent to about 0.4 percent of Mexico's GDP in 2008. Investment by the public sector will be critical, but financing will not have to come entirely from the government; there is considerable room to involve the private sector in financing investments in energy efficiency, renewable energy, and sustainable transport. The recent reform of the oil and gas industry represents a positive step in promoting greater efficiency in the sector and attracting investments from the private sector. Since the Overview 9 mid-1990s, there has been a dramatic increase in the number of indepen- dent power producers for natural gas power plants. This model could be improved and extended to promote investments in energy efficiency, cogen- eration, and renewable energy generation. Changing the rules that limit Pemex from tapping its cogeneration potential and providing substantial electricity production to the grid is a high priority for low-carbon development. Other important policies could include increasing energy-efficiency standards for both new and used vehicles; revising residential electricity tariffs and increasing the prices of petroleum products and natural gas; changing public procurement rules to facilitate investments in energy efficiency in schools, hospitals, government buildings, and municipal services; improving coordination by federal, state, and municipal governments and by different sector agencies at all levels of government concerning urban land-use planning and public transport; improving fuel quality and enforcing air quality standards; and expanding forest management programs. Almost all of the MEDEC interventions have already been implemented in Mexico as commercial-scale investments projects or pilot programs, thus demonstrating the feasibility of implementing them in the near term. For many of the interventions, it is the scale-up from an individual project scale to a wider program that is needed. Scaling up these projects will require new policies and the financing of incremental investments, as well as other institutional and behavioral changes. Some of the MEDEC interventions could be supported by resources from the Clean Development Mechanism (CDM) or other international carbon finance mechanisms. Most, however, would require new rules--in the context of either a reformed CDM or new mechanisms--to qualify for support. Understanding the mitigation potential, net costs, and implemen- tation barriers is therefore crucial in the light of ongoing international cli- mate negotiations. Near-Term Priorities Several low-carbon interventions could be implemented in Mexico in the near term. High-priority actions that have already been proven in Mexico and could be scaled up over the next five years include the following: · Bus rapid transit, based on projects in Mexico and pioneered in other parts of Latin America · Expansion of the efficient lighting and appliances programs devel- oped by Fideicomiso para el Ahorro de Energía Eléctrica (FIDE) (Fund for Electricity Savings) and the Secretaría de Energía (SENER) (Ministry of Energy) · Wind farm development in Oaxaca and elsewhere, based on CFE's pilots · Avoided deforestation, based on the Los Tuxtlas project in Veracruz · Cogeneration in Pemex facilities, based on the project at Nuevo Pemex. 10 Low-Carbon Development for Mexico Wherever Mexico's low-carbon development projects begin, there will be a need to experiment and gain experience, especially with new invest- ment mechanisms and regulatory policies. To establish domestic support for a low-carbon program, Mexico should begin with measures that have positive economic rates of return. As the analysis shows, such interventions are plentiful. A second priority is to promote interventions that have posi- tive social and environmental benefits, such as those with positive environ- mental externalities in the forestry sector and those that reduce local air pollution and health impacts in both sustainable transport and rural fuel use. CHAPTER 1 Introduction O n May 25, 2007, President Felipe Calderón announced Mexico's National Climate Change Strategy (Estrategia Nacional de Cambio Climático [ENACC]), which put climate change at the center of Mexico's national development policy (SEMARNAT 2007). The ENACC established an initial blueprint for the long-term climate change agenda for the coun- try, together with medium- to long-term goals for adaptation and mitiga- tion. On August 28, 2009, Mexico published the PECC, which defines how to operationalize the ENACC during the coming three years, in particular by identifying priorities and financing sources, both domestic and interna- tional (PECC 2009). Like all government programs, the PECC is considered part of the 2007­12 Plan Nacional de Desarrollo (PND) (National Devel- opment Plan) and an integral part of the environmental sustainability pillar of the PND.1 This study was conceived and has been carried out with the objective of contributing to Mexico's agenda on climate change mitigation. Objectives of the Study This study seeks to identify and evaluate low-cost options for reducing greenhouse gas emissions that Mexico can implement in the short to medium term. Specific objectives include the following: · Evaluate low-carbon interventions by key sectors in Mexico using a common cost-benefit methodology (box 1.1), and identify barriers to implementing the interventions; · Build a low-carbon scenario for Mexico to the year 2030 based on the potential and costs of the sectoral low-carbon interventions; · Identify priority policies that would support a low-carbon develop- ment pathway, including a portfolio of low-carbon interventions that can be implemented now and within the next 5­10 years. 11 12 Low-Carbon Development for Mexico Box 1.1 Cost-Benefit Analysis Methodology The economic analysis of low-carbon interventions uses a standardized cost-effectiveness frame- work for all sectoral interventions. The methodology is not technically a cost-benefit analysis, because it does not measure the benefits of climate change mitigation in terms of the reduction in climate change impacts but instead compares the costs of different interventions to reduce greenhouse gas emissions. In other words, the economic analysis does not assume a value for carbon mitigation but rather produces a "cost of carbon" as an output. The analysis calculates the net present value as of 2008 of the direct economic costs and benefits of each intervention between 2009 and 2030 to arrive at the "net costs" of reducing emissions. The cost-effectiveness of reducing greenhouse gas emissions is thus the present value of the net cost of reducing (avoiding) 1 ton of CO2 equivalent emissions. For each intervention over the study period, annual emissions reductions were added up to the cumulative emissions reduction; the stream of annual net costs was then discounted at 10 percent a year to determine the present value of the net cost in 2008. In the analysis, carbon was not discounted. The net cost of the mitigation intervention is calculated by subtracting the direct benefits from the direct costs of implementing the intervention. The financial costs are reflective of the economic (social) opportunity costs to the extent that corrections were made for taxes and subsidies and traded goods were evaluated at their import and export parity values. Examples of direct benefits include energy cost savings or travel time and travel cost savings. Environmental externalities are considered as indirect co-benefits and are not included in the first-order cost-effectiveness calcula- tion shown in the marginal abatement cost curve. However, for some interventions in which health benefits from reduced air pollution are particularly important and damage functions have been estimated--such as transport and household fuelwood use--externality values were calculated (these results are discussed in the sector chapters, in box 5.1, and in chapter 7). In the analysis of individual interventions, comparisons are made between the intervention and the baseline--the alternative that would have been pursued in the absence of the MEDEC program. Incremental net costs (benefits) are calculated by subtracting the costs (benefits) of the option from the costs (benefits) of the baseline case; and incremental net greenhouse gas emissions are calculated by subtracting the greenhouse gas emissions of the option from the greenhouse gas emissions of the baseline case. (For a more detailed explanation of the cost-benefit analysis, see appendix B.) MEDEC builds on the ENACC and on the low-carbon development work program outlined in Mexico's Third National Communication, with the intention of providing tools for assessing and prioritizing low-carbon interventions and policies in Mexico. The study evaluates a broad range of potential low-carbon activities, comparing the results with international experiences and identifying strategic and competitive advantages of low- carbon development for Mexico, including opportunities for greater access to the carbon market and other resources for climate change mitigation. The analyses focus on strategic sectors or themes of importance to Mex- ico that were jointly identified by the World Bank and the government of Mexico, following consultations with government agencies, academic insti- tutions, and public and private stakeholders. The new research undertaken Chapter 1: Introduction 13 for the study was intended to cover areas in which information was not abundant and to avoid overlap with earlier studies and projects. The sector analyses cover five themes: · Power generation, which includes the production of electricity by cen- tralized or decentralized power plants · The oil and gas industry, which includes oil and gas extraction, pipe- lines, and refineries · Energy end-use, which includes energy efficiency in the manufactur- ing and construction industries and the residential, commercial, and public sectors · Transport (the single largest emitter of carbon dioxide equivalent [CO2e] in Mexico), which includes primarily road transport · Agriculture and forestry, which covers crop and timber production, forest and other land-use management, and a broad range of biomass energy. The study also undertakes economic and emissions modeling and sce- nario analysis, in order to provide a broad perspective of opportunities and achievable goals, from an international perspective. The modeling uses the outputs of each sector analysis and develops emission scenarios to 2030. The study conducts cost-benefit analyses of specific low-carbon oppor- tunities for reducing greenhouse gas emissions in each sector, the financial requirements for investment in the sector, and the issues related to imple- menting the low-carbon development portfolio. Climate change mitiga- tion options (referred to as "interventions") were selected based on their potential for greenhouse gas reduction, net costs (benefits), and feasibility in terms of political, social, institutional, legal, and other preconditions. The interventions identified are presented both by sector and individually, in order to allow the government or other institutions to assess what a combi- nation of reduction activities would entail in terms of investment costs and reduction potential and to be able to assess this flexibly within the frame- work of political conditions, available resources, and other considerations. Strategic Significance to Mexico of Low-Carbon Development Mexico could benefit from moving to a low-carbon economy for at least four reasons: · It is likely to suffer disproportionately from the impacts of climate change and therefore has a strong interest in ensuring that an interna- tional agreement to limit emissions is adopted. · Various "no-regrets" interventions (that is, interventions that have positive economic rates of return and should be undertaken regardless of climate change considerations) can contribute substantially to the country's economic development. 14 Low-Carbon Development for Mexico · Many interventions yield important co-benefits, such as energy secu- rity, human health benefits, and environmental protection. · Countries that pursue low-carbon development are likely to enjoy strategic and competitive advantages. Mexico faces high risks from climate change with respect to water avail- ability, the increased frequency and intensity of tropical storms, and poten- tial inundation from two ocean coastlines. Initially, the impact of climate change was expected to be felt only over the longer term; there is now increasing evidence that climate change impacts are already occurring. The Fourth Assessment Report of the Intergovernmental Panel on Cli- mate Change (IPCC) predicts that under baseline scenarios, relative to 1961­90, temperature increases in Latin America and the Caribbean could reach 0.4o­1.8oC by 2020 and 1o­4oC by 2050 (De la Torre, Fajnzylber, and Nash 2009). These projections, derived from global circulation models, also forecast changing precipitation patterns across the region (Christensen and others 2007). The predictions of at least five of eight global climate models indicate that by 2030 the number of consecutive dry days in Mexico will increase and heat waves will become longer. Midrange climate fore- casts indicate that arid regions of the country are likely to experience severe species loss by 2050, losing 8­26 percent of their mammal species, 5­8 per- cent of their bird species, and 7­19 percent of their butterfly species (De la Torre, Fajnzylber, and Nash 2009). Damage to the Gulf Coast wetlands in Mexico is a serious concern. Global circulation models agree that the Gulf of Mexico is most vulnerable to the impacts of climate change of all coastal areas in the region; Mexico's three national communications to the United Nations Framework Conven- tion on Climate Change (UNFCCC)--in 2001, 2004, and 2007--docu- ment ongoing damage, raising urgent concerns about the area's security from climate change. Wetlands in this region are currently suffering from man-made impacts associated with land-use changes, mangrove destruc- tion, pollution, and water diversion, which make the ecosystem even more vulnerable to the impacts of climate change. The total mangrove area in the Gulf Coast region is disappearing at an annual rate of 1 to 2.5 percent. As a result of climate change, Mexico may experience 10­20 percent decreases in water runoff nationally and as much as a 40 percent decline over the Gulf Coast wetlands. These wetlands possess the most productive ecosys- tem in the country and one of the richest on Earth (Vergara 2008).2 About 45 percent of Mexico's shrimp production, for example, originates in the Gulf wetlands, as does 90 percent of the country's oyster crop and at least 40 percent of commercial fishing volume. Data also suggest a trend toward storms and weather-related natural disasters in Mexico and surrounding countries that are more frequent, stronger, or both. Extreme weather events already exact a high toll in the region. In 1998 Hurricane Mitch killed at least 11,000 and perhaps as many as 19,000 people across Central America and Mexico. In 2005 Hurricane Wilma, the strongest Atlantic hurricane on record, damaged 98 percent of Chapter 1: Introduction 15 the infrastructure along the northeastern coast of Mexico's Yucatan Pen- insula, home to Cancun, and inflicted an estimated $1.5 billion loss on the tourism industry. Mexico hopes it can benefit strategically and economically by moving to a low-carbon economy and tapping local opportunities and advantages. Many policies and actions it can take to reduce greenhouse gas emissions can improve energy security, enhance the country's competitive position and trade balance, and reduce local environmental damage. Previous studies have identified several promising areas for mitigating climate change in Mexico: · Expanding energy efficiency and the development and use of renew- able energy · Increasing domestic gas production, and improving the overall effi- ciency of the sector (such as reducing gas losses), in order to meet the country's growing demand for natural gas, improve local air quality, increase energy efficiency in power and industry, and reduce the growing dependence on imports of gas from the United States · Avoiding deforestation and implementing reforestation and afforesta- tion projects, which can reduce greenhouse gas emissions in Mexico while contributing to biodiversity preservation, water and soil man- agement, and improved local livelihoods. The benefits to Mexico of taking a stronger position on climate change and promoting low-carbon development are competitive and strategic. The federal government, which has taken a proactive position on climate change, recognizes these benefits. Greenhouse Gas Emissions in Mexico Mexico emitted 643 million tons of carbon dioxide equivalent (Mt CO2e) in 2002 (Third National Communication to the UNFCCC). About 390 Mt CO2e--61 percent of total emissions--was generated from fossil fuel­based energy production and consumption, including significant fugitive emis- sions (leakage, venting, flaring) in oil and gas production and transporta- tion. The remaining emissions were from land use, land-use change, and forestry (LULUCF) (14 percent); waste (10 percent); industrial processes (8 percent); and agriculture and livestock (7 percent). Mexico ranks 13th in the world in total greenhouse gas emissions and is the second largest emitter in Latin America after Brazil. Mexico accounts for 1.4 percent of global CO2e emissions from energy consumption; it is the largest emitter in Latin America if land-use change and forestry emis- sions are excluded. Mexico's CO2e emissions from energy consumption are greater than those of Brazil and South Africa but significantly below those of China or India. Its total greenhouse gas emissions are equivalent to about 6 t CO2e per capita; or about 4 t CO2e per capita if only emissions from fossil fuel combustion are included (figure 1.1). 16 Low-Carbon Development for Mexico Figure 1.1 Comparison of Per Capita Greenhouse Gas Emissions and GDP, G8+5 Countries, 2003 United States Canada Russian Federation Germany Japan United Kingdom country Italy South Africa France China per capita GDP ($ thousands, ppp/capita) Mexico per capita energy emissions (t CO2/capita) Brazil India 0 10 20 30 40 $ thousands per capita or tons of CO2 per capita Source: IEA 2008b. Note: PPP = purchasing power parity. Excluding LULUCF, for which emissions estimates are less certain than they are for energy consumption, Mexico's greenhouse gas emissions increased 30 percent from 1990 to 2002 (figure 1.2). Emissions from waste experienced the fastest growth, almost doubling in quantity, driven by increased solid waste and wastewater. Emissions from industrial processes also grew significantly, in large part because of booming construction in this period, which increased the use of limestone and dolomite as well as the production of building materials, such as cement, iron, and steel. Agricul- tural emissions, which include emissions from livestock, fertilizers, and soil carbon, declined about 3 percent during the same period, mainly as a result of the decline in fertilizer use. Greenhouse gas emissions from energy production and consumption activities grew steadily between 1990 and 2002, accounting for 60 percent of the overall increase in emissions (figure 1.3). Increased fossil fuel con- sumption in power generation and transport accounted for about 90 per- cent of the increment in greenhouse gases associated with energy production and consumption. Chapter 1: Introduction 17 Figure 1.2 Greenhouse Gas Emissions Inventory, by Source 700 waste 600 agriculture 500 industrial processes Mt CO2e 400 energy production & 300 consumption 200 100 0 1990 1996 2002 2006 year Sources: SEMARNAT and INE 2006a (data for 1990­2002); 2006 data are preliminary and are from INE. Note: Data exclude emissions related to land use, land-use change, and forestry. LULUCF is an important source of Mexico's greenhouse gas emissions. Estimates based on new information put the net emission of LULUCF at about 103 Mt CO2e in 2005, a sizable increase over the 90 Mt CO2e figure in the 2002 national inventory. Over the longer term, with improved for- estry management and an overall balance between deforestation and refor- estation or afforestation, LULUCF could become a net sink of greenhouse gases in Mexico.3 Mexico's Climate Change Actions Recognizing the threat climate change poses to its development, Mexico has been among the most active countries in international climate change discus- sions. As a non­Annex I country,4 Mexico is not mandated to limit or reduce its greenhouse gas emissions under the Kyoto Protocol, but the country has firmly adopted the UNFCCC principle of "common but differentiated responsibilities" and pledged to reduce its emissions on a voluntary basis. Mexico has submitted three National Communications to the UNFCCC. The First National Communication (1997) established the national green- house gas inventory and reported the first studies on Mexico's vulnerability to climate change. The Second National Communication (2001) updated the national greenhouse gas inventory to cover 1994­98 and included future emission scenarios. The Third National Communication (2006) updated the national greenhouse gas inventory to 2002 and included land- use change emissions estimates for 1993­2002 and a number of mitiga- tion and adaptation studies (SEMARNAP and INE 1997; SEMARNAT and INE 2001, 2006b). Mexico is the only non­Annex I country to have submitted a Third National Communication and is currently preparing its Fourth National Communication. 18 Low-Carbon Development for Mexico Figure 1.3 Greenhouse Gas Emissions from Energy Production and Consumption, by Sector 450 other 400 manufacturing & 350 construction 300 Mt CO2e transport 250 oil & gas: fugitive 200 emissions 150 oil & gas: fossil fuel use 100 power generation 50 0 1990 2002 2006 year Sources: SEMARNAT and INE 2006a (data for 1990­2002); 2006 data are preliminary and are from INE. Note: Data exclude emissions related to land use, land-use change, and forestry. Recognizing the multisectoral challenges posed by climate change, in April 2005 Mexico established the Comisión Intersecretarial de Cambio Climático (CICC) (Intersecretarial Commission on Climate Change). The CICC's key mandates include formulating and coordinating national cli- mate change strategies and incorporating them into sectoral programs.5 The CICC contains several working groups, including groups on mitigation and adaptation. Associated with the CICC is an advisory board on climate change, which creates a link between the CICC, the scientific community, and civil society (see http://tinyurl.com/infoc4). Overview of the Sector Analysis and Structure of the Report Chapters 2­6 assess the potential for greenhouse gas reduction in Mexico by sector. For the purposes of analysis, the economy was divided into five primary sectors: electric power; oil and gas; stationary energy end-use sec- tors (including residential, industrial, commercial, and service sectors); transport; and agriculture and forestry (including biomass energy). These sectors, chosen based on their importance to current and projected future emissions, cover more than 90 percent of Mexico's current emissions.6 The sectoral work draws on detailed background reports prepared for MEDEC. Each sectoral analysis focuses on a set of MEDEC interventions that would reduce greenhouse gas emissions over the coming two decades. The emission reduction interventions were selected based on their potential for overall emissions reduction, the net costs of interventions that reduce emis- Chapter 1: Introduction 19 sions, and the feasibility of implementing the interventions in the short to medium term (box 1.2). Forty interventions were selected (table 1.1). Many are cross-sectoral or occur in one sector but have effects in others. In particular, several inter- ventions in the industrial, oil and gas, and agriculture and forestry sectors generate electricity and thus mitigate greenhouse gas production in the elec- tricity sector. Most energy end-use efficiency interventions reduce electricity consumption. The majority of interventions in the agriculture and forestry sector reduce greenhouse gas emissions through "avoided deforestation" and by actively building up carbon stocks in woody biomass and in soils. Other agricultural interventions include the substitution of fossil fuels by liquid biofuels, reducing emissions in the transport sector. Some forestry interven- tions have multiple impacts: they produce biomass energy that substitutes for fossil fuel use in other sectors, and they contribute to a reduction in deforestation and forest degradation. Chapters 2­6 present the findings of the detailed sectoral work under- taken as part of MEDEC. The results of the analysis of the low-carbon interventions for each sector are aggregated in chapter 7 to form a sce- nario for low-carbon development in Mexico through 2030. The rela- tive costs of the interventions are compared in chapter 7 in the form of a marginal abatement cost curve. Chapter 8 discusses the conclusions of the low-carbon scenario analysis in terms of the feasibility of implementing a program of interventions and a portfolio of projects that could be carried out in the near term. 20 Low-Carbon Development for Mexico Box 1.2 Criteria for Selecting Interventions Three principal criteria have been used to identify low-carbon interventions for analysis in the MEDEC study: the potential for reducing greenhouse gas emissions, the net cost of doing so, and the feasibility of implementation. potential for net cost of feasibility of GHG reduction GHG reduction implementation MEDEC interventions The first criterion is that low-carbon interventions should have substantial potential for reducing greenhouse gas emissions. For the purposes of this study, 5 million tons (Mt) of CO2e emissions reduction implemented between 2009 and 2030 was used as the threshold for including an interven- tion. Some interventions that did not meet the 5 Mt CO2e threshold may have excellent economic and social returns and should be pursued under domestic or international carbon programs. (For example, evaluation of the collection and use of animal waste determined that this intervention did not meet the threshold reduction target. A number of animal biogas projects are being undertaken in Mexico, several with carbon revenues. Such projects may be excellent candidates for support under a climate mitigation program.) Such interventions were not included in this study. The second criterion is that low-carbon interventions should be low cost. Interventions should have positive economic and social rates of return (at a given discount rate or cost of capital). Many interventions have positive net benefits. In these cases CO2 reduction is free, because the other financial and economic benefits of the intervention more than cover the costs. Such projects are often referred to as "no-regrets" projects, because society should be undertaking them even in the absence of climate change considerations. Other interventions have net costs. In these cases the cost per ton of CO2e should be low. An upper bound of $25 per ton CO2e was used for selecting these interventions. The third criterion is that low-carbon interventions should be feasible in the short or medium term. This criterion is the most challenging and requires discussions with sectoral experts, govern- ment officials, the private sector, and civil society. For the purposes of selecting the MEDEC interventions, "feasibility" was first determined by sectoral experts in terms of their technical potential, market development, and institutional requirements. (The MEDEC interventions assumed reliance on existing technologies; any productivity gains and related cost reductions would be caused largely by changes in the scale of production.) Most of the selected interventions were also discussed with government officials, to assess the political and institutional feasibility of expanding the intervention in Mexico. (All MEDEC interventions have already been implemented, at least on a pilot level, in Mexico or in other countries with similar conditions. Some interventions face barriers in the short term, but it was believed that these barriers can be removed in the medium term.) Finally, the interventions were subjected to a review by World Bank staff to ensure that the mea- sures were feasible in a broader context, both from a market perspective and with respect to sustainability criteria, such as environmental and social safeguards. (A discussion of the social, political, institutional, and financial barriers to low-carbon interventions and the policies that could be used to overcome them is provided in the sector and final chapters.) Chapter 1: Introduction 21 Table 1.1 MEDEC Interventions by Sector Emissions reduction Elec- Trans- Land Sector Intervention tricity Heat port use Othera Wind power Geothermal power Electric Small hydropower power Biogas Utility efficiency Cogeneration in Pemex Oil and Refinery efficiency gas Gas leakage reduction Bagasse cogeneration Cogeneration in industry Residential air conditioning Residential lighting Street lighting Energy Industrial motors end-use Nonresidential lighting Nonresidential air conditioning Residential refrigeration Solar water heating Improved cookstoves Urban densification Bus rapid transit systems Nonmotorized transport Bus system optimization Transport Vehicle fuel economy standards I&M in 21 cities Border vehicle inspection Road freight logistics Railway freight Biomass electricity Fuelwood co-firing retrofitting Charcoal production Zero-tillage maize Reforestation and restoration Agricul- Afforestation ture and forestry Wildlife management Forest management Payment for environmental services Palm oil biodiesel Sorghum ethanol Sugarcane ethanol Source: Authors. Note: I&M = inspection and maintenance. a. "Other" includes industrial processes, waste, flaring, and fugitive emissions. 22 Low-Carbon Development for Mexico Notes 1. The main objective in this pillar is to turn the concept of environmental sustain- ability into a cross-cutting element of public policies and ensure that all public and private investments are compatible with environmental protection. Objec- tives and strategies are structured in such areas as water, forests, climate change, biodiversity, solid waste, and cross-sectoral environmental sustainability policy instruments. 2. The Mexican National Institute of Ecology (INE) has identified wetlands in the Gulf of Mexico as one of the ecosystems most threatened by anticipated climate changes (data published on projected forced hydroclimatic changes, as part of IPCC assessments [Vergara 2008]). This has been documented in Mexico's third national communication to the UNFCCC. 3. The uptake and storage of carbon by plants and soil is often referred to as a "sink" of CO2 from the atmosphere. Thus, for example, if the amount of car- bon absorbed by forests is greater than the CO2 emissions from forests, such as through forest fires or soil degradation, there is said to be a net sink of CO2. 4. Annex I countries are signatories to the UNFCCC (and the Kyoto Protocol) that agree to reduce their greenhouse gas emissions to targets set by the Convention. Non­Annex I countries include developing countries and economies in transi- tion that do not have mandatory reduction targets under the Kyoto Protocol. 5. The CICC is chaired by the Minister of Environment and Natural Resources (SEMARNAT), the Vice-Minister of Environment Planning serves as Executive Secretary with Ministers of the following areas serving as members: the Min- istry of Agriculture, Livestock Production, Rural Development, Fisheries and Food (SAGARPA), the Ministry of Communication and Transportation (SCT), the Ministry of Economy (SE), the Ministry of Social Development (SEDESOL), the Ministry of Energy (SENER), and the Ministry of Foreign Affairs (SRE). The Ministry of Finance (SHCP) is a permanent invited member to the CICC's deliberations. For more details, see http://tinyurl.com/infocicc. 6. The sectors that are not covered by MEDEC are waste and industrial processes. Some relevant mitigation opportunities exist in these sectors. In particular, wastewater treatment plants and landfill sites have significant potential for cap- turing and burning methane or for using it for energy purposes. CHAPTER 2 Electric Power M exico's electric power sector is the second-largest greenhouse gas emitter after transport, accounting for about 26 percent of green- house gas emissions from energy production and consumption (see fig- ure 1.3). Electricity production is expected to grow significantly in Mexico over the coming decades to meet the needs of an expanding economy and growing population. The technologies and fuel mix for power generation will have a major impact on the resulting greenhouse gas emissions from the sector. The Mexican electricity system is dominated by two state-owned com- panies--Comisión Federal de Electricidad (CFE) and Luz y Fuerza del Cen- tro (LyFC)1--which handle generation, transmission, and distribution of electricity and serve more than 97 percent of the population. CFE provides service to most of the country outside the capital; LyFC operates in Mexico City and surrounding areas. Since the late-1990s, new generating capacity has been provided primar- ily by independent power producers (IPPs) that generate and sell power exclusively to CFE under long-term contracts. In 2007 IPPs represented about 23 percent of total installed capacity in Mexico and generated 31 per- cent of total electricity. As of 2007, the total installed capacity of the electric power system, including self-supply and export projects, was 59,209 MW, which generated 262 TWh a year. About 76 percent of Mexico's installed generation capacity is fired by fossil fuels--fuel oil, natural gas, coal, and small amounts of diesel. The remaining capacity consists of hydropower (19 percent), nuclear (2.3 per- cent), geothermal (1.6 percent), bagasse (sugarcane pulp) and other bio- mass (0.6 percent), and a small fraction of wind power. The most notable change in the generation mix over the past decade has been the large increase in natural gas­fired plants, which have replaced fuel 23 24 Low-Carbon Development for Mexico oil plants. The use of natural gas in the power sector increased at an aver- age annual rate of about 16 percent between 1997 and 2007, reaching an installed capacity of about 20,000 MW (excluding self-supply). Natural gas consumption by the power sector reached 27,300 Mm³ in 2007, equivalent to 38 percent of total domestic gas consumption (SENER 2008b). Coal- fired plants entered the mix in the early 1980s and have gradually increased to 7.9 percent of installed capacity. Despite public and regulatory pressure to reduce coal use in some industrial and middle-income countries based on environmental considerations, the overall international trend, driven by investment and fuel costs, is toward further expansion of coal-fired capac- ity. Mexico's hydropower capacity increased by 50 percent in absolute terms over the past two decades, but its share in total capacity fell from 30 percent to 19 percent. The large share of gas-fired generation and sizable portion of hydropower contributed to the relatively low carbon intensity of electricity in Mexico relative to most G8+5 countries (figure 2.1). In 1997 the government of Mexico created a financial mechanism-- Proyectos de Impacto Diferido en el Registro de Gasto (Projects with Differed Expenditure Impact) (PIDIREGAS)--to finance long-term oil, gas, and power projects with government-guaranteed private investment. Under this scheme and through traditional budget financing, CFE increased installed capacity by more than 15 GW between 1999 and 2008, including Figure 2.1 Electric Power Generation by Fuel Type in Selected Countries, 2005 Brazil Mexico Japan United Kingdom country Germany United States India China South Africa 0 20 40 60 80 100 % of total power generation coal oil gas nuclear hydro- geothermal wind other power power power power renewables Source: IEA 2008a. Chapter 2: Electric Power 25 11 GW through IPP contracts based on combined-cycle natural gas plants. As of 2008, Mexico had a surplus of generating capacity, with an operating reserve margin of 21 percent (15 percent is standard). Technical transmission losses have been declining in percentage terms in both CFE and LyFC, partly as a result of an ambitious investment program in CFE, financed through the PIDIREGAS scheme. As of 2005, technical trans- mission losses were less than 2 percent for CFE, which is on par with good international practice, and 3 percent for LyFC (Komives and others 2009). In contrast, distribution losses in both companies are high by interna- tional standards, and they have been increasing in recent years. CFE's tech- nical and commercial distribution losses rose from 11.0 percent in 2000 to 11.6 percent in 2005. (Good international practice would be about 8 per- cent for a utility with CFE's load and geographic characteristics.) LyFC's distribution losses are very high, having exceeded 30 percent since 2005. Overall, technical and commercial losses of Mexico's electricity system rep- resent 16.2 percent of electricity generation (figure 2.2). Figure 2.2 Transmission and Distribution Losses in the Electric Power Sector for Selected Countries Brazil Mexico country China United States Japan 0 5 10 15 20 losses as % of electricity supplied Sources: Information on Mexico provided directly by CFE; data for other countries extracted from IEA documents on country energy policies and from IEA 2006. The Baseline Scenario The government projects electricity demand to grow 4.8 percent a year between 2007 and 2016, compared with projected annual GDP growth rate of 3.0­3.5 percent.1 This growth path follows the historical trend, in which electricity consumption has grown significantly faster than GDP. Meeting this rising demand will require the addition of 2,040 MW of new capacity each year on average. Annual average investments--for generation, trans- mission, distribution, and related fuel-handling facilities, such as ports and processing facilities--are estimated at about $5.5 billion.2 26 Low-Carbon Development for Mexico The baseline scenario uses the government's demand projections for the period to 2016. For the period 2017­30, it assumes that electricity gen- eration increases 3.9 percent a year, reaching 630 TWh by 2030. Installed capacity (not including self-supply) is projected to increase by a factor of 2.2, from about 50 GW in 2008 to 110 GW in 2030.3 The selection of power-generation technologies for 2017­30 was based on the assumptions that expansion is based on demand projections and least-cost technology4 and that environmental requirements for criteria pol- lutants (particulates, SO2, and NOX) are met. Unlike the government's cur- rent planning outlook, which sets a ceiling on coal penetration, the baseline scenario assumes that power-supply technologies are driven primarily by costs, without consideration of climate change or other policy-driven issues. The large increase in coal-based electricity generation under the baseline sce- nario is consistent with recent trends in a number of countries worldwide. Under these assumptions, there would be a distinct shift in the fuel mix of Mexico's power sector by 2030, with a nearly 6-fold increase in coal- fired generation requiring significant investments in coal-related infrastruc- ture and a 2.5­fold increase in gas-fired power generation (figure 2.3). Both coal and gas imports for power generation would rise significantly. Figure 2.3 Electricity Generation by Fuel Type in Mexico: Historical Trend and Projected Growth under the Baseline Scenario, 1965­2030 700 power generation (terawatt hours) 600 biomass 500 wind power hydropower 400 geothermal power nuclear power 300 natural gas cogeneration 200 natural gas fuel oil and other fossil 100 fuels coal and coke 0 1965 1970 1980 1990 2000 2010 2020 2030 year Source: Authors, based on records from SENER and CRE. Under the baseline scenario, total CO2e emissions from power generation increase 230 percent, from 142 Mt CO2e in 2008 to 322 Mt CO2e in 2030 (figure 2.4). The expansion of coal-fired generation accounts for 33.5 per- cent of the increase; gas-fired generation accounts for 46.2 percent. Despite the much larger share of coal-fired generation, the overall carbon intensity of electricity production drops in the baseline, from 0.538 t CO2e/TWh in Chapter 2: Electric Power 27 Figure 2.4 CO2e Emissions from Electric Power Generation: Baseline versus MEDEC Scenarios, 2008­30 350 0.6 emission factor (t CO2e/MWh) 300 baseline emission factor emissions (Mt CO2e/year) 0.5 baseline emissions 250 MEDEC emission factor 0.4 MEDEC emissions 200 0.3 150 0.2 100 50 0.1 0 0 2008 2015 2020 2025 2030 year Source: Authors. 2008 to 0.493 t CO2e/TWh in 2030, because of the larger contribution of hydropower and natural gas and the smaller contribution of fuel oil. The MEDEC Low-Carbon Scenario Under the MEDEC low-carbon scenario, reduction of greenhouse gas emis- sions is introduced as an explicit goal of power-capacity expansion. No attempt is made to reoptimize the power expansion plan of the baseline scenario by imposing an arbitrary greenhouse gas mitigation constraint. Instead, a range of power supply options and technologies is evaluated. As the baseline already assumes a significant decrease in fuel-oil use, the low- carbon technologies are compared with the other two dominant power gen- eration technologies in the baseline that contribute significantly to CO2e emissions: natural gas power plants (combined-cycle technology) and coal- fired power plants (supercritical technology). The MEDEC scenario is constructed by replacing new power capacity from these technologies under the baseline with suitable lower-carbon options and generation technologies (table 2.1). The potential for each low-carbon technology is assessed considering the availability of renew- able resources in Mexico and the technical feasibility of integrating intermittent energy into the system. Based on international experiences of electricity systems with relatively large shares of intermittent energy sources, the reliability of the Mexican electricity system is not expected to be reduced by implementation of the MEDEC scenario. Furthermore, since the MEDEC scenario includes a mix of technologies offering base- load (geothermal), intermittent (wind), and peak generation (biomass, 28 Low-Carbon Development for Mexico Table 2.1 Levelized Costs of Main Power Generation Technologies $/MWh Nonfossil Fossil Generation Exploration O&M fuel fuel Technology investment investment costs costs costs Total Baseline technologies Combined-cycle gas 19.57 n.a. 4.08 n.a. 55.17 78.98 Supercritical coal 30.97 n.a. 6.49 n.a. 18.33 55.79 Large hydropower 83.42 n.a. 1.55 3.58 n.a. 88.55 Gas turbine 68.88 n.a. 9.62 n.a. 82.12 160.62 MEDEC technologies Wind power 58.79 n.a. 10.45 n.a. n.a. 69.24 Small hydropower 71.84 n.a. 13.50 3.58 n.a. 88.92 Geothermal power 40.18 31.52 24.23 n.a. n.a. 95.92 Biogas 52.60 n.a. 10.29 n.a. n.a. 62.88 Cogeneration in Pemex 40.50 n.a. ­$4.71 n.a. ­138.95 ­103.16 Cogeneration in industry 25.18 n.a. 4.89 n.a. 39.10 69.17 Bagasse cogeneration 99.12 n.a. n.a. n.a. ­22.27 76.85 Biomass electricity 40.37 n.a. 18.33 ­7.48 0.34 51.55 Sources: World Bank 2008; CFE 2008a. Note: n.a. = not applicable; O&M = operations and maintenance. Exploration costs for fossil fuels are not included, because they are reflected in fossil fuel costs. Externalities are not included in the estimates. and most small hydro and cogeneration), it is assumed that the demand for power can be met. Investment costs for the different generation technologies are based on international references (World Bank 2006b, 2008), assuming no major changes in technology over the scenario period.5 The operations and mainte- nance costs and fuel consumption figures reflect local conditions in Mexico (CFE 2008a). Fuel prices are based on common macroeconomic projections used in all sectors and reflect international trends. The cost analysis also estimates health damage costs, based on published valuations of externali- ties of SO2, NOX, and particulates (PM10), but they are not included in the marginal abatement cost assessment--nor are they included in table 2.1. The MEDEC scenario assumes that generation technologies with a net cost below $25/t CO2e will be deployed. Under this scenario, the share of coal declines significantly relative to the baseline scenario, from 31 percent to 6 percent, and the contribution of low-carbon technologies increases substantially (figure 2.5). The share of power generation increases from 2.0 percent to 11.0 percent for geothermal, from 0.1 percent to 8.0 for biomass, from 1.3 percent to 6.0 percent for wind, and from 0.4 percent to 2.5 percent for small hydro. Relative to the baseline, implementing the MEDEC scenario requires estimated net investment of $10 billion for the electric power sector. Chapter 2: Electric Power 29 Figure 2.5 Electric Power Generation by Fuel Type in Baseline versus MEDEC Scenarios 700 efficiency power generation (terawatt hours) 600 biomass 500 wind power hydropower 400 geothermal power nuclear power 300 natural gas cogeneration natural gas 200 fuel oil and other fossil fuels coal and coke 100 0 2008 2030 baseline 2030 MEDEC Source: Authors. Five interventions are included (table 2.2). Four deploy renewable energy technologies for the generation of electricity (wind, small hydro, geothermal, and biogas). One entails energy-efficiency improvements in Table 2.2 Summary of MEDEC Interventions in the Electric Power Sector Maximum annual Net cost or benefit Capacity emissions reduction of mitigation Intervention (MW) (Mt CO2e/year) ($/t CO2e) Utility efficiency n.a. 6.2 19.3 (benefit) Electricity generation Biogas 940 5.4 0.6 (cost) Wind power 10,800 23.0 2.6 (cost) Small hydropower 2,750 8.8 9.4 (cost) Geothermal power 7,500 48.0 11.7 (cost) Electricity generation in other sectorsa Cogeneration in Pemex 3,690 26.7 28.6 (benefit) Cogeneration in industry 6,800 6.5 15.0 (benefit) Bagasse cogeneration 2,000 6.0 4.9 (cost) Biomass electricity 5,000 35.1 2.4 (benefit) Fuelwood co-firing retrofitting 2,100 2.4 7.3 (cost) Source: Authors. Note: n.a. = not applicable. a. See chapters 3, 4, and 6 for descriptions of electricity generation interventions in other sectors. 30 Low-Carbon Development for Mexico public utilities, including in transmission, distribution, and auxiliary equip- ment in existing power plants.6 Several interventions in the electricity sector were considered and assessed but ultimately not included in the MEDEC scenario, because they did not meet the MEDEC criteria, because data were not available, or for other reasons. In particular, the generation of electricity from concentrated solar power or grid-connected photovoltaic technologies is set to become a relevant mitigation option in the coming decades, but mitigation costs are still well above the 25 $/tCO2e threshold. The generation of electricity from nuclear power in Mexico faces a series of security, environmental, and economic constraints. The rehabilitation of existing power plants, including thermal and hydro, is in many cases a cost- effective option, but was not analyzed owing to a lack of data. Barriers to Mitigating Greenhouse Gas Emissions The deployment of mitigation interventions in the electric power sector faces significant policy and institutional biases against two important low- carbon alternatives: cogeneration and renewable energy. Additional barri- ers to implementation are identified in table 2.3. The power sector is designed to operate with current conventional, cen- tralized generation technologies. Although in many cases cogeneration and renewable energy can compete with conventional technologies in Mexico in terms of cost, such technologies have scale and availability characteristics that are not conducive to centralized control. Utility procurement rules, for example, exclude in practice small-scale projects. Current power generation planning methods do not account for impor- tant co-benefits offered by low-carbon technologies. In addition to climate mitigation, these benefits can include reducing local environmental and health impacts, increasing the security of the energy supply, diversifying the sources of energy and reducing risk, and enhancing industrial competitive- ness by increasing efficiency. There is significant potential to reduce greenhouse gas emissions through small hydropower generation at moderate incremental costs. Development of this source of energy is hindered, however, by relatively large capital costs and the high level of uncertainty over water concession licenses, which are provided by the Comisión Nacional del Agua (CONAGUA) (National Water Commission), and over the availability of water once the plant is in operation, when the resource will be shared with other uses, such as fishing and irrigation. The schedule for resource sharing is determined by CONAGUA, which has traditionally given priority to nonpower activities. This practice significantly increases the financial risk of hydropower proj- ects and has discouraged private participation in small-scale hydro projects under the self-supply scheme. At the same time, many existing water supply and irrigation facilities could be equipped for electricity generation. Prelimi- nary estimates suggest that more than 70 irrigation dams in Mexico could be used for power-generation purposes (CONAE 2002). Chapter 2: Electric Power 31 Table 2.3 Low-Carbon Development in the Mexican Electric Power Sector: Barriers and Corrective Actions Barrier Corrective action Large-scale projects Planning seeks least-cost technology and does Modify planning procedures to assess and not consider portfolio approach consider, in addition to costs, volatility risks associated with different technologies, and minimize the portfolio's overall risk and cost over the long term Planning does not consider ex-plant infrastruc- Include other benefits, such as local environ- ture costs and co-benefits mental externalities, all infrastructure costs (for example, ports, pipelines), and possible carbon mitigation revenues Only large-scale projects can participate in Allow small-scale renewable energy and bidding processes cogeneration projects to offer partial capacity in bidding processes Unresolved environmental and social issues Establish better negotiation mechanisms for associated with large hydro projects planning, construction, and operation of hydropower plantsa Small-scale projectsb No predefined contracting procedures for Develop small power purchase agreements renewable energy and cogeneration projects to sell electricity to the grid Renewable energy generators only paid Develop payment systems that reward all short-term marginal costs and not for capacity benefits, including capacity, risk reduction, and externalities (including applicable carbon payments) No capacity payments for cogeneration Develop payment systems that reward all projects benefits, including capacity, risk reduction, and externalities (including applicable carbon payments) Obtaining local and federal licenses is difficult Establish streamlined licensing procedures Transmission bottlenecks exist Expand transmission capacity in areas with large renewable energy potential Source: Authors. Note: This table does not consider the new secondary regulations on renewable energy, included in the Anteproyecto de Reglamento de la Ley para el Aprovechamiento de Energías Renovables y el Financiamiento de la Transición Energética. a. Refer, for example, to the mechanisms proposed by the World Commission on Dams (WCD 2000). b. Barriers to small-scale projects refer primarily to changes that supply electricity to the grid rather than for self-supply. Conclusions Demand for electric power in Mexico has been growing faster than GDP over the past several decades, and this trend is likely to continue, as electric- ity use continues to grow in all sectors. Meeting the increasing demand for power under a baseline scenario is projected to increase total CO2e emis- sions from power generation by 230 percent between 2008 and 2030, from 142 to 322 Mt CO2e. Based on their economic costs of production--exclud- ing carbon and local externalities--both coal- and gas-fired power genera- 32 Low-Carbon Development for Mexico tion would increase under the baseline scenario, with coal accounting for 37 percent and gas 25 percent of the new capacity. Cogeneration could provide about 12.5 percent of new capacity under a low-carbon scenario, at costs that are substantially lower than the current marginal costs of power generation in Mexico. The generation of electric- ity from biomass is a promising technology for Mexico, with estimated costs that are also lower than current marginal costs. At a cost of CO2e of up to $10/t, additional low-carbon energy technologies--hydro, wind, geothermal, and other biomass, such as biogas and bagasse--could replace much of the incremental fossil fuel generation in the baseline scenario. Total incremental investment costs for the MEDEC low-carbon scenario for the power sector amount to $10 billion between 2009 and 2030, much of which would be offset by lower operation costs. Despite regulatory mechanisms that favor the development of self-supply renewable energy projects, the environment to tap cogeneration and renew- able energy remains inadequate in Mexico. Several policy and regulatory changes are needed to overcome barriers that have inhibited the success- ful development of the country's renewable energy resources and cogen- eration potential. These include low planning prices (including the lack of externalities) CFE assumes for new fossil fuel­based power generation, the lack of recognition of the portfolio effect in planning, and the inability to adjust procurement procedures to the particularities of renewable energy projects.7 For cogeneration--which has linkages to both the oil and gas sec- tor and other industries in end-use energy--new contracting procedures are needed for small power producers to reduce the risks and transaction costs. In November 2008, Mexico passed new legislation to promote renew- able energy (LAERFTE 2008) as part of the energy reform package, and the corresponding secondary regulations were published in September 2009. Its impact will depend on the methodologies and regulatory instruments that are issued by the Regulatory Commission and SENER in the coming months. Notes 1. As of October 11, 2009, LyFC has been taken over by CFE. 2. This figure corresponds to projections made in 2007 that are included in the Electricity Sector Outlook 2007­2016. Given the global financial crisis, the rate of growth of the economy may be below this average in the coming years. 3. About 40 percent of this investment will be needed for generation. See SENER (2007) and CFE (2008b). 4. The government's Electricity Sector Outlook 2008­17 (SENER 2008c) sets lower capacity targets, in light of the international financial crisis and the cur- rent overcapacity of Mexico's power generation system. The latest projections have electricity demand growing at 3.3 percent per year from 2008 to 2017, and the projected annual GDP growth rate is 2.3 percent. The baseline scenario could be revised to match these recent developments, although given that the overall magnitude of the interventions in terms of tons of CO2e would be simi- lar, doing so is not necessary. Chapter 2: Electric Power 33 5. Mexico's electricity law mandates least-cost procurement of electricity genera- tion sources. This mandate, as well as its rather strict interpretation by CFE, has constituted a barrier to the penetration of cleaner technologies. 6. Although there will undoubtedly be technological change in power-generation technologies during the coming two decades, the study takes a technology- neutral stance and allows cost reductions from economies of scale only. 7. The analysis of these five interventions was carried out by the electricity team, with the collaboration of the energy-efficiency team. A detailed description of the assumptions used in the analysis of these interventions is included in appen- dix C. 8. In order to foster energy source diversity in the power sector, the Energy Minis- try (SENER) has established a 40 percent ceiling for natural gas capacity and a 25 percent floor for renewable energy capacity, including large hydro. However, given the increasing volatility in oil and natural gas prices and the country's high dependence on these hydrocarbons, a more effective approach might be a planning methodology that considers fuel price volatility, such as the use of portfolio theory. CHAPTER 3 Oil and Gas T he potential to reduce greenhouse gas emissions in Mexico's oil and gas sector through both low-cost and no-regrets interventions is significant. Specific interventions that have good economic rates of return include reduc- ing gas distribution leakage, exploiting cogeneration potential at Petróleos Mexicanos (Pemex) facilities, and improving the efficiency of energy use at refining and processing facilities.1 The success of Pemex's plans to reverse the decline in oil production and further increase gas production will also play a major role in future greenhouse gas emissions from Mexico, because the alternative is the likely increase in imports of fossil fuels, including coal. The oil and gas industry in Mexico is a major source of revenue, employ- ment, and national pride. Since being nationalized, in the late 1930s, the oil industry has contributed enormously to the country's development. Pemex is currently among the largest companies in the world in terms of assets. It is the largest source of export earnings for Mexico and directly employs more than 130,000 people. Although Pemex's contribution to the economy has declined in the past two decades--it accounted for 6.5 percent of GDP in 2008--oil revenues still account for more than one-third of the federal budget. Among the greatest challenges facing Mexico's oil industry is the need to reduce the decline in oil production. Crude oil production increased from 3.0 million barrels a day (mbd) in 2000 to a peak of 3.4 mbd in 2004. By August 2009, however, production had fallen to about 2.6 mbd, led by the rapid decline in production from Mexico's largest field, Cantarell. As recently as 2004, Cantarell accounted for nearly two-thirds of Mexico's total oil production (2 mbd); since then, production has declined sharply. In July 2009, production at Cantarell was only about 600,000 bd. Production is likely to fall by 15 percent a year between 2009 and 2012. If production from new fields cannot offset the losses from Cantarell, Mexican oil pro- 35 36 Low-Carbon Development for Mexico duction could fall below 2.5 mbd by 2010, with a resulting large drop in oil exports and a consequent fall in public revenues. Mexico also recognizes the need to improve the efficiency of Pemex.2 Recent reforms in the oil and gas industry are intended to provide addi- tional budgetary and financial flexibility to Pemex. Spending by Pemex, a decentralized federal agency, falls under the restrictions of the federal bud- get, and its financial obligations fall under public borrowing structures.3 Over the past two decades, a limited federal budget and constraints on bor- rowing have led to insufficient investment in the oil and gas sector in order to meet production targets and related product quality improvements. Pemex is currently the world's most indebted oil company (total debt was $46.1 billion debt in 2007, and the ratio of debt to proven reserves was $3.1 dollars per barrel of oil equivalent) (figure 3.1). This high level of indebtedness has limited the company's ability to raise financing in private capital markets. The relationship between investment in the oil sector and future energy production and earnings is recognized in Mexico. The prob- lem is the fact that investments in the energy sector compete with pressing social programs, such as health, education, and poverty alleviation, which have relied on oil earnings to finance increases in budget allocations. Figure 3.1 Pemex Debt and Earnings in Recent Years earnings before 60 interest, depreciation, and 50 amortization 40 debt $ billions 30 20 10 0 ­10 2003 2004 2005 2006 2007 year Source: Pemex 2008. Sustaining and expanding natural gas production is critical to meeting Mexico's energy demand. Gas demand in Mexico has been increasing over the past two decades, as the country expands the use of efficient and clean combined-cycle gas for power generation. Between 2000 and 2007, produc- tion of natural gas increased from 4,679 million cubic feet per day (mcfd) to 6,058 mcfd (figure 3.2). The majority of the increase in production has been attributable to the increase in nonassociated gas (gas produced inde- pendently of oil). However, the 29 percent increase in production between Chapter 3: Oil and Gas 37 Figure 3.2 Natural Gas Production in Mexico 7,000 6,000 5,000 4,000 not associated with oil production mcfd 3,000 2,000 associated with oil production 1,000 0 2000 2001 2002 2003 2004 2005 2006 2007 year Source: SENER 2008a. 2000 and 2007 was insufficient to satisfy the increase in demand, which rose 38 percent over the same period. This led to a significant increase in imports of gas, mainly from the United States, a trend that is likely to con- tinue in the near to medium term. At the same time, significant quantities of natural gas are being vented and flared at oil production facilities, prin- cipally in offshore areas. If tapped for consumption (as opposed to reinjec- tion, which is another option) and the challenge of high nitrogen content could be overcome, this amount of natural gas could nearly offset natural gas imports. In light of the natural gas situation in Mexico, the Ministry of Energy has set itself the near-term goals of increasing domestic natural gas production and reducing gas flaring and venting. The Baseline Scenario Under the baseline scenario, oil and gas production peaks about 2016 and declines thereafter. Energy demand--including gas for power and industry and petroleum products (gasoline and diesel) for the transport sector--is expected to increase throughout this period--exactly when oil and gas pro- duction peaks will have a significant impact on the Mexican economy and on greenhouse gas emissions. In the absence of additional domestic gas production, Mexico will need to consume other fuels for power generation. Imported coal is the most likely fuel source based on financial costs and availability. Mexico could also import additional natural gas from the United States or through liquefied natural gas (LNG) projects. Under the baseline scenario, Mexico could cease to be a net energy exporter within the next decade. 38 Low-Carbon Development for Mexico The MEDEC Low-Carbon Scenario Three interventions were evaluated in the oil and gas sector.4 They include increasing cogeneration in Pemex, improving refinery efficiency, and reduc- ing gas leakage.5 Cogeneration in Pemex Cogeneration potential in Pemex refineries and basic petrochemical plants is equivalent to more than 6 percent of Mexico's total installed capacity. About 3,700 MW of cogeneration potential could be tapped at Pemex's six refineries and four petrochemical plants (table 3.1).6 Table 3.1 Pemex Cogeneration Potential Type of facility Location Size of plant (MW) Refinery Cadereyta 375 Madero 350 Tula 480 Salamanca 440 Minatitlán 475 Salina Cruz 565 Petrochemical plant Cangrejera 400 Morelos 300 Pajaritos 105 Independencia 200 Source: Pemex 2004. The operation of refineries and basic petrochemical plants requires con- siderable volumes of steam, which is generated by burning fossil fuels, such as refinery gas, fuel oil, and intermediate distillates. Modern oil refineries use cogeneration plants to provide steam for refining processes and elec- tricity for both self-consumption and sale to the grid. Cogeneration has become increasingly attractive, with refineries making use of low-value and polluting heavy residual fuel from the refining process, which they clean through gasification. The use of the resulting gasified fuel in cogeneration turbines can result in overall efficiency (thermal efficiency plus electric effi- ciency), reaching values exceeding 80 percent.7 The first stage of investment can be in a combined-cycle cogeneration power station fueled by natural gas. A second stage--which also helps dis- pose of dirty residual fuel--is to install a gasifier to exploit the residual fuels of the refineries. Refinery Efficiency Oil refining is a very energy-intensive industry. Fuel use varies depending on the type of crude oil processed, the mix of outputs produced, and the envi- Chapter 3: Oil and Gas 39 ronmental standards the refined products must meet. In refineries, most conversion processes take place under conditions of high temperatures and pressure, which contributes to the formation of deposits in tubing and equipment that hinders heat transfer, leading to higher fuel consumption. Several methods can be used to reduce the resulting energy losses, including process controls, temperature control, and the cleaning and maintenance of equipment. In some processes it is also possible to recover pressure energy by replacing throttling devices by hydraulic turbines, which in turn drive other machinery or generate electricity (pumps as turbines are especially suitable for this purpose). Reviewing processes, installing new heat recovery systems, implementing maintenance and upgrade practices, and conducting energy development studies and audits can all contribute to improving the energy efficiency of a refinery and reduce greenhouse gas emissions. In general, the options available to increase energy efficiency in a refin- ery can be grouped under two large categories: (a) low-cost actions related to energy-management systems that can be implemented in the short and medium term and (b) larger, more comprehensive technological reconfigu- ration programs, such as investments in fuel use and process technologies that require longer implementation times. Energy-management measures include maintenance programs, installation of heat and pressure recovery equipment, and efficient lighting. Technological reconfiguration programs imply the revision and modification of processes in the refinery, as well as the implementation of more efficient technologies for energy generation, such as energy integration. As a result of modest energy efficiency measures undertaken by Pemex between 2001 and 2006, energy intensity was reduced 3 percent. Neverthe- less, the overall energy efficiency of Mexican refineries remains consider- ably below international refining industry standards.8 To assess the energy-efficiency potential of Pemex refineries, the team evaluated a broad renovation of processes and equipment, including the recovery of hydrogen from exit gases in various process units (hydrocrack- ing, hydrotreating, coking, and fluidized catalytic cracking [FCC]). Given the complexity and size of refineries, it is generally difficult to achieve optimum efficiency through renovation investments. Many investments in Mexican refineries that improve energy efficiency and that are required to meet increasing fuel-quality standards are often not profitable, because it is difficult to pass on the costs of quality improvements to consumers. For this reason, the refinery-efficiency intervention was found to impose net incre- mental costs relative to the baseline and thus had a positive incremental cost for reducing greenhouse gas emissions. A wide range of less comprehen- sive, extremely cost-effective investments in existing refineries--for lighting, pumps, motors--can improve energy efficiency. Gas Leakage Reduction Reducing losses of natural gas can generate large financial savings. More- over, because natural gas (methane) has a global warming potential 21 40 Low-Carbon Development for Mexico times higher than CO2, the benefits of reducing methane leakage in terms of carbon payments are among the highest of greenhouse gas mitigation inter- ventions. Methane emissions from natural gas systems account for an esti- mated 18 percent of total worldwide methane emissions, with Mexico emitting about 7 percent of the global total from natural gas systems. Nearly 80 percent of methane emissions from natural gas transport in Mexico are associated with wet seals used with the operation of compres- sors within the production, storage, and distribution network. The replace- ment of wet seals with dry seals allows the use of high-pressure systems, which can reduce the leakage of methane, require less maintenance, and reduce the risk of accidents. The potential for this technology in Mexico is large, given that 46 of 67 compressors still use wet seals (table 3.2). An economic analysis of replacing wet seals with dry seals was conducted using the Ciudad Pemex gas-processing center as the reference case. Based on the results, it was assumed that the program could be applied in all gas centers with wet-seal compression systems. Table 3.2 Potential for Compressor Seal Replacement in Mexico's Gas Processing Centers Number of compressors Number of compressors Center with wet seal with dry seal Cactus 15 0 Nuevo Pemex 11 0 Ciudad Pemex 3 3 Coatzacoalcos 3 0 Poza Rica 4 0 Reynosa 2 0 Burgos 0 18 La Venta 5 0 Matapionche 3 0 Total 46 21 Source: Authors. Wet-seal replacement was estimated to have a reduction potential of 3 million tons of CO2e through 2030, or an average of 140,000 tons a year. Recent estimates of natural gas losses in Mexico (as reported by the Meth- ane to Markets program) indicate that losses could be significantly higher than the official figures cited above, in which case measures to identify and implement measures to reduce losses would be of even greater importance for greenhouse gas mitigation policy in Mexico. Summary of Oil and Gas Interventions The greatest net benefit comes from increasing cogeneration in Pemex facili- ties, followed by increasing refining efficiency and reducing gas leakage Chapter 3: Oil and Gas 41 (table 3.3). Other interventions in the oil and gas sector were considered and assessed but ultimately not included in the MEDEC scenario, because they did not meet the MEDEC criteria, because data were not available, or for other reasons. Reducing gas flaring and venting may be a cost-effective intervention, but Pemex is planning to implement the intervention in the coming years, which means that it has become part of the baseline scenario. Reducing fugitive methane emissions in the oil and gas industry from sources other than gas compression stations, such as oil storage facilities, may be cost-effective, but too few data were available to assess the corre- sponding potentials and costs. Lack of data prevented a careful cost-benefit analysis of other potential opportunities as well. Table 3.3 Summary of MEDEC Interventions in the Oil and Gas Sector Maximum annual Net cost or benefit emissions reduction of mitigation Intervention (Mt CO2e/year) ($/t CO2e) Cogeneration in Pemex 26.7 28.6 (benefit) Gas leakage reduction 0.8 4.4 (benefit) Refinery efficiency 2.5 16.6 (cost) Source: Authors. Barriers to Mitigating Greenhouse Gas Emissions Barriers to the implementation of low-carbon interventions in Mexico's oil and gas sector include intervention-specific barriers and barriers that are symptomatic of the organizational and management structure of Pemex (box 3.1). From Pemex's perspective, although investments in cogeneration plants, for example, have excellent rates of return, such investments are less attractive than petroleum exploration and development. They are therefore not a high priority from Pemex's perspective. Because of Pemex's high debt, it has had difficulty tapping commercial credit markets at reasonable terms. Recent oil industry reforms have been aimed at improving the situation. However, given Mexico's dependence on oil industry revenues for financing the federal budget, reform measures that reduce tax payments by Pemex are likely to be limited in the short term. The most significant barrier to implementation of cogeneration in Mex- ico is the unfavorable conditions for the sale of surplus electricity to the grid. Pemex's electricity demand is currently in the range of 900 MW--a fraction of the potential for cogeneration of more than 3,700 MW. Although some of the inefficient electricity production in Pemex can be replaced by more efficient cogeneration, Pemex must be able to sell surplus electricity (as well as the corresponding capacity) to CFE in order to tap the full potential of cogeneration in its facilities. Since the cost of cogeneration from Pemex 42 Low-Carbon Development for Mexico Box 3.1 Financing Pemex Infrastructure Projects with High Environmental Benefits A smaller federal budget and limited borrowing capacity have reduced the ability of Pemex to allocate financial resources to capital projects with a high environmental benefit and a high return in recent years. The higher financial rate of return expected on exploration and development (E&D) activities has precluded the possibility of financing these and other projects, despite their environmental benefit and attractive returns. On average, E&D investment has accounted for more than 80 percent of Pemex's portfolio. An additional factor hampering the financing of non­E&D projects is Pemex's huge debt (see figure 3.1 and figure below), which reduces the company's ability to raise funds in the commercial finance markets. Pemex has tapped commercial credit in the past for infrastructure investments, but given its poor credit rating, the company has typically used other financing mechanisms (namely, the federally approved budget and PIDIREGAS). Although the ratio of earnings before interest, depreciation, and amortization to debt has been positive in recent years, the international financial crisis may limit the ability of the company to obtain commercial finance for its investments. Ratio of Total Debt to Proven Reserves for Selected Oil Companies, 2007 $ per barrel of oil of 1P reserves 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Exxon BP Conoco Shell Petrobras Statoil Pemex Source: Authors' calculations based on Pemex 2008. facilities is estimated to be significantly lower than the new power capacity CFE is planning to contract, the benefits to Mexico are clear. In theory, investment in cogeneration facilities by Pemex could be con- tracted to the private sector, because it does not involve the "ownership" of oil or gas resources. This is not the case for reducing gas leakage or improving refinery efficiency. Contractual arrangements with private inves- tors would face more onerous legal obstacles in these areas. There are many reasons why Pemex has not adopted more energy- efficiency measures in its refineries. Many relate to investment restrictions imposed on Pemex by the federal government and the lack of success in Chapter 3: Oil and Gas 43 upgrading refineries to meet tighter fuel quality standards and dispose of highly polluting residual fuels. Conclusions There is significant potential to reduce greenhouse gas emissions in Mexi- co's oil and gas sector through both no-regrets and low-cost interventions. In particular, there is significant cogeneration potential in Pemex facilities, where more than 6 percent of Mexico's total installed electric power capac- ity could be installed. Another intervention that can reduce greenhouse gas emissions and that has good economic rates of return is reducing gas distri- bution leakage. A number of policy constraints have limited energy-efficiency invest- ments in Pemex. The hope is that passage of the oil industry reform measures in 2008 will make it easier for Pemex to undertake needed invest- ments, including in efficiency improvements. A major limitation remains the extremely large share of the federal budget provided by oil revenues from Pemex. Measures to allow contracting with the private sector to finance cogeneration investments could overcome some of the current investment constraints for Pemex, within existing Mexican laws. Overcoming barriers to domestic gas production will be a key determi- nant of Mexico's future CO2 emissions, because under all scenarios natural gas will need to increase substantially to meet the growing demand from the electric power, industrial, and residential and commercial sectors. Without large new sources of natural gas, the least-cost alternative for power genera- tion will be coal. One of the objectives of the energy reform program approved by the Mexican congress in 2008 was to provide greater flexibility to allow Pemex to operate in a manner similar to other national oil companies. Despite greater financial, budgetary, and procurement flexibility included in the reforms, it is still unclear whether the private sector will be attracted to Pemex's new terms, especially in E&D. Although the reform does not allow private investment in downstream activities, the hope is that Pemex will be able to contract services provided by the private sector. Considering that some low-carbon investment projects, such as cogeneration, could be pro- vided by service contracts with Pemex, these projects could help test the effect of the recent reforms for improving investment in non­E&D activities. Notes 1. For the purposes of this study, the oil and gas sector includes the extraction of oil and gas; the refining, transport, and distribution of oil products; the trans- port, processing, and distribution of natural gas; and a portion of secondary petrochemical production in Mexico coming from Pemex facilities. 2. A number of countries have moved to improve the investment climate and the accountability of their state-owned energy companies over the past two decades. 44 Low-Carbon Development for Mexico Petrobras of Brazil and Statoil of Norway, for example, have modernized their oil industries, making them among the most efficient and profitable in the world. 3. Recent reform legislation also ended the use of PIDIREGAS for long-term financing for Pemex (see chapter 2). 4. The analysis of all interventions except cogeneration was carried out by the energy efficiency and oil and gas team. The electricity team analyzed cogeneration. 5. The reduction in gas flaring and venting is an important mitigation strategy in the oil and gas sector. As of 2007, Mexico was among the largest gas-flaring countries in the world, with a total of 5.6 billion cubic meters and an emis- sion rate that is high by international standards. Most of Mexico's unrecovered associated gas (gas that is produced as a by-product of oil production) is flared offshore at the Cantarell field. Gas flaring and venting is estimated to have pro- duced up to 44 Mt CO2e in 2007, which accounts for as much as half of total greenhouse gas emissions from the oil and gas sector (extraction, refining, and production of oil and gas), or about 6 percent of total national emissions. Pemex is currently undertaking investments to substantially reduce flaring and venting by 2012; because of this strategy, it is not included as a MEDEC intervention. 6. Pemex recently launched the bidding process for the construction and operation of a cogeneration plant at the Nuevo Pemex gas-processing plant, and plans are nearly complete for a similar investment at the Salamanca oil refinery. In addi- tion to producing heat to satisfy the gas plant, the facility will provide 300 MW of power capacity to cover the electricity requirements of this and other Pemex facilities in southeast Mexico (by wheeling power through the electricity grid). 7. The efficiencies for the whole process (from residual fuels to heat and power) are somewhat lower. 8. The Solomon Index of Energy Efficiency, an international parameter of refinery efficiency, was improved for Mexican refineries from 122 in 2001 to 118 in 2006. For comparison, the average efficiency for Canadian refineries is 93 on this scale. CHAPTER 4 Energy End-Use M anaging the growth of electricity and fuel demand through energy- efficiency measures in the end-use sectors will be critical to mitigating Mexico's greenhouse gas emissions. The industrial, residential, and com- mercial and public service sectors account for 95 percent of electricity con- sumption in Mexico, and their electricity use has been growing at more than 4 percent a year since 1995. By contrast, the fuel consumption (direct consumption of gas, oil products, and coal) of these three sectors, which account for about 42 percent of total end-use fuel in Mexico, has remained essentially flat since 1995. These trends reflect the changing production pat- tern in the industrial sector (away from fuel-intensive basic materials), as well as the impact of rising wealth in urban areas, which tends to drive up electricity consumption. This chapter examines the contribution of stationary (nontransport) energy end-use to Mexico's greenhouse gas emissions and the potential and cost of emissions reduction through energy-efficiency improvements. The analysis focuses on the three large end-use sectors (as defined by national energy statistics): industry, residential, and commercial and public services. Together these sectors account for about 48 percent of total energy end-use in Mexico (figure 4.1). (Transport, which depends almost exclusively on oil products, accounts for 49 percent of energy end-use, and is analyzed in chapter 5.) Mexico's national energy-efficiency programs started in the early 1990s, after the establishment of Comisión Nacional para el Ahorro de Energía (CONAE) (National Commission for Energy Savings) in 1989 and FIDE in 1990. Following passage of the Law for Sustainable Energy Use in November 2008, the Comisión Nacional para el Uso Eficiente de la Ener- gía (CONUEE) (National Commission for the Efficient Use of Energy) was established as an administrative body with technical and operational auton- 45 46 Low-Carbon Development for Mexico Figure 4.1 Energy End-Uses in Mexico by Sector, 2006 100 80 agriculture percentage transport 60 commercial & public services 40 residential industrial 20 0 total oil natural coal biomass electricity end-use products gas Source: IEA 2008a. omy. CONUEE's mission is to promote energy-efficiency and serve as the technical authority for the sustainable use of energy. FIDE, a private-public trust fund created by the federal electricity utility CFE, has been a leader in promoting electricity savings through demand-side management measures, such as the introduction of compact fluorescent lamps and the retirement of old appliances. It is estimated that as of 2006, standards related to elec- tricity end-uses saved an accumulated total of 16,065 GWh and avoided about 2,926 MW of generation capacity. FIDE energy-efficiency pro- grams achieved estimated electricity savings of 15,146 GWh and avoided 1,745 MW of generation capacity as of 2008 (FIDE 2008). There remains considerable potential for energy-efficiency improve- ments in Mexico. After significant improvements in the 1990s, the down- ward trend in Mexico's energy intensity of GDP has stalled (figure 4.2), primarily because of the rapid increase in electricity consumption, which has grown significantly faster than GDP. Both CONUEE and FIDE have set ambitious targets for electricity savings by 2012. The baseline analysis provides the context for understanding the energy savings potential in each of the three major end-use sectors. The Baseline Scenario The industrial, residential, and commercial and public sectors account for the majority of electricity use and a substantial share of other fuel use in Mexico. The industrial sector is characterized by both extremely modern and energy-efficient industries, such as steel and cement, and antiquated and high energy-consuming industries, many of them small and medium- size firms. In the residential, commercial, and public sectors, the demand for air conditioning and refrigeration has been increasing and is likely to con- tinue to do so as incomes rise. Room for growth is significant, as per capita Chapter 4: Energy End-Use 47 Figure 4.2 International Comparisons of Energy Intensity Trends , a. Energy intensity as a proportion of GDP 1980­2006 1.6 energy intensity (1980 = 1) 1.4 Brazil 1.2 South Africa 1.0 India 0.8 Mexico Japan 0.6 United States 0.4 China 0.2 0 1980 1986 1991 1996 2001 2006 year b. Absolute value of energy intensity in 2006 40 35 MJ per $ (2000 prices) 30 25 20 15 10 5 0 Mexico United Brazil South China India Japan States Africa GDP at purchasing GDP at market power parity rates exchange rates Source: Based on data from the U.S. Energy Information Administration (www.eia.doe.gov). electricity use in Mexico remains a fraction of that in high-income countries with similar climates. The Industrial Sector The industrial sector is the second-largest energy end-user in Mexico (after transport), accounting for about 27 percent of total energy end-use.1 It is the largest electricity user, accounting for 58 percent of total electricity con- sumption.2 More than half the industrial energy use is in five main subsec- tors, which also account for the majority of fuel use (oil products, gas, solid fuels): cement (nonmetallic minerals), iron and steel, chemicals and petro- chemicals, mining, and food and tobacco (figure 4.3). 48 Low-Carbon Development for Mexico Figure 4.3 Industrial Energy Use by Subsector, 2006 12 10 other Mtoe 8 food and tobacco mining 6 nonmetallic mineralsa 4 chemicals & petrochemicals 2 iron and steel 0 oil natural solid electricity products gas fuels Source: IEA 2008a. a. Nonmetallic minerals include cement, glass, ceramics, bricks, tiles, and other. Some large-scale basic materials industries in Mexico are relatively efficient by international standards. Mexico's iron and steel industry, for example, is among the least carbon intensive in the world, thanks in part to its reliance on advanced technologies.3 The energy intensity of crude steel in Mexico has remained below 14 gigajoules per ton (GJ/t) since the early 2000s, compared with the global average of about 20 GJ/t. In Mexico's cement industry, total primary energy use per ton is 19 percent lower than in Canada and 27 percent lower than in the United States, albeit about 15 percent higher than that of world leaders Brazil and Japan (IEA 2007). Nonetheless, a large portion of Mexico's industrial sector is made up of small and medium enterprises in a wide range of activities that have rela- tively high energy intensity. They often use older equipment and lack access to technical know-how and financing for upgrades. Broadly speaking, in addition to cogeneration, the main sources of energy savings in the industrial sector come from energy-efficiency improve- ments in motor systems, steam systems, and kilns and furnaces. Motor sys- tems account for 70 percent of total industrial electricity consumption in Mexico, and steam systems are responsible for an estimated 40 percent of industrial fuel consumption. Kilns and furnaces account for most of the remaining industrial fuel and electricity consumption. According to the International Energy Agency's industrial energy-efficiency assessment (IEA 2007), adopting international best practices would reap technical energy savings of 20 percent in industrial motors, 10 percent in steam systems, and 15 percent in kilns and furnaces. About 80 percent of Mexico's industrial cogeneration potential has not been utilized; the undeveloped potential is concentrated in Pemex facilities (see chapter 3) and in the food processing, chemical and pharmaceutical, automobile, pulp and paper, textile, glass, and sugar industries. Chapter 4: Energy End-Use 49 The Residential Sector The residential sector accounts for about 18 percent of total energy end-use in Mexico. Its share of total electricity consumption increased from 16 per- cent in 1995 to 22 percent in 2006. Per capita residential electricity con- sumption in Mexico is about 320 kWh/year--about one-tenth of the 3,150 kWh/year consumed in the United States. In the states of Arizona, New Mexico, and Texas, which have high air-conditioning demand and a climate that is similar to that of large parts of Mexico, electricity accounts for up to 80 percent of residential energy consumption. As incomes grow in Mexico, the implied growth potential for residential electricity demand is staggering. In urban areas of Mexico, cooking and water heating rely pri- marily on liquefied petroleum gas (LPG), which accounts for more than 53 percent of residential fuel consumption. Biomass consumption. Biomass consumption, which accounts for about 40 percent of residential fuel, has remained stable in Mexico; it is used pri- marily by rural households for cooking in traditional open fires. The resi- dential use of biomass is relevant for greenhouse gas emissions for two primary reasons. First, biomass consumption produces net CO2 emissions, because a portion of the fuelwood used is not harvested in a sustainable manner. Second, non-CO2 gases are emitted because of incomplete biomass combustion. In addition, the traditional use of biomass is linked to severe respiratory and other health problems, especially among women and chil- dren in rural households, because of exposure to smoke from inefficient fuelwood combustion. The experience in Mexico shows that the transition to LPG among rural households faces important economic and cultural barriers; in the short term, improving biomass stoves is a more feasible way to address both health impacts and greenhouse gas emissions (Troncoso and others 2007). Air conditioning, refrigeration, and home appliances and electronics. Air conditioning, refrigeration, and home appliances and electronics are expected to be the main growth areas of residential electricity demand in Mexico. Currently, these three end-uses plus lighting account for about- equal shares of residential electricity consumption. Air-conditioner satura- tion rates in Mexico were only about 20 percent in 2005, compared with about 95 percent in regions of the United States with similar cooling-degree days. One recent study projects that air-conditioner electricity use in Mex- ico could increase 10-fold by 2030, reaching a value that is three times higher than total residential electricity use in 2005 (McNeil and Letschert 2008). The saturation rate of refrigerators is relatively high in Mexico, at 82 percent (2006), but it still has room to grow, both in number and stor- age capacity. Recent efforts to promote compact fluorescent lamps notwith- standing, incandescent lamps still account for about 85 percent of the in-use residential light bulbs in Mexico, indicating a large potential for scaling up use of compact fluorescent lamps. 50 Low-Carbon Development for Mexico Mexico has minimum energy performance standards (MEPS) for 18 types of electricity-consuming equipment, including air conditioners, refrigerators, and clothes washers. In general, these standards are on par and consistent with the MEPS in the United States, because of harmoni- zation efforts begun in the early 1990s. Large electricity savings can be achieved through the accelerated retirement of old and inefficient air condi- tioners and refrigerators and the enforcement of increasingly stringent man- datory MEPS on new products. The availability of cheap and inefficient secondhand air conditioners from the United States is a particular problem for northern Mexico, where air-conditioning demand is also highest. Mexico does not have a residential building energy-efficiency code. Such a code has proven to be a highly effective means of reducing cooling loads (through thermal insulation and window improvements) in the U.S. state of California, which has progressively pursued mandatory building energy- efficiency codes since the late 1970s. The combination of codes for residen- tial buildings with inherently lower cooling demands and high-efficiency air conditioners can drastically reduce air-conditioning electricity consumption in new homes. Domestic hot water accounts for about 52 percent of residential LPG and natural gas consumption in Mexico; it is the main end-use driving up residential fuel consumption (PROCALSOL 2007). Although there is potential to improve the energy efficiency of hot water boilers, much larger fossil fuel savings can be achieved by scaling up the application of solar water heaters, especially in low-density dwellings, such as single-family homes and townhouses. The Commercial and Public Services Sector Energy use by the commercial and public services sector in Mexico is esti- mated to account for less than 4 percent of total energy end-use. The sector is nevertheless an important electricity consumer, accounting for more than 21 percent of total electricity use.4 As cities expand and modernize, the commercial and public services sector will assume a much larger role in Mexico's energy use. In the United States, the commercial and public sec- tors account for about 14 percent of total energy end-use and 35 percent of total electricity consumption. Lighting accounts for more than half of electricity consumption in the commercial and public sector in Mexico; air conditioning and refrigeration account for about 18 percent each; and the energy used by water supply and sanitation companies accounts for about 9 percent. As a large portion of the commercial and public services sector (public buildings and munici- pal water companies) is owned by federal, state, or municipal governments, substantial economies of scale are available through fairly simple procure- ment and retrofit programs. New commercial buildings are subject to two national standards enforced through third-party verifications. The lighting system standard is enforced through the service contracting process of the national utilities (CFE and Chapter 4: Energy End-Use 51 LyFC), which require compliance certificates for the provision of service. The compliance for the building thermal envelope standard has to be man- dated by local codes and enforced by local authorities. A lack of local capac- ity and political will has contributed to significant lapses in enforcement of the building envelope standard. Given the large growth potential of electric- ity use in the commercial and public services sector, a focus on tightening the energy-efficiency standards and enforcement for lighting, refrigeration, air conditioning, and buildings will be crucial to reducing greenhouse gas emissions from this sector. Energy End-Use Demand Projections In the baseline scenario, electricity demand is projected to reach 425 TWh by 2030, up from 222 TWh in 2008 (excluding transmission and distribu- tion losses, nontechnical losses, and in-plant consumption). The combined contribution of the residential, commercial, and public service sectors is projected to increase to 67 percent, up from 47 percent in 2008. The most important component of end-use fuel consumption is trans- port, discussed in chapter 5. For the industrial, residential, commercial, and public sectors, fuel demand is estimated to increase at an average annual rate of less than 2 percent (figure 4.4). Figure 4.4 Energy End-Use by Sector: Baseline Scenario 180 160 agriculture 140 120 transport Mtoe 100 commercial & public services 80 residential 60 40 industrial 20 0 2005 2030 2005 2030 electricity fuel Source: Authors. The MEDEC Low-Carbon Scenario The MEDEC study evaluated the costs and impact of 11 energy end-use interventions. Each is briefly described in the following paragraphs.5 Electricity End-Use Efficiency Residential Air Conditioning. This intervention focuses on the 1 million households in Mexico with the highest air-conditioning use. It entails accel- erating the phaseout of old air conditioners by 2030 and installing thermal 52 Low-Carbon Development for Mexico insulation in these households. The combined effect of the new standard- compliant air conditioners and the thermal insulation is assumed to reduce air-conditioning electricity consumption by these households from 4,000 kWh/year to 700 kWh/year. Residential Lighting. In 2008 there were an estimated 234 million light bulbs operating in about 29 million households in Mexico. The MEDEC scenario assumes that 85 percent of all light bulbs used one hour a day or more in 80 percent of households will be compact fluorescent lamps. Residential Refrigeration. This intervention proposes the accelerated substi- tution of refrigerators 10 years or older by new devices compliant with current standards. Nonresidential air conditioning. The air-conditioning electricity consump- tion of commercial and public sector buildings was estimated for several types of commercial and public buildings. This intervention assesses the effect of accelerating the substitution of air conditioners in these buildings with advanced devices. Nonresidential lighting. This intervention involves accelerating the substitu- tion of low-efficiency fluorescent lighting with high-efficiency T8 lighting.6 Street lighting. This intervention proposes substituting the entire stock of mercury vapor, incandescent, halogen (iodine-quartz), and fluorescent street lamps by high-efficiency high-pressure sodium lamps. Industrial motors. This intervention involves the accelerated substitution of large industrial motors and the introduction of high-efficiency (above the current standard) motors. Although the efficient motors are more than twice as expensive as standard motors, the intervention produces net eco- nomic benefits. Cogeneration Cogeneration in industry. The estimated potential for cogeneration in Mex- ican industry is about 6,800 MW, excluding the oil and sugar industries. This potential is concentrated in industries with steam requirements in which topping-cycle plants can be used. It is a conservative estimate, as it excludes medium- and small-scale cogeneration schemes. The conditions for bottoming-cycle plants are less favorable, because the waste heat from such sectors as cement and steel and iron is of too low a temperature to be utilized efficiently (CONUEE 2009).7 Cogeneration enables the construc- tion of new power capacity by utilities to be delayed, leading to higher overall efficiencies in the energy system. Bagasse cogeneration. Low-efficiency cogeneration plants are currently in operation in most sugar mills in Mexico, fueled by a mixture of bagasse and Chapter 4: Energy End-Use 53 fuel oil. By substituting these plants with high-pressure, high-efficiency plants, sugar mills can deliver surplus electricity to the grid and cease using fuel oil. Renewable Heat Supply Solar water heating. This program entails increasing the penetration of solar water heaters to reduce the use of LPG or natural gas in both existing and new homes. It is assumed that by 2030, 80 percent of new households and 60 percent of households existing in 2008 will have installed solar water heaters. Improved cookstoves. This intervention entails replacing traditional open fires by more efficient devices in rural households. Penetration by 2030 is assumed to reach 100 percent of rural people who use traditional open fires. Improved cookstoves reduce fuelwood consumption and improve combustion efficiency, thereby reducing both the net CO2 emissions linked to the nonrenewable fraction of biomass and the non­CO2 emissions linked to incomplete combustion. At least two government programs and several nongovernmental projects are currently operating in Mexico, providing reason for optimism that the assumed penetration rate can be achieved. Doing so would require, however, that appropriate training, technical assis- tance, and follow-up be provided, as most ongoing programs provide funds only for the purchase and installation of cookstoves. This intervention pro- duces large net benefits when health and time savings benefits are included (box 4.1 and figure 4.5).8 Table 4.1 summarizes the energy end-use interventions, almost all of which are no-regrets interventions. Other interventions in the energy end- use sectors were considered and assessed but ultimately not included in the MEDEC scenario, because they did not meet the MEDEC criteria, because data were not available, or for other reasons. In particular, the pumping Box 4.1 Reducing Emissions, Saving Time, and Providing Health Benefits through Improved Cookstoves Improved cookstoves are a cost-effective tool for reducing greenhouse gas emissions even without valuing the time family members save by not having to collect as much fuelwood and the health benefits from reduced indoor air pollution impacts. When time savings and the positive health impacts of reducing exposure to fine particulate matter (PM2.5) and carbon monoxide are considered, the intervention provides major benefits to households and society. The net benefit of the intervention rises from essentially zero to $2.34/t CO2e when time savings are included and to $18.90 when both time and health benefits are included. With about 80 percent of the rural population in Mexico dependent on wood for cooking and heating (Armendáriz and others 2008), the greenhouse gas mitigation potential of widespread introduc- tion of improved cookstoves is substantial. 54 Low-Carbon Development for Mexico Figure 4.5 Mitigation Costs of Improved Cookstoves 5 net benefits net costs $/t CO2e $0.07 (cost) 0 $2.34 (benefit) 5 10 15 20 $18.90 (benefit) without time with time savings with time savings savings and local and without local and local health health impacts health impacts impacts Source: Authors. Table 4.1 Summary of MEDEC Interventions in the Energy End-Use Sectors Maximum annual Net cost or benefit emissions reduction of mitigation Intervention (Mt CO2e/year) ($/t CO2e) Electricity end-use efficiency Residential air conditioning 2.6 3.7 (benefit) Residential lighting 5.7 22.6 (benefit) Residential refrigeration 3.3 6.7 (benefit) Nonresidential lighting 4.7 19.8 (benefit) Nonresidential air conditioning 1.7 9.6 (benefit) Street lighting 0.9 24.2 (benefit) Industrial motors 6.0 19.5 (benefit) Cogeneration Cogeneration in industry 6.5 15.0 (benefit) Bagasse cogeneration 6.0 4.9 (cost) Renewable heat supply Solar water heating 18.9 13.8 (benefit) Improved cookstoves 19.4 2.3 (benefit) Source: Authors. Chapter 4: Energy End-Use 55 of water for irrigation, water supply, or drainage purposes has a signifi- cant mitigation potential, and a number of pressure-recovery opportunities could be harnessed by means of hydraulic turbines. Lack of adequate data prevented the thorough examination of these interventions. Barriers to Mitigating Greenhouse Gas Emissions The barriers to improving energy end-use efficiency are understood; various barrier-removal policies and instruments have had successes (table 4.2). The approaches and processes to barrier removal are often as varied as the country or locality in which they are applied. Table 4.2 End-Use Efficiency: Barriers and Corrective Actions Barrier Corrective action Industrial and commercial sectors Limited awareness of energy efficiency, Industry awareness campaigns on energy- including costs, benefits, and risks of new efficiency opportunities, technology seminars technologies and actions and expositions Few examples presenting the business case for Development and dissemination of targeted energy efficiency, limited market data, and few energy-efficiency information, technical guides, identified opportunities to encourage private case studies, project databases, and benchmark sector participation studies Lack of expertise to conduct quality audits and Technical training of energy managers, ESCOs, identify energy efficiency opportunities, lack of and auditors; development of standardized market expertise to package investments into template audit reports, bidding documents, and bankable project proposals case studies High import tariffs for energy-efficiency Establish tax waivers and/or incentives for equipment energy-efficiency equipment purchases Low or questionable quality of energy- Update/expand energy-efficiency standards, efficiency equipment labels, and codes High project development costs (audits) and Develop standard loan procedures, monitoring transaction costs and verification protocols, and bidding documents; dedicate funds for energy- efficiency audits Limited private sector investment in energy Develop local business models/ESCOs, efficiency (for audits, advisory services, leasing, promote joint venture options and venture ESCOs) due to limited equity and available capital funds, make small grants to stimulate financing the market and ESCOs Limited banking expertise to assess energy- Provide technical assistance to local financial efficiency proposals, low-quality loan applica- institutions, and conduct demonstrations of tions, high perceived risks for energy efficiency project performance projects Unclear responsibilities and incentives among Improved building codes/certificates, incentives building developers, owners, and tenants for green buildings, energy metering (principal-agent problem) Poor customer creditworthiness or limited debt Create dedicated financing schemes (revolving capacity among borrowers funds, pooled financing), credit enhancement mechanisms, and alternative financing models to share risks for energy-efficiency projects (continued) 56 Low-Carbon Development for Mexico Table 4.2 End-Use Efficiency: Barriers and Corrective Actions (continued) Barrier Corrective action Public sector Limited awareness of energy efficiency, Awareness campaigns targeted to public including its costs, benefits, risks, and service administrators, case studies options Limited incentives to implement energy- Revise budgeting to allow retention of energy efficiency projects (due to potential loss of savings, awards for agencies/public staff that budget) and to explore new approaches improve energy efficiency Restrictive budgeting, financing, and procure- Revise public policies to encourage energy- ment and contracting rules efficiency products (for example, life-cycle costing) and ESCOs, develop alternative ESCO models to suit local conditions, create dedi- cated energy-efficiency revolving funds for public agencies Residential sector Limited awareness of energy efficiency, Public energy-efficiency awareness campaigns including its costs, benefits, and risks Concerns over which products are energy Update/expand energy-efficiency standards, efficient and about actual costs/savings, quality, labels, and codes; conduct manufacturer reliability, high upfront investment costs, high negotiations; seek market transformation transaction costs (through bulk purchase, for example); energy costs/savings information provided through utility billing, utility-financed energy-efficient investments Low energy pricing Energy sector pricing and institutional reforms Unclear responsibilities and incentives among Improved building codes/certificates, incentives building owners, developers, and tenants for green buildings (principal-agent problem) Source: Authors. The Industrial and Commercial Sectors For the industrial and commercial sectors, the most common issue is insti- tutional. Decision makers, including senior management and financial offi- cers, typically have other investment priorities, such as essential maintenance and repair, production expansion, and product quality enhancements. They therefore give very low priority to investments in reducing operating costs. Many countries have developed energy service company (ESCO) business models, often alongside dedicated energy-efficiency funds, which allow company managers to pay from energy savings, and thus do not need to alter investment priorities or take on additional technical and performance risk. Unfortunately, industrial country ESCO models, which rely on detailed legal contracts, have often been too complex for many developing countries to implement and have not proven viable. There is growing experience with developing local ESCO models, which are having more success (see Taylor and others 2008). A number of efforts have been initiated in Mexico since 2004 to promote market-oriented energy efficiency, mostly focusing on dedicated energy- Chapter 4: Energy End-Use 57 efficiency financing programs.9 Although there have been some innova- tive and promising proposals, a fundamental gap has been the underlying business model needed to support the transaction. There is often a mis- taken belief that if a bank determines that a customer is not creditworthy, the ESCO can finance the project. The reality is that ESCOs are generally unable and unwilling to take on both project performance and credit risks, especially if the customer is deemed risky, despite the attractiveness of the underlying project. Furthermore, new ESCOs in developing countries often have limited experience and weak balance sheets, which may not be capable of handling the full performance risks and dealing with high project devel- opment and monitoring and verification costs. Developing more robust, Mexican-grown models, along with financing programs designed based on these models, is much more likely to result in meaningful investments in energy efficiency in the industrial and commercial sectors. The Residential Sector Electricity subsidies for middle- and high-income residential consumers dis- courage many energy-efficiency investments in appliances and lighting. Most electricity consumers in Mexico receive some subsidies; residential and agricultural consumers are the most heavily subsidized (box 4.2). The residential sector is complex, given the diverse nature of the sector, the large numbers of households, and often limited disposable income. A major issue is the high implicit discount rates households often use when considering energy-efficiency investments. In addition, if the additional cost of the more efficient appliance or equipment is very high, it is less likely to be adopted, regardless of the life-cycle cost. Programs that can reduce costs (for example, bulk purchase, manufacturer negotiations, subsidies, rebates), ensure product quality and cost-effectiveness, and provide an efficient and effective distribution mechanism have a good track record. Mexico already has strong experience with implementing residential appliance programs and has faced these difficulties in the past. Expansion of such programs, particularly targeting air conditioning, lighting, and solar water heating, could have significant impacts. Several programs and projects in Mexico focus on the dissemination of improved cookstoves (see box 4.1). Potential barriers to large-scale implementation include resistance from rural and indigenous communities because of established traditions and habits, the lack of standardized con- struction techniques, the difficulty of reaching a large and dispersed rural population, the lack of trained personnel in both the social and technical aspects of cookstove dissemination, and high follow-up costs. The Public Sector The public sector faces many procedural and incentive barriers. Govern- ment agencies often have restrictive budgets that do not allow them to undertake equipment upgrades; if they do, the financial benefits may not accrue to them. Procurement rules typically favor least-cost equipment 58 Low-Carbon Development for Mexico Box 4.2 Underpricing Electricity through Residential Subsidies The underpricing of electricity to residential consumers in Mexico results in overconsumption and excessive greenhouse gas emissions (Komives and others 2009). Electricity subsidies in Mexico are among the largest in the world ($9 billion in 2006). More than two-thirds of total electricity subsidies go to residential consumers. Average residential electricity prices cover only about 40 percent of the cost of supply; agricultural tariffs cover only about 30 percent. The price/cost ratios for other sectors (commercial, industrial) are much less distorted, with tariffs covering 83­97 percent of the cost of supply. Consumption levels for residential consumers vary dramatically in Mexico by seasonal tariff zones (figure); as expected, consumption is much higher among customers paying lower tariffs in the more highly subsidized geographic areas (that is, those with higher summer temperatures). Average consumption in the fifth decile of Tariff 1 (least subsidized) is just 97 kWh per month per household, whereas average consumption in the same decile for consumers in Tariff 1F (most subsidized) is 277 kWh per month. The difference between consumption levels in decile 10 is even larger: the largest-volume consumers in Tariff 1 use 270 kWh a month on average compared with 1,240 kWh in Tariff 1F. Monthly Electricity Consumption by Tariff Category and Consumption Decile 1,200 1 1A 1B 1C 1D 1E 1F 1,000 kWh/month 800 600 400 200 0 3 1 2 3 4 5 6 7 8 9 10 Consumption decile Underpricing of electricity reduces the incentive for customers to take energy-saving measures, such as replacing old equipment and appliances. Elevated demand leads to incremental emissions from power plants, not only of greenhouse gas emissions but also of local pollutants, such as particulates and ozone precursors, which are responsible for the majority of air pollution health impacts. Furthermore, electricity subsidies for irrigation pumping in Mexico have contributed to the overexploitation of groundwater resources in numerous localities. The bulk of Mexico's electricity subsidies go to the nonpoor. In 2005 the bottom three residential income deciles accounted for about 21 percent of total subsidies, whereas the top three income deciles accounted for 38 percent. By contrast, the pilot program Oportunidades Energéticas has a very progressive distribution of resources across income classes, with nearly 75 percent of energy payments going to the bottom three income deciles. Source: Komives and others 2009. Chapter 4: Energy End-Use 59 rather than life-cycle costs, and the hiring of ESCOs, which are often involved in both the initial audit and project implementation, can be nearly impossible.10 Mexico also has very restrictive contracting policies at the federal and state levels, which prevent contracts from being awarded for more than one year (because of budget cycles and future obligations), thus limiting efficiency investments. After studying these issues in 2005, the U.S. Agency for International Development suggested that, rather than seek sweeping changes in pro- curement and budgeting policies, the government consider implementing a few pilots to test alternative approaches. Simplified ESCO contracts, which could be adjusted to fit one-year contract restrictions with simpler perfor- mance verification requirements, could be tested and, based on implementa- tion experience, adjusted and replicated. As these bidding schemes become more accepted, an increased emphasis could be placed on bundling multiple public facilities together in order to scale up investments while reducing transaction costs. This effort could be complemented with a public revolving fund, perhaps on concessional terms, to improve the incentives for energy- efficiency projects to be implemented. This experience would then allow more informed, comprehensive revisions of public policies to be considered. Conclusions Mexico's energy-efficiency, cogeneration, and renewable energy interven- tions in all stationary energy end-use sectors should be an important com- ponent of climate change mitigation policy. This has been clearly recognized in the National Strategy on Climate Change. Many of the MEDEC inter- ventions represent accelerated or scaled-up activities that CONUEE, FIDE, and other agencies are already undertaking. The MEDEC interventions are mainly retrofit/renovations that involve replacement of existing equipment with new and more efficient ones. As Mexico's electricity demand is projected to more than double by 2030, it is important that new equipment meets increasingly stringent energy- performance standards. In this regard, Mexico will benefit from the increas- ing harmonization of MEPS with the United States and Canada. Mexico would also benefit from a concerted effort to stop the inflow of old and inefficient equipment from the United States. In the rural sector, the dis- semination of improved fuelwood cookstoves has significant greenhouse gas mitigation potential, with additional co-benefits. Energy-efficiency standards for buildings is an area in which Mexico can make significant progress. Doing so requires creating incentives for local governments to adopt and enforce the federal commercial building energy standard and introducing (preferably) mandatory energy-efficiency standards for residential buildings, at least in warm areas with high air- conditioning demand. There is much potential for ESCOs in advancing Mexico's energy- efficiency agenda, especially in the industrial, commercial, and public sec- 60 Low-Carbon Development for Mexico tors. Exploiting this potential will require increased support to developing and piloting ESCO business models that suit Mexico's circumstances. Reducing broad-based residential electricity price subsidies while providing properly targeted support for low-income households, will contribute to improving the incentives for energy conservation and investment in more efficient residential equipment. Notes 1. This figure does not include energy production and conversion sectors, such as power generation and oil and gas. 2. About 22,000 GWh a year included in industrial electricity consumption are actually attributable to the commercial and services sector, because a number of large nonindustrial buildings, such as hotels, supermarkets, and hospitals, pay an industrial electricity tariff, the basis on which the data are collected. Therefore, industrial electricity use is overestimated and commercial and public services use underestimated by current electricity statistics in Mexico (estimate by Odón de Buen, energy efficiency consultant, 2009). 3. The direct reduction process uses a gas (in Mexico's case, natural gas) to reduce iron ore to produce direct-reduced iron, which can then be fed into electric arc furnaces. Electric arc furnaces account for roughly three-quarters of Mexico's steel output, one of the highest shares in the world (IEA 2007). 4. Overall energy use data are based on IEA (2008a). According to the SENER Energy Information System for 2008 (SENER 2008d), electricity consumption by the commercial and public services sector is 24,300 GWh per year (11 per- cent of Mexico's total). However, the actual figure for commercial and public service electricity consumption is closer to 46,300 GWh per year, or 21 percent of the total (see note 2 above). 5. The "upstream" benefits of electricity savings in terms of forgone electricity- generation capacity, fuel use, operations and maintenance costs, and emissions were calculated according to the same assumptions of the power sector--that is, that a mix of coal and natural gas generation is displaced. Several teams carried out these analyses: the land-use and bioenergy team developed improved cook- stoves and bagasse cogeneration; Odón de Buen (energy efficiency consultant) analyzed street lighting, nonresidential lighting, and nonresidential air condi- tioning; the electricity team was involved in the two cogeneration interventions; the energy-efficiency team was in charge of the remaining interventions. 6. The federal government is planning large-scale residential refrigeration and lighting programs. It is therefore possible that the proposed MEDEC interven- tions will actually be part of the baseline. 7. Moreover, in the steel and iron sector, the waste heat fluids are highly corro- sive and therefore difficult to handle. Cogeneration projects are basically of two different types of power cycles, topping or bottoming. The topping cycle is the most widely applicable in industry, where waste heat from an electrical or mechanical power process is used. A bottoming cycle uses the waste heat from a heating process, which is typically supplied to a steam turbine, extract- ing steam to the heating process and also generating electrical power (Sci-Tech Encyclopedia 1997). Chapter 4: Energy End-Use 61 8. This report benefited from substantial research on the health and climate change impacts of adopting improved cookstoves in Mexico (Armendáriz and others 2008; Johnson and others 2008, 2009). 9. Efforts include the energy-efficiency financing study by the U.S. Trade and Development Agency (USTDA) and Nacional Financiera (Nafin), Mexico's larg- est development bank (USTDA/Nafin); the energy-efficiency financing proto- cols developed by the Asia-Pacific Economic Cooperation (APEC) and CONAE (APEC/CONAE); the special-purpose financing vehicle for energy efficiency developed by the Energy Sector Management Assistance Program (ESMAP) and the North America Development Bank (NADB) (ESMAP/NADB); the per- formance and credit risk mechanism developed by the Renewable Energy and Energy Efficiency Partnership, EPS Capital Corporation, and Nafin; and sev- eral energy-efficiency/clean energy financing programs developed by FIDE, the Clean Tech Fund, Fondelec Capital Advisors company, NADB, the Japan Bank for International Cooperation, and Nafin. 10. The fact that each ESCO bids on a different project, with different investment needs, energy savings, share of savings to the customer, and other details can make it difficult to evaluate transparency. CHAPTER 5 Transport T ransport is the largest and fastest-growing sector in Mexico in terms of energy consumption and greenhouse gas emissions. The sector consists of the road, air, rail, and water transport subsectors. It produces about 18 percent of total greenhouse gas emissions in Mexico, with road trans- port accounting for about 90 percent of energy consumption and CO2e emissions from the transport sector (SEMARNAT 2007). Energy use by road transport in Mexico increased more than fourfold between 1973 and 2006, compared with the approximate doubling of energy use by industry and other sectors (IEA 2008a). The country's vehicle fleet nearly tripled in a decade, increasing from 8.3 million vehicles in 1996 to 21.5 million vehicles in 2006. The import of used vehicles from the United States has been an important factor behind the growth of the vehicle fleet. It has also led to an increase in the average age of the fleet and related problems of low gas mileage and high emissions of criteria pollutants (CO, NOX, SOX, and particulates). In 2005 alone, Mexico imported 1.3 million vehicles from the United States that were more than 10 years old (CTS 2009). Over the next 25 years, Mexico's motorization rate--defined as the number of vehicles per 1,000 people--is projected to continue to increase, following a worldwide trend (figure 5.1). Important factors explaining the increase in motorization in Mexico include the increase in per capita income, the availability of inexpensive vehicles (new and used), and the relatively low cost of transport fuels. Other factors that have contributed to increasing energy use and greenhouse gas emissions from the transport sector are the deteriorating quality of public transportation, the inadequate enforcement of vehicle emission standards, the neglect of transportation needs in urban development plans, and the lack of regulation of freight transport. 63 64 Low-Carbon Development for Mexico Figure 5.1 Motor Vehicle Ownership: Historical Trend and Projected Growth for Selected Countries Spain 2030 1,000 United States 2002 United States 2030 vehícles per1,000 people: historical and projected (log scale) Japan 2002 Japan 2030 Spain 2002 Mexico 2030 Korea, Rep. of, 2030 United States 1960 Brazil 2030 Korea, Rep. of, 2002 China 2030 Mexico 2002 Brazil 2002 India 2030 100 Mexico 1960 Brazil 1962 India 2002 Japan 1960 China 2002 Spain 1960 10 China 1960 Korea, Rep. of, 1960 India 1960 3 30 per capita income: historical and projected (thousands 1995 $ ppp, log scale) Source: Dargay, Gately, and Sommer 2007. Note: PPP = purchasing power parity. One additional factor that contributes to demand for transport fuel is fuel pricing. The prices of the two primary road transport fuels--gasoline and diesel--remained stable or fell over the past 15 years in Mexico (fig- ure 5.2). Fuel prices in Mexico are lower than those of most countries in the Organisation for Economic Co-operation and Development. The Baseline Scenario The baseline scenario follows historical trends in Mexico and is consistent with the pattern of motorization growth worldwide. Under this scenario, the national fleet increases from 24 million vehicles in 2008 to a little more than 70 million vehicles in 2030 (figure 5.3). The majority of the increase is for passenger cars, but there is also a large increase in light-duty trucks, buses, and sport utility vehicles (SUVs). Greenhouse gas emissions from the Chapter 5: Transport 65 Figure 5.2 Gasoline and Diesel Fuel Prices in Mexico, 1980­2007 2.5 per liter prices in constant 2005 $ gasoline 2.0 1.5 1.0 0.5 diesel 0 1980 1987 1992 1997 2002 2007 year Source: CTS 2009. Figure 5.3 Transportation Fleet: Historical Trend and Projected Growth under the Baseline Scenario, 1980­2030 70 60 million vehicles heavy-duty vehicles 50 light-duty vehicles 40 taxis buses 30 SUVs passenger cars 20 motorcycles 10 0 1980 1990 2000 2010 2020 2030 year Source: Authors. transport sector increase from 167 Mt CO2e in 2008 to more than 347 Mt CO2e in 2030, with 72 percent of the emissions (and energy consumption) generated by private vehicles (passenger cars, SUVs, and light- and heavy- duty vehicles) (figure 5.4). Total emissions rise from 659 Mt CO2e in 2008 to 1,137 Mt CO2e in 2030, with transport's share rising from 25 percent to 31 percent (figure 7.1). 66 Low-Carbon Development for Mexico Figure 5.4 Baseline CO2e Emissions by Transport Mode 450 400 maritime total emissions (Mt CO2e) 350 trains 300 airplanes heavy-duty vehicles 250 light-duty vehicles 200 taxis buses 150 SUVs 100 passenger cars motorcycles 50 0 1980 1990 2000 2010 2020 2030 year Source: Authors. Figure 5.5 MEDEC Emissions Scenario for Transport 350 other sugarcane ethanol 300 e line palm oil biodiesel bas emissions (Mt CO2e/year) sorghum ethanol 250 fuel economy standards I&M in 21 cities 200 road freight logistics nonmotorized transport 150 bus rapid transit urban densification 100 border vehicle inspection MEDEC emissions railway freight 50 bus system optimization 0 2008 2015 2020 2025 2030 year Source: Authors. Note: I&M = inspection and maintenance. Figure includes all interventions that lead to a reduction in transport sector emissions; this includes those addressed in this chapter as well as the biofuel interventions outlined in chapter 6. The MEDEC Low-Carbon Scenario The transport analysis used a programmatic approach to evaluate an inte- grated set of nine low-carbon interventions.1 The objective was to identify an aggressive scenario that could dramatically reduce Mexico's transport- Chapter 5: Transport 67 related greenhouse gas emissions. The priority areas evaluated in the study include urban land-use, fuels and technology, public transit, nonmotorized transport, travel demand management, and freight transport. Modal Shift and Urban Development Urban densification. This intervention seeks to promote a policy for the development and preservation of urban centers, using sustainability criteria that offer conditions of livability (access to work, schools, shops). Urban planning that incorporates increased density makes it possible to reduce the demand for motorized transportation while revitalizing urban centers with mixed land use; recovering the urban landscape; and rebuilding communities by providing equal access to goods and services, education, and maintenance of environmental and urban quality. High-density urban planning imposes growth limits on urban zones, directly affecting the use of vehicles (private and public) and fuel consumption. The cost-benefit analysis considers the changes in infrastructure investment and operation costs (lower in the high- density scenario) and in distances traveled (shorter in high-density areas). Bus rapid transit. BRT refers to the substitution of minibuses in the main axis routes by rapid mass transit systems of the type introduced in several cities in Mexico (León, Mexico City, and Guadalajara). Systems would be introduced in Mexican cities that currently have more than 750,000 inhabit- ants. The target of the program is to have 1.5 kilometers per 100,000 inhab- itants of BRT lanes by 2030, equivalent to 122 lines of BRT systems, with a total of 1,830 kilometers nationwide. The analysis assesses the mitigation resulting from a fraction of passengers switching from other more polluting means of transport (minibuses as well as passenger cars and taxis) to BRT. Bus system optimization. This intervention involves the restructuring of the mass transit system's feeder routes by removing redundant vehicles. If com- plemented by improvements in urban infrastructure (roads, bus stops, traf- fic signs); public information; traffic monitoring; control; and vehicle improvements, this measure represents an important option for mitigating greenhouse gas emissions in urban public transportation, because the growth of the private vehicle fleet (and related issues of urban sprawl and congestion) has been at least in part the result of inefficient transportation systems. Nonmotorized transport. Nonmotorized transport is a mobility alternative that gives priority to pedestrians and bicyclists, mostly for short trips. It is an efficient, accessible, nonpolluting means of transportation that is benefi- cial to health and has recreational value. Formal nonmotorized transport systems are typically used as feeder systems to mass transit systems for lon- ger-distance trips; they should be interconnected with the most important trip destinations (schools, work, shopping centers, tourist sites). Under this scenario, the study quantified a 5 percent national modal share for bicycle trips by 2030. The cost and benefit data are based on studies undertaken in 68 Low-Carbon Development for Mexico cities that have undertaken effective nonmotorized transport infrastructure programs. Technologies and Demand Management Border vehicle inspection. Border vehicle inspection would indirectly regu- late the efficiency of used imported vehicles by requiring such vehicles to meet minimum environmental standards. Vehicles that exceed the 2 percent CO (volume) threshold--20 percent of imports in 2006--would be restricted from being licensed in Mexico. Inspection and maintenance in 21 cities. A program of vehicular use restric- tions would be implemented through inspection and maintenance in 21 cities. The objective of the program would be to deter the use of private vehicles and allow the promotion of sustainable mass transit. Within Mex- ico's current legal framework, the implementation of such a program would lie with state or municipal level authorities; it would be politically difficult to enact it at the federal level. This intervention therefore assumes the adop- tion of a vehicular inspection and maintenance program similar to the pro- gram in place in Mexico City as well as vehicle use restrictions for older vehicles in 21 other metropolitan areas, which would cover about 60 per- cent of Mexico's total vehicle fleet (without including Mexico City). Fuel economy standards. This intervention would provide a regulatory incentive to promote more efficient technologies for new vehicles. An energy- efficiency standard based on the weighted average of sales, fuel consumption, and the total number of vehicles manufactured for sale in the country was evaluated for its impact on energy consumption and greenhouse gas emis- sions. Assuming an increase in vehicle prices as a result of the CAFE­style standard,2 this measure runs the risk of encouraging sales of used cars, which could reduce fuel economy if implemented in isolation. Therefore, standards for new vehicles should be accompanied by mechanisms that discourage the purchase and ownership of inefficient used vehicles, such as the inspection and maintenance and border inspection interventions outlined above. Freight Road freight logistics. This intervention aims to optimize freight transpor- tation by coordinating the operation of heavy-duty vehicles. It includes the creation of freight enterprises or cooperatives, specialized terminals, freight transportation corridors, and information systems. Despite higher fixed costs arising from the companies' infrastructure and management, net costs (and emissions) would be lower, because of the reduction in empty trips. Railway freight. This intervention would expand the use of the railroad sec- tor from 7.6 percent of all national transported freight in 2007 to 37 per- cent by 2030. The increase in rail transport would come at the expense of truck freight, although road freight transport would continue to grow in absolute terms, driven by economic growth. Chapter 5: Transport 69 Summary The analysis of urban transport interventions considered the time savings associated with the reduction in congestion as well as the positive health impacts caused by the reduction in local pollutant emissions (box 5.1). Even without considering these co-benefits, all transport interventions show positive overall cost savings (net benefits) for mitigating emissions (table 5.1). Other interventions in the transport sector were considered and assessed but ultimately not included in the MEDEC scenario, because they did not Box 5.1 More Time and Better Health: Co-Benefits of Reducing Emissions in the Transport Sector In addition to reducing emissions, all of the urban transport interventions examined had significant co-benefits. By reducing the distance traveled by the vehicle fleet, the reduction in congestion leads to time savings. The reduction in local pollutant emissions leads to lower health costs by decreasing the rate of respiratory illness. These time and health impacts were assessed for all seven of the non- freight MEDEC transportation interventions (figure). The analysis estimates the average time savings likely to result from the interventions, conservatively valuing time at the minimum wage. The health analysis used externality cost factors per liter of fuel burned in urban areas, which were derived from a model that considered estimates of the exposure to local pollutants (PM2.5, NOX, SO2, and SO4) by the affected population. The methodology was adapted from a study by the Instituto Nacional de Ecología (INE 2006), which used exposure response relationships between pollution exposure and health impacts, including cardiovascular mortality, pulmonary mortality, infant respiratory mortality, chronic bronchitis, lost work days, and restricted activity days. Together these co-benefits can be significant for some transportation interventions, providing a major rationale for implementation. Externality and Time Costs for MEDEC Transport Interventions 0 bus system optimization railway freight border vehicle inspection urban densification bus rapid transit nonmotorized transport road freight logistics 20 I&M in 21 cities fuel economy standards Net mitigation benefits 40 ($/t CO2e) 60 80 100 direct benefits unpaid time benefits 120 externalities Source: Authors. Note: I&M = inspection and maintenance. 70 Low-Carbon Development for Mexico Table 5.1 Summary of MEDEC Interventions in the Transport Sector Maximum annual Net cost or emissions benefit of reduction mitigation Intervention (Mt CO2e/year) ($/t CO2e) Modal shift and urban development Bus system optimization 31.5 96.6 (benefit) Urban densification 14.3 66.4 (benefit) Bus rapid transit 4.2 50.5 (benefit) Nonmotorized transport 5.8 50.2 (benefit) Technologies and demand management Border vehicle inspection 11.2 69.0 (benefit) I&M in 21 cities 10.6 14.5 (benefit) Fuel economy standards 20.1 12.3 (benefit) Freight Road freight logistics 13.8 46.3 (benefit) Railway freight 19.2 88.7 (benefit) Source: Authors. Note: I&M = inspection and maintenance. meet the MEDEC criteria, because data were not available, or for other reasons. These included the introduction of hybrid vehicles, which have mitigation costs well above the $25/t CO2e threshold; the introduction of diesel vehicles (passenger cars and SUVs), whose mitigation costs were also high; and other travel demand management interventions, such as parking restrictions or congestion charges, on which insufficient information was available. Besides railway freight transport, which was assessed as one of the MEDEC interventions, the redevelopment of railway passenger trans- port in Mexico is also a promising, although smaller, mitigation option. Barriers to Mitigating Greenhouse Gas Emissions Implementation of the aforementioned interventions faces political, finan- cial, and social barriers. An important barrier for the optimization of urban transportation systems is the lack of coordination between agencies work- ing on environment, urban planning, and transport issues, as well as across different levels of governments. The typical result has been an oversupply of low-quality public transport and a lack of overall metropolitan develop- ment and mobility planning. Mass transit interventions also face the challenge of changing the insti- tutional framework and the stakeholders who work in this subsector. In particular, the large number of buses and small concessions for different routes has made it difficult to implement BRT systems or mass transit opti- Chapter 5: Transport 71 mization programs in Mexico. Successful implementation of BRT requires negotiations with route concessionaires who operate along prospective BRT corridors. Demand studies that identify the optimal location for the corridors and technical advice for system planning and operation are also needed. The most important barrier to vehicular restriction through inspection and maintenance is the lack of enforcement of federal environmental regu- lations for vehicle emissions, which must be implemented at the state level. As the primary benefit of vehicle inspection programs is on the reduction of local pollutants, the best way to enforce compliance is through public education about health impacts. Vehicle inspection programs can also have an important impact on reducing CO2e emissions by restricting the use of old vehicles that are both highly polluting and energy inefficient. Conclusions Reliance on private vehicles is not a sustainable transport option for Mex- ico. Although the increase in vehicle ownership in Mexico is probably inevi- table, it is possible to substantially reduce vehicle emissions through policies that improve vehicle efficiency, expand and improve public transportation, and optimize the movement of freight. The analysis concludes that all nine transport measures evaluated produce financial and economic savings, as well as yield other benefits, including reduced congestion, pollution, and greenhouse gas emissions. Because many transport options are interdependent and complemen- tary, it is important that transport issues be addressed in a holistic and programmatic approach rather than as a set of individual measures. Given the historical and future urbanization pattern in Mexico, urban transport and related issues of land-use planning will be a critical determinant of the country's transport energy use and associated emissions. Improving urban transportation will require developing mechanisms that integrate public transportation with urban planning and development efforts by the federal, state, and municipal governments. Although low-carbon development can be an additional consideration, the underlying drivers of sustainable trans- port policies will be efficient, safe, and clean access to school, work, shop- ping, and neighborhoods. Notes 1. The analysis of all transport sector interventions was carried out by the trans- port team. 2. The standard evaluated for Mexico is similar to the vehicle efficiency standard for new vehicles in the United States known as the corporate average fuel econ- omy (CAFE) standard. CHAPTER 6 Agriculture and Forestry T he agriculture and forestry sector generated about 135 Mt CO2e of greenhouse gas emissions in 2002 (PECC 2009), accounting for 21 per- cent of Mexico's total emissions. Two-thirds of the emissions were gener- ated by the forestry subsector; the remainder came from agriculture and livestock. This chapter examines a set of low-carbon interventions in the rural sector that reduces emissions from agriculture and forestry. It also presents several biomass energy interventions that use crops, crop residues, and sustainable fuelwood that reduce emissions in other sectors (transport, power, industry, and residential) by replacing fossil fuel energy. Mexico has a surface of 198 million hectares, of which 15 percent is used for agricultural crops and 58 percent is used for some form of grazing. Forests cover 67 million hectares, or 34 percent of the country. In 2006 the agricultural, forestry, and fishing sectors accounted for 5.4 percent of GDP (SAGARPA 2007a). The forestry subsector has been identified as one of the key areas for greenhouse gas mitigation in Mexico (Masera, Cerón, and Ordóñez 2001), in terms of both avoiding emissions through such actions as reducing defor- estation and capturing carbon in forest soils and biomass. There are fewer cost-effective measures for reducing greenhouse gas emis- sions in the agricultural sector. Minimum-tillage crop production appears to be a promising technology for Mexico to reduce energy use and aid in soil carbon sequestration. The production of liquid biofuels faces financial and economic barriers, and more research and development needs to be conducted on other low-carbon measures in the agricultural and livestock sectors. Bioenergy produced by both forestry and agriculture systems represents 8 percent of the primary energy consumption in Mexico (408 petajoules), mainly from the consumption of fuelwood (78 percent) and sugarcane bagasse (22 percent). An estimated 25 million people in rural areas of Mex- 73 74 Low-Carbon Development for Mexico ico--one-fourth of Mexican households--use fuelwood, mainly for cook- ing.1 Fuelwood is also used in many small industries, such as pottery and brick-making. Sugarcane bagasse is the basic fuel used in sugar mills. Mod- ern bioenergy has great potential for reducing greenhouse gas emissions and contributing to medium- and long-term energy diversification in Mexico. The Baseline Scenario Under the baseline scenario, emissions from the agriculture and forestry sector decrease slightly, from about 100 Mt CO2e a year in 2008 to 87 Mt CO2e in 2030. Agriculture and livestock accounted for 7 percent of green- house gas emissions in Mexico in 2002 (SEMARNAT and INE 2006a); the baseline scenario assumes that these emissions remain at roughly the same levels in absolute terms. The forestry subsector contributes about 14 per- cent of greenhouse gas emissions, mostly because of deforestation. The baseline assumes that greenhouse gas emissions from the forestry sector remain constant in absolute terms but also that, based on current reforesta- tion and afforestation trends, net forestry emissions decline slightly over the coming decades. Historically, three patterns of deforestation have been observed in Mex- ico: (a) clearing of temperate coniferous, tropical, and subtropical forests for subsistence agriculture and cattle grazing; (b) deforestation in tropical forests associated with the settling of land under the agrarian reform; and (c) land clearing for commercial large-scale cattle ranching and farming. Deforestation by small farmers has been decreasing over the past 20 years because of urban migration and because government-supported land settle- ment has officially ended.2 The clearing of forests for large-scale agriculture may be more or less intense in the future depending on market conditions and government land policy. The MEDEC Low-Carbon Scenario The study identified and evaluated mitigation interventions within the for- estry, agriculture and livestock, and bioenergy subsectors.3 Twelve interven- tions met the criteria for emissions reduction, cost less than $25/t CO2e, and were judged to be feasible to implement based on existing programs and pilots in Mexico and other countries. The potential for all agriculture and forestry sector interventions was assessed by means of a geographic infor- mation system that included the main features of Mexico's territory (fig- ure 6.1). All interventions comply with designated land-use regulations, including adequate set-aside areas for conservation, and avoid competition between food and bioenergy production. Forestry The MEDEC forestry interventions include a range of biomass production and forest management programs. Interventions in this subsector can be Chapter 6: Agriculture and Forestry 75 Figure 6.1 Geographic Distribution of Agriculture and Forestry Sector Interventions 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 3,500,000 UNITED STATES 3,000,000 MEXICO Gulf of Mexico 2,500,000 BIOFUELS Sugarcane ethanol Palm oil biodiesel Jatropha biodiesel Sorghum ethanol Pacific Ocean 2,000,000 AFFORESTATION Afforestation BELIZE REDD Environmental services GUATEMALA Wildlife management HONDURAS Sustainable forest management EL SALVADOR 0 125 250 500 75 1,000 Km 1:12,500,000 Sources: Ghilardi and Guerrero 2009, based on REMBIO 2008; INEGI 1995, 2000, 2002. Created in ArcGIS 9.2 using ArcMap. Note: Sustainable forest management includes all interventions that involve a productive use of biomass (biomass electricity, fuelwood co-firing, charcoal production, and forest management). Areas suitable for reforestation and restoration or for zero-tillage maize are not included. The area depicted for afforestation assumes eucalyptus plantations. Jatropha biodiesel, an intervention not included in the MEDEC scenario because of its high net cost of mitigation, is included. divided into those that reduce emissions from deforestation and forest deg- radation (REDD)4 and those that contribute to the reforestation or affores- tation of deforested or degraded land (table 6.1). REDD interventions can be divided into those that entail some form of productive use of the woody biomass and those that do not. When the woody biomass is used as a fuel (biomass electricity, fuelwood co-firing, and charcoal production interven- tions), it displaces the use of fossil fuels. Those interventions therefore reduce emissions through both a REDD and a bioenergy effect. Together the six REDD interventions would involve the management, protection, or both of 65 million hectares of forests, resulting in a zero rate of deforesta- tion and degradation in 2030.5 Biomass electricity. Biomass electricity entails the generation of electricity from fuelwood produced in sustainably managed forests. It is assumed that 76 Low-Carbon Development for Mexico timber, which represents 30 percent of wood production, is sold for other purposes and that sustainable forest thinning and logging residues are used as fuelwood. Sustainable forest management would be accompanied by measures to stop deforestation and forest degradation. Two hundred small power plants (with a capacity of 25 MW each) would be built in regions with native forests. This labor-intensive intervention could create about 200,000 jobs throughout the country. Although there is no experience with this kind of generation technology in Mexico, its use is widespread in other countries, including Austria, Sweden, and the United States. Fuelwood co-firing retrofitting. Fuelwood co-firing, which combines up to 20 percent wood with fossil fuels, uses fuelwood produced under the same circumstances as in biomass electricity that is then mixed with coal to gen- erate electricity. Of the three coal-fired power plants in Mexico, the 2,100 MW Petacalco plant (in Guerrero state) is the only one located near forests that can provide an adequate fuelwood supply. The intervention is therefore limited to this plant and involves retrofitting the power plant for handling fuelwood and mixing it with coal. Charcoal production. About 0.6 million tons of charcoal are produced each year in Mexico to meet the needs of the residential and commercial sectors. This intervention increases charcoal production 13-fold to meet increasing urban demands and replace 75 percent of coke demand in industry. It also replaces traditional earthern kilns with more efficient brick kilns. It is assumed that efficient charcoal kilns would supply 70 percent of urban charcoal consumption by 2030 and 100 percent of industrial demand. There are currently no specific government programs for the implementa- tion of efficient brick charcoal kilns. The technology and practice is wide- spread internationally, however. Like the previous two interventions, charcoal production assumes that sustainable forest management practices reduce deforestation and forest degradation. Forest management. Forest management is the last of the four interventions that reduce deforestation and forest degradation through the sustainable pro- duction of woody biomass. Unlike the previous three interventions, which use biomass as a fuel and therefore substitute for the fossil fuels, in this inter- vention woody biomass is used as timber or for other nonenergy purposes. Wildlife management. Wildlife management would involve the scaling up of activities and experiences of a current program of the federal government that provides certification for wildlife management units (known by their acronym in Spanish, UMAs). It is assumed that the income from wildlife management (mainly in the form of hunting permits) would enable UMAs to reduce deforestation and forest degradation. Payment for environmental services. Payment for environmental services would expand a current government program that provides direct cash Chapter 6: Agriculture and Forestry 77 payments to forest owners in exchange for forest protection. It is assumed that the payment would be equal to the opportunity cost of using the land for other purposes and that it would enable the owners to put in place mechanisms to reduce deforestation and degradation. The first six interventions aim to reduce deforestation and forest degrada- tion through the sustainable production of biomass or other mechanisms. Two other interventions, afforestation (commercial tree plantations) and reforestation and restoration, seek to restore forests in areas that have already been deforested. Afforestation. This intervention entails the planting of eucalyptus and pine species on 1.5 million hectares of land for the production of marketable timber for sawmills, paper mills, poles, and fuelwood. The survival rate for trees planted on these plantations is assumed to achieve the observed rate over the past several years of 50 percent. It is also assumed that 50 percent of the carbon content of each harvest is emitted to the atmosphere. Reforestation and restoration. This intervention involves the planting of native species in areas in which native vegetation has been cleared. Unlike afforestation, reforestation and restoration does not assume any productive utilization of forest products. Whereas afforestation is assumed to use high- quality soils, reforestation and restoration use lower-grade soils (with lower opportunity costs). Agriculture The agriculture subsector includes changes in maize production practices, and the production of biofuels. Maize has been the most important crop in Mexico since pre-Columbian times. SIACON (2007) reports that some 8.2 million hectares were sown with maize in 2006, equivalent to 38 per- cent of Mexico's total planted area. Zero-tillage maize. This intervention involves an increase in the sequestra- tion of carbon in the soil (as well as a minor reduction in diesel consump- tion). Zero-tillage is defined as the tillage system that keeps at least 30 percent of the surface covered with harvest residues, cover, or litter after sowing.6 The intervention assumes that the maize-planted area under zero- tillage increases from 0.5 million hectares in 2008 to 3 million hectares in 2030, reaching 50 percent of the commercial maize cropping area. The accumulation and decomposition of plant residues leads to an increase in organic carbon soil sequestration. The reduction of diesel consumption by tractors also reduces emissions slightly. The liquid biofuel category includes current-generation ethanol and bio- diesel technologies that substitute for gasoline and diesel from petroleum. For all of the biofuel interventions, it is assumed that the land required for feedstock production comes from pastures and grasslands and that land 78 Low-Carbon Development for Mexico cannot be converted from other crops, forests, or protected lands. Some level of indirect competition is, however, impossible to avoid (for example, the displacement of pasture land may increase pasture prices and lead to more agricultural land being used for pasture). Sugarcane ethanol. This intervention involves the installation of 97 ethanol plants, each producing 170 million liters a year. Each plant would require the production of sugarcane from about 30,000 hectares. The intervention assumes that the use of bagasse would allow the plants to be self-sufficient in energy and to sell surplus electricity to the grid. This intervention would reduce greenhouse gas emissions by displacing gasoline use by ethanol in transport and other fossil fuels by bagasse in the electricity sector. Sorghum ethanol. This intervention involves the construction of 19 ethanol plants of 165 million liters per year per plant. Each ethanol plant would require the production of sorghum from about 160,000 hectares of land. An important source of revenue in this intervention comes from the sale of dried distillers grains, a by-product of ethanol production. Palm oil biodiesel. This alternative entails the installation of 21 processing plants with a production capacity of about 34,000 tons of biodiesel per year per plant. Each plant requires about 10,000 hectares of palm planta- tions. Revenues are generated from biodiesel production and the sale of palm oil cake, which can be used as cattle feed. Summary Successful implementation of all agriculture and forestry measures would mitigate about 1,700 Mt CO2e between 2008 and 2030. The six REDD interventions have a combined reduction potential of 1,120 Mt CO2e, or two-thirds of sectoral emission reductions. Other interventions with high greenhouse gas mitigation potential are reforestation and restoration (10 percent), afforestation (9 percent), and sugarcane-based ethanol (9 per- cent). Together these nine alternatives account for 94 percent of mitigation potential in the sector. The land use, land-use change, and forestry (LULUCF) emissions reduc- tions (63 percent from reduced emissions, 37 percent from carbon capture) of the 12 agriculture and forestry interventions would amount to 927 Mt of CO2e, accounting for 54 percent of the total impact of these interven- tions. The remaining 46 percent of emissions reductions would take place in other sectors, through the substitution of fossil fuels by bioenergy in the electricity, industrial, and transport sectors. The MEDEC scenario implies that LULUCF emissions in Mexico would become negative in year 2030-- that is, Mexico would become a net sink in terms of LULUCF (figure 6.2). All of the forestry interventions have large reduction potential. Their reduction costs range from a net cost of $18/t CO2e to a net benefit of $20/t CO2e (table 6.1). The REDD and reforestation projects have significant Chapter 6: Agriculture and Forestry 79 Figure 6.2 LULUCF CO2e Emissions under the MEDEC Scenario 100 baseline emissions (Mt CO2e/year) othera environmental services wildlife management 50 reforestation & restoration afforestation biomass electricity MEDEC emissions forest management zero-tillage maize 0 2008 2015 2020 2025 2030 year Source: Authors. a. "Other" includes charcoal production and fuelwood co-firing, which have a small impact in the reduction of LULUCF emissions. Note that many of the agriculture and forestry interventions produce biomass that substitutes for fossil fuel use in other sectors, including electricity (biomass), transport (biofuels), and heat applications, and are thus shown in other sector emission graphs. environmental benefits, which were not included in the economic analysis. These co-benefits should be considered (they are discussed in chapter 7). In terms of economic benefits per ton of CO2e reduced, the most efficient interventions are charcoal production ($20/t) and zero-tillage maize ($15/t). Other interventions in the agriculture and forestry sector were consid- ered and assessed but ultimately not included in the MEDEC scenario, because they did not meet the MEDEC criteria, because data were not available, or for other reasons. Methane from livestock production, which can be reduced using biodigestors, is a major component of greenhouse gas emissions. Too little information was available on biodigestors for pig or dairy farms, however, and their mitigation potential appeared relatively low. Several crops for biofuels were considered, but adequate data were available for only four crops--the three assessed above plus jatropha, for the production of biodiesel. Jatropha was not included because of its high mitigation costs. Several technologies for generating electricity from bio- mass were considered, including gasification in several scales. A standard boiler and vapor turbine was finally chosen, for economic reasons. Barriers to Mitigating Greenhouse Gas Emissions Although the Mexican government has increased budgets and established new programs in the forestry subsector over the past few years, significant barriers to the implementation of forestry activities remain. Reforestation 80 Low-Carbon Development for Mexico Table 6.1 Summary of MEDEC Interventions in the Agriculture and Forestry Sector Surface area Maximum annual Net cost or benefit (million emissions reduction of mitigation Intervention hectares) (Mt CO2e/year) ($/t CO2e) Agriculture Zero-tillage maize (best practice) 2.5 2.2 15.3 (benefit) Biofuel production Sugarcane ethanol 1.5 16.8 11.3 (cost) Sorghum ethanol 3.2 5.1 5.3 (cost) Palm oil biodiesel 0.2 2.4 6.4 (cost) Forestry REDD With productive use of biomass Biomass electricity 11.4 35.1 2.4 (benefit) Fuelwood co-firing 0.6 2.4 7.3 (cost) Charcoal production 9.0 22.6 19.6 (benefit) Forest management 9.0 7.8 12.7 (benefit) Without productive use of biomass Wildlife management 30.0 27.0 17.8 (cost) Payment for environmental 5.0 4.4 18.1 (cost) services Reforestation/afforestation Reforestation and restoration 4.5 22.4 9.3 (cost) Afforestation 1.6 13.8 8.4 (cost) Source: Authors. and restoration programs could achieve greater success with selected and certified sources of seeds and improved quality of seedlings, training for landowners, and better selection of planting sites. Management of native forests could be greatly improved through closer supervision by forest ser- vices; control of illegal logging, fires, and pests; and improved thinning practices. Most of these issues could be addressed through capacity building at all levels, including training programs on seed collection and nursery and forest management, which are among the most urgent measures required. As most forests in Mexico are under some form of community ownership, the implementation of all forestry interventions involves the design of ade- quate institutional frameworks for community participation. Charcoal production would encounter some barriers to implementation. These include the lack of a dedicated government program, cultural resis- tance to the adoption of new production technologies, the need for training and technical assistance to ensure proper use and maintenance of the new technology, lack of capital to invest in kilns and equipment, and the short- age of qualified and certified kiln builders. Chapter 6: Agriculture and Forestry 81 The zero-tillage maize farming system is used in Mexico, but there are a number of barriers to its wider implementation. Most farmers are not familiar with it; there is not a well-developed market and market-support structure for associated agricultural services, such as spraying and direct sowing; and it runs counter to the traditional use of maize stubble as forage for cattle. Conclusions The interventions in forestry account for almost three-fourths of the mitiga- tion potential in the agriculture and forestry sector, yielding among the largest mitigation gains in Mexico. The analysis does not consider the envi- ronmental benefits (such as biodiversity conservation) associated with maintaining and increasing forest cover. The successful implementation of most forestry subsector interventions depends on changes in forest manage- ment, public funding, and the development of a market for sustainable for- est products. Climate change considerations could provide additional incentives for forestry programs in Mexico. The estimated cost to achieve REDD through the payment of environmental services is about $18/t CO2e. In contrast, forest management interventions for bioenergy or other pur- poses, which also produce REDD benefits, have net benefits rather than costs. Bioenergy has significant potential for reducing emissions at low costs. The lowest-cost intervention in the agriculture and forestry sector is charcoal production; the highest annual mitigation is achieved by biomass electricity. Liquid biofuels interventions other than sugarcane ethanol were esti- mated to have limited reduction potential without impinging on land used for food crops, forests, or conservation lands. (There was an explicit assumption not to include lands for biofuels that are currently being used for other crops, forests, or other conservation purposes; in practice, it is difficult to control land conversion if there are profitable uses for the land.) Mexican production costs for sugarcane are significantly above world lev- els, requiring domestic subsidies for sugar producers. Unless production costs can be dramatically reduced, Mexican ethanol will not be competitive with ethanol produced in other countries. If all the agriculture and forestry interventions were implemented, the sector could provide about one-third of total national emissions reductions over the coming two decades. About two-thirds of the reduction could be achieved at net costs of less than $10/t CO2e. Notes 1. An intervention that addresses improved biomass cookstoves is discussed in chapter 4. 2. Land reform in Mexico, which began in the 1930s and continued through 1992, provided more than 100 million hectares--almost half of the national territory 82 Low-Carbon Development for Mexico and some two-thirds of the country's total rural property--to rural Mexicans, who formed 30,000 ejidos (cooperatives) and communities. The land transfer included certain restrictions, such as an obligation to actively cultivate the land and a prohibition on the sale or rental of the land, in addition to restrictions on intergenerational land transfer. Some of the state-driven land colonization proj- ects were disappointing: vast forest areas were cleared for agricultural settle- ments that never achieved their intended production levels. Forest and natural ecosystems were cleared not only for agricultural purposes but also for pasture and for tourism development. These projects favored vested interests and paid little attention to environmental consequences. Unlike elsewhere in Latin Amer- ica, land distribution in Mexico contributed to social stability during the 1970s and 1980s. The cost of Mexican social peace was paid for with the natural capital of the lowland tropics, however. In 1992 the agrarian legal framework was updated and a series of legal and policy reforms--the National Certification Program of Ejido Rights and Urban Lots [PROCEDE]--was introduced, includ- ing a program of land rights regularization targeting the "social sector." Among other things, the program authorized ejidos to form joint ventures with private companies, lifted the prohibition on land rental, and authorized land sales with some restrictions intended to keep the plot within the hands of the local com- munity (de Dinechin and Larson 2007). 3. All interventions in this chapter were analyzed by the land-use and bioenergy team. The electricity sector team participated in biomass electricity and in fuel- wood co-firing. 4. For the purposes of this study, deforestation is defined as the change from forest to any other category of land use. This study also assumes that all of the above- ground biomass of the forest is converted into CO2e. By contrast, land degrada- tion is assumed to result in only a partial loss of the forest biomass. 5. Since 2001 the government has designated an ever-increasing budget to the forestry sector, and reduction of deforestation and forest degradation are key components of the National Forest Strategy for 2002­25 (CONAFOR 2001). In 2007 the various support programs for forest development were united into a single program known as Proarbol. The program includes direct transfer payments to landowners, through various subprograms designed to conserve forests, restore degraded areas, and reforest land, including through financial assistance to communities for forest fire control, pest management, and the introduction of efficient fuelwood stoves in rural areas. The MEDEC scenario assumes that this program would be continued and expanded. 6. Zero- or minimum tillage has been implemented in Mexico since the late 1970s, under scientific guidance. Its benefits include less soil erosion; higher moisture retention; lower soil compaction; lower energy consumption; improved physical, chemical, and biological properties of the soil; reduction of weeds and absence of new weeds; reduced production costs; greater biological activity in the soil; better development of crop roots; and reduction of water deficiency (Navarro 2000; Pitty 1997; Rojas, Mora, and Rodríguez 2002; SAGARPA 2007a). CHAPTER 7 A Low-Carbon Scenario for Mexico T his chapter presents the aggregate results of the sectoral interventions evaluated under MEDEC, which are used as inputs to an alternative emissions modeling scenario for 2030. This chapter also compares the net costs (benefits) of the low-carbon interventions across sectors in the form of a marginal abatement cost curve. The chapter concludes by presenting the results from a dynamic computable general equilibrium model used to examine the potential impact of the MEDEC interventions on the Mexican economy. The Carbon Path under the Baseline Scenario To generate a low-carbon scenario for Mexico, it is necessary to first assess what would happen under the baseline case with no consideration for cli- mate change and assuming an effective carbon price of zero. For this sce- nario, the study used the LEAP (Long-range Energy Alternatives Planning) model to account for emissions from energy production and consumption activities.1 Emissions from activities not associated with energy, such as industrial processes and land-use, were modeled separately. The baseline scenario is based on macroeconomic assumptions that are consistent with those of the government of Mexico, including average annual GDP growth of 3.6 percent,2 average annual population growth of 0.6 percent, and a set of fuel prices that correspond to a West Texas Inter- mediate oil price of about $53 per barrel in 2009, which increases slightly in real terms over the period of analysis to 2030. The baseline scenario takes into account both historical trends and the impact of sector policies and programs that are already under implementation (table 7.1). Based on these assumptions, the baseline scenario estimates that total greenhouse gas emissions in Mexico will grow from 659 Mt CO2e in 2008 83 84 Low-Carbon Development for Mexico Table 7.1 Key Assumptions and Indicators for Baseline Scenario Parameter 2008 2030 Assumptions and trends Population 106.7 million 120.9 million 0.6% annual growth Urbanization 77% 85% Official projections GDP $734 billion $1.599 trillion 3.6% annual growth CO2e emissions Electric power 142 Mt 322 Mt Current growth in power generation is mainly (22%) (28%) based on imported natural gas; baseline scenario foresees a continued increase but a slowdown in new natural gas­based capacity and an increase in the contribution of coal (mostly imported) in the power sector energy mix End-use fuel 107 Mt 160 Mt Fuel consumption in all energy end-use sectors consumption (16%) (14%) except transport is expected to grow at below- for heat GDP growth rates Transport 167 Mt 347 Mt Increased ownership and use of private cars due (25%) (30%) to income growth, urban sprawl, and the availability of cheap second-hand cars imported from the United States Land use 100 Mt 87 Mt A slowdown in deforestation rate is assumed (15%) (8%) Waste and 143 Mt 221 Mt Increased raw materials consumption and waste industrial (22%) (19%) production due to continued income growth and processes urbanization Total 659 Mt 1,137 Mt Source: Authors. Figure 7.1 Greenhouse Gas Emissions under the Baseline Scenario, by Source 1,200 land use 1,000 emissions (Mt CO2e/year) industrial processes, waste, flaring, and 800 fugitive emissions heat 600 transport 400 electricity 200 0 2008 2015 2020 2025 2030 year Source: Authors. Chapter 7: A Low-Carbon Scenario for Mexico 85 to 1,137 Mt in 2030 (figure 7.1). Although this is a substantial increase in total emissions, it reflects a reduction in GDP carbon intensity, from 0.98 kg CO2e to 0.74 kg CO2e per dollar. However, per capita carbon emissions would increase from 6.75 t CO2e to 9.84 t CO2e, reflecting to a large extent the effect of rising income on energy and materials consumption.3 Most of the emissions growth under the baseline takes place in the two sectors that are already the largest contributors, transport and electric power. The share of the transport sector in total emissions is projected to increase from 21 percent in 2008 to 27 percent in 2030; emissions by the power sector are projected to grow from 18 percent to 24 percent of total emissions. Land-use emissions are projected to decrease in absolute terms from 100 Mt to 87 Mt a year, following the historical trend in Mexico of a reduction of emissions from deforestation. The MEDEC Alternative Low-Carbon Path The alternative MEDEC scenario is built on the same macroeconomic assumptions as the baseline for GDP growth, population growth, and the rate of urbanization. The key objective of the MEDEC low-carbon sce- nario is to achieve a similar level of economic growth with a significantly smaller carbon footprint. This is achieved by pursuing cost-effective low- carbon interventions through policies and investments. Forty interven- tions from five sectors (see table 1.1) are included in the MEDEC scenario, all of which meet the criteria outlined in the evaluation methodology described in box 1.1. The MEDEC scenario reflects the emissions reduc- tions and corresponding implications of implementing only these 40 interventions. Under the MEDEC scenario, sector policies are assumed to be adopted that maximize the benefits of no-regret low-carbon interventions; to that extent, greenhouse gas emission mitigation becomes an explicit policy objective (table 7.2). In the electric power sector, for example, investments and policies that promote low-carbon alternatives such as cogeneration, wind, geothermal, and hydropower would be pursued. In oil and gas, the objective would be to improve the efficiency of Pemex facilities and to reduce the leakage of gas in distribution and storage. In the energy end- use sectors, investments and policies would mainly scale up and accelerate ongoing initiatives by the government and the private sector, building on previous successes. In transport, investments and policy measures would be pursued to increase the modal share of public transport and other alterna- tives to private vehicles in urban areas, improve vehicle fleet efficiency, and optimize the movement of freight. In agriculture and forestry, the prior- ity would be to strengthen programs for reforestation and afforestation, reduce deforestation and degradation, and promote the use of sustainable biomass energy. Implementation of the MEDEC interventions would stabilize Mexico's greenhouse gas emissions at roughly 2008 levels over the period to 2030, 86 Low-Carbon Development for Mexico Table 7.2 Results and Key Sector Developments under the MEDEC Scenario Cumulative GHG Emissions emissions reduction reduction 2008­30 achieved in 2030 Key sector developments compared with Sector (Mt CO2e) (Mt CO2e/year) baseline scenario Electric 876 91 Reduced fossil fuel consumption in power power (17%) generation by increasing the utilization of low-carbon renewable energy technologies Oil and 435 30 Reductions in gas leakage in natural gas gas (8%) transportation, cogeneration in Pemex, and refinery efficiency Energy 857 63 Reduced electricity demand by tightening end-use (16%) minimum energy performance standards and accelerating programs to replace inefficient appliances, lights, and industrial motors; reduced fuel demand by scaling up solar water heating in households and cogeneration in industries; lower CO2 and other emissions by accelerating the dissemination of improved fuelwood cookstoves Trans- 1,422 131 Lower fossil fuel demand by promoting higher port (27%) density urban growth, efficient mass transit, nonmotorized transport, vehicle fleet effi- ciency, and improved logistics and increased use of rail for freight transport Agricul- 1,706 162 Expanded programs for reducing deforesta- ture and (32%) tion and degradation, reforestation and forestry afforestation, forest management, and sustainable fuelwood and biomass energy production Total 5,296 477 Steady economic growth without increasing (100%) Mexico's carbon footprint and with significant co-benefits Source: Authors. Note: GHG = greenhouse gas. reducing CO2e emissions by about 477 Mt relative to the baseline (fig- ure 7.2). Under the MEDEC low-carbon scenario, it is possible for income in Mexico to grow steadily while maintaining carbon emissions at roughly the same level.4 The three sectors that currently account for the majority of greenhouse gas emissions also have the greatest potential for cost-effective emissions reduction under the low-carbon scenario.5 Of total cumulative greenhouse gas emissions reduction in the MEDEC scenario, 27 percent come from transport, 17 percent from electricity generation, and 32 percent from agriculture and forestry. Measures in the energy end-use sectors, mostly resulting in reduced electricity demand, account for about 16 percent of the cumulative greenhouse gas emissions reduction. The oil and gas industry contributes the remaining 8 percent (table 7.2).6 Chapter 7: A Low-Carbon Scenario for Mexico 87 Figure 7.2 Projected Emissions Reduction by Sector under the MEDEC Low-Carbon Scenario 1,200 agriculture and forestry 1,000 ne oil and gas emissions (Mt CO2e/year) ba s e li energy end-use 800 transport electric power 600 400 MEDEC emissions 200 0 2008 2015 2020 2025 2030 year Source: Authors. The Net Costs (Benefits) of Emissions Reduction One of the main objectives of the MEDEC study is to quantify the benefits and costs of potential greenhouse gas mitigation options using a consistent methodology. In this way, MEDEC interventions from different sectors can be compared based on a robust economic analysis (see box 1.1 and annex B). The MEDEC study is not a comprehensive assessment of possible mitigation interventions in Mexico.7 Other promising low-carbon interventions could be subjected to a similar type of analysis to compare their reduction poten- tial, costs, and investment requirements with the 40 MEDEC interventions. The study took a two-part approach to determining the net costs (ben- efits) of the low-carbon interventions. In the first step, the analysis is limited to measurable financial and economic costs and benefits--such as the level of new investment, avoided investments, operating costs, and a stream of benefits, such as the value of energy savings--for all of the important stake- holders. In a second step, the externality costs and benefits are identified and evaluated. The approach, similar to that used in a typical World Bank financial and economic appraisal of an investment project, would include such results as profitability, income generation, and an assessment of the social and environmental externalities (both positive and negative). The quantitative environmental externality analysis undertaken for the MEDEC study was limited to the health impacts associated with reducing local air pollution (primarily for transport, household fuel use, and electric power generation). Because comparable data were not available for most interventions, and because only air pollution externalities were assessed, the environmental externality results are not included in the marginal abate- ment cost curve; these results are reported separately. Other costs and 88 Low-Carbon Development for Mexico benefits that were not included in the economic analysis for MEDEC inter- ventions include transaction costs, such as the political cost of passing and implementing new legislation, and other more tangible but also difficult to quantify costs, such as the need to inform consumers, develop public or private institutions, and build new businesses and markets. Many interventions with positive economic benefits are not being imple- mented and are not likely to be implemented until key barriers are over- come. Some of the major barriers inhibiting the implementation of MEDEC interventions were discussed in the sector analysis chapters (chapters 2­6). A number of the broader policy and investment barriers are discussed in chapter 8. Additional work is needed to assess the institutional, behavioral, and other barriers that inhibit low-carbon interventions from being imple- mented and how such barriers can be overcome. The results of the economic evaluation are summarized in the combined marginal abatement cost curve (figure 7.3). Interventions in the upper half of the curve have net incremental costs; interventions in the lower half have net incremental benefits. The area of each bar represents the total net cost (benefit) of a MEDEC intervention. Some bars are either too narrow (small emissions abatement, such as efficient street lighting) or too small (low unit net costs or benefits, such as biogas) to be visible. Figure 7.3 Marginal Abatement Cost Curve 100 net mitigation costs environmental services reforestation & restoration nonresidential air conditioning wildlife management residential air conditioning cogeneration in industry border vehicle inspection refinery efficiency bus system optimization fuel economy standards bagasse cogeneration nonmotorized transport sugarcane ethanol residential refrigeration cogeneration in Pemex nonresidential lighting gas leakage reduction fuelwood co-firing improved cookstoves palm oil biodiesel road freight logistics charcoal production sorghum ethanol forest management urban densification solar water heating biomass electricity residential lighting zero-tillage maize industrial motors geothermal 50 bus rapid transit afforestation small hydro utility efficiency I&M in 21 cities railway freight street lighting wind power biogas ($/t CO2e) 0 net mitigation benefits 50 100 0 1,000 2,000 3,000 4,000 5,000 cumulative mitigation 2009­30 (Mt CO2e) Source: Authors, based on MEDEC study results. Chapter 7: A Low-Carbon Scenario for Mexico 89 Among the interventions with the greatest total emissions abatement potential are geothermal electricity (393 Mt CO2e), cogeneration in Pemex (387 Mt), biomass electricity (376 Mt), bus system optimization (360 Mt), wind power (240 Mt), improved cookstoves (222 Mt), and higher fuel economy standards (195 Mt). Together these seven interventions account for about 40 percent of the overall emissions-reduction potential of all MEDEC interventions. The interventions with the highest benefit per ton of CO2e abated are on the lefthand side of the marginal abatement cost curve. They include bus system optimization, road and railway freight logistics optimization, fuel economy standards, border vehicle inspection, urban densification, improved residential lighting, cogeneration in Pemex, and electric utility efficiency improvements. Twenty-six interventions have negative net costs (that is, net benefits); together they account for about 65 percent of the overall emissions reduc- tion potential of the interventions analyzed. Thirty-five interventions (including the 26 no-regrets interventions) could be achieved at a cost at or below $10/t CO2e. Together they account for 82 percent of the total emis- sions reduction potential of MEDEC interventions. Putting the reduction potential and net incremental cost criteria together allows a first-order prioritization of low-carbon interventions (figure 7.4). All other things equal, the objective of a low-carbon program would be to promote projects with high emissions reduction potential and a net eco- nomic benefit. Figure 7.4 Criteria for Selecting Low-Carbon Interventions net benefit net benefit net benefit low potential high potential net cost net cost low potential high potential net cost /low potential potential Source: Authors. Macroeconomic Impact of MEDEC Interventions The macroeconomic model developed by Boyd and Ibarrarán (2008) was used to assess the potential impacts of implementing MEDEC interventions on the Mexican economy. The outputs from MEDEC interventions (invest- ment, operating and other costs, benefits) were scaled and integrated into a 90 Low-Carbon Development for Mexico computable general equilibrium (CGE) model of the Mexican economy. The results from the MEDEC low-carbon scenario were compared in the CGE model with a baseline scenario using the same growth rate and other underlying variables. The CGE analysis allows an assessment of the impact of MEDEC low-carbon interventions on economic growth, the distribution of income, the level of economic welfare, the level of government revenue, the balance of trade, and the size of investment and capital in Mexico between 2008 and 2030. The overall economic impact of implementing the MEDEC interventions was found to increase the overall level of GDP by as much as 5 percent in 2030. Under the MEDEC scenario, the level of overall investment in the economy climbs considerably, as does the final level of the capital stock. In the model, the respective investments by the government and the pri- vate sector are calculated according to the MEDEC interventions; the pro- duction functions in the model are revised over time to reflect the general increase in the efficiency of energy use. Government revenue rises slightly in the MEDEC scenario, indicating that the negative effect of subsidizing vari- ous low-carbon programs is more than compensated for by the increased aggregate tax revenues generated by an increase in the level of GDP. The overall increase in GDP is by no means evenly distributed: the agricultural and forestry sectors are by far the biggest winners. The impact on the level of welfare is progressive: per capita income grows for all income groups, with the greatest increase accruing to the lowest deciles (table 7.3). Table 7.3 Combined Effect of MEDEC Interventions on the Mexican Economy Percentage change with respect to the baseline Parameter 2020 2030 GDP 2.06 5.58 Total investment under MEDEC scenario 7.04 15.82 Government spending under MEDEC scenario ­0.70 1.35 Final capital stock in the economy -- 7.55 Cumulative welfare Deciles 1­2 -- 3.19 Deciles 3­5 -- 2.96 Deciles 6­8 -- 1.87 Deciles 9­10 -- 0.84 Source: Authors. Note: -- = not available. Chapter 7: A Low-Carbon Scenario for Mexico 91 Notes 1. LEAP is a Windows-based software system designed for bottom-up energy and environmental policy analysis. It was developed and supported by the Stock- holm Environment Institute U.S. Center (see www.energycommunity.org/). 2. The Mexican government changed its planning prospects to reflect the cur- rent financial crisis. It is considering a lower GDP growth rate to 2017. Given the long-term nature of the MEDEC modeling exercise, the study continues to assume the same long-run average GDP growth rate. 3. In 2007 the GDP carbon intensities of the United States and Japan were 0.53 kg CO2e and 0.30 kg CO2e per dollar, respectively; per capita CO2e emissions were 24 t CO2 and 11 t CO2, respectively. 4. The magnitude of emissions reduction under the MEDEC low-carbon scenario is not highly dependent on the baseline assumption of a substantial increase in coal consumption. If natural gas were the primary incremental fuel for power generation under the baseline, the majority of MEDEC low-carbon interventions in the electricity sector would substitute for natural gas, thus slightly reducing the emissions reduction potential relative to coal. Given the expectation that natural gas generation (much of it imported as liquefied natural gas) would be more expensive than coal, the incremental cost for alternative low-carbon interventions for gas would be even lower, which would promote substitution. If the baseline were less coal intensive, the overall level of CO2e emissions would decline; overall emissions in the baseline could be lower in 2030 than in 2008, but the MEDEC scenario emissions would be essentially the same. 5. The sectors correspond to the chapters of this report; they do not indicate where the emissions occur. For example, a number of interventions in the energy end- use sectors reduce emissions in the electricity sector. 6. Based on the "Methane to Markets" program in which Mexico is participating, methane leakage in the natural gas transmission and distribution system may be considerably underestimated. If this is the case, oil and gas sector emissions in the baseline scenario--and the potential for reduction--may be much larger. 7. Among the high-priority interventions not evaluated by MEDEC are those in waste management, such as landfill gas collection and urban recycling programs. CHAPTER 8 Elements of a Low-Carbon Development Program T here appears to be significant potential for Mexico to reduce its green- house gas emissions at fairly low cost. Based on the analysis, Mexico could keep its emissions relatively constant over the coming two decades while maintaining steady economic growth by following a low-carbon development pathway. Although the MEDEC scenario assumes an aggressive program of low- carbon policies and investments, the magnitude of the emissions reductions obtained would appear to understate actual reductions, because of several conservative assumptions: only 40 of the many possible interventions are considered; the baseline assumes a rapid increase in fossil energy use by the transport and power sectors; and no major improvements in technology or reductions in technology costs are assumed. Moreover, nearly two-thirds of the interventions included involve actual cost savings relative to the baseline case, excluding externalities or transaction costs. High-Priority Areas Which sectors hold the most promise for reducing emissions at a low cost? High-priority areas for greenhouse gas reduction include interventions in the transport, electric power, forestry, and energy-efficiency sectors. Transport A substantial proportion of emissions reduction potential lies in the road transport subsector, the largest and fastest-growing emission sector in Mex- ico. Increasing the modal share of public and collective (as well as nonmo- torized) transport in urban areas and raising the overall fuel efficiency of the vehicle fleet (for both passengers and freight) will be critical to reducing future road transport emissions. 93 94 Low-Carbon Development for Mexico Electricity Given that Mexico will likely more than double its total power-generating capacity by 2030, it is important that new capacity be as efficient and low- carbon as possible. Based on international costs, it is possible that at least half of the new installed power capacity could be coal fired under the base- line. Mexico has significant cogeneration potential in industry (including in the oil and gas sector) and renewable energy resources (especially wind power in Oaxaca) that could begin to supply large amounts of power within the next five years at costs lower than Mexico's current marginal costs of electricity. Over the medium (5­10 years) to longer (more than 10 years) term, Mexico could develop significant renewable energy resources (hydro, wind, geothermal, solar, biomass), in many cases at low cost, that could be part of a low-carbon power development strategy. Forestry Although energy-related emissions dominate Mexico's current and projected CO2e trajectories, the forestry sector provides the single greatest potential for reducing greenhouse gas emissions over the coming decades. Forestry interventions are generally more costly than those in transport or energy efficiency (on a $/t CO2e reduced basis), but most interventions that combine the reduction of deforestation and forest degradation benefit with the pro- ductive use of biomass, especially for energy purposes, have net benefits. Energy End-Use This study confirms the conclusions of other analyses that show that the overall potential for low-cost mitigation in the energy end-use sectors in Mexico is high in all sectors. The measures assessed for the study had the highest financial rates of return of any sector, as well as high economic rates of return without considering health benefits or other co-benefits, such as energy security or increased competitiveness. "Feasibility" and Barriers to Implementation What does it mean for a low-carbon intervention to be feasible? Almost all of the MEDEC interventions included in the low-carbon scenario have already been implemented in Mexico as regular investment projects or pilot programs, thus demonstrating their feasibility, at least on a limited scale. For many of the interventions, it is precisely the scale-up from an individual project to a broader program that is needed; scaling up such interventions typically involves changes in policies, institutions, and behaviors. Regula- tory policy and incentives for investment in energy efficiency and renewable energy may not exist for implementing a low-carbon intervention on a wider scale. For instance, CFE and the private sector have implemented a number of wind projects in Oaxaca (many for self-supply), but the general policies needed to promote private sector provision of wind power to the grid are not yet mature in Mexico.1 Chapter 8: Elements of a Low-Carbon Development Program 95 Just because an intervention has positive net economic benefits and is feasible does not mean that it will happen automatically. Positive net eco- nomic benefits imply that the overall benefits for society of the project are greater than the costs; it says little about who the winners and potential los- ers are or whether the project has the political support to be approved and implemented. As highlighted in the sectoral analyses, a number of barri- ers--ranging from inexperience and the lack of information among suppli- ers and consumers to incompatibility with industry norms or government regulations--inhibit low-carbon interventions from being undertaken on a large scale. Many of the interventions evaluated in this study face a vari- ety of market and nonmarket barriers, such as the high transaction costs associated with small projects or principal-agent problems, in which the beneficiary and the investor have different interests. Two of the greatest challenges that Mexico and other countries will face in implementing a larger number of low-carbon interventions of the type evaluated in this study are financing the often larger upfront costs of low- carbon interventions and putting in place supportive policies and programs. Although a majority of the interventions have positive net present values, many low-carbon projects will require larger upfront investment in plant and equipment. Policies to promote low-carbon interventions exist, but new policies or changes in existing ones will be needed to accelerate the implementation of such interventions. For both public and private decision making, upfront investment costs can be a major impediment to implementation. In many cases, low-carbon interventions, such as energy efficiency and renewable energy projects, have higher initial investment costs that are compensated by lower fuel and operating costs. But even if the life-cycle costs are lower, higher upfront investment costs often inhibit such investments from being approved and implemented, especially where credit markets are not well developed or implicit discount rates are high (that is, credit is expensive). Therefore, in addition to financial and economic analysis, it is important to assess the investment requirements for low-carbon interventions and to identify potential investment financing sources. The marginal abatement cost curve shown in figure 7.3 does not indicate the level of investment needed for each investment. Those costs are pre- sented in figure 8.1. The interventions are presented in the same rank order as in the marginal abatement cost curve, ranging from lowest net cost (high- est net benefit) to highest net cost. The width of each bar measures the total reduction potential; the area of each bar represents the total investment for that intervention. These results tell a very different story from that told by the marginal abatement cost curve. Some interventions with large emissions reductions and low net costs have very large investment requirements; other interven- tions have low or minimal investment requirements. Not surprisingly, the largest investment requirements are for large-scale and capital-intensive interventions, such as renewable energy projects (geothermal, wind, bio- 96 Low-Carbon Development for Mexico Figure 8.1 Marginal Abatement Investment Curve public investment 60 private investment new investment costs ($/t CO2e) 40 20 0 bus system optimization railway freight border vehicle inspection urban densification bus rapid transit nonmotorized transport road freight logistics cogeneration in Pemex street lighting residential lighting nonresidential lighting charcoal production industrial motors utility efficiency zero-tillage maize cogeneration in industry I&M in 21 cities solar water heating forest management fuel economy standards noresidential air conditioning residential refrigeration gas leakage reduction residential air conditioning biomass electricity improved cookstoves biogas wind power bagasse cogeneration worghum ethanol palm oil biodiesel fuelwood co-firing afforestation reforestation & restoration small hydro sugarcane ethanol geothermal refinery efficiency wildlife management environmental services 0 1,000 2,000 3,000 4,000 5,000 cumulative mitigation 2009­30 (Mt CO2e) Source: Authors. mass electricity, small hydro, and solar water heating); energy efficiency (cogeneration, refinery efficiency, and residential refrigeration); and trans- port (bus rapid transit and fuel economy standards). But not all low-carbon interventions have higher investment costs. Among the interventions that may not have high investment costs are those related to improvements in operational or organizational efficiency (bus sys- tem optimization, road freight logistics); better utilization of existing infra- structure (railway freight);2 or adoption of vehicle inspection programs. In some cases, the barrier is not direct financial costs or investment hur- dles but rather the costs of developing, passing, and enforcing new regula- tions, such as efficiency standards or operational norms for new and existing equipment. Even though all suppliers may be subject to the new standards, manufacturers may oppose them out of fear that they will drive up produc- tion costs, reducing sales. Information about the benefits of the program-- for both producers and consumers--could help overcome opposition. Inspection programs for in-use vehicles are interventions that would also have low investment costs. Such programs can help keep highly polluting and out-of-tune vehicles off the road, reducing both local pollutants and CO2e. The costs of the program can be covered by nominal fees for vehicle owners through regular inspections. Chapter 8: Elements of a Low-Carbon Development Program 97 Implementing all of the MEDEC interventions over the period 2009­ 30 would require investment of $64.5 billion, or about $3 billion a year (table 8.1). This level of investment represents about 0.4 percent of Mexi- co's current GDP. Table 8.1 MEDEC Investment Requirements to 2030 $ millions New Forgone Net Sector investment investment investment Electric power 21,406 10,933 10,473 Oil and gas 4,637 1,482 3,155 Energy end-use 15,771 9,898 5,873 Transport 11,729 36,249 ­24,520a Agriculture and forestry 10,928 3,699 7,229 Total 64,471 62,261 2,210 Source: Authors. a. A negative net investment means that new investments under the low-carbon scenario are less than the avoided (forgone) investment under the baseline scenario. In addition to the new investments required for MEDEC interventions, some investments made under the baseline would be forgone. Investments in low-carbon electric power capacity and energy efficiency (lighting, air conditioning, refrigeration), for example, would replace investments in power plants fired by natural gas or coal. Investment in buses and infra- structure would be reduced (as a result of bus system optimization); a large number of smaller buses would be replaced by large articulated buses in BRTs; and the need for trucks and freight infrastructure would fall (as a result of the optimization of road freight logistics). Overall, the value of the avoided transport investments associated with the MEDEC inter- ventions is estimated to be worth more than three times the value of new investments, resulting in overall negative net investment under the MEDEC transport scenario. (Because many of the avoided investments accrue to different actors, it is not meaningful from a project perspective to subtract avoided investments from new investments. However, the "net" investment numbers presented in table 8.1 do reflect the investment requirements for Mexico as a whole.) Financing Low-Carbon Interventions Investment in low-carbon development need not come from the govern- ment (figure 8.1). Even under current budgeting practices, the vast majority of the interventions--including most of the energy-efficiency investments-- would be financed by the private sector and households (table 8.2). 98 Low-Carbon Development for Mexico Table 8.2 Low-Carbon Interventions by Financing Source Private sector Household Public sectora Commercial energy Residential energy Street lighting efficiency efficiency Public services Industrial energy efficiency Solar water heating efficiency Cogeneration in industry, Zero-tillage maize Reforestation and including sugar factories restoration New vehicles IPPs for renewables (wind, Transport infrastructure biomass) Vehicle I&M Geothermal power Buses Oil and gas Liquid biofuels investments Source: Authors. Note: I&M = inspection and maintenance. a. Worldwide, many public sector investments are financed through concession schemes with private contractors or operators, including for power generation, oil and gas, public transportation, and other public utilities (water and sanitation). Government support is important for many public infrastructure invest- ments, and government subsidy programs can and should be designed to introduce and accelerate the adoption of some low-carbon interventions. It is also possible to shift more investment for traditionally public services and infrastructure, such as urban transportation or the energy sector, to the private sector through public concessions or other types of public-private partnerships. Among the specific areas in which the private sector could become more active with changes in regulatory policies are public sector energy efficiency and renewable energy production. In addition, improving the efficiency of public financing--especially in the petroleum and electric- ity sectors in Mexico--can reduce the cost and risk to the government. Mexico is unique among middle-income countries in that the energy industry--including at the retail distribution level--is largely in the hands of three large state-owned companies: Pemex, CFE, and LyFC. The role of public and private sector investment will be particularly important in Mexico in the energy sector given the dominance of state-owned compa- nies and the limitations (including in the constitution) on private sector investment. Mexico can provide a conducive environment for investment in the energy sector without being the primary investor itself. As some state- owned oil and power companies in other countries have shown, doing so does not necessarily mean sacrificing national sovereignty over the owner- ship of strategic natural resources. What is needed to attract investment in the electric power and the oil and gas sectors are stable environments with clear rules that allow contracting according to international best practices. There is substantial room for improving the operational and investment efficiency of the state-owned energy industry in Mexico; climate change concerns can provide additional leverage for making such improvements. Chapter 8: Elements of a Low-Carbon Development Program 99 Despite recent turmoil in international financial markets, Mexico will remain an attractive country for private sector investment in the energy field, and there will likely be increasing attention worldwide to opportuni- ties in renewable energy, energy efficiency, and sustainable transport. There is thus considerable room to involve the private sector in these sectors in Mexico. Recent government reforms aimed at improving the efficiency of the state energy sector represent a positive step. The dramatic increase in the number of independent power producers in Mexico since the mid- 1990s demonstrates the potential for involving the private sector (even if the model chosen involved higher risk and higher cost for the public sector than is typical worldwide). Another area in which government investment is important is research and development on low-carbon technologies and interventions. In many areas, Mexico can take advantage of the technological advances made in other countries that will help lower greenhouse gas emissions, including technologies currently on the horizon, such as carbon capture and storage, and technologies that are yet to be developed. In other areas, such as large- scale wind machines, Mexico has a comparative advantage; the government should help promote research and industrial development in such areas. Research areas that are more important to Mexico than to other coun- tries--such as developing energy-efficient residential building standards in hot and dry climates--may also warrant dedicated effort. Policies for Low-Carbon Development Many of the high-priority MEDEC interventions will require changes in poli- cies before they can be implemented on a large scale (box 8.1). Some policy barriers can be removed or reduced through specific new regulations directed at a class of interventions, such as renewable energy legislation; other barri- ers, such as the impact of low energy prices on energy-efficiency investments, are economywide. Some low-carbon interventions--such as those in urban transport--will require increased coordination among multiple government agents and across different levels of government. A number of interventions require both longer-range planning by the government and more continuity across the six-year administrative periods at the federal and state levels. Many recommended policies--such as contracts with independent power producers or ESCOs--are not new in Mexico. They could be improved and extended to promote low-carbon development through energy efficiency and renewable energy (which would also have energy diversification and environmental protection benefits). Among the problems for renewable energy projects has been the low planning prices (including the exclusion of externalities) for fossil fuels, the lack of adequate capacity recognition for intermittent renewables, and the inability to adjust procurement procedures to the requirements of renewable energy projects. Preestablishing small power purchase agreements would promote electricity sales to the grid from small or intermittent renewable energy or cogeneration producers. 100 Low-Carbon Development for Mexico Box 8.1 Policies to Support Low-Carbon Development A variety of policies could support low-carbon development in Mexico. Seven of them are described here. · Electric power from renewables. Promotion policies, such as predefined contracts, and tariffs ("feed-in tariffs") that permit and actively encourage small generators to produce and sell elec- tricity to the grid by reducing project development risks, would increase power, much of it at a lower cost than CFE currently pays. Establishing small power purchase agreements would be a useful first step. · Energy-efficiency standards. The establishment or improvement of existing minimum effi- ciency standards for widely used equipment (motors, pumps, lighting, boilers, furnaces), appli- ances (air conditioners, refrigerators), and vehicles (cars, trucks, buses) would reduce per unit energy consumption. Standards need to be complemented by measures to ensure the effi- ciency of used vehicles and equipment, such as vehicle inspection and maintenance programs, and cash payments for scrappage of vehicles and appliances.a · Energy pricing. In light of the regressive nature of energy subsidies in Mexico, reductions in implicit subsidies for middle- and high-income residential electricity consumers would have an immediate impact on reducing electricity consumption in Mexico while improving the distribu- tive effect of energy pricing (see box 4.2). Raising gasoline prices, which have been stable or have fallen over the past 20 years, would have a direct effect on the use of private automobiles, a primary contributor to Mexico's increasing greenhouse gas emissions over the past 25 years. · Changes in public procurement rules. Energy efficiency in many public facilities (schools, hos- pitals, government buildings, water supply and sanitation) is restricted by the inability of public agencies to sign contracts with private energy-efficiency companies for more than one year. Revision of public procurement rules would help public institutions save energy and reduce their operating costs. (continued) Recent legal changes have removed barriers to tap Pemex's cogeneration potential--which represents more than 6 percent of total installed capacity in Mexico--but there is still a need to establish a regulatory framework that enables these projects to offer energy and capacity to the grid at scale and with adequate incentives. The Importance of Co-Benefits Positive externalities (co-benefits) can be large for certain types of mitiga- tion measures; their inclusion can help justify low-carbon interventions. The fact that positive externalities are not included in the comparative eco- nomic analysis presented in chapter 7 means that projects that reduce fossil fuel consumption or protect forests would have even higher net economic returns if health or ecological benefits were included.3 Transport interventions that reduce overall transport intensity or improve vehicle efficiency can have significant positive impacts on acute Chapter 8: Elements of a Low-Carbon Development Program 101 Box 8.1 Policies to Support Low-Carbon Development (continued) · Urban planning and public transport. Complementary regulations and coordinated actions by federal, state, and municipal government agencies are needed to promote urban planning that reduces overall transport demands (high-density zoning, radial corridors) and provides convenient, accessible, and safe public transport infrastructure, including areas for pedestrians and bicycles. · Forestry programs. Policies to manage and protect native forests--such as those that control illegal logging, prevent fires, and manage pests--will yield local and global environmental benefits. Other measures to reduce deforestation and promote reforestation/afforestation programs include commu- nity forestry programs. · Air quality standards. Improved fuel quality standards and better enforcement of air quality standards could provide cost-effective CO2 reduction. Improved fuel quality--principally for gasoline, diesel, and fuel oil--would help meet Mexico's ambient air quality standards; by allowing better engine perfor- mance, it could reduce CO2 emissions. Inspection and maintenance programs help keep grossly out of tune vehicles off the road, improving local air quality and raising fuel efficiency. Alternatively, air quality standards could be defined as atmospheric pollutant concentration standards rather than vehicle emis- sion standards, and local authorities be made responsible for meeting them; this would enable the authorities to seek--according to the local context--other means of compliance beside vehicle emis- sions, such as public transportation or nonmotorized transport, which could also have important green- house gas mitigation effects. All measures would help air pollution "nonattainment" areas in Mexico meet air quality standards. a. In the case of refrigerators, international experience shows that when people purchase a new refrigerator and the old one is not taken in trade or removed, it can end up as a second refrigerator in the same household or transferred to another household, thus resulting in an overall increase in electricity use for refrigeration and negating the potential efficiency gains of the new appliance. respiratory disease and asthma. Vehicle inspection and licensing programs at the national level would result in large energy savings for vehicle owners and help meet Mexico's air quality standards. This is an area of particular importance for Mexico given the large numbers of used vehicles that enter the country from the United States each year.4 Forestry projects--including avoided deforestation and reforestation--can generate large environmental benefits in terms of soil conservation, water quality, and ecosystem pres- ervation (externalities that were not estimated in MEDEC), in addition to providing employment and income for rural communities. Air pollution in Mexico City is an example of a negative externality that has attracted significant public attention and resulted in a substantial politi- cal response. During the 1990s, Mexico City implemented many measures to reduce air pollution. These measures reduced the number of days each year that air quality standards are violated. The climate change mitigation interventions outlined in this report provide air pollution reduction as a co-benefit (the primary objective is to reduce overall energy consumption 102 Low-Carbon Development for Mexico and greenhouse gas emissions). Many projects currently being promoted as "climate change" projects had previously been advocated for their energy security (renewables and energy efficiency) or local health and environment (reforestation and urban transportation) benefits. As elsewhere in the world, co-benefits in Mexico are typically not included in cost-benefit analysis or are undervalued in public decision mak- ing. Internalizing such benefits and costs--through pollution charges for air pollution or payments for environmental services, for example--is likely to lead to more efficient outcomes. Near-Term Actions As the government of Mexico moves forward with its climate change miti- gation program, it is important that it prioritize near-term interventions. This study recommends that priority be given to interventions with the fol- lowing characteristics: · Significant emissions reduction potential · Positive economic rates of return, including large co-benefits · Successful demonstration at commercial scale in Mexico or internationally · Low investment costs and the ability to obtain financing. An additional consideration, in light of the international financial crisis of 2008­09, is that low-carbon interventions should have positive employ- ment and secondary development effects. Initial evidence suggests that investments that contribute to improving the capital stock have the greatest impact on employment (additional research on this topic is warranted).5 The MEDEC interventions were limited to existing commercial tech- nologies; all are therefore available today. All of the energy-efficiency inter- ventions, plus those involving efficiency improvements in the power sector (cogeneration, utility efficiency) are technically ready, and all have sub- stantial commercial demonstrations in Mexico. Some technologies--such as biomass power generation--have been demonstrated at scale abroad but not in Mexico; these interventions may need several years of market development to ramp up. The benefits of interventions involving changes in urban infrastructure--roads, buildings, housing, pedestrian facilities--will take time to reap, but all could be started immediately. Because the majority of interventions evaluated cost less than $10/t CO2e (and no interventions were considered that cost more than $25/t CO2e), most are economically viable today or would be so in the near future, assuming the development of a widespread international carbon market in which Mexico can participate.6 A final important criterion for implementation in the near term is that the legal, regulatory, and institutional barriers to implementation be sur- mountable. The litmus test for MEDEC interventions has been that they have already been successfully undertaken in Mexico or abroad. Most of the MEDEC interventions meet these criteria. Institutional barriers, such as Chapter 8: Elements of a Low-Carbon Development Program 103 those discussed with respect to the energy sector, remain and will continue to inhibit investments and efficiency improvements, but all could be over- come with modest changes in regulations governing the energy industry. Several low-carbon interventions that meet the criteria of potential, cost, and feasibility could be implemented in the short to medium term (one to five years). Some of these interventions, such as BRT, are already being scaled up. Based on projects in Mexico City and pioneered in other parts of Latin America, BRT is being expanded to other routes in Mexico City as well as in other large cities in Mexico. Other examples of projects that could be scaled up in the near term include residential lighting programs developed under FIDE, wind farms in Oaxaca based on CFE's pilots, forest management based on the Los Tuxtlas project in Veracruz, cogeneration in Pemex refineries based on the project at the Nuevo Pemex Refinery, and fuel economy standards for new vehicles and inspection programs for used vehicles (table 8.3). International Support Several international mechanisms could support Mexico's low-carbon development program. An international agreement to set emissions limits on industrial countries and to extend the carbon market mechanisms is a necessary ingredient to maintaining the sale of carbon credits by developing countries. International political momentum for adopting climate change mitigation actions has been growing over the past several years, and the stage has been set for a new agreement that will further motivate actions to reduce greenhouse gas reduction by both industrial and developing coun- tries, with developing countries benefiting from a carbon trading system. Based on the experience gained through clean development mechanism projects--both positive and negative--it is likely that the private carbon market will continue to focus on projects that are relatively easy to finance. These will include projects to reduce methane, such as landfill gas and ani- mal waste projects. They will also likely include small and discrete projects whose emission reductions are relatively easy to verify and monitor (such as single-technology interventions in the energy sector). Revision of the rules governing the clean development mechanism or a subsequent replacement mechanism to allow more flexibility for promoting mitigation projects in developing countries, including a move toward a policy and programmatic approach, is needed. Programs to support mitigation of climate change supported by bilat- eral and international organizations, including those governed by the UNFCCC, will seek to expand the current mitigation agenda to project areas that have not been the mainstay of the private carbon market. There is a need, for example, to expand the coverage of carbon markets to include more land-use projects, an important source of emissions reductions. Such projects have relatively modest financial costs and could benefit from the political support that carbon revenues could provide. 104 Low-Carbon Development for Mexico Table 8.3 Potential Near-Term Interventions Total Maximum Mitigation Total new emissions annual emis- cost or Implementa- investment reduction sions reduction benefit tion time Intervention ($ millions) (Mt CO2e) (Mt CO2e) ($/t CO2e) frame Utility efficiency 286 103 6 19 (benefit) Short term Wind power 5,549 240 23 3 (cost) Short/ medium term Cogeneration in 3,068 387 27 29 (benefit) Short/ Pemex medium term Residential lighting 237 100 6 23 (benefit) Short term Solar water heating 4,464 169 19 14 (benefit) Short/ medium term Nonresidential lighting 420 47 5 20 (benefit) Short term Improved cookstoves 434 222 19 2 (benefit) Short term Border vehicle 0 166 11 69 (benefit) Short term inspection Bus rapid transit 2,332 47 4 51 (benefit) Short term I&M in 21 cities 0 109 11 15 (benefit) Short term Forest management 148 92 8 13 (benefit) Short term Bus system 0 360 32 97 (benefit) Short/ optimization medium term Nonmotorized 2,252 51 6 50 (benefit) Short/ transport medium term Road freight logistics 0 157 14 46 (benefit) Short/ medium term Fuel economy 7,145 195 20 12 (benefit) Short/ standards medium term Afforestation 1,084 153 14 8 (cost) Short/ medium term Reforestation & 2,229 169 22 9 (cost) Short/ restoration medium term Total 29,648 2,767 247 Source: Authors. Note: I&M = inspection and maintenance. Another area that has not been sufficiently supported by the carbon market, and that is a high priority for Mexico and other middle-income countries, is road transport. The Global Environment Facility and new ini- tiatives such as the Clean Investment Funds are increasingly interested in greenhouse gas mitigation in such areas as sustainable transport programs and other programs that have not seen much involvement by either the pri- vate carbon market or public climate change mitigation programs. MEDEC provides additional evidence of high-priority interventions in the transport sector. Based on findings from this study, Mexico has submitted a proposal Chapter 8: Elements of a Low-Carbon Development Program 105 to tap funding from the Clean Investment Funds for sustainable transport, energy efficiency, and renewable energy. Notes 1. In some cases, initial pilot projects were funded in part with grant resources, such as funds from the Global Environment Facility. 2. The investment costs for this intervention were assumed to be zero (based on better utilization of existing rail infrastructure). In reality, a substantial increase in railway freight would involve investment costs in engines, cars, and probably track. 3. For examples of the health benefits from transport and improved cookstove interventions, see boxes 4.1 and 6.1. 4. The flow of older and dirtier vehicles into Mexican states with lax enforcement of environmental standards and weak vehicle inspection and maintenance pro- grams is probably an example in which free trade and differential environmen- tal standards can worsen environmental quality in the receiving country. 5. The macroeconomic modeling using the computable general equilibrium model of Mexico yields evidence of a positive correlation between the low-carbon sce- nario and employment. Unemployment was lowest in the scenarios that resulted in the largest increase in new capital stock. 6. More than four-fifths of the emissions reduction potential of MEDEC inter- ventions had a cost of less than $10/t CO2e, without considering positive externalities. APPENDIX A Summary of MEDEC Interventions Table A1 Estimated Investment, Emissions Reduction, and Net Abatement Cost of MEDEC Interventions Maximum Net cost Total annual or benefit New emissions emissions of investment reduction reduction mitigation Intervention Sector ($ millions) (Mt CO2e) (Mt CO2e) ($/t CO2e) Bus system optimization Transport * ­360 ­31.5 ­97 Railway freight Transport 0 ­220 ­19.2 ­89 Border vehicle inspection Transport 0 ­166 ­11.2 ­69 Urban densification Transport * ­117 ­14.3 ­66 Bus rapid transit Transport 2,333 ­47 ­4.2 ­51 Nonmotorized transport Transport 2,252 ­51 ­5.8 ­50 Road freight logistics Transport 0 ­157 ­13.8 ­46 Cogeneration in Pemex Oil and gas 3,068 ­387 ­26.7 ­29 Street lighting Energy efficiency 39 ­9 ­0.9 ­24 Residential lighting Energy efficiency 237 ­100 ­5.7 ­23 Nonresidential lighting Energy efficiency 420 ­47 ­4.7 ­20 Charcoal production A&F 416 ­248 ­22.6 ­20 Utility efficiency Electricity 286 ­103 ­6.2 ­19 Industrial motors Energy efficiency 907 ­94 ­6.0 ­19 Cogeneration in industry Energy efficiency 3,738 ­61 ­6.5 ­15 Zero-tillage maize A&F 74 ­25 ­2.2 ­15 Solar water heating Energy efficiency 4,464 ­169 ­18.9 ­14 I&M in 21 cities Transport 0 ­109 ­10.6 ­14 (continued) 107 108 Low-Carbon Development for Mexico Table A1 Estimated Investment, Emissions Reduction, and Net Abatement Cost of MEDEC Interventions (continued) Maximum Net cost Total annual or benefit New emissions emissions of investment reduction reduction mitigation Intervention Sector ($ millions) (Mt CO2e) (Mt CO2e) ($/t CO2e) Forest management A&F 148 ­92 ­7.8 ­13 Fuel economy standards Transport 7,145 ­195 ­20.1 ­12 Nonresidential air Energy efficiency 589 ­25 ­1.7 ­10 conditioning Residential refrigeration Energy efficiency 1,907 ­29 ­3.3 ­7 Residential air Energy efficiency 1,174 ­42 ­2.6 ­4 conditioning Gas leakage reduction Oil and gas 16 ­17 ­0.8 ­4 Biomass electricity A&F 4,254 ­376 ­35.1 ­2 Improved cookstoves Energy efficiency 434 ­222 ­19.4 ­2 Biogas Electricity 1,141 ­55 ­5.4 1 Windpower Electricity 5,549 ­240 ­23.0 3 Bagasse cogeneration Energy efficiency 1,860 ­59 ­6.0 5 Sorghum ethanol A&F 991 ­62 ­5.1 5 Palm oil biodiesel A&F 99 ­24 ­2.4 6 Fuelwood co-firing A&F 454 ­43 ­2.4 7 Afforestation A&F 1,084 ­153 ­13.8 8 Small hydropower Electricity 2,634 ­86 ­8.8 9 Reforestation and A&F 2,229 ­169 ­22.4 9 restoration Sugarcane ethanol A&F 1,011 ­150 ­16.8 11 Geothermal power Electricity 11,797 ­393 ­48.0 12 Refinery efficiency Oil and gas 1,553 ­31 ­2.5 17 Wildlife management A&F 169 ­316 ­27.0 18 Environmental services A&F 0 ­51 ­4.4 18 Source: Authors. Note: A&F = agriculture and forestry; I&M = inspection and maintenance. * New investment for intervention was negative, that is, less than under the baseline. APPENDIX B Summary of Benefit-Cost Analysis Methodology Cost-effectiveness is defined as the present value (in 2008) of the net benefit of reducing (avoiding) 1 ton of CO2­equivalent emissions ($/t CO2e) by implementing a particular option (definitions of CO2e are from IPCC 2007). For each intervention, the annual emissions reductions (in t CO2e) are summed to calculate total emissions reduction, and the stream of annual net cost is discounted at 10 percent a year to arrive at the present value of the net cost. The cost-effectiveness ratio is then calculated by dividing the sec- ond amount by the first. Using the cost-effectiveness form of benefit-cost analysis allows the analyst to avoid directly estimating the marginal value (damage function) for each additional ton of CO2e added to the atmo- sphere. At the same time, the cost per ton of CO2e estimate for each option considered provides a convenient comparison against which estimates of CO2e damage functions or carbon market prices can be made. The net benefit of a mitigation option is calculated by subtracting the direct financial costs from the direct benefits of implementing it. Examples of direct benefits include energy cost savings or travel time and cost savings. Indirect benefits, such as environmental externalities, are not quantified. The financial costs reflect economic opportunity costs to the extent that corrections were made for taxes and subsidies and that traded goods were assessed at their import and export parity values. Pairwise comparisons are made between particular options and the base- line scenario (the alternative that presumably would have been pursued in the absence of the MEDEC program). Incremental net costs and incremen- tal net greenhouse gas emissions are calculated by subtracting the costs (or greenhouse gas emissions) of the option from the costs (or greenhouse gas emissions) of the baseline case. The analysis used a cost-effectiveness format in which "output" is counted but not valued in currency terms and "input" costs are measured 109 110 Low-Carbon Development for Mexico and valued in constant (2008) U.S. dollars. The output in this case is tons of CO2e avoided by the option (relative to emissions under the baseline alternative). Benefits are net of indirect co-benefits (see below). The cost per ton of net CO2e emissions avoided (mitigated) by each option was then calculated. In the cash-flow format, the annual emission of CO2e appears as the annual flow of CO2e in that year, but it adds to a "stock" of greenhouse gas in the atmosphere that will continue to be there at the end of the plan period (2030). As discounting and compounding are mathematical meth- ods for converting a flow resource into a stock equivalent at the beginning or the end of the plan period, it would not be appropriate to compound or discount a number (tons of CO2e) that already represents a stock value. Thus, the cost-effectiveness ratio that is calculated represents the cost per ton of CO2e stock avoided or mitigated for the entire time it would have remained in the atmosphere. Each option analyzed had a project life based on the economic (rather than the physical) life of the most important asset. Less important assets having longer lives than the project life have their remaining salvage value added back to the cash flow at the end of the project life. For assets that do not last as long as the most important asset and thus must be replaced from time to time during the project life, their investment value enters into the cash flow at more than one point. If the project life was not evenly divis- ible by the life of the shorter-lived asset, a salvage value related to the final replacement of the asset was added back at the end of the regular project life. A series of similar projects makes up a program. Program duration is always 2009 to 2030, with projects usually starting at different dates. Most projects go beyond the end of the program (2030), either because they start after 2009 or because their assets (such as power plants) have economic lives exceeding the 22-year plan period. In this case, assets with remain- ing life after 2030 had their residual value added back to the cash flow for 2031. Residual value includes the net sale value of any assets plus the recap- ture of working capital stocks remaining when production is shut down, whether prematurely or at the exhaustion of the most important asset. Net sale value of remaining assets is called salvage value if the asset has unused life remaining. If the asset has come to the end of its useful economic life, the term scrap value is more commonly applied. The common convention with scrap values is to assume that removal costs are equal to market value of the scrap, suggesting a residual value equal to zero for those assets. Sal- vage values were not applied to assets being replaced under the low carbon program before they were fully depreciated, because doing so would imply continued use of the asset and continued emissions of greenhouse gases. Greenhouse gas reduction options analyzed for the MEDEC portfolio were limited to technologies already in use or those realistically expected to come into use within five years. Moreover, no technological progress was presumed once the investment in the option went from "putty" to "clay." Appendix B: Summary of Benefit-Cost Analysis Methodology 111 A full-blown economic analysis normally starts with the financial cash flow of the most important stakeholder, to which it makes the following adjustments: 1. Delete direct transfer payments (taxes and subsidies). 2. Divide inputs and outputs between traded and nontraded goods (and services), and value the traded items at import and export parity equivalent values. 3. Use input-output analysis or other methods to trace and remove the indirect taxes and subsidies involved in supplying nontraded inputs to the project. 4. Convert nontraded outputs to willingness-to-pay values (which involves extensive analysis of the degree of market development and market distortions in some cases). 5. Determine quantitative measures of environmental spillovers, develop damage functions related to those spillovers, and determine willing- ness-to-pay values or willingness-to-accept compensation values for these externalities. The MEDEC economic analysis involved only the first two of the five steps in this sequence. Because of the importance of environmental co- benefits in their sectors, the transport group and the electricity group attempted to complete step five as a side calculation, without including these co-benefits in calculating cost per ton of greenhouse gas mitigated. The objective function for the MEDEC study is cost per ton of greenhouse gas reduction or mitigation. Non­CO2 greenhouse gases are converted to CO2 equivalents (CO2e); other impacts are either converted to net costs or are ignored. Outputs that are produced in conjunction with greenhouse gas reductions are divided into direct and indirect co-benefit categories. Direct co-benefits (such as time savings and automobile expenditures saved by riders of urban transport or energy savings by users of energy-efficient household appliances) are included in the net cost calculation where fea- sible. Indirect co-benefits (such as environmental externalities) are counted where feasible, but their imputed values in willingness-to-pay terms are not included as co-benefits in the calculation of cost per ton of CO2e reduction. The cost-per-ton calculations do not include the additional organiza- tional and institutional interventions that might be required to overcome barriers to implementing an option. For example, the reduced-tillage option does not specify ownership of the equipment or organizational costs nec- essary to make the equipment available to the farmers who are expected to use these new practices; the costs do not include the information and education costs of encouraging the adoption of reduced tillage. The costs of household energy-efficiency options exclude the costs of organizing distribution; convincing households that the options are better than the high-carbon alternatives; and developing certification, service, and mainte- nance systems. These project costs cannot be calculated until interventions designed to remove existing barriers are identified. Omission of these costs 112 Low-Carbon Development for Mexico plays a large part in explaining the negative net cost-per-ton outcomes for several of the options analyzed by MEDEC. Positive net benefits (or negative net costs) of an investment option usu- ally suggest the presence of barriers that prevent private parties or public agencies from acting in a way that cost-effectiveness calculations suggest makes economic sense. Without these barriers, profitable investments pre- sumably would not be left on the table. The fact that no-regrets green- house gas reduction options exist suggests that that the remaining task is to identify the barriers that account for them, analyze the ability to surmount them, and design the requisite programs of interventions to remove, sur- mount, or skirt them. The surmountability of the barriers and the cost of interventions to surmount them then becomes the third criterion in rating the investment options (along with the net benefit per ton of greenhouse gas reduction provided by that option and the scope the option provides for reducing greenhouse gas). APPENDIX C Intervention Assumptions This appendix describes the assumptions used throughout the analysis. It first introduces the general assumptions before introducing specific assump- tions adopted in each sector. The following general assumptions were used in the MEDEC analysis: · MEDEC duration: 22 years (2009­30) (programs are made up of a series of projects, which may have different durations, usually accord- ing to the lifetime of their main assets) · MEDEC year zero: 2008 · Discount rate for costs and externalities: 10 percent · Discount rate for CO2e emissions: 0 · Year of constant dollars: 2005 · GDP annual growth rate: 3.6 percent · Average annual population growth: 0.6 percent · Changes in technology: No major change in technology over the sce- nario period · Net costs (or benefits): Sum of net present value of new public invest- ment, new private investment, forgone investment, salvage value (sal- vage value in 2031 was calculated in a nonlinear way), energy costs (includes only fossil energy costs), other operations and maintenance costs, labor costs, and unpaid time costs (time savings were calculated using the minimum wage of $0.55/hour) · Fuel prices: West Texas Intermediate crude oil price (about $53 per barrel in 2009; table C.1). · Emission factors for fossil fuels: Standard IPCC factors for down- stream (end of pipe) emissions. For upstream emissions, sources are Yan (2008) for LPG, gasoline, and diesel and Hondo (2005) for fuel oil, natural gas, and coal (coke upstream emissions are assumed to be equal to those for coal) (table C.2). 113 114 Low-Carbon Development for Mexico Table C.1 Fuel Cost Assumptions for MEDEC Interventions Type of fuel Cost in 2009 ($/GJ) Annual cost increase (%) Gasoline 15.98 0.567 Diesel 12.84 0.527 Fuel oil 7.39 0.403 LPG 12.09 0.469 Natural gas 7.85 0.190 Coal 2.07 0.471 Coke 15.02 0.471 Source: Authors. Table C.2 Downstream and Upstream Emissions t CO2e/GJ Type of fuel Downstream emissions Upstream emissions Gasoline 0.0693 0.0160 Diesel 0.0741 0.0173 Fuel oil 0.0774 0.0038 LPG 0.0631 0.0130 Natural gas 0.0561 0.0135 Coal 0.0946 0.0090 Coke 0.1082 0.0090 Source: Hondo 2005; IPCC 2007; Yan 2008. Electricity Sector According to the government's official outlook, electricity demand is expected to grow 4.9 percent a year through 2016 (SENER 2007). A growth rate of 3.9 percent a year was assumed for the period 2017­30. The selection of power-generation technologies (additions and with- drawals) for the period 2007­16 is based on the official outlook. Technolo- gies beyond 2016 are based on the following assumptions: · Expansion is based on demand projections and meeting the load curve. · Expansion is based on least-cost technology. · Old power plants are withdrawn. · Environmental requirements for criteria pollutants (particulates, SO2, and NOX) are met. Investment costs are based on international values (World Bank 2008). Operations and maintenance costs and fuel consumption figures reflect Mexico's local conditions (CFE 2008a). Unit costs are the same regardless of scale (no economies of scale are considered). The cost of cooling water is Appendix C: Intervention Assumptions 115 assumed to be $0.679/m3. Table C.3 shows the costs assumed for the coal and natural gas technologies. Table C.3 Baseline Technology Characteristics of Coal and Natural Gas Coal, Natural gas, Characteristic supercritical combined cycle Overnight private investment ($/[MWh/year]) 321 203 Operations and maintenance ($/MWh) 6.490 4.080 Externalities ($/MWh) 1.859 0.580 Fuel use (GJ/MWh) 8.356 6.901 Capacity (MW/[MWh/year]) 0.00015245 0.00014671 Source: World Bank 2008; CFE 2008a. Note: Real investment occurs over several years; overnight investment is its equivalent in financial terms on the day the plant becomes operational. These considerations led to a baseline scenario based primarily on coal, natural gas, and hydropower (table C.4). Under this scenario, coal would be used in power plants located in coastal areas near ports, providing base power; natural gas and hydropower would cover inland areas and interme- diate and peak production. Given the availability of fossil fuels in Mexico, it is likely that most coal and gas in the baseline scenario would be imported. Table C.4 Projected Energy Capacity and Generation under the Baseline Scenario Capacity New capacity Withdrawals Capacity Generation in in 2008 2009­30 2009­30 in 2030 2030 Source of energy (MW) (MW) (MW) (MW) (GWh) Natural gas 23,104 28,008 ­4,095 47,016 293,353 Coal 4,718 26,391 0 31,108 208,783 Hydro 11,466 13,727 0 25,193 86,784 Fuel oil 12,830 0 ­7,112 5,718 26,826 Geothermal 960 976 ­150 1,785 13,890 Uranium 1,365 269 0 1,634 12,610 Natural gas cogeneration 2,069 314 0 2,383 10,828 Wind 85 3,488 ­85 3,488 9,090 Diesel 657 443 ­106 995 4,345 Coke 507 0 0 507 3,711 Biomass 325 0 0 325 815 Other fossil fuels 152 0 0 152 307 Source: Authors. Note: Figures include public service and self-supply. 116 Low-Carbon Development for Mexico The analysis of MEDEC interventions that generate, use, or save elec- tricity (that is, all interventions in the electricity sector plus a number of interventions in the stationary energy end-use, oil and gas, and agriculture and forestry sectors) was carried out based on the following assumptions: · MEDEC interventions (including generation and efficiency) replace baseline production capability. Net generation in the MEDEC sce- nario is therefore equal to the baseline scenario minus the total energy saved in electricity end-use efficiency interventions. · Every MEDEC intervention substitutes 86 percent of coal-based gen- eration (supercritical technology) and 14 percent of natural gas gen- eration (combined-cycle technology). The exceptions to this rule are cogeneration in industry and cogeneration in Pemex, which substitute 100 percent natural gas­based generation (because they are consid- ered as efficient ways to use natural gas, not fuel-substitution interventions). · The total coal capacity displaced in the MEDEC scenario is equal to all new coal power plants foreseen in the baseline scenario (except the 678 MW Carboeléctrica del Pacífico power plant, in the state of Guer- rero, which will begin operations in 2010). Forgone costs in coal and natural gas include investment costs (propor- tional to new electricity generation or savings), operations and mainte- nance costs, fossil energy costs, and environmental externalities costs (not included in the reported figures). The analysis of electricity interventions recognizes the fact that 1 MWh of electricity saved in the distribution grid implies more than 1 MWh saved in generation, because of energy losses in transmission and distribution. Distribution loss factors of 1.012 subtransmission voltage, 1.042 primary voltage, and 1.067 secondary voltage were used (data for Mexico were not available; these data are from Southern California Edison [2008]). Windpower · Program definition: Install a power-generation capacity of 10,800 MW · Project duration: 22 years (21-year lifetime plus 1 year planning and construction) · Plant factor: 30 percent · Own consumption: 0 · Investment costs: $1,336,311/MW · Fixed operations and maintenance costs: $27,458/year/MW · Variable operations and maintenance costs: 0 · Investment profile: Single year · Cost factors for externalities (life-cycle analysis): SO2: $0.003/MWh (gross); sulphates: $0.224/MWh (gross); PM10: $0.094/MWh (gross); NOX: $0.043/MWh (gross) Appendix C: Intervention Assumptions 117 Small Hydropower · Program definition: Install a power-generation capacity of 2,750 MW · Project duration: 31 years (30 years lifetime plus 1 year planning and construction) · Plant factor: 45 percent · Own consumption: 0 · Investment costs: $2,669,523/MW · Fixed operations and maintenance costs: $36,161/year/MW · Variable operations and maintenance costs: $4.329/MWh (gross) · Water use: 12,028 m³/MWh (gross) · Investment profile: Single year · Hydropower water cost: $0.00030/m³ (opportunity costs of using the water in other applications) · Cost factors for externalities (life-cycle analysis): sulphates: $0.023/ MWh (gross); PM10: $0.010/MWh (gross) Geothermal Power · Program definition: Install a power-generation capacity of 7,500 MW · Project duration: 33 years (30 years lifetime plus 3 years planning and construction) · Plant factor: 90 percent · Own consumption: 0 · Investment costs: $2,803,515/MW · Fixed operations and maintenance costs: $146,269/year/MW · Variable operations and maintenance costs: $0.041/MWh (gross) · Cooling water usage: 0.10 m³/MWh (gross) · Geothermal steam consumption: 19.29 GJ/MWh (gross) · Geothermal steam cost, levelized: $1.922/GJ · Percentage of steam cost that corresponds to exploration and other initial investments: 85 percent · Cost factor for externalities: 0 · Investment schedule: Year ­3: 3 percent; year ­2: 60 percent; year ­1: 38 percent Biogas · Program definition: Install a power-generation capacity of 930 MW · Project duration: 22 years (21 years lifetime plus 1 year planning and construction) It is assumed that in the baseline scenario, landfill biogas is captured and burned. Therefore the reduction in methane emissions is not accounted for, and landfill costs are not included (biogas is considered to be available for free). · Plant factor: 80 percent · Own consumption: 0 · Investment costs: $3,226,104/MW 118 Low-Carbon Development for Mexico · Fixed operations and maintenance costs: $16,613/year/MW · Variable operations and maintenance costs: $8.039/MWh (gross) · Investment profile: Single year · Distribution loss factor: Subtransmission voltage · Cost factors for externalities: SO2: $0.007/MWh (gross); sulphates: $0.456/MWh (gross); PM10: 0; NOX: $0.539/MWh (gross) Utility Efficiency · Program definition: Substitute several auxiliary equipments in power plants, transmission, and distribution · Project duration: 30 years · Exchange rate: 10.8 pesos/$ · Barrel of oil equivalent per GWh: 2.4 BOE/MWh (PAESE) · Costs and savings: See table C.5 Table C.5 Costs and Savings for Utility Efficiency Actions Total PAESE PAESE program Number Life- investment (millions annual savings of units in time Item of pesos per unit) (BOE per unit) program (years) Power plants Energy audita 1 n.a. 66 30 Variators 2.1 2,637 198 10 Compressors 3 2,160 264 10 Ventilators 2 12,125 132 10 Vapor-vapor generators 2 6,900 132 5 Controllers 2 50,000 132 10 Burners 2 50,000 132 5 Combustion control with viscosity 2 19,400 66 15 meters Transmission and distribution Power temperature control for 0.08 54.6 660 30 substations Transformer substitution 0.075 20.8 14,520 30 Source: PAESE. Note: Total number of units in program and lifetime of assets is based on expert opinion. BOE = barrel of oil equivalent; n.a. = not applicable. a. The energy audit would identify potential improvements, including through improved routine maintenance and some capital investments, and would specify the energy savings to be gained from these actions. Oil and Gas Sector Gas Leakage Reduction · Program definition: Reduce leakage of natural gas by replacing seals on 46 natural gas compressors · Project duration: 25 years Appendix C: Intervention Assumptions 119 · Emissions per compressor: 38.29 million ft³/year without project, 6.22 million ft³/year with project (PGPB 2006) · Upstream emissions: Not included · Investment cost of dry seals per compressor: $444,000 Cogeneration in Pemex · Program definition: Install a cogeneration capacity of 3,690 MW · Project duration: 33 years (30 years lifetime plus 3 years planning and construction) Without project · Self-supply capacity in Pemex: 2,130 MW (SENER 2008c) · Plant factor: 50 percent (CRE data) · Fuel to electricity efficiency: 15 percent · Operations and maintenance costs: Same as for modern cogeneration plant (fixed cost: $29,050/year/MW; variable cost: $0.368/MWh [gross]) · Current fuel to heat (boiler) efficiency: 35 percent · Boiler operation costs: $0.200/GJ fuel Cogeneration assumptions · Fuel: Natural gas. A number of cogeneration schemes would be fueled by gas coming from the gasification of refinery vacuum residuals; because gasification needs to be carried out for other reasons, its costs are not accounted for here. · Plant factor: 80 percent · Own consumption: 2.74 percent · Investment costs: $1,505,000/MW · Fixed operations and maintenance costs: $29,050/year/MW · Variable operations and maintenance costs: $0.368/MWh (gross) · Cooling water usage: 2.06 m³/MWh (gross) · Fuel to electricity efficiency: 37 percent · Fuel to heat efficiency: 42 percent · Investment schedule: Year ­3: 7 percent; year ­2: 72 percent; year ­1: 20 percent · Cost factors for externalities: SO2: $0.001/GJ; sulphates: $0.044/GJ; PM10: $0.011/GJ; NOX: $0.028/GJ Refinery Efficiency · Program definition: Renovation of all six refineries in Mexico · Project duration: 22 years · Investment: $2,110,000 for each kB/day of crude oil · Baseline refinery energy consumption for each kB/day of crude oil: natural gas: 0.252 million ft³/day; diesel: 0.008 kB/day; fuel oil: 0.036 kB/day; electricity: 2.860 GWh/year; vapor: 3.631 t/hr · Reduction in fuel use: 12 percent · Reduction in electricity use: 0 · Investment profile: Years ­3 to ­1: 33 percent/year 120 Low-Carbon Development for Mexico · Refinery data and schedule: Salina Cruz (2009): 308 kB/day; Tula (2012): 296 kB/day; Minatitlán (2015): 285 kB/day; Madero (2018): 188 kB/day; Cadereyta (2021): 235 kB/day; Salamanca (2024): 176 kB/day Stationary Energy End-Use Sectors A number of assumptions for these sectors are based on estimates by Odón de Buen, energy efficiency expert. The assumptions for the interventions that address the commercial and service sectors (nonresidential buildings) are included in table C.6. Table C.6 Scope for Energy Savings from Nonresidential Air-Conditioning and Lighting Interventions, by Type of Building Total bldg No. of Avg. AC Bldgs w/ Avg. Bldgs w/ stock bldgs Bldgs energy old AC lighting old lighting Type of (million (thou- w/ AC (MJ/m²/ technology energy technology building m²) sands) (%) yr) (%) (MJ/m²/yr) (%) Warehouses 5 1 50 100.00 80 170.33 75 Hotels 12 13 80 289.94 70 281.04 25 Restaurants 2 10 100 289.94 70 281.04 50 Office 4 8 50 148.34 75 143.79 75 buildings Wholesale and 15.2 2.1 100 177.18 75 171.75 75 retail properties Theaters and 2.8 2 100 226.61 75 219.65 75 recreational facilities Hospitals and 6 21 100 313.25 75 303.63 75 health facilities Schools 121 150 50 48.32 80 187.36 100 Other services 110 200 50 50.00 80 100.00 50 Source: Based on data from NRCan (2007), adjusted for Mexico, and authors' assumptions. Note: Figures assume 10 hours per day of air-conditioning use for all building types. AC = air conditioning. Nonresidential Air Conditioning · Program definition: Install efficient air conditioning in all nonresiden- tial buildings · Project duration: 30 years (equal to air-conditioning lifetime) · Demand per ton of standard air conditioning: 1.7 kW · Demand per ton of efficient air conditioning: 0.9 kW · Cost per ton of efficient air conditioning: $1,140 · Time for implementation of full program: 10 years · Air conditioning lifetime: 30 years Appendix C: Intervention Assumptions 121 Nonresidential Lighting · Program definition: Bring forward by 10 years installation of efficient lighting in all nonresidential buildings · Project duration: 22 years · Power of standard equipment (T12 with electromagnetic ballast): 0.192 kW/device · Power of efficient equipment (T8 with electronic ballast): 0.09 kW/ device · Cost per efficient unit: $55/device · Time for implementation of full program: 10 years · Hours per day of lighting use, for all building types: 12 · Applicable distribution loss factor: Primary low voltage Street Lighting · Program definition: Bring forward by 10 years the substitution of all street lighting lamps in Mexico by high-pressure sodium lamps · Project duration: 22 years · Project schedule: All lamps replaced in 10 years · Operating hours per year: 4,380 · Energy consumption in 2006: 4,303,000 MWh · Other technology assumptions: See table C.7 Table C.7 Technology Assumptions for Street Lighting Power Estimated use Lamp Application/type of lamp (watts) Lumens (% of total) cost ($) Main streets Mercury vapor 400 23,000 10.00 n.a. Halogen (iodine-quartz) 1,000 21,000 2.50 n.a. High-pressure sodium 250 28,000 12.50 84.60 Secondary main streets Mercury vapor 250 13,000 7.50 n.a. Fluorescent 215 14,800 2.50 n.a. Mixed light 500 14,750 2.50 n.a. High-pressure sodium 150 16,000 12.50 20.70 Neighborhood streets Mercury vapor 125 6,300 12.50 n.a. Incandescent 300 6,300 6.25 n.a. Halogen (iodine-quartz) 300 6,000 3.13 n.a. Fluorescent 85 5,250 3.13 n.a. High-pressure sodium 70 6,300 25.00 19.10 Source: Authors. Note: n.a.= not applicable. 122 Low-Carbon Development for Mexico Industrial Motors · Program definition: Accelerate substitution of old, high-usage motors and leapfrog to high-efficiency motors in Mexican industry · Project duration: 30 years · Project schedule: All motors are substituted in 7 years · Demand factor for high-usage motors to be included in program: 5,000 hours/year · Efficiency before motor substitution: 86 percent Without project assumptions · Cost of standard motor: $25/HP (market survey) · Efficiency of new standard motor: 90 percent (current standard) · Period over which baseline substitution would take place: 15 years Project assumptions · Applicable distribution loss factor: Subtransmission voltage · Cost of high-efficiency motor: $57.50/HP (market survey) · Efficiency of high-efficiency motor: 96 percent · Reported use of electricity in Mexican industry in 2007: 106,633 GWh/year (SENER 2008c) · Consumption of electricity reported as "industrial" that actually cor- responds to service sector: 22,000 GWh/year · Annual growth of electricity consumption in Mexican industry 3.50 percent (SENER 2008c) · Percentage of electricity used in motors in industry: 70 percent · Average demand factor for all industrial motors: 4,000 hours/year · Percentage of total motor capacity included in program (meets pro- gram criteria): 70 percent Cogeneration in Industry · Program definition: Install a cogeneration capacity in industries of 6,720 MW · Project duration: 33 years (30 years lifetime plus 3 years planning and construction) Without project assumptions · Boiler efficiency: 75 percent · Boiler operation costs: $0.200/GJ fuel Cogeneration assumptions · Cogeneration plant substitutes natural gas combined-cycle central- ized generation · Fuel: Natural gas · Plant factor: 80 percent · Own consumption (by the cogeneration plant itself): 2.74 percent · Investment costs: $1,505,000/MW · Fixed operations and maintenance costs: $29,050/year/MW · Variable operations and maintenance costs: $0.368/MWh (gross) Appendix C: Intervention Assumptions 123 · Cooling water usage: 2.06m³/MWh (gross) · Fuel to electricity gross efficiency: 35 percent · Fuel to heat efficiency: 40 percent · Distribution loss factor: Subtransmission voltage · Investment schedule: Year ­3: 7 percent; year ­2: 72 percent; year ­1: 20 percent · Cost factors for externalities: SO2: $0.001/GJ; sulphates: $0.044/GJ; PM10: $0.011/GJ; NOX: $0.028/GJ Bagasse Cogeneration · Program definition: Install efficient cogeneration plants in 55 sugar factories · Project duration: 27 years Background assumptions · Sugarcane consumption per factory: 1 Mt sugarcane/year · Bagasse yield ratio: 0.3 t bagasse/t sugarcane · Bagasse heat value (50 percent humidity): 8 GJ/t · Electricity and mechanical energy consumption by sugar factory: 0.04 MWh/t sugarcane · Current share of electricity purchased from the grid: 25 percent · Current fuel oil consumption: 8 l/t sugarcane · Factory working days: 155 days/year Project assumptions · Investment in boilers, power plant, transformers: $2.5 million/MW · Investment schedule: 2 years, 50 percent each · Electricity efficiency of cogeneration unit: 20 percent (assuming a 62-bar, 2-bar back-pressure, system) · Fuel oil consumption with cogeneration project: 0 l/t sugarcane · Operations and maintenance costs and externalities related to local emissions are assumed to be the same with and without the project · Distribution loss factor: Subtransmission voltage Residential Air Conditioning · Program definition: Provide thermal insulation and accelerate substi- tution of residential air conditioners in 1 million high-consumption households · Project duration: 30 years Project assumptions · Cost of new device $488 (IIE 2006) · Air-conditioning lifetime: 15 years · Applicable distribution loss factor: Secondary low voltage Without project assumptions · Energy consumption before substitution: 4,000 kWh/year · Period over which baseline substitution would take place: 15 years 124 Low-Carbon Development for Mexico · Consumption after substitution to standard-compliant equipment: 2,800 kWh/year With project assumptions · Energy consumption with new device plus thermal insulation: 700 kWh/year · Cost of thermal insulation: $1,200 Program assumptions · Total number of households in program: 1 million (based on INEGI data) Residential Lighting · Program definition: Replace the most important lamps in 80 percent of households in Mexico by fluorescent lamps · Project duration: 10 years Market assumptions · Current annual incandescent bulb sales: 210 million bulbs (CONUEE) · Total bulbs per household: 8 (FIDE) · Number of existing fluorescent lamps: 35 million bulbs (authors' assumption) A model that divides household lamps into four categories with different hours per day of use was developed, fitting the above assumptions. Tech- nology assumptions appear in table C.8. Table C.8 Technology Assumptions for Residential Lighting Lamp type Incandescent Fluorescent Laboratory lifetime (hours) 1,000 8,000 Reduction in lifetime because of voltage 25 25 variations and other factors (%) Lamp cost ($) 0.50 3.00 Efficacy (lumens/watt) 16 60 Source: Authors. Program assumptions · Number of electricity paying households: 28.2 million · Number of nonpaying households: 1 million · Replacement program will replace lamps used at least: 1 hr/day · Program coverage: 80 percent of households · Applicable distribution loss factor: Secondary low voltage Appendix C: Intervention Assumptions 125 Residential Refrigeration · Program definition: Accelerate substitution of old residential refrig- erators in Mexico · Project duration: 30 years · Applicable distribution loss factor: Secondary low voltage Without project assumptions · Energy consumption: 0.850 MWh/year (older refrigerators have higher consumption, of about 1.050 MWh/year, but a large number comply with the 1996 standard) With project assumptions · Energy consumption: 0.369 MWh/year · Cost of new 9ft³ refrigerator: $203 (based on market survey) · Refrigerator lifetime: 15 years Program assumptions · Refrigerators to be substituted by program: 10 million refrigerators (based on INEGI data) · Number of years to achieve target: 5 · Number of years for substitution in the baseline scenario: 20 Solar Water Heating · Program definition: Install by 2030 solar water heaters in 60 percent of existing (2009) households and 65 percent of new households · Project duration: 22 years Assumptions for new and existing households · Hot water consumption: 75 l/day/person · Household occupancy: 4 people/household (CONAPO 2006) · Required temperature increase: 25°C · Size of solar water heater: 4 m² · Lifetime: 22 years · Solar radiation: 18 MJ/day/m² (PROCALSOL 2007) · Solar water heater efficiency: 50 percent · Gas water heater efficiency: 60 percent · In households with solar water heating, gas is used as a backup to supply 10 percent of water heating energy needs Assumptions for existing households · Cost of solar water heater: $1,050 · Installation cost: $262 Program assumptions · Number of households in 2009: 27.5 million · Share of 2009 households that will have water heating (of any kind) in 2030: 60 percent; out of this set of households, those that will have solar water heater in 2030 are in ­ baseline: 1 percent ­ intervention: 60 percent 126 Low-Carbon Development for Mexico Assumptions for new households · Cost of solar water heater for new households: $875 · Installation cost: $175 Program assumptions · Number of households in 2030: 39 million (CONAPO 2008) · Share of new households with water heating (of any kind) in 2009­ 30: 80 percent; out of this set of households, those that will have solar water heater in 2030 are in ­ baseline: 10 percent ­ intervention: 65 percent Improved Cookstoves · Program definition: Install improved cookstoves in all households with traditional biomass open fires · Project duration: 24 years Project assumptions · One-time investment in training and promotion: $34/stove · Investment: $84.45/stove · Stove lifetime: 4 years · Adoption rate: 60 percent · Annual monitoring and administration costs: $16/stove · Annual maintenance cost: $14/stove · Annual open-fire fuelwood consumption (dry matter): 4.2 TDM/stove · Savings factor for improved cookstove: 50 percent · Emission factor open fire: 2 t CO2e/TDM (Johnson and others 2009) · Emission factor improved cookstove: 1.62 t CO2e/TDM (Johnson and others 2009) · Emission factors include non-Kyoto gases · Fuelwood cost: $26.25/TDM (García-Frapolli and others forthcoming) · Effective time savings per day because of use of the improved stove: 0.25 hours/stove/day (García-Frapolli and others forthcoming) · Benefits from reduced health damages and environment protection (externalities): $341.64/stove/year (García-Frapolli and others forthcoming) Program assumptions · Number of fuelwood-using households in Mexico at 2030 in the baseline scenario: 3,878,070 · Fuelwood productivity: 2.9 TDM/hectare/year Transport Sector · Baseline assumptions: See table C.9 · Impact on unpaid time costs (time lost by society because of conges- tion): 0.030 hour/km of total urban distance · Urban area, 2009: 11,854 km² · Annual growth of urban area: 0.89 percent Appendix C: Intervention Assumptions 127 Table C.9 Baseline Assumptions for Transport Sector Item Gasoline vehicles Diesel vehicles Vehicle fleet, 2009 (millions) 24.4 1.27 Vehicle fleet, annual growth (%) 5 4 Average efficiency, 2009 (km/liter) 7.87 3.08 Average annual increase in efficiency (%) 1.64 0.23 Total average distance, 2009 (km/year/vehicle) 14,167 59,416 Urban distance as percent of total average distance, 2009 92.5 34.84 Externalities ($ per liter of fuel used in urban areas) 0.04 0.06 Source: Authors, based on assumptions by Centro de Transporte Sustentable de México, A.C. Bus System Optimization · Program definition: Redesign all feeder mass transit lines in Mexico and make institutional changes (main axis lines are covered by the BRT intervention) · Project duration: 24 years · Minibus (small passenger bus) mileage: 73,000 km/year/bus · Redundancy percentage without project: 34 percent (according to transit plan for city of Querétaro) · Minibus (small passenger bus) efficiency: 2.9 km/l · Minibus (small passenger bus) lifetime: 12 years · Minibus (small passenger bus) cost: $40,000/minibus · Annual maintenance costs per minibus: $1,034 · Driver salary (two drivers per bus): $556/month/driver · The intervention assumes no new investment costs, only forgone investments · Baseline assumption for number of minibuses in 2030: 1.1 million Urban Densification · Program definition: Reduce annual urban area growth from 0.89 per- cent to 0.4 percent · Project duration: 22 years · Area growth rate: 45 percent of baseline rate · Lag in time to obtain results: 3 years · Infrastructure cost /km2: $4,088,342 for low-density cities, $4,566,235 for high-density cities (Transit Cooperative Research Program 1998) · Annual operation costs/km2: $290,563 for low-density cities, $525,764 for high-density cities (Transit Cooperative Research Pro- gram 1998) This intervention assumes no new investment needed, only forgone investment. Urban area growth reduction involves reduction in urban trip distances proportional to the square root of the urban area, reduction in urban infrastructure and operation costs, and reduction in unpaid time costs, proportional to distances. 128 Low-Carbon Development for Mexico Bus Rapid Transit Systems · Program definition: Establish 122 BRT lines · Project duration: 24 years · Length of line: 15 km · Passengers per line: 125,000 trips/day · Number of standard buses replaced by one articulated bus: 4 · Number of articulated buses per line: 50 · Average trip length: 11 km · Cost of infrastructure: $1.8 million/km · Cost of articulated bus: $300,000/bus · Cost of standard bus: $120,000/bus · Articulated bus lifetime: 12 years · Standard bus lifetime: 12 years · Standard bus mileage: 73,000 km/year · Articulated bus mileage: 250 km/day · Usage factor articulated bus: 300 days/year · Maintenance costs articulated bus: $0.26/km · Salary for driver of articulated bus: $741/month · Annual maintenance costs standard bus: $1,034/bus/year · Salary for driver of standard bus: $556/month · Drivers: 2 drivers/bus · Other assumptions: See table C.10 Table C.10 Assumptions for Vehicles and Passengers before and after BRT Intervention Trips Vehicle occupancy Vehicle forgonea (passengers/ efficiency Vehicle (%) vehicle) (km/l) Fuel Private car 10 1.3 9.3 Gasoline Taxi 6 1.2 10.0 Gasoline Standard bus 84 27.3 2.3 Diesel Articulated bus n.a. 130.0 1.8 Diesel Source: Authors, based on assumptions by Centro de Transport Sustentable de México, A.C. Note: n.a. = not applicable. a. Percentage of BRT passengers traveling by other means before using BRT. Nonmotorized Transport · Program definition: Raise proportion of trips by bicycle in Mexican cities to 6 percent by 2030, through the building of cyclepaths · Project duration: 60 years Project assumptions · Cyclepath length: 100 km · Cyclepath cost: $110,000/km Appendix C: Intervention Assumptions 129 · Bicycles purchased by users: 200 bicycles/km of cyclepath · Bicycle cost: $100/bicycle · Bicycle lifetime: 5 years · Average trip length: 11 km · Trips per year in year 2030: 14.8 million trips/year · Total length of cyclepaths to be built: 37,500 km (based on experi- ence of Portland, Oregon, where similar density of cyclepaths led to 6 percent of trips by bicycle) Without project assumptions · Road infrastructure costs: $5 million · Road infrastructure lifetime: 10 years · Road maintenance: $400,000/year · Car cost: $7,500/car · Car maintenance: $750/year · Cars forgone: 2 cars/km of cyclepath · Car lifetime: 12 years · Other assumptions: See table C.11 Table C.11 Assumptions about Vehicles and Passengers before Nonmotorized Transport Intervention Trips forgone as Vehicle occu- Vehicle result of pancy (passen- efficiency Vehicle intervention (%) gers/vehicle) (km/l) Fuel Buses 62.4 15 2.3 Diesel Cars 29.2 1.3 9.3 Gasoline Motorcycles 5.2 1 15 Gasoline Taxis 3.1 1.2 10 Gasoline Source: Authors, based on assumptions by Centro de Transporte Sustentable de México, A.C., based on experience of Portland, Oregon. Fuel Economy Standards · Program definition: Establish fuel economy standards for cars, sport- utility vehicles, and light-duty vehicles in Mexico · Project duration: 30 years · Efficiency increase: Standards apply from 2011; exponential growth until 2015, then linear growth (figure C.1) · Vehicle lifetime: 15 years · Additional costs calculated from studies carried out by ARB (2009) Inspection and Maintenance in 21 Large Cities · Program definition: Implement inspection and maintenance scheme in Mexico's 21 largest cities (excluding the metropolitan area of Mexico City, where an inspection program is already operational), with a one day a week restriction for older vehicles 130 Low-Carbon Development for Mexico Figure C.1 Projected Vehicle Efficiency with and without Proposed Standard, 2010­30 22 20 efficiency, km/liter passenger cars, 18 with project passenger cars, 16 without project large SUVs, 14 with project large SUVs, 12 without project 10 8 2010 2015 2020 2025 2030 year Source: Authors, based on assumptions by Centro de Transporte Sustentable de México, A.C. · Project duration: 22 years · Percentage of total fleet in 21 large cities: 41 · Percentage of gasoline vehicles in large cities that would be subject to inspection and maintenance, 2009: 95.65 (the remaining percentage corresponds to other vehicles such as motorcycles) · Annual change factor for above percentage: -0.9974 · Percentage of vehicles with one day a week restriction, year 1: 70 · Annual change factor for the percentage: -0.9833 · Percentage of distance reduction for restricted vehicles: 23 percent · Inspection cost: $46/year/vehicle · Additional maintenance cost: $55/year/vehicle · Labor share of inspection and maintenance costs: 40 percent Border Vehicle Inspection · Program definition: Inspect second-hand imported vehicles in order to ensure their compliance with national standards on emissions of cri- teria pollutants · Project duration: 22 years · Estimated number of second-hand imported vehicles, 2009: 890,000 · Estimated annual growth for the amount of second-hand imported vehicles: 4 percent · Estimated percentage of second-hand vehicles that would fail national standards: 20 percent · Remaining lifetime for imported second-hand vehicles: 8 years · Costs (assumed to be incurred only by imported vehicles going through inspection): Appendix C: Intervention Assumptions 131 ­ Additional maintenance: $55/vehicle ­ Inspection: $92/vehicle ­ Labor share of costs: 40 percent Road Freight Logistics · Program definition: Substitute all single-man owned trucks in the country with freight enterprises or cooperatives. A single company with 80 trucks is assumed to provide the same service as 100 single- man owned trucks as a result the reduction in empty trips. · Project duration: 24 years · Truck efficiency: 3.4 km/l · Truck mileage: 70,000 km/year · Truck cost: $300,000/truck · Intervention assumes that there is no new investment; only forgone investment · Truck life: 12 years · Truck maintenance: $20,000/truck/year · Truck driver salary: $741/month · Drivers: 2/truck · Management costs for enterprise: $1.5 million/year · Number of single-man owned trucks to be substituted: 1 million Railway Freight · Program definition: Move 37 percent of total long-distance freight by rail by 2030 · Project duration: 22 years · Road and railway freight assumptions for a 600 km trip: See table C.12 · Current long-distance freight: 321 billion t × km/year · Current railway share 7.6 percent · Long-distance freight expected in 2030: 658 billion t × km/year · Expected railway share without project in 2030: 7.6 percent · Expected railway share with project in 2030: 37.0 percent Table C.12 Road and Railway Freight Transport Assumptions Item Road Railway Capacity (tons) 30 3,000 Load factor (percent) 70 100 Fuel efficiency (km/liter) 1.20 0.033 Operations and maintenance costs excluding fuel ($/trip) 900 90,000 Source: Authors. 132 Low-Carbon Development for Mexico Agriculture and Forestry Sector General assumptions for the sector are as follows: · Long-distance transport assumptions (for biomass fuels): ­ Truck capacity: 16 tons/truckload ­ Fixed transport cost: $92.59/truckload ­ Variable transport costs excluding diesel: $0.38/km ­ Share of labor cost in fixed and variable transport costs: 50 percent ­ Specific diesel consumption: 0.33 l/km ­ Annual deforestation rate in the baseline: 0.5 percent ­ Annual degradation rate in the baseline: 0.7 percent ­ Emissions from deforestation: 143.9 t CO2/hectare ­ Emissions from degradation: 28.3 t CO2/hectare (degradation occurs over several years; it is assumed here to occur in a single year in order to simplify the model) Biomass Electricity · Program definition: Install a biomass-fired power-generation capacity of 5,000 MW · Project duration: 26 years Power plant assumptions · Typical power plant size: 24 MW · Plant factor: 80 percent · Own consumption: 5 percent · Gross efficiency: 20 percent · Investment costs: $2.25 million/MW (Martin 2008) · Direct labor cost: $5.37/MWh (gross) (based on data from CBC 2008) · Management and administration: $0.54/MWh (gross) (CBC 2008) · Maintenance: $4.03/MWh (gross) (CBC 2008) · Insurance: $3.76/MWh (gross) (CBC 2008) · Variable operations and maintenance costs: ­ Purchases: $1.07/MWh (gross) (CBC 2008) ­ Ash disposal: $0.54/MWh (gross) (CBC 2008) ­ Other operation expenses: $0.75/MWh (gross) (CBC 2008) ­ Cooling water usage: 2.00 m³/MWh (gross) ­ Investment schedule: Year ­3: 10 percent; Year ­2: 40 percent; Year ­1: 50 percent ­ Cost factors for externalities: SO2: $0.010/MWh (gross); sulphates: $0.669/MWh (gross); PM10: $0.054/MWh (gross); NOX: $1.227/MWh (gross) Biomass production and forest management data · Deforestation and degradation rates with project: 0 · Fuelwood high heat value: 19 GJ/TDM (De Jong and Olguín-Álvarez 2008) Appendix C: Intervention Assumptions 133 · Fuelwood (cordwood) productivity: 2.9 TDM/hectare/year (De Jong and Olguín-Álvarez 2008) · Forest management costs, every 10 years: $35/hectare · Timber productivity: 1.3 TDM/hectare/year · Timber stumpage price: $92.59/TDM · Fuelwood harvesting costs (roadside fuelwood cost): $26.24/TDM · Percent of labor cost in harvesting: 65 · Fuelwood handling and chipping: $8.50/TDM · Harvestable area (area around the power plant available to be har- vested): 30 percent · Emissions from fuelwood combustion: 0.050 t CO2e/MWh Fuelwood Co-firing · Program definition: Retrofit the six units of the Petacalco power plant, with a combined capacity of 2,100 MW, so that they are fired by a mix of 80 percent coal and 20 percent biomass · Project duration: 22 years Power plant assumptions without project · Capacity before retrofitting: 350 MW · Plant factor: 90 percent · Own consumption: 7.2 percent · Fixed operations and maintenance costs: $34,619/year/MW · Variable operations and maintenance costs: $0.198/MWh (gross) · Cooling water usage: 2.79 m³/MWh (gross) · Gross efficiency: 40.81 percent · Cost factors for externalities: SO2: $0.261/MWh (gross); sulphates: $17.440/MWh (gross); PM10: $1.995/MWh (gross); NOX: $1.798/ MWh (gross) Power plant assumptions with project · Plant factor: 87 percent · Biomass use: 20 percent · Own consumption: 7.2 percent · Retrofitting investment costs: $260,000/MW · Fixed operations and maintenance costs: $34,619/year/MW · Variable operations and maintenance costs: $0.198/MWh (gross) · Cooling water usage: 2.79 m³/MWh (gross) · Gross efficiency: 37.81 percent · Investment schedule: Single year · Cost factors for externalities: SO2: $0.061/MWh (gross); sulphates: $0.000/MWh (gross); PM10: $0.381/MWh (gross); NOX: $1.045/ MWh (gross) · Greenhouse gas emissions from fuelwood combustion: 0.050 t CO2e/ MWh 134 Low-Carbon Development for Mexico Biomass production and forest management data · Deforestation and degradation rates with project: 0 · Fuelwood high heat value: 19 GJ/TDM (De Jong and Olguín-Álvarez 2008) · Fuelwood productivity: 2.9 TDM/hectare/year (De Jong and Olguín- Álvarez 2008) · Forest management costs, every 10 years: $35/hectare · Timber productivity: 1.3 TDM/hectare/year · Timber stumpage price: $92.59/TDM · Fuelwood harvesting costs (roadside fuelwood cost): $26.24/TDM · Percent of labor cost in harvesting: 65 · Fuelwood handling and chipping: $16.00/TDM · Harvestable area: 30 percent Charcoal Production Program definition · Part A: Meet 75 percent of industrial coke demand in Mexico with charcoal · Part B: Improve charcoal production for urban (residential and com- mercial) consumption by ensuring sustainable forest management and substituting traditional kilns by improved kilns for 70 percent of char- coal production Part A Project assumptions · Project duration: 31 years · Module size: 500 hectares · Module is divided into 10 equal parts, called coupes. Annual coupe size: 50 hectares (exploitation will be made in 10-year cycles; every year a new coupe is exploited) · Average standing stock: 150 m³/hectare · Average allowed cut per coupe: 45 m³/hectare · Area per kiln: 3.125 hectare · Dry matter contents: 65 TDM/m³ wood · Wood to charcoal conversion (improved kilns): 0.3 t charcoal/TDM · Large-scale charcoal production costs: See table C.13 · Operation costs: $162/t charcoal · Share of labor cost in operation costs: 80 percent · Average long-distance transport: 400 km · Chainsaws: 8 chainsaws/module · Liters of gasoline per day per chainsaw: 3 l/day/chainsaw · Chainsaw use: 200 days/year · Small local truck capacity: 5 m³/trip · Gasoline per trip of small truck: 3 l/trip · Non­CO2 charcoal kiln emissions: 1.108 t CO2e/t charcoal (Pennise and others 2001) · Coke replacement coefficient: 1.00 t charcoal/t coke Appendix C: Intervention Assumptions 135 Table C.13 Large-Scale Charcoal Production Costs Lifetime Production costs Cost ($) (years) Preparation of forest management program (1 module, 500 hectare) 9,259 10 Firebreaks and roads construction 3,000 meters per coupe first year 27,778 1 3,000 meters per coupe following years 20,833 1a Kilns 26,667 2a 4-tonner second-hand truck 4,630 3 Chainsaws 5,926 1 Source: Estimates by charcoal experts Enrique Riegelhaupt and Tere Arias. a. Consecutive coupes are adjacent and can use roads built earlier. Biomass production and forest management data · Deforestation and degradation rates with project: 0 · Forest management costs, every 10 years: $35/hectare · Module timber productivity: 1.3 TDM/hectare/year · Timber stumpage price: $92.59/TDM Program assumptions · National coke demand 2009: 3.29Mt/year · National coke demand forecast for 2031: 9.5 Mt/year Part B project assumptions · Production of charcoal per improved kiln: 54 t charcoal/year/kiln (equivalent to production of one improved kiln) · Fuelwood cost: $26/TDM fuelwood · Labor cost: $12/day · Charcoal price: $185/t · Traditional and improved charcoal kiln assumptions: See table C.14 · Estimated charcoal demand in 2008: 592,102 t charcoal/year · Estimated annual growth of charcoal demand: 0.8 percent · Fuelwood productivity: 2.9 TDM/hectare/year Forest Management · Program definition: Place 9 million hectares under forest management · Project duration: 30 years · Forest management costs: $35.00/hectare/10 years · Operations and maintenance costs: $36.50/hectare/year · Revenue from wood sales: $120/hectare/year · Revenue without project (opportunity costs): $31.50/hectare/year 136 Low-Carbon Development for Mexico Table C.14 Assumptions about Traditional and Improved Charcoal Kilns Traditional Improved Kiln assumptions kiln kiln Charcoal/wood ratio (t charcoal/TDM) (%) 18 30 Labor days per ton of production 6.00 2.22 Investment per kiln ($) n.a. 1,980 Operations and maintenance first year per kiln (training and n.a. 146 supervision costs) ($) Lifetime (years) n.a. 5 Emissions of CO2 (t CO2e/t charcoal) 2.403 1.382 Emissions of other gases (CH4 and N2O) (t CO2e/t charcoal) 1.106 1.108 Percentage of nonrenewability 80 0 Source: Pennise and others 2001; estimates by charcoal experts Enrique Riegelhaupt and Tere Arias. Note: n.a. = not applicable. Wildlife Management · Program definition: Place 30 million hectares under wildlife management · Project duration: 22 years · Investment costs: $15/hectare · Operations and maintenance costs: $36.50/hectare/year · Revenue from agritourism: $4/hectare/year · Revenue without project (opportunity costs): $31.50/hectare/year Payment for Environmental Services · Program definition: Place 5 million hectares under compensation for environmental services · Project duration: 22 years · Investment costs: 0 · Operations and maintenance costs: $35.19/hectare/year · Revenue with project: 0 · Revenue without project (opportunity costs): $31.50/hectare/year Afforestation · Program definition: Afforest 1.5 million hectares · Project duration: 30 years Project assumptions · Investment: $1,120/hectare · Maintenance: $230/hectare/year (this is considered as investment in the economic analysis because it takes place only during the first five years) · Opportunity costs: $140/hectare/year · Harvest factor: 30 percent · Harvest pattern: First 30 percent harvest at year 10; second 30 per- cent harvest at year 20; final harvest (100 percent) at year 30 Appendix C: Intervention Assumptions 137 · Stumpage value: $20/m³ · Percentage of carbon contents of harvest that is emitted to the atmo- sphere: 50 percent Sequestration data · Growth: 9.92 m³/hectare/year · Specific weight: 0.6 TDM/m³ · Carbon contents of dry matter: 0.48 t C/TDM Reforestation and Restoration · Program definition: Reforest or restore 4.5 million hectares of forest · Project duration: 30 years Project assumptions · Investment: $1,119.57/hectare · Maintenance: $229.56/hectare/year (this is considered as investment in the economic analysis because it takes place only during the first five years) Without project assumptions · Cattle productivity: 40 kg/hectare/year · Cattle price per kg (alive): $2 · Expenses as a percentage of gross income: 80 percent Sequestration assumptions · Forest growth: 4.71 m³/hectare/year · Specific weight: 0.6 TDM/m³ · Carbon contents of dry matter: 0.48 t C/TDM Zero-Tillage Maize · Program definition: Convert 2.5 million hectares from traditional maize agriculture to zero-tillage maize agriculture · Project duration: 24 years Project assumptions · Opportunity costs: $139/hectare/year (FIRA 2006a, 2006b) · Technical services: $37/hectare/year (FIRA 2006a, 2006b) · Administration costs: 15 percent of variable costs (FIRA 2006a, 2006b) · Tractor costs per hour excluding diesel: $19/hour · Labor cost: $11/day · Diesel consumption by tractor: 8.21l/hour · Maize price: $259/t (market survey) · Stubble price: $74/t (market survey June 2008: $Mex20 per 25 kg pack) · Stubble production: 5 t/hectare/year (Etchevers, Tinoco, and Riegel- haupt 2008) · Baseline and zero-tillage costs: See table C.15 · Cost of additional machinery: $40,000 (Etchevers, Tinoco, and Riegelhaupt 2008) 138 Low-Carbon Development for Mexico Table C.15 Baseline and Zero-Tillage Costs With project Without Item project First year Ensuing years Tractor time (hours/year/hectare) 17 12.25 8 Labor time (days/year/hectare) 14.5 10.6 8.25 Seed cost ($/hectare/year) 111 111 111 Agrochemical products (herbicides) ($/hectare/year) 106 106 160 Fertilizer ($/hectare/year) 324 324 389 Productivity (t/hectare) 3.20 3.20 Gradually increasing Annual productivity gain (t/hectare/year) n.a. n.a. 0.1 Stubble availability for sale (%) 70 0 0 Source: FIRA 2006a and 2006b; Etchevers, Tinoco, and Riegelhaupt 2008. Note: n.a. = not applicable. · Machinery lifetime: 8 years · Area covered by one machine: 810 hectares/year (60 days/year × 13.5 hectares/day) · Incorporation of stable organic matter to soil: 0.20 t/hectare/year · Content of carbon in organic matter: 85 percent Sugarcane Ethanol · Program definition: Develop 1.5 million hectares of sugarcane etha- nol production · Project duration: 29 years Project assumptions · Typical plant capacity: 85,000 m³ ethanol/year; 550 m3/day · Lifetime: 25 years · Unit investment cost: $388/m³ ethanol/year · Investment profile: Year ­4: 9.1 percent; Year ­3: 22.7 percent; Year ­2: 27.3 percent; Year ­1: 40.9 percent · Factory operations and maintenance: $4.40/t sugarcane · Labor share: 30 percent · Ethanol conversion factor: 0.08 m³ ethanol/t sugarcane Sugarcane costs · Transport cost: $3.06/t sugarcane (FIRA 2007) · Field costs: $30/t sugarcane (FIRA 2007) · Labor share: 40 percent Energy production · Electricity generation: 0.08 MWh/t sugarcane · Electricity consumption: 0.03 MWh/t sugarcane · Distribution loss factor: Subtransmission voltage Appendix C: Intervention Assumptions 139 Plantation assumptions · Yield: 61 t/year/hectare Sorghum Ethanol · Program definition: Develop 3 million hectares of sorghum ethanol production · Project duration: 30 years Project assumptions · Typical plant capacity: 165,000 m³ ethanol/year; 0.5 million l/day · Lifetime: 25 years · Unit investment cost, including planning: $557/m³ ethanol/year · Investment profile: Year ­5: 9.1 percent; Year ­4: 22.7 percent; Year ­3: 27.3 percent; Year ­2: 18.2 percent; Year ­1: 22.7 percent · Operations and maintenance: $11.42/t sorghum · Labor share of operations and maintenance costs: 12 percent · Ethanol conversion factor: 0.36 m³ ethanol/t sorghum · Transport cost, average 100 km: $8.49/t sorghum · Field costs: $135/t sorghum · Labor share of field costs: 18 percent · By-product sales: DDG yield: 0.333 tons DDG/t sorghum; value: $140/t DDG · Electricity consumption: 0.0756 MWh/t sorghum · Distribution loss factor: Primary low voltage · Natural gas consumption: 0.00835 GJ/t sorghum · Sorghum high yield: 3.5 t/year/hectare · Sorghum medium yield: 2 t/year/hectare · High- and medium-yield surfaces grow up to a total of 3 million hectares Palm Oil Biodiesel · Program definition: Develop Mexico's production of palm oil bio- diesel reaching a surface area of 215,000 hectares in 2030 · Project duration: 25 years Project assumptions · Plant investment, including planning stage: $12,482,800/plant · Plant capacity: 37,854 m³/year · Investment profile: Year ­2: 9 percent; year ­1: 91 percent · Fixed operations and maintenance costs: $377,900/year/plant · Labor share of operations and maintenance costs: 47 percent · Cost of fresh fruit bunches: $111/t · Labor share of fresh fruit bunch costs: 45 percent · Oil yield from fresh fruit bunches: 20.40 percent (www.fedepalma.org) · Use of other raw materials: See table C.16 · Miscellaneous materials: $153,000/year/plant · Greenhouse gas emissions from the use of these materials are calcu- lated from IPCC emission factors 140 Low-Carbon Development for Mexico Table C.16 Use of Raw Materials in the Production of Biodiesel Raw material Needs (t/year/plant) Unit cost ($/t) CH3OH 3,921 278.53 NaOCH3 329 953.54 HCl 273 128.06 NaOH 167 598.80 Water 1,124 1.78 Source: Estimates by Oliver Probst, Instituto Tecnológico y de Estudios Superiores de Monterrey. · Electricity consumption: 1,008 MWh/year/plant · Distribution loss factor: Primary low voltage · Diesel consumption (for transportation): 10,000 GJ/year/plant By-products · Kernel: 7,716 t/plant/year, at $150/t · Glycerine: 3,429 t/plant/year, with no value ($0.00/t) Plantation data · Average yield: 16.3 t fresh fruit bunch/year/hectare (INEGI data) · Production curve reaches maximum of 24 t/hectare/year for high- yield areas and then declines · Medium-yield areas: 60 percent of high-yield areas Bibliography Antonius, A., S. 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Index Boxes, figures, tables, and notes are indicated B with b, f, t, and n following the page number. bagasse power, 23, 32, 52­53, 73, 123 baseline scenario aggregate results, 83­85, 84f, 84t A agriculture, 74 afforestation, 7, 15, 77, 78, 136­37 electric power, 25­27, 26f agrarian reform, 74, 82n2 energy end-use, 46­51 agriculture, 73­82 forestry, 74 baseline scenario, 74 oil and gas, 37 biofuels and, 6 residential sector, 49­50 deforestation and, 74 transport, 64­66 electricity subsidies, 57, 58b baseload power generation, 27 energy end-use, 46f, 51 benefit-cost analysis methodology, 11, 12b, GHG emissions from, 15, 16, 17f 109­12 implementation barriers, 80­81 bicycles. See nonmotorized transport MEDEC low-carbon scenario, 6, 7f, 75f, biodigestors, 79 77­78, 80t, 86, 86t, 87f, 90, 132­40 biodiversity, 15, 22n1 mitigation options, 5­6, 21t biofuels, 6, 19, 78 air conditioning biogas, 20b, 29, 29t, 117­18 commercial and public sector, 50, 52, 120 biomass electricity mitigation potential, 4, 7 assumptions, 132­33 residential sector, 49­50, 51­52, 123­24 electric power demand and, 2­3 air quality forestry interventions, 76 benefit-cost analysis, 12b generation capacity, 23 low-carbon interventions and, 87­88 MEDEC low-carbon scenario, 27­28, oil and gas interventions and, 15 29f, 32, 89 standards, 9, 101b, 102 residential sector consumption, 49 transport interventions and, 5, 69b border vehicle inspections, 89, 130­31 animal biogas, 20b bottoming-cycle plants, 52, 60n7 appliance retirement programs, 4, 46, 50, Boyd, R., 89 51, 52 Brazil Asia-Pacific Economic Cooperation cement industry efficiency, 48 (APEC), 61n9 electric power generation, 24f associated gas, 36­37, 37f, 44n5 energy intensity, 47f Austria and biomass electricity generation, 76 GHG emissions in, 15, 16f automobiles. See vehicles oil and gas industry reforms, 44n2 149 150 Low-Carbon Development for Mexico building codes, 9, 50­51 Comisión Federal de Electricidad (CFE) bus rapid transit (BRT) distribution losses, 25, 25f assumptions, 128 electricity system role of, 23 implementation barriers, 71 financing infrastructure investments, 98 MEDEC low-carbon scenario, 67 low-carbon interventions and, 3, 32, 33n5 mitigation potential, 5 private sector partnership with, 94­95 near-term feasibility, 9 residential lighting program, 103 bus system optimization, 67, 89, 96, 127 transmission losses, 25, 25f Comisión Intersecretarial de Cambio C Climático (CICC), 18, 22n5 CAFE standard, 72n2 Comisión Nacional del Agua (CONAGUA), Calderón, Felipe, 11 30 Canada Comisión Nacional para el Ahorro de cement industry efficiency, 48 Energía (CONAE), 45, 61n9 GHG emissions in, 16f Comisión Nacional para el Uso Eficiente refinery efficiency in, 44n8 de la Energía (CONUEE), 45­46, 59 Cantarell field, 35, 44n5 commercial building codes, 9, 50­51 carbon markets, 2, 12, 104­5 commercial credit markets, 4, 36, 41, 42b, 95 carbon monoxide, 53b commercial fishing, 14 carbon sequestration, 6, 22n3, 73, 77, 79 commercial plantations, 5. See also af- cement industry, 4, 47­48, 48f forestation CFE. See Comisión Federal de Electricidad commercial sector charcoal production, 76, 81, 134­35 air conditioning, 52, 120 chemicals and petrochemicals industry, 4, energy end-use, 45, 46f, 60n4 47­48, 48f implementation barriers, 55t, 56­57 China lighting, 52, 121 electric power generation, 24f community ownership of forests, 80 energy intensity, 47f compact fluorescent lighting, 4, 46, 49, 52 GHG emissions in, 15, 16f computable general equilibrium (CGE) CICC (Comisión Intersecretarial de Cam- model, 90, 105n5 bio Climático), 18, 22n5 CONAE (Comisión Nacional para el Clean Development Mechanism (CDM), Ahorro de Energía), 45, 61n9 9, 103 CONAGUA (Comisión Nacional del Clean Investment Funds, 105 Agua), 30 Clean Tech Fund, 61n9 congestion charges, 70 climate change agenda, 1, 11, 14, 17­18, contracting policies, 59 22n1 CONUEE (Comisión Nacional para el Uso coal-fired power Eficiente de la Energía), 45­46, 59 baseline scenario, 26, 32, 37 cookstoves. See improved cookstoves electric power demand and, 2 corporate average fuel economy (CAFE) fuelwood co-firing and, 76 standard, 72n2 generation capacity, 24, 24f cost-benefit analysis. See benefit-cost MEDEC low-carbon scenario, 27, 28, 29f analysis methodology co-benefits costs of agriculture and forestry interventions, 6 electric power interventions, 30 of low-carbon interventions, 1­2, 14, improved cookstoves, 54f 87­89, 101­2 marginal abatement cost curve, 7, 8f, of transport interventions, 5 12b, 88­89, 88f, 95 cogeneration MEDEC low-carbon scenario, 7, 18­19, bagasse, 123 28­29, 28t electric power interventions, 3 cultural resistance to change, 81 energy end-use interventions, 52­53 implementation barriers, 42 D industrial sector, 48, 122­23 deforestation. See reduce emissions from MEDEC low-carbon scenario, 28, 32, deforestation and forest degradation 85, 119 (REDD) at Pemex, 3, 9, 10, 38, 38t, 41t, 44n6, demand projections 89, 100 electric power, 2, 4, 26 coking, 39, 76 energy end-use, 51 combined-cycle technology, 27, 36, 38 oil and gas, 36­37 Index 151 diesel fuel, 64, 65f, 70, 77 energy service companies (ESCOs), 56­57, direct reduction process, 60n3 59­60, 61n10, 99 distillers grains, 78 environmental protection distribution losses, 25, 35 co-benefits of agriculture and forestry dry seals, 40, 40t interventions, 6 co-benefits of electric power interven- E tions, 30 co-benefits of low-carbon interventions, economic development 2, 14, 22n1 in benefit-cost analysis, 12b, 87 forestry interventions and, 101 co-benefits of agriculture and forestry environmental service payments, 77, 81, 136 interventions, 6, 15 EPS Capital Corporation, 61n9 low-carbon interventions and, 1, 13, ESCOs. See energy service companies 20b, 88­90, 89f, 90t ESMAP (Energy Sector Management As- oil and gas interventions, 3­4 sistance Program), 61n9 efficiency improvements Estrategia Nacional de Cambio Climático charcoal production, 76, 81 (ENACC), 11, 12 energy end-use, 4, 56­57 exploration and development investments, investments, 96 3­4, 41, 42b, 43 mitigation potential, 7, 15 externalities. See co-benefits oil and gas, 35 policies supporting, 100b refineries, 38, 41t, 44n8, 85 F transport sector, 5 feasibility of low-carbon interventions, 19, utilities, 36, 39, 118 20b, 94­97 vehicles, 7, 9 federal budget ejidos, 82n2 for forestry sector, 82n5 electric arc furnaces, 60n3 MEDEC low-carbon scenario impact Electricity Sector Outlook (SENER), 32n4 on, 90 electricity tariffs, 9 oil and gas revenues and, 4, 35, 36, 41, electric power, 23­33 43 baseline scenario, 25­27, 26f, 27f, 29f, 85 Pemex infrastructure investments and, end-use efficiency, 51­52 42b GHG emissions from generation of, 16, public sector investments and, 57­59 17f, 18f federal contracting policies, 59 high-priority interventions, 94 federal transport interventions, 9, 70, 101b implementation barriers, 30­31, 31t feed-in tariffs, 100b MEDEC low-carbon scenario, 6, 7f, fertilizers, 16 27­30, 27f, 28­29t, 29f, 85, 86, 86t, Fideicomiso para el Ahorro de Energía 87f Eléctrica (FIDE), 9, 45­46, 59, 103 assumptions, 114­18 financing. See also federal budget mitigation options, 2­3, 21t MEDEC interventions, 8, 95, 98­99, 98t electronic appliances. See appliance retire- oil and gas investments, 3­4, 24­25, 42b ment programs fine particulate matter, 53b emissions reductions, 6­7, 87­89. See also First National Communication to greenhouse gases (GHGs) UNFCCC, 17 ENACC (Estrategia Nacional de Cambio fishing, commercial, 14 Climático), 11, 12 flaring, 15, 37, 41, 44n5 energy end-use, 45­61, 46f fluidized catalytic cracking, 39 baseline scenario, 46­51 fluorescent lighting, 52 demand projections, 51 Fondelec Capital Advisors, 61n9 high-priority interventions, 94 food and tobacco industry, 47, 48f implementation barriers, 55­56t, 55­59 forest management, 2, 9, 22n1, 76, 135 MEDEC low-carbon scenario, 6, 7f, forestry, 73­82 51­55, 54t, 86, 86t, 87f baseline scenario, 74 assumptions, 120­26 high-priority interventions, 94 mitigation options, 4­5, 21t implementation barriers, 80­81 energy intensity, 46, 47f MEDEC low-carbon scenario, 7f, Energy Sector Management Assistance 75­77, 75f, 80t, 86, 86t, 87f, 90 Program (ESMAP), 61n9 assumptions, 132­40 152 Low-Carbon Development for Mexico mitigation options, 5­6, 21t high-priority interventions, 9­10, 11, policy framework for, 101b 93­94, 102­3 freight. See railways; road freight logistics Hurricane Mitch, 14 fuel economy standards Hurricane Wilma, 14­15 assumptions, 129 hybrid vehicles, 70 CAFE standard, 72n2 hydraulic turbines, 55 MEDEC low-carbon scenario, 68, 89 hydrocracking, 39 policy recommendations, 9 hydropower. See also small hydropower refinery efficiency and, 39 generation capacity, 23, 24, 24f, 33n8 fuelwood, 53, 73­74, 76, 133­34. See also implementation barriers, 30 improved cookstoves MEDEC low-carbon scenario, 29f, 32, 85 fugitive emissions, 15, 18f, 41 hydrotreating, 39 Fund for Electricity Savings. See Fideicomi- so para el Ahorro de Energía Eléctrica I furnaces, 48, 60n3 Ibarrarán, M. E., 89 IEA (International Energy Agency), 48 G implementation barriers gas-fired power agriculture, 80­81 baseline scenario, 26, 32 commercial sector, 56­57 electric power demand and, 2 electric power, 30­31, 31t generation capacity, 23­24, 24f, 33n8 energy end-use, 55­56t, 55­59 MEDEC low-carbon scenario, 27, 29f forestry, 80­81 gasifier technology, 38, 79 identification objectives, 11 gas leakage reduction, 3, 39­40, 41t, 118­19 industrial sector, 56­57 gasoline, 64, 65f, 100b MEDEC interventions, 94­97 generation capacity, 23, 24f oil and gas, 41­43 geographic information system (GIS), 74, 75f policy recommendations, 8­9 geothermal power, 2­3 public sector, 57­59 generation capacity, 23, 24f residential sector, 57 MEDEC low-carbon scenario, 27­29, transport, 70­71 29f, 29t, 32, 85, 89, 117 windpower, 3 GIS (geographic information system), 74, 75f improved cookstoves Global Environment Facility, 105, 105n1 assumptions, 126 government buildings, 9. See also public baseline scenario, 49 sector health co-benefits of, 49, 53, 53b, 61n8 greenhouse gases (GHGs) MEDEC low-carbon scenario, 53­55, agriculture sector emissions, 74 53b, 54f, 57, 89 electric power emissions, 26­27 mitigation potential, 4, 7 emission levels, 12b, 15­17, 16­18f incandescent lighting, 4, 49, 52 forestry sector emissions, 74 incremental net costs, 12b, 32 transport sector emissions, 65, 66f independent power producers (IPPs), 23, 99 grid-connected photovoltaic technologies, 30 India Gulf Coast wetlands, 14, 22n2 electric power generation, 24f Gulf of Mexico, 14 energy intensity, 47f GHG emissions in, 15, 16f H industrial sector halogen lighting, 52 cogeneration, 7, 48, 122­23 health energy end-use, 45, 46, 46f, 47­49, 60n2 benefit-cost analysis, 12b GHG emissions from, 15, 16, 17f electric power interventions and, 30 implementation barriers, 55t, 56­57 improved cookstoves and, 49, 53, 53b, mitigation potential, 4, 22n6 61n8 motors, 52, 122 low-carbon interventions and, 2, 14, INE (Instituto Nacional de Ecologia), 87­89 22n2, 69b nonmotorized transport benefits, 67 infrastructure improvements transport interventions benefits, 5, 69, financing, 98 69b, 71, 101 oil and gas investments, 42b heat recovery, 39, 52, 60n7 transport interventions and, 67 high-pressure sodium lighting, 52 institutional barriers, 8, 80, 103 Index 153 Instituto Nacional de Ecologia (INE), transport interventions and, 67, 71, 101b 22n2, 69b Law for Sustainable Energy Use (2008), 45 insulation, 51­52, 103 leakage and GHG emissions, 3, 15, 39­40, Intergovernmental Panel on Climate 41t, 118­19 Change (IPCC), 14, 22n2 life-cycle cost, 57, 95 intermittent power generation, 27 light-duty vehicles, 64­65, 65f international best practices, 25, 48 lighting International Energy Agency (IEA), 48 commercial and public sector, 50, 52, 121 international support, 103­5 mitigation potential, 4, 7 Intersecretarial Commission on Climate near-term feasibility, 9 Change. See Comisión Intersecre- residential sector, 52, 103, 124 tarial de Cambio Climático street, 52, 121 interventions. See also specific sectors liquefied petroleum gas (LPG), 37, 49, 50 aggregate results, 83­91 livestock, 15, 16, 74, 78, 79 agriculture, 5­6 local government. See municipal government assumptions, 113­40 Long-range Energy Alternatives Planning electric power, 2­3 (LEAP), 6, 83, 91n1 energy end-use, 4­5 Los Tuxtlas project, 10 forestry, 5­6 Luz y Fuerza del Centro (LyFC) macroeconomic impact of, 89­90 distribution losses, 25, 25f oil and gas, 3­4 electricity system role of, 23 by sector, 2­6, 21t financing infrastructure investments, 98 selection criteria, 2, 20b, 88­89, 89f transmission losses, 25, 25f summary, 107­8 transport, 5 M investments. See also financing macroeconomic impact of low-carbon electric power interventions, 28­29, 28t scenario, 89­90, 90t, 105n5 marginal abatement investment curve, mangrove destruction, 14 95­96, 96f marginal abatement cost curve, 7, 8f, 12b, MEDEC low-carbon scenario, 94­97, 88­89, 88f, 95 96f, 97t marginal abatement investment curve, oil and gas sector, 3­4, 42b 95­96, 96f transport interventions, 67 market development barriers, 8 in utilities, 29­30 mass transit. See bus rapid transit; public IPCC (Intergovernmental Panel on Climate transportation Change), 14, 22n2 mercury vapor lighting, 52 iron and steel industry, 4, 47­48, 48f, 60n7 methane emissions, 39­40, 41, 79 irrigation dams, 30 Methane to Markets program, 91n6 México: Estudio sobre la Disminución de J Emisiones de Carbono (MEDEC). Japan, cement industry efficiency in, 48 See also specific sectors Japan Bank for International Cooperation, benefit-cost methodology, 11, 12b, 61n9 109­12 jatropha biodiesel, 6, 79 low-carbon interventions aggregate results, 83­91, 86t K assumptions, 113­40 investment requirements, 94­97, kilns, 48, 76, 81 96f, 97t Kyoto Protocol, 17, 22n4 macroeconomic impact of, 89­90 by sector, 21t L selection criteria, 2, 20b, 88­89, 89f landfill sites, 22n6, 91n7 summary, 107­8 land use, land-use change, and forestry objectives, 11­13 (LULUCF), 15­16, 17, 78­79, 79f sector analysis overview, 13, 18­19 land-use planning minimum energy performance standards biofuels and, 6 (MEPS), 50, 59 climate change impact on, 14 mining industry, 47, 48f coordination on, 9 Ministry of Energy. See Secretaría de mitigation potential, 5 Energía 154 Low-Carbon Development for Mexico mitigation options. See interventions 38­41, 86, 86t, 87f motorization rate, 63, 64f assumptions, 118­20 motors, industrial, 48, 122 mitigation options, 3­4, 15, 21t, 22n6 municipal government refinery efficiency, 38­39 commercial building codes, 51 Oportunidades Energéticas, 58b energy efficiency improvements, 9 opportunity costs, 12b land-use planning and public transport, 9 oyster production, 14 transport interventions and, 70, 101b vehicle inspection program and, 68 P palm oil biodiesel, 6, 78, 139­40 N palm oil cake, 78 Nacional Financiera (Nafin), 61n9 parking restrictions, 70 National Certification Program of Ejido passenger cars, 64­65, 65f Rights and Urban Lots (PROCEDE), peak power generation, 27 82n2 PECC (Programa Especial de Cambio National Climate Change Strategy, 11, 59 Climático), 1, 11 National Commission for the Efficient Use pedestrians. See nonmotorized transport of Energy. See Comisión Nacional Petrobras (Brazil), 44n2 para el Uso Eficiente de la Energía Petróleos Mexicanos (Pemex) National Commission on Energy Savings. cogeneration, 7, 9, 10, 38t, 44n6, 89, 100 See Comisión Nacional para el debt load, 3­4, 36, 36f, 42b Ahorro de Energía financing infrastructure investments, National Development Plan. See Plan 42b, 98 Nacional de Desarrollo as implementation barrier, 41­43 National Forest Strategy, 82n5 oil and gas interventions, 3­4, 35 National Institute of Ecology (INE), 22n2, operational efficiency, 36, 39 69b photovoltaic technologies, 30 National Water Commission, 30 PIDIREGAS. See Proyectos de Impacto natural disasters, 14 Diferido en el Registro de Gasto natural gas. See oil and gas sector Plan Nacional de Desarrollo (PND), 11 new vehicles, efficiency standards for, 5, policy framework 7, 9 oil and gas, 43 nonassociated gas, 36­37, 37f recommendations, 8 nonmotorized transport, 5, 67­68, 128­29 supporting low-carbon interventions, nonresidential sector. See commercial 99­100, 100­101b sector pollutants no-regrets interventions benefit-cost analysis, 12b defined, 1 low-carbon interventions and, 2 economic development and, 13 transport interventions and, 5, 69b energy end-use, 53 portfolio theory, 32, 33n8 intervention selection and, 20b precipitation patterns, 14 oil and gas interventions, 43 pressure recovery, 39, 55 priority given to, 2 pricing North America Development Bank oil and gas, 9 (NADB), 61n9 policies, 100b Norway, oil and gas industry reforms, 44n2 transport fuels, 63­64, 65f nuclear energy, 23, 24f, 29f, 30 underpricing of electricity, 58b principal-agent problem, 95 O private sector offshore oil and gas, 37 agrarian reform and, 82n2 oil and gas sector, 35­44 cogeneration investments, 42 baseline scenario, 37 investments from, 8­9, 98­99, 98t cogeneration in Pemex, 38 oil and gas investments, 43 gas leakage reduction, 39­40, 41t wind projects investments, 94­95 generation capacity, 24f Proarbol program, 82n5 GHG emissions from, 15, 18f PROCEDE (National Certification implementation barriers, 41­43 Program of Ejido Rights and Urban investments, 9 Lots), 82n2 MEDEC low-carbon scenario, 6, 7f, procurement rules, 9, 30, 33n5, 100b Index 155 Programa Especial de Cambio Climático residential building code, 50 (PECC), 1, 11 residential sector Proyectos de Impacto Diferido en el Reg- air conditioning, 49­50, 51­52, 123­24 istro de Gasto (PIDIREGAS), 24­25, baseline scenario, 49­50 42b, 44n3 biomass consumption, 49 public-private partnerships, 94­95, 98 electricity subsidies and tariffs, 9, 57, public sector 58b air conditioning, 52, 120 energy end-use, 4, 45, 46f, 49­50 energy end-use, 46f, 60n4 implementation barriers, 56t, 57 implementation barriers, 56t, 57­59 lighting, 52, 103, 124 investments from, 8­9, 98­99, 98t refrigeration, 52, 125 lighting, 52, 121 resource sharing schedule, 30 procurement rules, 9, 30, 33n5, 100b road freight logistics public transportation, 5, 7, 9, 71, 101b assumptions, 131 investments, 96 R MEDEC low-carbon scenario, 68, 89 mitigation potential, 5 railways rural areas freight transport, 5, 68­69, 89, 96, co-benefits of agriculture and forestry 105n2, 131 interventions, 6 passenger transport, 70 fuelwood use in, 73­74 recycling programs, 91n7 improved cookstoves, 4, 49, 53b, 57, reduce emissions from deforestation and 59, 61n8 forest degradation (REDD) biofuels and, 19 MEDEC low-carbon interventions and, S 75, 78 Second National Communication to mitigation potential, 5­6, 15, 19 UNFCCC, 17 near-term feasibility, 10 Secretaría de Energía (SENER), 9, 33n8, refinery efficiency, 3, 35, 38­39, 41t, 85, 60n4 119­20 service contracts, 43 reforestation and restoration shrimp production, 14 assumptions, 137 small hydropower MEDEC low-carbon interventions, 75, electric power demand and, 2­3 77, 78 implementation barriers, 30 mitigation potential, 5, 7, 15 MEDEC low-carbon scenario, 28, 29, refrigeration 29t, 117 commercial and public sector, 50 social rates of return, 20b energy end-use, 49­50 soil management, 15, 101 mitigation potential, 4, 7 solar power, 30 residential sector, 52, 125 solar water heating, 4, 7, 50, 125­26 regulatory framework Solomon Index of Energy Efficiency, 44n8 electric power, 33n5 sorghum ethanol, 6, 78, 139 feasibility of interventions and, 94­95 South Africa for low-carbon development, 99­100 electric power generation, 24f oil and gas sector, 3 energy intensity, 47f recommendations, 8, 103 GHG emissions in, 15, 16f for renewable energy, 32 Special Climate Change Program. See Pro- transport sector, 68 grama Especial de Cambio Climático renewable energy. See also specific tech- sport-utility vehicles (SUVs), 64­65, 65f nologies state government co-benefits, 2 contracting policies, 59 generation capacity, 33n8 land-use planning and public transport, investments, 8, 96 9 mitigation potential, 15 transport interventions and, 70, 101b policies supporting, 100b vehicle inspection program and, 68 regulatory framework supporting, 32 state-owned enterprises, 23, 98 Renewable Energy and Energy Efficiency Statoil, 44n2 Partnership, 61n9 steam systems, 48 renewable heat supply, 53­55 Stockholm Environment Institute U.S. 156 Low-Carbon Development for Mexico Center, 91n1 urban densification, 5, 67, 71, 127 strategic value of low-carbon development, U.S. Agency of International Development, 2, 13­15 59 street lighting, 52, 121 used vehicles, 5, 7, 9, 63, 68 subsidies U.S. Trade and Development Agency regressive nature of, 100b (USTDA), 61n9 residential electricity, 57, 58b utilities. See also specific companies sugar producers, 81 efficiency improvements, 36, 39, 118 sugarcane ethanol, 6, 78, 81, 138­39 energy end-use, 50­51 sugar mill cogeneration, 52­53 investments in, 29­30 surplus electricity sales to grid, 41, 100 procurement rules, 9, 30, 33n5, 100b sustainable forest products, 6, 76 Sweden and biomass electricity genera- V tion, 76 vehicles. See also new vehicles; used vehicles T border inspections, 89, 130­31 tariffs, 9, 100b inspection and maintenance programs, thermal insulation, 51­52, 103 71, 96, 101, 105n4, 129­30 Third National Communication to UN- MEDEC low-carbon scenario, 7, 9, 68 FCCC, 12, 17 venting, 15, 37, 41, 44n5 timber industry, 76 time savings W improved cookstoves and, 53, 53b waste transport interventions, 69, 69b co-benefits of low-carbon interventions, topping-cycle plants, 52, 60n7 2, 22n1 tourism industry, 15 GHG emissions from, 15, 16, 17f traffic congestion, 5, 67, 70 management, 91n7 transmission losses, 25 mitigation potential, 22n6 transport, 63­72 wastewater treatment plants, 22n6 baseline scenario, 64­65, 66f, 85 water resources energy end-use, 46f co-benefits of low-carbon interventions, GHG emissions from, 15, 16, 18f 6, 15, 22n1 high-priority interventions, 93­94 energy end-use interventions and, 55 implementation barriers, 70­71 forestry interventions and, 101 investments, 96 risks to, 14 MEDEC low-carbon scenario, 6, 7f, weather-related natural disasters, 14 66­70, 66f, 70t, 86, 86t, 87f wetlands, 14, 22n2 assumptions, 126­31 wet seal replacement, 40, 40t mitigation options, 5, 19, 21t wildlife management, 76, 136 policy framework for, 101b wind power Trust Fund for Thermal Insulation, 103 electric power demand and, 2­3 feasibility, 9 U generation capacity, 23, 24f implementation barriers, 3 underpricing of electricity, 58b MEDEC low-carbon scenario, 27­29, United Nations Framework Convention 29f, 29t, 32, 85, 89 on Climate Change (UNFCCC), 14, assumptions, 116 17, 22n4, 104 private sector investments, 94­95 United States World Bank biomass electricity generation in, 76 financial appraisal methodology, 87 cement industry efficiency, 48 MEDEC low-carbon interventions and, electric power generation, 24f 12, 20b energy end-use in, 47f, 49, 50 fuel economy standards in, 72n2 GHG emissions in, 16f Z natural gas imported from, 15, 37 zero-tillage maize, 6, 77­78, 81, 82n6, residential building codes in, 50 137­38 used vehicles imported from, 5, 63 ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. The · 17 trees Office of the Publisher has chosen to print Low- · 5 million British Carbon Development for Mexico on recycled thermal units of paper with 100 percent postconsumer fiber in total energy accordance with the recommended standards · 1,624 pounds of net for paper usage set by the Green Press Initia- greenhouse gases tive, a nonprofit program supporting publish- (CO2 equivalent) ers in using fiber that is not sourced from · 7,819 gallons of endangered forests. For more information, visit waste water www.greenpressinitiative.org. · 475 pounds of solid waste Low-Carbon Development for Mexico provides a robust and rigorous assessment of the costs of different options for low-carbon development, from energy efficiency to afforestation. It also shows that even when one relies on existing technologies, there are a number of relatively low-cost measures that can be undertaken in Mexico (and most countries of the world) in the near term that can significantly reduce the carbon intensity of development. Such analysis at the national level is crucial to inform good policy in the transition to a low- carbon economy, and it is laudable that the Government of Mexico has actively supported this and other low-carbon analyses. ­ Lord Nicholas Stern IG Patel Professor of Economics & Government London School of Economics and Political Science The analysis presented in Low-Carbon Development for Mexico provides additional evidence showing that it is possible to keep the global average temperature increase below the dangerous threshold of 2°C, at a cost that will be significantly less than the costs of the impacts we would face if we failed to take action today. ­ Patricia Arendar Executive Director, Greenpeace Mexico This World Bank study is a timely contribution to the ongoing discussions on the global framework that are needed in order to undertake climate change mitigation actions at the scale humankind requires. The study has also played a key role in developing recent Mexican views on the economics of climate change, and we at ECLAC have been able to corroborate that plenty of low-cost, low-carbon opportunities with significant additional co-benefits exist in Mexico. In our current efforts to assess the economic implications of climate change in Latin America and the Caribbean, we are certain that the study will serve as an example for other countries, and we expect to identify similar synergistic opportunities for lower-carbon development. ­ Alicia Bárcena Executive Secretary of the Economic Commission for Latin America and the Caribbean ISBN 978-0-8213-8122-9 SKU 18122