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PROGRAM INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB3668
Mexico - Climate Change Development Policy Loan
Operation Name
LATIN AMERICA AND CARIBBEAN
Region
General water, sanitation and flood protection sector (50%);
Sector
General energy sector (25%); Forestry (25%)
P110849
Project ID
THE UNITED MEXICAN STATES
Borrower(s)
SEMARNAT
Implementing Agency
February 19, 2008
Date PID Prepared
February 27, 2008
Estimated Date of
Appraisal Authorization
Estimated Date of Board April 8, 2008
Approval
(I) Key development issues and rationale for Bank involvement
1.
Mexico emits 643 million t CO2e (or about 1.5%) of total greenhouse gases (GHG), which
makes it the twelfth largest GHG emitter in the world and second largest in Latin America (see Figure 1
for Mexico’s share of carbon dioxide emissions excluding land-use change and forestry, and Annex 2
for a comparison of the top 20 emitters of all GHG including land-use change and forestry). Mexico’s
emissions have been growing steadily over the past 25 years (see Figure 2) and are now equivalent to
about 6 t CO2e per capita (including emissions from land-use change and forestry). The carbon intensity
of the Mexican economy is 837 t CO2e per million US$ of GDP. The main sources of Mexico’s GHG
emissions include energy generation (24%), transport (18%), forests and land-use change (14%), waste
management (10%), and agriculture (7%). The oil and gas sector is responsible for about 12% of GHG
emissions, about half of which is classified under energy generation.
Figure 1: Mexico’s Share of CO2 Emissions (excluding land-use change and forestry)
in 2005
Source: Energy Information Administration, www.eia.doe.gov/environment.html
Figure 2: Mexico’s CO2 Emissions (excluding land-use change and forestry)
from 1984 to 2005
Mexico: Total CO2 Emissions
450
400
350
300
250
200
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: Energy Information Administration, www.eia.doe.gov/environment.html
2.
Mexico will be disproportionately affected by climate change, in particular hurricanes, changes
in temperature, precipitation (more rain leading to floods in some regions, less rain leading to droughts
in other areas), and the extent and frequency of floods and droughts. The country’s large and relatively
exposed coastline along the Gulf of Mexico is a frequent landfall point for hurricanes. The cost of
hurricane impacts has steadily increased in Mexico. Recent data indicates a 1000% increase in damages
compared to the decade of the 1950s. Projected sea level increases will lead to further impacts on the
Gulf Coast.1 Also, recent studies on the vulnerability of hydrologic regions in Mexico suggest that
potential changes in air temperature and precipitation may have a dramatic impact on the pattern and
magnitude of run-off on soil moisture and evaporation.2 Recent data from IPCC assessments on
projected forced hydro-climatic changes indicate that Mexico may experience significant decreases in
run-offs in the order of 10 to 20% nationally and up to 40% along the Gulf Coast wetlands as a result of
global climate change.3 These climate change impacts would further aggravate the country’s available
water supply and given current pressures on water resources, which have grown tremendously over the
past decades, constitute a priority adaptation issue. Reduced runoffs would also negatively affect the
integrity of major ecosystems, including the system of wetlands in the Gulf of Mexico as well as the
remaining primary forests in the north of the country.
3.
On May 25, 2007 President Calderón announced the National Climate Change Strategy, which
places climate change at the heart of the country’s national development policy. The Strategy identifies
options for decoupling GHG emissions from economic growth. It also proposes a long list of potential
climate change mitigation (i.e., GHG emission reduction) activities, as well as general ways to reduce
vulnerability to climate change. Please refer to Annex 3 for a discussion of the Strategy.4
4.
In the Strategy, the country commits itself to reducing GHG emissions on a voluntary basis (as a
non-Annex I country, Mexico has no formal obligation to reduce its emissions by 2012). The Strategy
recognizes the possibility for the country to adopt voluntary commitments, and to have those monitored
by the international community (‘pledge and review’). However, no penalty would be incurred for noncompliance, and the pledge would not compromise Mexico’s basic right to economic development. In
1
Hurricane intensity has been increasing in the Caribbean basin with a 40% increase in category 4 and 5 hurricanes generated
and reaching landfall over the past five years compared to a comparable period staring in 1970 in the North Atlantic. A recent
analysis commissioned by the Bank indicates that a further increase should be expected as a result of increase sea surface
temperatures in the Caribbean.
2
Run-off generally is equal to the difference between precipitation and evapo-transpiration and, hence, from a resource
perspective, runoff is a measure of sustainable water availability.
3
These results have been confirmed through an independent assessment using the Earth Simulator.
4
Please see www.semarnat.gob.mx/Documents/Estrategias_libro_completo_compress2.pdf for the complete Strategy in
Spanish. An executive summary in English can be found at www.un.org/ga/president/61/followup/climatechange/Nal_Strategy_MEX_eng.pdf .
addition, emission reductions over and above the country’s voluntary commitments could be offered for
sale as carbon credits on the international market.
5.
The GOM has confirmed that it is working on a Special Climate Change Program (Programa
Especial de Cambio Climático) to be adopted in 2008. This Program will be adopted under the 20072012 National Development Plan, and expand upon the 2007 National Climate Change Strategy, in
particular by identifying priorities and financing needs for climate change mitigation.
6.
Mexico City has also issued a Local Climate Change Strategy and is the first city in Latin
America to have done so.5 The strategy calls for measures to reduce the carbon footprint of economic
sectors and in particular, it focuses on reducing emissions from its transport sector, which accounts for
about 40% of the emissions in the Mexico City metropolitan area. The strategy also prioritizes
adaptation activities to climate impacts.
7.
Mexico is the only developing country to have submitted a third National Communication under
the UN Framework Convention on Climate Change.6 In this communication, Mexico reported its latest
GHG emissions levels and trends, and described the measures that were being taken to adapt to and
mitigate climate change. This communication, which preceded the adoption of the National Climate
Change Strategy, shows Mexico’s commitment to analyze and address the climate change challenge.
8.
Beyond strategies and programs, the country is already taking steps to reduce emissions from its
business-as-usual scenario. In particular, visible and well-publicized initiatives are underway to increase
reforestation and reduce flaring in the oil and gas sector.7
9.
With these strategies, analyses and investments, Mexico assumes a position of leadership among
developing countries. Mexico is part of the “G8+5” group of countries (G8 plus Brazil, China, India,
Mexico, and South Africa) formed for the Clean Energy Investment Framework and Gleaneagles
Dialogue.
10.
To implement its National Climate Change Strategy (NCCS), the Government of Mexico (GoM)
has requested a Development Policy Loan (DPL) in the amount of US$500 million. It is to be presented
to the Board for its approval jointly with a new Country Partnership Strategy (CPS) before the spring
meetings (April 11-12, 2008). The request underlines the GoM’s interest in a continued, strong
engagement with the Bank, under a new business model deemed more appropriate for a leading
emerging market economy like Mexico. The DPL would support government priorities within its
climate change agenda.
11.
Mexico is making renewed progress on its legislative reform agenda addressing some longstanding as well as newly emerging structural challenges in enhancing economic growth and reducing
the still high levels of poverty. In its first year, the current administration led by President Calderón
made progress in proposing, negotiating, and obtaining legislative approval of laws and amendments to
the Constitution aimed at strengthening the performance of the public sector. These include reforms to
the federal government workers’ pension scheme, the tax policy and administration, intergovernmental
Gobierno del Distrito Federal. 2006. Estrategia local de acción climática de la ciudad de México: Acciones locales, Logros
globales. Gobierno del Distrito Federal, México.
5
6
Please see http://unfccc.int/resource/docs/natc/mexnc3.pdf.
7
Illustrations are the emphasis that top public officials give in the public appearances on tree plantation through the
PROARBOL program, or the Tres Hermanos associated gas flaring reduction project between PEMEX and Statoil
(see http://www.statoilhydro.com/en/NewsAndMedia/News/2007/Pages/CuttingCarbonEmissionsWithPemex.aspx )
fiscal relations, and public expenditure policy and management, which were approved last year and are
currently under implementation.
12.
The proposed operation would be the first in a number of larger, annual Development Policy
Loans (DPLs) that make up a streamlined lending program to support an expanded set of analytical and
advisory services. As outlined in the Mexico 2008-2013 CPS, to be presented to the Board at the same
time as the proposed loan, the GoM has requested the Bank to change its lending and advisory services
program over the next few years to a series of on-demand analytical and advisory services and
streamline the bulk of its lending program into one larger, annual Development Policy Loan of up to
US$1 billion. The streamlined lending approach aims to minimize the transaction cost of borrowing
from the Bank, thereby providing access to low-cost financing and freeing up human and budgetary
resources for an enhanced, higher-value program of advisory services. The amount of the proposed DPL
is below the annual target of the streamlined lending program in order to provide a transition towards the
newly defined Bank support program as well as space for on-going FY08 pipeline operations. The
strategy also foresees a series of smaller, environmentally-focused investment loans and grants.
13.
Mexico has maintained a solid macroeconomic framework which has moderated output volatility
and strengthened economic growth. A consistent set of macroeconomic policies, including monetary
policy within an inflation targeting framework, a flexible exchange rate, a balanced budget fiscal policy
and public debt management that favors the development of domestic capital markets, has led to a
substantial improvement of the fundamentals of the Mexican economy. The evolution of the main
macroeconomic indicators over the past five years confirms a picture of balanced growth with a
significant reduction of vulnerabilities to external shocks.
14.
Fiscal policies, successful in reducing the public debt-to-GDP ratio, have been complemented by
a debt management strategy that has favored domestic currency financing of public debt. Over the past
five years, the GoM has consistently implemented a debt management strategy aimed at reducing the
exchange rate and interest rate vulnerability and rollover risk, shifting away from external debt and
increasing the share of fixed-rate instruments at longer maturities. Mexico now periodically issues fixedrate peso bonds with maturities of up to 30 years. The average maturity of domestic debt increased to 5.5
years by the end of 2007.
15.
Despite a reduction in the absolute level of gross public external debt, the GoM has expressed its
interest in keeping a liquid long-term yield curve in international bond markets as well as maintaining an
active relationship with multilateral agencies. The reduction of foreign currency financing of Mexico’s
public debt and its accumulation of international reserves increased its capacity to withstand turmoil on
international capital markets and avoid external payment crises which disrupt economic growth and
poverty reduction. Government debt management strategies take into account a combination of cost and
risk considerations to reduce the longer-term borrowing cost. Even though the spread between the cost
of Bank loans and Mexican global bonds has substantially narrowed over the past few years, Bank
financing remains an approximate 100 basis points less expensive for Mexico at the moment.
16.
The Bank’s engagement to date in Mexico on climate change issues has entailed support for 25
initiatives, financed by IBRD loans, GEF grants, carbon finance emission reduction purchase
agreements, grants for capacity building in the carbon finance area, and grants for economic sector work
and knowledge products. These initiatives are the result of a long-standing dialogue with a wide range of
Mexican stakeholders and center on the following main objectives: (i) support for adaptation; (ii) policy
development and institution building; (iii) first-of-a-kind mitigation projects and programs; and (iv)
identification and promotion of short-term and long-term mitigation options
(II) Proposed objective(s)
17.
The objective of the proposed operation is to support the government’s efforts under its National
Climate Change Strategy to (a) mainstream climate change considerations in economic policy making
and (b) identify opportunities and measures to mitigate the impacts of climate change. Further, the
proposed operation is part of the country’s plan to promote environmental sustainability, which, in
addition to targeted social programs, infrastructure, rural development, and competitiveness, is one of
the planned areas of Bank engagement in the 2008-2013 Country Partnership Strategy (CPS) for
Mexico. The CPS also highlights the partnership with Mexico on climate change, aiming to (a) identify
and implement measures to address key vulnerabilities to climate change; (b) collaborate with Mexico's
scientific community and government agencies in the strengthening of institutional capabilities and
access to knowledge on climate change; and (c) promote low carbon development. In addition,
environmental sustainability is one of the key pillars of GoM’s 2007-2012 National Development Plan.
18.
President Calderon’s announcement of the National Climate Change Strategy and its adoption by
the Intersecretarial Commission on Climate Change in May 2007 constitute the prior action for this
operation. The proposed operation provides overall budget support in recognition of the significant
contribution that the National Climate Change Strategy will have on Mexico’s development agenda. The
Strategy establishes the framework and represents the vital first steps for confronting the challenges of
climate change in a comprehensive and integrated fashion. The Strategy was a truly national effort and a
major undertaking by several Ministries, coordinated by the Secretariat of Environment and Natural
Resources (SEMARNAT). It distinguishes Mexico among most other major developing countries. Only
South Africa, Mexico, and China have also adopted such a strategy.
19.
The following draft Policy Matrix summarizes the operation’s objectives, prior action, and
expected outcomes.
Key Objectives
Mainstream climate change
considerations in economic
policy making
Prior Action
Adoption of National Climate
Change Strategy
Key Outcomes
Knowledge about impacts of
climate change on major on
potentially vulnerable areas (e.g.,
coastal areas and highlands) and
people (e.g., those in peri-urban
areas, coastal areas, and those
living at higher elevations)
disseminated to relevant groups
and organizations
Practitioners and technical
experts brought together with
economic decision-makers (in
same key sectors as above)
Costs of confronting climate
change (‘Stern report a la
Mexicana’) analyzed and
discussed
Identify climate change
mitigation opportunities
Adoption of National Climate
Change Strategy
Special Climate Change Program
(Programa Especial de Cambio
Climático) adopted under the
2007-2012 National Development
Plan (Plan Nacional de
Desarollo), which identifies
priorities and financing needs for
mitigation actions
Programmatic CDM activities
and CDM projects developed in
priority sectors (e.g., waste
management, transport, tourism,
energy, water, and forestry)
Low-Carbon Country Case Study
(MEDEC) completed
Country ready for reducing
emissions from deforestation and
forest degradation (REDD)
(III)
Preliminary description
20.
To support the GoM in better adapting to climate change, the operation will foster the
mainstreaming of climate change considerations in economic policy making. First, it will raise
awareness on climate change by: (i) disseminating and discussing the National Strategy on Climate
Change amongst government and civil society groups; (ii) sharing knowledge on the impacts of climate
change on potentially vulnerable areas (e.g., coastal areas and highlands) and people (e.g., those in periurban areas, coastal areas, and those living at higher elevations); (iii) inter-agency coordination and
bringing together policy practitioners and technical experts with key decision-makers, especially in the
economic sectors affected by changes in water resources; and (iv) considering the development of on the
ground demonstration projects to help in climate risk management in key sectors. Second, it will support
the analysis of the costs of confronting climate change (both through mitigation and adaptation
measures). This study will provide the analytical foundation for identifying concrete programs and
financing sources.
21.
This operation will also facilitate the identification of mitigation opportunities, in particular
through the adoption of the Special Climate Change Program.
22.
Further, the operation will identify and develop particular programmatic CDM activities, other
CDM projects, and build capacity for reducing emissions from deforestation and forest degradation
(REDD). The Bank will assist in the identification and development of programmatic CDM activities in
priority sectors that the GOM has identified, e.g., waste management, transport, tourism, energy, and
water resources. Developing a CDM program of activities may require cross-sectoral coordination, as
well as strengthening the institutional capacity of sectoral/regional agencies. REDD is also a priority for
the GOM, and the country will develop its capacity, also referred to as ‘readiness,’ to undertake REDD
activities. By building its readiness for REDD, Mexico can acquire the methods and systems that will
allow it to benefit from financial incentives in the post-2012 climate change regime.
23.
The identification and development of programmatic CDM activities and REDD programs are
expected to complement the ongoing Low-Carbon Country Case Study (MEDEC) and the existing
grants under the Bank-managed CF-Assist program. Moreover, the Bank can facilitate financing of the
programmatic CDM activities and REDD programs under the proposed Climate Investment Facility, the
recently announced Norwegian initiative on tropical forests, and the new carbon facilities proposed by
the Bank, namely the Carbon Partnership Facility and the Forest Carbon Partnership Facility.
(IV)
Environment Aspects
24.
The provisions of OP8.60 apply to the proposed operation. The operation is expected to have
positive impacts on the environment and natural resources. The operation is precisely designed to reduce
the adverse environmental impacts of climate change. It supports the government’s efforts under its
National Climate Change Strategy, in particular the reduction of GHG emissions on a voluntary basis.
Therefore, in the short term, no environmental costs are expected from the implementation of the
National Climate Change Strategy. It is possible, however, that in the medium to long term, certain
mitigation and adaptation measures might have indirect environmental impacts due to the need for
relocating infrastructure or agricultural activities. These costs would be justified by the paramount
objective of protecting this infrastructure or agricultural potential in the first place. However,
environmental assessments for the corresponding investments would be needed so that these indirect
costs can themselves be mitigated.
25.
With respect to social aspects, the short-term priority for the Bank is to support the scientific
modeling of climate change effects on the country and in the region to build the scientific base that will
lead to adaptive measures. This modeling is expected to provide better estimates of these corresponding
costs, including costs for their mitigation.
(V) Tentative financing
Source:
Borrower
International Bank for Reconstruction and Development
Total
(VI) Contact point
Contact: Benoit Bosquet
Title: Natural Resources Mgmt. Spec.
Tel: (202) 458-0923
Fax: (202) 614-1190
Email: [email protected]
($m.)
0
500
500