Environmental Technologies Industries

Environmental Technologies Industries

Market Plans

Climate Change Report

Chapter 1 - Introduction

The objective of this report is to characterize the existing and prospective market for climate change mitigation technologies and services in developing countries in general and in six selected countries (Brazil, China, India, Mexico, the Philippines, and South Africa) in particular. The report serves to educate U.S. companies that supply such technologies and services on how to access this market and its
specific segments.

The Emerging Market for Climate Change Mitigation Technologies and Services in Developing Countries

The 1990 report “Scientific Assessment of Climate Change” produced by the Intergovernmental Panel on
Climate Change (IPCC) launched an international effort to find ways to address this global problem. The first milestone was the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that committed the parties (including both developed and developing countries) to “formulate, implement, publish and regularly update national and, where appropriate, regional programs containing measures to mitigate climate change” by reducing greenhouse gas (GHG) emissions and enhancing carbon sinks. Another milestone was reached in December 1997 when 38 industrialized nations negotiated the Kyoto Protocol, agreeing to reduce their greenhouse gas emissions from 1990 levels between 2008 and 2012.

The UNFCCC also introduced the concept of project-based joint implementation (JI) which would allow developed countries to obtain credits toward their emission reduction targets in exchange for investment in mitigation projects abroad (in either developed or developing countries) where the costs of GHG reductions are lower. Initially, this brought about the pilot phase for Activities Implemented Jointly (AIJ) that would test the feasibility of JI without allocating any credits for GHG reductions.

Despite the unavailability of “credit” during the AIJ pilot phase, JI proponents made significant investments in over 75 demonstration projects. These were carried out among a very limited number of parties, primarily through bilateral initiatives such as the U.S. Initiative on Joint Implementation (USIJI) and the Norwegian/World Bank AIJ program. Only the United States, Norway, and the Netherlands have
developed AIJ projects in developing countries.

Despite the fact that the Kyoto Protocol has not been ratified by the U.S. Senate, the agreement, negotiated in 1997, gave a significant boost to the development of market for climate change projects. It reaffirmed the commitments of the parties to the UNFCCC and placed legally binding limits on GHG emissions of developed countries. According to article 3 of the Kyoto Protocol, the overall commitment
is to reduce emissions by a combined 5 percent below 1990 levels in the time interval 2008–2012.

The Kyoto Protocol does not set any binding limits on developing nation emissions, nor does it establish a mechanism or timetable for these countries to take on such limits voluntarily. However, in article 10 of the Protocol, the developing countries agree to formulate emission reduction measures in their national strategies. These measures are defined generally to include:
Energy efficiency improvements;
Protection and enhancement of forests and other terrestrial carbon sinks;
Sustainable agricultural practices;
Renewable energy technologies;
Recovery and use of methane;
Transportation emission reductions; and
Policy reforms to limit energy use and resulting
emissions.

Summary of USIJI Projects

The U.S. Initiative on Joint Implementation (USIJI) supported the development and implementation of voluntary pilot projects between U.S. and non-U.S. partners that reduce, avoid, or sequester GHG emissions.

The USIJI project portfolio includes 30 projects in the following countries: Belize (2), Bolivia (2), Costa Rica (7), the Czech Republic (1), Ecuador (1), Honduras (3), Indonesia (1), Mexico (4), Panama (1), the Russian
Federation (6), and Sri Lanka (1).

The 30 USIJI projects span four principal sectors: 12 projects are classified as land-use change and forestry projects; 15 are classified as energy projects; two as both energy and waste projects; and one as an agriculture project.

In the energy sector, project activities include fuel switching, energy efficiency improvements, cogeneration, capture of fugitive emissions, and renewable energy. The two multisector projects involve the conversion of biomass waste to energy.

Individual project GHG reduction benefits are expected to accrue over project lifetimes that vary from 10 to 60 years.

Source: U.S. Environmental Protection Agency, 1998.

Some developing countries (e.g., Mexico) have already formulated national programs that prioritize climate
change mitigation actions, thereby creating a general market driver for mitigation technologies and services.
The Kyoto Protocol calls for the “creation of an enabling environment for the private sector to promote and
enhance access to and transfer of environmentally sound technologies” to developing countries. It opens
a potentially large market for such technologies, especially since it requires the developed countries to fund
climate change research and development, education and training, and technology transfer. However, the
viability of this market largely depends on the availability of resources to implement relevant national
programs.

These countries’ determination to address the climate change issue is expected to be reinforced by the
so-called Clean Development Mechanism (CDM) introduced in article 12 of the Kyoto Protocol. CDM
allows developed countries to invest in projects in developing countries that reduce GHG emissions and
receive credit for the reductions. The intent is to enable developed countries to meet their emission
reduction commitments at the lowest cost while helping developing nations minimize their emissions even
as they enhance their economies.

The Kyoto Protocol requires CDM project participants to:
Demonstrate positive changes in an energy system (or land use practice);
Document the resulting net emission reductions from the project;
Monitor and verify that the reductions have been achieved; and
Certify that these actions are performed to a certain standard of reliability and quality.

In addition to the global benefits of reducing GHG, there are inherent benefits to CDM for the initiating entity
(e.g., a U.S. company) and the host country participant. The initiating entity gains access to new opportunities
in the growing developing country markets for climate change-related technologies and services. On the other
hand, CDM encourages technology transfer and facilitates private sector investments in technologies and
projects that reduce GHG emissions while contributing to the overall host country development objectives.

The scope of the CDM is expected to be finalized at the Sixth Conference of Parties to the UNFCCC (COP-6) in
2000. Questions remain on issues ranging from project finance to certification, auditing, and verification of
emission reductions. However, a CDM provision would allow emission reduction credits earned between 2000
and 2008 to be applied toward Kyoto commitments for 2008–2012. Thus, arguably, a CDM-driven market may
already be emerging.

The Kyoto Protocol specifically determines that CDM activities and acquisition of emission reduction credits
may involve private or public entities. It is expected that the private sector will be the source of most CDM
projects and investment. Multilateral donor projects that currently dominate the existing small climate change
market may also be incorporated into the CDM mechanism in the future. It is essential to point out, however,
that CDM implementation in an individual developing country requires a national programmatic framework that
would establish conditions for CDM to realize its potential as a vehicle for funding and technology transfer.

U.S. firms’ participation in the CDM almost entirely depends on the ratification of the Kyoto Protocol by the
U.S. Senate. The present uncertainty of the U.S. position on Kyoto implementation threatens to discourage
U.S. companies from investing in GHG mitigation projects in developing countries. Although the U.S.
Government signed the protocol in November 1998, the Congress included a provision in the FY 1999 budget
legislation that prohibits federal spending on any implementation or preparation to implement the Kyoto
agreement until its ratification (the ratification by the current Senate is widely viewed as unlikely). At the same
time, the Credit for Voluntary Reductions Bill introduced in both chambers of Congress proposes to award
credit to U.S. companies that undertake GHG mitigation measures prior to the introduction of any mandatory
requirements. (It is unclear whether this bill, even if passed, would have any effect on U.S. climate change
investment overseas.)

Scope and Methodology of the Report

The report concentrates on mitigation technologies and related services for the following economic sectors:
Energy supply sector (fuel switching, power plant technology and efficiency improvements, electricity
transmission and distribution improvements, and renewable energy);
Manufacturing sector (industrial process controls, industrial motors and adjustable speed drivers,
cogeneration, boiler efficiency, and process improvements);
Commercial and residential sectors (lighting; building controls; and heat, ventilation, and air conditioning;
building envelope; and household appliances); and
Transportation (improved vehicle technical efficiency, clean fuel vehicles, and transportation management
systems).

Mitigation markets in agriculture and forestry (e.g., sequestration projects) are not included in this study.

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.

With the CDM and other climate change mitigation mechanisms currently under development, it is difficult to
estimate the additional market over the baseline market, since any GHG-reducing measure may potentially
become part of a climate change project. The exception is targeted donor-funded programs such as those of
the Global Environment Facility, but those are unlikely to represent a major share of the market once the
private sector starts to play a key role. This report covers both the additional market created by climate change
initiatives and the baseline market for GHG mitigation technologies and services in general. It focuses on
assessing the market qualitatively while referencing quantitative estimates developed by other studies for
selected market segments.

Chapter 2 of this report contains market profiles of various categories of mitigation technologies and services
in the target economic sectors, including market characteristics and opportunities for each category. This
chapter should give the reader an understanding of the overall market demand for different products and
services, and their contribution to mitigating GHG emissions.

Chapter 3 discusses funding and financing options for U.S. exports of climate change-related technologies
and services. Chapter 4 suggests market entry strategies for U.S. companies and describes the resources
they can draw on in entering, or expanding business in, developing country markets in general and in the
climate change market in particular.

Finally, Chapter 5 contains six country market profiles that comprise descriptions of business climate, overview
of GHG sources, principal market drivers, and market opportunities.

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