Existing Studies

The results from chapter 3 are supported by the few papers that also take net present values o f ‘real’ carbon emission reduction cost data. Mintzer et al (1994) produce present values o f carbon emission reduction costs for eight GEF projects. These are projects numbering 31, 32 in table 3.2 and projects 37 to 42 in tables 3.3. Mintzer et al discounted the project costs at -3%, 0%, 3% and 10% respectively. No account was taken o f the fact that carbon causes rising damage over time. Using a 3% discount rate, the cost o f carbon emission reduction for each o f the eight projects were as set out in table 4.2. Using a rising carbon damage ratio as in chapter 3 would make these costs very slightly lower.

Table 4.2: Cost of Emission Reduction from Mintzer et al (1994)

No. Method Country Cost S/tC

31 Demand side energy efficiency Mexico 12

32 Fuel switching Poland 206

37 Carbon planting Ecuador 7

38 Fuel switching India 9

39 Fuel switching Mauritius 4

40 Fuel switching Pakistan 36

41 Fuel switching^ Philippines 3

42 Demand side energy efficiency Thailand 13

(Source: Mintzer et al, 1994)

Mintzer et al (1994, p. 17) argue that these costs are relatively low. This is a perverse interpretation, although admittedly Mintzer et al focus on the 0% discount rate results rather than the 3% results examined here. When the 3% discount rate is used, only four o f the eight projects have costs o f less than $10/tC and only two projects have costs below $5. The fuel switching cost o f $206 is very high. If more fiiel switching projects were examined, the average emission reduction cost o f the projects would be higher.

® The five fuel switching projects are quite different: they are a coal to gas ctmversion project (in Poland); two waste to energy projects (Pakistan and Mauritius), a wind and solar power project (India) and a geothermal project (the Philippines).

Significantly, if we ignore for a moment the renewable energy projects (projects 38-41) we see that the carbon hierarchy produced by the remaining four projects is exactly the same as that given in chapter 3: carbon sequestration is low cost but greater than $5/tC (at $7/tC), demand side energy projects are the next most expensive projects ($12 and $13), while fuel switching is by feir the most ejqjensive ($206).

The novel element o f Mintzer et al’s study is the renewable energy fuel switching project costs, ranging fi-om $36/tC to $3/tC. The case for waste to energy is not convincingly made since the two costs o f $36/tC and $4/tC cancel each other out. However, wind and solar power ($9/tC) and geothermal project costs ($3/tC) are much lower than those given in chapter 3. Unfortunately, Mintzer et al do not provide enough information to con^rehend these cost. Mintzer et al may be focusing only on variable costs not fixed costs.

Further support for the view that emission reduction costs are high comes fi*om Heintz (1995) who examined three GEF projects: the Mexican ILUMEX project, the Poland coal to gas project and a Zimbabwean photovoltaic project. Ignoring non carbon benefits, Heintz calculated benefit cost ratios o f 0.38, 0.34 and 0.23 respectively for these three projects.

R Anderson (1995) calculated the cost o f emission reduction by the Mexican high efficiency light project (ILUMEX) and the two sub-components o f the Poland coal to gas projects on a net present value basis. ILUMEX’s emission reduction cost is calculated to be between $8.2 and $9/tC, while the coal to gas project conqx)nents achieve carbon emission reduction at $9/tC and $22.9/tC. R. Anderson presented net costs; gross costs for the coal to gas project could be $15/tC or more higher, given the heavy secondary pollution in that particular location in Poland. R. Anderson’s study of ILUMEX is particularly interesting since he also produced an ILUMEX emission reduction cost using a sinq)listic ‘laboratory style’ approach as advocated used by Mills et al (1991) (see section 4.31.). Emission reduction costs calculated in this way came out at -$0.01/tC. R Anderson argues (1995, p. 10) that this cost is indefensibly small, stating that.

‘If these calculations are even approximately accurate, CFLs (contact fluorescent light bulbs) should immediately replace incandescent bulbs in a wide variety o f applications on a pure cost-efiFectiveness basis, without regard for global and local external benefits’.

R Anderson’s results are a condemnation o f the laboratory style approach. At the same time they provide evidence that demand side energy efiBciency projects are fer more expensive at reducing emissions than supply side energy efiBciency. Furthermore, evidence o f a fuel switching project with net costs greater than $20/tC is produced.

Further succour to the high cost approach o f this thesis comes fi’om top down models. Top down models have told us that a tax to hold US emissions at their 1990 level in 2010 would range between $20 and $150. This can be interpreted loosely as saying that the cost o f emission reduction would range between $20 and $150. To reduce emissions to 80% o f their 1990 level by 2010 would take a tax in the range o f $50 to $330 (Toi 1997, p. 127).’

Studies into the cost o f carbon emission reduction using real data were presented above. These support the argument that emission reduction is more expensive than many have suggested support the carbon hierarchy advanced in chapter 3. Evidence gathered in Venezuela that also supports these stances is presented below.

4.2.2 Venezuelan Costs

Information on five potential joint inqjlementation projects was gathered whilst on a field trip in Venezuela in 1996. One o f these projects involves the accelerated reduction o f methane flaring and venting, while three are forestry projects and one is a hydroelectricity project.* Venezuela’s country specific carbon hierarchy is presented here. The political and social costs o f energy reform are discussed in section 4.5.

^ The main differences between the models’ results are explained by the price elasticity of energy demand and the speed at which the capital stock can adjust; high price elasticity and high capital malleability imply lower taxes.

* Meetings were held with Yamil Bonduki, Ministry of Environment and Natural Resources (7 March 1996), Luis Vilaneuva, Director of Energy Planning, Energy Planning Division, Ministry of Energy and Mines, (7 March 1996) and the Banco Interamericano de Desarrollo (Interamerican Development Bank).

Venezuela had a GNP per capita in 1992 o f $2,910 and was classified as an a upper middle income economy (World Bank 1992). The population grew to 20.9 million in 1992 fi*om 10.6 million in 1970; the population growth rate was 2.6% per annum fi-om 1980 to 1991, slowing to 2.3% per annum in 1992.

Venezuela is well endowed with energy resources; energy has played a fimdamental role in the country’s development. The energy sector accounts for 30% o f GNP and the oil subsector is responsible for 80% o f exports. Through taxation o f crude oil and petroleum products, oil accounts for about 50% o f fiscal income. Oil revenues have been channelled through the country’s investment fimd, the Fondo de Inversiones de Venezuela (FTV), to subsidise otherwise unprofitable state industrial and power enterprises. The abundance o f oil and gas has allowed energy to be sold domestically at well below the international market price, at not much more than the cost of production. Venezuela has the lowest energy prices in Latin America and amongst the lowest in the world.

Emissions Inventorv

The Venezuelan Government signed the Framework Convention on Climate Change in December 1994. The Convention requires all parties to publish national inventories of anthropogenic greenhouse gas emissions and national plans to reduce or control emissions. All signatories’ report CO2, CH4, N2O, NO*, CO and NMVOC (non methane

volatile organic conqx)und) emissions fit>m six sectors: energy, industrial processes, solvent use, land use change and forestiy, agriculture and waste. The IPCC and OECD jointly produced common inventory guidelines and emission fiictors for all industrial processes (IPCC/OECD 1994).

Venezuela’s three biggest sources o f carbon equivalent emissions are carbon dioxide emissions fi’om the energy sector (42%), carbon dioxide emissions fi-om land use changes and forestry (32%) and methane emissions fi-om the energy sector (14%). 99% o f emissions in this latter category come fi-om fugitive emissions Le. venting.

flaring and leakages o f methane fi*om the energy sector. Venting, flaring and leakages are problems associated with methane not carbon dioxide.^

Table 4.3: Annual Venezuelan CO2 and CH4 Emissions in Absolute Terms and Carbon Equivalent Q uantities

CO2 CH4 Gg C eqmv. CO2 emissions Gg C equiv. CH4 emissions Total Energy 107,330 1,840 29,270 (42%) 9,780 (14%) 39,050 (57%) Industry 2,860 780 ( 1%) 780 ( 1%) Agriculture 950 5,050 ( 7%) 5,050 ( 8%) Forestry 80,610 160 21,990 (32%) 840 ( 1%) 22,830 (33%) Waste 220 1,180 ( 2%) 1,180 ( 2%) Total 190,810 3,170 52,040 (75%) 16,850 (24%) 68,890 (100%) (Source: Perdomo et al 1995)

According to the World Resources Institute, Venezuela contained 46 million hectares o f natural forest in 1990, down fi*om 52 million hectares in 1980, with an annual deforestation rate fi’om 1981 to 1990 o f 1.2% or 600,000 ha./yr. (World Resources 1994; these flgures are also given in World Bank 1995, p. 227). This deforestation rate was less than Paraguay (2.4%) and Ecuador (1.7%), buf more than Bolivia (1.1%), Brazil and Columbia (both 0.6%) and Peru (0.4%). 1.2% is a high annual deforestation rate; only four Afiican countries have higher flgures.

However, the Venezuelan government argued until recently that the annual deforestation rate o f the country was substantially lower, at 150,000 to 200,000 ha./yr.. The Government eventually admitted to a 520,000 ha./yr. figure (excluding the south where little deforestation is believed to take place). The Venezuelan government still holds that Venezuela contains 58 million hectares o f forest, that is more than 60% o f national territory, making the deforestation rate lower than 1% per annum (Perdomo et al, 1995, p. 102). Land use and forestry changes contribute 21,990 Gg o f C emissions made up o f 22,990 Gg fi*om forest clearing, 500 Gg fi’om grassland conversions, minus 1,500 Gg o f carbon sequestered by managed forests. The greatest land clearance takes place in the west where the largest population is in proximity to

forests. A problem in the last five years has been deforestation fi-om mining in the south east. Mining causes deforestation and soil erosion and is largely illegal.

Other Studies

One component o f a UNEP ‘bottom up’ study (1994) (also studies in section 4.3.1 below) focused on Venezuela (1993b). This study attempted to construct a national marginal abatement cost curve using the LEAP (long-range energy alternatives planning system) bottom up energy demand forecasting system developed by the Stockholm Environment Institute in Boston. This study costed eighteen emission reduction strategies: fifteen demand side energy efficiency projects and three supply side energy efficiency projects. The conclusion was that the two cheapest options are supply side measures: accelerated reduction o f natural gas fiaring and venting ($0.6/tC) and accelerated reduction o f methane leaks fi-om natural gas distribution networks ($0.9/tC). The next cheapest option costs $5.7/tC. The eighteen options fit into five categories: accelerated reduction o f fiaring and venting (average cost $0.75/tC), improvements in the electricity supply sector ($8.9/tC), inçrovements in transport energy intensity (average $10.8/tC), improvements in industry energy intensity (average $17.5/tC) and improvements in household energy intensity (average $31.4/tC). These results fit in with results presented hitherto in this thesis: stopping gas leakage or stopping venting is by fer and away the lowest cost project, whereas demand side energy efficiency projects are not low cost. The UNEP study did not examine carbon sequestration nor fuel switching costs.

Results

The cost o f carbon emission reduction in five Venezuealan projects, using data collected on a field trip there, are as follows. These figures are calculated as in chapter 3, using a 3% discount rate and using the Fankhauser carbon damage ratio. Information used to calculate these costs is presented in annex 4B below.

Table 4.4: Venezuelan Results

Name Method Country Cost $/tC

Merida Carbon planting Venezuela 11.60

Barinas Carbon planting Venezuela 4.51

Aragua Carbon planting Venezuela 4.02

Costa Bolivar Supply side energy efiBciency Venezuela 0.48

Caruachi Fuel switching Venezuela 127.26

(Source: own table)

In table 4.4 we see an already familiar pattern. Supply side energy efiBciency projects are extremely inexpensive. Carbon switching projects are moderately inexpensive but greater than $4/tC. Fuel switching costs are high.

Only one o f the projects, the hydro-electric plant, is currently going ahead. The fact that the three forestry projects cannot gain private sector support suggests that joint in^lementation could play a role in securing funds for these projects.

A Comparison >\^h Chapter 3’s Costs

The results gathered from Venezuela are in line with results developed in chapter 3 and in line the criticisms o f bottom up costs presented in this chapter. Results also concur with UNEP (1993b) in that accelerated reduction o f venting and flaring is the lowest cost method.

The model generated to explain chapter 3’s costs (equation 6, chapter 3)^° would predict a fuel switching emission reduction cost for Venezuela o f $107.7/tC and a cost for carbon sequestration o f $15.0/tC. The equation explaining forestry costs in chapter three (equation 7) " would predict a carbon sequestration cost o f $10.3 given a GNP per capita in Venezuela o f $2,910. These actual figures were $127.3 for fuel switching and $11.6/tC, $4.5/tC and $4.0/tC for carbon sequestration.

The Venezuelan results are set alongside results from Costa Rica in diagram 4.1 below. Carbon sequestration costs in Venezuela range from $4.0/tC to $11.6 whilst the range

Q =

" CFi =

2.8 + 92.7 Ti + 0.0042 Wi 5.0 + 38.3 Ri + 0.0018 Wi

in Costa Rica is from $3.2/tC to $24.4/tC. Venezuela’s fuel switching project costs $127.3/tC, Costa Rica’s projects range from $120.5/tC to $157.7/tC.

Chapter 3 raised doubts about the Costa Rican forest protection project price of $3.2/tC on the grounds of leakage. If we assume this project’s carbon is higher than $3.2/tC, we can conclude that carbon sequestration is cheaper in Venezuela than in Costa Rica; an unsurprising result given the lower price of land in Venezuela.