THE ENERGY ENVIRONMENT REVIEW (EER) IN THE ISLAMIC REPUBLIC OF IRAN (IRI)

1. THE ENERGY ENVIRONMENT REVIEW (EER)IN THE ISLAMIC REPUBLIC OF IRAN (IRI) BY SHERIF ARIF REGIONAL ENVIRONMENTAL AND SAFEGUARD ADVISOR, MNA PRESENTED AT THE WORKSHOP OF CEA, SEA AND DPL JANUARY 18, 2005

2. 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

3. 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

4. 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

5. 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.

6. 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.

7. 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.

8. ENERGY DEMAND IN IRAN IN 2001

9. 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

10. 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

11. 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

12. Distribution of Damage by Sector and Fuel

13. The Damage Growth in Iran • The main problem in Iran is the growth of pollution from private gasoline vehicles

14. DAMAGE GROWTH BY SECTOR

15. 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.

16. 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).

17. Damage costs by pollutant in selected years under reform (In trillion Rials)

18. 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?

19. Damage cost savings per % price increase • Gas-oil and gasoline give the biggest savings in damage per unit of price increase

20. 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

21. Sectoral Measures Proposed

22. 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.

23. 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.

24. 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%.

25. 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

26. THANK YOU VERY MUCH FOR YOUR KIND ATTENTION