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Grasping climate change challenges
A recent climate change initiative approved by the IDB amid increasing signs of the adverse impacts and costs of climate change provides a favorable environment to pursue opportunities for making economic growth more "green."

Speaking at IDB headquarters, the Executive Secretary of the United Nations’ Framework Convention on Climate Change, Yvo de Boer, called for climate change mitigation and adaptation for developing countries.

He cited the International Energy Agency's (IEA) forecast that by 2030, world energy demand will grow by 60 percent and global greenhouse emissions will rise by 55 percent. He added that two-thirds of the increase in emissions will come from developing countries, which will remain substantial users of coal.

In spite of that increase, over 1 billion people worldwide will still lack adequate access to energy, according to the IEA’s reference scenario.  Moreover, “up to 2030, the energy-supply infrastructure worldwide will require a total investment of $20 trillion, with about half of that in developing countries,” de Boer said.

To meet this growing energy demand, the UN expert indicated that the average annual investment requirement in Latin America will top $45 billion (in 2000 prices). “The challenge for climate policy then is how to 'green' energy investment, so that it does not lock economies into unsustainable paths for the next 30-50 years.”

But thanks to the impact of government policies regarding increased renewable energy and energy efficiency, the forecast figures could decrease by 10 percent and 16 percent for energy demand and contaminated emissions, respectively. And improved end-use efficiency of electricity and fossil fuels could account for two-thirds of avoided emissions in 2030.

New trends in energy investment

According to the UN expert, the international carbon market allows for cost-effective emissions reductions for industrialized countries, while "greening" investments and generating funding for adaptation in developing countries.

But de Boer presented an alternative scenario in which the pattern of investment is substantially different. Rather than having investments devoted chiefly to expanding energy production, more investments would go into more efficient energy consumption. The total amount of capital required for the entire energy chain would not differ much, de Boer added. “Larger capital needs on the demand side would be entirely offset by lower investment needs on the supply side.”

Developing countries will require almost half of global investments in the energy sector. But these countries will not be able to meet their investment requirements solely by mobilization of domestic savings, the UN expert advised.  “To meet the energy and investment challenge, more private sector involvement in developing countries will be required because in Latin America (excluding Brazil), domestic savings are nearly 7 percentage points lower than total domestic investments.  A significant increase in foreign investment and technological cooperation with industrialized countries will be required.”  

The case of Mexico

In Mexico, electricity demand is expected to grow 2.5 times by 2025, compared to the year 2000. But Mexico’s oil production capacity is under pressure now: more than 60 percent of the country’s oil comes from the giant Cantarell field, the largest in the country. That supply source is now declining, creating an enormous challenge to maintain or increase oil production, de Boer explained. “The country’s ability—and the method used—to meet this challenge will change the fundamental role of oil in Mexico’s economy.”

Moreover, high energy prices lead to new tensions. Mexico has benefited from rising oil prices, but has been harmed by sharp increases in the cost of imported natural gas and refined products, and the resulting pressure on electricity costs.  Thus, Mexico’s economy will be directly affected by its future net energy trade balance and the evolution of global energy prices.

Depending on the scenario the development of the energy sector follows, there will be large implications for greenhouse gas emissions. Under a fuel-oil-dominant outlook, carbon dioxide emissions in 2025 will be 3.84 times higher than in 1996. But under an alternative scenario where the share of renewables in the total installed capacity increases to 54 percent by 2025, greenhouse gas emissions will be 64 percent lower than under the first scenario.

The challenge for this alternative scenario is to raise the capital for the required investments, the UN expert emphasized. “There is an abundance of renewable energy opportunities in Mexico, but currently applications to "green" power generation are minimal.”

Outlook for the future

According to de Boer, industrialized countries will only commit to the deep emissions cuts required by the Kyoto Protocol if their implementation costs are not prohibitive to economic growth. Developing countries on the other hand, require technology and investments to take a more sustainable path, as economic growth and poverty eradication are the overriding concerns.

Recent studies suggest that avoiding major environmental consequences will require deeper emissions cuts than are currently envisioned by industrialized countries—some leaders refer to reductions on the order of 60-80 percent by mid-century.  If half of these reductions are met through investments in developing countries, “there is the potential to generate up to 100 billion dollars per year in green investment flows to developing countries.  This would be a move towards a self-financing climate compact, which is needed to tackle climate change.”