E3G - EWI

Underpinning the MENA Democratic Transition

Delivering energy, resource and climate security

October 2013

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Contents

• Context

• Understanding fragility

• Energy subsidies

• Four strategic recommendations

Context

• High risk of instability driven by enduring high youth unemployment, regional and social inequalities, dependence on low-value and underperforming sectors (e.g. tourism and textile), harmful exposure to global food and energy markets, strong competition from emerging economies

Decline in living standards biggest immediate driver of instability

• Regional (non-fossil export) economies are too weak to meet the aspirations of their growing populations. Fossil fuel exports are masking some risks which will emerge later

• Given worsening fiscal balances caused by lower exports and high energy and food subsidy payments, net oil and food importers have ever fewer resources to buffer these risks

• MENA economies face significant constraints on growth due to shortages of energy and water exacerbated by climate and resource pressures E3G - EWI 3

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Contents

• Context

• Understanding fragility

• Energy subsidies

• Four strategic recommendations

The Climate-Energy-Resource Nexus

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Source: E3G 2006

Increasing resilience to shocks is critical requirements to manage successful democratic transitions

Climate related hazard exposure in North Africa

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Scarcity, Climate and Food Prices 2030

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Food Price Volatility 2030

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0 100 200 300 400 500 600% increase on 2010 baseline

% increase in average world market export price 2010-2030 (caused by climate change and other factors)

Additional % increase in world market export price in 2030 due to weather related shock

NORTH AMERICA SHOCK:140% additional price increase on 2030 baseline

177% increase on 2010 baseline by 2030

NORTH AMERICA SHOCK:33% additional price increase on 2030 baseline

120% increase on 2010 baseline by 2030

MAIZE

WHEATWHEAT

Source: Oxfam 2012

Projected rainfall in Ethiopian highlands from selected climate models

Projected rainfall in Eastern Sudan from selected climate models

Uncertainty over Nile flows could drive tensions?

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Strategic Assessment I

• Communal tensions over resource scarcity/volatility e.g. pastoralist/farmer conflicts in SSA

• Economic recession e.g. drought limiting hydro electric output; climate driven drop in tourism revenue; drop in demand for carbon-intensive goods

• Sudden drop in living standards e.g. food and fuel price shocks in 2008 and 2010 driven by droughts and wildfires in Russia and flooding in Australia

• Inter and Intra state governmental tension over resource management e.g. shared watercourse management; fisheries management

• Extreme events: floods/droughts driving mass displacementE3G - EWI 10

Strategic Assessment II

• Stability will also be impacted by other “known unknowns” such as Islamic militancy, impact of unresolved conflicts (Syria, Libya) and regional state-to-state competition

• Effective development strategies remain an important pillar of stability but need to focus more strongly on building economic and social resilience alongside economic growth

• Resource efficient and low carbon investment opportunities offer potentially high-value stability interventions but require shifts in country and international partner priorities and practices

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Contents

• Context

• Understanding fragility

• Energy subsidies

• Four strategic recommendations

Half of total global energy subsidies in MENA >$200 bn

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Case study: Egypt

• In 2010 energy subsidies amounted to $20 bn or 12% of GDP = 73% of all subsidies

• Same pricing scheme for every household means the richest third of the population receives 60% while the poorest third only 25%

• Leading to increased inequality and vulnerability to volatile international energy prices; creating investment distortions and incentives for waste and smuggling; diverting public resource away from efficiency, RES, public services

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There is scope for redistribution as most subsidies flow to the richest consumers but fiscal measures alone will not suffice

to reduce consumer and industry vulnerabilities

Delivery resilience in practice

• Low growth rates, weak policy buffers and high political instability create bad environment for subsidy reforms

• To manage costs to poorer and middle ranking consumers need significantly more focus on investment in energy efficiency solutions Introduce feebates on energy efficiency appliances and

housing fabric upgrades to reduce costs of materials through economies of scale

Increase national building codes and air-conditioning standards

Align and support at regional level standard-setting for buildings, vehicles, appliances to overcome cross-border trade barriers E3G - EWI 15

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Contents

• Context

• Understanding fragility

• Energy subsidies

• Four strategic recommendations

1. Improve resilience to shocks

Refocus investment to address immediate resilience challenges over energy, water and food

• Address energy price vulnerability and energy subsidy reform through integrated packages of price reform, social support and recycling some subsidy reduction into targeted energy efficiency. Draw on international climate finance to smooth transition and provide up-front financing.

• Develop packages of water management reforms based on efficiency, community management and targeted investment in areas of high potential water and social stress.

• Assess the sustainability of food and agriculture policy in the region under the full range of scenarios of food prices and volatility. Reassess focus of support to export agriculture vs. national food security based policies.

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2. Economic diversification into resource efficient industries

Support new industries which are sustainable under future resource stresses and climate policy contexts

• Countries should stress test national development plans against a range of resource, trade, energy policy and climate change scenarios.

• Analyse actual potential of individual countries to develop competitive advantage in clean energy exports to Europe and the wider region.

• Carry out scoping studies for low carbon zones (LCZs) as a potential driver of economic diversification and industrial development. Explore linking LCZs to EU trade preferences.

• Develop active industrial strategies around existing investment in renewable energy and in resource efficiency sectors to drive development of local and high-value supply chains.

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In the national resource and social context including shifting from hard to soft solutions

• Develop explicit national infrastructure planning assumptions and assessments for a range of resource scarcity, low carbon trajectory and climate change scenarios to 2040.

• OECD public investment – including public-private partnerships - should assess the resilience of their investments under different scenarios and put forward equivalent demand reduction alternatives for all new supply side investments in energy and water.

• Undertake a comprehensive review of planned water, food control and sewage infrastructure to develop alternative investment packages based on demand reduction, community control, and natural management in a way that improves social resilience.

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3. Build resilient infrastructure

4. External support

Rationalise external support on resource pressures: focus on a high impact stability and development objectives

• The EU and engaged Member States should carry out strategic assessment of how their related trade, migration, energy and aid policies impact stability in the region, and assess where reforms can be made to increase the impact of external support

• Assess aid delivery and allocation structures to ensure they can blend different funding streams to mitigate resource scarcity and climate change related risks

• The European External Action Service should convene European and regional Governments to identify a common view on the highest priority areas for international support to regional electricity interconnection projects

• OECD countries should initiate a dialogue on sustainability and stability with regional and BRICs investors active in developing critical infrastructure in the region. Aiming to align short term competition with mutual interest of ensuring medium term stability 20E3G - EWI

For more material visit e3g.org

To download the report visit E3G website

or drop me an emailluca.bergamaschi@e3g.org

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The “ABC” Risk Management Framework

• Aim to mitigate to stay below 2°C;

• Build and budget for resilience to 3-4°C;

• Contingency plan for capability to respond to 5-7°C

Elements same for all countries/actors but goals will differ; there is no universal risk management approach

Source: “Degrees of Risk”, E3G 2011

Weak MENA Manufacturing Exports

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Exports are shrinking in labor-intensive manufacturing

E3G - EWI 24Source: UNDP Arab Development Report 2012

Critical Stability Dynamics

• Transitional democracies are more vulnerable to internal instability than either autocracies or mature democracies

• Instability in an autocracy can give space for democracy; instability in transitional democracies can lead to autocracy

• Strong correlation between sudden declines in per capita income and increased risks of instability

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FDI largely directed towards oil exporters

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Source: OECD, FDI Trends In the MENA regionAnd Persisting PolicyChallengesUNCTAD 2010

Increased Failure of the Cereal Growing Season

2000 2050

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