THE ENERGY ENVIRONMENT REVIEW (EER)IN THE

ISLAMIC REPUBLIC OF IRAN (IRI)

BYSHERIF ARIF

REGIONAL ENVIRONMENTAL AND SAFEGUARD ADVISOR, MNA

PRESENTED AT THE WORKSHOP OF CEA, SEA AND DPL

JANUARY 18, 2005

Structure of the Presentation

The Fuel for Thought Strategy and the EER

The Energy Sector in Iran Damage Costs due to Air Pollution Policy Options for Reducing

Damage Costs Outcome

The EER Concept

The Energy and Environment Review 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

EER OBJECTIVES

The main objectives in this strategy are to: facilitate more efficient use and

substitution of traditional fuels; protect the health of urban residents

from air pollution due to fuel combustion;

promote environmentally sustainable development of energy resources;

mitigate potential impacts of energy use on global climate change; and

develop capacity for environmental regulation, monitoring and enforcement

WHY EER IN IRAN

The Government of Iran (GOI) has requested the World Bank assistance to integrate environment priorities into its energy sector, with the intention that some of its recommendations could be included in the 4th Five Year Development Plan (2005-2010).

The objective of the 4th Five Year Development Plan to achieve fast and sustainable growth and accelerate the transition to a market economy.

The suggested actions will promote economic efficiency through a proper allocation of scarce resources, including environmental resources, so as to achieve economic efficiency and environmental and social protection.

CONTENT OF THE 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.

SIZE OF IRAN’S ECONOMY AND ITS ENERGY SECTOR

Iran population is 64.5 million (2002) Its GDP is US$ 114 billion, Economic growth in 2001/02 is estimated at

5.7%; this is the highest rate of growth since 1992.

Nominal GDP per capita in 2002 was 1710 US$/capita

Iran is OPEC’s second largest oil producer; at the end of 2002 it possessed 12.3 billion tons of proved reserves, amounting to 8.3% of global proved reserves.

In 2002, there were 23 trillion cubic metres of proved reserves of natural gas in Iran, equivalent to 14.8% of known world reserves and the second largest in the world after the Russian Federation.

ENERGY DEMAND IN IRAN IN 2001

0

50

100

150

200

250

300

Agriculture. ResComm Industry Transport Others

mb

oe

/ye

ar

 Elec’y

LPG

Fueloil

Gasoil

Kerosene

Gasoline

Natural Gas

Solid fuels

Subsidies in Iran Energy 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 Rls

($1 bn

= 8x

10^1

2 Rls)

Others

Transport

Industry

ResComm

Agriculture

Damage Costs in Iran

A first-order estimate of the benefit values for local pollutants in Iran was made by scaling ExternE values according to the relative GDP per capita measured at parity purchasing power (PPP).

No local studies were found for calibration

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 GDP

IN 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 Iran The main problem in Iran is the

growth of pollution from private gasoline vehicles

0

20

40

60

80

100

120

140

160

180

2001 2004 2009 2014 2019

10

^1

2 R

ls (

US

$1

bn

= 8

x1

0^

12

Rls

)

CO

NOx

SO2

PM10

DAMAGE GROWTH BY SECTOR

0

20

40

60

80

100

2001 2004 2009 2014 2019

10

12 R

ls (

US

$1

bn

= 8

x1

012 R

ls)

Others

Transport

Industry

ResComm

Agriculture

PowerGen

Oil refining

POLICY OPTIONS

The EER examined the consequences of:

price reform policies ;and sectoral 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.

Impacts of price reform in Iran

The EER examined three scenarios for price reform with end dates: 2009 - end of 4th Plan; 2014 - end of the 5th Plan; 2019 - end of 6th Plan

With price reform, the total damage cost in 2019 is 81 Trillion Rials ($US10 billion) compared to 155 Trillion Rials ($US19 billion) under the reference scenario.

The cost is still higher than in 2001. Price reform will avoid annual environmental damage by 2019 of 74 Trillion Rls ($US9 billion).

Damage costs by pollutant in selected years under reform (In

trillion Rials)

0

20

40

60

80

100

2004 No -09 -14 -19 No -09 -14 -19 No -09 -14 -19

2009 2014 2019

CO

NOx

SO2

PM10

Options for Partial Price Reform in Iran

Political constraints and the inflationary impacts of price reform could prevent the introduction of cost-effective prices even by 2019.

Which energy prices should be addressed in a partial reform process?

Which would give the most environmental benefit?

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

tril

lio

n R

ials

Gasoline

Kerosene

Gasoil

FO

NatGas

Elec (residential)

Classification of measures Sectoral measures were classified as

follows: A: Measure is win-win B: Measure is cost-effective if local

damage savings are included C: Measure is cost-effective only when

global damage savings are incorporated; suitable for CDM activities

D: 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

Impact on the Environment of Measures without Price Reform

The estimated annual damage cost savings induced by sectoral measures by 2019 is around 29 Trillion Rials ($US3.5 billion). Sectoral measures by themselves are only partially effective. Damage continues to grow and is higher in each of the snapshot years than in 2004.

0

20

40

60

80

100

2004 No Yes No Yes No Yes

2009 2014 2019

Dam

ag

e c

ost

(10

12

Ria

ls)

CO

NOx

SO2

PM10

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

Da

ma

ge

co

st

(10

12 R

ials

)

CO

NOx

SO2

PM10

OUTCOME OF THE EER

The EER recommendations were included 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 Rials per year (10 cents/liter).

As of March 21 2005, The gasoline price above the subsidized quota will be 2200 Rials/liter ( 25.6 cents per liter). It is expected that the price of gasoline should reach its market value in 2009.

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%.

OUTCOME OF THE EER

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 2004

EER unit in DOE is still functional

THANK YOU VERY MUCH FOR YOUR KIND

ATTENTION