THE ENERGY ENVIRONMENT REVIEW (EER)IN THE

ISLAMIC REPUBLIC OF IRAN (IRI)and

IN THE ARAB REPUBLIC OF EGYPT(ARE)

BYSHERIF ARIF

REGIONAL ENVIRONMENTAL AND SAFEGUARD ADVISOR, MNA

PRESENTED AT THE Strategic Environment Assessment in

the Energy SectorThursday, March 9, 2006

Structure of the Presentation

The Fuel for Thought Strategy and the EERThe Energy Sector in Iran and EgyptDamage Costs due to Air Pollution Policy Options for Reducing Damage CostsOutcome

The EER Concept

The Energy and Environment Review (EER) is a specific tool proposed in Fuel for Thought: An Environmental Strategy for the Energy Sector as an instrument to help set operational priorities for mainstreaming the environment

Fuel for Thought - PrinciplesFuel for Thought identifies three basic

principles:1. “We will create a framework for

environmentally sound energy sector development” To assess the problem we will create a grant-funded technical assistance product, Energy-Environment Review, closely integrated with the CAS

2. “We will address local and regional environmental and social impacts as a first priority” – health damage, shortened life-expectancy, especially from respiratory diseases; environmentally sound investment decisions; small-source pollution from vehicles; indoor air-pollution

3. “We will help tackle climate change”.

Why the Energy Sector in Iran and Egypt

Generates a large share of foreign currency receipt.Has major impact on the balance of payments.Manages key natural resources (oil and natural gas reserves both for the present and the future.Is a major source of pollution.Is an important sector for environmental mainstreaming

SIZE OF THE ECONOMY AND THE ENERGY SECTOR

(2002-2003)

Iran Egypt

Population 64.5 million 65.2 million

GDP ($ billion) 114 98

Proven oil reserves

94.3 billion barrels

3.3 billion barrels

Proven gas reserves

23 trillion m3 1.3 trillion m3

CONTENT OF THE EER STUDY

The study consisted of:An analysis of the current situation with regards to energy generation and use; An evaluation of the growth prospects with regards to energy generation and use; The identification of the environmental issues induced by the generation and use of energy and estimation of the costs of the damages; The evaluation of the extent of contribution to the climate-change phenomenon through emission of greenhouse gases;The evaluation of the proposed mitigating measures for the previously identified environmental problems; and Conclusions and recommendations, and a proposal for an action plan.

Overview of MethodologyThe process of data collection and energy modelling occurs in parallel with the identification and characterisation of operational policiesThe two streams come together in the cost-benefit analysis, from which the Action Plan derivesData collection and policy analysis were done in a participatory manner and involved sector ministries and energy expertsA training program on CBA was also provided to both Iranian and Egyptian energy and environmental specialists

Data collection and review

Energy supply& demand

forecasts &modelling

Action Planfor energy & environment

Policy review &identification

of gaps & key issues

Parametrisationof policy

instruments

Cost-benefitanalysis of

policies and policy options

Damage costs

Damage costs were based on Western European estimates supplemented where possible with local studiesThe assessment of damage from air pollution was based on ExternE, a methodology used by the EU member states applied for power generation and transport, Results have been used to support EU legislation concerning:

incineration, the Large Combustion Plant Directive, the EU strategy to combat acidification, the National Air Quality Strategies

Limitations of the Methodology

The physical, social and economic character of the MNA region is different from the EUThe is much inherent uncertainty in the ExternE estimatesThe EER applications are rather simple and aggregated – with more time the methodology could be better adaptedFull details of the methodology of ExternE, the results for all fuel-cycles and the applications to Member States can be found on www.externe.jrc.es.

Values used

For global pollutants, a range of damage cost values was used.

Low: based on the value of trades in the Prototype Carbon Fund (US$ 3/t)Medium: based on expected values in the EU carbon trading scheme (US$ 10/t) and High: based on damage assessments made by the IPCC (US$ 80/t).

Egypt Value ($/tonne)

PM10 3,441 NOx 473 SO2 1,462 CO 151 NMVOCs 0.4

Iran Value ($/tonne)

PM10 4,300 NOx 600 SO2 1,825 CO 188 NMVOCs o.5

ENERGY DEMAND IN IRAN IN 2001

0

50

100

150

200

250

300

Agriculture. ResComm Industry Transport Others

mbo

e/ye

ar

Elec’y

LPG

Fueloil

Gasoil

Kerosene

Gasoline

Natural Gas

Solid fuels

Subsidies in IranEnergy in the domestic market is heavily subsidized. The target increase in energy price of 10% per annum is lower than inflation (11.4 % in 2001). The EER estimated the total subsidy in 2001 at 118x1012 Rials (US$ 15 billion). Energy subsidies amount to 17.8% of the Iranian GDP

0

5

10

15

20

25

30

35

40

NaturalGas

Elect Gaso-line

Kero-sene

Gasoil FuelOil

LPG

10^1

2 R

ls ($

1 bn

= 8

x10^

12 R

ls)

OthersTransportIndustryResCommAgriculture

MAGNITUDE OF DAMAGE COSTS IN IRAN

The annual sum of damage from all sources in 2001 was estimated at:

56 Trillion ($7 billion); this is equivalent to 8.4% of nominal GDPIN ADJUSTING FOR PPP, DAMAGE COSTS ARE 2.3% OF GDP

Distribution of Damage by Sector and Fuel

Damage costs by activity

Oil refining

Pow erGen

Agriculture

ResComm

Industry

Transport

Others

Damage costs by energy form

Natgas

Elec

Gasoline

Kerosene

Gasoil

FuelOil

LPG

The Damage Growth in IranThe main problem in Iran is the growth of

pollution from private gasoline vehicles

0

20

40

60

80100

120

140

160

180

2001 2004 2009 2014 2019

10^1

2 R

ls (U

S$1

bn =

8x1

0^12

Rls

)

CONOxSO2PM10

Egypt:Energy Subsidies in Egypt Are L.E. 14.5 billion (1999/2000)

about 5% of GDPF

-2

0

2

4

6

8

10

A

gric

ultu

re

R

esid

entia

l&

Com

mer

cial

In

dust

ry

Tr

ansp

ort

Impl

icit

Subs

idy

(LE

billi

on/y

ear)

ElecOtherLPGFuelOilGasoilKeroseneNatural

Magnitude of Damage Costs in Egypt

Damage cost due to air pollution is the highest :

( L.E. 6.4 billion) or 2.1% of GDP) and L.E. 1.2 billion/year in Greater Cairo

Egypt:Current and Projected Damage Costs

0

2

4

6

8

10

1999/00 2010/11

Loca

l Dam

age

Cos

ts

(LE

billi

on/y

ear)

COSO2NOxPM 10

Total Local Damages = LE 6.5 billion

Industry27%

Others16%

Transport36%

Power Gen.21%

Total Local Damages = LE 6.5 billion

Gasoline12%

Gasoil23%

Fuel Oil44%

Others21%

EgyptDamage Costs by Sector and Fuel

Egypt:

Priorities to Reduce Local Damage Costs

80% from 5 major contributors - target these

Contributor LE billion % of Total1.4 21%1.2 19%1.2 19%0.8 12%0.7 11%1.2 18%

Total 6.5 100%

Agriculture - Others - PM10

Others

Industry - Fuel Oil - SO2

Transport - Gas Oil - SO2, NOx, PM10

Power Gen - Fuel Oil - SO2

Transport - Gasoline - CO

Damage in the future

Damage from air pollution in Iran increased faster than GDP because of the large expected growth in private vehiclesDamage increased also in Egypt, but more slowly than GDPTransport in both countries is the major contributor to damageDamage increase with time despite the penetration of natural gas into power generation and industryCost-effective penetration of gas is limited by low prices and distorted differentials

POLICY OPTIONS

The EER examined the consequences of:price reform policies ;andsectoral measures, separately and in combination.

By a sectoral measure is meant an intervention that aim to cause a specific behavioural change, e.g. through targeted financial incentives and standards for equipment and appliances.

Sectoral measures

The EERs in both countries made detailed cost-benefit analyses of sectoral measures to reduce the environmental impacts The CBA valued energy at opportunity costs and included local and global damage costs. Where sectoral measures save energy, there is a financial benefit to the state budget from avoided subsidies. The cost-benefit analysis in these cases has been used to estimate the net cash-flow to the state. The short-list of sectoral measures was derived in discussion with local experts, workshops and review of other TA

Classification of measuresSectoral measures were classified as follows:

A: Measure is win-winB: Measure is cost-effective if local damage savings are includedC: Measure is cost-effective only when global damage savings are incorporated; suitable for CDM activitiesD: Measure is not cost-effective X: Either insufficient data is available to conduct a CBA or the topic does not lend itself to the methodology

Sectoral Measures Proposed Mainstreaming the environment X Public awareness raising X Reduction of flaring C Management of drilling mud / fluids X Renewable energy C Flue Gas Desulphurisation at power plant. B Reducing fugitive emissions at refineries C Reduction of T&D Losses in electricity A Reduction in losses from oil and gas network X Price reform for energy products A Reduction in the S content of middle distillates B Inspection and maintenance of vehicles A Exhaust emissions standards for new vehicles B Congestion management for transport X Enhancing public transport C Increased use of CNG in vehicles A Energy Efficiency fund for the industrial sector A Energy efficiency fund for rescomm A Demand side management programme C Building efficiency standards X Standards and labelling for appliances B & C Switching oil to natural gas in industry A Switching oil to natural gas in rescom D Fuel switching from diesel to electricity A Management of CH4 from landfills C

Iran :Sectoral Measures and Price ReformCombined

The combined effect reduces damage substantially below the 2004 value by 2009 in all three cases. Even by 2019 the damage is less than in 2004. Only the combination of measures and price reform will achieve a cleaner environment in 2019 than now. Price reform by 2009 plus sectoral measures provides

the cleanest environment over the period.

0

10

20

30

40

50

60

70

80

90

100

2004 No -09 -14 2009

-19 No -09 -14 2014

-19 No -09 -14 2019

-19

Dam

age

cost

(1012

Ria

ls)

CONOxSO2PM10

Egypt: Damage Costs 2010/2011 with

Price Reform & Sector MeasuresCompared with Business as Usual

0

2000

4000

6000

8000

10000

Actual(1999/2000)

BAU Price reform Sectormeasures

Combined

mn

LEL.E

. M

illio

n

Options for Partial Price Reform

Political constraints and the inflationary impacts of price reform could prevent the introduction of cost-effective prices . Which energy prices should be addressed in a partial reform process? Which would give the most environmental benefit?

Iran: Damage cost savings per % price increase

Gas-oil and gasoline give the biggest savings in damage per unit of price increase

Damage Cost in 2019

90

95

100

105

110

115

120

0% 5% 10% 15%

annual % price increase

trill

ion

Rial

s

GasolineKeroseneGasoilFONatGasElec (residential)

Egypt: Reducing Local Damage Costsa Win-Win solution

Revenue at market prices % increaseLE million/year

Residential Electricity 3801 3.9Gas Oil 3472 4.3Fuel Oil 813 18LPG 455 33

A price increase in any of the four fuel types could generate L.E. 15 0 million/yearPrice Readjustment could lead to reduction in local damage costs of L.E. 1.3 billion/year

Program is extremely cost effective within ten yearsPV is L.E. 3.0 billion in ten years ( including avoided damages)

Major EER Output- Increased Awareness for

Management of Climate Change

FFT identifies a need to “Evaluate Climate Change Externalities as a Matter of Routine”, make a “Bigger push for New Technologies –sector reform, renewables and EE, Develop a Market for Carbon EmissionsThe EERs have demonstrated the possibility of bring all these issues together within a single frameworkThe CBA framework is relevant to the climate change issue: only with systematic CBA can proper baselines be established and additionality demonstrated

DIRECT OUTCOME OF THE EER in Iran

Major recommendations will be included in the CAS ( under preparation)EER report was used by the Carbon Business Finance Unit for considering carbon emission reduction opportunities during a WB mission in September 2004The Bank’s funded Environment Management Support Project is providing TA and air quality monitoring equipment in four cities

INDIRECT OUTCOME OF THE EER in Iran

The EER assisted in the policy formulation in the forthcoming fourth year development plan as follows:

Increase of the energy fuels ( gasoline, diesel, and electricity should reach their real market values by 2009;The gasoline price was increased from 600 Rials per liter ( 7 cents/liter) to 850 Rialsper year (10 cents/liter).Diesel fuel was increased by 15 percent from 120 Rials/liter ( 1.4 cents/liter) to 165 Rials/liter ( 1.9 cents/liter);Electricity price increased by 20%.

Direct Outcome of EER in Egypt

Used by the Bank for advancing its policy dialogue in the Energy SectorEnabled the Carbon Business Finance Unit to commit to the purchase of US$ 50 million of carbon emission reductionsHelped the Bank in convincing the GOE to ratify the Kyoto ProtocolIncluded in the Country Environmental Analysis of Egypt

Direct Outcome of EER in Egypt

The Egypt-Pollution Abatement Project II (EPAP II) to be submitted to the Board in March 23 2006, used the EER to justify investments in the amount of US$ 20 million from IBRD and US$ 140 million from JBIC (Japan), EIB and Agence Francaise de Développment(AfD)

Indirect Outcome of the EER in Egypt

Increased penetration of natural gas in industrial sectors as well as CNG in taxisImproved efficiency of electrical transmissions and distribution systemsIncreasing the price of dieselVehicle Emission Testing (VET) in Greater Cairo

How much SEA costs and How long it takes

In Egypt: US$ 250,000 from the TFESSD for

consultants and training 2 years

In IranUS$ 350,000 from TFESSD for consultants and training30 months.

THANK YOU VERY MUCH FOR YOUR KIND ATTENTION