Latin America Report - Executive Summary

Under the United Nations (UN) Paris Agreement, 195 nations signed‑on to limit the rise in average global surface temperatures to less than 2 degrees Celsius (C) above pre‑industrial levels. Reaching this goal will require a transformation of the global energy system over the upcoming decades. Most of the signatories of the Paris Agreement are refining their Nationally Determined Contributions (NDCs) for the 2018 Facilitative Dialogue that will be held at the 24th session of the Conference of the Parties (COP24) in Katowice, Poland in December 2018. Countries can deploy a wide range of policies to bridge the gap between current emission trajectories and NDC goals, and national strategies for compliance with NDCs are evolving.

The goals of this report are to conduct a gap analysis between emission levels that can be achieved under planned policies/practices and national‑level NDC targets for ten selected Latin American (“LAM”) countries—Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Peru, Uruguay, and Venezuela—to identify key challenges to compliance, and to suggest regionally applicable policy and technology solutions, with a focus on the electricity sector. There are several publications that track the progress of reaching the Paris Agreement goals, such as UN Emissions Gap Report and Climate Action Tracker (climateactiontracker.org). They focus on global results providing information for selected countries.

Main Takeaways

• For the Paris Agreement process, the Latin American countries pledge to reduce their emissions through 2025 or 2030 and introduce numerous policies to fulfill their pledges. This report offers a discussion of policy instruments and technologies in the energy sector that can assist ten selected Latin American countries (“LAM”) in achieving their emission mitigation targets.
• In aggregate the LAM region is making strong progress towards its Paris goals with government‑led efforts to increase the use of renewables and natural gas. Under the unconditional pledges, the LAM region faces an emissions gap (i.e., the needed reduction to meet the Paris pledges) of around 60 MtCO₂e, which indicates that the LAM region will need additional actions to reduce emissions by 2% by 2030 relative to its current trajectory. Under the conditional (i.e., subject to more ambitious global efforts and technology and financial transfers) pledges, the emissions gap is about 350 MtCO₂e, which indicates a needed reduction of 10% by 2030.
• Individually, while some countries are projected to be close to or to even over‑achieve their unconditional and conditional goals for 2030, others require additional efforts. While some LAM countries face the challenge of developing stable regulatory and legal frameworks to further encourage private investments in clean energy projects, there are many policy and technology options available to them to reduce the emissions gap.
• Carbon pricing through taxes or cap‑and‑trade systems tends to be the most cost‑effective option but can be politically challenging to implement. Other policy instruments are therefore needed to promote clean technology (e.g., enhancing renewable energy auctions and support to natural gas infrastructure development).
• While wind and solar generation provide attractive options for lowering emissions, enhancement of natural gas infrastructure enables higher penetration of intermittent renewables by serving as backup capacity.
• Our country‑specific analysis for Argentina and Colombia shows that existing plans for the expansion of non‑fossil electricity generation are sufficient to meet unconditional emission reduction targets in Argentina and Colombia. Conditional emissions reduction pledges can be achieved with moderate additional policies. For example, when non‑fossil electricity targets are met, the addition of an all‑sectors emission trading scheme (ETS) that caps emissions at the level consistent with each nation’s conditional pledge results in carbon prices in Argentina and Colombia of, respectively, of $2.7 and $2.9 per tCO₂e.
• Our assessment is unique in that the gap analysis covers both larger and smaller Latin American economies and clearly documents the data and assumptions associated with our calculations. We hope the open source format of our input data and tools for analysis will enhance the capacity to analyze the Latin America countries’ pathways in meeting their emission mitigation goals.

Top-down energy-economic modeling approaches often use simplified techniques to represent heterogeneous resource inputs to production. We show that for some policies, such as feed-in tariffs for renewable electricity, detailed representation of renewable resource grades is required to describe the technology more precisely and identify cost-effective policy designs. We demonstrate the hybrid approach for modeling heterogeneity in the quality of natural resource inputs required for renewable energy production in a stylized computable general equilibrium framework. Importantly, compared to the traditional approach, the hybrid approach resolves near-flat or near-vertical sections of the supply curve and improves the precision of policy simulation. We then represent the shape of a resource supply curve based on more detailed data. We show that for the case of onshore wind development in China, a differentiated feed-in tariff design that can only be modeled with the hybrid approach requires less than half of the subsidy budget needed for a uniform feed-in tariff design to achieve the same installation targets.

Highlights

• We extend the hybrid approach to model heterogeneity of resource inputs in CGE model.

• The approach can integrate detailed resource data allowing more precise simulation.

• A modeling case on China’s onshore wind shows the accuracy and flexibility of the approach.

• A differentiated FIT design requires less subsidy and is more cost-effective.