KEY CHALLENGES TO INTRODUCING CLEAN TECHNOLOGIES IN LATIN AMERICA *

By: Roebyem Heintz **

INTRODUCTION

Many Latin American countries are being rapidly faced with a growing demand for energy and transportation services, and they have to make important decisions such as how to replace their capital reserves to provide those services. There is a strong argument for acting now and making aggressive use of Environmentally Sound Technology (EST) whenever possible. After all, many of the decisions we make on technology today, whether in energy production, energy efficiency in buildings, transportation, industry, or agriculture and forestry, will be in use for the rest of this generation and even the next one.

Transfer of these technologies and practices is occurring around us all the time, mainly through direct negotiations and investments from abroad. The role of the private sector is the key to this process, but governments can play a significant role by influencing the quality and amount of technology transfer. Transfer of climate-friendly technologies includes “soft” tools and services such as consulting, technical and legal assistance, training, etc., which can result in reductions in greenhouse gas emissions and a decrease in the impact on global heating.

This article points out some of the key barriers and opportunities for encouraging transfer and introduction of climate-friendly technologies in Latin America. Three of these challenges are: (i) to create an attractive environment for investing in projects having to do with climate-friendly technologies; (ii) to increase awareness of climate-friendly technology options; and (iii) to look for investment opportunities involving these technologies, and combining national development with environmental agendas. A number of specific issues will have to be taken on to confront these challenges, including political or institutional issues, structuring and information capability and financial issues.

To better understand the viewpoints of the private sector on decisive issues for encouraging climate technologies in Latin America, the Climate Technology Initiative (CTI) organized a seminar for industry in Latin America. This seminar was organized with the cooperation of the United Nations Framework Convention on Climate Change Secretariat (UNFCCC) and was held in El Salvador in March of 2000. The seminar included workshops focusing on transportation, renewable energy and energy efficiency. Discussions were reinforced by a large number of case histories on technology transfer prepared by Econergy International Corporation (EIC, consultants based in Boulder, Colo., USA). These case histories as well as the report on the industrial seminar in El Salvador (both available on the CTI Internet site) are the basis for this article.

POLITICAL AND INSTITUTIONAL ISSUES

The creation of an environmental market that would attract private sector investments in these technologies is a widely praised incentive for introducing climate-friendly technologies. This can require policy changes in the different countries of the region, as well as incentives in the industrialized countries for encouraging exports of these technologies. These policy changes may be in three categories: (i) the elimination of barriers and distortions to the economy; (ii) proactive policy and incentives in developed and developing countries for encouraging investments in climate-friendly technologies; and (iii) green corporate policy and marketing.

Elimination of Political and Institutional Barriers

The lack of environmental policies and standards, lack of copyright protection or weak enforcement of existing policies, are discouraging direct foreign investment in projects having to do with clean technology. At the project development level, investors are perceiving bureaucratic procedures for getting them approved, complicated legislation, corruption and a lack of coordination between different authorities as key barriers to the selection of alternative technologies. Markets dominated by monopolies and prices distorted by subsidies tend to discourage investments in EST, while for example, more representative energy prices create an incentive for more rational energy use. Some countries design specific policies for dealing with specific obstacles, such as laws for protecting intellectual property. The list of distorting policies and institutional barriers is lengthy, and it is often more gratifying to think in positive terms on how a country can make a commitment to create an attractive environment for climate-friendly technologies which can lead to the elimination of the above barriers.

Incentives for Encouraging Investments in EST

Some countries have successfully adopted an image of respect for the environment or a commitment to go along with the “spirit” of the Convention. Costa Rica is trying to build a reputation as a country that takes environmental and climate change issues seriously, and it is converting what others perceive as a threat or cost in opportunities into business opportunities such as ecotourism, CDM (Clean Development Mechanisms) project infrastructure, etc. Other countries have successfully created a market for climate-friendly technologies by “defining correct prices” in introducing environmental effects. With rapid improvements in technologies using gas and diesel in the last decade, needs for speedy growth of energy markets or quick and economical generation capacity are increasing as a challenge to these fossil fuel technologies. Honduras is an example of a country that created an investment climate that discourages investments in the creation of fossil fuel technologies and introduces an incentive for investing in renewable energy sources. Similarly, in the context of electricity deregulation, some U.S. states have adopted a portfolio of requirements for including renewable energy sources.

Green Corporate Policy and Marketing

Many companies are increasing in awareness of the commercial benefits of being environmentally receptive. British Petroleum and Shell, historically opposed to any climate action, are adopting aggressive policies for mitigating climate change, and today they are promoting themselves as environmentally responsible energy companies. The degree to which companies in developed countries have implemented environmental management systems (EMS) depends in great measure on national environmental regulations, as well as on their perception of business standards in the main industrialized countries of the world. The development and widespread adoption of the ISO 14000 series of standards is an example of how a concern for the environment and management practices is leading companies in emerging markets to implement EMSs.

EVALUATION OF TECHNOLOGY

Climate change is not commonly a priority issue in the environmental or sustainable development agenda in Latin America. Therefore, to increase interest in climate change nationally, requires a linkage between issues having to do with climate change (energy, transportation, industry, agriculture, land use change, coastal adaptations, etc.) and sustainable development priorities. It is important to help countries in evaluating their needs for technologies that are in agreement with their development or local environmental agenda. Agendas vary widely from country to country. There are also critical differences in ability from country to country in adapting to and absorbing technology, infrastructure, availability of natural and human resources, culture, economic and political environment, etc. These differences make evaluation of technology by region, country or sector an important issue in the technology transfer process. Evaluation of technology is only useful when it includes an evaluation of how to effectively attract and apply these technologies.

STRUCTURING CAPABILITY AND INFORMATION CHALLENGES

One of the keys for encouraging technologies is access to use of information. Countries and companies are different in their capability for access to information, evaluation and selection of technology. Information for companies is available more and more through the Internet, fax, conferences and seminars. However, the smallest companies, especially those located in rural areas or that belong to poorly organized or informal sectors, may have inadequate access to information and technical and financial support and other resources for developing a project. Information through the Internet can be overwhelming, and the quality and reliability of information may not be sufficient for selecting a technology. For example, once a technology is used, its financial, economic, environmental and social performance can be different from what had been projected in a theoretical analysis or from information secured from suppliers on the Internet. Useful information goes beyond information on technical tools. A country or company can only select a climate-friendly technology after its neighbor has successfully implemented it. The building of trust through demonstration projects and feasibility studies is a key, in addition to best practices, training/education and exchanges.

FINANCIAL ISSUES

Financial obstacles may well be the most powerful obstacles in dealing with projects for climate change benefits in Latin America. The origin of this problem lies both in project features and in the nature and availability of financing sources. Some climate change projects have features in common that make it hard to assure financing, such as high development costs, large “soft” components (feasibility studies, energy audits, hiring foreign and local consultants, carrying out training programs and travel costs, etc.), small scale investments and higher transaction costs. On the other hand, project financing people are reluctant to finance small projects, and look for projects involving well proven and developed technologies with clear risk and return patterns.

In some financial markets such as Mexico, sharp liquidity restrictions have caused a marked resistance among bankers to consider loans for projects outside a narrowly defined group of project types. In addition to limitations on liquidity, return periods for loans tend to be relatively brief. This can be more problematic in the case of renewable energy projects and especially in the case of land use projects, given the long growth period for most tree species. Even though there are commercial risk capital funds, companies can have doubts about resorting to these resources if loan costs are very high. Funding subsidies may be required to compensate for costs that cannot be economically supported by project revenues, such as in the frequent case of renewable energy applications in rural areas. Creativity in financing is required while markets adjust to the real cost of projects containing external factors. Energy Services Companies are a good example of creativity in a financing mechanism for energy efficiency projects.

There are numerous programs designed for making financing for climate change projects easier by providing risk and debt capital for investing in companies, as well as for mechanisms providing guarantees. Examples of multilateral organizations include the SME Program by the International Finance Corporation (IFC), the Global Environment Facility (GEF) and the Renewable Energy and Energy Efficiency Fund (REEF). In many cases, difficulty in gaining access to these financing sources is perceived, particularly for small companies. Many see the “Kyoto Mechanisms” (Clean Development Mechanisms and Implementation of Alliances) as a means for making climate friendly projects that are commercially viable. Costa Rica actually created an infrastructure for developing CDM projects. If projects financed by commercial banking are also evaluated for their respect for climate, this will certainly drive investments in this area. In this regard, there is a need to train “green bankers” capable of analyzing and financing climate friendly projects, in addition to training financial intermediaries on how to proactively identify and develop projects in this area that can be financed.

WHAT CAN THE CTI DO TO MANAGE THESE CHALLENGES IN LATIN AMERICA?

From the above analysis it appears that there are many policies and initiatives that can influence the quality and amount of technology transfer to an emerging Latin America. This section summarizes the key challenges and makes suggestions on the type of activities the CTI can support.

The section on evaluation of technology shows that the key challenges for Latin America are to help countries evaluate their needs for technology, and even more important, to help countries evaluate what is required to create a market for these technologies. In connection with this subject, the section on political and institutional challenges suggested that it is a priority to create an awareness of how to make an environmental policy attractive for investments in climate friendly projects.

In response to these needs, the CTI can start a Cooperative Technology Implementation Plan (CTIP) on a sector, national or regional basis. A CTIP is a mechanism through which joint experience and the experience of CTI member countries can work together with individual countries and key parties to create a market and speed up the use of specific climate friendly technologies in their economies.

CTIPs are adapted to the needs of a country, and can include the following elements:

  • Identifying a group of climate friendly technology options for the purpose of satisfying the needs of the sector,
  • Supporting developing countries in preparing CTIPs that will define actions for eliminating hindrances to the use of climate friendly technologies.
  • Becoming involved with countries and international businesses in designing and implementing actions for overcoming barriers to investments in climate friendly technologies.
  • Facilitating plan implementation by linking up the host country’s action with private sector participation and donor support.

CTI is exploring the possibility of a CTIP in Central America with a focus on encouraging investments in renewable energy technology.

An understanding of how to create an attractive environmental policy for investments in climate friendly technologies can also include an in-depth analysis of barriers, as these are perceived by the private sector, as well as an exchange of experiences among countries on “what works” and “what doesn’t work”.

In response to this need, the CTI is able to organize specialized training courses and training groups for technicians and managers to bring environmental issues into decision making, and to insure the sustainability of this experience through the management of knowledge and “training of trainers”. CTI’s capability for structuring activities includes preparing and making available studies on experiences and practices that have been successfully used in facilitating the adoption of climate friendly technologies. This summer the CTI plans to organize a training course on the introduction of energy efficiency standards in Latin America.

On the other hand, CTI is responding to these needs by organizing specialized workshops for industry. These seminars typically provide (i) an opportunity for the private sector to express its policy recommendations to key decision makers, and helping to create an attractive climate for environmental technologies; (ii) a platform for preparing the ground for project development; (iii) an idea of financing opportunities for climate related projects, including Clean Development Mechanisms, and opportunities for risk management. The Industrial Seminar in El Salvador was a general seminar, and it served to identify activities to be followed and to define seminars for the Latin American and Caribbean region in the area of transportation, energy efficiency and renewable energy.

The section on challenges in financing climate friendly projects emphasized the importance of encouraging the development of creative financing and guarantee mechanisms. It also emphasized that increased commercial financing of climate friendly projects through an increased awareness in the financial community of climate change projects will potentially have a much greater impact. There is also a need to increase awareness among project developers/intermediaries of available sources of financing so they can have access to them; for small and medium sized companies in particular.

In response to this need, the CTI is able to organize industrial seminars focused on financing for climate change projects. A forum on financing can bring the financial community, insurance companies and project developers together in managing these key financial issues.

The section on information challenges shows that the key challenges for Latin America are to help countries in collecting and organizing information on the social, environmental and economic performance of specific technologies, and to use industrial associations and/or a central information collection for making these experiences broadly available.

The CTI is now providing improved access to relevant information on technology through its specialized page on the Internet with a search feature (http://www.ClimateTech.net). The CTI is also encouraging the spread of climate technology through its awards program. The Secretariat is calling for nominations for CTI 2000 prizes (See box). You can obtain further information on CTI and its activities in Latin America from the Internet page: http://www.ClimateTech.net.

CONCLUSIONS

Increasing transfer of climate friendly technologies, or diverting the attention of direct foreign investment and negotiation flows toward a respect for climate is something that is challenging, but possible. This article emphasizes some key areas in which this process may be influenced. Transfer of climate technology seems to be much more tangible than most people have suggested. The CTI plays its most important role as a facilitator by serving as a liaison between governments, donors, industry, financing sources and other parties. Through consultations, workshops and articles, the CTI can help to promote policies and institutional changes that can lead to the elimination of barriers and increased penetration of the climate friendly technology market. The role of the private sector in this process is vital. The CTI Secretariat urges readers of this article to make specific suggestions on activities to be included in this business plan and work schedule for Latin America.
 

* Article first published in Calidad Ambiental, Vol. V, N 3, May-Jun. 2000, p. 12.

** Roebyem Heintz has two master degrees, in Economy and Politics by the University of Amsterdam, and in Sciences, with specialization on Environmental Economy, by the University College London. Currently she is working at the Climate Technology Initiative (CTI) Secretariat at the International Energy Agency as Coordinator for the Latin American and Caribbean region. She has been working in this effort since the summer of 1999 in the key task of establishing a CTI program for Latin America. She had worked for three years at the World Bank as Marketing Director for the Prototype Carbon Fund as well as for the Clean Air Initiative for Latin America as an environmental economist. Before that she had worked for four years at the Institute for Environmental Studies, Vrije Universiteit, in Amsterdam, Holland. She holds two masters degrees in economic and political sciences from the University of Amsterdam and a Masters of Science with a major in environmental economics from University College London.