Energy, development, and climate change: considerations in Asia and Latin America

Feb. 2, 2004
Climate change is a global environmental concern with potentially significant consequences for society, both from the possible future impacts of climate change and from the socioeconomic consequences of policies proposed to respond to it.

Climate change is a global environmental concern with potentially significant consequences for society, both from the possible future impacts of climate change and from the socioeconomic consequences of policies proposed to respond to it.

Formed in 1988, the IPIECA Climate Change Working Group (CCWG) monitors, analyzes, and informs its membership of key developments on the issue, especially those taking place at the United Nations Framework Convention on Climate Change (UNFCCC) and Intergovernmental Panel on Climate Change (IPCC).

CCWG encourages the development of policy options that strike a balance between the projected consequences of potential climate change and the estimated costs of response options to mitigate or adapt to climate change. The IPIECA CCWG sponsors dialogues and workshops addressing key aspects of the ongoing negotiations and provides a technical publication series as a means of constructive input to the process.

IPIECA was founded in 1974, following the establishment of the United Nations Environment Program (UNEP) in 1972. IPIECA is the petroleum industry's principal channel of communication with the UN. It is accredited with the UN Economic and Social Council (Ecosoc) as an Ecosoc Category II nongovernmental organization (NGO), which provides IPIECA with formal observer status in UN programs.

IPIECA membership consists of both petroleum companies and associations at the national, regional, and international levels. It is the single global association representing the petroleum industry on key environmental and social issues, including global climate change, biodiversity, social responsibility, fuel quality and vehicle emissions, human health, and oil spill preparedness and response. IPIECA promotes scientifically sound, cost-effective, practical, and socially and economically acceptable solutions to these global issues. In pursuing this mission, IPIECA works in cooperation with industry, government, regulatory bodies, international agencies, academia, and NGOs.

IPIECA held two high-level regional workshops in 2002 addressing the issues of energy, development, and climate change. Each of these events brought together about 100 experts from academia, business, governments, international institutions (e.g., United Nations Development Program and the World Bank), emissions trading groups, and oil and gas industry climate-change experts.

The first workshop, in Kuala Lumpur, Malaysia, aimed to increase understanding of Asian development and climate-change issues and to identify opportunities for effective near and long-term action, particularly through the clean development mechanism (CDM). The second event, organized jointly with the Regional Association of Oil & Natural Gas Companies in Latin America & the Caribbean (ARPEL) and UNEP, was held in San Jose, Costa Rica. This workshop addressed more-practical issues associated with the opportunities and barriers for developing CDM projects in Latin America and the Caribbean.

This article reviews the main lessons gleaned from these two workshops, which are summarized in the box on p. 20.

Background to the workshops

A driving goal for developing nations is to achieve economic development similar to those countries in the Organization for Economic Cooperation and Development, and this will lead to increasing energy consumption and emissions for some time to come.

UNFCCC has noted that emissions originating in developing countries will grow to meet those nations' social and development needs.1 The World Summit on Sustainable Development (WSSD) made clear the importance of affordable energy and its role in poverty alleviation. The Johannesburg Plan of Implementation includes the urgent goal of creating access to modern energy services for 1.6 billion people who currently do not have access to modern energy services.2

Click here to enlarge image

OECD's International Energy Agency Energy Outlook 2002 projects that, over the next 30 years, global primary energy demand will grow by 1.7%/year—to 15,300 million tonnes of oil equivalent (Mtoe) from 9,200 Mtoe—and that this demand will be met primarily by increased consumption of oil, natural gas, and coal (Fig. 1).

Click here to enlarge image

Energy from renewable resources also is expected to grow but will remain a small percentage of the total energy mix (Fig. 2).3

It also is projected that many of the 1.4 billion people living at or below the poverty line will remain without access to electricity, which is an essential requirement for social and economic development.3

Click here to enlarge image

Global energy-related emissions of carbon dioxide also are projected to grow at a rate slightly higher than that of primary energy demand, at 1.8%/year from 2000 to 2030 (Fig. 3).3 This creates a fundamental challenge: to provide affordable energy for economic and social development while limiting long-term growth in greenhouse gas (GHG) emissions and associated atmospheric concentrations to the extent that may prove necessary. The development and deployment of efficient and economic technology offers a variety of potential solutions, including efficiency improvements, CO2 capture and storage, use of biological sinks, and development of commercially viable nonfossil fuel energy systems.

The focus of climate-change policy in most developed countries (listed in Annex B of the Kyoto Protocol on Climate Change) to date has been on commitments to emissions-reduction targets during the first commitment period (2008-12) of the protocol. Improving energy efficiency is often the most cost-effective way to reduce emissions over this timeframe. Systems for emissions trading and other market-based mechanisms also have been developed to facilitate cost-effective emissions reductions. The CDM mechanism in particular was addressed by the recent workshops in Costa Rica and Kuala Lumpur. It is clear that efforts to reconcile society's growing demand for energy, to alleviate poverty and promote economic and social development, with promoting efforts to mitigate the risk of climate change, pose a fundamental challenge.

Developing-country concerns

Reflecting a rapid growth in demand for energy, IEA noted that fossil fuel consumption in developing countries is expected to surpass that of industrialized nations by 2020. Developing regions will account for 65% of the 45 million b/d increase in global oil demand from 2000 to 2030, with Asian countries constituting the largest share. In East Asia, excluding China, growth in CO2 emissions is projected to increase from 1.1 billion tonnes in 2000 to 2.8 billion tonnes in 2030, while in Latin America emissions are projected to rise from 0.9 billion tonnes to 2.1 billion tonnes over the same period.3

In Kuala Lumpur it was noted that over 500 million people in Southern Asia live on less than $1/day and that the provision of affordable and reliable energy to communities currently without access to electricity will be a key requirement for regional development.4 At both workshops it was emphasized that climate-change mitigation is not a near-term priority, with the provision of primary education, medical facilities, regular employment, clean water supplies, and proper sanitation having priority on national development agendas. Regional representatives also emphasized the need for climate-change strategies to be considered within the context of these national sustainable development priorities.

CDM objectives, type, potential

The CDM approach offers one pathway to encourage technology transfer, promote sustainable development, and reduce GHG emissions.

The three aims of the CDM, as specified in Article 12 of the Kyoto Protocol, are to promote sustainable development in non-Annex 1 countries, help achieve the ultimate objective of the climate convention to stabilize atmospheric concentrations of GHGs, and assist Annex 1 parties in cost-effectively meeting their obligations under the protocol.6

Click here to enlarge image

For non-Annex 1 developing countries, the CDM promises to create a reduced-emission infrastructure, support national sustainable development objectives, promote technology transfer, build local capacity, and attract foreign investment. The need for CDM projects to meet developing-country sustainable development objectives and encourage technology transfer was emphasized, with the generation of Certified Emission Reduction credits (CERs) to meet Annex 1 party objectives being of secondary importance. A CDM project cycle is shown in Fig. 4.

Although the potential for CDM in Asia is considerable, project and institutional activity is more developed in Latin America. The emissions reduction potential in both Asia and Latin America is on the order of hundreds of millions of tonnes of CO2, with large-scale CDM projects (e.g., fuel-switching from coal to oil and gas, CO2 capture and geologic sequestration, LNG for replacing coal-fired power generation, and reduction of flaring and venting) accounting for the bulk of this potential. Current activity, however, is on small-scale emissions-reduction projects, particularly renewable energy (hydro, solar, wind, biomass, and geothermal) and energy-efficiency projects. A diverse range of candidate CDM projects was presented in Kuala Lumpur and Costa Rica (see box on p. 24).

Comparing the CDM candidate projects presented and the host countries' project expectations the following points were noted:7

  • Most CDM projects are being developed in the larger Asian and Latin American economies.
  • Project developers in Latin America emphasised the environmental and emissions reductions benefits of CDM, while in Asia the emphasis was on the need for sustainable development and poverty eradication.
  • Forestry and natural resource-based projects were being developed by host countries in Latin America and the Caribbean region, but these did not rank high with national authorities in Asia.
  • More CDM projects are currently being developed in Latin America and the Caribbean region than in Asia.

CDM institutional considerations

It also was noted at these workshops that national and international processes to review and approve CDM projects have developed rapidly over the last months, but that much work remains to be done.

The establishment of Designated National Authorities (DNAs)—responsible for reviewing, recommending, and submitting projects for approval to the CDM Executive Board—advanced the furthest in Latin America, with 11 of the 14 developing-country DNAs registered with the UNFCCC secretariat (June 2003).8

However, in both Latin America and Asia many countries have yet to establish DNAs, and many have an urgent need to develop local capacity and expertise.

The two workshops clearly illustrated a diversity of national approaches to establishing DNAs, in part to reflect different national priorities and circumstances.

Business perspectives

The fledgling CDM market is dominated by projects in Latin America.

Future CDM investment in both regions is expected to come from a variety of sources, including Annex B governments, multinational corporations, international finance institutions (e.g., World Bank's Prototype Carbon Fund), development agencies (e.g., UNDP), and local and national companies. Further clarity on procedural and project-related CDM issues will be required before significant levels of investment, trading in CERs or technology transfer occur. It was also noted that the anticipated level of investment through CDM would be several orders of magnitude lower than that in the energy sector over the same period.7

It was emphasized that if the CDM is to attract private sector investment, clarity is needed on a wide variety of issues. CDM issues that require further clarification include:7

  • Clear guidance on project eligibility criteria.
  • Acceptable methodologies for calculating emission baselines.
  • Criteria for determining whether projects meet additionality criteria.
  • Timeframe for processing and approving projects.
  • Project information requirements.
  • Level of transaction costs.
  • Future price of CERs.

It also was recognized that projects must be based on sound economics, as the generation of CERs will in most cases affect economic returns only at the margins. The need to "learn by doing," to build knowledge and confidence through actually developing projects, was emphasized by many participants.

Oil, gas industry focus

Large-scale CDM projects have substantial emissions-reduction and technology-transfer potential but currently receive little attention at the international negotiating level, resulting in a lack of focus at national levels.

The oil and gas industry is particularly well-suited to deploying large-scale projects with significant emissions-reduction potential, such as:7

  • Energy efficiency improvements.
  • Utilization of previously flared associated gas.
  • Large-scale fuel-switching projects (e.g., from coal to oil and natural gas).
  • Capturing vented methane.
  • CO2 capture and storage.

However, it was also noted that these types of projects currently face technical challenges (e.g., defining baselines and determining additionality) and that their political acceptability remains uncertain (e.g., eligibility, approval process).

Looking forward

Many participants reflected that short-term international mechanisms, such as the CDM, alone cannot address the long-term challenges and risks associated with global climate change.

Measures included under the Kyoto Protocol are likely to have only a marginal affect on climate change.

Given that the emissions reduction targets and timetables set by the protocol apply only to developed countries for the first commitment period up to 2012,6 it remains unclear what kind of international framework may evolve after that to address the deep cuts in global emissions that may be needed to meet the UNFCCC stabilization goal.

Some attendees emphasized that the development and deployment of efficient commercial technologies that lead to significant emission reductions need to be a key part of future climate-change strategies, but it remains unclear what kind of international framework would ensure that this occurs.

The alleviation of poverty and the provision of clean water, health services, sanitation facilities, and primary education are key priorities in the developing world.

With 1.6 billion people worldwide lacking access to modern energy services, the provision of affordable energy is a key requirement for economic and social development in Asia and Latin America.

Actions to mitigate and adapt to the long-term risk of climate change must be considered within this context. Reflecting increasing development in Asia and Latin America, energy demand is forecast to grow rapidly during 2000-30.

Projections show that this demand will be met primarily by increased consumption of fossil fuels. This poses a challenge to meet developmental goals while at the same time addressing increased GHG emissions.

The global deployment of economically viable existing technologies that result in low GHG emissions and the development of improved technologies are key elements to address this challenge.

The CDM provides one pathway to encourage technology transfer, promote sustainable development, and reduce GHG emissions. There is considerable emissions-reduction potential for CDM projects in Asia and Latin America. The current focus, however, is on small-scale energy-efficiency improvement and renewable-energy schemes.

In order to realize the potential of the CDM, large-scale projects will be required. This is particularly true for oil and gas projects.

Capacity for governments and companies in both regions to address the development of CDM projects has increased, but individual nations still vary in their capacity to review CDM projects. Several countries, in both Asia and Latin America, have established or are planning the establishment of DNAs needed to approve projects in the host countries.

There currently remain economic, methodological, and institutional barriers to private-sector investment in CDM projects.

Uncertainties about the rules surrounding the CDM mechanism have progressed from the more-hypothetical concerns about additionality and baselines to more-practical concerns about institutional capacity to review and approve project applications in a timely and cost-effective manner.

While concerns and detailed issues about additionality and baselines remain, the development of more projects and the series of international negotiations and clarification of proposed rules and processes have led to an improved understanding of the CDM since the first of our workshops cited here.

No CDM projects, however, have yet been approved by the international Executive Board of the CDM, and it is unclear what sort of CDM projects will be awarded CERs.

Future CDM investment in both regions is expected to come from a variety of sources, including Annex B governments, multinational corporations, international finance institutions, development agencies, and local and national companies.

Investment in CDM projects will, however, be dwarfed by the overall investment in energy, especially in Asia, through to the end of the Kyoto Protocol's first commitment period in 2012.

Over the next decade, the petroleum industry will make investments leading to development and transfer of technology and emissions reductions or avoidance that will go far beyond that which may receive credits under the Kyoto Protocol.

It remains unclear what international framework may evolve beyond the emissions-reduction targets and timetables specified by the Kyoto Protocol for the first commitment period of 2008-12—and what future obligations might be undertaken by developing countries.

It is clear that the development and deployment of technologies that result in significant emissions-reductions need to be a key part of any future strategy, but the framework within which this can occur remains uncertain.

Acknowledgments

IPIECA would like to thank the workshop hosts, Petronas in Kuala Lumpur and Recope (Refinadora Costarricense de Petroleo) in San Jose. We also would in particular like to recognize the effort of the following ARPEL members for their work in organizing the workshop in San Jose: Alvaro Coto (Recope), Arturo Gonzalo Aizpiri (Repsol-YPF SA), Javier Bocanegra (Petroleos Mexicanos, or Pemex), Salvador Gómez Avila (Pemex), Jon Roed (Statoil ASA), Ramona Harbajan-Sankar (Petroleum Co. of Trinidad & Tobago), and Miguel Moyano (ARPEL Executive Secretariat). Our thanks also go to UNEP for its support of the San Jose workshop. We would also like to thank all the workshop participants for their valuable input and support, which ensured the success of the workshops.

References

1. United Nations Framework Convention on Climate Change (UNFCCC), 1994.

2. The World Summit on Sustainable Development Johannesburg Plan of Implementation (2002).

3. International Energy Agency, World Energy Outlook 2002.

4. International Petroleum Industry Environmental Conservation Association (IPIECA), "Development and Climate Change: Issues and Approaches in Asia, 2002."

5. IPIECA, Regional Association of Oil & Natural Gas Companies in Latin America & the Caribbean, United Nations Environment Program, "A practical approach to identifying emission reduction opportunities: Examples under the Kyoto Mechanisms in Latin America and the Caribbean," 2003.

6. UNFCCC Kyoto Protocol on Climate Change. 1997.

7. IPIECA, "Energy, Development, and Climate Change: Considerations in Asia and Latin America," 2003.

8. UNFCCC, CDM web site at http://cdm.unfccc.int/, 2003.

The authors
This article was developed by the following members of the IPIECA Climate Change Working Group: Abdulmuhsen Al-Sunaid, senior engineering consultant, Environmental Protection Department, Saudi Aramco, [email protected]; Frede Cappelen, senior advisor, environment, Statoil, [email protected]; Foo Say Moo, senior manager, environment, Petronas, [email protected]; Haroon Kheshgi, advanced research associate, ExxonMobil Research & Engineering Co., [email protected]; Arthur Lee, advisor, global policy and strategy, ChevronTexaco Corp., [email protected]; David Mansell-Moullin, project manager, IPIECA, [email protected]; Wishart Robson, international manager, EHS, Nexen Inc., [email protected]; John Shinn, staff engineer, ChevronTexaco, JShinn@chevrontexaco. com; Tim Stileman, project manager, IPIECA, [email protected]; and Richard Sykes, group environmental advisor, Shell International Ltd., [email protected]).

Key messages from IPIECA workshops

  • The alleviation of poverty and the provision of clean water, health services, sanitation facilities, and primary education are the key near-term priorities in the developing world. Actions to mitigate the long-term risk of climate change must be considered within this context.
  • Energy demand and consumption over the next 30 years in Asia and Latin America are forecast to grow rapidly, with this demand being met primarily by increased consumption of fossil fuels, thus posing a fundamental challenge to meet developmental goals while at the same time addressing increased greenhouse gas emissions.
  • There is considerable emissions-reduction potential for clean development mechanism (CDM) projects in Asia and Latin America, but the current focus on small-scale, energy-efficiency improvement and renewable energy schemes will not realize this potential.
  • Individual nations still vary in their capacity to review CDM projects. Governments can play key roles in CDM project development by ensuring that all national sustainable-development criteria are met and by government-facilitated agreements between multilateral funding agencies and the private sector.
  • Added to concerns about the uncertainties and impractical requirements around additionality and baselines for the CDMs are practical concerns about institutional capacity to process project applications in a timely and cost-effective manner. It remains unclear what sort of CDM projects will be awarded certified emission reduction credits.
  • Investment in CDM projects will be dwarfed by the overall investment in energy, especially in Asia, through to the end of the Kyoto Protocol's first commitment period in 2012.
  • Over the next decade, the petroleum industry will make investments leading to development, transfer of technology, and emissions reductions or avoidance that will go far beyond what may receive credits under the Kyoto Protocol.
  • Emissions-reduction targets and timetables specified by the Kyoto Protocol are for the first commitment period from 2008 to 2012. It remains unclear what international framework may evolve after that and what future obligations might be undertaken by developing countries.
  • The development and deployment of technologies that result in significant emissions reductions need to be a key part of any future strategy, but it remains unclear what kind of international framework will ensure that this occurs.

Examples of candidate CDM projects presented at workshops

Asia4

Wind power, small-scale hydro, and biomass in India.

Geothermal and gas venting elimination in Indonesia.

Anaerobic digestion and municipal waste management in the Philippines.

Biodiesel and oil palm in Malaysia.

Biomass energy and anaerobic digestion in Thailand.

Clean-coal technologies in China.

Latin America and the Caribbean5

Reforestation and geological sequestration in Argentina.

Gas flaring abatement and cogeneration in Mexico.

Utilization of previously flared associated gas, fugitive gas emissions, and energy efficiency in Brazil.

Waste treatment, landfill gas, and cement production in Costa Rica.

River runoff hydropower project in Chile.

Wind farm project in Colombia.

Carbon sinks and fugitive gas emissions in Venezuela.