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Climate Change Report
Executive Summary


The growing international concern over climate change has launched a global effort to address this problem. Under the 1992 United Nations Framework Convention on Climate Change (UNFCCC), the nations party to the convention have committed to formulating and implementing programs to mitigate global warming. In December 1997, 38 industrialized nations negotiated the Kyoto Protocol, agreeing
to reduce their greenhouse gas emissions from 1990 levels between 2008 and 2012. To have the force of law in the United States, the treaty must be approved by the Senate.

The development of such country-specific programs creates market opportunities for U.S. companies to export technologies and services that contribute to greenhouse gas (GHG) emission reductions. Multilateral and bilateral donor projects currently dominate this market in terms of funding. However, market opportunities are expected to be greatly enhanced by the implementation of the Clean Development
Mechanism (CDM). The CDM is likely to make the private sector the main player in the climate change market in developing countries.

The climate change mitigation market is driven by a variety of factors. “Baseline” factors include cost effectiveness, environmental enforcement, power sector policies, indigenous energy resource base, etc. and define the existing market for GHG-reducing technologies and related services. The “additional” market is primarily driven by recent global climate change initiatives and consists of projects specifically designed to achieve GHG reductions. These projects may be part of a developing country’s domestic
efforts under the national climate change mitigation program or may be initiated through international climate change mechanisms. There is no clear line between the baseline and additional market, however, due to the complex interaction of all the drivers. This report covers both the additional market created by climate change initiatives and the baseline market for GHG mitigation technologies and services in general.

ES.1 The Market

The report concentrates on mitigation technologies and related services for the following economic sectors:
 Energy supply sector,
 Manufacturing sector,
 Commercial and residential sectors, and
 Transportation.

The energy supply sector is often the largest contributor to GHG emissions. As power generation continues to grow
in developing countries, there are multiple technology options that offer developing nations an opportunity to
expand their energy supply while mitigating their climate change impact. Exports of these technologies constitute a
major market opportunity for U.S. suppliers.

There are four basic categories of GHG-reducing technologies for the energy supply sector:
 Switching to fossil fuels with a lower carbon content per energy unit (e.g., coal to natural gas)
 Power plant technology and combustion efficiency improvements;
 Electricity transmission and distribution efficiency improvements; and
 Renewable energy technologies.

There is also a substantial market for consulting services in the energy sector, including assistance to governments
in developing energy efficiency incentives for the power sector and energy system planning for electric utilities.

The manufacturing sector is a fast-growing market for energy-efficient technologies, as industries in developing countries continue to invest in modern production processes. Industrial process controls have a wide range of applications and can be found in nearly all industrial sectors, especially in energy-intensive industries. Energy-efficient motors and boilers are other ways to reduce energy use in different industries. Industrial cogeneration technologies enjoy good market opportunities in countries that encourage independent power production. The five biggest energy consumers in the manufacturing sector are pulp and paper, chemicals, petroleum, primary metals, and cement industries. They all represent good potential markets for GHG mitigation technologies. The best opportunities for energy efficiency consulting services in industry include energy efficiency audits, training programs for operators
of energy-intensive equipment, designing systematic maintenance programs, and specifying and installing relevant process equipment.

The commercial and residential sectors offer lucrative opportunities for energy-efficient equipment (lighting, air conditioners, and household appliances), improved building envelope technologies, and building energy use controls. Exports of energy-efficient lighting are likely to become the single largest market opportunity in this market segment, particularly in Asia. Consulting services to government agencies (in developing product energy efficiency standards), electric utilities (in developing demand
side management programs), and individual commercial entities are also in great demand.

The transportation sector in developing countries currently provides limited but growing opportunities for both equipment exports (vehicles with improved fuel efficiency characteristics, clean fuel vehicles, and related equipment) and consulting services. The consulting services focus on designing and implementing transportation management systems (including travel pricing mechanisms, public transit
planning, and appropriate spatial development) for major metropolitan areas in developing countries.

Table 1 summarizes the geographical distribution of best market opportunities in developing countries for U.S. exports of climate change mitigation technologies and services.
Table 1 - Principal Developing Country Marketsfor GHG Mitigation Technologies
Sector
Technologies
Regions Presenting Best Opportunities
Energy SupplyClean coalAsia, South Africa, Eastern Europe
Advanced natural gas Middle East, Latin America, Eastern Europe
Transmission/distribn. improvementsMost developing countries
Renewable energy Asia (China, India, Philippines), Latin America
ManufacturingIndustrial process controlsAsia (China, Taiwan, S. Korea), Latin America
Industrial motorsAsia, Eastern Europe
CogenerationAsia (China, Thailand), Latin America
Efficient boilersAsia, Eastern Europe
Commerical & ResidentialEnergy-efficient lightingAsia, Latin America, Eastern Europe
Building controls/HVACAsia, Middle East, Eastern Europe
Building envelopeAsia, Latin America
Household appliancesAsia
TransportationClean fuel vehiclesLarge metropolitan areas in Asia, Latin America


ES.2 Funding and Financing Sources
Since most developing countries do not have the financial resources available to implement climate change
mitigation projects, external funding and financing are critical for U.S. exports of mitigation technologies and services.

The Clean Development Mechanism (CDM), the Kyoto Protocol’s flexible mechanism for cooperation in GHG emission reductions between developed and developing countries, has potential to generate substantial financial resources to cover the incremental costs of projects specifically designed to reduce greenhouse gases. In the form of cofinancing within a larger project finance context, the CDM financing is expected to come exclusively from developed countries. For developing countries, the CDM would bring foreign investment and access to cleaner technology. For industrialized countries, it would provide a cheaper and more flexible way to meet their emission reduction targets. And for technology exporters, it would bring market opportunities, new partnerships, and a better public image. The specifics of the CDM are not yet clearly defined but are expected to be finalized in the year 2000 as a result of detailed international negotiations.

The CDM envisions two options for project financing: pooled investments globally managed and allocated by a multilateral agency, or direct sponsor-host transactions at the project level. A mix of both options may well be adopted as a result of future discussions of CDM rules. The supply of CDM projects in developing countries will ultimately depend on individual countries’ interest in participating in this mechanism and availability of other funding and financing sources for infrastructure investments.

While the CDM funding is not yet available, multilateral donor projects are presently the largest source of funds in the market. The Global Environment Facility (GEF), designated by the UNFCCC as its primary funding mechanism, is the leading multilateral entity promoting energy efficiency and renewable energy technologies in developing countries. The World Bank is in the process of establishing the Prototype Carbon Fund, a post-Kyoto financing mechanism that would complement the GEF funding. The fund will operate in accordance with CDM procedures for obtaining GHG reduction credits from mitigation projects,
once such procedures are established. Other World Bank programs, including energy efficiency and renewable energy initiatives, also create attractive market opportunities. In addition, large environmental improvement and infrastructure development projects of the regional multilateral development banks offer substantial opportunities for climate change-related technologies and services.

The U.S. Agency for International Development (USAID) is the principal U.S. bilateral donor for climate
change programs in developing countries. Its Climate Change Initiative helps finance climate change projects by leveraging multilateral resources and private investment funds. USAID also supports the development of climate change-friendly government policies and promotes cleaner technology transfer. USAID currently has climate change-related activities in 44 countries around the world. There are also many U.S. investment and export credit programs that U.S. companies can use to take advantage of market
opportunities in developing countries.

Other funding and financing sources include debt financing from U.S. and local commercial banks, as well as vendor and local electric utility financing.

ES.3 Business Strategies for U.S. Firms
In order to succeed in the developing country markets for climate change mitigation technologies and services, U.S. firms should be aware of the realities of doing business in each country, know how to take advantage of particular market opportunities, and be able to use the available information support services.

Country market research is a key success factor. Knowing the local market characteristics and business climate is critical in prioritizing business development efforts. Marketing approaches depend on such country-specific countries as distribution channels, product knowledge, buyer concentration, and market barriers.

Local partnerships and representation are desirable for U.S. companies in order to have the advantage of learning about attractive market opportunities before the competitors. Methods for developing a local presence range from hiring a local consultant or agent to represent the firm, to establishing a local office or a joint venture.

As multilateral and bilateral donors currently represent the largest source of funding in the climate change market, companies should be prepared to bid for such projects. Understanding the donor’s project cycle and bidding procedures, and tracking prospective projects are the key elements of successful marketing for donor-driven opportunities for technology and services exports. Where-as U.S. firms often have to compete with third-country local companies for donor projects, they have a distinct competitive advantage under USAID bilateral funding.

As the rules of the CDM become finalized, U.S. companies can prepare themselves for possible market
opportunities under both multilateral and direct private sector CDM funding options. It is essential to explore the field of potential U.S. investors in CDM projects, including electric utilities and large manufacturing firms. There are several information sources on potential CDM projects that
are available to U.S. technology and services firms.

The U.S. Government has a number of programs designed to assist U.S. environmental and cleaner energy technology and services companies in penetrating developing country markets. These programs offer information support, trade promotion events, customized market research, identification of trade leads, selection of local partners, and other important services.

ES.4 Selected Country Markets

The report describes markets for climate change mitigation technologies and services in six developing countries: Brazil, Mexico, China, India, the Philippines, and South Africa. Table 2 summarizes the qualitative assessment of the markets in the six countries and demonstrates the relationship between key market drivers and opportunities. It is evident from the exhibit that in the countries with more advanced climate change and energy policies and large-scale targeted donor funding, market opportunities are much
stronger.
Table 2 - Climate Change Market Drivers and Opportunities in Selected Countries
Brazil
Mexico
China
India
Philippines
S. Africa
Market Drivers
Climate Change Policies
+
+
o
x
+
o
Energy Policies/Programs
+
+
+
o
+
o
Targeted Doner Funding
+
+
+
+
o
x
Market Opportunities
Energy Supply
+
+
+
+
+
o
Manufacturing
o
+
+
o
o
x
Comm'l/Residential
o
+
+
o
o
o
Transportation
+
o
x
o
o
x

+ Well-developed market drivers or opportunities
o Evolving market drivers or opportunities
x Limited market drivers or opportunities

Brazil is actively developing its national climate change policies and intends to adopt a fast track for participation in the CDM. Brazil also has multiple energy efficiency programs and enjoys substantial donor support from the World Bank and the GEF for its climate change mitigation initiatives. As a result, Brazil represents a significant market for GHG-reducing technologies and services, particularly in the areas of renewable energy, industrial cogeneration and process controls, building envelope and controls, and
clean fuel vehicles.

Mexico is one of the most advanced developing countries in terms of its climate change policies (the Mexican Government has recently released the National Climate Change Action Program). There is also a well-developed institutional, regulatory, and programmatic framework for energy efficiency. Mexico is an active participant in joint implementation pilot projects and receives substantial amounts of U.S. bilateral assistance. All of these factors, combined with the favorable business climate in Mexico, make this country a particularly attractive climate change market for U.S. firms. The best opportunities exist in the
energy supply sector (fuel switching, advanced natural gas combustion, and renewable energy technologies) and commercial and residential sectors (energy-efficient lighting). USAID-funded technical assistance projects create a large market for climate change-related consulting services in Mexico.

China has a long history of energy-efficiency programs but is just starting to develop its climate change policies. Donor funding is a major climate change market driver in China, as most of the government funding goes to macroeconomic programs. China has the biggest potential climate change mitigation technologies market in the developing world, due to the size of the Chinese economy and population, and to the great potential for GHG emission reduction. The main elements of this market are advanced coal combustion technologies as well as energy-efficient technologies in the manufacturing, commercial, and residential sectors.

India has not yet developed a national climate change policy although it is very active in developing its renewable energy resources. India is a huge market for clean coal and renewable energy technologies in the power sector and energy-efficient technologies in the manufacturing sector. However, the additional climate change market is much smaller and is primarily donor-driven. The market of CDM projects is likely to be quite substantial but not in the short term, as it will take a few years for India to develop a national
climate change/CDM program. The active role of USAID in promoting climate change mitigation in India creates a particularly favorable climate for U.S. firms in this market.

The Philippines has a substantial additional market for climate change mitigation technologies and services, mainly due to the active position of the Philippine Government on climate change issues and its efforts to comply with the Philippines’ commitments under the UNFCCC. The Philippine Government is also carrying out many energy efficiency and renewable energy programs. USAID is very active in mitigating GHG emissions from the Philippine power sector, creating market advantages for U.S. firms.
USAID promotes more efficient electricity generation, distribution, and consumption, and encourages private investment in the natural gas industry and renewable energy development. These market segments represent the largest market potential for U.S. companies.

South Africa currently represents a relatively insignificant additional market for climate change mitigation
technologies and services. This is explained by the absence in South Africa of large donor-funded projects specifically targeting GHG emission reductions, as well as the lack of specific government programs on climate change and energy efficiency. However, should the South African Government
decide to take an active part in the CDM, there is a substantial baseline market to be tapped, particularly in
energy supply (clean coal technologies) and manufacturing (process improvements and process controls in the primary metals processing and petrochemical industries).

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