ACS8179 green F Y R MACEDONIA growth COUNTRY A SSESSMENT March 2014 © 2014 THE WORLD BANK GROUP 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved. This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. R I G H T S A N D P E R M I S S I O N S The material in this publication is copyrighted. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. table of contents Abbreviations and Acronyms.......................................... ix Chapter 3 Acknowledgements......................................................... xi How Will a Changing Climate Affect FYR Macedonia’s Future? A Climate-Sensitive Baseline............................ 23 Executive Summary........................................................xiv Chapter Summary...................................................... 23 Challenges for Greener Growth...............................xvii Challenges for Greener Growth ............................... 23 Methodology and Main Findings.............................xxii Overview.................................................................... 23 Methodology...........................................................xxii Methodology and Main Findings.............................. 24 Main findings........................................................... xxiv Methodology............................................................ 24 Recommendations....................................................xxx Main findings............................................................. 25 Recommendations..................................................... 26 Introduction...................................................................... 1 Chapter 4 Chapter 1 Will Water Shortages Constrain Growth?...................... 29 What is Green Growth, and How Green is FYR Chapter Summary ..................................................... 29 Macedonia? A Benchmarking Exercise ........................... 5 Challenges for Greener Growth ............................... 30 Chapter Summary ....................................................... 5 Overview.................................................................... 30 Challenges for Greener Growth ................................. 6 Dealing with Sector Inefficiency Overview...................................................................... 6 in the Context of Green Growth.............................. 31 Where Should Countries Start?................................. 7 Methodology and Main Findings.............................. 32 Methodology and Main Findings................................ 8 Methodology............................................................ 32 Methodology.............................................................. 8 Main findings............................................................. 33 Main findings............................................................... 9 Recommendations..................................................... 38 How green is FYR Macedonia? Environmental performance and the green asset base.........................9 Chapter 5 Going green: flexibility of the economy.......................13 Can Agriculture Flourish in a Changing Climate?.......... 43 Riding a green wave: innovation...................................13 Chapter Summary...................................................... 43 Recommendations..................................................... 14 Challenges for Greener Growth................................ 44 Overview.................................................................... 44 Chapter 2 Dealing with Sector Inefficiency Where is FYR Macedonia Heading? A Baseline Scenario in the Context of Green Growth.............................. 46 for Economic Development to 2050.............................. 17 Methodology and Main Findings.............................. 48 Chapter Summary...................................................... 17 Methodology............................................................ 48 Challenges for Greener Growth ............................... 17 Main findings............................................................. 50 Overview.................................................................... 17 Recommendations..................................................... 51 Does the Past Provide a Good Roadmap for the Future?....................................................................... 18 Chapter 6 What should FYR Macedonia do to catch up How Can the Energy Sector Be Transformed, with the European Union? ....................................... 19 and What Can Energy Efficiency Contribute?................ 55 Methodology and Main Findings.............................. 19 Chapter Summary ..................................................... 55 Methodology............................................................ 19 Challenges for Greener Growth................................ 56 Main findings............................................................. 20 Overview.................................................................... 56 Recommendations..................................................... 21 Methodology and Main Findings.............................. 61 Methodology............................................................ 61 Main findings............................................................. 64 Recommendations..................................................... 68 Chapter 7 Chapter 10 How Can Transport Support Sustainable Growth?........ 73 Can Co-benefits such as Cleaner Air Arise Chapter Summary...................................................... 73 from Greening? ........................................................... 113 Challenges for Greener Growth................................ 73 Chapter Summary.................................................... 113 Overview.................................................................... 73 Challenges for Greener Growth.............................. 113 Dealing with Sector Inefficiency Overview.................................................................. 113 in the Context of Green Growth.............................. 75 Methodology and Main Findings............................ 114 Methodology and Main Findings.............................. 78 Methodology.......................................................... 114 Methodology............................................................ 78 Main findings........................................................... 116 Main findings............................................................. 82 Recommendations................................................... 121 Recommendations..................................................... 86 Chapter 11 Chapter 8 How Should Social Dimensions Be Addressed?.......... 125 Can Urban Areas Lead on Greening?............................ 91 Chapter Summary ................................................... 125 Chapter Summary...................................................... 91 Challenges for Greener Growth ............................. 125 Challenges for Greener Growth................................ 92 Overview.................................................................. 125 Overview.................................................................... 92 Challenges of Social Inclusion Critical Urban Issues in the in the Context of Green Growth............................ 126 Context of Green Growth........................................ 93 Methodology and Main Findings............................ 128 Methodology and Main Findings.............................. 95 Methodology.......................................................... 128 Methodology............................................................ 95 Main findings........................................................... 130 Main findings............................................................. 96 Recommendations................................................... 132 Recommendations..................................................... 99 Chapter 12 Chapter 9 How Can Public Investment Choices Support Greener Should Infrastructure Be Built Differently Growth? ....................................................................... 135 to Be Climate Resilient?............................................... 103 Chapter Summary ................................................... 135 Chapter Summary.................................................... 103 Challenges for Greener Growth.............................. 136 Challenges for Greener Growth ............................. 104 Methodology and Main Findings............................ 137 Overview.................................................................. 104 Methodology.......................................................... 137 Methodology and Main Findings ........................... 105 Main Findings.......................................................... 139 Methodology.......................................................... 105 Recommendations................................................... 142 Main findings........................................................... 107 Recommendations................................................... 110 References.................................................................... 146 iv F Y R M aced onia Gr een Grow th Country A ssessment Figures Summary Figure A. A framework for green growth Figure 1.7. The Macedonian economy has high benchmarking.....................................................................xiv emissions intensity, although it produces limited total emissions due to its size............................................ 11 Summary Figure B. FYR Macedonia is vulnerable to a changing climate..........................................................xv Figure 1.8. FYR Macedonia is vulnerable to a changing climate............................................................. 12 Summary Figure C. The Macedonian economy has high emissions intensity, although it produces limited total Figure 1.9. FYR Macedonia’s supportive business emissions due to its size.....................................................xvi environment cannot make up for poorly functioning labor markets...................................................................... 12 Summary Figure D. Macedonian energy sector is the top emitter............................................................... xvii Figure 1.10. Global links are not yet strong enough....... 12 Summary Figure E. Green actions help reduce Figure 1.11. FYR Macedonia is not ready demand-supply gaps for irrigation water.........................xxi for a wave of innovation..................................................... 13 Summary Figure F. Adaptation efforts in green Figure 2.1. Recent turbulence makes projections scenarios lead to increased revenue and improved more difficult....................................................................... 18 irrigation efficiency............................................................xxii Figure 2.2. Productivity growth and capital investment Summary Figure G. Energy: development of gas will be the major sources of long-run growth.................. 20 supply will help to replace lignite and oil with gas.........xxii Figure 2.3. Structural shift from agriculture towards Summary Figure H. Energy: new gas and energy efficiency services will continue, but agriculture share in measures provide most cost efficient abatement.......... xxiii total output will remain relatively high ............................ 20 Summary Figure I. Transport: green policies limit emission Figure 2.4. Energy and emissions will be partly growth, but do not achieve decoupled from GDP growth ........................................... 21 an absolute reduction of emissions................................ xxiii Figure 3.1. A hotter and drier future is likely.................... 24 Summary Figure J. Air pollution: Skopje, Bitola, Kumanovo, Figure 3.2. While agriculture losses per employee Tetovo, and Veles suffer the worst health impact........... xxv rise, those losses constitute a declining share Summary Figure K. Implementation of green of GDP, as agriculture occupies a shrinking share packages of measures will dampen GDP in of total output..................................................................... 25 the short term, but then boost it......................................xxv Figure 3.3. FYR Macedonia is projected to become Figure 1.1. Elements of environmental sustainability that drier and hotter................................................................... 26 together constitute green growth....................................... 7 Figure 3.4. Projected climate change, including extreme Figure 1.2. A framework for green growth benchmarking.8 weather, leads to a 0.6 percent drop in GDP. .................. 26 Figure 1.3. Mineral extractions are drawing down total Figure 4.1. Agriculture is the top water wealth.................................................................................... 9 consuming sector............................................................... 30 Figure 1.4. Air pollution worse than EU average............. 10 Figure 4.2. Water withdrawal level creates moderate water stress........................................................ 31 Figure 1.5. Natural resources are less productive than in the EU..................................................................... 10 Figure 4.3. Analytic Framework for Water Sector............ 34 Figure 1.6. Production is creating high levels Figure 4.4. Green actions help reduce of greenhouse gas emissions............................................ 10 demand-supply gaps for irrigation water......................... 35 v Figure 4.5. Green investments lead to increased Figure 8.1. FYR Macedonia’s urban population water sector efficiency........................................................ 35 has recently been growing faster than rural population .92 Figure 4.6. Green investments lead to increased Figure 8.2. Denser cities account for fewer efficiency in agriculture...................................................... 36 GHG emissions per capita................................................. 93 Figure 4.7. Areas projected to have sufficient Figure 8.3: Urban form influences service water availability to support expanded irrigation............ 40 delivery patterns and energy intensity.............................. 94 Figure 5.1. Agriculture is important for economic Figure 8.4: Houses in FYR Macedonia are output and employment in FYR Macedonia growing much faster than households............................. 94 and underlies the country’s vulnerability to Figure 8.5. Skopje is sprawling outwards......................... 96 climate change................................................................... 45 Figure 8.6. Share of public transportation in Figure 5.2. Agricultural productivity has Skopje is below average.................................................... 98 been increasing.................................................................. 46 Figure 8.7. Urban public transport ridership Figure 5.3. Government expenditures on in FYR Macedonia has been declining............................. 98 agriculture grew 44-fold during 2006 to 2012 ................. 46 Figure 8.8. FYR Macedonia generates less Figure 5.4. Macedonian agriculture is not emissions waste than other EU countries.......................................... 98 intensive.............................................................................. 47 Figure 8.9. The level of non-revenue water in FYR Figure 5.5. AQUACROP model......................................... 49 Macedonia is high comparable to cities in the region ... 99 Figure 5.6. Adaptation efforts in green scenarios Figure 9.1. Impact of climate change on weather lead to increased revenue and improved patterns is uncertain ........................................................ 104 irrigation efficiency.............................................................. 51 Figure 9.2. Adaptation is cost-effective for Figure 6.1. Demand exceeds supply and the FYR Macedonia in some but not all sectors, gap is filled with imported power..................................... 57 and its value rises over time for many sectors............... 110 Figure 6.2. Macedonian economy has high Figure 10.1. FYR Macedonia’s population emissions-intensity compared with European countries.58 has the highest exposure to particulate Figure 6.3. Macedonian energy sector matter air pollution........................................................... 115 is the top emitter................................................................ 59 Figure 10.2. FYR Macedonia has fifth largest Figure 6.4. Macedonian economy relies heavily death rate in Europe due to particulate on lignite and has almost no gas in primary energy........ 59 matter air pollution........................................................... 115 Figure 6.5. Methodological Framework for Figure 10.3. Analytic framework...................................... 117 the Energy Sector Analysis................................................ 64 Figure 10.4. Air pollution has been above Figure 6.6. Greening power supply mix means EU standards for years..................................................... 118 moving away from lignite and oil to gas........................... 67 Figure 10.5. Over 90 percent of PM emissions Figure 6.7. New gas and energy efficiency measures are from metallurgy, electricity and heat production, provide most cost efficient abatement ............................ 69 asphalt mixing in road paving and household wood burning.............................................................................. 118 Figure 7.1. Mobility in FYR Macedonia will rise sharply with economic growth, and so will emissions ........ Figure 10.6. Health impacts are highest in municipalities 74Figure 7.2. Growth in car ownership—a major emissions of Skopje, Bitola, Kumanovo, Tetovo, Veles................... 117 driver—is promising to increase with income.................. 75 Figure 11.1. The gap in living standards between Figure 7.3. Poor quality of roads translates into urban and rural regions increases................................... 127 high level of accidents....................................................... 75 Figure 11.2. Regional differences in employment Figure 7.4. Methodological framework for are high.............................................................................. 127 transport sector.................................................................. 81 Figure 11.3. FYR Macedonia is a country with major Figure 7.5. Green policies limit emissions growth, environmental, economic and social problems............. 131 but do not achieve an absolute reduction ...................... 83 Figure 11.4. Examples of green growth measures, Figure 7.6. Cost of Super Green policies (NPV, 2012-2050) divided in categories of complexity and costs of is not directly related to the resulting abatement........... 86 implementation by workshop participants..................... 131 vi F Y R M aced onia Gr een Grow th Country A ssessment Figure 12.1. Three markets and three agents................ 137 Table 8.1. Urban transport network and equipment declines............................................................ 97 Figure 12.2. Short-run impact of mitigation investment on GDP.......................................................... 138 Table 9.1. Infrastructure assets are long-lived................ 105 Figure 12.3. Modeling macroeconomic Table 9.2. Cost matrix for all infrastructure impact of ‘green’ policy interventions in sectors........... 139 for five selected adaptation scenarios, FYR Macedonia, 2031-35................................................. 108 Figure 12.4. GHG emissions fall by 40 percent.............. 139 Table 9.3. Adaptation costs for most countries Figure 12.5. GHG emissions fall by 70 percent.............. 139 are below 2 percent of baseline expenditures............... 108 Figure 12.6. Green mitigation requires investments Table 9.4. Adaptation costs vary considerably of 1% of GDP.................................................................... 140 by sector............................................................................ 109 Figure 12.7. Super green mitigation requires Table 10.1. Annual deaths and disabilities investments of 2% of GDP............................................... 140 in FYR Macedonia due to air pollution cost Figure 12.8. Impact on GDP differs across over €253 million ............................................................. 119 climate action measures ................................................. 142 Table 10.2. Potential health savings from reduction Figure 12.9. Decomposition of GDP impact in PM10 and PM2.5 can equal 2 percent of GDP if EU limit in the Super Green scenario is similar to the values were reached, € million and % GDP.................... 119 Green scenario, but its magnitude is bigger ................ 142 Table 10.3. Skopje and its municipalities represent half of the health burden from air.................. 120 Table 11.1. Employment opportunities in Tables some regions are scarce.................................................. 127 Summary Table A. Methodologies for the Green Growth Table 11.2. Overview of the major environmental, Country Assessment......................................................... xxix economic and social dimensions by sector/theme....... 130 Summary Table B. Green scenarios developed for Table 12.1. Economic impact of the Green scenario modelling.......................................................................... xxxi (deviation from BAU, in %)............................................... 141 Summary Table C. Recommended actions by sector... xxxii Table 12.2. Economic impact of the Super Green scenario (deviation from BAU, in %)................................ 141 Table 4.1. Green policy and investment action in water, by scenario.......................................................................... 33 Table 4.2. Financial assessment summary for proposed investment options............................................................. 37 Boxes Table 4.3. Investment options with varying facility/basin level financial assessment outcomes................................ 37 Summary Box A. Green scenarios: a basic explanation..............................................................xx Table 5.1. Green policy and investment actions in agriculture, by scenario...................................................... 50 Box 1.1. Green Scenarios: a basic explanation.................. 2 Table 6.1. Green policy/investment action in energy, Box 1.2. Measuring Vulnerability to Climate Changea.... 11 by scenario.......................................................................... 63 Box 2.1. Baseline scenario as a benchmark for Table 6.2. Households and industry contribute most to analyzing the impact of green interventions ................... 18 power demand reductions under both scenarios............ 65 Box 5.1. EU cross-compliance requirements Table 6.3. Industry contributes most to non-electric for agriculture...................................................................... 49 energy demand reductions under both scenarios........... 66 Box 6.1. Fuel wood use in FYR Macedonia...................... 60 Table 6.4: Combined supply and demand scenario Box 6.2. Modeling parameters, constraints and characteristics..................................................................... 68 assumptions for the baseline scenario*............................ 62 Table 7.1. Green policy actions in transport..................... 79 Box 6.3. EFFECT (Energy Forecasting Framework and Table 7.2. Main outcomes of modeling: abatement Emissions Consensus Tool)................................................ 64 level, implementation cost and unit cost of abatement, Box 6.4. MARKAL (MARKet ALlocation) model*.............. 65 by scenario, policy package and individual Box 7.1. External costs of road transporta........................ 77 policy option....................................................................... 87 vii Box 7.2. European Commission’s TREMOVE and Good Practice Boxes TRANSTOOLS models (economic TRansport and EMissions model and TOOLS for TRansport Forecasting Good Practice Box 1. Achieving green growth objectives ANd Scenario testing)........................................................ 82 through innovation and R&D policies in Norway............. 14 Box 7.3. World Bank’s EFFECT.......................................... 82 Good Practice Box 2. Institutional capacity building Box 7.4. Sources and assumptions for implementation cost to increase efficiency of tariff reform in the water and estimatesa........................................................................... 88 wastewater sector in the Danube Basin............................ 39 Box 8.1. The Tool for Rapid Assessment of City Energy Good Practice Box 3. Climate-smart investment in (TRACE)............................................................................... 95 agriculture in Kazakhstan................................................... 48 Box 10.1. PM10 and PM2.5: definitions and their health Good Practice Box 4. Eco-farming goes together impact................................................................................ 114 with improved living standards in China........................... 51 Box 11.1. Summary of scenarios used at the PSD Good Practice Box 5. Green growth in manufacturing workshops......................................................................... 129 through green knowledge dissemination in Vietnam..... 69 Good Practice Box 6. Financing energy efficiency programs in Mexico and Brazil.......................................... 70 Box Figures Good Practice Box 7. Reducing emissions while lowering fuel costs through fuel-switching in Los Angeles, USA...... 76 Box Figure 6.1. Wood is the dominant fuel Good Practice Box 8. Reducing transport emissions for Macedonian heating..................................................... 60 through a price mechanism in France.............................. 85 Good Practice Box 9. Eco-cities allow ecological and economic progress to go hand-in-hand through integrated Box Tables urban planning and management in Singapore.............. 93 Good Practice Box 10. Waste management in Box Table 7.1. Five main external costs of transport Japan and Turkey.............................................................. 100 sector emissions................................................................. 77 Good Practice Box 11. The UK’s Thames Estuary 2100 Project....................................................................... 105 Good Practice Box 12. Improving air quality in Vienna and Mexico City................................................... 120 Good Practice Box 13. Participatory approach helps to link global environmental solutions with local development in India....................................................... 126 viii F Y R M aced onia Gr een Grow th Country A ssessment abbreviations and acronyms AquaCrop crop water productivity model MOMA Macroeconomic Options of Mitigation and BAU business-as-usual scenario including the Adaptation model impact of a changing climate MtCO2e millions of metric tons of carbon dioxide BAU0 business-as-usual scenario without the equivalent impact of a changing climate MWh megawatt hours bcm billion cubic meters of natural gas NOx mono-nitrogen oxides CHP combined heat and power NPV net present value CLIRUN CLImate and water RUNoff model O&M operations and maintenance CO2 carbon dioxide OECD Organization for Economic Cooperation and CO2e carbon dioxide equivalent Development DSGE Dynamic Stochastic General PM atmospheric particulate matter Equilibrium PM10 atmospheric particulate matter smaller than EC European Commission 10 microns ECA region countries of Eastern Europe and Central PM2.5 atmospheric particulate matter smaller than Asia: Albania, Armenia, Azerbaijan, Belarus, 2.5 microns Bosnia and Herzegovina, Bulgaria, Croatia, PSD participatory scenario development Czech Republic, Estonia, Georgia, Hungary, R&D research and development Kazakhstan, Kosovo, Kyrgyz Republic, SIDA Swedish International Development Latvia, Lithuania, FYR Macedonia, Moldova, Cooperation Agency Montenegro, Poland, Romania, Russian Solar PV Solar photovoltaic power Federation, Serbia, Slovak Republic, TCO2e metric tons of carbon dioxide equivalent Slovenia, Tajikistan, Turkey, Turkmenistan, TREMOVE EU TRaffic and Emissions MOtor VEhicle Ukraine, and Uzbekistan model (approximate) EPI Columbia-Yale Environmental Performance UMC upper middle income countries Index UNFCCC United Nations Framework Convention on ESMAP Energy Sector Management Assistance Climate Change Program, World Bank US$ United States dollars EU European Union UTMS urban traffic management system Eurostat the statistical office of the European Union VAT value-added tax FDI foreign direct investment WEAP Water Evaluation And Planning model GCMs Global Circulation Models GDP gross domestic product GGKP Green Growth Knowledge Platform GHGs greenhouse gases GW gigawatt (1000 megawatts) GWh gigawatt hour Vice President, ECA: Laura Tuck ha hectares Sector Director, PREM: Roumeen Islam IEA International Energy Agency Sector Manager, ECSP2: Satu Kahkonen LEZ Low Emissions Zone (urban) Task Team Leader: Erika Jorgensen MAC marginal abatement cost ix x F Y R M aced onia Gr een Grow th Country A ssessment acknowledgements This report is a synthesis of extensive sector and topical analysis carried out under the FYR Macedonia Green Growth and Climate Change Analytic and Advisory Support Program. The Program, generously supported by the Government of Norway and the Government of Sweden’s SIDA, has been conducted by a World Bank team led by Erika Jorgensen (Task Team Leader) and Gary Stuggins (Co-task Team Leader). This synthesis report was authored by Erika Jorgensen and Maria Shkaratan, with technical support from Femi Faleye, drawing on the analyses under the Program. Sector and topic analysis was carried out by teams as follows: ■■ Leszek Kasek, leading a macroeconomic modeling team of Maciej Bukowski, Jan Gąska, Agnieszka Śpionek (Institute for Structural Research, Warsaw) and Ali Bayar (EcoMod). ■■ Michael Jacobsen, leading a water team of James Neumann, Kenneth Strzepek, Brent Boehlert, Alyssa McCluskey, Charles Fant, and Miriam Fuchs (Industrial Economics) and local consultants Vladimir Stavric, Anton Chaushevski, and Ordan Cukaliev; ■■ Maurizio Gaudagni, leading agriculture, based on technical analysis by Industrial Economics; ■■ Govinda Timilsina, leading an energy supply team of Natasa Markovska, Aleksandar Dedinec, Verica Taseska-Gjorgievska (Macedonian Academy of Sciences and Arts), and Stephanie Gil; and Victor Loksha leading an energy efficiency team of international consultants John Rogers, Femi Faleye, and Duane Kexel, Ipsos Strategic Puls (FYR Macedonia ) and local consultant Rubin Taleski; ■■ Carolina Monsalve and Liljana Sekerinska, leading a transport team from Atkins International; ■■ Bjorn Philipp, leading an urban team of Marcel Ionescu-Heroiu, Ranjan Bose, Bekim Ymeri,and local consultant Rozalija Karchicka-Vasilevska; ■■ Urvashi Narain, leading the infrastructure adaptation analysis with Gordon Hughes (University of Edinburgh); ■■ Craig Meisner, leading an air pollution team including the Institute for Public Health (FYR Macedonia); ■■ Nicolas Perrin, leading a social team of Ben Kamphuis, René Verburg, Tom Kuhlman, Floor Brouwer, Jolanda van den Berg, and Lazo Dimitrov (the Agricultural Economics Research Institute, LEI, part of Wageningen University and Research Centre, Netherlands) and Terra-Consulting (FYR Macedonia), supported by CeProSARD (Center for Promotion of Sustainable Agricultural Practices and Rural Development, FYR Macedonia) and FFRM (Federation of Farmers in the Republic of FYR Macedonia ). The work was carried out under the overall supervision of Satu Kahkonen and the supervision of sector and topic analysis by Kulsum Ahmed, Juan Gaviria, Sumila Gulyani, Elisabeth Huybens, Ranjit Lamech, and Dina Umali-Deininger. Advice and support was provided by Yvonne Tsikata, (former) Sector Director and Lilia Burunciuc, (former) Country Manager; and overall guidance by Jane Armitage, xi (former) Country Director. Ron Hoffer, (former) Co-Task Team Leader, was fundamental to the design of the overall program. Ivana Horvathova and Denis Boskovski have provided excellent communications support for the Program. Liljana Sekerinska and Denis Boskovski have served energetically and effectively as the focal points for the Program in the Skopje office and managed relations with the Macedonian National Council for Sustainable Development. Markus Repnik, (former) Country Manager, initiated this Program through his very effective dialogue with Swedish and Norwegian counterparts. The work benefited from comments and suggestions from peer reviewers: ■■ For the overall report: Milan Brahmbhatt , Kirk Hamilton, and Kseniya Lvovsky; ■■ For macroeconomic modeling: Richard Damania, Evgenij Najdov, and Jevgenijs Steinbuks; ■■ For water: Guy Alearts and Denis Boskovski; ■■ For agriculture: Willem Janssen and Dorte Verner; ■■ For energy, Mohinder Gulati, Peter Johansen, and Wendy Hughes; ■■ For transport, Andreas Kopp and Zhi Liu; ■■ For urban, Ellen Hamilton and Steve Karam; ■■ For infrastructure adaptation, Milan Brahmbhatt , Richard Damania, and Stephane Hallegatte; ■■ For air pollution, Ernesto Sanchez-Trianaand Hocine Chalal; ■■ For social aspects, Robin Mearns. The country assessment benefited significantly from the ongoing interest, guidance, and support of the Macedonian National Council for Sustainable Development chaired by Deputy Prime Minister Vladimir Pesevski , the technical feedback and advice from the Technical Working Group of the NCSD chaired by Sandra Andovska, and the extensive collaboration with Sector Technical Working Groups for each sector or topic report. We thank the numerous government officials for their collaboration throughout the Program, and we look forward to the NCSD Action Plan that will support implementation of green growth and sustainable development recommendations. xii F Y R M aced onia Gr een Grow th Country A ssessment Sustainable development is not an abstract concept – it is the roadmap for responsible acts at national level. Climate Change imposes the necessity of ecologically innovative approaches to support economic development. President Gjorge Ivanov Copenhagen Summit, December 2009 xiii executive summary WATER WATER ENERGY ENERGY AIR POLLUTION AIR POLLUTION TRANSPORT TRANSPORT DEMAND ENERGYDEMAND URBAN URBAN ISSUES ISSUES AG AG RICULTURE RICULTURE ENERGY SOCIAL DIMENSIONS AND SOCIAL DIMENSIONS COMMUNITY FEEDBACK AND COMMUNITY FEEDBACK MACROECONOMIC MACROECONOMIC A N A LYS I S & M O D E L I N G A N A LYS I S & M O D E L I N G t his green growth country assessment for FYR Macedonia aims to define the outlines of a green growth path and the initial steps along that path. According to the World Bank’s recent flagship report, green growth is “growth that is efficient in its use of natural resources, clean in that it minimizes pollution and environmental impacts, and resilient in that it accounts for natural hazards and the role of environmental management and natural capital in preventing physical disasters.”1 While FYR Macedonia, like many countries, is already moving in a green direction. The Macedonian economy continues to evolve, with ongoing programs of structural reforms to improve growth and competitiveness and with growing align- ment with Europe. The country’s momentum towards Europe is already requiring it to focus more on environmental issues. This report summarizes analytic work undertaken in sectors and on issues selected as critical for defining and understand- ing the green growth path of the country, with an emphasis on most countries might agree that such growth is a worthy climate action. Chapters of the report start with an overview of goal, determining what a green growth path might mean for the relevant challenges to green growth of climate adaptation a particular country is a significant challenge. Green growth and mitigation, and then set out the methodology applied, the can be defined more precisely, as economic growth with more findings that emerged, and consequent recommendations. sustainable use of natural resources (minerals, water and clean The nine sectors and issues that constitute the components air, and biodiversity), with proper consideration of mitigation of the Green Growth Country Assessment are represented of greenhouse gas emissions; with attention to adaptation to in the opening graphic in this summary. a changing climate; and with more focus on innovation and green jobs to enhance benefits flowing from the technological The findings and recommendations that emerge from this innovation and new industries spurred by a shift to green country green growth assessment can be summarized. In growth. This report takes a practical approach to identifying the short-run, the country needs to address the many inef- specific challenges and opportunities FYR Macedonia faces in ficiencies that keep it off its best possible growth path by building its green growth future and to present them in a form pursuing reforms and investments to improve the overall useful for decision makers. The report will address mitigation, performance of key sectors. These baseline actions will adaptation, and the most immediately challenging resource create conditions for the implementation of green growth sustainability issue—clean air. policies and investments and need to be taken before (or in coordination as) the country makes green investments. Many of the baseline actions recommended in this assessment 1. World Bank. 2012. Inclusive Green Growth: The Pathway to Sustainable are already included in the country’s economic plans or are Development. Washington, DC: World Bank, p. 2. E x ecu ti ve Su mmary xv required for full European Union (EU) membership. Many of ■■ A greener energy sector needs to aim at increased supply them require limited investment and can be implemented security, reduced greenhouse gas emissions, and increased with a small effort, constituting part of a list of ‘no regret’ sector efficiency. More generation is needed to avoid black- interventions. Policymakers need, at the same time, to keep outs and expensive imports. A cleaner sector demands the long-term in mind, both the likely impact of a chang- replacing lignite and oil with gas and renewables in the ing climate on water, agriculture, and infrastructure and the supply mix over the medium to long run and modernizing growing obligations to mitigate greenhouse gas emissions. existing lignite plants in the short run. Big investments are This consideration is particularly important for decisions on needed in new gas generation and infrastructure; renew- long-lived infrastructure such as power supply or urban public able energy, including hydropower with water storage and infrastructure. A further set of no-regrets actions, such as wind; expansion of the transmission network; and replace- energy efficiency or water conservation, that promote greener ment of outdated equipment in existing facilities. At the growth as well as efficiency should be adopted regardless of same time, aggressive energy efficiency measures will help uncertainty about future climate. Perhaps most importantly, contain the need for new generation. Most important will the underlying analysis supporting policy decisions needs be equipment replacement in industry, building retrofitting continual updating using the tools and models developed and introduction of new construction standards, higher under this Program and elsewhere to reevaluate any big moves efficiency household appliances, modern stoves for resi- that trade off short-term growth and long-term sustainability. dential heating (as a short term measure), and improved heating, cooling and lighting in the non-residential sector. Critical actions and key advice that emerge from this country assessment stress the need to maintain momentum on sector ■■ A balance between better transport services to support growth reforms to foster overall economic growth while greening and a more environmentally sustainable sector will require both the growth path. The main elements of a green growth path infrastructure and new policies. Car ownership and driving reach across sectors, with a particular emphasis on water (and distances are projected to increase steeply in the future, and the closely-linked agriculture sector) to address adaptation so will emissions, unless measures are taken to improve vehicle challenges in a changing climate and on energy and transport fuel efficiency and reduce driving while encouraging public to address greenhouse gas mitigation challenges. transport. Investment in transport infrastructure, especially in rail and public transport, is overdue, and projected increase ■■ Competition for water between agriculture (especially as the in severe weather events will push capital and operations and climate warms and dries), the power sector (for hydropower, maintenance (O&M) costs up. Measures in the transport sector a critical element in a lower emissions electricity system, and should be implemented as packages, taking into account that for thermal cooling), and industrial and municipal uses will they are interconnected: e.g., pricing policies to reduce per- pose difficult tradeoffs for Macedonian policymakers by 2020 sonal car use should be accompanied by increased availability unless efficiency in both demand and supply is bolstered. of public transport. Benefits outside of the transport sector The growing scarcity of water can be addressed, first of all, should be considered in assessing options, including local by reducing inefficiencies through pricing and regulation of air pollution reduction, decreased congestion and decline of groundwater and through rehabilitation and maintenance of traffic-related deaths and injuries. existing infrastructure. Growing seasonal scarcity can be man- aged through investment in more storage (for irrigation and ■■ Urban areas, especially the capital city of Skopje, lead for hydropower), while overall shortages in future decades can economically, contribute in a similarly outsized fashion to be addressed through encouragement of water conservation. pollution and emissions, and hold the potential to lead FYR Macedonia toward a greener growth path. In recent years, ■■ An evolution in agriculture towards larger, more com- urban sprawl, mainly driven by growth in the number of petitive, export-oriented farms will raise overall sector single family houses that use wood for heating and private incomes while heightening resilience to a changing cli- cars for commuting, has pushed up the energy intensity mate. Investment in basin-scale irrigation and drainage of urban life as well as the cost of delivering infrastructure infrastructure (as noted above) will be critical to help water services to a less-dense community. Deterioration of local supply meet water demand. Even ambitious adaptation service delivery including public transportation, water investments in agriculture are estimated to deliver benefits and wastewater services, and solid waste collection and through 2050 that exceed costs four-fold. At the same disposal have also pushed Macedonian cities farther away time, land consolidation, switching to high value crops, from a green path. First steps to more sustainable cities and farmer education campaigns, along with other effi- would include expansion of energy efficiency programs ciency improvements, will raise agricultural incomes and to reduce significantly demand for energy and, therefore, compensate for scarcer water. emissions from fuel combustion. In public transportation, x vi F Y R M aced onia Gr een Grow th Country A ssessment investments are needed to increase availability and quality ■■ Carefully-chosen public investments and policies can ease of services. Rehabilitation of water and wastewater net- the path to a more resilient and climate-friendly economy works and increased utility efficiency are recommended without sacrificing long-term growth. An economy-wide to improve the quality of water supply and reduce utility macroeconomic assessment estimates the impact on subsidies. Establishment of integrated regional waste growth and employment of packages of actions on green management systems and usage of modern equipment growth across sectors and provides advice on priorities for and proper landfills in the solid waste sector is essential to public investment. Climate investments pose costs upfront reduce emissions and pollution from solid waste. but provide benefits both now and later. Adaptation inter- ventions (which protect tomorrow’s output from climate ■■ Weather patterns affect the reliability and quality of infra- damage) are found to be less costly to growth and employ- structure services, and climate change is exacerbating ment in the short-term than mitigation measures (which these effects. Uncertainty about future climate compounds reduce greenhouse gas emissions) once sector results are the challenge of making wise choices on infrastructure that integrated into a general equilibrium model. Under a ‘green’ is often long-lived and expensive. Planners need to decide climate action scenario, moderate adaptation measures whether to build infrastructure to be more resilient today or in agriculture and water and incremental expenses in the wait to see what happens and spend more on maintenance climate-proofing of physical infrastructure barely put a and rehabilitation (or replacement) later. Since it would be dent in output, while moderate mitigation measures would unaffordable to build all infrastructure today to be resilient require the mobilization of resources constituting about to all possible climate futures, ex ante adaptation should one percent of annual GDP. More ambitious climate action, only be pursued where it makes financial sense. For FYR under a ‘super-green’ scenario, would require water sector Macedonia, the top priorities for infrastructure adaptation investments that reach one percent of GDP by 2015 while over the next decade include urban drainage systems, mitigation investments require two percent of GDP by 2020. health and education facilities and municipal buildings. Green climate action would together generate short-term losses to national income of more than two percent if financ- ■■ Air pollution in the country is among the highest in Europe, ing is mobilized domestically, while super-green action and any green growth path that considers human health induces even bigger losses. However, both moderate and must address its reduction, which will provide large local ambitious climate action promise a medium- to long-term co-benefits to Macedonians. Most of the particulate matter boost in the level of GDP—reaching 1.5 to 2 percent by 2050. pollution comes from the largest industrial facilities and can be abated by installing modern pollution abatement equip- ment. A switch from lignite to natural gas in the energy CHALLENGES FOR GREENER GROWTH sector will help to significantly reduce air pollution from electricity generation. Pollution from road paving can be How green is FYR Macedonia? A good place to start in under- addressed by better equipment for asphalt mixing, while standing what greener growth might mean for the Macedonian exhaust from the country’s old and polluting vehicles needs economy is to understand how the country compares on various to be addressed through transport policies. Another large relevant dimensions. The scheme below (Summary Figure A) helps and unusual source of air pollution is the widespread use of to categorize aspects of FYR Macedonia’s economy that ease or wood for heat in urban areas by households which can be obstruct the way to green growth. Firstly, has the country made any reduced in the near-term by replacing old inefficient stoves progress in decoupling economic growth and natural resource use, with modern ones. Building a system of policy incentives including greenhouse gas emissions?2 Is the country preparing for for industrial, commercial, and household compliance with the impacts of a changing climate? Secondly, is the Macedonian existing air quality regulations will be essential to achieve economy flexible enough to succeed in the transition towards green objectives. green growth? Is it efficient and adaptable? Thirdly, how can FYR Macedonia be ready for a surge of innovation and be competitive ■■ Participation of the population in the design of green in new and growing green industries? Better environmental stew- growth strategies is critical for the success of their ardship is already well-defined as part of readiness for European implementation. A participatory process can help to Union membership, while the innovation and green jobs agenda, increase awareness about climate change, to refine the while intriguing, does not yet offer much beyond standard advice policies and investments chosen by government to those on openness and flexibility. Thus, this report focuses primarily on most efficient and least costly to society, and encourage the challenges of mitigation and adaptation. communities to build resilience and flexibility to prepare 2. Emitting greenhouse gas emissions can be considered equivalent to for a greener future. using up the natural resource of the atmosphere as a carbon sink. E x ecu ti ve Su mmary xvii Summary Figure A. A framework for green growth benchmarking how green? going green riding a green wave Natural resource Structure of the economy endowment Connections to Labor market flexibility global knowledge Productive use of and human capital natural resources Getting ready for the Business environment energy (r)evolution Greenhouse gas emissions and capital mobility Green and near green Responding to a Energy pricing industries and exports changing climate Global links: carbon emissions embodied in trade Benchmarking. FYR Macedonia falls short on air quality, pro- technology transfer. Lastly, FYR Macedonia’s connections to ductivity of natural resources it uses (especially scarce water), global knowledge and readiness for an innovation revolution and the emissions intensity of production compared to other are insufficient to benefit from green technological change. countries, while it is at the same time vulnerable to a chang- ing climate and not well prepared for a greener world. The Climate damages. Projected climate change will affect Green Growth At-A-Glance benchmarking exercise maps FYR FYR Macedonia’s economy, mainly via a direct shock to Macedonia against comparator countries and country groups agriculture and associated spillovers on other sectors in using available quantitative indicators that reach across the the economy, and to a lesser extent due to losses caused key aspects of greening to identify critical issues for further by extreme weather events. The effect of climate change on analysis. Firstly, FYR Macedonia’s natural resource endowment FYR Macedonia’s water supply is estimated to be large and is close to the EU average in most aspects, but air quality is widespread, occurring as early as 2020 in most places in the among the worst. Resource usage is less sustainable over the country, but with larger reductions in mean annual volume long term, and natural resources are less productive, with of water through 2050 in rivers as temperature increases water withdrawals that have created moderate water stress. and rainfall declines. Changes in rainfall amounts as well as Greenhouse gas emissions are high, driven by heavy use of their temporal and spatial patterns will tend to reduce water lignite and high energy intensity of GDP. The country has availability across consuming sectors—agriculture, hydro- high exposure to climate change among European countries power, thermoelectric cooling, and industrial and municipal and among middle-income countries globally. Its sensitivity demand—especially at times of peak demand. Growing water to climate change (the likelihood of economic damages) is shortages will dampen crop yields and agricultural incomes. At somewhat high because of low quality infrastructure and the same time, as the country becomes drier and hotter, the dependence on agriculture, while its capacity to adapt is risk of floods will diminish, but the risk of wildfires will increase. limited by institutional weaknesses, high inequality and a relatively low income (Summary Figure B).3 Secondly, FYR Sector challenges. The overuse of natural resources and the Macedonia’s economy is not sufficiently flexible to benefit persistent need for improved sector investments and policies easily from going green. The country’s supportive business compound the challenge of ‘going green.’ Drawing on the environment cannot make up for poorly functioning labor sector analysis of this assessment, it is clear that inefficient use markets, and global links are not yet strong enough to facilitate of limited resources has resulted in water stress, energy inse- curity, an energy demand-supply gap, soil fertility problems, 3. Vulnerability to climate change can be thought of in three components: exposure, sensitivity and adaptive capacity, each of which can be measured dangerous levels of air pollution, and high emissions intensity approximately using indicators. The physical impacts of a changing climate, the impact of those physical changes on a country’s people and economy, of energy, industry and transport. These inefficiencies in FYR and the country’s ability to react will vary. xviii F Y R M aced onia Gr een Grow th Country A ssessment Summary Figure B. FYR Macedonia is vulnerable to a changing climate Exposure, sensitivity and capacity to adapt to climate change, 2009-2010 Gini 200% 100% 0% Exposure -100% Overall Governance -200% -300% -400% Quality of infrastructure Water resources pc (m3) PM10 per m3 FYR Macedonia ECA EU UMC Note: UMC is upper middle income countries. Source: Staff calculations based on World Bank databases: Development Data Platform, Poverty and Inequality database, and Worldwide Governance indicators. Macedonia’s economy include outdated, poorly maintained industrial users, as well as insufficient quantity to thermal assets across sectors; high supply losses in the water and generation plants for cooling; and a low capacity factor of power sectors; low service quality; inefficient pricing; and hydropower generation. A hotter, drier climate will damage under-collection of payments, among other issues. The inef- infrastructure, including in transport, imposing costs on ficiency of FYR Macedonia’s economy creates a significant users and on the public budget. Climate-driven constraints degree of gridlock for green growth (as well as a drag on on hydropower, in turn, limit options for a cleaner energy ‘plain’ growth). It exacerbates the unsustainable use of natural sector, with more supply—and more dependable supply—but resources, because an inefficient economy requires more fewer greenhouse gas emissions. The bounds for economical water, energy, and other natural resource inputs per unit of mitigation in FYR Macedonia’s energy sector push responsibil- output. An inefficient economy produces high and increas- ity for mitigation onto the transport sector, the next highest ing emissions and blocks climate change adaptation efforts emitter. Urban public transport, in particular, needs boosting, (Summary Figure C). Inefficiencies consume financial resources since the trend towards sprawling development and fast-rising that could otherwise be used to enhance technological innova- personal mobility portend sharply-rising emissions, in future tion and green jobs, which could better position the country decades. Local co-benefits such as reduced air pollution, cur- for ‘riding the green wave.’ rently taking a large toll on health, could justify and motivate otherwise expensive urban improvements. Across all these More efficient use of FYR Macedonia’s somewhat scarce challenges lies the common thread of public policy and public natural resource assets is necessary, both to support eco- investments, where choices supportive of a greener growth nomic growth in future decades as well as to allow a greener path will prove pivotal. and more resilient path. This concern pertains especially to water and agriculture, energy, transport, urban planning, ■■ In the water sector, assets are not performing as expected, and the control of air pollution. In the water sector, FYR and the system of irrigation is outdated. The cumulative Macedonia is already experiencing moderate water stress. required maintenance and needed rehabilitation of water Water consumers–irrigation, municipal and industrial users, sector infrastructure total almost four percent of GDP. Water and the power sector–are facing seasonal water shortages. prices are set below costs, driving up sector financial losses The consequences include agricultural yields below those and further delaying overdue investment. Agriculture, in similar countries; poor quality water for municipal and mining, and industry, in an attempt to avoid economic losses E x ecu ti ve Su mmary xix Summary Figure C. The Macedonian economy has high emissions intensity, although it produces limited total emissions due to its size Emissions intensity (Greenhouse Gases, GHG, per unit GDP), per capita GDP, and total emissions, 2005 CHE 60,000 DNK GDP per capita, USD 50,000 AUT SWE 40,000 DEU 30,000 GRC SVN PRT FYR Macedonia 20,000 CZE SVK HRV LTU POL RUS 10,000 LVA BGR HUN AZE ALB TUR ROM SRB UKR KAZ 0 - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 GHG per GDP, tons/$1M Note: Total emissions Include CO2, methane, HFC, NOx, PFC and SF6; total in the economy (from all sectors). Bubble size reflects total emissions, in Mt CO2e/year. Source: World Bank, Development Data Platform. due to irregular supply from water utilities, have turned to investment in generation from other potential sources,5 and widespread and unsustainable use of groundwater. Starting limited energy choices, FYR Macedonia faces deteriorat- from a situation of moderate water stress, FYR Macedonia ing security of supply. Electricity demand has exceeded faces a drier and hotter climate in the future, with water supply for a decade and the gap has been filled with power supply shortages likely for all water-consuming sectors imports at a price well above domestic costs. In addition, unless adaptation actions are undertaken. the lignite-based energy sector–with lignite constituting 50 percent of primary energy— is very emissions-intensive and ■■ Agriculture is a major employer, with almost one-third of the responsible for some 70 percent of the overall carbon dioxide labor force by some estimates, but it is also the economic equivalent (CO2e) emissions6 in the country (Summary Figure sector most directly harmed by a changing climate. Both D). Imported oil further adds to the emissions intensity of water scarcity and water demand for irrigation are predicted energy while gas imports are negligible and constitute only to rise. Irrigation is already insufficient and poorly designed 2 percent of primary energy. Predominant use of outdated for today’s small farms. Many farms depend on local wells devices and processes to utilize energy causes the inefficien- and unsustainable extracted groundwater, which is neither cies in the sector. In addition, power sector tariff reform has regulated nor priced. Soil fertility problems will worsen with a been underway over the last decade, but electricity prices changing climate, especially erosion. Small and fragmented do not yet reflect the cost of supply. Gas sector liberalization farms and inadequate land markets limit agricultural pro- is planned but overdue. Artificially high prices, an outcome ductivity, while government subsidy programs are poorly of the modest levels of off-take, have so far limited demand designed to achieve their stated objectives. for gas and delayed the partial replacement of lignite and oil with cheaper gas in the primary energy mix. The result ■■ In the energy sector, indigenous fossil fuel resources are lim- is that the ratio of greenhouse gas emissions to GDP is five ited to lignite, and the remaining lignite will be fully exploited times higher than the EU average. within the next 30-45 years.4 At the same time, the energy 5. The options considered are: domestic hydro, wind, solar, geothermal, sector heavily depends on domestic lignite. With too little biomass and biogas, as well as imported gas. See more detail in the next sections of the Report Summary and in Chapter 6 on energy. 4. Assuming a 3 percent growth rate of lignite production, a rate consistent 6. Carbon dioxide equivalent or CO2e is a standard unit to express with the Government strategy. emissions or concentrations of other greenhouse gases reflecting their global warming potential compared to CO2. x x F Y R M aced onia Gr een Grow th Country A ssessment Summary Figure D. Macedonian energy sector is the top emitter CO2e emissions for FYR Macedonia and the EU, shares, 2009 a. FYR Macedonia b. EU Others Others 3% 5% Residential 2% Agriculture 0.4% Transport Residential 15% 12% Agriculture Construction 1% 0.2% Electricty and Heat Manufacturing 9% 43% Transport Electricty and Heat 25% 71% Manufacturing 13% Construction 0.3% Notes: Energy sector refers to electricity and heat production and energy sector own use; transport sector includes all transport activity regardless of the economic sector; residential refers to emissions from fuel combustion in households; “Other” includes commercial/institutional activities, fishing and emissions not specified elsewhere. Source: Staff calculations using the International Energy Agency (IEA) database. ■■ In the transport sector, the poor condition of roads and rail power plants and transmission lines, telephone lines, infrastructure, an and Heat fleet, and old vehicle Electricty the lack of public Manufacturing Construction roads, Transport rail, airports, Agriculture ports, water/sewer infrastructure, Residential Others transportation prevent the sector from providing efficient hospitals, health facilities, school buildings, municipal and appropriate services to the rest of the economy. infrastructure, and urban storm water drainage. Strategies Transport is emissions-intensive compared with other need to be developed to maintain infrastructure services countries in the region. Its contribution to global warming into the future by applying either: (i) an adaptive strategy and local air pollution significantly exceeds the technically under which new infrastructure is built tougher, but more unavoidable level. The sector is the second highest emitter expensively; or (ii) a reactive strategy to wait for climate in FYR Macedonia, following the energy sector; it produces damage to occur and then fix or replace the infrastructure. about 15 percent of total greenhouse gas emissions. A high The adaptation strategy involves high up-front investment and growing share of road transport and the prevalence of but lower costs during the planned life of the asset. The old vehicles are the main factors in high sector emissions. reactive strategy requires higher costs later to maintain, The same factors render the sector vulnerable to climate rehabilitate or replace damaged infrastructure before change, abetted by low infrastructure quality. the end of its economic life. The choice between the adaptive and reactive strategies is complicated by two ■■ In the urban sector, inefficient use of land is reflected in urban considerations: a wide range of projections of the future sprawl, which leads to excessive use of energy, pushes up climate and the long life of infrastructure assets, most of the cost of infrastructure services and spurs further growth which cannot be easily upgraded. of personal car ownership, which in turn exacerbates emis- sions. Urban development also suffers from interruptions ■■ Driven by larger cities, mainly Skopje, the air pollution of water supply, lack of wastewater treatment and irregular level in the country is one of the highest in Europe, solid waste collection, interruptions of the power supply, resulting in the fifth highest air pollution-related death and a dearth of public transportation. rate in Europe. A main culprit is the widespread use of wood for winter heating by urban households. ■■ Vulnerability of infrastructure to weather is rising sig- nificantly because of climate change, including risks to E x ecu ti ve Su mmary x xi METHODOLOGY AND MAIN FINDINGS Water modelling linked sectors critical in adaptation and mitigation and allowed the assessment of water as a Methodology constraint to growth, assessing the impact of a changing climate on competing uses of water. A series of models The analysis completed for this report responded to the were applied, starting from Global Circulation Models, challenges identified in the initial stages of sector assess- to water planning, water run-off, and an agricultural yield ments, and many different models and tools were used. model. The impact of green (adaptation) policies and Summary Table A (at the end of this Summary) presents the investments on the water sector and the two main water main characteristics of the analytic approach for each sector consuming sectors– agriculture and power– was evaluated; or issue. Analysis in each sector used available tools judged and an optimal set of adaptation investments was linked appropriate to the objectives, which included modeling (for to the macroeconomic modeling. The modeling outcomes macroeconomic analysis and setting the baseline for all analy- provided new knowledge due to innovations in the way ses, and in the energy sector, transport sector, water sector, the modeling tools were interlinked and the detailed find- agriculture, and infrastructure); data collection and a decision- ings generated. As a result, the outcomes reflected not making tool (the urban sector), exposure-response functions only the impact of runoff and irrigation water demand on (for air pollution analysis), and participatory tools (for social water storage, hydropower potential and water availabil- inclusion). While objectives were similar, the methodologies ity, as did previous studies utilizing the same models, but were customized as needed. Summary Table B summarizes also the reverse impact of the unmet irrigation demand the modeling scenarios. Modeling involved formulating three on crop yields in irrigated areas. Further, water modeling scenarios–Business as Usual, Green and Super Green–and included hydropower as a water-consuming sector, which using them to estimate the benefits of Green Growth, as is was an innovative approach allowing for an estimate of briefly explained in Summary Box A. A number of innova- an interconnection between hydropower and irrigation tive elements across sectors were integrated in the analytic water consumption and, in particular, the negative impact methodology, and critical new data was collected. of increased hydro produc tion and newly deployed x xii F Y R M aced onia Gr een Grow th Country A ssessment hydro plants on agricultural yields. In addition, the water analysis of Skopje: assessing potential energy and cost savings analysis generated detailed data for sixteen water basins, from implementing cross-sectoral energy efficiency measures using climate projections from global models and hydro- and for prioritizing policies and investments across sectors. meteorological data for FYR Macedonia, as opposed to the The analysis included the following municipal service areas: previously available data for five basins, allowing for better urban transport, municipal buildings, water and wastewater, and more practical policy recommendations. power and heat, street lighting, and solid waste manage- ment. The urban sector data collection tool also collected In the energy sector, the main objectives were to find the new data useful for sector strategic planning for a number optimal mix for power supply in FYR Macedonia by ensuring of Macedonian cities. Rapid assessments were conducted in minimum cost of supply while reducing emissions, as well as to some other Macedonian cities and helped to propose relevant find demand-side energy saving solutions. Demand-side mod- actions and prioritize them. eling estimated the potential reduction in energy demand as a result of energy efficiency improvements, applying an energy The infrastructure analysis developed a framework for deci- demand model, EFFECT ((Energy Forecasting Framework and sion-making about long-lived infrastructure assets despite Emissions Consensus Tool, developed by the World Bank). uncertainty about future climate conditions. The methodology Supply-side modeling via a MARKAL energy supply model combined cost-benefit analysis under uncertainty, climate- (developed by the IEA), provided power supply generation informed decision analysis, and robust decision-making. The mixes to meet the new demand at minimum cost while reduc- analysis applies a cost-benefit approach over a range of cli- ing GHG emissions. A Marginal Abatement Cost (MAC) curve mate scenarios to identify robust options and then identifying presents a standard summary of each of the proposed energy a subset of options likely to yield satisfactory results under a efficiency measures and supply technologies with marginal range of climate outcomes. These adaptation assessments net cost per unit of abatement and the related abatement were linked into the macroeconomic modeling. potential. The optimal mitigation investments were linked to the macroeconomic modeling. Substantial data collection, The air pollution analysis was designed to estimate the including a new household survey, created the country’s first health impacts of air pollution in FYR Macedonia and the energy efficiency database. cost of these impacts to society using standard tools. It used exposure-response functions that quantify the In the transport sector, the impact of green policies and relationship between the exposure to particulate matter investments on transport demand and resulting emissions, and mortality/morbidity, to aggregate the impact of pol- as well as cost effectiveness of the proposed invest- lution on public health. ments and policies, were assessed using transport sector models, the European Commission’s TREMOVE (economic Social participation was considered by applying Participatory TRansport and EMissions model) and TRANSTOOLs (TOOLS Scenario Development (PSD) methodology, which the gov- for TRansport Forecasting ANd Scenario testing). Also, the ernment can use as one of the instruments of green growth EFFECT tool was first extended to include the railway sector, decision-making. Participatory methodology aimed at improv- and new data was collected through a passenger vehicle ing government decision-making on green growth policies survey (adding to the new energy efficiency database). and implementation was tested. Pilot participatory scenario Then, the tool was applied to assess green policy inter- development workshops were held with local and regional ventions and their potential impact on road and rail travel stakeholders who discussed major challenges related to demand, on fleet composition, and on the level of emis- climate change and environment and policy options for a sions. The optimal mitigation investments were linked to the green transition. macroeconomic modeling. Modeling was complemented by vulnerability analysis which evaluated the transport sector’s The innovative aspect of the macroeconomic modeling was climate change sensitivities and climate change related the integration of both mitigation and adaptation invest- increase in costs. ments into an economy-wide model to assess the impact on growth, employment, and fiscal balances of climate action In the urban sector, the objective of the analysis was to priori- in water, agriculture, infrastructure, energy, and transport. tize the most urgent issues of urban development that need to This modeling brings together much of the sector analysis be addressed in the context of green growth. The analysis was into a common framework to assess the net impact on growth designed to assess the impact of urban policies and invest- and employment of packages of actions on green growth ments. The Tool for Rapid Assessment of City Energy (TRACE, across sectors as well as assessing public investment options. developed by the World Bank) was used for in-depth city-level Putting the sectors together provides the government with E x ecu ti ve Su mmary x xiii a potentially powerful tool to consider which public invest- ments will have the highest returns over time, including Summary Box A. Green scenarios: a basic investments to counter climate change and investments to explanation reduce greenhouse gas emissions. Macroeconomic model- Scenario analysis is used to evaluate the impact of mitigation ing developed a dynamic general equilibrium model with and/or adaptation actions in five overlapping sectors—water, detailed sectors to simulate green scenarios against the agriculture, energy, transport, and infrastructure—which are baseline. The Macroeconomic Options of Mitigation and then integrated into the macroeconomic or economy-wide Adaptation model (MOMA model) captures the complex analysis. Two policy scenarios— Green and Super Green — were formulated in a bottom-up fashion based on the specifics linkages between climate mitigation and adaptation policies of each sector as part of the sector analysis. These scenarios and macroeconomic performance. This large-scale dynamic are compared to Business-as-Usual (BAU) or the baseline stochastic general equilibrium model integrates detailed scenario, a development path for the economy to 2050, which engineering options for mitigating greenhouse gases and assumes sectoral inefficiencies are addressed and includes for adaptation. The options were analyzed by the MOMA the main projected impacts of climate damages. The Green model, not only in a ‘bottom-up’ manner (for agriculture and and Super Green scenarios involve government policies and water, energy and transport) but also econometrically in a investments to address greenhouse gas emissions mitigation and adaptation to climate damages. The Green scenarios in ‘top-down’ manner (for facilities of physical infrastructure). each sector constitute a package of ambitious but practical Mitigation and adaptation options were integrated into the actions to reduce emissions and counter climate change. The model to allow analysis of the growth, employment, and Super Green scenarios are very ambitious and more expensive fiscal implications of different combinations of green growth packages, generally requiring more aggressive implementa- actions. Advice on public investment priorities emerges from tion of Green measures or wider coverage of such measures. the assessment. See Summary Table B for the main policy and investment elements of the green and super green scenarios. Main findings Baseline scenario. The baseline scenario that has been generated as part of this assessment forms an essen- demand will persist, especially for some basins. The overall tial starting point for the green growth analysis. It is a demand-supply gap in the water sector must be managed hypothetical path envisaging what would happen to FYR through green actions in all water-using sectors, with a Macedonia until 2050 under current and expected policies big emphasis on improving efficiency and strengthening and considering the impact on the economy of a changing conservation. Green action can constrain irrigation water climate. The business-as-usual (BAU) scenario reflects a demand only modestly but with high variance across broad consensus that income per capita in FYR Macedonia basins. In irrigation, green (adaptation) investments will will catch up gradually towards European Union levels, reduce water demand by implementing basin-scale irriga- growing at an annual average rate of 3.4 percent between tion improvements and drainage infrastructure upgrades, 2012 and 2050. However, such a path assumes a gradual replacing and rehabilitating broken-down assets of the improvement in policies and performance over the long- current irrigation infrastructure and creating a new irrigation term. At the same time, projected climate change will affect system, adequate for a modern system of farming. Summary FYR Macedonia’s economy, mainly via a direct shock to Figure E shows the variation across the country in unmet agriculture and associated spillovers on other sectors in the irrigation water demand under different policy scenarios. economy. These losses are projected to increase in absolute For the country as a whole, the package of Green adapta- value, but they will decrease as a share of GDP because of tion measures reduces irrigation water demand by about the shrinking role of agriculture over the next four decades. nine percent for the next 40 years while the Super Green Due to climate damage, the level of GDP in 2050 is esti- scenario has an impact of only five percent or so because of mated at around 0.6 percent lower than otherwise. It is new irrigation in certain basins (in the Vardar, Skopje, and critical to keep in mind that, for the baseline scenario to Eastern regions). Despite adaptation measures, a changing 2050 to materialize, key sectoral inefficiencies will need to climate will affect the availability of cooling water for some be addressed, including dilapidated infrastructure, high thermoelectric power plants, and the expansion of hydro- supply losses, inefficient pricing of services and low quality power that will help clean up the energy sector will not be of service provision. possible without coordinated water-saving measures across sectors. An ambitious Super Green program of adaptation Water. Water shortages will worsen into the future; and, action can reduce total unmet water demand by more than despite action on adaptation, gaps between supply and half by 2050. x xiv F Y R M aced onia Gr een Grow th Country A ssessment Summary Figure E. Green actions help reduce demand-supply gaps for irrigation water Met and unmet demand for irrigation water, by planning region, in MCM, 2050 MCM 140 120 100 80 60 40 20 0 Vardar Eastern Southwestern Southeastern Pelagonia Polog Northeastern Skopje Baseline Plus Met Demand Unmet Demand Green Met Demand Unmet Demand Super Green Met Demand Unmet Demand Notes: MCM is millions of cubic meters. The light shading is unmet irrigation demand while the dark is met demand. Source: Agriculture sector technical paper and presentations. Agriculture. Climate change will pose tough challenges for Energy. Aggressive energy efficiency measures will be agriculture which will require resolution of today’s obstacles critical to contain demand while investments in gas supply as well good choices on adaptation. Although the economic and renewables are important to clean up supply. While importance of agriculture is likely to wane in coming decades, demand-side actions are a critical short-term solution due to as overall growth pushes the Macedonian economy to look their lower cost and shorter implementation period, longer- more like Europe, actions to contain irrigation demand while term and investment-intensive supply-side measures provide improving irrigation and overall sector efficiency and resil- the biggest gains in bridging the supply-demand gap and iency will be critical. The importance of irrigation water for providing abatement. The outcomes of modeling show that the agriculture sector in largely arid FYR Macedonia cannot the combination of the Super Green scenario’s demand-side be overstated: climate change presents a risk of increased measures and the Green scenario’s supply side measures is aridity and water shortages, particularly in the agricultural best in meeting jointly the strategic objective of supply security growing season, for most areas of the country. The water and the financial objective of minimizing abatement costs and and agriculture modeling finds that adaptation expenditures is, therefore, recommended. By investing €800 million in Super are good investments. Significant adaptation effort under a Green demand measures, the required generation capacity Super Green scenario, with annual investment of about US$148 can be reduced by 600MW and annual GHG emissions by 1.6 million in irrigation, drainage, improved crop varieties, and million metric tons by 2050. Under the Green supply scenario, better agronomic practices yields benefits through 2050 that the structure of supply by fuel will be very different from both outweigh costs more than four-fold while closing the water the actual in 2009 and that projected for 2050 under BAU. demand-supply gap by almost one-quarter. Under both a It will be based on gas, which would constitute 83 percent more modest Green package of adaptation actions and of total supply, and have no lignite. The rest of the fuel mix the more ambitious Super Green package, crop yields and will be hydro generation (15 percent) and other renewable agricultural revenues rise, while with no action, incomes from sources (2 percent). This mix would significantly lower GHG agriculture would decrease by 17 percent by 2050 because of emissions. Total GHG emissions in 2050 under the Green the impact of higher temperatures and reduced water avail- Supply scenario would amount to 4.2 MtCO2e, down from 9.1 ability. (Summary Figure F.) in the BAU scenario. (Summary Figure G.) E x ecu ti ve Su mmary x xv Summary Figure F. Adaptation efforts in green scenarios lead to increased revenue and improved irrigation efficiency Impact of adaptation scenarios on agriculture, 2011-50 5,000 Super Green Additional agricultural revenues, US$ mln 4,000 10.3% 3,000 2,000 Green BAU 1,000 Size of bubbles and numbers inside bubbles represents 11.8% water demand-supply gap as percent of water demand 0 13.4% -1,000 -200 0 200 400 600 800 1000 1200 1400 1600 Adaptation costs, US$ mln Notes: Costs are the present value over 2011 to 2050 of the flow of required additional expenditures (investment and O&M) compared to BAU. Revenues are the present value over 2011 to 2050 of the flow of the incremental sector revenues. Water demand-supply gap is the difference between water demand and supply (deficit), presented as percentage of demand. Source: Staff calculations based on water and agriculture sector modelling outcomes Summary Figure G. Energy: development of gas The energy sector Marginal Abatement Cost (MAC) curve supply will help to replace lignite and oil with gas ranks GHG mitigation measures from both demand and supply from least to most expensive. The curve uses two characteris- Power generation mix, actual in 2009 and by scenario in 2050 tics of the green scenarios and technologies within proposed new supply capacity: the unit cost of abatement (present value7 100 of net investment cost8 per unit of abated carbon (CO2e)) and abatement potential (MtCO2e) of each proposed green mea- 90 sure for 2010-2050. Among all supply side technologies that 80 are included in additional generation capacity in the green 70 scenarios, the most cost efficient ones are new gas capacity, new hydro capacity and new nuclear capacity—those with percentage 60 low net unit cost of abatement and high abatement potential.9 50 Both demand scenarios, Green and Super Green, are very 40 efficient–they have a negative net unit cost of abatement and high abatement potential (Summary Figure H). 30 20 Transport. Green policies such as vehicle fuel efficiency measures and investment in railways significantly reduce the 10 rate of emissions growth; however, the level of emissions 0 level compared with 2010 (Summary Figure I). Modeling Actual 2009 BAU 2050 Green 2050 outcomes show that the main drivers of emissions are the Import Renewables 7. Capital and operational costs net of revenue discounted to 2010 at 6% rate. Lignite Hydro Gas 8. In the transport sector analysis, policies were included in addition to proposed investments. This approach is not traditional and was used because in the FYR Macedonia transport reform, the emphasis in the road Source: Staff calculations based on energy sector supply-side modeling segment of the sector is on policy incentives. outcomes. 9. Nuclear power is a technically available option that warranted consideration in the analysis. x xvi F Y R M aced onia Gr een Grow th Country A ssessment Summary Figure H. Energy: new gas and energy efficiency measures provide most cost efficient abatement Marginal abatement cost (MAC) curve for supply technologies and energy efficiency (demand) measures, cumulative 2012-2050 Marginal abatement cost, €/ton of CO2 reduced 14 12 new PV 10 New Combined Heat 8 and Power New Wind 6 4 Super Green Demand New Hydro New Gas 2 0 0 50 100 150 200 250 300 350 -2 -4 CO2 reduction, mln tonnes -6 Source: Staff calculations based on energy sector modeling outcomes. Summary Figure I. Transport: green policies limit emission growth, but do not achieve an absolute reduction of emissions Projected land transport emission levels by scenario, in kilotons of CO2e per year, and emission reduction in green scenarios in 2050 as % of BAU emissions 3,500 Difference in the level of CO2 in 2050 in green scenarios as compared with BAU, by mode of transport, in kt of CO2 3,2 3,000 66 3,266 Green Super-Green BAU 2,500 Private road -108 -216 2,686 Kilotons of CO2 per year Green 2,000 Freight road -575 -949 Super-Green 2,232 1,500 Transit 1 4 1,000 Rail 102 127 500 0 -580 -1,034 2010 2030 2050 Source: Transport sector modelling outcomes, Transport sector technical paper. E x ecu ti ve Su mmary x xvii old vehicle fleet, increasing private ownership of vehicles, emissions from waste have been increasing in the transition low availability of public transportation, and a high road years due to rising waste quantities and inappropriate disposal transport share. The Fuel Efficiency package delivers the practices. Municipal water supply in FYR Macedonia suffers highest benefits and is most cost efficient. It consists of from high technical losses and low revenue collection. policy options that create incentives to use less fuel, either by using fuel-efficient technologies/driving mode, or by Air pollution. Particulate matter (PM) in the air is responsible driving less, and includes such measures as a pricing signal for over 1350 deaths in FYR Macedonia annually and (adjusting the fuel price and/or tax), encouraging purchase thousands of lost work days, with economic costs equivalent of fuel-efficient vehicles, eco-driving information campaigns to 3.2 percent of GDP. Most of PM pollution is generated by and training, and use of vehicle trains.10 The Rail Investment five economic activities in a few largest industrial facilities, package provides the next highest benefits after the Fuel as well as in the road sector and in the household sector. Efficiency package. This policy option is aimed mainly at The economic activities with highest particulate emission increasing the availability of both freight and passenger rail concentration are ferroalloy production, electricity and heat service, together with increased energy efficiency of rail. production, energy combustion in the non-ferrous metals Rail investment will result in significant co-benefits including industry, road paving and wood combustion by households. reduced congestion, increased road safety, and lowered air Emissions are concentrated in particular production pollution levels. The Urban Development package is char- facilities and three large industrial emitters are responsible acterized by mutual complementarity of its policies. Many for 92 percent of emissions from large emitters: Jugohrom of the Urban Development policies support each other Ferroalloys near Tetovo (metallurgy), REK Oslomej, and Bitola and are not as beneficial individually as they are together. (energy). PM pollution can be reduced by 80-90 percent using Measures include parking management improvements available technologies in the industry and the road sector (Skopje), behavior change and travel planning, investment and by government programs supporting usage of modern in urban and inter-urban transit, and land use planning and fuel-efficient stoves in the household sector. Pollution can regulation. A simple vulnerability analysis concludes that the also be geographically targeted, as almost half of the health main concern regarding transport sector sensitivity to climate impact occurs in Skopje and several local production zones. change is related to the projected increase in temperatures Also, at least one-third of PM emissions may come from and precipitation, which will push costs up. transboundary sources, and regional agreements are needed to control them. Lowering PM10 and PM2.5 to EU limit values Urban. Urban sprawl increases per capita emissions and drives would result in avoiding over 800 deaths and thousands of up the cost of public service delivery. FYR Macedonia’s cities, days in lost productivity, representing a health cost savings especially Skopje, are sprawling and losing density. Urban of €151 million per year. (Summary Figure J). sprawl leads to increased emissions and problems with public service delivery pushing their cost up and their quality down. Social participation. The piloting of the Participatory The main source of increased urban emissions is a growing Scenario Development (PSD) approach demonstrated its number of urban single family houses that use wood for heating usefulness for participatory decision making. If used as and cooking. Problems with service delivery are related to a a part of green growth strategy design, PSD will increase larger city territory, which means that such networks as trans- the sustainability of green growth measures by providing portation, water and sanitation, solid waste collection, roads, a tool for stakeholder consultations early on in the process street lighting and other infrastructure need to be expanded and by increasing awareness about climate change. The in areas with lower population density and therefore higher PSD workshop discussions provided information about per household service cost. Buildings insulation and increased the level of awareness of the green growth concept; the energy efficiency of street lighting could help reduce emissions potential impact on vulnerable groups including farmers significantly. Street lighting energy efficiency improvements and socially-disadvantaged groups such as the unemployed, also have considerable cost savings potential. Emissions from disabled, elderly, children, rural women and farmers, and the urban transport are driven by an increase in private car owner- need for social protection strategies; the potential impact ship and old vehicle fleet in both private and public segments. on employment and the need for programs aimed at creat- Public transport is old and emission intensive, but the first steps ing new skills and knowledge to adapt to new conditions; to improve the situation have been made. Limited wastewater and the requirements for local capacity for planning and treatment has become a major source of water pollution. GHG implementing green growth strategies. 10. Vehicle trains are groups (platoons) of vehicles electronically connected together with a single manually-driven lead vehicle. This technology is new Macroeconomic modeling. Mitigation measures enabling 40 and currently undergoing trial, it is assumed available only starting in 2020. Each vehicle taking part is very conservatively assumed to achieve a 10 to 70 percent reduction in emissions by 2030 costs about one percent reduction in fuel use. x xviii F Y R M aced onia Gr een Grow th Country A ssessment Air pollution: Skopje, Bitola, Kumanovo, Summary Figure J. Tetovo, and Veles suffer the worst health impact Economic cost of PM air pollution, € million Source: Air pollution technical paper. to two percent of GDP in incremental investment costs while Summary Figure K.Implementation of green adaptation measures in the water and agriculture sectors are packages of measures will dampen GDP profitable even at a high discount rate. The Green and Super in the short term, but then boost it Green scenarios, derived from the sector analyses, reflect Macroeconomic modeling: decomposition of GDP ambitious and very ambitious climate action. The mitigation impact of Green scenario measures, mainly in energy, enable impressive 40 percent and 2.0 70 percent reductions in GHG emissions starting in the early 1.5 2030s, in the Green and Super Green scenarios respectively, GDP deviation from BAU, in % 1.0 measured relative to BAU (the business-as-usual scenario including the impact of a changing climate). A precautionary 0.5 set of adaptation measures were selected in water and agri- 0.0 culture based on financial assessments (including benefit-cost -0.5 ratios and NPVs) and in infrastructure based on positive rates of return. Implementation of the Green package of policies -1.0 and investments will dampen GDP by 2.7 percent in the short- -1.5 term but boost GDP by 1.5 percent of GDP by 2050 (Summary -2.0 Figure K), while Super Green implementation will undercut -2.5 GDP by almost seven percent in the short-term, but increase it by 1.3 percent by 2050. The (‘bottom-up’) estimates of costs -3.0 2015 2020 2025 2030 2035 2040 2045 2050 of adaptation in the water sector were revealed to be of much higher magnitude than the (‘top-down’) costs of protecting Water adaptation Transport Energy Efficiency infrastructure facilities; while for mitigation actions, the model Infrastructure adaptation Energy Supply Total Green finds that energy efficiency measures are most promising from a long-term growth perspective. The interventions proposed Source: Staff calculations based on macroeconomic modeling outcomes, for transport seem to be prohibitively costly, but there is an Macroeconomic technical paper. E x ecu ti ve Su mmary x xix important caveat in this interpretation as local benefits of capacity of research and extension systems, incentives to a modernized transport infrastructure were omitted. In the adopt environmentally friendly practices, monitoring pro- Super Green package, the economic effects are of similar grams for soil, water, groundwater and biodiversity, improved pattern but of a higher magnitude. hydro-meteorological capacity, and crop insurance would complement the key investments in adaptation. Recommendations Energy. The combination of ambitious (Green) supply and The recommendations include both baseline sectoral reforms very ambitious (Super Green) demand measures delivers that should be implemented regardless of the green growth the best results in 2050, balancing security of supply, overall agenda as well as green actions needed to move the country cost, unit investment costs, and unit cost of abatement. As to a greener growth path. The baseline reforms and invest- part of the Green supply scenario, aggressive development ments would aim at improving the overall performance of of gas supply is recommended such that gas completely key sectors and would constitute conditions for the effective replaces lignite once the existing lignite plants reach the end implementation of green growth policies and investments. The of their economic life. This shift implies construction of new baseline actions need to be taken before the country invests in gas generation plants, of a new cross-border gas pipe line, greener growth. For example, baseline actions such as energy of new transmission and distribution lines, and of new gas efficiency or water conservation should be adopted regardless supply infrastructure. In addition, new hydropower and wind of uncertainty about future climate. The next step would be to plants would be constructed. The key enabling policies on focus on green actions, including the necessity to adapt to a the supply side include developing a regional strategy and hotter drier climate and the obligations to mitigate greenhouse implementation plan for gas supply, addressing potential gas emissions. Adaptation actions form the core green agenda private investors’ concerns about investing in hydropower, in sectors such as agriculture, water and physical infrastructure, and ensuring that incentive schemes deliver renewables while mitigation is critical in the energy and transport sectors. in the most cost-effective manner.11 On the demand side, standard energy efficiency measures that have proved to be Water. Top benefits in adaptation action will come from cost-efficient in other countries should be implemented as packaging together the green investments and policies quickly and broadly as possible. Key elements of a successful identified in the analysis, thus enhancing their individual energy efficiency strategy are strengthened institutional capa- benefits. The growing scarcity of water can be addressed, first bility to design and implement energy efficiency programs; of all, by reducing inefficiencies through pricing and regulation available low-cost capital for capital intensive, long-payback of groundwater and through rehabilitation and maintenance of measures such as building retrofits; and utilities involved as existing infrastructure. Growing seasonal scarcity can be man- intermediaries between the government and customers in aged through investment in more storage (for irrigation and energy efficiency programs. for hydropower), while overall shortages in future decades can be addressed through encouragement of water conservation. Transport. Based on the outcomes of the analysis, two Implementing measures aimed at municipal and industrial action plans were developed: a mitigation action plan water conservation are also essential. aimed at reducing transport sector emissions and a cli- mate adaptation plan. The proposed mitigation action Agriculture. A more competitive, export-oriented agri- plan recommends the following actions as bearing the culture sector in future decades will be possible only if greatest benefits : pricing signal, encouraging purchase adequate policies and investments are implemented and of fuel efficient vehicles, rail investment, parking manage- if adaptation measures are taken. In irrigation, adaptation ment (Skopje), investment in urban and inter-urban transit, investments in drainage infrastructure for irrigated areas will and behavior change. The main areas of concern coincide improve crop yields. Improved wheat varieties are another with the top drivers of emissions. Many of them should be key modest adaptation measure. Under a stronger adapta- addressed using policy incentives. These include an old tion effort (the super green adaptation scenario), a package vehicle fleet and increasing private ownership of vehicles. of expanded irrigation in some basins plus improved drain- They should be dealt with using such behavioral incentives age infrastructure would provide major investment gains. In as regulations, taxes, fees and pricing aimed at encouraging addition to investment in irrigation, other measures would replacement of old vehicles with the ones that are newer and bring important benefits, including: improved farm prac- more fuel efficient (at a faster pace than current turnover) and tices, greenhouse production, improved soil management, at achieving reduction in driving time per vehicle, as well as in improved pasture management, land consolidation and land 11. The current level of feed-in-tariffs is extremely high, reaching up to 10 market improvements, and organic agriculture. Increased times the price currently paid by households for power. x x x F Y R M aced onia Gr een Grow th Country A ssessment driving in the city centers. Investment is needed to address weather stresses. Monitoring weather outcomes and updating other emission drivers within the proposed action plan to climate projections using the data collected will be an essen- reduce emissions. In particular, this relates to recommended tial element of any set of adaptation policies. Assessment of rail infrastructure and service development, which would the optimal choices for adaptation in infrastructure assets provide a lower-emission alternative to road transport, both must also be updated regularly. passenger and freight. Investment is also needed to revive public transport in Skopje, a clear alternative to private road Air Pollution. Reduction of pollution from ferroalloys and transport, which can be developed faster and at a much lower non-ferrous metal production is a priority, since it constitutes cost than rail. Yet another investment recommended would a large share of overall pollution. Air pollution can be reduced help with the re-design of the city centers and improvements using modern equipment. For example, in the biggest polluter in sector management (parking management, urban traffic Jugohrom Ferroalloy’s, emissions could be reduced by up to management systems). A climate change adaptation plan’s 80 percent through such measures as low energy scrubbers, measures mostly relate to the implementation of existing sealed furnaces and enclosed product transfer (e.g., conveyor) standards on local roads and improvement of road surface. systems. In the energy sector, the major heat and energy Further improvements, using new pavement materials and suppliers need to undertake new investments to reduce implementation of new standards, may be required in order emissions from existing sources and switching to natural gas. to adapt to future changes in climate. Emissions from public electricity and heat production could be reduced up to 80 percent through the installation of pollution Urban. Recommended priority areas for intervention include abatement equipment and fuel switching. The primary fuel investment in public transportation and in water and waste- source in FYR Macedonia is high emission lignite. In addition, water networks rehabilitation, establishment of integrated outdated plant equipment exacerbates the problem. In the regional waste management systems and expansion of energy road sector, installation of dust collectors and fabric filters in efficiency programs. In urban planning, it would be important asphalt mixing plants is essential to reduce emissions. Many of to develop integrated urban plans and provide incentives to these technological solutions can reduce emissions by over 90 make city centers more livable. This would decrease urban percent. In the household sector, new modern stoves should sprawl. Local authorities can influence dwelling patterns be used to replace the currently inefficient ones. Some run through investment decisions and urban planning that provide on fuel such as concentrated wood pellets, can reach 80-90 incentives for citizens and businesses to stay in the core city. percent efficiency and are associated with lower emissions This will require integrated planning across departments in city of carbon monoxide, volatile organic compounds (VOCs), administration and better enforcement of existing planning particulate matter and other hazardous air pollutants. regulations: building permits, parking zones, and business licenses. In the public transport sector, it is necessary to Social participation. The piloted Participatory Scenario improve coverage and quality of public transport and invest in Development approach proved to be a valuable tool for non-motorized transport modes. Energy efficiency improve- participatory decision making. PSD should be used from ment programs need to go beyond Skopje and other pilot early on and at all stages of the decision-making process cities. Investing in water network rehabilitation and metering in order to ensure full inclusion of stakeholder input into would help reduce losses and increase cost recovery. In the the country’s Green Growth strategy and to maximize the wastewater sector, access to available grant funding to invest level of population awareness of green growth measures. in wastewater treatment infrastructure is needed. In the solid Workshop outcomes should be analyzed, taking into account waste sector, it would be beneficial to accelerate establishing the location where they took place, representation of various integrated regional waste management systems. social groups (by education, age, gender, income, profes- sional affiliation) in each workshop, and the timing of the Infrastructure. The infrastructure assets included in the analy- workshop in relation to major events that are relevant to the sis formed two groups: those where the adaptation strategy topics of workshop discussion. Then, the outcomes could will be most beneficial and those where reactive strategy will be used at the local, as well as central, level and interpreted be best. Adaptation is preferred for urban drainage systems, with better insight. The outcomes could be compared across health and educational facilities and municipal buildings. In the workshops to conclude which opinions are typical for the these sectors, design standards and O&M practices should country and which could be representative for certain social be modified based on anticipated climate change. The reac- groups and locations. The temporary impact of major events tive approach is better for roads, power, telecoms, water and and their discussion in mass media could be separated from sewer networks, and non-road transport, where enhanced stable public opinion. maintenance and upgrades will be used to respond to future E x ecu ti ve Su mmary x x xi Macroeconomic modeling. Public investment choices on scenario, which moves the country forward on a convergence green actions can be guided by the findings produced by path towards Europe.12 Second, they include recommended macroeconomic modeling. Adaptation interventions are less green actions that have relatively low costs and relatively low costly, and so more easily afforded than mitigation measures, implementation barriers. Full-scale green actions include both on the investments needed and the expected economic the remainder of green actions recommended based on the impacts. Within adaptation measures, public investments outcomes of Green and Super Green scenario modeling and to prevent losses in agricultural production are significantly sector analysis. The databases developed under the Program, higher than those for maintenance of various infrastructure especially the energy efficiency database, provide a strong services. The investments in infrastructure resilience can be starting point for additional analysis and monitoring. interpreted as a type of insurance against the risk that a chang- ing climate will derail the country’s growth in future decades Decisions being made today will amplify or diminish FYR by disrupting infrastructure services. From the viewpoint of Macedonia’s opportunities to shift successfully to a greener cost efficiency and economic performance, the government’s growth path. The country needs to conserve relatively-scarce approach to mitigation should be equally selective and should natural resources while supporting growth along a resilient focus first on energy efficiency. While foreign financing would path. Although greening is a long-term agenda, requiring a counter the short-run costs to FYR Macedonia from green horizon that reaches out forty years or more, decisions on policies and investments, given the uncertainty of access to long-lived public investments and policies that shape the non-debt financing, including the availability of EU funds, type and location of long-lived private investments as well as domestic savings options are the most likely funding source establishing directions for the economy will determine how over the near term. This fiscal constraint makes prioritization green FYR Macedonia can be tomorrow. Assessing options of public investments, including green investments, even on mitigation and adaptation is a critical first phase, hopefully more important since even the green scenario’s relatively quickly followed by a commitment to action. Continuing the modest financing needs would constitute one-quarter to benchmarking of the economy’s greenness can then serve to one-fifth of the annual public investment budget. Lastly, this monitor how the country is doing in the international context assessment is not cast in stone. Many sources of uncertainty as well as contribute to tracking the impact of a green growth and several methodological issues remain in applying an econ- strategy. The longer term agenda needs to aim at preparing omy-wide model such as MOMA, in conjunction with sector the Macedonian economy to thrive in a greening world. FYR analytic approaches, to key green growth policy questions. Macedonia should aim not merely to attain the labor market Government commitment to ongoing and ever-improving flexibility and strong human capital, the efficient business in-country analyses to provide up-to-date assessments for environment and mature financial markets, to survive ‘going their policy decisions will be essential. Technical assistance green’. Rather, the country should aim at enhancing con- in building such tools with a working group drawn from across nections to global knowledge, fostering local technological government and local institutions enables the government to innovation, and building green jobs, to better position the apply such models to a variety of policy questions in the future. country for ‘riding the green wave.’ Although the analysis synthesized in this report focuses on a greener development path for FYR Macedonia to 2050, more immediate advice for the government is also provided. The main focus of this green growth country assessment has been to lay out a long-term development path for FYR Macedonia that is greener and includes climate action. By developing a set of tools and models across eight sectors and issues, tied together with macroeconomic modelling, useful advice on priorities and sequencing could be generated for policymakers. As a first phase in focusing the many recommendations of this Program on the most needed actions in the next few years, Summary Table C divides actions recommended on the basis of both modeling and non-modeling analysis into two groups: 12. The list is not exhaustive. Other challenges and imbalances that must be addressed include: inefficient industry, which uses outdated, energy- ‘no-regrets’ actions and full-scale green growth actions. intensive and high-emissions equipment; substandard infrastructure in the water, agriculture, energy, transport, and urban sectors; high No-regrets actions combine two types of interventions. unemployment and somewhat inflexible labor markets; a low manufacturing First, they include policies and investments essential for FYR export share; outdated telecommunications assets and low access to broadband; and insufficient research and development expenditures. Macedonia to realize the growth path set out in the baseline x x xii F Y R M aced onia Gr een Grow th Country A ssessment Summary Table A. Methodologies for the Green Growth Country Assessment Sector Analytic Framework Objective or issue Models used and modeling framework Modeling outcomes Water and Adaptation options: Global Circulation Models (GCMs), Water Evaluation And Intermediate outcomes: Agriculture To assess the impact of Planning (WEAP) model, a water run-off model (CLIRUN) ●● Climate projections a changing climate on and an agricultural yield model (AquaCrop). Investment competing uses of water, options were linked to the macroeconomic model (MOMA). ●● Water runoff especially by the agriculture 1. GCMs produced climate projections, which were used ●● Irrigation water demand and power sectors. as inputs in CLIRUN to estimate streamflow runoff and ●● Crop yield in AquaCrop to estimate crop yield and irrigation water ●● Water availability demand. ●● Hydropower potential 2. Runoff and irrigation demand estimates from CLIRUN and AquaCrop were used as inputs in the WEAP tool, where ●● Water storage water storage, hydropower potential, and water availability Main outcomes: were modeled. ●● Projected revenues from crop 3. To refine the AquaCrop estimates of crop yield in irrigated production and hydropower areas, the unmet demand for irrigation water from WEAP, generation together with statistical data on irrigated crop sensitivity to water availability, was fed back into Aquacrop. ●● NPV of investments 4. Finally, the WEAP hydropower generation and AquaCrop Financial evaluation of crop yield results are analyzed to produce estimates of infrastructure investment options their economic implications: projected revenue from crop for water and agriculture: production and hydropower and NPV of investments in ●● Net present value of the cash these sectors. flow of benefits and costs Energy Mitigation options: a To find Demand-side modeling (EFFECT), supply-side modeling Reduction in energy demand and optimal solutions for power (MARKAL) and Marginal Abatement Cost (MAC) analysis, associated GHG emissions as a supply mix to cover demand with links to the macroeconomic model (MOMA). result of energy efficiency measures, at a minimum cost while The MOMA model projected basic economic indicators as well as required investments, for reducing emissions and which drive energy demand: GDP, energy sector value- three sectors: residential buildings, emission intensity of the added, and energy prices. They were used as inputs public and commercial buildings, and power sector and industry. in EFFECT to produce energy demand projections for industrial. Included potential power and non-electric energy. To meet power demand Optimal solution for electricity reduction in power demand projections, MARKAL found a least-cost mix of power supply mix at the minimum possible as a result of energy sources— lignite, oil, gas, hydropower, solar, wind and cost, given that the volume of power efficiency measures in nuclear—while accounting for constraints such as resources supplied should be sufficient to meet industry, household, and (hydro, nuclear, lignite), technology, user constraints and a the level of demand projected from non-residential sectors. cap on GHG emissions. the demand-side analysis and GHG Marginal abatement cost (MAC) analysis evaluated the reduction target should be met. effectiveness of each of the proposed abatement measures by Energy efficiency database created. measuring its marginal net cost (present value of net cost per New household and vehicle surveys unit of CO2e abatement) and the related abatement potential. conducted. Transport Mitigation and adaptation TREMOVE (economic TRansport and EMissions model), Outcomes in EFFECT: options: To assess impact TRANSTOOLs (TOOLS for TRansport Forecasting ANd ●● Road travel demand and road of green actions on land Scenario testing), EFFECT (Energy Forecasting Framework transport fleet composition and transport demand and and Emissions Consensus Tool). Investment options were performance (fuel consumption emissions. linked to the macroeconomic model (MOMA). and emissions) as a result of To estimate the cost 1. TREMOVE and TRANSTOOLs models evaluated the green policy implementation. of proposed green impact of various transport and environmental policies on Outcomes in TREMOVE: investments and the transport sector outcomes. emissions reduction, and ●● Sectoral indicators (vehicle 2. The World Bank’s EFFECT model assessed green policy population and age, vehicle- evaluate transport sector interventions and their potential impact on road travel vulnerability to climate kilometer traveled, ton-kilometer demand and on road transport fleet composition and transported, volume of rail change. performance, including fuel consumption and emissions. travel). Sectoral outcomes The outputs comprise forecast levels of vehicle ownership, used to project the level of fuel travel and emissions by vehicle category for the period consumption and emissions from 2010 to 2050. including CO2, NOX, and PM10.b Modeling was complemented by vulnerability analysis aimed at assessing transport sector’s climate change sensitivities and resulting increase in requires investment and maintenance costs. a. Consistent with constraints on hydropower that emerged from water modeling. b. NOx is a generic term for mono-nitrogen oxides, in particular, NO2. NO2 forms quickly from emissions from cars, trucks and buses, power plants, and off- road equipment. In addition to contributing to the formation of ground-level ozone, and fine particle pollution, NO2 is linked with a number of adverse effects on the respiratory system. NOx are distinct from nitrous oxide (N2O), a greenhouse gas emitted from agricultural lands. PM10 is atmospheric particulate matter smaller than 10 microns. E x ecu ti ve Su mmary x x xiii Sector Analytic Framework Objective or issue Models used and modeling framework Modeling outcomes Macroeconomic To capture complex The Macroeconomic Options of Mitigation and Adaptation Growth, employment, fiscal, and Modeling and linkages between mitigation model (MOMA model), a dynamic stochastic general investment impacts of mitigation and Construction and adaptation policies and equilibrium model, was developed and applied to simulate adaptation actions, as well as impact of a Baseline economic performance; green scenarios. Mitigation and adaptation options were on sectoral structure. Scenario and to set out a detailed integrated into the model. The components of the Green Serves as the reference scenario for economic baseline scenario. and Super green scenarios came from sector analyses. other sector and macroeconomic Incorporated mitigation actions from energy and transport; analysis. adaptation actions from water, agriculture, and the infrastructure analysis. MOMA and GCMs downscaled to country level used to estimate impact on macroeconomic variables of climate change. Urban To assess the impact of Tool for Rapid Assessment of City Energy (TRACE) urban green policies and 1. General urban sector review. A scoping paper reviewed urban policies, strategies and pertinent investments under two legislation; identified existing data sources; and provided a preliminary overview of key urban green growth scenarios. trends. 2. An in-depth city level analysis of Skopje using the Tool for Rapid Assessment of City Energy (TRACE) for data collection and benchmarking. TRACE was used as a decision-making tool for assessing potential energy and cost savings from implementing cross-sectoral energy efficiency measures in Skopie and for using the outcomes to plan the city’s green growth in a systematic way, prioritizing policies and investments across sectors. The analysis focuses on six municipal service areas: urban transport, municipal buildings, water and wastewater, power and heat, street lighting, and solid waste management. 3. To complement TRACE’s analysis of Skopje, rapid assessments were conducted in selected additional Macedonian cities. Infrastructure Adaptation options: To Decision-making framework for infrastructure planning, combining cost-benefit analysis under assess infrastructure uncertainty, climate informed decision analysis, and robust decision-making. adaptation investment 1. Defining the baseline infrastructure needs for all asset types for each five-year period from 2015 to choices despite uncertainty 2050 based on the country’s level of development and current climate conditions. about future climate conditions. 2. Estimating the costs for each infrastructure category under adaptive and reactive strategies using stressor-response (or dose-response) functions between the climate stresses and the costs, with planning horizon of up to 40 years, and outcomes of climate modeling (17 climate scenarios up to 2090 based on separate GCM runs). 3. Filtering out infrastructure categories for which adaptation is cost effective. 4. Defining a robust adaptation strategy. When adaptation is cost effective, a robust adaptation strategy, i.e., a strategy optimal for a wide range of climate outcomes, was defined. Standard economic models of decisions subject to uncertainty were used. Robust adaptation strategies were identified using systematic evaluation of all possible combinations of planning scenarios, planning horizons, and climate outcomes. The objective was to minimize the risk of making particularly costly mistakes and, at the same time, perform reasonably well for a range of climate outcomes. Air Pollution Local co-benefits of The health impact of air pollution was estimated using exposure-response functions that capture mitigation: To estimate the relationship between a pollutant’s concentration and the health response of an individual. the health impacts of air Data on air pollutants was combined with estimation of the exposed population. Physical health pollution. impacts—mortality, morbidity, and DALYs (disability-adjusted life years) —were calculated using exposure-response functions and then the health impact was monetized using three approaches to valuation. Social Pilot Participatory Scenario PSD workshops involved discussions with the population of two scenarios of development: Participation Development (PSD) Business as Usual and Green Growth. Each workshop consisted of four steps: (i) facilitators approach was aimed inform participants about climate change and green growth and describe two scenarios of at testing a suitable development—business-as-usual and green growth; (ii) participants discuss the social impact of participatory approach climate change and green growth under two scenarios; (iii) participants identify adaptation and to green growth decision mitigation solutions; (iv) participants discuss feasibility of the proposed solutions. making. PSD is a process of stakeholder discussions of policy issues and is used to identify the effects of alternative responses to challenges; to determine how different groups of stakeholders view the range of possible policy and management options; and to identify appropriate public policies and investment support necessary to facilitate effective action. The pilot social module explored possible solutions to mitigate negative effects in dialogue with major stakeholders at regional level. x x xiv F Y R M aced onia Gr een Grow th Country A ssessment Summary Table B. Green scenarios developed for modelling Summary of policies and investments used for analysis Sectors Green scenario Super Green scenario Combination of water conservation, investment in sector Expanded Green scenario: Water and assets and re-positioning of agriculture: 1. All Green interventions; Agriculture 1. Improved water management and conservation in 2. Improvement in basin scale irrigation efficiency in all Modelling response to today’s moderate stress on water resources, basins to 100% which increases with climate change; 3. Improvement of drainage infrastructure in currently 2. Improvement in basin scale irrigation efficiency in all irrigated and rainfed areas basins to 75% 4. Improvement in varieties for wheat, maize, and apples 3. New basin scale storage as laid out in plans (irrigated and rainfed) 4. Improvement of drainage infrastructure in all currently 5. Optimization of timing of water and fertilizer application irrigated areas for all crops in all basins 5. Improvement in wheat varieties (irrigated and rainfed) 6. Irrigation expanded by 50% in basins with sufficient water; low-value rainfed production converted to irrigated maize, apples, and/or tomatoes Combination of demand side (improved energy efficiency) Expanded Green scenario : Energy Supply and and supply side (optimized power generation mix) measures: 1. All Green interventions Demand Modelling 1. Supply-side measures include significantly increased 2. More aggressive gas strategy, more investments in wind and usage of gas and construction of a new gas pipeline, solar reduced usage of lignite and oil, moderate hydropower development and renewable energy development 3. Replace some lignite and gas with new nuclear plant 2. Demand side measures include full implementation of all 4. Tighter schedule of energy efficiency implementation available energy efficiency interventions in household, commercial, public and industrial sectors A mix of investments in infrastructure, policies creating Expanded Green scenario: Transport behavioral incentives, and management improvements: 1. Higher investment level Modelling 1. Investments in infrastructure: in rail infrastructure and 2. Tighter implementation schedule services and rail energy efficiency, in urban and inter-urban transit, in walking and cycling infrastructure, in vehicle train technology for road freight 2. Behavioral incentives: fuel prices increase, fuel tax introduction, policies to increase carpooling and reduce travel time, policies to increase demand for fuel efficient vehicles, eco driving; pedestrian zones, limited parking, freight restrictions 3. Management improvements: parking management; urban traffic management systems Macroeconomic Ambitious climate action on mitigation and adaptation. Very ambitious climate action on mitigation and Modeling 1. Mitigation measures to achieve a 40 percent reduction in adaptation. GHG emissions from energy supply and energy efficiency; 1. Mitigation measures to achieve an almost 70 percent transport reduction in GHG emissions from energy supply and energy 2. Adaptation measures (precautionary) from agriculture, water, efficiency; transport and physical infrastructure across sectors 2. Adaptation measures (proactive) from agriculture, water, and physical infrastructure across sectors E x ecu ti ve Su mmary xxxv Summary Table C. Recommended actions by sector Detailed policies, investments, institutions ‘No regrets’ actions Full-scale green actions (urgent measures to sustain growth and low-cost green (more ambitious and more costly greening measures measures with positive short-term returns) from both the Green and Super Green scenarios) Water and agriculture Policies: Policies: ●● Design policies for municipal and industrial water conservation to ●● Apply municipal/industrial water conservation policies reduce water demand and eliminate waste (metering) ●● Further control over groundwater usage (wells) ●● Design policies to address unregistered wells ●● Agriculture: continue land consolidation and land market improvement –– create national groundwater register –– reestablish national groundwater monitoring network ●● Convert low-value rainfed production to irrigated maize, apples, or –– create groundwater permit/tariff system tomatoes ●● Optimize timing of water and fertilizer application for all crops in all ●● Increase efficiency of the Water Economies (utility) including first steps basins toward cost recovery tariffs and control over ground water usage (metering, better collection) ●● Apply policies to address soil management of arable land ●● Optimize water user fees in agriculture Investments: ●● Improve municipal and industrial water system efficiency and address ●● Improve basin scale irrigation efficiency through better design and water losses more efficient infrastructure (remove, rehabilitate, or expand) ●● Agriculture: first set of measures toward land consolidation and land ●● Expand irrigation to all crops that need to be irrigated in all areas with market improvement sufficient water ●● Design policies to address soil management of arable land ●● Improve drainage infrastructure in all irrigated and rainfed areas Investments: ●● Construct basin scale storage ●● Improve basin scale irrigation efficiency targeting high value crops ●● Improve wheat, apple and maize varieties (irrigated and rainfed) ●● Rehabilitate water supply assets ●● Build the planned hydropower plants as part of energy strategy Institutional strengthening and knowledge sharing: Institutional strengthening and knowledge sharing: ●● Agriculture: continue educational campaigns and experience-sharing ●● Agriculture: organize educational campaigns and experience-sharing among farmers among farmers, such as precision farming, soil management, pasture management, greenhouses Energy Policies: Policies: ●● Adopt the National Plan for Energy Efficiency in Public Buildings ●● Design and implement policies to address transmission and distribution ●● Develop a regional strategy and implementation plan for gas supply losses ●● Address potential private investors’ concerns about investing in ●● Apply a regional strategy and implementation plan for gas supply hydropower ●● Establish new construction standards to reduce demand for heating ●● Design and apply incentive schemes for renewables ●● Establish commercial building standards for new construction ●● Achieve cost recovery pricing in power and gas Investments: ●● Set up a sustainable financing mechanism for energy efficiency ●● Invest in new gas plants (replacing lignite plants) measures ●● Construct new hydropower plants ●● Make low-cost capital available for energy efficiency investments (e.g., ●● Invest in wind plants and solar PV panels building retrofits) ●● Expand natural gas infrastructure Investments: ●● Household sector: apply more efficient lighting, introduce higher ●● Energy efficiency energy efficiency standards for refrigerators and water heaters, retrofit –– increase efficiency of HH appliances buildings –– improve efficiency in heating, cooling and lighting in non- residential sector ●● Non-residential sector: more efficient lighting, building retrofit –– replace inefficient equipment in the industry ●● Industry: introduce energy-efficient technologies, including optimizing –– roll-out LEDs for street lighting across the country existing energy supply systems and technology replacement when new production capacity is added Institutional strengthening and knowledge sharing: Institutional strengthening and knowledge sharing: ●● Strengthen the institutional capability to design and implement energy efficiency programs ●● Continued efforts ●● Build and maintain energy consumption data ●● Implement energy efficiency training programs for professionals (architects, building contractors, energy auditors) ●● Organize consumer information campaigns regarding energy efficiency measures x x x vi F Y R M aced onia Gr een Grow th Country A ssessment ‘No regrets’ actions Full-scale green actions (urgent measures to sustain growth and low-cost green (more ambitious and more costly greening measures measures with positive short-term returns) from both the Green and Super Green scenarios) Transport Policies: Policies: ●● Road sector ●● Road sector design incentives to improve fuel efficiency of vehicles and reduce –– apply fuel tax –– car usage (prices, taxes, regulations) apply policies for improved fuel efficiency of vehicles and reduced –– –– apply emission standards for all road transport car usage (prices, taxes, regulations) –– design and apply policies to reduce vehicle occupancy and the –– apply passenger car scrappage scheme number of trips ●● Urban sector ●● Urban sector: design and implement improved regulated and paid expand regulated and paid parking and increase parking charges –– parking implement improved ticketing system and fares –– ●● Rail: design and apply passenger information system and e-ticketing, –– integrate smart cards electronic freight billing and tracking of shipments system ●● Rail Investments: –– apply competitive fares (against car use costs) and freight access ●● Invest in improved road infrastructure charges –– change to electricity recharge mechanism to incentivize operators ●● Road sector: design investment plans for public transportation (buses, trams) adopting energy efficient behaviors ●● Urban sector: create investment plans for city center re-design Investments: including walking/cycling zones and for reducing city congestion (parking restrictions and charges, pedestrian zones, cycling zones, ●● Road sector: invest in public transportation (buses, trams) freight restrictions) ●● Urban sector ●● Rail: design a program for rail sector development and rail track and ●● build tram infrastructure in Skopje infrastructure investment ●● invest in walking and cycling infrastructure Institutional strengthening and knowledge sharing: ●● invest in freight consolidation centers ●● Road sector: design and implement awareness campaigns and driver ●● Rail training aimed at driving style (smooth acceleration and deceleration, no idling), observed speed limits, tire pressure checks, timely vehicle –– start construction of the track and infrastructure along Pan- maintenance European corridor VIII –– invest in stations, rail yards and depots ●● Road and rail: improve transport sector adaptation information and –– rolling stock investment data –– regenerative braking (rolling stock and infrastructure investment) –– create a database of extreme weather events –– conduct damage calculations (Agency for State Roads) Institutional strengthening and knowledge sharing: –– create a database costing infrastructure damages by weather events ●● Road sector: conduct awareness campaigns and driver training; ●● Rail: conduct driver energy efficiency training –– on-board energy use metering and software –– driver training Urban Policies: Policies: ●● Design integrated urban plans ●● Expand regulated and paid parking and increase parking charges –– create incentives to make urban center more livable ●● Implement improved ticketing system and fares –– design and implement improved regulated and paid parking ●● Integrate smart cards ●● Design and implement water conservation policies Investments: ●● Improve operational efficiency of water utilities ●● Build tram infrastructure in Skopje ●● Meter water supply ●● Invest in walking and cycling infrastructure ●● Accelerate establishing integrated regional waste management ●● Invest in freight consolidation centers systems ●● Invest in public transportation. Investments: Institutional strengthening and knowledge sharing: ●● Create investment plans for city center re-design including walking/ ●● Continued actions cycling zones and for reducing city congestion –– parking restrictions and charges –– pedestrian zones –– cycling zones –– freight restrictions ●● Invest in/find financing for public transport, water supply networks and wastewater sector ●● Access available grant funding for wastewater treatment infrastructure ●● Invest in/find financing for parking, traffic management, and walking and cycling infrastructure ●● Invest in/design financing for energy efficiency improvements Institutional strengthening and knowledge sharing: ●● Awareness campaigns regarding energy efficiency, water conservation, trash recycling ●● Promotion of public transportation, biking and walking, driver training E x ecu ti ve Su mmary x x x vii ‘No regrets’ actions Full-scale green actions (urgent measures to sustain growth and low-cost green (more ambitious and more costly greening measures measures with positive short-term returns) from both the Green and Super Green scenarios) Social Capacity development: Provide for stakeholder involvement in the design of any green growth strategy and related sectoral planning infrastructure Policies: Policies: ●● Design new (modified) standards and operations and maintenance ●● Design financing to support upgrades and maintenance for roads, practices for urban drainage systems, health and educational facilities, power, telecoms, water and sewer networks, and non-road transport and municipal buildings ●● Investments: Investments: ●● For roads, power, telecoms, water and sewer networks, and non-road ●● Invest in urban drainage systems, health and educational facilities, and transport: enhanced maintenance and upgrades to respond to current municipal buildings weather stresses Institutional strengthening and knowledge sharing: Institutional strengthening and knowledge sharing: ●● Continuously revise and improve monitoring of the weather outcomes ●● Continued efforts and update climate projections on this basis ●● Regularly update the assessment of the optimal choices for adaptation in infrastructure assets Air Pollution Policies: Policies: ●● Design and implement policies to create incentives for industry, energy, ●● Continue including PM in air emission programs and in health impact and road sectors to invest in pollution reduction, primarily in: estimates for urban, energy and transport planning ●● modern equipment in ferroalloys and non-ferrous metal production Investments: ●● pollution abatement equipment and fuel switching in the heat and ●● Invest in modern equipment in ferroalloys and non-ferrous metal power production production ●● dust collectors and fabric filters in asphalt mixing plants ●● pollution abatement equipment and fuel switching in the heat and ●● Include PM in air emission programs and in health impact estimates for power production urban, energy and transport planning ●● dust collectors and fabric filters in asphalt mixing plants Investments: ●● Replace inefficient stoves and implement energy efficiency ●● Design and implement low cost financing mechanism/find grants to the improvements household sector to replace inefficient stoves and for energy efficiency Institutional strengthening and knowledge sharing: improvements ●● Continued actions ●● Design and implement low cost financing mechanism for enterprises for improved environmental management Institutional strengthening and knowledge sharing: ●● Continue financial support to air quality monitoring (MEPP) ●● Develop capacity in the area of health impact monitoring (MEPP) ●● Conduct health impact assessments on a regular basis (Institute of Public Health) x x xviii F Y R M aced onia Gr een Grow th Country A ssessment E x ecu ti ve Su mmary x x xix WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING introduction t his report takes a practical approach to identify- ing specific challenges and opportunities FYR Macedonia faces in building its green growth future, presenting them in a form useful for deci- sion makers. In particular, it defines green growth in concrete terms, as economic growth with more sustainable use of natu- ral resources (minerals, water and clean air, and biodiversity), with proper consideration of mitigation of greenhouse gas emissions; with attention to adaptation to a changing cli- Program in sectors and on issues selected as critical for defining and understanding the green growth path of FYR Macedonia. The report starts with an overview of the main green growth challenges in the country, map- ping FYR Macedonia against the EU, the Eastern Europe and Central Asia (ECA) 13 region, and upper middle income countries (UMC) 14 using selected indicators from the Green Growth benchmarking analysis developed by the study team (Chapter 1). Then, the next two chapters lay out baseline mate; and with more focus on innovation and green jobs to projections to generate a ‘business-as-usual’ scenario, enhance benefits flowing from the technological innovation the starting point for the subsequent analysis of green and new industries spurred by a shift to green growth. This growth issues. Chapter 2 describes a ‘zero-baseline,’ which green growth country assessment for FYR Macedonia aims provides macroeconomic projections as well as projections to define the outlines of a green growth path and the initial for greenhouse gas (GHG) emissions15 for the period up to steps along it. 2050. The zero-baseline considers past economic trends as well as current policies and developmental plans but does FYR Macedonia, like many countries, is already moving not include the impact of a changing climate on the economy. in a green direction. The Macedonian economy continues Chapter 3 describes the final baseline scenario (Business-as- to evolve, with ongoing programs of structural reforms to Usual or BAU scenario), which incorporates an estimate of improve growth and competitiveness and with growing align- climate change damages, creating a more realistic possible ment with Europe. Environmental and sustainability issues are growth path for the economy to 2050. gradually rising in importance in the public policy debate, 13. ECA is the East Europe and Central Asia region and includes the although, as in most countries, more so during times of stable following twenty-eight countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, growth. The country’s momentum towards Europe is already Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, requiring it to focus more on environmental issues, including Montenegro, Poland, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Turkmenistan, Ukraine, and Uzbekistan. climate action. 14. Using the World Bank classification of countries by income. 15. A greenhouse gas absorbs and emits radiation within the thermal This synthesis report summarizes analytic work undertaken infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth’s atmosphere are water specifically under the Green Growth and Climate Change vapor, carbon dioxide, methane, nitrous oxide, and ozone. See Wikipedia or any of numerous sources for further explanation. INTRODUC TIO N 1 The central part of the report further examines green growth issues specific to FYR Macedonia and, starting from the BAU scenario, generates Green and Super Green Box 1.1. Green Scenarios: a basic explanation scenarios for each. (See Box 1.1 for more on scenarios). Scenario analysis is used to evaluate the impact of mitigation Sectoral outcomes under the two green growth scenarios and adaptation actions in five overlapping sectors—energy, are assessed by comparing them with the baseline scenario. transport, water, agriculture, and infrastructure—which are then This analysis is conducted for the following sectors: the combined in the macroeconomic or economy-wide analysis. Two water sector (Chapter 4), the agriculture sector (Chapter policy scenarios— Green and Super Green —were formulated in a bottom-up fashion based on the specifics of each sector 5), the energy sector (Chapter 6), and the transport sector as part of the sector analysis. These scenarios are compared to (Chapter 7). The following report chapters present cross- Business-as-Usual (BAU) or baseline scenario, a development sectoral green growth issues, which by necessity take path for the economy to 2050, including the main projected issue-specific approaches: urban green growth challenges impacts of climate damages. The Green and Super Green sce- (Chapter 8), adaptation in infrastructure in the face of cli- narios involve government policies and investments to address mate damages (Chapter 9), air pollution as a health issue greenhouse gas emissions mitigation and adaptation to climate critical for FYR Macedonia, and the inclusion of stakeholders damages. The Green scenarios in each sector constitute a pack- age of ambitious but practical actions to reduce emissions and in green growth reforms (Chapter 11). counter climate change. The Super Green scenarios are very ambitious and more expensive packages, generally requiring The report concludes with a macroeconomic analysis more aggressive implementation of Green measures or wider based on modeling that generates economy-wide out- coverage of such measures. comes building on the sectoral analyses of water, energy, transport, and agriculture. Putting the sectors together allows consideration of the impact of green growth actions (investments and policies) in each sector on other sectors and on overall economic growth and employment and provides the government with a tool able to compare the impact of their rationale, while the recommendations describe public investments across sectors. optimal investment strategies. Chapters of the report have a standard structure. Each ■■ In agriculture (Chapter 5), the analysis combines modeling starts with a chapter summary, followed by an overview of outcomes16 with relevant sector analysis from outside this the relevant challenges to green growth and a description of assessment, and the findings and recommendations are sectoral issues critical for greener growth. Then, the method- also a combination of quantitative and qualitative analysis. ology is laid out, and the main findings summarized. Finally, conclusions and recommendations are introduced. Despite ■■ Urban analysis (Chapter 8) examines cross-sectoral urban the identical structure of the chapters, the underlying analytic issues in several municipal sectors: water and wastewater, work varies. Background technical papers are available with energy, transport, waste collection and disposal. It utilizes greater detail for each of the chapters. the Tool for Rapid Assessment of City Energy (TRACE) for data collection and benchmarking, which provides Analytic work undertaken for each sector or topic of this a structured way to collect and analyze data and to country assessment differs depending on sector specif- identify areas of greatest potential efficiency gains. As ics, green growth objectives in particular sectors in FYR a result, the findings propose focus areas for municipal Macedonia, and analytic tools available. Therefore, the policy decision-making and recommend priority areas for analysis has varying objectives, methodological frameworks, interventions across the municipal sectors. analytic tools including modeling, and types of findings and recommendations. ■■ Adaptation choices for infrastructure (Chapter 9) involve an alternative approach to climate uncertainty and assessed the ■■ In the water, transport and energy sectors and in the choices to be made when investing in long-lived infrastructure macroeconomic analysis (Chapter 4, Chapter 6, Chapter assets in the context of climate change. The recommendations 7 and Chapter 12), the analysis is based on modeling and provided are related to the timing of infrastructure replacement includes an interlinked set of models that evaluate the and refurbishing and are based on the cost of various available impact of green investments and policies on sector and options. macroeconomic outcomes. As a result, the main findings in these sectors reflect proposed investments and explain 16. The water and agriculture sectors are modeled jointly. 2 F Y R M aced onia Gr een Grow th Country A ssessment ■■ The air pollution analysis (Chapter 10) was designed to ■■ The macroeconomic analysis (Chapter 12) used a dynamic estimate the cost of the health impact of air pollution, computable general equilibrium model constructed for both a typical target of greening efforts and a co-benefit the Macedonian economy that captures the complex of many mitigation efforts. The findings also identify eco- linkages between climate mitigation and adaptation poli- nomic activities and geographic areas with the highest cies and macroeconomic performance in an innovative reduction potential from targeted actions. manner. ■■ The social inclusion analysis (Chapter 11) proposes a Summaries of the methodologies used for each sector and participatory instrument that would help policymakers cross-cutting issue and of the main policies and investments to make green growth design and implementation socially that constitute the Green and Super Green scenarios for inclusive and reports on its successful piloting as part of the assessment are available as concluding tables in the this assessment. Report Summary. INTRODUC TIO N 3 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 1 What is Green Growth, and How Green is FYR Macedonia? A Benchmarking Exercise u CHAPTER SUMMARY for 1990 to 2009. This benchmarking exercise aims to define, “What is green growth, and how green is FYR Macedonia?” A selection of key indicators constitutes Green Growth At-A- Glance to illustrate the main messages from the benchmarking sing a broad set of indicators of green exercise. Firstly, FYR Macedonia’s natural resource endowment growth, FYR Macedonia is compared to is close to the EU average in most aspects, but air quality is international and regional benchmarks to among the worst in the EU. Resource usage is less sustainable provide an initial portrait of the country’s over the long term than in the EU, and natural resources are status, prospects, and challenges with respect to green less productive, with somewhat high levels of mineral extrac- growth. Green growth is growth in economic output that pre- tion, water withdrawals that have created moderate water serves the ability of natural assets to provide the resources stress, and low productivity of agricultural land. Greenhouse and services on which human welfare depends.17 Green gas emissions are high, driven by heavy use of lignite and growth starts with a traditional concern about sustainable high energy intensity of GDP. The country has high exposure use of natural resources, including minerals, water and clean to climate change among European countries and among air, and biodiversity, and then adds consideration of mitiga- middle-income countries globally. Its sensitivity to climate tion of greenhouse gas emissions, attention to adaptation change (the likelihood of economic damages) is somewhat to a changing climate, and more focus on innovation and high because of low quality infrastructure and dependence green jobs. For any individual country, the nature of a greener on agriculture, while its capacity to adapt is limited by insti- growth path will depend on endowments and history, which tutional weaknesses. Secondly, FYR Macedonia’s economy is position countries quite differently with respect to current not sufficiently flexible to benefit easily from going green. The ‘greenness’ and potential greening of their growth paths. A country’s supportive business environment cannot make up framework to define a list of questions key to understanding for poorly functioning labor markets, and global links are not how FYR Macedonia or any country compares in an inter- yet strong enough to facilitate technology transfer. Lastly, FYR national context is constructed with three aspects — “how Macedonia’s connections to global knowledge and readiness green?”, “going green,” and “riding a green wave,” and used for an innovation revolution are insufficient to benefit from to guide a benchmarking exercise in which FYR Macedonia green technological change. is mapped against comparator countries and country groups using a dataset of more than 100 indicators for 69 countries This benchmarking exercise not only identified key issues for further analysis but also could serve as a tool for monitoring 17. Green Growth Knowledge Platform website. Developed in partnership between the Global Green Growth Institute, the OECD, UNEP, and the progress under a green growth program. As the Macedonian World Bank: www.ggkp.org. W hat is Green Growth, and How Green is F Y R M acedonia? A Benchmarking E x ercise 5 government considers implementation of a green growth pro- Green growth starts with a traditional concern about sus- gram, policymakers need to think when drawing down natural tainable use of natural resources. The efficient exhaustion of capital in the interest of economic growth is a wise tradeoff and nonrenewable resources such as energy and mineral deposits when it is not. Certainly, more investment in maintaining and and the sustainable use of renewable resources such as for- upgrading natural assets seems warranted; substantial invest- ests and fisheries, water and clean air have been considered ments are needed, especially in the energy sector to advance part of a sustainable growth agenda for decades. Natural mitigation of greenhouse gases; and government needs to resources are necessary to economic activity, providing raw manage actively the likely impacts of a changing climate on materials and environmental services essential for produc- agriculture. To cope with a greening world, greater flexibility of tion to continue. Some components of natural resources the economy, strengthened connections to global knowledge, have become of greater concern in recent years, among and more effective support of innovation should be fostered them freshwater resources affected by overexploitation, through policies and investments. In addition to these key pollution, and climate change; and biodiversity under threat elements of a green growth strategy, the government should from habitat alteration and pollution. consider the development of a results framework populated by a combination of internationally-comparable and locally- Mitigation of greenhouse gas emissions is a critical addi- developed indicators to support effective implementation. tional component of environmental sustainability, with With a growth path already shaped by the requirements of EU rising prominence and particularly difficult challenges for accession, this first glance at green growth for FYR Macedonia countries. The growing imbalance of greenhouse gases (or seems to indicate much complementarity between the short ‘carbon’) in the atmosphere is a clear example of the breeching term and the long term, with relatively little conflict between of planetary boundaries and of a global public good. As such, policies and structural reforms that will lead to more vibrant as individual countries can reap only local co-benefits such as well as more sustainable growth. reduced suspended particulates in the air if fossil fuel burning is reduced. Since the bulk of the benefits do not accrue to an individual country, a decision to move to low carbon generally CHALLENGES FOR GREENER GROWTH must be motivated by other considerations, including access to carbon finance and other external funding, in response to Overview regional standards and requirements such as those of the European Union, or driven by a decision to lead on global According to the World Bank’s recent flagship report, issues and prepare for an eventual global agreement. green growth is “growth that is efficient in its use of natural resources, clean in that it minimizes pollution and environ- Adaptation to a changing climate must also be part of a mental impacts, and resilient in that it accounts for natural country’s sustainable growth path. Regardless of future hazards and the role of environmental management and greenhouse gas emissions, climate is already changing, with natural capital in preventing physical disasters.”18 Further, more extreme weather events, rising sea levels, and overall the report explains that, “Inclusive green growth is not a warming. Some countries, sectors, and populations will be new paradigm. Rather, it aims to operationalize sustainable strongly affected, although with major impacts in most places development by reconciling developing countries’ urgent not materializing for some decades. For many countries, it need for rapid growth and poverty alleviation with the need makes sense to consider how adaptation needs can be incor- to avoid irreversible and costly environmental damage.” 19 porated into decisions about long-lived infrastructure such While most countries might agree that such growth is a worthy as new hydropower plants. More generally, countries that goal, determining what a green growth path might mean for a will face significant impacts need to factor such shifts—in particular country is a significant challenge. This green growth frequency of droughts, in crop yields, in coastal and river- country assessment for FYR Macedonia aims to define the bank flooding—into thinking about sustainable and greener outlines of that path and the initial steps along it. development paths. 18. World Bank. 2012. Inclusive Green Growth: The Pathway to Sustainable The newest element of the green growth agenda is the Development. Washington, DC: World Bank, p. 2. strong emphasis on innovation and green jobs. This dimen- 19. Ibid. This definition is consistent with those set out by the OECD and UNEP, and the approaches of the three institutions are being brought sion of green growth proposes that a shift towards greener together under the Green Growth Knowledge Platform, along with a growth will spur technological innovation, especially in the fourth partner, the Global Green Growth Institute. The Platform, launched in Mexico City in January 2011, is a global network of researchers and energy sector, and promote the emergence of new industries. development experts that seeks to identify and address major knowledge gaps in green growth theory and practice. Through widespread Innovation can help decouple growth from natural resource consultation and world-class research, the GGKP hopes to provide depletion and greenhouse gas emissions by shifting out global practitioners and policymakers with better tools to foster economic growth and implement sustainable development (www.ggkp.org). production possibilities and allowing more production with 6 F Y R M aced onia Gr een Grow th Country A ssessment fewer and more environmentally-friendly inputs. Environmental Elements of environmental Figure 1.1. considerations don’t necessarily constrain growth, but, to the sustainability that together constitute contrary, a dynamic technical change towards low carbon and green growth low pollution technologies could drive growth and generate jobs at all skill levels.20 (Figure 1.1) Sustainable use Mitigation of Where Should Countries Start? of natural greenhouse gas resources emissions A greener growth path must address these four aspects and balance greening with growth of output and incomes, Green but the details of a country’s path will depend on country- Growth specific conditions and policy choices. Each country starts with a set of endowments, natural and man-made. While some Adaptation Innovation and aspects of any country’s current condition are driven by recent to a changing green jobs policy choices, much derives from exogenous characteristics climate such as geography or endowments of fossil fuels, hydropower potential, or forests; and the myriad of distant policy deci- sions that drove national development to where it is today. These characteristics position countries quite differently with valuation of environmental costs and benefits, an approach respect to the current ‘greenness’ and potential greening of which has been part of the sustainability agenda for many their growth paths. In considering the complex task of assess- years. Recent international agreement to support wealth ing green growth at the country level, the starting point is accounting or green national accounts is moving this effort fundamental to the costs and tradeoffs the country faces in into the mainstream. A correct costing of depreciation of choosing a greener path forward. natural resources such as mineral deposits and of externali- ties such as air and water pollution will take countries who One holistic approach to sustainability is national wealth adopt such an approach a good distance to maximizing a accounting and the measurement of natural capital, which greener type of GDP. However, some elements of green- aims to capture a good part of the green challenges to ness are not easily costed, among them greenhouse gas orthodox growth measurement. Part of the determination of emissions, biodiversity and the non-income benefits (or an optimal green growth path for a country involves proper happiness) that comes from living in a country with a healthy and well-protected natural environment. 20. Such an argument is consistent with mainstream economic thinking if there is close substitutability between clean and dirty technologies. In that case, temporary government subsidies or other supportive policies A simpler starting point in such assessment is benchmark- can push the economy towards a clean solution, causing the sector with ing against comparator countries —using indicators that clean technology to become large enough to be self-sustaining. In such a situation, the shift to greener technologies will support growth rather than measure various dimensions of green growth. This quick limiting it. See Aghion, Philippe, Daron Acemoglu, Leonardo Bursztyn and David Hemous. 2011. “The Environment and Directed Technical Change.” mapping can help identify challenging areas, as well as easy Growth and Sustainability Policies for Europe (GRASP) project of the wins. It can create a balanced portrait of a country’s green European Commission (EC). Working Paper 21. Brussels: EC. See also the quick overview in Jamus Lim. May 23, 2010. “Environmentally-Friendly issues, and, as set out below, it can have an analytic rather Growth Without the Pain.” Prospects for Development. Washington, DC: World Bank, http://blogs.worldbank.org/prospects/environmentally- than monitoring objective. friendly-growth-without-the-pain#1. W hat is Green Growth, and How Green is F Y R M acedonia? A Benchmarking E x ercise 7 compared to a subset of these countries selected based METHODOLOGY AND MAIN FINDINGS on economic, social and policy criteria and also against three country groups: the European Union (EU), the ECA Methodology region, and all upper middle income countries (UMC). 22 Acknowledging that attempting to measure green growth The scheme below (Figure 1.2) helps to define a list of ques- is not a new effort, the design of the database draws on tions key to understanding how FYR Macedonia or any country lessons from recent OECD and Environmental Performance compares in an international context. Firstly, how important are Index (EPI) publications. 23 Data is derived from a variety of natural resources to current growth, and how productively has sources, including the World Bank’s Development Data the country made use of them? Is pollution a major problem? Platform. The selection of relevant indicators balanced Has FYR Macedonia made any progress in decoupling eco- data availability and reliability. Some indicators are prox- nomic growth and greenhouse gas emissions? Is the country ies or correlated variables such as using life expectancy preparing for the impacts of a changing climate? Secondly, is to capture environmental health impacts. Unfortunately, FYR Macedonia’s economy flexible enough to succeed in the there are important areas of environmental performance transition towards green growth? Is FYR Macedonia’s economy where reliable, internationally comparable data is missing, well-diversified and ready to reap emerging opportunities? e.g., waste production and management, toxic substance What will be FYR Macedonia’s greatest challenges in greening concentrations, and water and soil quality. its economy, and what will be its biggest payoffs from ‘going green’? Thirdly, how can FYR Macedonia be ready for a surge of innovation and be competitive in new and growing green industries? These three aspects of measuring ‘green-ness’ capture a country’s status, prospects, and challenges with 22. For more detailed analysis and comparisons to selected comparator respect to the four elements in Figure 1.1. countries, see the Benchmarking technical paper. The ECA region is the Eastern Europe and Central Asia region and includes the following thirty countries: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, FYR Macedonia was benchmarked against compara- Kosovo, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, tor countries using a specially-constructed database. Montenegro, Poland, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Tajikistan, Turkey, Turkmenistan, Ukraine, and Uzbekistan. Information on more than 100 indicators across 69 coun- 23. One of the best known approaches to country environmental tries for 1990 to 2009 was collected. 21 FYR Macedonia was performance is the Columbia-Yale Environmental Performance Index. For the newly-emerging area of green growth, the OECD, the EU, and the UN have pioneered work on indicators, and the World Bank’s new Green 21. All European Union, OECD, and other Eastern Europe and Central Asia Growth Knowledge Platform, a joint effort with OECD, UNEP, and the countries are included as well as ten other large countries to allow for more Global Green Growth Institute, will focus on further development and balanced regional representation. harmonization of indicators of green growth. Figure 1.2. A framework for green growth benchmarking how green? going green riding a green wave Natural resource Structure of the economy endowment Connections to Labor market flexibility global knowledge Productive use of and human capital natural resources Getting ready for the Business environment energy (r)evolution Greenhouse gas emissions and capital mobility Green and near green Responding to a Energy pricing industries and exports changing climate Global links: carbon emissions embodied in trade 8 F Y R M aced onia Gr een Grow th Country A ssessment Main findings Mineral extractions are drawing Figure 1.3. down total wealth While wealth accounting with natural capital incorporated Adjusted net savings is conceptually appealing, as noted above, in practice this approach does not produce sufficient insights on green 20 growth for FYR Macedonia. Wealth accounting aims to inform 15 % of gross national income the sustainability of a country’s GDP, in particular through calculation of the adjusted net savings rate24 to allow a judg- 10 ment as to whether total wealth is increasing or decreasing. 5 FYR Macedonia’s adjusted net savings ratio has fluctuated over the last 15 years, from -1.6 percent of GNI to 10.5 per- 0 cent (See Figure 1.3). Strongly positive net national savings -5 in recent years has been somewhat offset by higher mineral depletion, which rose from an annual average of -0.3 percent -10 of GNI during 1996-2005 to -4.0 percent during 2006-2010. A smaller factor depressing savings is fuel (lignite) deple- -15 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 tion, which increased from an annual average of -0.4 percent during 1996-2005 to -0.8 during 2006-2010. As for the richest Net national savings Education exp. Adjusted countries globally, FYR Macedonia’s total wealth is dominated net savings CO2 damage Energy depletion by intangible (human and social) capital rather than natural Mineral depletion PM damage capital. Thus, other approaches are needed to generate useful insights into the nature of FYR Macedonia’s green growth issues and challenges. Source: Staff calculations based on World Bank Development Data Platform. The figures and text below constitute an approach to Green Part 1: How green is FYR Macedonia? Growth At-A-Glance. Each of the three blocks of the bench- Environmental performance and the green marking framework is addressed in turn. A selection of key asset base indicators is presented to illustrate the main messages from the full benchmarking exercise. Note that the data were rescaled A country’s natural resources are vital as productive inputs into using a normalization formula25 to adjust indicators measured economic processes or as conditions for production, as well as in different units and make them comparable to each other. providing direct utility. Like other forms of capital, this natural Each indicator in the charts is measured in percentage dif- capital requires investment, maintenance and good manage- ference from the sample mean for all 69 countries, weighted ment in order to be productive and contribute to rising output by its sample standard deviation. Note that zero in the charts and welfare. Environmental degradation, on the other hand, is below is the sample mean for each indicator. In addition, the costly to welfare and eventually to growth; while counteracting data were adjusted by assigning a positive or a negative sign degradation can raise the long-run growth rate. Countries start depending on the interpretation of the indicator: when higher with differing endowments of land (forests and agricultural land), values of the indicator reflected a desirable outcome, the sign water, clean air,26 energy and minerals, and ecosystems, and they was made positive (e.g., cereal yield); when higher values mean use these resources with differing degrees of sustainability of a worse outcome (e.g., unemployment), the sign is negative. As exploitation and productivity. Greenhouse gas emissions are a result, the higher the indicator value in the charts, the better considered here (as use of the natural resource of the atmosphere the outcome with respect to green growth. as a carbon sink) as is the country’s stance towards adapting to a changing climate (important to sustainability of growth). FYR Macedonia’s natural resource endowment is close to the 24. Adjusted net savings equals gross savings minus consumption of fixed capital, plus education expenditures, minus energy depletion, mineral EU average in most aspects : land (including forest, agricul- depletion, net forest depletion, and particulate emissions and carbon dioxide damage. For detailed methodology see: World Bank. 2011. The tural land, mineral deposits and terrestrial ecosystems), water Changing Wealth of Nations: Measuring Sustainable Development in the (water resources per capita, surface and ground water), and New Millennium. Washington, DC: World Bank. ecosystems. Air quality is among the worst in the EU, especially 25. The normalization formula is (x-µ)/σ, where x is a value of the indicator, μ is the mean of all values of an indicator across all 69 countries, and σ is the when adjusted to account for where people live (see Figure 1.4). standard deviation, and measures the difference between each indicator value and the sample mean per unit of the sample’s standard deviation. The outcome is negative when the raw score is below the mean, positive when above. 26. Clean air is not strictly an endowment but rather an outcome linked to past and current policy choices (as well as other factors such as industrial structure and geography). W hat is Green Growth, and How Green is F Y R M acedonia? A Benchmarking E x ercise 9 Figure 1.4. Air pollution worse than EU average Natural resources are less productive Figure 1.5. Natural assets: land, water, air, energy and minerals, than in the EU ecosystems, 2009-2010 The productive use of natural assets: land, water, air, energy and minerals, ecosystems, 2009-2010 Forest (% land area) Materials extraction 200% (% GDP) 100% 100% 0% 0% -100% Water -100% Air quality: PM10/m3 -200% resources (m3/capita) -200% SO2 per GDP - grammes SO2 Cereal yield per US dollar PPP (kg/hectare) Agricultural land (% of land area) FYR Macedonia ECA EU UMC FYR Macedonia ECA EU UMC Source: Staff calculations based on World Bank Development Data Platform. Source: Staff calculations based on World Bank Development Data Platform. Further, resource usage is less sustainable over the long term Figure 1.6. Production is creating high levels of than in the EU. The level of materials extraction (minerals) is greenhouse gas emissions somewhat high: as a percent of GDP, it is more than double the Indicators of greenhouse gas emissions and energy use, EU average although slightly below the ECA regional average 2009-2010 (see Figure 1.5). In addition, FYR Macedonia has low efficiency 100% CO2 emissions of freshwater resource usage (or, phrased differently, the some- (per capita) what high level of water withdrawals creates moderate water stress), low agricultural productivity including low cereal yield, a 0% high level of SO2 pollution compared to output (almost 3 times above the EU and close to the ECA region’s average level), and insufficient ecosystem protection. The issue of unsustainable -100% resource usage in FYR Macedonia is addressed in the following chapters of this report: Energy, Water, Agriculture, Urban, and Air Pollution. Emissions Energy (ktCO2 ) per $1 GDP (kg oil eq.) per $1 GDP FYR Macedonia is not ready for a changing climate. The country has high exposure to climate change, worse than averages for any of the three comparator groups and in FYR Macedonia ECA EU UMC the top quintile within ECA countries (see Figure 1.8). With Source: Staff calculations based on IEA database. negative impacts already in evidence for its agriculture, water and hydropower sectors and with projected increased tem- peratures and reduced (and more variable) precipitation, the today’s economy but also will tend to amplify climate damages damages will increase unless resilience is improved. At the into the future. Last, FYR Macedonia’s adaptive capacity is same time, FYR Macedonia’s sensitivity to climate change somewhat low, driven by high inequality (Gini coefficient), lim- is somewhat high, due to the relatively low quality of infra- ited political stability, somewhat weak governance and voice structure, the importance of agriculture in today’s output and and accountability scores, and relatively low GDP per capita. employment (the sector expected to be hit hardest), and high (See Box 1.2 for definitions.) FYR Macedonia’s vulnerability existing levels of air pollution (indicating already damaged to a changing climate is addressed in the following chapters: health). Low infrastructure quality is not only a problem for Transport, Urban, Agriculture, Air Pollution, and Social Aspects. 10 F Y R M aced onia Gr een Grow th Country A ssessment Figure 1.7. The Macedonian economy has high emissions intensity, although it produces limited total emissions due to its size Emissions intensity (Greenhouse Gases, GHG, per unit GDP), per capita GDP, and total emissions, 2005 CHE 60,000 DNK GDP per capita, USD 50,000 AUT SWE 40,000 DEU 30,000 GRC SVN PRT FYR Macedonia 20,000 CZE SVK HRV LTU POL RUS 10,000 LVA BGR HUN AZE ALB TUR ROM SRB UKR KAZ 0 - 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 GHG per GDP, tons/$1M Note: Total emissions Include CO2, methane, HFC, NOx, PFC and SF6; total in the economy (from all sectors). Bubble size reflects total emissions, in Mt CO2e/year. Source: World Bank, Development Data Platform. Box 1.2. Measuring Vulnerability to Climate Changea Vulnerability to climate change can be thought of in three components: exposure, sensitivity and adaptive capacity, each of which can be measured approximately using indicators. The physical impacts of a changing climate will vary by country. The impact of those physical changes on a country’s people and economy will vary. And the country’s ability to react will vary. Exposure is the strength of future climate change relative to today’s natural variability for a country. It is measured here as an index based on annual and seasonal temperature and precipitation.b Sensitivity to climate change is measured based on indicators likely to increase the impact of climate shocks. These include the level of water stress (renewable water resources per capita), the extent of air pollution (PM10 ); the importance of agriculture in the economy (share of employment and value added); the exposure of the power sector to climatic risks (share of electricity generated by hydroelectric plants); the exposure of network infrastructure to climate change including extreme events (logistics index or index of overall quality of transport infrastructure); and the share of population under 5 (a measure of demographic/social flexibility of the society). Adaptive capacity aims to capture a country’s ability to react effectively. This capacity is a function of organizational skills, access to and ability to use information, and access to financing. In this analysis, three types of adaptation capacity are included: social adaptive capacity measured by the Gini coefficient (income inequality indicator), economic adaptive capacity measured by GDP per capita, and institutional adaptive capacity reflected in governance indicators. a. The definitions and many of the indicators used here replicate those proposed in Marianne Fay, Rachel Block, Tim Carrington, and Jane Ebinger, eds. (2009) Adapting to Climate Change in Eastern Europe and Central Asia. Washington, DC: World Bank. b. Based on data used in Baettig, Michele B., Martin Wild, and Dieter M. Imboden. 2007. “A Climate Change Index: Where Climate Change May Be Most Prominent in the 21st Century.” Geophysical Research Letters, Vol. 34, Issue 1. Washington, DC: American Geophysical Union. W hat is Green Growth, and How Green is F Y R M acedonia? A Benchmarking E x ercise 11 Figure 1.8. FYR Macedonia is vulnerable to a changing climate Exposure and sensitivity to climate change and capacity to adapt (selected indicators), 2009-2010 Gini 200% 100% 0% Exposure -100% Overall Governance -200% -300% -400% Quality of infrastructure Water resources pc (m3) PM10 per m3 FYR Macedonia ECA EU UMC Source: Staff calculations based on World Bank databases: Development Data Platform, Poverty and Inequality database, and Worldwide Governance indicators. FYR Macedonia’s supportive business Figure 1.9. Figure 1.10. Global links are not yet strong environment cannot make up for poorly enough functioning labor markets Trade and openness, 2009-2010 Labor market flexibility and human capital, 2009-2010 100% Net energy imports Labor participation 50% (% energy used) (% population 15+) 0% 400% -50% -100% 200% -150% 0% Trade -200% -200% (% GDP) Manufacture exports Urban popul. -400% (% merchandise exp.) (% total) Unemployment (% labor force) Tariff rate, all products (%) Working age popul. (% total) FYR Macedonia ECA EU UMC FYR Macedonia ECA EU UMC Source: Staff calculations based on the World Bank Development Data Platform. Source: Staff calculations based on the World Bank Development Data Platform. 12 F Y R M aced onia Gr een Grow th Country A ssessment FYR Macedonia is not ready for Figure 1.11. FYR Macedonia’s economy is not sufficiently flexible to ben- a wave of innovation efit easily from going green. The country had some of the strictest employment protection legislation in the ECA region Global connections, innovation readiness, and green industry, 2009-2010 (for FDI inflows: 2006-2010) (as of 2008), and unemployment is the highest in Europe at 34 percent of the labor force. Labor force participation is low, FDI inflows (% GDP) as is tertiary school enrollment. The business regulatory envi- 150% ronment is evaluated as well above average, and the overall 100% level of investment is one of the highest. The trade channel 50% should be important for FYR Macedonia in benefiting from 0% Broadband global green growth agenda. However, the country’s share of Researchers Internet in R&D -50% subscribers manufactures exports is at the low end of the sample range (per mln -100% (% population) for the EU and the ECA region, while tariff barriers to trade popul.) -150% remain high, well above the ECA regional average. Last, FYR Macedonia is dependent on imports of energy, although less so than most of the countries in the sample. Flexibility of the Macedonian economy as it relates to green growth is discussed R&D in the following chapters: Macroeconomics, Water, Agriculture, expenditure High-tech exports (% manuf. exports) Energy, Transport, Urban, Air Pollution, and Social Aspects. (% GDP) FYR Macedonia ECA EU UMC Part 3: Riding a green wave: innovation Source: Staff calculations based on the World Bank Development Data Platform. Might greener growth be faster growth that creates more jobs? If so, it will be due to frontier innovations that shift out global Part 2: Going green: flexibility of the economy production possibilities. The scope of opportunity for any par- ticular country will depend on how fast the world as a whole goes Transition to a greener economy can be thought of as green and whether that country has access to global knowledge an economic shock, where higher benefits and lower coupled with the ability of its firms to understand, adapt and use adjustment costs will be closely related to flexibility and that knowledge. Some countries offer best practice examples availability of human capital and the nature of global links. of achieving green growth objectives through innovation (see As for a trade shock, the greening of the world will change Good Practice Box 1). The energy sector is likely to be at the relative prices. 27 The same basic conditions that support heart of both frontier and catch-up innovations which adapt economic growth would also support the shift to greener new technologies to local settings. Openness to international growth: a flexible labor market, human capital adequate trade and foreign direct investment (FDI) are among the key for a modern economy, and a supportive business environ- factors correlated with innovation. Many green technologies are ment and sufficient capital mobility to ease firms’ entry and embodied in imported capital goods, machinery and equipment. exit. Efficient labor market regulation and strong human Foreign trade opens the gate for technological advances as new capital are critical for the green growth transition as labor technologies embedded in imports help modernize the existing resources should be easily reallocated to more dynamic capital stock, while new markets offer scale economies from sectors; and urban concentration facilitates that mobility. export expansion. Access to modern communication means is Business regulation defines the private sector capacity to another significant factor of innovation. Finally, country’s capac- create jobs in response to changing prices and markets while ity to absorb knowledge, reflected in such characteristics as other supporting indicators are a current focus on manufac- research and development (R&D) expenditures, the percentage turing rather than agriculture (which tends to respond slowly) of researchers in the population and patent applications, is a and energy pricing that covers costs (as a first step towards critical component of its innovation potential. reducing energy sector emissions). Lastly, global links need to be strong. Openness to trade facilitates new technology FYR Macedonia’s connections to global knowledge and transfer and replacement of more obsolete capital stock.28 readiness for an innovation revolution are insufficient, by these indicators. Although the foreign trade-to-GDP ratio in FYR 27. The parallels between trade shocks and greening of growth are also proposed in a recent paper: Porto, Guido. 2012. “The Cost of Adjustment to Macedonia increased from around 62 percent in the early 1990s Green Growth Policies: Lessons from Trade Adjustment Costs.” World Bank to around 100 percent by 2010, the country remains less open Policy Research Working Paper 6237. Washington, DC: World Bank. than such economies as Hungary, Slovakia, the Czech Republic, 28. Openness to trade and the nature of trade are important for a variety of reasons. Greater openness (such as lower tariff rates) allows for easier Slovenia, Lithuania and Bulgaria. In recent years, FYR Macedonia technology transfer and adoption, often embedded in capital equipment. A focus on manufactures exports makes such transfer more likely. Trade allows for outsourcing of pollution—carbon leakage or trading. Greater dependence on imported fuels and minerals reduces the ability of the economy to adjust quickly and with modest cost to higher fuel prices. W hat is Green Growth, and How Green is F Y R M acedonia? A Benchmarking E x ercise 13 attracted FDI of about 2 percent of GDP, which is close to the country that merit more serious analysis and consideration. sample average but far below the level needed to achieve Further, a country pursuing green growth might find occa- investment-driven accelerated growth today or strong global sional benchmarking of value to measure relative progress. links into the future. While FYR Macedonia’s potential in the It would likely be most useful if supplemented with a locally- energy sector and in the broader green economy is significant, designed results framework, populated with local detailed FYR Macedonia will need to craft appropriate policies to take data. In some instances, it may be necessary to develop and advantage of these opportunities. For access to modern com- collect new and better data to enhance monitoring. With this munication, FYR Macedonia lags behind neighboring countries: benchmarking exercise as evidence, the Macedonian govern- its broadband subscription level (subscribers per 100 people) ment might consider the use of these and similar indicators, is 2.5 times below that of the EU. FYR Macedonia also needs and the development of a results framework populated by to enhance its knowledge absorption capacity: currently it lags indicators, to support the implementation of its National behind countries like Denmark and Switzerland by a factor Strategy for Sustainable Development.29 greater than 10 in the indicator of researchers per million of population; it has a very low level of R&D expenditures—the FYR Macedonia faces numerous challenges in building its lowest level of patent applications by population in Europe green growth path. One complicated area is unsustain- (among countries with available data). These issues, while able use of resources. The Macedonian economy suffers important, reach beyond the scope of this report. from decades of unsustainable usage of resources including moderate water stress created by high water withdrawals, low agricultural productivity including low cereal yield, a RECOMMENDATIONS high level of pollution, insufficient ecosystem protection, and, more recently, rather high rates of metal extraction. This benchmarking exercise identified a selected set of 29. FYR Macedonia’s National Strategy for Sustainable Development issues within the broad green growth agenda on which FYR (NSSD), adopted by the Government in 2010, pulled together analysis Macedonia should focus as it considers how to move onto across 11 sectors and six themes to provide an integrated strategy aimed at economic growth, environmental stewardship, and social progress, a a greener growth path. Mapping FYR Macedonia against combination that now is often called ‘green growth’. The strategy declares that social, economic and environmental goals should be complementary comparator countries and country group aggregates allows and interdependent throughout the development process, a concept lying policymakers to consider the country’s relative standing on at the heart of the concept of sustainable development. It aims to provide an effective framework on how to plan and implement sustainable development, the three aspects of measuring ‘green-ness’: (i) How green? offering an overall umbrella for policies and strategies across various sectors. Submitted to the EU as part of candidacy requirements, the NSSD (ii) Going green, and (iii) Riding a green wave. Benchmarking recommended that the government develop an integrated policymaking is, of course, only a starting point, making use of existing data approach and combat a lack of awareness on sustainable development issues. The new analysis synthesized in this report will be used to revise the to highlight in a quick fashion the key aspects for a particular NSSD and generate a prioritized action plan for implementation. Good Practice Box 1. Achieving green growth objectives through innovation and R&D policies in Norway The Norwegian green growth strategy aspires to achieve green objectives through innovation and sees innovation as a process of building a creative society, which puts human wellbeing and sustainability at the center.a Three areas of innovation are prioritized—entrepreneurship, business growth and innovative environment building—and six sectors are targeted: energy and environment, oil and gas, healthcare, agriculture, marine, maritime and tourism. In line with the strategy, a new environmental technology scheme supporting enterprises which conduct pilot research was launched with funding of US$ 80 million. More research funds are now allocated to the development of environmental technology. A Strategy Council for Environmental Technology was set up and a national strategy for environmental technology prepared.b The users of the new technologies are involved in the development of innovation programs, increasing the program quality and leading to strong and continued stakeholder support. Also, the Norwegian Research Council’s new strategy for innovation for 2011-2014 was adopted. It emphasizes public sector innovation and innovation through procurement and focuses on competitive Norwegian sectors, such as energy, marine, and maritime. Source: Background information from the Green Growth Best Practice Initiative, Green Growth Best Practice Assessment Report 2013. Seoul: GGBP. a. See the 2008 white paper on Innovative and Sustainable Norway by the Norwegian Ministry of Trade and Industry. b. Towards a New Innovation Policy for Green Growth and Welfare in Nordic Region. 2012. Oslo, Norway: Nordic Innovation. Available at http://www. nordicinnovation.org/Global/_Publications/Reports/2012/2012_02%20Towards%20a%20new%20innovation%20policy%20for%20green%20growth%20 and%20welfare%20in%20the%20Nordic%20Region.pdf, accessed on 10 July 2013. 14 F Y R M aced onia Gr een Grow th Country A ssessment Policymakers need to consider when drawing down natural Rigidity of the economy will prove an obstacle to green capital in the interest of economic growth is a wise trad- growth. It will be important for the success of any green growth eoff and when it is not. More investment in maintaining plans to implement a set of structural reforms, consistent with and upgrading natural assets seems warranted from the the government’s short-term growth agenda, to address the benchmarking exercise. Another area of concern is the high remaining rigidities of the Macedonian economy—creating emission intensity of the Macedonian economy. To break a truly flexible labor market, enhancing openness to trade, this pattern, substantial investments are needed, with the and continuing to strengthen the business environment, and most significant capital expenses likely to be in gas transport improving infrastructure and logistics. A last challenge, and and distribution; energy sector and large industry mod- perhaps the most difficult, is in increasing connections to ernisation; and construction of new electricity generation global knowledge and support of innovation, to bridge the facilities, mainly hydro and renewable energy. Policy reforms gap with other European countries in access to modern com- are also critical to achieve reduced emissions in the energy, munications and in support of scientific research. While the industrial, transport and household sectors. FYR Macedonia list of challenges seems long, FYR Macedonia also benefits also needs to improve its climate change adaptive capacity from advantages. The tradeoffs between high, traditionally- and reduce its sensitivity to climate change. Many of the measured economic growth and a broader definition of long improvements needed will arise naturally as part of rising term welfare are not severe in the case of FYR Macedonia; incomes, but the government does need to manage actively rather, there is much complementarity between the short term the likely impacts on agriculture, especially because of the and the long term. The country continues to implement policy large number of households still dependent on agricultural and structural reforms that will lead to more vibrant as well as earnings. The impact of a changing climate should provide more sustainable growth. Its location in the middle of Europe additional impetus to the government to modernize agricul- in itself provides substantial economic opportunities, and ture, improve infrastructure, and invest in skills. its aspirations to membership in the EU both limit its policy choices and align them with greener paths. W hat is Green Growth, and How Green is F Y R M acedonia? A Benchmarking E x ercise 15 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 2 Where is FYR Macedonia Heading? A Baseline Scenario for Economic Development to 2050 t CHAPTER SUMMARY date. This baseline is also incomplete because it fails to con- sider the damages to economic activity likely from a changing climate into the future. he baseline or business-as-usual (BAU0) scenario CHALLENGES FOR GREENER GROWTH in the absence of climate change serves as a start- ing point for comparisons of economic outcomes Overview before and after policy actions or investments. It is a hypothetical path envisaging what would happen to FYR A baseline scenario serves as a benchmark for comparisons Macedonia until 2050 under current policies and without con- of economic outcomes before and after policy actions or sidering the impact on the economy of a changing climate. The investments, but it is a purely hypothetical path that envis- BAU scenario proposed here reflects a broad consensus that ages what would happen in the case of no policy change or income per capita in FYR Macedonia will catch up gradually ‘business-as-usual’ (see Box 2.1 describing baseline scenario to European Union levels, growing at an annual average rate as compared with green scenarios). In the academic literature, of 3.4 percent between 2012 and 2050. The baseline scenario business-as-usual projections are often based on extrapo- to 2050 developed here initiates an answer to the question, lation of historical trends or adoption of steady-state GDP “Where is FYR Macedonia heading?” growth. A steady-state baseline, in which all physical quantities grow at an exogenous uniform rate while relative prices remain Total factor productivity gains are expected to be the main unchanged, would have the virtue of providing a transparent growth driver. Structural change in the Macedonian economy reference path for the evaluation of policy options. However, will be reflected in a gradual shift from primary sectors such such a path is unrealistic, especially over a long time period, as agriculture and industry towards services, although FYR limiting the usefulness of the model results to policymakers, Macedonia is to retain more specialization in these sectors who need more realistic comparisons. For example, when a in comparison to the average experience in the EU. Shifts in country decides on a target for mitigating greenhouse gases, output towards less energy and emissions-intensive sectors the target is generally defined against a base year, as a certain and rising efficiency within sectors will together drive energy percent reduction compared to that year. But such a definition and greenhouse gas emission intensities in FYR Macedonia provides little indication of the degree of challenge involved towards EU levels. While the BAU scenario incorporates cur- in meeting the target. What matters is the size of the reduc- rent information and agreed assumptions, updating will be tion compared to the level of emissions in the target year, necessary if further analysis is to be undertaken at a future which lies in the future. This expected level is a matter for W here is F Y R M acedonia Heading ? A Baseline Scenario for Economic Development to 2050 17 projections, determined by assumptions about the growth rate of emissions in the absence of additional policy—the Baseline scenario as a benchmark for Box 2.1. business-as-usual emissions baseline. Faster expected growth analyzing the impact of green interventions translates to faster rising emissions, and the higher is the Scenario analysis is used to evaluate the impact of mitigation future emission level in the absence of climate policy, the and/or adaptation actions in five overlapping sectors—water, more stringent are the effective reduction targets and, thus, agriculture, energy, transport, and infrastructure—which are the costs of abatement. then integrated into the macroeconomic or economy-wide analysis. Two initial scenarios and then two policy scenarios are constructed for the analysis. Does the Past Provide a Good Roadmap for the Future? Green scenarios. Two green policy and investment scenarios— ‘Green’ and ‘Super Green’—are formulated in a bottom-up FYR Macedonia’s historical trends are important inputs fashion based on the specifics of each sector, as part of the into the construction of the baseline scenario, and the sector analysis. For each sector, the Green and Super Green recent disturbances in longer term trends due to the global scenarios involve government policies and investments to crisis make this exercise complicated. FYR Macedonia’s address greenhouse gas emissions mitigation and adaptation steady growth during the pre-crisis period of 2004-2008 to climate damages. They constitute a package of ambitious but practical actions to abate emissions and counter climate was followed by a mild recession in 2009. Then the gradual change. The Super Green scenarios are very ambitious and recovery to near 3 percent during 2010 and 2011 became more expensive packages, generally requiring more aggres- increasingly threatened by the worsening Euro zone outlook. sive implementation of green measures or wider coverage of Southern Europe suffered most from this downturn, and such measures. The sector scenarios are then combined into FYR Macedonia’s 2012 GDP growth was pushed below 0.5 economy-wide green scenarios. percent. Without the last two years, the average growth rate in FYR Macedonia in the 2000s would reach 3.2 percent on Business as Usual (BAU) scenarios (see Chapters 2 and 3). The policy (green) scenarios are compared to BAU, a baseline sce- average. However, due to improved business climate efforts nario, which extrapolates current economic development trends to attract investment, the medium-term growth outlook for for FYR Macedonia to 2050 and also accounts for climate change FYR Macedonia is relatively positive, with growth projected projections. Sometimes called a ‘no policy change’ scenario, the to rebound in 2013-2014 and reach 3.5 percent in 2015. Also, BAU scenario is built as an extrapolation of current economic from a broader, global perspective and considering the trends without considering climate damages (the BAU0 scenario). experience of fast growing middle-income economies in Even under BAU, however, key sectoral inefficiencies must be East Asia and selected African countries, FYR Macedonia addressed to allow the economy to reach a consensus growth path. Then the scenario is adjusted for climate change to create can be seen to possess significant reserves that could speed the final BAU scenario. up GDP growth. Similar to other countries moving towards EU membership in the past, FYR Macedonia may well reap substantial benefits from ever-closer economic integration Figure 2.1. Recent turbulence makes projections with Europe (See Figure 2.1). more difficult Economic convergence is a reality for the European Union. Macedonian growth path Although there is no agreement over whether economic 25 convergence of nations holds overall, the European Union has demonstrably fostered strong convergence among its 20 members and also, to some extent, on candidate countries. Projection growth, in % 15 The ‘catch-up’ hypothesis is driven by the assumption that productivity growth rates vary inversely with productiv- 10 ity levels. Then it follows that the convergence process stems from lower initial income levels, higher returns on 5 capital, and substantial potential to improve labor partici- pation and productivity, while the country benefits from 0 2008 2009 2010 2011 2012 2013 2014 2015 a diffusion of global technological progress. Over a long -5 forecasting period, such as the 40-year horizon used in this analysis, convergence is a convincing and practical GDP Gross Investment approach to predicting what any individual economy might look like in the distant future. Source: Staff calculations. 18 F Y R M aced onia Gr een Grow th Country A ssessment In the water sector, lack of control over groundwater has led to What should FYR Macedonia do to catch up its unsustainable usage, free of charge, by agriculture, mining with the European Union? and industry. In agriculture, farm fragmentation and inad- equate land markets have encouraged unproductive land use. A set of essential reforms is needed for FYR Macedonia to In addition, unregulated and careless farm practices has led catch up with EU countries over time, and the baseline scenario to soil fertility problems, such as erosion, soil-born pests and assumes progress. Across sectors, the largest productivity gains diseases, and soil pollution by fertilizers, seriously affecting that are implicitly included in the baseline will come from tackling agricultural productivity. In transport, public transportation is three major problems of the Macedonian economy: (i) outdated almost non-existent, including in cities, exacerbating over-use and broken down assets that need to be refurbished or replaced; of private vehicles. (ii) some prices below cost recovery level; and (iii) an insufficient legal and institutional framework. All these reforms will require FYR Macedonia is a relatively small and open economy; policy support, and some will require substantial investments. hence, productivity improvements and projected further Their full implementation is a long-term task. declines in energy and carbon intensities will be byprod- ucts of trade and international technology spillovers. Those Essential sectoral assets are run down, leading to lowered spillovers will occur automatically through new investment, productivity. Assets have outlived their lifespan and have not because most capital machines and equipment are imported; been maintained properly since for decades. In agriculture, this and even if not new, they will be newer and more efficient than relates to irrigation systems, which do not provide adequate the existing Macedonian capital stock. Assuming a five percent coverage of the irrigation needs and are dilapidated. At the depreciation rate of existing capital, the total capital stock in same time, irrigation is essential for expanding production of FYR Macedonia would be replaced in about 20 years, and this high-value crops, which is the core objective of the sector reform. process will repeat during the next 20 years. Therefore, the In the water sector, the supply systems are broken down, causing energy and carbon intensity of the economy will improve via unreliable water supply and water losses. This creates economic the trade channel, which will provide technological spillovers losses throughout the economy, affecting productivity of all via embedded technical progress. Thus, innovation in the water-consuming sectors including the household sector. Low EU—its main trading partner—or elsewhere in the world will quality roads and railways cause problems with connectivity, spread to FYR Macedonia. negatively affect safety of transportation, and, as a result, impose additional cost on the economy. This is exacerbated by a growing As will be outlined in each of the sectoral chapters below, prevalence of old fuel inefficient personal vehicles, which adds FYR Macedonia will achieve increased employment, boost its to the safety problem and increases the cost of transportation. long-term economic growth, and make progress toward the In the telecommunications, outdated assets negatively affect EU requirements for the country’s accession to Europe if the both present and future competitiveness of the country in the problems described above are tackled. FYR Macedonia has increasingly technology-based global economy. already committed to specific plans and a schedule of actions in energy, renewable energy, competition, and the environ- Pricing key inputs below cost recovery level means high ment by ratifying the Energy Community Treaty for South East level of subsidization, both implicit and explicit, which is Europe in 2006. Actions in other areas will be added to this burdensome for the public sector and discourages private list of commitments as the country moves closer to European investment. Water tariffs do not cover the cost of water supply, Union membership. with resulting negative net revenue of the water utilities. While a good tariff methodology has been approved as a law, it is yet to be applied. Gas sector liberalization has been delayed, and METHODOLOGY AND MAIN FINDINGS gas pricing is inefficient, leading to lowered demand for gas, which could be a major component in the future Macedonian Methodology fuel mix, reducing the prices of energy. Electricity prices in the industrial and commercial sectors reached cost recovery, The baseline scenario for FYR Macedonia 2050 reflects a broad but the process of power tariff increases in the household consensus that income per capita in FYR Macedonia will catch sector, after significant progress during 2008-2012, has stalled. up gradually to EU levels, growing at an annual average rate of District heating prices are also below their cost recovery level. 3.4 percent during 2012-2050. Future economic trends in FYR Macedonia are expected to follow broadly the trends observed A poor legal and institutional framework is yet another prob- in countries that in the past had comparable income per capita lem that must be overcome to reach EU levels of productivity. levels to FYR Macedonia today. These trends include a shift W here is F Y R M acedonia Heading ? A Baseline Scenario for Economic Development to 2050 19 from primary sectors such as agriculture and industry towards data. Then projections of the key variables for the EU27 and services, quickly rising labor supply and labor productivity in the FYR Macedonia through 2050 were generated based on the near term, moderating over the long-term; sustained total factor growth trends for the EU adjusted by the convergence rates productivity growth, and a strong contribution from capital. for each sector. Once the convergence process is completed, i.e., the country reaches the average EU level, it continues to Total factor productivity gains are expected to be the main grow at the average, trend rate. growth driver in FYR Macedonia through 2050. The projected growth trajectory is consistent with long-term total factor Main findings productivity (TFP) growth rates of about 2.3 percent in FYR Macedonia and 1.5 percent in the EU. The latter assump- The structure of output will gradually shift from primary tion reflects a reduced growth potential due to the recent sectors such as agriculture and industry towards services by crisis. Smaller positive contributions to growth are to stem 2050. This pattern derives from the general growth pattern from capital accumulation during the projection period. A observed in more advanced EU countries in the past and other positive contribution from labor is expected only in the 2010s high-income countries outside Europe over recent decades as and 2020s, when increases in the employment rate from its incomes were rising. The sector projections were generated current extremely low level (of 39 percent in 2010) outweigh based on historical data as a starting point and adjusted by the negative effects of an aging population. In the following the projected convergence rates for each sector, calculated two decades, the contribution of labor will become negative, using regression techniques, as noted above. Following while over the same time period, both GDP and TFP growth experts’ judgment, a few modifications were introduced to rates begin to moderate. (See Figure 2.2). the sectoral pattern—given that the regression sample was from the pre-crisis period, the share of finance and business The baseline scenario through 2050 was estimated services was kept stable rather than increasing to the very econometrically, based on continuation of the trends high levels observed in the EU pre-crisis. (See Figure 2.3). and convergence processes observed in the EU and FYR Macedonia in the recent past. The business-as-usual scenario Despite moving towards the economic structure of the EU, (before consideration of climate change, the BAU 0 scenario) agriculture and industry will continue to have a higher share assumes that FYR Macedonia will continue to converge in the Macedonian economy than in the EU today, and this towards the economic structure of the average EU country will be reflected in employment. The share of agriculture and in line with the path experienced by EU members in the agro-industry in value-added is projected to decline from 17 recent past. Using data for EU countries and FYR Macedonia percent in 2010 to about 10 percent in 2050, a level three times during 1996-2006, panel regressions estimated the pace of higher than the average in the EU. At the same time, the share convergence across 11 sectors for value-added share, energy intensity, and emission intensity. Long-term growth trends Structural shift from agriculture Figure 2.3. for the 27 EU countries were estimated based on the same towards services will continue, but agriculture share in total output will remain relatively high Productivity growth and capital Figure 2.2. Structure of value-added by sector investment will be the major sources of long-run growth 100 90 Value-added decomposition, annual growth in % 80 percentage 70 60 4.0 50 40 3.0 30 growth, in % 2.0 20 10 1.0 0 1998 2001 2007 2010 2013 2016 2019 2022 2025 2028 2031 2037 2040 2043 2046 2049 2004 2034 0.0 1998 - 2010 2011 - 2020 2021 - 2030 2031 - 2040 2041 - 2050 - 1.0 Other Public Fin. and Construction services services bus. services Trade Mining Transport Energy Total factor productivity Capital Labor and Fuels Light industry Heavy industry Agriculture Value added Source: Macroeconomic technical paper. Source: Macroeconomic technical paper. 20 F Y R M aced onia Gr een Grow th Country A ssessment of light and heavy industry is to increase from 13 percent to 16 will benefit from the new technologies developed elsewhere, percent over the next four decades, reflecting the country’s even without adopting state-of-the-art technologies, since comparative advantage in these sectors. Finally, the shares any new vintage of capital is usually more energy efficient of construction, public, financial, and other services will rise than the previous one. gradually. These trends in value-added, together with changes in labor productivity, will be reflected in the sectors’ shares of employment. Employment shares in agriculture, industries, RECOMMENDATIONS and energy are projected to decline, while there will be a higher share of employment in services and construction. A business-as-usual scenario is the foundation of any analysis of alternative policy and investment paths. Since Energy and GHG emission intensities in FYR Macedonia the baseline is so critical to analytic results, it is particularly will also converge towards EU levels. Sectors vary in their important that the method of construction is transparent, that energy and carbon intensities (defined as the ratio of energy assumptions such as future world energy prices are frequently consumption or GHG emissions to value-added in a given reassessed, and that alternative baselines are explored. The sector). A unit of output produced by heavy industry usually scenario needs to be updated whenever its assumptions have requires more energy (and, hence, more emissions) than a unit become stale or whenever policymakers or analysts change of output in services. The energy and emissions intensity pro- their views about the likely path forward for the economy jections for FYR Macedonia in 2050 are fairly conservative and in the absence of any policy change. Importantly, the BAU 0 assume gradual improvements in energy and carbon intensity scenario is not an accurate forecast of the future until the likely levels over time. The efficiency gains will be slower in the years impact of a changing climate on economic assets and activity ahead as compared to those FYR Macedonia experienced in is incorporated. (See the next chapter). the past decade. The picture depicted by future energy and carbon intensity portrays a partial decoupling of energy and GHG emissions from GDP growth, as emissions grow but more slowly than output. (See Figure 2.4). The projected energy and carbon efficiency improvements over the next 40 years will be largely channeled through imports of investment goods (with embedded new tech- nologies). With robust economic growth through 2050, value-added in FYR Macedonia is to increase by a factor of 4, energy use by a factor of 3, and emissions by a factor of 2, all relative to 2010. As a small open economy, FYR Macedonia Energy and emissions will be partly Figure 2.4. decoupled from GDP growth Value-added, energy consumption, and GHG emissions, Year 2010=1 4.0 3.9 3.5 3.2 3.0 growth index 2.5 2.0 2.1 1.5 1.0 0.5 1998 2002 2006 2010 2018 2022 2026 2030 2038 2042 2046 2050 2014 2034 Value Added Energy Emissions Source: Macroeconomic technical paper. W here is F Y R M acedonia Heading ? A Baseline Scenario for Economic Development to 2050 21 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 3 How Will a Changing Climate Affect FYR Macedonia’s Future? A Climate-Sensitive Baseline a CHAPTER SUMMARY The BAU scenario improves the baseline by bringing it closer to the likely evolution of the Macedonian economy in the absence of policy change. However, in addition to the uncertainty of a simple baseline, the incorporation of more complete business-as-usual (BAU) some main avenues for climate damage into the scenario scenario starts from the BAU0 scenario set compounds the complexity of the forecast and greatly out in Chapter 2 and aims to capture the raises the degree of uncertainty surrounding the scenario. main elements of the impact of projected climate change on FYR Macedonia’s economy to 2050. 30 A baseline that ignored climate damages over the next 40 years CHALLENGES FOR GREENER GROWTH would be inaccurate. The climate-sensitive BAU scenario sets the appropriate baseline against which to assess adaptation Overview measures to recover from those damages and addresses the important question, “How will a changing climate affect FYR A changing climate is expected to impose damages on Macedonia’s future?” economies. Those damages can come from extreme weather events: floods and storm surge, heat waves Projected climate change will affect FYR Macedonia’s and wildfires, and sea level rise; and related events such economy mainly from a direct shock in agriculture and as the spread of disease. The damage can come from associated spillovers on other sectors in the economy, reductions in productivity driven by, for example, growing and to a lesser extent due to losses caused by extreme water scarcity. The damage can be directly to people, events. Growing water shortages will dampen crop yields to their houses and possessions, or to infrastruc ture and agricultural incomes. These losses are projected to and capital. Estimates of global costs to world GDP increase in absolute value, but they will decrease as a ratio in 2050 related to a changing climate generally do not to GDP because of the shrinking role of agriculture over exceed 2 percent. The impact of a changing climate on the next four decades. As the country becomes drier and the Balkan Peninsula, for which little analysis has been hotter, the risk of floods will diminish but the risk of wildfires undertaken to date, can be expected to resemble that for will increase. Due to climate damage, the level of GDP in the Mediterranean region, where economic losses by the 2050 is estimated at around 0.6 percent below the BAU 2080s are projected at not more than 1.5 percent of GDP. 31 scenario level. 31. See macroeconomic modelling technical papers for a review of global 30. See Box A and Box 2.1 describing modeling scenarios in this study. estimates. H ow W ill a Changing Climate A ffect F Y R M acedonia’s Fu ture ? A Climate -Sensitive Base line 23 While GDP losses due to climate change have not before been quantified at the national level for FYR Macedonia, METHODOLOGY AND MAIN FINDINGS the country’s latitude and geography would argue that rising temperatures and less rainfall accompanied by more Methodology extreme weather are most likely to dominate the climate future. Scarcer water and hotter summers could well put Future climate scenarios were developed, showing rising agriculture, a major employer and important economic sector temperatures and falling precipitation. Climate baselines were in today’s FYR Macedonia, at risk and might also have direct developed using climate data for each of FYR Macedonia’s 16 health impacts. More variable weather would increase dam- river basins, derived from monthly historical temperature and ages to infrastructure and people from weather extremes precipitation observations from the country’s 22 meteorologi- such as floods, droughts and wildfires. cal stations for 1961 to 2000. The baselines were combined with projections of changes in temperature and precipitation The business-as-usual scenario derived in Chapter 2 is not obtained from Global Circulation Models (GCMs) to create an accurate baseline for FYR Macedonia’s future growth daily and monthly time series of future climate from 2011 to because it ignores the impact of a changing climate on 2050. Three climate scenarios are used--low impact, medium economic performance. Although incorporating climate impact, and high impact--based on the most positive, the change into growth scenarios is a challenging task with no median, and most negative changes in the climate moisture agreed methodology, the failure to do so would make it dif- index (a measure of aridity) from the baseline to 2050 across ficult to consider the positive impacts of adaptation policies 56 available combinations of GCMs and scenarios employed and investments, a key part of a greener growth path. Those by the Intergovernmental Panel on Climate Change (IPCC) investments are meant to recover some of the lost output and (See Figure 3.1). employment caused by climate damage. Figure 3.1. A hotter and drier future is likely Three scenarios for future temperature and precipitation through 2050 Temperature for the Continental AEZ 13.5 Base Low 13 Medium High 12.5 Temperature (°C) Precipitation for the Continental AEZ 12 60 58 11.5 56 Precipitation (mm) 11 54 10.5 Base 2010s 2020s 2030s 52 Decade 50 Base 48 Low Medium High 46 Base 2010s 2020s 2030s 2040s Decade Source: Water sector technical paper; Agriculture sector technical paper. 24 F Y R M aced onia Gr een Grow th Country A ssessment Two kinds of losses from a changing climate were consid- the hotter months, for drinking, bathing, cleaning, and for ered—from extreme weather events and from agriculture. support of gardens and lawns. In the thermoelectric sector, To estimate the impact of the changing climate on FYR where water is used for cooling, higher water temperatures in Macedonia’s economy, a production function approach proved rivers can reduce its efficiency as a medium for heat dispersion. to be helpful. With that framework in mind, extreme weather events can be seen as harming mainly physical capital–the Losses in agriculture will result mainly from the projected stock of buildings and machinery required for production. water deficit. Once translated into water flows, the predicted On the other hand, there are losses in agriculture that directly changes in climate from Figure 3.1 are forecast to depress harm crops and production in that sector. Consequently, the annual runoff by 18 percent against the baseline by 2050. flow of GDP in the agriculture sector should be adjusted by Competing demands for water were assessed across growing expected losses. Agricultural losses were assessed using municipal and industrial water use, irrigation demands, hydro- a linked series of models. The climate projections from the power demands, and environmental flows. Unmet demands GCMs were used to estimate runoff, crop yields, and irriga- create sector losses, which can be translated into changes in tion demand and other sector demand for water, including GDP and employment. Note that while the absolute values of hydropower. The outcomes of this set of models—revenue agriculture losses per employee continue to rise through 2040, from crop production and hydropower—were then translated those losses constitute a declining share of GDP (as agriculture into impacts on GDP. (See Chapter 4). Future losses from occupies a shrinking share of total output) (Figure 3.2).33 extreme weather events for FYR Macedonia were approxi- mated using data for the Balkans and Mediterranean countries Figure 3.2. While agriculture losses per employee as well as global data from the EM-DAT database.32 For flood rise, those losses constitute a declining share loss calculations, a log-normal distribution was assumed with of GDP, as agriculture occupies a shrinking an expectation is about 0.88 percent of GDP loss per flood, share of total output. while for wildfires, the Generalized Extreme Value distribution Agriculture losses as a percentage of GDP was used, assuming an average cost of wildfires of 0.26 percent and per employee of GDP. Wildfires are correlated with the annual maximum of consecutive dry days. Based on the assumption that wildfires 1.52 8,000 Euro 2010, PPP, per employee occur if the annual maximum number of consecutive dry days 1.50 Percentage og total GDP 7,000 exceeds 40, the probability of losses will increase significantly 1.48 6,000 in the next few decades. 1.46 5,000 1.44 4,000 Main findings 1.42 3,000 1.40 Climate change is likely to exert its major impact on FYR 1.38 2,000 Macedonia’s economy via water supply, through changes in 1.36 1,000 rainfall amounts as well as temporal and spatial patterns. 1.34 0 2020 2030 2040 Temperature changes are also important in determining the available water supply for the country, because higher tem- % of total GDP per employee peratures cause higher levels of evaporation in natural lakes and man-made reservoirs. Climate change also affects water Source: Water sector model outputs and staff calculations. demand in the agricultural, municipal, and thermoelectric sectors. Crop irrigation requirements are affected by both The type of extreme weather event for which FYR Macedonia temperature and precipitation, as water demand is directly is at greatest risk will shift from floods to heat wave and linked to both crop yield and to evapotranspiration. Climate wildfires. Distribution analysis of annual temperature and also affects the timing of water demands. Recent warming has precipitation suggests that FYR Macedonia will be drier and led to the presence of higher spring temperatures. As a result, hotter (Figure 3.3). Based on this projection, floods will occur Macedonian crops now some years begin to demand water less frequently and heat waves and wildfires more frequently in April instead of May, and irrigation water demand peaks than they do now. Climate models anticipate a substantial shift in June instead of July – further, much water demands are in annual maxima of number of consecutive dry days, which sustained through August. Continued warming will exacerbate is strongly correlated with wildfires. That shift is so important these changes. Municipal demands for water increase during that it implies the expected losses from wildfires will almost equal losses from floods by 2050. 32. An Emergency Events Database maintained by WHO’s Collaborating Centre for Research on the Epidemiology of Disasters (CRED). 33. See Chapter 4 on water. H ow W ill a Changing Climate A ffect F Y R M acedonia’s Fu ture ? A Climate -Sensitive Base line 25 Figure 3.3. FYR Macedonia is projected to Figure 3.4. Projected climate change, including become drier and hotter extreme weather, leads to a 0.6 percent drop Generalized extreme value distribution shift in GDP. of maximum annual number of consecutive dry days Difference in GDP and extreme weather events between (with precipitation of less than 0.5 mm ) BAU and BAU0 8 0.1 2011 - 2020 2021 - 2030 2031 - 2040 2041 - 2050 7 6 0.0 percentage 5 4 -0.1 3 2 -0.2 percentage 1 0 -0.3 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 -0.4 1971-1980 2021-2030 2041-2050 -0.5 Source: Macroeconomic technical paper. -0.6 In the BAU scenario, the level of GDP in 2050 is estimated at -0.7 around 0.6 percent below the BAU0 scenario, while the loss Extreme weather events Agriculture Total in physical capital reaches about 0.2 percent relative to the partial baseline derived in the previous chapter. The rising cost of wildfires is more than offset by the milder and less Notes: BAU is the business-as-usual scenario including the impact of a changing climate. BAU0 is the business-as-usual scenario without the frequent floods in the future, resulting in less physical capital impact of a changing climate. being destroyed and adding slightly to GDP. At the same Source: Macroeconomic technical paper. time, more frequent and severe droughts lead to significant losses in agriculture. (See Figure 3.4). RECOMMENDATIONS These results suggest that over the next few decades, avenues for climate damage into the scenario compounds protection against droughts and wildfires will be of grow- the complexity of the forecast and greatly raises the degree ing importance. Farmers will be more likely to suffer severe of uncertainty surrounding the scenario. The GCMs involve losses of crops due to droughts. Although the Macedonian much uncertainty, both around future emissions levels and the economy will grow, and thus losses will be less perceptible impact of emissions concentrations on climate as well as the for the average inhabitant, they will touch farmers more and downscaling to a particular country. Data on the distribution of more intensively. As farmers are the poorest group of society, losses from extreme events—in particular, floods and wildfires more attention should be devoted to designing policies and in the Balkans—is limited. Policymakers will need to have programs that might protect them from significant loss of confidence in the BAU scenario if it is to be used for policy income resulting from the severe droughts that will occur analysis, and sensitivity analysis and updating would be wise more frequently in the future. (See Chapter 5). Furthermore, measures if the scenario is to be maintained for a long period. in coming years, more attention will need to be paid to the protection of people and capital against wildfires. The BAU scenario improves the baseline by bringing it closer to the likely evolution of the Macedonian economy in the absence of policy change. However, in addition to the uncer- tainty of a simple baseline, the incorporation of some main 26 F Y R M aced onia Gr een Grow th Country A ssessment H ow W ill a Changing Climate A ffect F Y R M acedonia’s Fu ture ? A Climate -Sensitive Base line 27 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 4 Will Water Shortages Constrain Growth? a CHAPTER SUMMARY are compared to the business-as-usual scenario. The Green scenario presumes policies and investments consistent with EU membership requirements, including more hydropower to meet mitigation obligations, investments in storage, water conservation, upgrading of irrigation and drainage, and well-func tioning water sec tor in FYR improved crop varieties. The Super Green scenario includes Macedonia is essential for the economy, more ambitious adaptation measures including substantial especially for the agriculture sector, but new irrigation infrastructure. The analysis finds that water projected climate change will deepen water supply shortages are likely for all water-consuming sectors scarcity. Current water withdrawal levels create moderate unless adaptation Is undertaken. Competition for water stress on limited national water resources, with climate change between agriculture (especially as the climate warms and exacerbating scarcity. Water sector assets, including irriga- dries), the power sector (for hydropower, a critical element in tion infrastructure, are old, unreliable, and dilapidated; and a lower emissions electricity system, and for thermal cooling), seasonal water shortages reduce productivity of all water- and industrial and municipal uses will pose difficult tradeoffs consuming sectors. The accumulated backlog of maintenance for Macedonian policymakers by 2020 unless efficiency in and rehabilitation of water sector infrastructure now totals both demand and supply is bolstered. almost four percent of GDP. Agriculture, mining, and industry, in an attempt to avoid economic losses due to irregular supply Water shortages will worsen into the future; and, despite from water utilities, have turned to widespread and unsustain- action on adaptation, gaps between supply and demand able use of groundwater. These challenges raise the important will persist, especially for some basins. The overall demand- question, “Will water shortages constrain growth?“ supply gap in the water sector must be managed through green actions in all water-using sectors, with a big emphasis The analysis is aimed at evaluating green (adaptation) on improving efficiency and strengthening conservation. policies and investments in the water sector and two main Green action can constrain irrigation water demand only water-consuming sectors: agriculture and power.34 Several modestly but with high variance across basins. In irrigation, interlinked models are used in the analysis: Global Circulation green (adaptation) investments will reduce water demand Models (GCMs), Water Evaluation And Planning (WEAP) by implementing basin-scale irrigation improvements and model, a water run-off model (CLIRUN) and an agricultural drainage infrastructure upgrades, replacing and rehabilitating yield model (AquaCrop). Two green (adaptation) scenarios broken-down assets of the current irrigation infrastructure and creating a new irrigation system, adequate for a modern 34. The same modeling was used for the agriculture sector analysis, and Chapter 5 provides more detailed outcomes for agriculture. See also system of farming. Despite adaptation measures, a changing Chapter 6 on the power sector, which provides complementary analysis. W ill Water Shortages Constrain Growth ? 29 climate will affect the availability of cooling water for some Figure 4.1. Agriculture is the top water thermoelectric power plants, and the expansion of hydropower consuming sector that will help clean up the energy sector will not be possible Total annual freshwater withdrawals in FYR Macedonia, without coordinated water-saving measures across sectors. shares by sector An ambitious Super Green program of adaptation action can 1% reduce unmet water demand by half by 2050. Implementing measures aimed at municipal and industrial water conserva- tion are critical. The top benefits will come from packaging together the investments and policies described above, thus 27% Agriculture enhancing their individual benefits. The growing scarcity of 43% Municipalities water can be addressed, first of all, by reducing inefficiencies Industry through pricing and regulation of groundwater and through rehabilitation and maintenance of existing infrastructure. 29% Power Growing seasonal scarcity can be managed through invest- ment in more storage (for irrigation and for hydropower), while overall shortages in future decades can be addressed through encouragement of water conservation. Source: Agriculture sector technical paper. Current water withdrawal levels create moderate water CHALLENGES FOR GREENER GROWTH stress, Agriculture and a relatively low level of national water resources Municipalities increases the need for adaptation measures in the water Overview sector. Annual freshwater withdrawals as a percentage of total internal water resources–16.1 percent–places FYR Macedonia With hot dry summers and somewhat limited water, FYR in the category of countries with moderate water stress, Macedonia needs a water sector35 that can sustain agriculture indicating that improvements in water supply and demand but also provide resources to industry and the power sector management, as well as investments in sectoral assets, might and drinking water for municipalities.36 Irrigation is critical for be required.39 FYR Macedonia’s level of freshwater withdrawals agriculture, especially since its high value-added segments are is also high for the region, at 40 percent above the comparator mainly in irrigation-intensive crops.37 At the same time, most average (Figure 4.2). This pattern is driven by the relatively low irrigation water is currently used for the production of rice, a level of overall water resources per capita in FYR Macedonia. very water-intensive crop with low value per area of land and very low value per unit of irrigation water consumed. Irrigation Many water sector assets are old, unreliable, and dilapidated, water demand is high and makes agriculture the top water and the system of irrigation outdated. Most damaging for the consuming sector in FYR Macedonia with 43 percent of total economy is the condition of irrigation assets since irrigation is freshwater withdrawals. It is followed by the municipal water key to today’s agricultural production as well as to expanded demand, accounting for 29 percent of water withdrawals, and production of high-value crops, which are considered to be then by industry consuming 27 percent of the total amount of FYR Macedonia’s comparative advantage. Since the 1980s, water used, in particular, mining, metallurgy, chemicals, and irrigated area in the country has shrunk, and the majority textiles). The remaining one percent is attributed to cooling for of irrigation infrastructure has been abandoned. Currently, the thermal power sector (Figure 4.1). In addition to these water- only one-quarter of land suitable for irrigation is actually using sectors of the economy, FYR Macedonia’s mountainous irrigated,40 and much of that depends on local groundwater landscape has long supported hydropower generation, which wells for supplemental water.41 Much of the existing irrigation remains an important source for electric power, providing 20 infrastructure consists of pipes and canals that are often not percent of electricity generation.38 Also, water ecology requires operational, located too far from current agricultural fields, a level of flow defined by existing environmental norms for and use outdated equipment, such as standpipes designed ecosystem maintenance. for mid-20 th century agriculture. 39. This indicator is significantly affected by the size of the country’s water 35. The water sector is defined here to include water-related impacts on resources; therefore the data are more indicative for countries that are at agriculture (especially irrigation, but also water use efficiency and drainage), the either end of the scale of total resources: scarcity or abundance, while energy (mainly hydropower), and municipal and industrial water supply. FYR Macedonia is in the middle of the range. 36. Problems with municipal water supply are discussed in Chapter 8 on 40. 162,500 ha have or had infrastructure for irrigation. But only 127,000 ha urban issues. are considered suitable for irrigation, and 33,000 ha are irrigated. See World Bank (2011). 37. More information about irrigation can be found in Chapter 5 on agriculture. 41. Data on groundwater wells is very sparse. Estimates suggest that up to 38. More information about hydropower can be found in the Energy chapter. half of irrigated areas rely on groundwater sources (local wells). 30 F Y R M aced onia Gr een Grow th Country A ssessment Water withdrawal level creates Figure 4.2. Dealing with Sector Inefficiency in the Context moderate water stress of Green Growth43 Annual freshwater withdrawals, % of resources, by country, 2009 40 Climate change is projected to exacerbate water supply shortages, placing water and water-consuming sectors at 35 % of internal resources the heart of vulnerability to climate change. Future weather 30 is expected to reduce supply and increases demand for water. 25 Water shortage is already an issue in the southeast of the 20 country, the area where desertification has already started 15 (the Krivolak Semi-desert) and also in the northeast. Irrigation 10 across the southeast is suspended regularly. Municipal water 5 supply in the cities of Negotino, Kavadarci and Radovis in the southeast, as well as in Kumanovo in the northeast is often 0 cut due to shortages. Water resources are currently abundant Serbia Croatia Latvia Slovak Republic Russian Federation Sweden Slovenia Romania Albania Austria Switzerland Hungary Lithuania Denmark mean Portugal Greece Czech Republic Macedonia, FYR Turkey Poland Germany Ukraine Bulgaria Kazakhstan Azerbaijan ECA EU UMC in some regions, but the dual effects of climate change on supply and demand has the potential to cause water shortages even in previous surplus regions. For example, it is likely that Note: Unweighted averages for ECA, EU, and UMC Strumica and Gevgelija in the southeast will start experiencing Source: World Bank Development Data Platform seasonal cuts within the next decade. (See Chapter 3 for a The lag of required cumulative maintenance and rehabilitation discussion of climate damages.) of water sector infrastructure equals about US$186 million or 3.8 percent of GDP. The government has not been able to finance Climate change raises water demand from agriculture, from water infrastructure rehabilitation since the early 1990s. Water utili- the municipalities, and for thermoelectric cooling. Crop irri- ties lack resources to do it either, as water tariffs do not cover the gation requirements are affected by both temperature and cost of water supply, leaving the utilities with negative net revenue. precipitation, as water demand is directly linked to both crop The total financing gap of the water utilities is US$18.6 million per yield and to evapotranspiration. Climate also affects the timing year or 0.4 percent of GDP. However, the water utilities are being of water demands. Recent warming has led to the presence reformed, and the new utilities, the Water Economies, perform of higher spring temperatures. As a result Macedonian crops better than their predecessors, the Water Management Agencies now some years begin to demand water in April instead of May, (WMAs). The Law on Water Economies provides for many needed and irrigation water demand peaks in June instead of July – reforms including a good tariff methodology. However, there is further, much water demands are sustained through August. still a long way to go. While water tariffs need to be restructured Continued warming will exacerbate these changes. Municipal to recover cost and eliminate cross-subsidization in the long run, demands for water increase during the hotter months, for drink- government subsidies are a necessity in the short run. ing, bathing, cleaning, and for support of gardens and lawns. In the thermoelectric sector, where water is used for cooling, The irregular supply from water utilities has pushed users higher water temperatures in rivers can reduce its efficiency in agriculture, mining and industry towards extensive use as a medium for heat dispersion. of groundwater. An unknown number of wells have been drilled across the country in recent years, and many users, Hydropower plays a special role in the greening of growth including large-scale agricultural and industrial concerns, in FYR Macedonia, providing a key clean energy source to rely on unregistered wells dug for own use. Consumption mitigate greenhouse gases while facing constraints from of groundwater resources is unmeasured, and groundwater water scarcity driven by climate change. Increased hydropower wells are not regulated. The size of the groundwater aquifer capacity will mean reduction of emissions from lignite and resources has not been estimated, but it is known that in diesel generation plants. However, sufficient water flows must some locations, water tables are falling, signaling that the be maintained for hydropower electricity generation plants to groundwater aquifers will be used up if this practice contin- produce planned levels of power. This intersection of mitigation ues. To resolve this problem, aquifer appraisal needs to be and adaptation, and the interactions between the water sector conducted, a groundwater well national register put in place, a and the key water-consuming sectors and actors—agriculture, national groundwater monitoring network reestablished, and power, industry, and municipalities and households—creates a groundwater permit and tariff system created.42 complexity in assessing a green development path. 42. Although data is incomplete, it is estimated that groundwater wells 43. See World Bank. 2011. Water Security in South-east FYR Macedonia supply about 20 percent of total municipal and industrial water supply. In through Strengthening of Water Economies. Country analysis. Washington, some areas of the country, it is estimated that half of irrigation comes from DC: World Bank. groundwater. W ill Water Shortages Constrain Growth ? 31 Achieving higher water use efficiency is one of the key fac- The following models were used for the analysis: the Global tors in a green growth strategy. Adaptation measures in the Circulation Models (GCMs), the Water Evaluation And water sector, starting with policies, investments, and institution Planning (WEAP) model, a water run-off model (CLIRUN) building to improve sector efficiencies and conserve water and an agricultural yield model (AquaCrop). The models supply, will be the backbone of green (adaptation) scenarios were implemented in the following sequence (Figure 4.3): for the country. The problems to resolve include dilapidated infrastructure and limited financing for its rehabilitation and ■■ Step 1. The Global Circulation Models of future climate modernization, inconsistent water supply, and financial and produced climate projections as a function of initial con- operational inefficiency of utilities. All this is a threat to eco- ditions and projected quantities of greenhouse gases nomic productivity in the agriculture, power and industrial emitted. sectors as well as to households in water-scarce regions. More efficient water usage will result in lower pressure on already ■■ Step 2. Climate projections from GCMs were used as stressed water resources. Improved irrigation and municipal inputs in the CLIRUN model to estimate streamflow and industrial water infrastructure, in combination with more runoff45 and also in the AquaCrop model to estimate efficient water utilities, will mean reduced/controlled demand crop yield and irrigation demand. for water and water sector subsidies. ■■ Step 3. The runoff and irrigation water demand estimates Transboundary flow arrangements are also a critical deter- from CLIRIN and AquaCrop, along with other hydrologic minant of water availability in FYR Macedonia, since the system inputs and non-irrigation water demand estimates, Vardar River flows into Greece. Although there are no existing were incorporated into the WEAP tool, where water storage, formal transboundary water agreements with Greece, the flow hydropower potential, and water availability were modeled. of water to Greece does represent an important aspect of international cooperation between the two countries. ■■ Step 4. To refine the AquaCrop estimates of crop yield in irrigated areas (see (2) above) by adjusting it to water availability modeled in WEAP (see (3) above), the unmet METHODOLOGY AND MAIN FINDINGS44 demand for irrigation water from WEAP, together with statistical data on irrigated crop sensitivity to water avail- Methodology ability46, was fed back into Aquacrop.47 The objective of the analysis was to assess the impact of ‘green’ ■■ Step 5. Finally, the WEAP hydropower generation and (adaptation) policies and investments on sectoral outcomes AquaCrop crop yield results were analyzed to produce in the water sector and two main water consuming sectors– estimates of their economic implications.48 The main agriculture and power— and to provide financial evaluation outcomes at this step were projected revenue from crop of the proposed infrastructure investment options for water production and hydropower and net present value (NPV) and agriculture. The impact of green policies and investments of investment in these sectors. was evaluated by comparing two green (adaptation) scenarios to the outcomes in the baseline or Business as Usual (BAU) sce- In addition to modeling, analysis involved evaluation of nario. Note that the BAU scenario already includes how climate infrastructure investment options for water and agriculture. change will affect water availability and irrigation water demand It was designed to provide ranking, based on financial assess- (See Chapter 3). Table 4.1 provides details on the policies and ment, of several water and agriculture sector investments investments included in each scenario, Water sector outcomes used in modeling49. The financial assessment calculated the were measured using indicators of annual water availability and benefit-cost ratio; the net present value of the cash flow of the water demand-supply gap in agriculture (irrigation), in the benefits and costs; the internal rate of return; and the payback combined demand from municipalities and the industrial sector, period. Costs included both capital and annual operating and and in the energy sector (thermoelectric cooling demand). maintenance costs. Benefits were calculated as direct financial Agriculture sector outcomes were measured by crop yields in 45. Streamflow runoff is the flow of water in streams, rivers, and other channels. irrigated areas and related revenues. Hydropower production 46. Data from Food and Agricultural Organization (FAO). outcomes were estimated by the indicators of annual generation 47. Details of this approach are provided in the prior work (World Bank. of hydropower and related revenues. 2012. Reducing the Vulnerability of FYR Macedonia’s Agricultural Systems to Climate Change: Impact Assessment and Adaptation Options. Washington, DC: World Bank). 44. The analytic work presented here builds on prior World Bank-supported work, in particular the “Macedonian Response to Climate Change for 48. Ibid. Agriculture”, which was part of a regional study of climate change and adaptation in agriculture: World Bank. 2012. Reducing the Vulnerability 49. In almost all cases, benefits and costs are assessed for each option of FYR Macedonia’s Agricultural Systems to Climate Change: Impact assuming other options are not employed. It is assumed climate change will Assessment and Adaptation Options. Washington, DC: World Bank. progress as anticipated for the medium climate change scenario. 32 F Y R M aced onia Gr een Grow th Country A ssessment Table 4.1. Green policy and investment action in water, by scenario Scenarios to 2050 Scenario description Policy/investment actions Business as Usual Policies gradually align with regional ●● All current and planned thermal and nuclear plant deployment/retirement; Scenario norms and no new infrastructure ●● All current and funded or in construction future hydropower plants and (no adaptation) investments unless already planned. associated storage; ●● Impact of climate change on demand ●● Current reservoir construction ; for irrigation and municipal water; ●● Irrigation capacity, use, and efficiency at current levels. ●● Impact on water supply for water consuming sectors (irrigation, ●● No increase in irrigation water demand. hydropower, thermal cooling for power generation, and municipal and industrial). Green Scenario Adaptation/mitigation in water and water-consuming sectors consistent with Annual investment of around US$11 million for the following measures in all (modest adaptation basins: effort) EU membership requirements: ●● Hydropower investments reflected in ●● Full build-out of planned hydropower plants; Macedonian energy sector strategy; ●● New basin scale storage as laid out in plans; ●● Planned investments in storage; ●● Municipal and industrial water conservation; ●● Municipal and industrial water ●● Improvement in basin scale irrigation efficiency in all basins to 75%; conservation; ●● Improvement of drainage infrastructure in all currently irrigated areas; ●● Upgrade of irrigation and drainage; ●● Improvement in wheat varieties (irrigated and rainfed). ●● Improvement in crop varieties. Super Green Scenario Maximizes greening potential by Annual investment of around US$148 million for the following measures: (ambitious adaptation expanding Green scenario: All investments in Green scenario, plus: effort) ●● All investments in Green scenario ●● Further municipal/industrial water conservation; ●● plus: ●● Improvement in basin scale irrigation; ●● Additional investment in water use ●● Cancellation of plans for nuclear plant; efficiency; ●● Improvement of drainage infrastructure in currently irrigated and rainfed ●● Cancellation of plans for a areas; Macedonian nuclear power plant; ●● Improvement in varieties for wheat, maize, and apples (irrigated and ●● Additional adaptation investments in rainfed); water and agriculture sectors. ●● Optimization of timing of water and fertilizer application for all crops in all basins; ●● Expand irrigation by 50% in basins with sufficient water; convert low-value rainfed production to irrigated maize, apples, and/or tomatoes. Note: See Table 5.1 for policy and investment actions in agriculture, and Box A and Box 2.1 describing modeling scenarios in this study overall. flows that result from the investment. Evaluated investment (irrigation, energy, municipalities and industry)? (iv) What are the options were related to water-use efficiency by municipalities options of investing in irrigation and hydropower infrastructure and in the industrial sector and in irrigation; construction and and the resulting impact on agriculture and energy production? rehabilitation of irrigation infrastructure and optimization of its usage; agricultural drainage infrastructure; improvement of Main findings crop varieties; and construction of hydropower plants and non- hydropower reservoirs.50 These investment options were then Climate change will undercut water availability while raising incorporated into the economy-wide modelling in Chapter 12. demand, triggering likely water shortages in all water- consuming sectors, even thermoelectric cooling. Predicted The analysis was designed to answer several questions changes in climate will reduce annual runoff in almost all basins. and provided an innovative approach to capturing the links In 2020 and 2030, runoff will be almost 10 percent below 2010 between the water, agriculture, and power sectors. (i) What levels and near 20 percent below by 2050. Pelagonia and the are potential adaptive responses by farmers to climate change Southwest face the largest supply-demand gaps for irrigation and the resulting marginal impact on agricultural production water in 2050 (see Figure 4.4). Only the Lower Vardar and and incomes? (ii) What is the potential impact of climate change Dojran basins show increases in runoff for some scenarios. A and green investments on power generation? (iii) What are the striking result of this analysis is the prediction of shortages trade-offs between alternative prioritization of water use by even in water for thermoelectric cooling. Although in general, unmet thermoelectric water demands are modest, at the Bitola 50. See the water and agriculture papers under Technical Reports in the Reference section for details on calculation of benefits and costs and data plant, the gap reaches 22 percent in the baseline scenario. sources. W ill Water Shortages Constrain Growth ? 33 Figure 4.3. Analytic Framework for Water Sector Green action can reduce the overall water demand-supply gap. Excess demand for water from all sectors combined MODELING will be significantly lowered as a result of green investments and policies such as storage and drainage, municipal and Location industrial conservation, and efficiency measures in agriculture. GCMs General Circulation Models The gap reduction in the Green scenario as compared with Historical runoff Crop Type Temperature Precipitation Temperature Precipitation BAU equals 28 percent in 2020 and 46 percent in both 2030 and 2050. In the Super Green scenario, the demand-supply Latitude CLIRUN gap is reduced from the BAU level by about one-third in 2020, AquaCrop Irrigation Rainfall Climate Runoff and over half in both 2030 and 2050. Green action affects Demand Runoff Unmet the water demand-supply gap in each of municipalities and irrigation water demand industry, agriculture (irrigation), and thermal power (cooling). Municipal and Industrial Demand differently (Figure 4.5) Crop yield WEAP Reservoir Specification River Basin Management Water Evaluation and Planning ■■ In the municipalities and industry, the water demand- Hydropower generation Unmet water demand supply gap is modest and drops significantly due to Socioeconomic adaptation action in both green scenarios in all future information Economic decades. The reduction is about half in 2020 in both Analysis green scenarios; about 90 percent in 2030; and over 80 percent in 2050. The size of the gap is small, however, at + only three to six percent of total municipal and industrial RE-ALLOCATION OF SUPPLY ANALYSIS demand, although it differs significantly across basins. + In Pelagonija/Upper Crna, the gap is the highest, largely INVESTMENT ANALYSIS because of the upstream reservoir, at 38 percent even in the Super Green scenario in 2020 and then, moderating somewhat as a result of water conservation, stands at a Source: Water sector technical paper. still high at 24 percent gap in 2050. ■■ In irrigation, the impact of green investment on water Green policies and investments can help manage water demand is small overall, but varies significantly by basin. demand for irrigation.51 Investments in storage and upgrad- The water demand-supply gap is reduced over the next ing of drainage increase irrigation efficiency, pushing water four decades in the Super Green scenario (by about demand down, while expanded irrigation has the opposite 10 percent in both 2020 and 2030 and by 16 percent in effect and increases demand. The combined outcome is a 2050) while the gap grows in the Green scenario (holding reduction in irrigation water demand as compared with the steady through 2020, 12 percent larger in 2030, and then BAU scenario for both the Green and Super Green scenarios unchanged through 2050. The size of the irrigation water for all three time points: 2020, 2030 and 2050. The Green demand-supply gap varies from zero to about 80 percent scenario reduces irrigation water demand by about nine across basins. In some basins, a high gap is explained percent for the next 40 years. The Super Green scenario by additional new hydropower plants upstream of these cuts irrigation water demand by about six percent in 2020, basins (Ohrid-Struga and Prespa). Across the three policy near three percent in 2030, and over three percent in 2050. scenarios in 2050, irrigation water demand-supply gaps are In select basins (Greater Skopje, Middle Vardar, Middle and greater than 40 percent of total irrigation demand in the Lower Bregalnica, Middle and Lower Crna, Lower Vardar, and Pelagonija/Upper Crna, Dojran, Prespa, and Ohrid-Struga Debar), water demand increases in the Super Green scenario, basins. reflecting new irrigation in those basins. (Figure 4.4). ■■ In thermal power, water shortages are persistent for 51. Here and throughout the Findings section, the underlying assumption some plants, despite adaptation measures. With compet- is that the demand sectors are prioritized as follows: first, municipal and industrial; second, environmental; third, thermoelectric cooling; fourth, ing municipal and industrial demands, only a percentage agricultural irrigation; and last, hydropower. Sensitivity analysis was also used, which evaluated supply reallocation among users with an alternative of water demands for the thermoelectric facilities can be prioritization giving the fifth priority to agriculture and the fourth to met, even with strategic reservoir management. The water hydropower. The outcomes demonstrated that while water availability for municipal and industrial use, as well as for thermoelectric generation demand-supply gap in 2020 is about 90 percent higher in were not affected by this change in sectoral prioritization, agriculture experienced significantly worsened water shortages and, as a result, a both green scenarios and then drops significantly for 2030 substantial decrease in yields. 34 F Y R M aced onia Gr een Grow th Country A ssessment Figure 4.4. Green actions help reduce demand-supply gaps for irrigation water Met and unmet demand for irrigation water, by planning region, in MCM, 2050 MCM 140 120 100 80 60 40 20 0 Vardar Eastern Southwestern Southeastern Pelagonia Polog Northeastern Skopje Baseline Plus Met Demand Unmet Demand Green Met Demand Unmet Demand Super Green Met Demand Unmet Demand Notes: MCM is millions of cubic meters. The light shading is unmet irrigation demand while the dark is met demand. Source: Agriculture sector technical paper and presentations. Figure 4.5. Green investments lead to increased water sector efficiency Water supply-demand gap reduction in Green and Super Green scenarios as % of gap reduction in BAU scenario a. overall b. by component 100 100 80 50 percentage percentage 60 0 40  Green  Green  Green Super Super Super -50 green green green 20 0 -100 Green Super Green Super Green Super 2020 2030 2050 green green green 2020 2030 2050 Irrigation Municipal and Industrial Thermal enegy Source: Water and agriculture sector modeling outputs. W ill Water Shortages Constrain Growth ? 35 and 2050. The gap ranges from zero percent to 44 percent of green action is most dramatic in 2050, because without across the power plants. High gap levels are explained these green actions, hydropower could decline by more than by specific plant conditions: for example, Bitola plant has 25 percent. Clearly, the benefits of a green growth investment the biggest gap, at 44 percent in both green scenarios in program are substantial. 2020, because it draws water from the Strezevo Reservoir, which has very low summer inflows. As a result of green investments, revenue from crop production and hydropower sales increase, while the NPV of investments is Hydropower generation can more than triple by 2050, but positive. In agriculture, in all instances, green investments push only with the right adaptation actions.52 Implementing both up sector revenues. The revenue from crop production increases new additions to hydropower capacity and water-saving in the Green scenario in all three time periods by 16 percent measures in other sectors, as in the green scenarios, adds and in the Super Green by almost 100 percent for each time significantly to hydropower production. As planned facilities period. Under the Super Green scenario, agricultural revenues are built to meet European Union obligations on mitigation increase more dramatically due to a broader set of investments and renewables, overall hydropower production more than made. Overall NPV values for FYR Macedonia under the Green doubles by 2030 and more than triples by 2050 in both the and Super Green scenarios are positive at US$449 million and Green and Super Green scenarios. The most significant US$2.65 billion, respectively. However, owing to the irrigation increases in hydropower production occur at the Cebren, water demand gap, several basins have negative NPV values in Gradec, and Veles facilities. For existing facilities, however, both green scenarios. In hydropower, in both green scenarios, hydropower production is expected to either decline or revenues increase dramatically: in 2020, by 86 percent; in 2030, remain relatively stable, across both green scenarios and by 153 percent; and in 2050, by 290 percent54. This is a result over time. The exception is the Globochina station which of new hydropower plants’ construction. Generally, NPVs are increases production in 2020 and reduces it thereafter. For positive across projects, although Lukovo Pole, Chebren, and current hydropower facilities, firm flow 53 generally declines Galishte have negative NPVs. (Figure 4.6) or experiences only modest gains, both over time and across both green scenarios. St. Petka represents a notable exception Financial assessment of proposed green investment options from this trend, experiencing significant production growth identified a set with the highest projected net benefit. 55 between 2020 and 2030. In 2050, production is lower than in Optimizing agronomic inputs, installing drainage systems, 2030 but still much higher than in 2020. These gains can only expanding irrigation systems, improving municipal and be accomplished if measures in all sectors are implemented in industrial system efficiency, and improving basin-level irri- jointly, due to the competition for water resources. The effect gation system efficiency are part of the set. These options 52. Hydropower modeling is also presented in Chapter 6 on energy. The 54. There is no difference between the Green and Super Green scenarios energy sector analysis applies different models than the analysis of the because they share the same construction schedule for the 16 planned water sector, but the general outcomes for hydropower are similar. facilities. 53. Firm flow is defined as the flow available at least 95 percent of the time 55. As mentioned above, in almost all cases, benefits and costs are assessed (in this case, 95 percent of the time during the period). for each option assuming other options are not employed. Figure 4.6. Green investments lead to increased efficiency in agriculture Percentage increase in Green and Super Green scenarios as compared with BAU a. Increased irrigated crop yields b. Increased unit revenue from sale of crops 100 7,000 USD per Ha of land 6,000 80 5,000 percentage 60 4,000 40 3,000 2,000 20 1,000 0 0 Green Super Green Super Green Super 2020 2030 2050 green green green BAU Green Super-Green 2020 2030 2050 Source: Water and agriculture sector modeling outputs. 36 F Y R M aced onia Gr een Grow th Country A ssessment have positive projected NPVs, benefit-cost ratios above 1 facilities/basins providing high levels of net benefits. These (benefits higher than costs), positive (in many cases, high) options include building hydropower facilities and enhancing internal rates of return (IRR) and average payback periods apple crop varieties. Other options such as drip irrigation have under eight years both at the national level and in all basins negative net benefits across the board. Basin level details of (Table 4.2). Some other investment options are expected to these options are presented in Table 4.3. have negative net benefits at the country level (negative NPV and below 1 benefit-cost ratio) and, at the same time, vary- The greatest green investment potential exists for opti- ing financial outcomes 1 at the facility/basin level, with some mizing agronomic inputs, including fertilizer inputs, with Table 4.2. Financial assessment summary for proposed investment options AVERAGE TOTAL NPV AVERAGE BC FRACTION BC INVESTMENT PAYBACK PERIOD (MILLIONS) RATIO RATIOS > 1 (YEARS) Optimize agronomic inputs $848.70 3.86 14 / 16 Irrigated lands $380.68 21.24 14 / 16 0.4 Drainage systems All lands $704.66 11.25 14 / 16 0.9 Expanding irrigation systems $153.48 3.26 14 / 16 8.0 M&I system efficiency $34.80 2.26 15 / 16 4.3 Basin-level irrigation efficiency $26.83 2.62 16 / 16 3.6 Hydropower facilities ($73.79) 1.12 13 / 16 11.2 Non-hydropower reservoirs Not evaluated Wheat ($13.96) 0.64 1 / 16 6.0 Enhance crop varieties Maize $40.98 2.41 14 / 16 0.9 Apple ($0.34) 0.94 6 / 16 4.6 Drip irrigation systems to optimize timing of ($178.40) 0.54 0 / 16 14.0 water application Notes: $ are US dollars. BC ration is benefit-cost ratio. Table 4.3. Investment options with varying facility/basin level financial assessment outcomes Pros: Most of planned facilities (13 out of 16) provide positive projected outcomes: ●● positive net benefits, ●● payback periods between 8 and 14 years, ●● Internal rates of return 6-13 percent, ●● most facilities may provide particularly high pay-off. Hydropower Cons: Three of the facilities have negative projected financial outcomes and, as a result, the overall NPV of this Facilities investment option is negative: ●● significantly negative projected NPV (ranging between -US$29.7 million and -US$196 million), benefit-cost ratio below 1 and internal rate of return either negative or very low (0.1%) in three planned facilities: Lukovo Pole, Galishte, and Chebren. ●● Negative financial projections are due to water stress: Lukovo Pole has competing demands from Skopje, and Chebren and Galishte are already experiencing water demand gaps.a Pros: Prior studies show that this option is beneficial for some crops including irrigated maize.b Drip irrigation Cons: systems to optimize ●● universally negative NPV values across basins, ranging from -US$350,000 to -US$35 million; timing of water ●● benefit-cost ratios below 1, ranging from 0.1 to 0.9; application ●● these negative outcomes are due to high capital and O&M costs of drip irrigation systems. a. Analysis of the Lukovo Pole project might underestimate its benefits due to incomplete attribution of incremental gains from hydropower production from other plants. Construction cost for this project reflects a new reservoir and a small hydropower plant. The incremental hydropower attributable to the site, therefore, is from the small HPP. However, while the benefits of the project include enhanced capacity and efficiency of the existing HPPs in the system, they are not included in this analysis. b. This was not part of the current analysis. However, it is one of the outcomes of: World Bank. 2012. Reducing the Vulnerability of FYR Macedonia’s Agricultural Systems to Climate Change: Impact Assessment and Adaptation Options. Washington, DC: World Bank. W ill Water Shortages Constrain Growth ? 37 the pay-off in significantly increased crop yields. Financial RECOMMENDATIONS assessment ranked this option among the best. (Table 4.2). The investment would focus on expanding high-quality Expanded irrigation will bring major gains, but those gains extension services, as well as on ensuring that sufficient depend critically on coincident investments in multi-sector quantities of fertilizers are available to farmers, the latter water-use efficiency and in prior or simultaneous resolution involving fertilizer subsidization. The highest benefit of this of institutional issues in the agriculture sector. All water-using investment would be with high-value added crops such sectors, including agriculture, industry and municipalities, and as fruits and vegetables. Currently, basins which focus on hydro and thermal power, need to invest in water-saving tech- high value crops and will, therefore, benefit the most from nologies and improve demand management. Rehabilitation this investment are Middle and Lower Bregalnica, Pcinja, of irrigation systems and expansion in those basins where Strumica, Greater Skopje, and Pelagonija/Upper Crna, as water shortages are not binding, along with drainage invest- well as in parts of the main Vardar basin. ments, will be key but must be accompanied by improved functioning (including cost recovery) of the Water Economies Drainage infrastructure investments also have a high poten- as well as demonstrated capacity of basin authorities and tial and bring higher crop yields. This investment has the other institutions that regulate water, starting with pricing highest benefit-cost ratio and the second-highest NPV and the and oversight of groundwater. Complementary policies in second lowest payback period among proposed investment agriculture include better soil management, land consolida- options. Its NPV is below that of the agronomic input optimiza- tion, and enhanced relevance and effectiveness of agricultural tion investment option due to higher initial capital and annual extension to improve and modernize farm practices. (See maintenance costs as compared to extension services56. The Chapter 5). An example of water sector regulatory reform that basins with highest benefit/cost ratio from this investment includes a strong institutional capacity building component are the Middle and Lower Bregalnica, Polog/Upper Vardar, is presented in Good Practice Box 2. and Strumica basins. Hydropower investments are a critical element in a 56. Financial assessment of the drainage infrastructure investment option greener growth path for FYR Macedonia, but they must be is based on a relatively crude assessment of current soil types and drainage capacity – these high capital cost investments should require more careful accompanied by the right adaptation actions. Net benefits examination at a project level before moving forward. 38 F Y R M aced onia Gr een Grow th Country A ssessment Institutional capacity building to increase efficiency of tariff reform in the Good Practice Box 2. water and wastewater sector in the Danube Basin The experience of the Danube Basin provides evidence on the importance of institutional capacity building for the success of technically complicated and politically challenging economic reforms. In this case, the implementation of cost recovery water and wastewater tariffs and effluent charges needed to be supported by improved understanding of the use of economic instruments by stakeholders, achieved through technical training and institution building. Regulation of tariffs set by water operators is critical for successful cost recovery policy and for the overall reform of the water and wastewater sector. However, such reform is both technically complicated and politically challenging, thus requiring reliable stakeholder support. To achieve stakeholder ownership of the reform program in the Danube Region, an extensive capacity building project is being implemented: regulators and water providers are receiving training on the economics of water sector reform. This effort is supported by the Danube Region Water Supply and Wastewater Sector Capacity Building Project, financed by the World Bank and under implementation in 11 countries. The objective of the project is to improve institutional capacity while developing regulatory and policy instruments. In the past, large capital investments in sectoral assets were not consistently matched with required institutional support. A new approach embraces the legal, regulatory, institutional, financial, organizational and managerial dimensions of the reform. Reforming utility management, better targeting subsidies to low income groups, restructuring tariffs, professionalizing staff, and improving cost recovery are all the ingredients for sustainable water and wastewater service provision. Also, training covers such topics as establishing management systems that motivate service quality improvements, usage of more efficient technologies, and increasing operational efficiency. Sources: Background information from the Green Growth Best Practice Initiative, Green Growth Best Practice Assessment Report 2013. Seoul: GGBP. World Bank, Danube Region Water Supply and Wastewater Sector Capacity Building Project. from hydropower facilities are lower than those from other important to support the package. This package would be investment options, with only a marginally attractive return. primarily applicable to six basins (Greater Skopje, Middle However, hydropower electricity generation is beneficial for Vardar, Middle and Lower Bregalnica, Middle and Lower Crna, green growth as it provides renewable power and can be used Lower Vardar, and Debar) that could support additional irriga- to replace lignite which currently dominates the power mix, tion in the future, as they are projected to have sufficient driving the high emissions intensity of the power sector. The runoff (Figure 4.7). energy sector analysis (Chapter 6) recommends new hydro- power development, and the Green energy supply scenario, Water shortages will worsen into the future, and, despite which is recommended for implementation, increases the action on adaptation, gaps between supply and demand volume of hydropower by 130 percent from 2010 to 2050, while will persist, especially for some basins. Conservation and keeping the share of hydro generation in total at the same efficiency measures need to be at the center of a green level of 20 percent. However, it is also noted in Chapter 6 that strategy for the water sector. These challenges will vary hydropower sites in FYR Macedonia have low capacity, and, significantly across the country. The reality of trade-offs thus, costs are higher than average costs of hydro produc- between sectors in providing access to limited water tion globally. Hydropower can deliver important benefits, but resources needs to be recognized more directly by policy- competition for water resources must be addressed. makers. For example, the analysis here indicates that there will be shortages of cooling water in the future for the Bitola Top benefits will come from packaging together beneficial and Bitola 4 power plants, and also modest shortages at investments, and in particular, an irrigation package would Mariova and Negotino II (if Negotino II is built). Water avail- provide major investment gains. The package would consist ability needs to be considered carefully in the decision to of all four proposed irrigation sector investments: construction locate thermoelectric power plants. Water scarcity and of new or rehabilitation of existing irrigation capacity, improve- how to respond need to be addressed as part of urban ment of basin-scale irrigation water efficiency, improvement of planning in drier parts of the country such as Strumitsa. agricultural drainage infrastructure, and drip irrigation systems (See Chapter 8). Zoning for new industrial concerns with to optimize timing of water application. Further, improvement water-intensive production should consider the suitability of municipal and industrial water use efficiency would be also of local water resources. W ill Water Shortages Constrain Growth ? 39 Figure 4.7. Areas projected to have sufficient water availability to support expanded irrigation Source: Water sector technical paper. The overall demand-supply gap in the water sector must be some new water storage, municipal and industrial water managed through green actions in all water-using sectors, conservation measures, and upgrading of irrigation and drain- with a big emphasis on improving efficiency and strengthen- age infrastructure as well as improvement in crop varieties in ing conservation. Clear positive investments across all basins agriculture. Together, these measures are estimated to reduce include expanding irrigation systems, installing drainage sys- irrigation water demand by less than 10 percent, but the overall tems, optimizing agronomic inputs, and improving municipal water demand-supply gap is reduced by almost half. The and industrial and basin-level irrigation system efficiency. Super Green scenario contains more ambitious adaptation The Green scenario assessed above includes a set of core actions, and new irrigation causes water demand to rise, but measures consistent with EU membership requirements that the overall water gap is reduced by more than half during the address water sector challenges: hydropower investments, next four decades. 40 F Y R M aced onia Gr een Grow th Country A ssessment W ill Water Shortages Constrain Growth ? 41 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND AGRICULTURE URBAN ISSUES SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 5 Can Agriculture Flourish in a Changing Climate? a CHAPTER SUMMARY analysis: 57 Global Circulation Models (GCMs), Water Evaluation And Planning (WEAP) model, a water run-off model (CLIRUN) and an agricultural yield model (AquaCrop). The modeling finds that adaptation expenditures are good investments. Significant adaptation effort, with annual investment of about griculture is a key sector that needs to be US$148 million in irrigation, drainage, improved crop varieties, transformed to achieve greener growth in and better agronomic practices yields benefits through 2050 FYR Macedonia. The country’s reliance on that outweigh costs more than four-fold while closing the water agriculture is a major component of its vulner- demand-supply gap by almost one-quarter. ability to climate change, which will compound current sector inefficiencies. Agriculture and agro-processing may employ A more competitive, export-oriented agriculture sector in almost one-third of the labor force, once informality estimates future decades will be possible only if adequate policies and are included. The country is already experiencing moderate investments are implemented and if adaptation measures are water stress, and climate change is pushing up water demand taken. In irrigation, adaptation investments in drainage infra- in agriculture, worsening the ‘adaptation deficit’. Irrigation structure for irrigated areas will improve crop yields. Improved is already insufficient and poorly designed for today’s small wheat varieties are another key modest adaptation measure. farms. Agriculture, as well as mining and industry, are trying to Under a stronger adaptation effort (the super green adaptation avoid economic losses due to irregular supply from water utili- scenario), a package of expanded irrigation in some basins ties and have turned to an unsustainable use of groundwater. plus improved drainage infrastructure would provide major Soil fertility problems will worsen, especially erosion. Small investment gains. In addition to investment in irrigation, other and fragmented farms and inadequate land markets limit measures would bring important benefits, including: improved agricultural productivity, while government subsidy programs farm practices, greenhouse production, improved soil manage- are poorly designed to achieve their stated objectives. Can ment, improved pasture management, land consolidation and agriculture flourish in a changing climate? land market improvements, and organic agriculture. Increased capacity of research and extension systems, incentives to adopt The objective of the analysis was to assess the impact of environmentally friendly practices, monitoring programs for soil, green (adaptation) policies and investments on agriculture water, groundwater and biodiversity, improved hydro-meteo- outcomes through joint modeling of water, agriculture, and rological capacity, and crop insurance would complement the the power sector; and to provide financial evaluation of key investments in adaptation. the proposed infrastructure investment options for water 57. The same modeling was used for the water sector analysis (Chapter 4). and agriculture. Several interlinked models are used in the This chapter presents more detailed outcomes for agriculture than those described in the Chapter 4. C an Agriculture Flourish in a Changing Climate ? 43 CHALLENGES FOR GREENER GROWTH are members of agricultural households 60. Using official sta- tistics, a revised estimate of rural employment, both formal Overview and informal, is 34 percent of the total61. This number stayed stable over the last two decades, which is not the case in many Agriculture is one of the sectors that need to be transformed neighboring countries (see Figure 5.1) 62. to achieve green growth in FYR Macedonia. While agricul- ture is not a major source of FYR Macedonia’s overall GHG The importance of agriculture for FYR Macedonia is also emissions, the country’s reliance on agriculture is a major reflected in the country’s structure of natural capital, which is component of its vulnerability to climate change, which will dominated by crop and pasture land. While the overall struc- compound current sector inefficiencies. Official statistics58 ture of wealth in FYR Macedonia is similar to the majority of show that agriculture is a currently a major contributor to European countries—most of total wealth (for FYR Macedonia national output in FYR Macedonia. Agricultural value-added , 83 percent) is intangible capital (human and social) with the constitutes 11.1 percent of total value-added, placing FYR remainder being produced and natural capital—the structure Macedonia well above the ECA region average of 8.9 percent. of natural capital is very different from most of Europe. In FYR When agro-processing is included, the contribution to GDP Macedonia, crop and pasture land provide 88 percent of total increases to 16 percent.59 Exports of agricultural products natural capital, and forests and protected areas add another 12 constitute 15 percent of the country’s merchandise exports. percent. This structure of natural wealth differs significantly from The share of employment in agriculture is 19.7 percent, slightly that of economies in which agriculture is no longer economically below the ECA region average of 22 percent. (Figure 5.1). important, where the share of crop and pastures is limited, or from energy-rich countries such as Russia, where natural capital The significance of agriculture for FYR Macedonia is underes- is dominated by energy. timated by official statistics, which do not capture the entire 60. World Bank. 2005. FYR of Macedonia Poverty Assessment for 2002– sector, as a substantial part of it is informal, both in terms of 2003. Washington, DC: World Bank. employment and transactions. Almost half of all agricultural 61. Rural employment is estimated using the share of rural population and age workers are not recorded as employed in the sector as they distribution of the population. Rural population is reported in official statistics at 41 percent of the total. Population 15 and older constitutes 83 percent of the total in the country and is higher in rural areas. Considering the informality of FYR Macedonian agriculture, it is assumed (i) working age for rural areas at 15 years and above and (ii) 100% employment rate. The resulting estimate for 58. Source of data: World Bank, Development Data Platform. Data for 2011 rural employment rate is 34% (=41%*83%). This is a conservative estimate— or, when mentioned, the latest year available prior to 2011. the actual number can be higher because rural population is older than 59. Sutton, William R., Peter Whitford, Emanuela Montanari Stephens, urban, while the national age distribution is applied in the calculations. Suzette Pedroso Galinato, Bonnie Nevel, Beata Plonka, and Ebru Karamete. 62. Since this number is a derivative of the share of working rural population, 2008. Integrating Environment into Agriculture and Forestry: Progress and it has probably stayed stable over the last two decades, as the share of rural Prospects in Eastern Europe and Central Asia. Washington, DC: World Bank. population varied little, from 40 to 42 percent, during the period 1990-2011. 44 F Y R M aced onia Gr een Grow th Country A ssessment Agriculture is important for economic output and employment in FYR Macedonia and Figure 5.1. underlies the country’s vulnerability to climate change Agricultural value added and agricultural employment, 2011 or latest available year 80 70 60 50 Percentage 40 adjusted to include informal official employment 30 statistics 20 10 0 Tajikistan Georgia Armenia Albania Azerbaijan Kyrgyz Rep. Romania Kazakhstan Macedonia Ukraine Croatia Poland Russian Fed. Lithuania Latvia Slovenia Bulgaria Hungary Estonia Slovak Rep. Czech Rep. Turkey mean FYR percentage of total employment percentage of GDP Source: Staff calculations using World Bank Development Data Platform. Agricultural productivity has been increasing in the last 15 programs are poorly designed to achieve their stated objec- years. Annual growth of agricultural value added has aver- tives. Average farm size (including all types of agricultural aged 2.6 percent in the past decade – slightly higher than in land) is 5.3 ha; and, on average, a farm is fragmented into 6 the ECA region. Value added per worker has been steadily non-contiguous plots, each less than one hectare. Average increasing with the annual average growth of 6.0 percent in arable land plots are even smaller, averaging 1.7 ha per farm, the period 1995-2010. This was happening mainly because according to the 2007 agricultural census. In practice, some agriculture is moving toward high value added crops such as non-transparent land uses (such as unregistered leasing) may fruits, vegetables, and livestock. Total crop area declined by moderate this problem, but it remains the fact that most farms about 13 percent from 2000 to 2008. At the same time, fruit are too small. While some small farmers can be competitive crop areas increased by 8 percent. depending on the type of production, most small farms cannot achieve production economies of scale nor obtain Benchmarking shows that FYR Macedonia’s performance the quantity needed to reach the most profitable markets. with respect to agricultural productivity is higher than in Government expenditures on agriculture aim at the objec- most ECA countries : FYR Macedonia is considerably above tive of increasing the productivity of agriculture to make it the regional median and close to the regional mean in competitive in European and Middle Eastern markets, where agricultural value added per worker. FYR Macedonia also demand for agricultural imports is expected to be strong,63 has been performing well according to the growth in this and agricultural spending grew 44-fold during 2006 and 2012 indicator, which exceeds regional median growth and almost and is planned to be further increased, by 14 percent in 2012- equals the regional mean in the period 1995-2010 (Figure 5.2). 2015 (Figure 5.3). However, the structure of FYR Macedonia’s Considering informality of Macedonian agriculture, however, agricultural subsidy program encourages preservation of small official data might be overestimating agricultural productivity, farms since farmers receive direct subsidy payments even for and the country’s position in the regional ranking could be farms of 0.5 ha, creating an incentive for smallholders to hold lower once informality is accounted. onto their property even if unused. Small and fragmented farms and inadequate land markets 63. Demand from Middle Eastern countries is expected to increase in limit agricultural productivity, while government subsidy coming decades as severe impacts of climate change sharply reduce local production. C an Agriculture Flourish in a Changing Climate ? 45 Figure 5.2. Agricultural productivity has been increasing Agricultural value added per worker, 2010, and its growth 1995-2010 20,000 450 76,633 400 % growth in value added per worker 16,000 350 value added per worker, US$ 300 12,000 250 200 8,000 150 100 4,000 50 - 0 Slovenia Croatia Bosni&Herz. Bulgaria Slovak Rep. Romania Hungary mean Czech Rep. Lithuania FYR Macedonia Belarus Armenia Estonia Latvia Turkey Poland Uzbekistan Russia Montenegro Ukraine Turkmenistan Georgia Kazakhstan Albania Moldova Azerbaijan Kyrgyz Rep. Tajikistan agricultural value added per worker, 2010 % growth in agric. value added per worker, 1995-2010 Source: Staff calculations using World Bank Development Data Platform. Government expenditures on Figure 5.3. Dealing with Sector Inefficiency in the Context agriculture grew 44-fold during 2006 to 2012 of Green Growth Past and planned government support to agriculture, Agricultural output and incomes could be much higher in € millions future decades if climate change adaptation measures are undertaken. Given the proximity to lucrative EU markets, and the potential opening of new markets in Northern Africa, demand for FYR Macedonia’s agricultural production can be high. Agricultural growth, however, is constrained by sectoral inefficiencies, which will be exacerbated by climate change in the future if no adaptation actions are taken. According to a recent World Bank report64, FYR Macedonia’s agricultural systems are poorly adapted to current climate, reflecting an ‘adaptation deficit.’ A key finding of that report is that many of the high-priority measures for adapting to future climate can also provide benefits in the short term and increase sector efficiency. Source: Agriculture sector technical paper. FYR Macedonia’s vulnerability to climate change is high, in part due to the high share of agriculture in today’s economy, but also due to limited water availability, sectoral structure and inefficiencies of the sector. The shares of both agriculture in GDP and agricultural employment in total employment are high, and these are important elements in considering 64. Sutton, William R., Jitendra P. Srivastava, and James E. Neumann. 2013. Looking Beyond the Horizon: How Climate Change Impacts and Adaptation Responses Will Reshape Agriculture in Eastern Europe and Central Asia. Directions in Development: Agriculture and Rural Development. Washington, DC: World Bank. 46 F Y R M aced onia Gr een Grow th Country A ssessment vulnerability to climate change.65 Climate projections forecast Figure 5.4. Macedonian agriculture is not that climate change in FYR Macedonia will mean a rise in emissions intensive temperatures, in the variability of precipitation, and in the Agricultural emissions as % of agricultural value-added intensity of the rainfall. The latter will mean increased run-off 6 and soil erosion and reduced water availability. The risk for tonsCO2e per US$1000 Macedonian agriculture is exacerbated by the fact that arable 5 land is limited – at 0.2 ha per person, just half of the ECA region average. 4 3 In contrast, agriculture contributes very little to overall emissions in FYR Macedonia and is not emissions inten- 2 sive. The sector does not produce high level of emissions 1 mainly due to its structure (type of crops which do not require nitrogen fertilizers, type of soil, and a relatively low share of 0 Moldova FYR Macedonia Georgia Turkmenistan Tajikistan Albania Armenia Hungary Azerbaijan Croatia Bulgaria Lithuania Poland Bosnia&Herz. mean Uzbekistan Ukraine Slovenia Estonia Turkey Kyrgyz Rep. Serbia Latvia Romania Czech Rep. Slovak Rep. Belarus Kazakhstan Russian Fed. livestock). Its contribution to national GHG emissions is very low, at 0.4 percent of the total. The emissions intensity of agriculture (MtCO2e per US$ of agricultural value-added) is also very low, both overall and by major components— CH4 N2O CO2 methane (CH4 ), nitrous oxide (N2O), 66 and carbon dioxide (CO2). Benchmarking places FYR Macedonia at the very end Notes: CH4 is methane. N2O is nitrous oxide. CO2 is carbon dioxide. TCO2e of ranking in the ECA region and shows that intensity of all per US$1000 is metric tons of carbon dioxide equivalent per thousand US dollars of agricultural value-added. three major components of agricultural emissions combined Source: Staff calculations using World Bank Development Data Platform. is the lowest in the region. Breaking down overall agricultural emissions by component, FYR Macedonia keeps its place in farms. As a result, only 20 percent of the available irrigation the ranking (lowest intensity among comparator countries) in infrastructure is actually used and farmers invest in their own N2O and CO2 emissions, while moving to the fifth place from independent irrigation systems, usually based on wells. These the bottom in methane emissions. (Figure 5.4) individual schemes are rarely registered, and the groundwater is often used without being paid for, which leads to overuse. Water availability is a critical issue for agriculture, with Sustainability of this system is questionable68. inadequate irrigation already limiting productivity, and cli- mate change expected to exacerbate the problem. 67 The Soil fertility problems seriously affect agricultural productivity, country is already experiencing moderate water stress, and and this situation will worsen with climate change. The issues climate change is pushing up water demand in agriculture. include erosion, soil born pests and diseases, soil pollution by The rising frequency of water shortages is undermining the fertilizers and pesticides and to a lesser extend salinization dependability of irrigation and, consequently, pushing down and water logging. According to FAO, about 52 percent of crop yields. Despite the insufficient irrigation, agriculture, the country is subject to soil erosion69, a much larger share according to formal statistics, is currently the largest user of than the average in the ECA region. Currently an estimated 1.7 water in FYR Macedonia accounting for 43 percent of total million cubic meters of soil are lost annually due to erosion70. water withdrawals. Irrigation is critical to achieve expansion of Erosion primarily affects topsoil, where most of the organic production of high-value crops, for which FYR Macedonia has matter and nutrients are concentrated. In addition to causing a comparative advantage. However, the Macedonian irrigation yield reduction, it also produces large amounts of sediment, system is highly inefficient: assets are old and not operational, which pollutes waterways and negatively affects the functioning the location of pipes and canals is inadequate considering the of reservoirs and irrigation and drainage infrastructure. Soil current location of farms, and the system is designed to serve large-scale farms, while today’s agriculture is based on small 68. Recent legislation requires water abstraction to be formally reported. Incentives to formalize informal land leasing have also been put in place. With growing demand for irrigation at farm level and formalization of 65. See Chapter 3 on Benchmarking for a more complete discussion of abstraction permits, investments in selective irrigation rehabilitation should vulnerability. In addition to the share of agriculture, FYR Macedonia’s become economically more viable. vulnerability to climate change is driven by a relatively high (as compared to ECA countries) exposure (see definition in the previous footnote), relatively 69. Food and Agriculture Organization (FAO). Land and Water Development low GDP per capita, relatively high inequality, relatively high political instability, Division. 2005. National Soil Degradation Maps, FYR Macedonia. ftp://ftp. relatively low quality of governance, and relatively low quality of infrastructure. fao.org/agl/agll/docs/wsr.pdf 66. Nitrous oxide (N2O), which is emitted from agricultural lands, is distinct 70. The annual loss of soil represents annual average loss of cultivable from NOx, a generic term for mono-nitrogen oxides, in particular NO2 soil layer of 20 mm thickness on an area of 8,500 ha. Source: European (nitrogen dioxide). Commission (EC). 2005. Agri-Environmental Programme for Implementation of IPARD Measure 201: Preparation for Implementation of Actions Relating 67. See more information regarding water availability in the Water chapter. to the Environment and the Countryside. Brussels: EC. C an Agriculture Flourish in a Changing Climate ? 47 erosion will worsen with climate change, as a result of pro- METHODOLOGY AND MAIN FINDINGS jected more intense precipitation combined with higher top temperatures unless adaptation actions are taken. Adaptation Methodology measures would include regulating land use, land consolidation, improved farming practices, using greenhouses and organic The objective of the analysis was to assess the impact of farming, and improved soil and pasture management (see Good green (adaptation) policies and investments on sectoral Practice Box 3 on Kazakhstan’s experience with agriculture outcomes in agriculture through joint modeling of water, adaptation measures which improved yields). agriculture, and the power sector; and to provide finan- cial evaluation of the proposed infrastructure investment options for water and agriculture. 71 The models used are Good Practice Box 3. Global Circulation Models (GCMs), the Water Evaluation And Climate-smart investment in Planning (WEAP) model, a climate runoff (CLIRUN) model agriculture in Kazakhstan and an agricultural yield model (AquaCrop). The models The Kazakhstan experience demonstrates how green invest- forecasted yields and prices of the crops that account for ments in agriculture can lead to improved productivity combined more than 50 percent of FYR Macedonia’s total agricultural with environmental benefits. The country adapted an innovative production: corn, rice, industrial crops (tobacco), vegetables ‘no-till’ technology which increases yields, reduces soil erosion, (tomatoes), apples, grapes, pastures, wheat, and alfalfa. improves soil fertility, saves fuel, and captures carbon. AquaCrop (Figure 5.5) was used to model crop yields and irrigation demand. Last, the Water Evaluation and Planning The strong winds of the steppes of northern Kazakhstan tend to System (WEAP) model was applied, using the inputs from blow away the snow in winter, making soil moisture in the spring CLIRUN to analyze potential basin-level shortages in water a vexing issue for farmers. This problem has been exacerbated by a recent increase in the frequency and magnitude of extreme available to agriculture. Any estimated water shortage from weather events. With support from the government and inter- the WEAP model was fed back to the biophysical step to national organizations, an innovative conservation-agriculture estimate the net effect of the shortage on irrigated crop no-till technology has been successfully applied as part of yields.72 (See Chapter 4 for more details). climate change adaptation. In 2012, this technology was used on 1.85 million hectares or 10 percent of all Kazakh farmland. Modeling 73 started with a Business-as-Usual (BAU) sce- The new technology leaves the stubble of the previous year’s nario for agriculture through 2050. This baseline scenario crop standing in the field to trap the snow. This technique allow for greater soil moisture when the weather warms. Farmers also assumes that the economy of today would evolve over the chop and spread the old crop residues on the fields at sowing next 40 years according to the pattern of West European time in the spring. countries. (Chapters 2 and 3). While policies would gradually align with regional norms, no significant new infrastructure In 2012, the adoption of no-till technology in Kazakhstan resulted investments would be made in agriculture beyond those in 0.7 million tons of additional wheat harvest, enough to feed 5 already funded and/or under construction. The BAU sce- million people for a year. The new method is increasing yields by nario incorporates the expected impact of climate change 30 to 40 percent, cutting cultivation costs, and reducing soil ero- sion. No-till requires investments in machinery and herbicides of on the demand for irrigation water and the impact of climate $250-300 per hectare, but the investment pays back in just a few on water supply for all demand sectors (irrigation, hydro- years. No-till is also capturing carbon, as healthy organic matter, power, thermal cooling for electric power production, and in the soil, contributing to climate mitigation. In Kazakhstan, municipal and industrial uses). 74 Agriculture is projected the shift in methods sequesters 1.3 million additional tons of to grow at an annual rate of two to three percent until carbon dioxide a year, which is the equivalent of taking 270,000 the mid-2040s and then at 1 percent to the end of the cars off the road. 2040s. Since the rest of the economy is projected to grow 71. As mentioned above, modeling was done jointly for the water and Source: World Bank. 2013. “No-Till: A Climate Smart Agriculture agriculture sectors. A more detailed description of modeling is presented in Solution for Kazakhstan.” Agricultural Competitiveness Project. Chapter 4 on water. Projects and Operations. World Bank website: http://www.worldbank. org/en/results/2013/08/08/no-till-climate-smart-agriculture-solution- 72. As outlined in Chapter 4, there are two basins in FYR Macedonia for for-kazakhstan which future agriculture water shortages are forecast. There should be sufficient irrigation water in other basins under climate change scenarios. 73. Modeling was done jointly for the water and agriculture sectors. While the general approach is described in Chapter 4 on water, specific agriculture sector issues are presented here in more detail. 74. The current Strategic Plan for Agriculture and Rural Development, while acknowledging the importance of irrigation for improving agricultural productivity, supports only general measures for increasing irrigation water access and infrastructure rehabilitation or re-construction. 48 F Y R M aced onia Gr een Grow th Country A ssessment Figure 5.5. AQUACROP model EU cross-compliance requirements Box 5.1. for agriculture Radiation Light interception Leaf area Good Agricultural and Environmental Conditions: Potential 1. Protect soils through appropriate measures (minimum soil Water and/or photosynthesis cover and land management) salt stress 2. Maintain soil organic matter levels through appropriate Actual practices (standards for crop rotation where applicable photosynthesis Maintenance and arable stubble management) respiration Growth 3. Maintain soil structure through appropriate measures Dry matter respiration (appropriate machinery use) increase Partitioning 4. Ensure a minimum level of maintenance and avoid the Death Roots deterioration of habitats (livestock stocking rates and/or (alive) appropriate regimes, protection of permanent pasture, retention of landscape features, avoid the encroachment of unwanted vegetation) Stems Storage organs Leaves Statutory Management Requirements: Death (alive) (alive) Death (alive) 1. Conservation of Wild Birds 2. Protection of Groundwater against Pollution Source: Agriculture sector technical paper. 3. Protection of the Environment and Soil when Sewage Sludge is used in agriculture 4. Protection of Waters against Pollution caused by Nitrates faster than agriculture, the relative weight of the sector 5. Conservation of Natural Habitats and of Wild Flora and will contract from the current 16 percent to 9 percent in Fauna 2050.75 As a consequence of agricultural labor absorption 6/7/8. Identification and Registration of Animals by other sectors, agricultural employment will contract from 9. Authorization, Placing on the Market, use and Control of the current 20 percent to 13 percent in 2050 (a level similar Plant Protection Products to Greece today). This is a normal path in most countries, 10. Prohibition on the use in of certain substances for and it is not expected that FYR Macedonia will significantly livestock farming deviate from such a pattern, but achievement of this path 11. Food law requirements and procedures in matters will require improvements in technology used in the sector, of food safety key structural reforms, and implementation of planned 12/13/14/15. Rules for the prevention, control and eradication of investments. Once today’s obstacles are addressed, the certain animal diseases level of technology will increase, together with the size 16/17/18. Rules concerning the protection of animals of land plots; agriculture will gradually become less labor kept for farming purposes intensive, while the value of its products will improve. Since water and agriculture were jointly modelled, the two green scenarios for agriculture are identical to those for water. (See Chapter 4 and Table 4.1 on joint water modelling new measures and investments are implemented, for a total scenarios). The Green scenario assumes that modest adapta- annual cost of US$148 million. These investments would tion measures are taken across agriculture and water-using include: improving drainage infrastructure in all current sectors with an annual investment cost of around UD$11 irrigated and rainfed areas, resulting in yield increases for all million. This scenario is based on policy actions required crops; use of improved varieties for wheat, maize, and apples for EU membership (see Box 5.1 with EU cross-compliance (irrigated and rainfed); optimization of agronomic practices requirements). It implies the following high benefit-cost (including timing of water and fertilizer application) for all measures: improved drainage infrastructure in all currently crops in all parts of the country; and expansion of irrigation irrigated areas and usage of improved wheat varieties for by 50 percent in each basin of the country that has sufficient all irrigated and rainfed wheat. 76 The Super Green scenario, water in the Super Green scenario. by comparison, assumes significant adaptation effort and that, in addition to the measures of the Green scenario, 75. Including agriculture and agro-processing. 76. These measures were agreed by major agricultural stakeholders to be the highest priority measures to undertake. C an Agriculture Flourish in a Changing Climate ? 49 Table 5.1. Green policy and investment actions in agriculture, by scenario Main findings77 Adaptation policies and The modeling outcomes show that the significant adaptation Scenario investments effort of the Super Green scenario would outweigh costs Business as Usual Maintaining current investments in Scenario ●● adaptation as constant even more than the modest adaptation effort of the Green (no adaptation) scenario. In particular, over the period from 2011 to 2050, a moderate adaptation expenditure of US$199 million (Green Green Scenario Annual investment of around US$11 million (modest adaptation including the following measures in all scenario, total discounted additional investment and O&M) basins: effort) would bring additional revenue of US$674 above that of BAU, ●● Improve drainage infrastructure in all currently irrigated areas, results in yield while a significant adaptation expenditure of US$1,287 million increases for all irrigated crops (Super Green scenario) would result in much higher additional Improve wheat varieties (irrigated and ●● rainfed) revenue of US$3,984 above BAU’s level.78 In both cases, ben- efits outweigh costs by more than 4 times: 4.1 times with the Super Green Scenario Annual investment of around US$148 (ambitious adaptation million including the following measures : Green scenario’s modest effort and 4.5 times with the Super effort) ●● Expand irrigation by 50% in each basin Green scenario’s significant effort. Also, green adaptation that has sufficient water in the Green scenario measures, especially those aimed at water demand reduction, ●● Improve drainage infrastructure in all help close the water demand-supply gap: the gap is reduced rainfed areas, causing yield increases for by 12 percent in the Green scenario and by 23 percent in the all crops ●● Improve varieties for wheat, maize, and Super Green scenario. (Figure 5.6). apples (irrigated and rainfed) ●● Optimize agronomic practices (including The models also estimate that if no adaptation effort is timing of water and fertilizer application) for all crops in all basins undertaken, total agricultural revenue will decrease by 17 percent by 2050 as the combined effect of positive and Note: See Table 4.1 for policy and investment actions in water, and Box A negative factors. The negative factors are the impact of and Box 2.1 describing modeling scenarios in this study overall. higher temperatures on rainfed crops, evapo-transpiration, and decreased availability of water for irrigation. The positive factors are related to the potential for yield increases for some rainfed crops79 and for all crops in some areas of the country80 due to higher temperatures during key stages of crop growth and a longer growing season. However, this assumes improved irrigation and investments to increase water efficiency and to optimize water use Cross-sector considerations. Agriculture critically depends on other sectors. The importance of irrigation water for the agriculture sector in largely arid FYR Macedonia cannot be overstated: climate change presents a risk of increased aridity and water shortages, particularly in the agricultural growing season, for most areas of the country. Changes in water supply and water demand, water-use efficiency, and return flow volumes in non-agricultural sectors that use water 77. Calculations of the present value of future revenues and costs were made using a 5-percent discount rate, consistent with recent analysis by the World Bank (see: World Bank. 2010. Economics of adaptation to climate change: social synthesis report. Washington, DC: World Bank.). Future prices were not adjusted according to the International Food Policy Research Institute (IFPRI) global price change forecast, which forecasts an increase of relative prices for food products. Such adjustments would significantly increase the benefits produced by investments in food producing activities such as agriculture. 78. Present value of incremental (additional to level in BAU) revenues and incremental total (capital and O&M) costs for the period 2011-2050, discounted at 5 percent. 79. Irrigated crops: wheat, alfalfa, apples, maize, and vegetables. 80. Alpine AEZ. 50 F Y R M aced onia Gr een Grow th Country A ssessment Adaptation efforts in green scenarios lead to increased revenue and improved Figure 5.6. irrigation efficiency. Impact of adaptation scenarios on agriculture, 2011-50 5,000 Super Green Additional agricultural revenues, US$ mln 4,000 10.3% 3,000 2,000 Green BAU 1,000 Size of bubbles and numbers inside bubbles represents 11.8% water demand-supply gap as percent of water demand 0 13.4% -1,000 -200 0 200 400 600 800 1000 1200 1400 1600 Adaptation costs, US$ mln Notes: Costs are the present value over 2011 to 2050 of the flow of required additional expenditures (investment and O&M) compared to BAU. Revenues are the present value over 2011 to 2050 of the flow of the incremental sector revenues. Water demand-supply gap is the difference between water demand and supply (deficit), presented as percentage of demand. Source: Staff calculations based on water and agriculture sector modelling outcomes affect the volume of water available for agriculture. The Good Practice Box 4. timing of non-agricultural water demands is also important— Eco-farming goes together with improved municipalities and industry, hydro generation and thermal living standards in China generation.81,82 Also, interconnections between agriculture and energy provide opportunities for green energy projects The innovative Hubei Eco-Farming Biogas Project in China combines the benefits of reduced GHG emissions, improved that improve living standards and quality of life in rural areas indoor air quality, and increased living standards. (see Good Practice Box 4 on China’s experience with eco- farming projects). In Hubei Province, China, 33,000 households in eight counties participated in the Clean Development Mechanism biogas digester program. The project reduces carbon emissions by RECOMMENDATIONS installing and operating biogas digesters that recover methane from livestock manure. The biogas is then used by households A more competitive, export-oriented agriculture sector in for heating and cooking, replacing high-emissions coal. The project also helps the households make other improvements future decades will be possible only if adequate policies and including an upgrade of the toilet, the pig pen, the kitchen, and investments are implemented and if adaptation measures are installation of a gas burner. taken. In order to address the climate change challenge, while also remediating current sector inefficiencies, several areas The use of biogas digesters by households has led to a reduction of interventions are critical. These include irrigation improve- of 59,000 TCO2e in emissions annually. This translates into rev- ments, improved management of arable land, improved enues of US$8.3 million to the participating farmers from selling pasture management, land consolidation and land market Certified Emission Reduction (CER) credits. It also improved indoor air quality, reducing the incidence of respiratory diseases improvement, and development of organic agriculture. Since and eye ailments caused by the burning of coal and fuel wood. overall water demand is expected to grow even while water supply becomes scarcer, all water-using sectors— agriculture, Source: Baeumler, Alex, Ede Ijjasz-Vasquez, Shomik Mehndiratta, editors. 2012. Sustainable Low-Carbon City Development in China, Directions in Development, Countries and Regions. Washington, DC: 81. Thermal generation utilizes water for cooling. World Bank. 82. See Chapter 4 (Water), Chapter 6 (Energy) and Chapter 8 (Urban). C an Agriculture Flourish in a Changing Climate ? 51 industry and municipalities, hydro and thermal power—need ■■ Improved farm practices, in particular, precision farming to invest in water-saving technologies and improve demand based on observing and responding to intra-field varia- management. Even with these precautions, not all basins will tions—including locating precise positions in a field using have sufficient water for all sectors, and some prioritization the Global Positioning System (GPS)—can significantly will be required. reduce the amount of nutrient and other crop inputs while boosting yields. More generally, enhanced relevance and ■■ Irrigation improvements. Irrigation systems should be effectiveness of agricultural extension is needed. rehabilitated and expanded in those basins where water shortages are not binding. As noted in Chapter 4, an irri- ■■ Greenhouses help reduce impact of climate on agriculture gation package including drainage would provide major while adding value. On the negative side, agricultural investment gains. Investments in irrigation need to target production in greenhouses often requires a significant water efficiency rather than simply increased irrigated level of inputs, including pesticides, which need to be area. To optimize water use, rehabilitation should be tar- carefully managed. geted to areas with the highest benefits from irrigation, in particular, those with high value crops (horticulture, ■■ Finally, organic agriculture can help in reducing the orchards, and vineyards). The option to work with micro- environmental impact of agriculture while contributing catchments and more locally-based irrigation systems to growth and employment generation, even though it rather than full large scale system rehabilitation should is not an adaptation practice. be also considered. Other approaches to increase water efficiency include optimization of water fees, beneficia- Policy and institutional strengthening is critical to support ries’ co-financing requirements and private options for the recommended interventions. Capacity of the research and micro catchments. Improved functioning (including cost extension systems should be upgraded to be able to address recovery) of the Water Economies will be necessary as adaptation challenge, especially the capacity to test feasibil- well as demonstrated capacity of basin authorities and ity of adaptive technologies. Systematic agri-environmental other institutions that regulate water. monitoring programs for soil, surface, groundwater and biodiversity are critical for sustainable agriculture. Improved ■■ Improved soil management of arable land . Global hydro-meteorological capacity would be necessary to track experience shows that farmers on good soils are less better the changes in climate. With increasing climatic risks affected by climate change. Reduced soil disturbance, to crops, crop insurance, particularly for droughts, needs to proper management of crop residues, crop rotation, be available and accessible to farmers. To motivate farmers reduce soil erosion and cultivation costs, improve water to adopt good agricultural practices, a system of incentives efficiency, and increase crop intensity and productiv- should be created and supported by information campaigns, ity. Other adaptation technologies include: avoiding and any agricultural subsidy program should support water- burning of crop residues, smoke curtains to address efficient choices of crops. late spring and early fall frosts, and hail protection nets for orchards or vineyards. Long-term challenges and opportunities are many. A last, long-term challenge for the agriculture sector will be to remain ■■ Improved pasture management. Improved pasture competitive when availability of cheap labor decreases and management could reduce soil erosion while improving food safety and quality requirements tighten. On the other productivity. hand, climate change is expected to provide opportunities in addition to challenges, as demand for agricultural goods ■■ Land consolidation and land market improvement. may increase, in particular from Middle Eastern countries, Modern land consolidation can make agriculture and rural whose own production potential is expected to suffer due economies more productive, competitive, risk-tolerant, to climate change. and environmentally sustainable. Small and fragmented land plots often lack access to roads and/or irrigation canals. The land consolidation process organizes land plots around access roads and irrigation canals. 52 F Y R M aced onia Gr een Grow th Country A ssessment C an Agriculture Flourish in a Changing Climate ? 53 WATER ENERGY SUPPLY AIR POLLUTION AND DEMAND TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 6 How Can the Energy Sector Be Transformed, and What Can Energy Efficiency Contribute? t CHAPTER SUMMARY as to find demand-side energy-saving solutions. Demand- side modeling estimates the potential reduction in energy demand as a result of energy efficiency measures implementa- tion under two green (mitigation) scenarios 83 . Supply-side modeling outcomes provide a minimum cost solution for the he main objectives of a green growth strategy in power generation mix while meeting expected EU require- the energy sector are achieving demand-supply ments for mitigation (21 percent reduction by 2020 compared balance and supply security, lowering emis- to 2005) and taking into consideration technology and other sions intensity, and increasing efficiency of the resource constraints. Marginal abatement cost (MAC) curve sector. In the power sector in FYR Macedonia during the last analysis evaluates the effectiveness of each of the proposed decade, demand has outpaced domestic supply, sometimes energy efficiency measures and supply technologies by mea- significantly. Power pricing, as well as operational inefficiencies suring marginal net unit costs (the present value of net cost per (collection and T&D, transmission and distribution, losses) unit of CO2e abatement) and the related abatement potential have also been critical issues. Significant progress has been of each measure. Three interlinked models are used for the achieved on tariff reform, but household tariffs for power and analysis: the macroeconomic model, the energy demand tariffs for district heating still need to be adjusted to achieve model EFFECT and the energy supply model MARKAL. cost recovery. Gas sector liberalization has been delayed, but the government plans to achieve efficient pricing of gas, The outcomes of modeling show that the combination of leading to increased demand for gas and partial replace- the Super Green scenario’s demand-side measures and the ment of lignite and oil with gas in the primary energy mix. Green scenario’s supply side measures is best in meeting A particularly challenging issue is the very high emissions jointly the strategic objective of supply security and the intensity of the Macedonian economy: the ratio of greenhouse financial objective of minimizing abatement costs and is gas (GHG) emissions to GDP is 5 times higher than the EU therefore recommended. While demand-side actions are a average, mainly due to the prevalence of lignite in the energy critical short-term solution considering their lower cost and mix and a negligible share of gas, but also due to outdated shorter implementation period, longer-term and investment- equipment. How can the energy sector be transformed, and intensive supply-side measures provide the biggest gains what can energy efficiency contribute? in bridging supply-demand gap and abatement. These measures should include aggressive development of gas The main objectives of the analysis are to find best solu- supply, such that gas completely replaces lignite and oil. This tions for the Macedonian power supply mix that would cover shift implies construction of new gas generation plants, of a demand at a minimum cost while reducing emissions and the emission intensity of the power sector and industry, as well 83. See Box A and Box 2.1 describing modeling scenarios in this study. How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 55 new cross-border gas pipe line, and of new gas distribution while the energy policy design and energy sector management infrastructure. In addition, new hydro and wind plants should are in the hands of the Department of Energy within the Ministry be constructed. On the demand side, standard energy effi- of Economy. The most important issues to be addressed, as ciency measures that have proved to be cost efficient in other reflected in the FYR Macedonia’s Energy Strategy84, are in the countries should be implemented as quickly and broadly as power and gas segments of the energy sector. possible to support the maximum achievable reduction in demand. Strengthening the institutional capability to design Reform in the power sector is most advanced. Power sector and implement energy efficiency programs is a key element restructuring started in 2004 with the vertical unbundling of of a successful energy efficiency strategy for FYR Macedonia. the Electric Power Company of FYR Macedonia (ESM) into Making low cost capital available for demand-side energy three legally separate entities – generation, transmission, and efficiency investments is essential for capital intensive, long- distribution and supply. Currently, tariffs for transmission, as payback energy saving measures such as building retrofit. well as distribution and public supply are regulated, while generation and wholesale supply to qualified consumers (large industrial users) are not regulated and are set by the market85. CHALLENGES FOR GREENER GROWTH Generation is fully state owned and the Electric Power Plants FYR Macedonia (ELEM) operates two major thermal power Overview plants, Bitola and Oslomej, comprising approximately 55 percent of the total installed capacity, and seven hydropower Energy sector transformation is critical for green growth in plants with 35 percent the total installed capacity. The gov- FYR Macedonia. The main objectives are achieving demand- ernment is planning to sell 49 percent of ELEM’s assets to supply balance and supply security, lowering emission a private investor, starting the deal in 2013 86 . Transmission intensity, which makes energy sector the top contributor is also fully state-owned and operated by Macedonian to the country’s total GHG emissions, and increasing effi- Electrotransmission System Operator (MEPSO). Distribution ciency of the sector including efficient cost of services and and supply is privatized and operated by a private joint stock increased quality of service provision. Importance of these company EVN FYR Macedonia (90 percent owned by EVN objectives places energy sector at the very top of the green Austria, 10 percent by MEPSO). growth agenda. The major current tasks include Western Balkan countries’ energy market integration, investment in The biggest issues in the power sector are supply-demand energy infrastructure and energy efficiency improvements, balance, import dependence and operational efficiency of supported by institutional and policy reforms. These tasks the sector, which includes efficient pricing. During the last correspond to the goals of the 2005 Energy Community Treaty, decade, demand has exceeded domestic supply, and the gap which aims at converging energy policy of the Western Balkan has been filled with imported power. Over the period from countries (Albania, Bosnia and Herzegovina, Croatia, FYR 2000 to 2009, electricity demand rose by 18 percent,87 while Macedonia, Moldova, Montenegro, Serbia and Kosovo) with domestic supply decreased by 3 percent and power imports that of the EU. The main obligations of the countries-parties averaged at as much as 20 percent of demand, peaking at to the Treaty are full unbundling of the energy companies, even higher 32 percent in 2008 (Figure 6.1). The average annual establishment of regulatory framework, liberalization of the cost of the power import in 2003-09 was €95 million, peaking energy markets including allowing consumers to choose at €235 million or 3.6 percent of GDP in 2008, thus adding suppliers, and cost recovery pricing of the end-user energy substantially to the country’s current account deficit.88 Energy products. All of the above are essential conditions for private import dependence 89 is 45 percent, which is close to the sector participation in generation and obtaining financing for investments in cross-border power transmission and gas 84. Ministry of Economy, FYR Macedonia. 2010. Strategy for Energy Development in the Republic of Macedonia until 2030. Skopje. pipelines, as well as in the construction and refurbishment of 85. Market prices will be eventually applied to a wider range of consumers. the generation plants and the networks. At the next step of this process, on July 1, 2013, middle sized companies will be qualified to pay market prices. FYR Macedonia has already made progress toward meeting 86. Previous attempts to attract private investment in hydro generation, namely, in two large plants Chebren and Galishte, were not successful. these obligations. The new regulatory framework is set to However, a new tender for this deal has been recently announced. achieve full liberalization of the energy market by January 1, 87. Annual average 1.9 percent in 2000-2009; the 12 percent drop from 2008 2015. An independent regulator Energy Regulatory Commission to 2009 is explained by the collapse of electricity-intensive exports from heavy industry. was established in 2002, with the mandate to issue energy 88. Tieman, Alexander F. 2011. “The Electricity Sector in FYR Macedonia.” licenses and regulate energy prices including power tariffs. The IMF Working Paper WMP/11/30. Washington, DC: IMF. Energy Agency was created in 2005 to implement energy policy, 89. Net imports as percent of total primary energy supply. 56 F Y R M aced onia Gr een Grow th Country A ssessment OECD average of 44 percent. All crude oil and oil products are Figure 6.1. Demand exceeds supply and the gap imported and constitute 12 percent of total imports making is filled with imported power it the country’s largest single import item.90 Also, all natural Electricity demand, supply and imports 2000-2010 gas is imported. Starting in 2000, FYR Macedonia has been importing electricity. 10,000 9,000 8,000 Electricity , GWh Power pricing, as well as operational inefficiencies (col- 7,000 lection and T&D losses) have also been critical issues. 6,000 Significant progress has been achieved with tariff reform 5,000 4,000 and industrial tariffs have reached cost recovery. However, 3,000 household tariffs, while there have been increases in the 2,000 previous years, are still below cost recovery level. Since 1,000 distribution was privatized, operational inefficiencies were 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 substantially reduced. The latest available analysis of the tariff subsidy estimated it at 0.7 percent of GDP for 2010 91. It also Demand Domestic Supply Imports estimated T&D losses and collection losses92 at additional 0.8 percent of GDP for 2009. Tariff subsidy reduced significantly Source: Alexander F. Tieman, The Electricity Sector in FYR Macedonia , IMF Working Paper WP/11/30, IMF, Washington DC, 2011 from 2008-09, when it amounted to 3.8 percent of GDP and 2.3 percent of GDP respectively. Also, after distribution was privatized in 2006, supply inefficiencies – T&D losses and intensity reduction and efficient costs of services. In the under-collection – were reduced. However, the problem with current market situation, both the supply of gas and demand subsidization has been exacerbated, following the 2008 crisis, for gas are constrained. First, there is an ownership dispute by a decrease in the share of large industrial users, the only regarding the currently operating gas pipeline, which delivers customers paying non-subsidized tariffs. Their share of con- Russian gas through the border with Bulgaria. The dispute sumption decreased from 25 percent in 2005-08 to 17 percent relates to the joint-stock venture between the Government of in 2009, resulting in higher average cost-tariff gap. Also, after FYR Macedonia and Makpetrol94. As a result of the dispute, two household tariff increases in 2012 (a 7.8 percent increase the gas pipeline to Skopje is operating at 12 percent of its in January and a 9.8 percent increase in August), subsequent capacity. Second, demand for gas is constrained by high increases were delayed and household tariffs are still below prices for imported gas95, which are based on the long-term their cost recovery level93. oil-indexed gas contracts and exceed gas prices in the EU, making power more attractive as an energy source for all Another critical issue is power sector cost efficiency, which customers, including exporting industry and households, an can be increased through continuing power and gas sector inefficient outcome in terms of both market costs and emission liberalization and increase in the gas share in the generation intensity. Resolving the dispute and achieving market-based mix. Gas sector liberalization has been delayed, but the gas pricing will drive demand for gas up. At the same time, Government plans to address it and achieve efficient pricing a sufficient infrastructure for gas supply will be required to of gas, increased demand for gas and partial replacement of support this outcome. lignite and oil with gas in FYR Macedonia’s primary energy mix, which would support the objectives of the energy Both a cross-border gas transportation system designed sector transformation including energy security, emission to ensure supply security and a gas distribution network within the country will be needed. The existing cross-border 90. International Energy Administration (IEA). 2008. Energy in the Western Balkans. The Path to Reform and Reconstruction. Prepared in Cooperation pipeline is transporting Russian gas to FYR Macedonia across with United Nations Development Program. Paris: Organization of Economic Cooperation and Development / IEA. the border with Bulgaria and has capacity to deliver 0.8 bcm 91. Tieman, Alexander F. 2011. “The Electricity Sector in FYR Macedonia.” per year, with a possibility to be upgraded to 1.2 bcm per IMF Working Paper WP/11/30. Washington, DC: IMF. year, enough to provide gas for more than 800 MW of base- 92. Not recorded in ELEM’s accounts. load power generation capacity, approximately half of the 93. Tariff analysis subsidy source: Tieman, Alexander F. 2011. “The Electricity total generation capacity today. Construction of additional Sector in FYR Macedonia.” IMF Working Paper WP/11/30. Washington, DC: IMF. Note that this subsidy is implicit: it is recorded in state-owned ELEM’s pipeline(s) is under consideration; this involves delivery of accounts as a loss and is cross-subsidized with profits from other activities. The estimate of this full implicit subsidy is based on a regional market price Russian and Algerian gas via new routes. A recently-built of €63 per MWh (ELEM’s average weighted import price in 2009), while the price at which ELEM supplies tariff customers is equivalent to some €30 94. Makpetrol is licensed to sell gas to industrial customers, while the joint per MWh. In addition, calculating the implicit subsidy takes account of the venture operates the pipeline. average transmission price of €4 per MWh, which is included in the import price of €63 per MWh but should not be included when calculating the 95. FYR Macedonia has no indigenous gas resources; all gas has to be opportunity costs, as this revenue would not accrue to the generator. imported. How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 57 Skopje Combined Heat and Power (CHP) plant would then Macedonian economy has Figure 6.2. likely become a least-cost source of heat supply in Skopje high emissions-intensity compared with during the winter and provide power at competitive prices in European countries the summer. To deliver gas for heating to customers, invest- Emissions intensity of GDP in 2008 and its ment in a gas distribution network will be needed. It is not yet growth, 1992-2008 clear whether the least cost option would be to create a net- work to deliver gas to CHP plants for district heating or directly Emission Intensity of GDP, 2008 to customers. A Government study evaluating costs of these 3 alternative options is about to be started in five Macedonian Bulgaria cities. Most efficient use of resources and increased energy FYR Macedonia 2 security would be provided by regional integration of gas West Balkan Azerbaijan AVG supply and the Energy Community is exploring a possibility Romania Czech Republic Poland for developing it.96 Hungary 1 Slovak Republic Croatia Turkey Albania Lithuania Greece EU Slovenia Portugal Latvia A most challenging issue is a very high emissions-intensity of Sweden Denmark Germany Austria Switzerland the Macedonian economy: the ratio of GHG emissions to GDP 0 -80% -60% -40% -20% 0% 20% is 5 times higher than the EU average and 1.5 times higher than Growth in emission intensity of GDP (1992-2008) the ECA regional average (Figure 6.2).97 The main reason is the structure of Macedonian energy consumption dominated Source: Staff calculations using the IEA database. by lignite and oil that together constitute more than three- fourths of the total. As a result, the energy sector accounts for 71 percent of total GHG emissions in the country (Figure 6.3) and is highly emission intensive mainly due to its heavy prevalence of lignite and a negligible share of gas. In countries reliance on fossil fuels. Additional factors of high emission such as Denmark, Germany, Britain, Italy, Canada and the USA, intensity of the Macedonian economy include energy-intensive the share of natural gas in total primary energy consumption industry; aged assets with low energy efficiency across the ranges from 20 percent to 40 percent, and the share of lignite economic sectors, including power sector; the district heating from 8 percent to 22 percent. In FYR Macedonia, the economy sector based on high-emission heavy fuel oil; a recent trend, relies heavily on domestic lignite, which is the dominant energy driven by increased power tariffs and low quality of power source, accounting for half of total primary energy consump- supply, of the household sector’s high and increasing usage tion and 60 percent of electricity generation. Hydropower and of wood and inefficient 98 stoves for heating; inefficient heat other renewables account for four percent of primary energy pumps for cooling; and poor building insulation in households, consumption and 19 percent of electricity generation99. The first municipalities, and the commercial and industrial sectors. wind generation plants are being constructed currently, and a limited solar photovoltaic capacity is functioning. Biomass The structure of Macedonian energy consumption differs from (fuel wood, agricultural and municipal residues and wastes) the majority of the EU and non-European OECD countries in accounts for seven percent of primary energy consumption, two respects: Macedonian consumption is characterized by but it is almost entirely fuel wood, which is widely used by households for heating and cooking (see Box 6.1). The structure 96. However, recent ideas of creating a West Balkans’ Natural Gas Ring, a of Macedonian primary energy consumption has remained gas transmission pipeline linking Albania, Bosnia-Herzegovina, Croatia, Kosovo, FYR Macedonia, Montenegro, and Serbia, originally suggested by more or less the same for the last decade. (Figure 6.4). Turkey’s Botas and Greece’s DEPA in 2003, have not been implemented in view of Greek and Turkish participation in the Nabucco and/or ITGI project (See http://www.transconflict.com/2010/09/re-linking-the-western-balkans- the-energy-dimension-309). 97. Very similar outcomes are presented in the following source: International Energy Administration (IEA). 2008. Energy in the Western Balkans. The Path to Reform and Reconstruction. Prepared in Cooperation with United Nations Development Program. Paris: Organization of Economic Cooperation and Development / IEA. According to this source, energy intensity in FYR Macedonia is 0.71 tons of oil equivalent per unit of GDP (1000’s of 2000 $), more than three times the average for OECD Europe (2005 data). In 2005, FYR Macedonia produced 0.64 kg CO2e per unit of GDP (1000’s of 2000 GDP), almost three times higher than the world average and more than five times the average for OECD Europe. 98. Typically with 22 percent efficiency. See International Energy Administration (IEA). 2008. Energy in the Western Balkans. The Path to Reform and Reconstruction. Prepared in cooperation with United Nations Development Program. Paris: Organization of Economic Cooperation and Development / IEA. 99. Source: IEA database 58 F Y R M aced onia Gr een Grow th Country A ssessment Figure 6.3. Macedonian energy sector is the top emitter CO2e emissions for FYR Macedonia and the EU, shares, 2009 a. FYR Macedonia b. EU Others Others 3% 5% Residential 2% Agriculture 0.4% Transport Residential 15% 12% Agriculture Construction 1% 0.2% Electricty and Heat Manufacturing 9% 43% Transport Electricty and Heat 25% 71% Manufacturing 13% Construction 0.3% Notes: Energy sector refers to electricity and heat production and energy sector own use; transport sector includes all transport activity regardless of the economic sector; residential refers to emissions from fuel combustion in households; “Other” includes commercial/institutional activities, fishing and emissions not specified elsewhere. Source: Staff calculations using the International Energy Agency (IEA) database. Figure 6.4. Macedonian economy relies heavily on lignite and has almost no gas in primary energy Primary energy by fuel, FYR Electricty andMacedonia Heat and comparators, Manufacturing 2009 Construction Transport Agriculture Residential Others 1 1 100 2 2 4 11 4 14 7 80 5 2 7 24 percentage 25 34 60 40 37 35 48 20 16 20 0 EU OECD FYR Macedonia Coal Oil Natural Gas Biofuels and wastes Nuclear Hydro Renewables Imported electricity Source: Staff calculations using data from the National Statistical Office. How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 59 Box 6.1. Fuel wood use in FYR Macedonia is for fuel while illegally harvested wood is presumed to be used entirely for fuel. Forest fires have also had deleterious impacts A surprisingly high and rising reliance on wood for heating drives on FYR Macedonia’s forests, affecting nearly 100,000 ha over the up FYR Macedonia’s emission intensity and generates excessive last 10 years (out of about 950,000 ha of total forest), while climate local air pollution. Household wood burning generates about eight change has exacerbated the threat of insect and disease damage. percent of the country’s GHG emissions and about the same share of total particulate matter pollution according to official statistics. The drivers of escalating biomass use in FYR Macedonia are the About 70 percent of energy used for heating comes from biomass rising price and low quality supply of district heating, higher or fuel wood. Most importantly, it is the widespread use of inef- electricity tariffs, and the underdeveloped gas supply network. ficient wood stovesa that undermines what could otherwise be a Poor building insulation aggravates the problem: residential climate-friendly use of renewables. Instead, the increasing usage of energy consumption for heating is two to three times higher than biomass should be seen as an indication of energy poverty, reflect- in Western Europe. The very low efficiency of most (50-85 percent) ing household inability to afford modern heating sources, such as of wood stoves, at around 22 percent, renders the economic choice gas, district heating or electricity; as well as a lack of access to gas. of wood into a high-polluting option. Modern masonry or down- burning stoves or pellet boilers could achieve efficiencies of 60 to Biomass use in FYR Macedonia is higher than most of Europe 80 percent. Further, since wood is mostly used in detached houses, (Box Figure 6.1) and has been rising in recent years. Three- urban sprawl, a dominant characteristic of FYR Macedonia’s urban quarters of the population use wood for heating on a daily basis. development over the past two decades, is another factor. Particularly surprising, even in urban areas, nearly 60 percent of households rely on biomass for heating (compared to 95 percent Only 10 percent of households are currently connected to district of rural households). Within Europe, only Montenegro, Bosnia and heating. Increasing prices (partly due to rising world oil prices, percentage Herzegovina, and Kosovo approach Macedonian levels of biomass but also system inefficiencies), building-level metering, and poor use. The upward trend for heating and cooking with biomass in FYR supply quality are all factors. Widespread disconnections in recent Macedonia has accelerated in recent years, rising by an average 6 years followed implementation of consumption metering at the percent during 2005-2010 after a much lower average 3 percent building level. At that time, many households in poorly insulated annual growth during 1991-2005. buildings, as well as in buildings with low connection rates, opted for disconnection and switched to electric and biomass heating. The numbers above underestimate the problem by 25 to 30 percent because of widespread illegal logging. The use of illegal Combined electric and biomass heating is a typical pattern in FYR fuel wood (in excess of regulated levels and cut without appropriate Macedonia. Macedonians use a much larger share of electricity licensing ) is prevalent throughout the country.b While the overall for heating than in a typical European country. On the average, forested area in FYR Macedonia has remained relatively stable, at households use 57 percent of electricity for heating, 25 percent for about 37 percent of the territory, illegal logging is a significant and home appliances, 11 percent for heating water, and only 7 percent growing threat to forest resources, taking a large proportion of for lighting. Still, because of the recent years’ increase in electricity the growing stock each year. 85 percent of wood harvested legally tariffs and the growing unreliability of supply, consumers combine use of electricity and biomass and Box Figure 6.1. Wood is the dominant fuel for Macedonian heating have been increasing the share of Final heat consumption by energy source, 2007 the latter. In the winter, when fuel wood prices increase and supply is short, consumers turn to electric 100% heaters, contributing to overload 90% of the electricity network. 80% 70% Reduction of biomass consumption 60% 50% by households can significantly cut 40% GHG emissions and air pollution. 30% Modeling conducted for this study 20% showed that most of the potential 10% household energy savings, and 0% therefore emission reduction of ia a a ia ia ia ia ia e ia n on v gi in at tv rb en ja ar do an r ed ra 68-69 percent lies in biomass.c La ai o eo lg Se m m ol Cr Uk rb ac Bu Ar G Ro M M e Az A combination of expanded gas R FY supply networks, improved cen- biomass electricity district central heat oil products natural gas coal lignite tral heating supply, and programs aimed at stove replacement would Source: United States Agency for International Development (USAID). 2007. Alliance to save energy. Municipal network for energy efficiency. Regional urban heating policy assessment, Part 1. be needed to reduce emissions 60 F Y R M aced onia Gr een Grow th Country A ssessment METHODOLOGY AND MAIN FINDINGS from biomass combustion. Stove replacement could be a first- tier solution, as it can be implemented faster and with a lower budget than the more permanent centralized heating options. Methodology Inefficient stoves should be replaced by modern ones that run on fuel such as concentrated wood pellets, can reach 80-90 The main objective of the analysis was to find best solu- percent efficiency, and are associated with lower emissions tions for Macedonian power supply mix that would cover of carbon monoxide, volatile organic compounds, particulate demand at a minimum cost while reducing power sector matter and other hazardous air pollutants. overall emissions and emission intensity of both the power sector and the industry. Another objective was to estimate potential reduction in the demand for power as a result of Sources used: Ministry of Economy, FYR Macedonia. 2010. Strategy for Energy implementation of energy efficiency measures in household, Development in the Republic of Macedonia until 2030. Skopje. industry and non-residential sectors. The cost of the proposed Ministry of Environment and Physical Planning, FYR Macedonia. 2012. FYR Macedonia’s Informative Inventory Report (IIR) 2010. Submission power sector green investments per unit of emission reduc- under the United Nations Economic Commission for Europe (UNECE) tion wase evaluated. The analysis was done in three steps: Convention on Long-range Transboundary Air Pollution. Skopje: UNECE. demand-side modeling, supply-side modeling and Marginal International Energy Administration (IEA). 2008. Energy in the Abatement Cost (MAC) analysis. Green policy measures were Western Balkans. The Path to Reform and Reconstruction. Prepared in Cooperation with United Nations Development Program. Paris: evaluated using three-scenario modeling (see description of Organization of Economic Cooperation and Development / IEA. the scenarios including policy measures in Table 6.1): the out- European Commission (EC). 2011. Biomass Consumption Survey for comes of Green and Super Green scenarios were compared Energy Purposes in the Energy Community, FYR Macedonia. Centre for Renewable Energy Sources and Savings. EC. with the outcomes of the Business as Usual (BAU) scenario. Stojilovska, Ana and Sonja Zuber. 2013. Energy poverty in FYR Macedonia. European Union (EU) Policy Brief. October 2013. Produced by Konrad Adenauer Stiftung and Analytica Think Tank, Demand-side modeling was used to estimate reduction in FYR Macedonia. EU. energy demand as a result of energy efficiency green measures US Forest Service, International Programs, FYR Macedonia. http:// www.fs.fed.us/global/globe/europe/macedonia.htm. implementation in two Green scenarios. It also evaluated the level of investment needed to implement the proposed green a. 61% of the households that reported biomass consumption measures. Modeling was done for three sectors - residential, use biomass for cooking. Very few, approximately 6 percent, of non-residential (public and commercial) and industrial – and households use biomass for water heating. b. Ministry of Economy, FYR Macedonia. 2010. Strategy for Energy the outcomes were then added up to calculate electricity Development in the Republic of Macedonia until 2030. Skopje. c. Other sources of energy included in the calculations were district sector total. Supply-side modeling provided best solution heating, LPG, gas/diesel, and lignite. for electricity supply mix at the minimum possible cost and considering that the volume of power supplied should be sufficient to meet the level of demand projected in the demand-side analysis and the GHG emission reduction target should be met. MAC curve analysis evaluated the effec- tiveness of each of the proposed abatement measures by measuring its marginal net cost (present value of net cost per unit of CO2e abatement) and the related abatement potential. Modeling was performed using three policy scenarios: the Business as Usual (BAU) scenario, the Green scenario and the Super Green scenario100. BAU scenario is based on the characteristics of the Macedonian national energy system - existing power technology stock, domestic power resource availability and import options, and existing policies, – as well as on the power sector development plans reflected in the FYR Macedonia Energy Strategy (2010).101 102 However, 100. See Box A and Box 2.1 describing modeling scenarios in this study. 101. Ministry of Economy, FYR Macedonia. 2010. Strategy for Energy Development in the Republic of Macedonia until 2030. Skopje. 102. In fact, this analysis uses the same supply-side model as the Macedonian Energy Strategy (MARKAL model, see description in this section below). However, this modeling uses more recent base year data (2009) than the Strategy (2006). How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 61 BAU differs from the FYR Macedonia Energy Strategy in two scenarios, 20 percent of supplied power comes from renew- aspects. First, the Energy Strategy assumes imports of lignite able sources by 2020, consistent with the EU requirements. The for power generation, while BAU does not consider lignite Green and Super Green Scenarios also assume that energy imports, as they are no longer justified based on the cur- efficiency measures are taken more aggressively than in BAU. rently expected increase in the price of lignite mining (see These measures combine building retrofit, investments in new Section 1) and on the higher than previously anticipated and technology, and policy incentives aimed at containing energy considered in the Energy Strategy investment cost of lignite demand (see details in Table 6.1). power plants. Second, the BAU scenario does not consider hydro and wind power plants, except those that are already Three interlinked models were used for the analysis: the under construction. The reasons for limiting new hydro capac- macroeconomic model, the energy demand model EFFECT ity in BAU include higher than previously projected cost of and the energy supply model MARKAL. The models were hydropower due to low capacity factor of FYR Macedonia’s implemented in the following sequence (Figure 6.5): hydro plants, pushed further down by climate change103, which, when combined with high up-front investment requirements ■■ Step 1. The Macroeconomic model produced projec- and long-term nature of hydro power construction, becomes tions for basic macro indicators, which are considered incompatible with the urgency of the FYR Macedonia supply- the key factors of energy demand: GDP, energy sector demand balance need and BAU’s limited financial resources.104 value added, and energy prices. These projections were (Box 6.1) used as input in the micro model EFFECT, which projects energy demand. Energy efficiency improvements assumed in the BAU scenario are also consistent with the FYR Macedonia Energy Strategy and driven by the country’s current economic development objectives. BAU assumes that households and businesses move into new buildings or houses, retrofit the old ones Modeling parameters, constraints Box 6.2. and replace electric appliances at the rate corresponding and assumptions for the baseline scenario* to the projected rate of economic growth and considering Key modeling parameters, projected using macroeconomic current regulations. BAU also assumes that industries replace modeling and data from the UN, Eurostat and the World Bank, equipment and implement energy efficiency measures at the include: 4.5 percent average annual GDP growth, 2.8 percent rate consistent with the projected rate of growth in industrial average annual energy sector growth, and 4.2 percent annual value added. BAU assumes no expansion plans for district average household income growth (2010-2035); fuel prices; heating companies and no new natural gas distribution lines existing generation plants plus new generation plant options; and therefore no increase in usage of natural gas and district expanded international trade; and increased tourism. heating by households, businesses and small and medium Key constraints and assumptions for the supply side energy industrial users. optimization model include: - New wind plant capacity is limited to plants already under The Green and Super Green scenarios include policy mea- construction and does not exceed 150 MW in 2050; sures and investments aimed at reducing energy demand as - New solar photovoltaic capacity is limited to 40 MW; compared with the BAU level at the lowest possible cost while - Imported power price is 4.5-11 € cents/kWh; lowering the GHG emissions as required by the EU policies. - Capacity of new large hydro plants is limited to those already This is achieved by switching from solid and petroleum- under construction; - Retiring lignite plants are replaced by new lignite and gas based fuels to natural gas and deploying renewable power. plants; In particular, retiring lignite plants are replaced by gas plants - Committed gas combined-heat-and-power plants are built. and new hydropower and wind capacity is added above the BAU level. Super Green scenario also considers adding solar Key assumptions for demand side modeling include increased photovoltaic and nuclear capacity.105 As a result, in both Green efficiency of household appliances; improved efficiency in heating, cooling and lighting in non-residential sector; and equipment replacement in industry. 103. Climate change has a negative impact on river runoff. 104. Hydropower development is also modeled in Chapter 4 on water. While the modeling framework in the water sector analysis differs, the outcomes *Note: Green scenarios have the same modeling parameters as are similar. in the business-as-usual (BAU) or baseline scenario; change in 105. Nuclear power is included in the Super Green scenario because the constraints and assumptions from BAU is related to the shift in the Macedonian Government’s Strategy for Energy Development includes the fuel mix away from solid and petroleum-based fuels to natural gas, construction of a 1000 MW nuclear power plant in the future, sometime hydro generation, wind, and solar photovoltaic; they also have more after 2020. Nuclear power is a technically available option that warranted aggressive energy efficiency strategy than in BAU. consideration in the analysis. 62 F Y R M aced onia Gr een Grow th Country A ssessment ■■ Step 2. The World Bank’s EFFECT model (Energy Some of the data needed as input into EFFECT were not Forecasting Framework and Emissions Consensus Tool) present in the available sources and a household survey (see Box 6.2) used macroeconomic projections from was conducted to collect the data on ownership and Step 1, together with other input data, to project energy energy consumption of household appliances, as well as demand for four sectors—household, non-residential, consumption of cooking fuels such as biomass, LPG and industrial, and transport—over the period from 2010 to osene. The survey was conducted by specialists at the ker­ 2035. The results were then extrapolated to 2050. For Ss Cyril and Methodius University in Skopje. The sample, each sector, demand was projected by subsector and representative of economic regions of the country and type of usage. The projections were made separately of socio-economic groups of the population, included for power and non-electric energy. The projections for 754 households. transport sector are presented in the transport chapter of this report. Table 6.1. Green policy/investment action in energy, by scenario Scenario Scenario design Policies/investments (see Box 6.1 for modelling parameters) Business as Usual Supply side: Supply-side investments/policies: (BAU): no change Increased share of gas in the ●● Investment in new gas CHP and hydro plants; in planned energy mix, slightly reduced policies ●● Investment in a new gas pipeline and in reinforcement of the existing one; share of lignite and low profile hydro generation development. Energy efficiency: increased efficiency of household appliances; improved efficiency in Differs from FYR Macedonia’s heating, cooling and lighting in non-residential sector; equipment replacement in the energy strategy on two aspects: industry. no lignite imports or aggressive ●● Household sector: lighting, refrigeration, water/space heating account for 83% of hydro development. household electric use and will be targeted. This would include substitution of CFL/LED Demand side: lights for incandescent bulbs; new refrigeration units; improved water heaters; building insulation. Full implementation of all energy efficiency interventions: ●● Non-residential sector: building insulation, efficient lighting; household, commercial, public ●● Industrial sector: equipment replacement; and industrial sectors. ●● Establishing minimum efficiency standards for new units Space heating improvements through insulation. Air conditioning: choice of higher efficiency options; ●● Tackling T&D losses. Green: Supply side: Supply-side investments/policies: green policies/ ●● More aggressive gas, hydro ●● More aggressive new natural gas plant investment (replacing lignite plants) than in BAU; investment plan and wind deployment ●● More hydroplant investment than in BAU, commissioned in 2012-22; than in BAU; fuel mix shifts further away from solid and ●● More wind plants than in BAU, 2.5 times higher capacity; petroleum based fuels (lignite ●● Investment in natural gas pipeline almost double of the BAU level. and oil) to natural gas; Energy efficiency : ●● More aggressive energy ●● Household sector: more efficient lighting than in BAU, introduction of higher energy efficiency strategy than in efficiency standards for refrigerators and water heaters than in BAU, retrofitting 50% of BAU. households with wall and roof insulation, new construction standards to reduce demand for heating; ●● Non-residential sector: more efficient lighting, retrofitting of 50% of buildings with wall and roof insulation, establishment of commercial building standards for new construction; ●● Industry: introduction of more energy-efficient technologies including optimization of the existing energy supply systems and technology replacement when new production capacity is added. Super-green: The Super Green Scenario Supply-side investments/policies: extended is a more aggressive version ●● More gas plants than in Green; green policies/ of the Green Scenario, both investment plan on the supply and demand ●● More hydro than in Green, commissioned after 2025; side. In addition to renewable ●● More wind than in Green; energy in the Green scenario, it ●● More solar PV than in Green: solar PV constitutes 0.06% of total power generation in 2012 assumes solar PV. It also includes to 0.3% in 2050; deployment of a nuclear plant. ●● Nuclear plant 1000MW, introduced after 2030; ●● Additional investment in new gas pipeline as compared with Green; ●● More significant energy efficiency measures than in Green. How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 63 Methodological Framework for the Figure 6.5. Energy Sector Analysis EFFECT (Energy Forecasting Box 6.3. Framework and Emissions Consensus Tool) EFFECT was developed by the World Bank and is an Excel-based Macroeconomic Impacts on GDP, Model employment, fiscal modeling tool used to forecast cross-sectoral greenhouse gas (GHG) emissions for a country under a range of development Macroeconomic variables driving scenarios. It covers sectors that contribute significantly to emis- energy demand (GDP, sectorial sions including road transport, power, industry, household and value added, energy prices) non-residential sectors. It is an ‘open’ tool with all inputs and formulas visible (or ‘open’) to the users. It is also open to the Energy Demand MAC Curve for energy demand public because its usage does not require specialized knowl- Modeling edge and anybody proficient with Excel can utilize it. EFFECT is a bottom-up engineering tool and is very data extensive: it End-use energy demand by sector is based on very detailed engineering data, such as energy (residential/commerical, industrial and transport) usage by household appliance and by unit of industrial equip- ment, or structure of car ownership by vehicle model and age. The data are collected using available statistics, industry data MAC Curve for Energy Supply Modeling energy supply (e.g., sales of new cars by model), expert opinions (e.g., when (MARKAL) designing a set of assumptions for projections) and consumer surveys. Consumer surveys are used when data are not available otherwise, for example, to collect data on the model and make Source: Energy supply technical paper. structure of vehicle park for vehicles that were bought as used. The model is available at http://esmap.org/esmap/EFFECT. ■■ Step 3. To meet power demand projected at Step 2, Demand Side Green Measures. The overall conclusion of MARKAL, an IEA energy supply model (see Box 6.3), the demand-side modeling is that the demand-side Super found the best mix of various power sources—including Green scenario, which has full-scale energy efficiency lignite, oil, gas, hydropower, solar, wind and nuclear— measures, is preferable to the Green demand scenario, while accounting for several constraints such as resources, with more modest energy efficiency actions, because the technology, user constraints and a cap on GHG emissions. Super Green scenario better supports supply security and The optimization was aimed at finding the least cost power because the unit cost of abatement is negative.106 Given mix solution. The model produces projections for the current policies, the supply-demand gap in the power sector power mix and corresponding emissions for the period will increase in the coming years. Half of power generation from 2010 to 2050. Analysis at this step was limited to capacity is scheduled to close in the next 15 years while power and did not include non-electric energy. power demand is projected to increase by 30 percent. Moreover, other Western Balkan countries are experiencing the same problems, and FYR Macedonia will not be able Main findings to continue covering its supply-demand gap from regional imports. Energy efficiency measures can reduce demand for The combination of the Super Green scenario’s demand side power as well as non-electric energy. Demand-side modeling measures and the Green scenario’s supply side measures is provided estimates for reduction in demand for power and optimal in meeting jointly the strategic objective of supply non-electric energy as a result of energy efficiency measures security and the financial objective of minimizing abatement in the Green and Super Green scenarios over the period costs. These cost concerns include limiting both the invest- 2010-2035.107 The set of Super Green demand measures ment costs of lowering GHG emissions consistent with EU provide higher benefits than the Green demand measures. requirements for member countries (21 percent reduction by By investing €800m in Super Green demand measures, the year 2020 as compared with 2005) but also limiting the unit cost of abatement. While demand-side actions are a critical 106. Energy efficiency is also part of the discussion in Chapter 8 on urban short-term solution considering their lower cost and shorter issues. implementation period, longer-term and investment-intensive 107. Energy efficiency measures considered in the analysis are described in detail in Table 6.1. To summarize, they include equipment replacement supply-side measures provide the biggest gains in bridging in industry, building retrofitting and introduction of new construction standards, increased efficiency of household appliances, usage of more supply-demand gap and abatement. efficient stoves by households, and improved efficiency in heating, cooling and lighting in the non-residential sector. 64 F Y R M aced onia Gr een Grow th Country A ssessment Box 6.4. MARKAL (MARKet ALlocation) model* MARKAL is a family of models used for the analysis of energy/environment policy and planning including design of carbon mitigation strategies. Typical questions MARKAL answers include the following: - How to reach carbon dioxide reduction? - What is the effect of market-based instruments? - How to model technology dynamics and the impact of R&D? MARKAL is a data-driven, energy system optimization model combining ‘bottom-up’ engineering and ‘top-down’ macroeconomic approaches. The user inputs the structure of the energy system to be modeled, including resource supplies, energy conversion technologies, end use demands, and the technologies used to satisfy these demands. The user must also provide data to characterize each of the technologies and resources used, including fixed and variable costs, technology availability and performance, and pollutant emissions. MARKAL then calculates, using linear and mixed-integer linear programming techniques, the least cost set of technologies over time to satisfy the specified demands, subject to various user-defined constraints. Outputs of the model include a determination of the technological mix at intervals into the future, estimates of total system cost, energy demand (by type and quantity), estimates of criteria and GHG emissions, and estimates of energy commodity prices. The first MARKAL model was developed in the late 1970s at Brookhaven National Lab in response to the oil crisis. In 1978, the International Energy Agency adopted MARKAL and created the Energy Technology and Systems Analysis Program (ETSAP) to oversee its develop- ment. Over time, under the IEA/ETSAP oversight, the model evolved from a simple optimization bottom-up framework to a family of sophisticated models with many applications. MARKAL models are used in approximately 40 countries. *Sources: US EPA: http://www.epa.gov/nrmrl/appcd/climate_change/markal.htm IEA-ETSAP: http://www.iea-etsap.org/web/Markal.asp Ad J. Seebregts et al., Energy/Environmental Modeling with the MARKAL Family of Models: http://www.gerad.ca/fichierspdf/rx01039.pdf required generation capacity can be reduced by 600MW and Households and industry contribute Table 6.2. annual GHG emissions by 1.6 million metric tons by 2050. most to power demand reductions under both scenarios Electric energy savings. If energy efficiency measures are implemented, overall power demand will be noticeably Reduction in electricity demand in 2035 and cumulative savings, 2010-35, by scenario reduced. In 2035, demand in the Green scenario is 15 per- cent lower than in BAU and in the Super Green, 22 percent Cumulative below baseline. The high industrial savings (46 percent and Demand demand reduction, 41 percent of totals in the Green and Super Green scenarios reduction in 2035, 2010-35, respectively, see Table 6.2) are a result of significant invest- % of BAU demand % of total ment in equipment replacement and building retrofit, made Green 15 100 possible by the ongoing expansion of the sector. Households Households 12 36 also save substantial amounts of energy: 36 percent of the Non-resident. 15 18 total in the Green scenario and 40 percent in the Super Green Industrial 18 46 scenario). (Table 6.2). Super Green 22 100 Household sector power demand reduction is achieved Households 21 40 mainly through increased efficiency of lighting, electric space Non-resident. 19 18 heating, refrigeration and electric water heating, which jointly Industrial 25 41 account for 92 percent of total power saved during 2010-2035. Source: Energy demand technical paper. In the non-residential sector, most power saving comes from private offices and retail buildings. Less significant non-res- idential power saving comes from restaurants, hotels, other buildings, and government offices. Power demand reduction in the industrial sector comes mostly from the group of largest How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 65 industries known as the “Big Four” and comprising iron and Table 6.3. Industry contributes most to non- steel, cement, ore extraction, and food/beverages/tobacco. electric energy demand reductions under both Jointly, they reduced total current industrial use of power by scenarios 13 to 18 percent during 2010-2035. Within this group, the iron Reduction in non-electric energy demand in 2035 and and steel industry generated more power savings than the cumulative savings, 2010-2035, by scenario rest of the “Big Four” industries combined: 62 percent in the Green scenario and 65 percent in the Super Green scenario Demand Cumulative demand reduction in during 2010-2035.   reduction, 2035, % of BAU 2010-35, % of total demand Non-electric energy savings. Approximately two-thirds of Green 22 100 the energy savings achieved during 2010-2035 in both green Households 12 14 scenarios are in non-electric energy, with the remaining third Non-residential 31 20 in power. Because industry is the dominant user of non-electric energy and because of the sector’s high projected rate of growth, Industrial 23 66 allowing for investment in new and more energy efficient tech- Super Green 33 100 nology, industry is responsible for more than half of the total Households 33 25 non-electric energy demand reductions—66 percent in the Non-residential 38 17 Green scenario and 57 percent in the Super Green scenario In Industrial 32 57 the Green scenario, industry also achieves the highest overall reduction of energy use, equaling 23 percent, while in the Super Source: Energy demand technical paper. Green scenario, it is the non-residential sector that leads (with 38 percent total energy savings), driven by a high volume of projected new construction. New construction standards provide measures include gas regional integration and greater use much greater energy savings compared to the alternative, which of renewable domestic resources– primarily hydropower, but is building retrofitting. By comparison, the household sector is also wind, solar and biomass—which would, in turn, reduce projected to have a high volume of retrofitting and less new GHG emissions at a lower per unit cost than the Super Green construction, which means fewer chances to reduce energy loss scenario. The supply side modeling included as a modeling by applying stricter new construction standards. (Table 6.3.) input a strategic objective to increase the share of gas in the energy mix, replacing lignite and oil sources, as well as Which fuels are used less after energy efficiency measures moderate hydro generation development. Lignite-based pro- are implemented? Households burn less wood, which duction in green scenarios is phased out by 2030 due to two accounts for almost 70 percent of total non-electric energy main reasons. In addition to the high level of emissions from savings in the household sector during 2010-2035. They lignite combustion, Macedonian domestic lignite is becom- substitute cleaner fuels and use more efficient heating and ing more expensive: its potential is limited109 and the cost of cooking appliances. In addition, they use less district heating production is increasing,110 as surface mines with cheap lignite and gas/diesel, which adds 10-12 percent to the overall energy production become exhausted, leaving only more expensive savings. These three energy sources–wood, gas/diesel and underground mining in the future. Rising lignite prices are district heating—account for 97 percent of total non-electric making other energy sources such as gas and hydro price energy savings in the Green scenario and 93 percent in the competitive. Moreover, EU standards will eventually require Super Green scenario. The non-residential sector uses less lower emission intensity of newly constructed lignite-fired heating oil, which constitutes 57 percent of the overall savings power plants, which will translate into higher average unit achieved during 2010-2035 in both scenarios. This sector also capital costs of production and therefore higher average unit reduces consumption of gas and wood. Industry substitutes costs of lignite-based power. The need for carbon allowances natural gas for petroleum-based and solid fuels.108 109. Macedonian lignite reserves (proven and exploitable lignite) are limited to 332 million metric tons and, given the current share of lignite in Supply Side Green Measures. The main conclusion from energy consumption, will be exhausted within approximately 30 years; FYR Macedonia n 300 million metric tons of additional resources (proven but the supply-side modeling is that the Green supply scenario currently unexploitable or unproven but possible lignite) will add 15 years to this estimate thus extending the availability of lignite to 45 years. Source: brings the highest benefits in terms of supply security, Staff calculations using 3 percent growth rate in lignite annual production investment costs, and unit cost of abatement. The main and data from 2 sources: German Federal Institute for Geosciences and Natural Reserves (BGR) and World Energy Council: http://www.bgr.bund.de/EN/Themen/Energie/Downloads/annual_ report_2011_en.pdf?__blob=publicationFile&v=2 108. The need for measures to reduce solid and oil-based fuel consumption http://www.worldenergy.org/documents/ser_2010_report_1.pdf in large industry is also discussed in Chapter 9 on air pollution because large industries are top polluters, significantly contributing to the 110. Production cost of lignite will increase with time, as surface mines are particulate matter air pollution which is most damaging to human health. depleted and replaced with cavity lignite excavation. 66 F Y R M aced onia Gr een Grow th Country A ssessment once FYR Macedonia joins the European Union’s Emissions Figure 6.6. Greening power supply mix means Trading Scheme is yet another factor increasing the costs of moving away from lignite and oil to gas lignite-based generation. As a result, gas is already nearly Power generation mix, actual and by scenario in 2050 price competitive with lignite. Supply-side modeling produced best power supply genera- 100 tion mixes for the Green and Super Green scenarios. These 90 minimum cost solutions aimed to achieve GHG emission 80 reduction consistent with the EU requirements for member states (21 percent reduction by 2020 compared with 2005), 70 taking into consideration technology and other resource percentage 60 constraints (Box 6.1). The generation mix included natural 50 gas, hydropower, wind, solar, and nuclear sources of power. As compared to the baseline, natural gas is developed more 40 aggressively in the green scenarios, with natural gas power 30 plants replacing some of the lignite fired power plants included in BAU. Hydropower is also developed more aggressively in 20 the green scenarios, but note that policy measures to attract 10 investment would be needed since FYR Macedonia’s hydro- 0 power sites do not have an attractive profile for the private Actual 2009 BAU 2050 Green 2050 sector due to low capacity factors. Green supply scenarios also include aggressive implementation of wind power. By 2050, Import Renewables wind power capacity under Green supply scenario would be Lignite Hydro Gas 2.5 times higher than in BAU. Although controversial, nuclear power is an option considered in the Super Green supply Source: Staff calculations based on energy sector supply-side modeling outcomes. scenario for analytic purposes,111 with a 1000 MW nuclear power plant proposed for introduction after 2030. GW) is much lower in the Green scenario (Table 6.4). Unit Under the Green supply scenario, total installed capacity in abatement cost in the Green scenario is also lower than 2050 would be 2.6 gigawatts (GW), and electricity supply in the Super Green scenario, because gas, the dominant would be 14 terrawatt hours,112 fully covering demand if component of Green supply, has a lower marginal cost per the proposed energy efficiency measures under the Green unit of abatement than nuclear energy (see Figure 6.7), which or Super Green demand scenarios are implemented. The replaces more than 50 percent of gas in the supply mix of the structure of supply by fuel will be very different from both Super Green scenario as compared with the Green scenario. the actual in 2009 and that projected for 2050 under BAU. Under the Green supply scenario, total investment costs (pres- It will be based on gas, which would constitute 76 percent of ent value) would be €9.2 billion (Table 6.4), consisting of the total supply, and have no lignite. The rest of the fuel mix will €8.4 billion in supply side costs and €0.8 billion in demand side be hydro generation (19 percent) and other renewable sources costs. The supply side investments include construction of new (5 percent) (Figure 6.6). This mix would significantly lower gas plants, a new gas cross-border pipeline, new transmission GHG emissions. Total GHG emissions in 2050 under the Green and distribution lines, extended gas supply infrastructure, and Supply scenario would amount to 4.2 MtCO2e, 113 down from additional hydro and wind plants. By comparison, the Super 9.1 in the BAU scenario. Green scenario requires total investment (present value) of €9.8 billion, of which €9.0 billion are the supply side costs and The total investment cost of the Green supply scenario is €0.8 billion are the demand side costs. The higher cost of the much lower than that of the Super Green supply scenario. Super Green supply measures is mainly due to the cost of the Considering that the installed capacity in both scenarios is nuclear generation plant which is part of this scenario, but not the same, it means that the unit cost of investment (€ per of the Green scenario. 111. See footnote 121 above. The total investment cost of the Green supply scenario is 112. One terawatt hour is equal to a sustained power of approximately 114 below the cost of the BAU supply scenario, while the emis- megawatts for a period of one year. sions are substantially reduced. This is due to cheaper gas 113. From this point on, all Green supply modeling outcomes assume that the previously recommended Super Green demand measures have been plants replacing lignite capacity, which allows for additional implemented. How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 67 Table 6.4: Combined supply and demand is the sum of abatement potential of all measures imple- scenario characteristics mented individually (if options were implemented together, they would have a smaller impact as some of them target the Installed capacity, same emissions). Measures with a negative unit cost result in installed capacity Total investment GHG emissions, Cost per unit of demand cost ( € net revenues for the public sector (Figure 6.7). supply and   (MtCO2e) ( € /GW) billions) Among all supply side technologies that are included in (GW) 2050 2050 additional generation capacity in the green scenarios, the Business-as-Usual 9.7 9.1 3.2 3.0 most cost efficient ones are new gas capacity, new hydro Green supply-Super capacity and new nuclear capacity —those with low net unit 9.2 4.2 2.6 3.5 Green demand cost of abatement, as reflected in the height of the corre- Super Green supply- sponding bars, and high abatement potential, as reflected Super Green demand 9.8 1.6 2.6 3.8 in the width of the bars. Both demand scenarios, Green and Super Green, are very efficient–they have a negative net unit Source: Staff calculations based on energy demand and supply modeling outcomes. cost of abatement and high abatement potential. expensive wind and hydro to be included in the mix and for the RECOMMENDATIONS cost associated with extending the gas supply infrastructure. The cost of new transmission and distribution lines is broadly in The combination of Green supply and Super Green demand line with that of the BAU supply scenario because the amount measures delivers the optimum results in 2050 considering of additional renewables resources remains low (in the order security of supply, overall cost, unit investment costs and of 50-100 megawatts to 2050), and because it is assumed that unit cost of abatement. As part of the Green supply sce- the new gas plants will be built at the location of the new lignite nario, aggressive development of gas supply and a significant plants in the BAU supply scenario. The cost of the Super Green increase of it in the generation mix are recommended such scenario is much higher than the cost of the Green scenario that gas completely replaces lignite and oil. This shift implies due to the construction of a nuclear plant, but emission construction of new gas generation plants, of a new cross- reduction is much more noticeable. However, implementing border gas pipe line, of new transmission and distribution mitigation measures would reduce emissions in both Green lines and of new gas supply infrastructure. In addition, new and Super Green scenarios significantly as compared to BAU: hydro and wind plants would be constructed. in year 2050 in the Green scenario, total emissions amount to 4.2 MtCO2e and in the Super Green scenario – to 1.6 MtCO2e, On the demand side, standard energy efficiency measures while BAU is projected to produce a much higher emission that have proved to be cost efficient in other countries level of 9.1 MtCO2 in year 2050 (Table 6.4). In the Green supply should be implemented as quickly and broadly as possible.115 scenario, emission reduction against BAU is driven by new gas This action will support the maximum possible reduction replacing new lignite power production and by new hydro, wind in demand, an important measure considering the current and PV solar generation. In the Super Green scenario, emission demand-supply gap and the policy objective of secure supply. reduction is driven by nuclear replacing lignite and/or gas. Economic incentives, capacity building, and knowledge dissemination are critical for the success of this task across The energy sector Marginal Abatement Cost (MAC) curve customer groups: industrial, non-residential, and households (Figure 6.7) displays two characteristics of the recommended (see Good Practice Box 5 on Vietnam’s experience with energy Super Green Demand–Green Supply scenario measures: efficiency knowledge dissemination in manufacturing). the marginal unit cost of abatement achieved cumulatively during 2010-50 (present value of net marginal cost114 per unit Strengthening the institutional capability to design and of abated carbon (CO2e)) and abatement potential (MtCO2e) implement energy efficiency programs is a key element of for 2010-2050. Abatement potential for each measure cor- a successful energy efficiency strategy for FYR Macedonia. responds to the width of the bar representing the measure. A lead agency or ministry department must have sufficient Marginal unit cost of abatement for each measure is reflected budget to attract high quality professional expertise. Capability in the height of the bar. The total width of the MAC curve to build and maintain energy consumption data is also crucial. Similarly, developing energy efficiency training programs for 114. In the transport sector analysis, policies were included in addition to proposed investments. This approach is not traditional and was used because in FYR Macedonia transport reform, the emphasis in the road 115. As noted above, energy efficiency measures considered in the analysis segment of the sector is on policy incentives. are described in detail in Table 6.1. 68 F Y R M aced onia Gr een Grow th Country A ssessment Figure 6.7. New gas and energy efficiency measures provide most cost efficient abatement Marginal abatement cost (MAC) curve for supply technologies and energy efficiency (demand) measures, cumulative 2010-2050 14 Marginal abatement cost, €/ton of CO2 reduced 12 new PV 10 New Combined Heat 8 and Power New Wind 6 4 Super Green Demand New Hydro New Gas 2 0 0 50 100 150 200 250 300 350 -2 -4 CO2 reduction, mln tonnes -6 Note: This chart presents cumulative abatement potential of the period 2010-50, while the data in Table 6.4 and in the related text refers to year 2050 only. Source: Staff calculations based on energy sector modeling outcomes. Good Practice Box 5. Green growth in manufacturing through green knowledge dissemination in Vietnam The Vietnam Clean Production Center has become a leading organization in disseminating clean production knowledge among manufacturers in the region. Since its establishment in 1998, the Center has been assisting companies in identifying problems that affect their environmental and economic performance and in finding solutions, including innovative approaches that would lead to emissions reduction combined with increased revenue and employment. Initially, the Center focused on cleaner production, but now its expertise has expanded to include sustainable product innovation, corporate social responsibility, financial engineering (via a Green Credit Line scheme financed by the Swiss Government), and implementation of Multilateral Environmental Agreements. The Center regularly conducts capacity building workshops and conferences around the region. To date, the Center has successfully assisted more than 500 manufacturing enterprises in Viet Nam, Lao PDR and Cambodia. Examples of the Center’s achievements include two clean production projects implemented in 2012 that cut emissions by 1,462 tons of CO2 and reduced wastewater by 37,660 m3. The Center has helped smaller enterprises engage in new markets, including those related to sustainable goods and services, and introduced them to sustainable public procurement regulations, eco-labels, and green global value chains. The Center has become the reference institution for green knowledge dissemination, and its clean production model has been replicated in 50 countries through South-South technical exchange. Source: United Nations Environment Program (UNEP). 2013. Building inclusive green economies – Success stories from South-South Cooperation. New York: United Nations. How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 69 professionals (architects, building contractors, and energy audi- The key enabling policies on the supply side include develop- tors) as well as raising consumer awareness through information ing a regional strategy and implementation plan for physical campaigns will be critical. gas supply, addressing potential private investors’ concerns about investing in hydropower, and ensuring that incentive Making low-cost capital available for demand-side energy schemes deliver renewables in the most cost-effective manner. efficiency investments is essential for investments in capital A plan for the development of national gas infrastructure intensive, long-payback energy saving measures such as building should be prepared and implemented. retrofits. Involving utilities as intermediaries between the govern- ment and the customers in energy efficiency programs proved Incentives are necessary to attract investment in renewables. to be a successful approach, since in many countries, utilities However, the current level of feed-in-tariffs is extremely high, find that investing in customers’ energy efficiency is financially reaching 10 times the electricity price paid by households for beneficial for them (see Good Practice Box 6 describing Mexico’s some technologies. Alternative approaches could be more experience with financing schemes and Brazil’s experience with economically attractive. utilities’ involvement in residential energy efficiency projects). Good Practice Box 6. Financing energy efficiency programs in Mexico and Brazil Using financing schemes to replace inefficient home appliances in Mexico Mexico’s Special Climate Change Program aims at reducing annual greenhouse gas emissions by more than 40 percent by 2030 without sacrificing economic development. The strategy encompasses a sweeping transformation of domestic home appliance markets to increase energy efficiency and offset the projected 4.8 percent annual increase in electricity demand. Some 1.7 million aging refrigerators and air conditioners are being replaced by the project with modern, energy-efficient models. The Program is supported by the Clean Technology Fund (CTF). To phase out inefficient appliances, CTF concessional financing will support a credit line for low-interest consumer loans, complementing a World Bank loan that will support a rebate program. The financing scheme will be offered through some of the country’s largest retail markets. In addition, local manufacturers and distributors will be receiving financial support to shift to the new technologies. Already, public awareness campaigns are alerting consumers to the advantages of an energy-efficient lifestyle. To ensure a seamless transition, the government is setting up recycling facilities for old lighting systems, disposal centers for out-of-date refrigerators and air-conditioning units, and local testing facilities for new appliances. Success of energy efficiency programs with utilities as intermediaries in Brazil The Brazilian experience shows how energy efficiency programs with utilities acting as intermediaries between the government and household customers can achieve the government’s energy efficiency targets through creating economies of scale. These programs benefit utility customers the most, especially poor households, who would not be able to incur the needed energy efficiency expenses on their own. In 2005, the Brazilian government established an energy efficiency program that requires utili­ ties to invest 0.5 percent of their annual revenues in improving customers’ energy efficiency. Fifty percent of the investment should benefit low-income households. Eligibility for the program is deter­ mined by consumption levels, connection type, and enrollment in other social assistance schemes. The utilities are in charge of designing and implementing the energy efficiency projects but are also allowed to subcontract energy service companies. The projects that target low-income households include mostly the following: replacing old, inefficient refrigerators; installing compact fluorescent light bulbs; replacing inefficient electric water heaters with more efficient electric or solar ones; informing households about efficient use of electricity. Investments are either covered by the utilities or shared by the utilities and the households. In the latter case, utilities offer financing schemes. Between 2005 and 2007, over 5 million compact fluorescent light bulbs and 60,000 efficient refrigerators were installed under the program. Because refrigerators and lighting account for 90 percent of the electricity consumption of low-income households in Brazil, the program achieved significant reductions in energy consumption. According to field assessments, electricity consumption of refrigerators and lighting on average was reduced by approximately 70 percent and 23 percent, respectively. As a result, peak demand for power was decreased by 15–20 percent. Sources: Climate Investment Funds website. “Mexico Gives Green Light to Energy Efficiency.” Highlights form the CIF Portfolio. Accessed on November 26, 2013: https://www.climateinvestmentfunds.org/cif/node/3361 Deichmann, Uwe and Fan Zhang. 2013. Growing Green: The Economic Benefits of Climate Action. Washington, DC: World Bank. 70 F Y R M aced onia Gr een Grow th Country A ssessment How C an the Energy Sector Be Transformed, and W hat C an E nergy E fficiency Contri bu te ? 71 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 7 How Can Transport Support Sustainable Growth? t CHAPTER SUMMARY The findings provide evidence that green policies can sig- nificantly reduce the rate of emissions growth; however, emission levels will continue to rise compared with 2010 due to increasing demand for transportation. Vulnerability analysis concludes that the main concern regarding transport sector he transport sector provides critical services to sensitivity to climate change is related to projected increases the rest of the Macedonian economy but faces in temperatures and extremes of precipitation, which will push special challenges in a landlocked country framed transport costs up. The recommended mitigation plan includes by mountain ranges. Transport infrastructure to measures that deliver the highest abatement level—pricing sig- foreign markets is focused into a small number of corridors, nals, rail investment and encouraging purchase of fuel efficient and transit traffic, already significant, is increasing. The trans- vehicles—as well as measures characterized by a relatively high port sector is the second highest emitter in FYR Macedonia, level of abatement in combination with low costs—land use producing 14.5 percent of total greenhouse gas (GHG) emis- planning and regulation, parking management (in Skopje), and sions, following the energy sector. The transport sector is also behavior change. Investment is needed in rail infrastructure, in emissions-intensive compared with other countries in the public transportation (in Skopje), and in urban development, region: its contribution to global warming and local air pol- including parking management and re-design of city centers lution significantly exceeds technically unavoidable levels. A to provide walking and cycling infrastructure. A conservative high and growing share of road transport and the prevalence and practical plan for climate change adaptation focuses mostly of old vehicles are the main factors driving high transport sector on better implementation of existing standards for local roads emissions, while vulnerability to climate change is heightened and improvement of road surfaces. by the low quality of infrastructure and the vehicle fleet. How can transport support sustainable growth? CHALLENGES FOR GREENER GROWTH The analysis summarized in this chapter assesses the impact of green policies and investments on transport demand and Overview the resulting emissions, as well as the cost effectiveness of the proposed investments and policies, using modeling. Transport connections play a pivotal role in supporting In particular, the EC’s TREMOVE (economic TRansport and FYR Macedonia’s economic growth, particularly due to its EMissions model), EC’s TRANSTOOLs (TOOLS for TRansport landlocked location and an already significant yet increasing Forecasting ANd Scenario testing) and the World Bank’s transit traffic. The country’s exports depend on two trans- EFFECT (Energy Forecasting Framework and Emissions European corridors passing through its territory and providing Consensus Tool) were applied. H ow C an Transport Support Sustaina ble Growth ? 73 links to the markets in Western Europe.117 In the past 20 years, Figure 7.1. Mobility in FYR Macedonia will rise significant investments have been made in rehabilitation and sharply with economic growth, and so will maintenance of the corridors. At the same time, less attention emissions has been paid to other sectoral issues. This situation is chang- Kilometers travelled per capita, 1995-2008, multiple data ing and the government is starting to address a wider set of points for each country, and income per capita sector reforms. In the last revision of the National Transport Strategy (2007-2017), the government included measures to 18,000 support a modal shift from road to rail, stimulate greater public 16,000 passenger-kms per inhabitant transport usage in urban areas and promote alternatively 14,000 fuelled vehicles.118 12,000 Road + Railways, 10,000 Belgium Bulgaria Czech Republic The Macedonian transport sector is emissions-intensive and, 8,000 Denmark Germany Estonia Ireland Greece Spain considering continuing growth in vehicle ownership and road 6,000 France Italy Cyprus Latvia Lithuania Luxembourg travel, is expected to be increasingly polluting, unless trans- 4,000 Hungary Poland Netherlands Portugal Austria Romania port policies change. The transport sector in FYR Macedonia 2,000 Slovenia Sweden Slovak Republic United Kingdom Finland Iceland Norway Croatia Macedonia, FYR has higher emissions-intensity than in other countries in the 0 Turkey 0 10,000 20,000 30,000 40,000 50,000 60,000 region; and, therefore, its contribution to global warming and local air pollution exceeds the technically unavoidable FYR Macedonia GDP per Capita (US$2000) level. Within the country, the transport sector is the second highest emitter, producing almost 15 percent of total GHG Source: Staff calculations based on FYR Macedonia’s road and rail transport development vectors from the Eurostat and the World Bank’s Development emissions, following the energy sector, which contributes Data Platform data. about 70 percent.119 The share of transport sector emissions has stayed relatively stable over the past two decades,120 while overall emissions have grown. Current trends of increasing car countries, the share of road traffic in total freight traffic rose ownership and road travel are projected to continue, and FYR from 55 percent to 71 percent between 2000 and 2008. The Macedonia is likely to reach on-land personal mobility of 9,000 same was happening in the passenger segment in the new passenger-kilometers per capita–about 13 times its current EU member countries: vehicle passenger trips, measured level–when GDP per capita reaches US$ 7,000121 (Figure 7.1, in km, increased from 68 percent of total passenger trips in Figure 7.2). This will mean significantly higher emissions, unless 2000 to 77 percent in 2008 and, as a result, rail carried only transport policies change, addressing the main emission driv- 7.5 percent of passengers in 2008. In FYR Macedonia, the ers— growth in road transportation, expansion of the personal share of road transport in the sector is even higher than in vehicle park, the old age of vehicles, and low availability of the EU’s new member states and growing: rail carried only public transportation. 2.3 percent of passengers in 2008, down from 3.5 percent in 2000122. This trend is echoed by FYR Macedonia’s freight High and growing road transport share is a major factor segment, where road transport accounted for 84.3 percent of transport sector emissions in FYR Macedonia. In the of passenger-kilometers in 2010. transport sector globally, key sources of emissions derive from road transport. At the same time, East European and Other drivers of sectoral emissions are prevalence of old Central European countries have been experiencing a steep vehicles, dominant and increasing private vehicle usage, and increase in the share of road transport in the last decade, low availability of public transportation. FYR Macedonia’s both in passenger and freight segments of the sector, and car, road freight and rail fleets are old: in 2012, the average FYR Macedonia is no exception. Among the new EU member age of the road fleet was 14 years and of the rail traction fleet 37 years. As a consequence, it has high emission intensity, 117. Corridor X (Munich-Ljubljana-Zagreb-Belgrade-Skopje-Thessaloniki- for example, half of the sampled trucks do not meet Euro 1 Athens) and Corridor VIII (Port of Durresh-Tirana-Skopje-Sofia-Port of Burgas). standards123. Passenger transport is dominated by private cars, 118. Ministry of Transport and Communications, FYR Macedonia. 2007. FYR Macedonia National Transport Strategy 2007-2017. Skopje. public transportation decreased significantly, thus pushing up 119. Source: IEA, 2009; transport sector includes all transport activity the level of emissions. Private cars accounted for 76.2 percent regardless of the economic sector. of passenger-kilometers in 2010. Given that car ownership is 120. The current share of transport sector emissions is not very different still low when compared to EU 27 average and is projected to from that of the previous years. According to the FYR Macedonia national GHG inventory, the transport sector had a stable contribution to total GHG emissions, in the range of 10.6 to 13.4 percent from 1990 to 2002. Source: 122. This is significantly less than the EU-15 average, which is 7.5 percent of FYR Macedonia’s Second National Communication under the UNFCCC, passengers carried by rail in 2008. 2008, page 75: http://unfccc.int/resource/docs/natc/macnc2.pdf 123. World Bank transport survey conducted in FYR Macedonia, February- 121. Staff calculations March 2012. 74 F Y R M aced onia Gr een Grow th Country A ssessment rise, this factor will continue to exacerbate emission problem countries in ranking based on Logistics Performance Index.124 unless policies change. With already low quality, transport infrastructure will be more easily damaged by extreme weather. In addition, old vehicles In addition to being emissions-intensive, transport sector are less capable of tolerating extreme weather events and in FYR Macedonia is also vulnerable to climate change due increased climatic variability. (Figure 7.3) to low infrastructure quality and an old vehicle fleet. A sig- nificant part of the transport infrastructure has outlived its Dealing with Sector Inefficiency in the Context planned 20-year life span, and benchmarking analysis places of Green Growth FYR Macedonia among the bottom one-third of comparator Lowering emission intensity of the future transport sector growth represents a key challenge and will require departure Growth in car ownership—a major Figure 7.2. from ‘business as usual’ policies in the transport sector.125 emissions driver—is promising to increase Mitigation policies need to support growth and provide local with income co-benefits and enhanced efficiency of the transport system, Passenger car ownership per population, projections: in addition to reducing emissions. For FYR Macedonia as an 2010-2050 EU candidate country, the policies also need to follow the EU’s transport policy, as well as the climate and energy package, the latter setting specific targets for reducing GHG emissions. rate per thousand population 600 550 For transport, excluding air transport, GHG emissions need to 500 450 be cut by 10 percent as compared with the 2005 levels through 400 reduced emission intensity of the vehicle fleet and increased 350 transport efficiency. Fuel efficiency of new cars and vans need 300 250 200 124. Logistics Performance Index is a combination of: (i) outcomes of a worldwide survey of global freight forwarders and express carriers reflecting 150 logistics “friendliness” of the countries where they work (conducted every 100 2 years) and (ii) quantitative data on performance of key components of the 2010 2015 2020 2025 2030 2035 2040 2045 2050 logistics chain by country. The Index combines the following dimensions: customs (efficiency of clearance process); quality of ports, roads, railroads, OECD Europe Eastern Europe FYR Macedonia information networks; ease of organizing international shipments; quality of logistics services; quality of tracking systems, timeliness of shipments. (Source: World Bank Development Data Platform) 125. Organization of Economic Cooperation and Development / International Source: United Nations Economic Commission for Europe (UNECE). 2013. Transport Forum (OECD/ITF). 2008. Greenhouse Gas Reduction Strategies in Transport database: http://www.unece.org/trans/main/wp6/wp6.html the Transport Sector, Preliminary Report. Paris: OECD/ITF. Figure 7.3. Poor quality of roads translates into high level of accidents Logistics performance index (2010) versus road accidents per kilometers travelled (latest year available, 2005-2011) 5 Sweden 4 Switzerland Denmark Austria Czech Republic Logistics Index Latvia Turkey Slovak Republic Average 3 Lithuania Slovenia Romania Croatia Kazakhstan Azerbaijan Russia FYR Macedonia Ukraine 2 0 1 2 3 4 Road traffic accidents per million passenger-km Source : World Bank Development Data Platform and Economic Commission for Europe (UNECE) Transport Database, 2013 H ow C an Transport Support Sustaina ble Growth ? 75 to be improved, alongside the long standing Euro standards A rapid development of the road transport sector in East which apply to cars, vans and Heavy Duty Vehicles (HDVs).126 Europe comes at a cost of sector inefficiency and increased Policies regarding the types of fuel used and fuel taxation emissions, but the same set of actions will be needed to need to be assessed and reconsidered (see Good Practice Box resolve both problems, and investment and policies address- 1 on the benefits of a fuel switch in public transportation in Los ing emissions will produce increased sector efficiency as a Angeles). Investment in transport infrastructure is overdue. co-benefit, resulting in cost savings. Specifics of the transport While this presents a challenge, it is also an opportunity to sector development are such that the set of policy actions climate proof transport infrastructure by including adaptation and investments that is needed to tackle sector inefficiencies measures to account for increased flooding and precipitation, significantly overlaps with actions needed to contain growth higher variation in temperature, and extreme weather events. of the transport sector emissions. In other words, quoting a recent publication, which discusses transport sector policies A specific challenge is related to pricing policies. At present, aimed at reducing GHG emissions and applicable to ECA pricing does not cover the full cost of transport, including countries, “climate friendly transport policies” would “provide investments, let along the cost of negative externalities. a menu of policy options to improve the functioning of the Current investments are heavily focused on enhancing road transport sector in the ECA region, while addressing the capacity. Pricing needs to be restructured to cover full costs externalities generated by the sector”127. Thus, reduction of and to provide for all required investments and climate change transport sector emissions will effectively have a co-benefit of mitigation. Changing current pricing would require the adop- increased sectoral efficiency. When co-benefits of the sector tion of the “user pays” principle, when all costs are covered by efficiency are considered, the costs of greening the transport end-user prices including the costs of congestion, accidents, sector, often viewed as being too high, becomes very reason- infrastructure wear and tear, noise and air pollution, and GHG able. Sectoral co-benefits can, in fact, be potentially much emissions. The EU is involved in the review of the New European higher than the benefits in terms of reduced emissions and Driving Cycle (NEDC) to develop a test cycle, which reflects air and noise pollution (see Box 7.1). real life vehicle emissions more closely. As the large majority of vehicles in use in FYR Macedonia are designed to be compliant Inefficiencies resulting from the transition of the road with EU requirements at the time of production (to be sold on transport sector in Eastern Europe can be grouped in the EU market), these regulations are already supporting an the following four types: pricing inefficiencies, fuel inef- improvement in fuel efficiency for new vehicles purchased in the ficient technology, and those that come with spontaneous country. Research work has also been undertaken on potential transition of the urban form. Pricing inefficiencies can be improvements to HDV fuel efficiency. addressed using such pricing instruments as fuel and road 126. See in: European Commission climate action website: http://ec.europa. 127. Monsalve, C. 2013. Controlling Greenhouse Gas Emissions Generated by eu/clima/policies/transport/vehicles/cars/index_en.htm the Transport Sector in ECA: Policy Options; World Bank, Washington, DC. Good Practice Box 7. Reducing emissions while lowering fuel costs through fuel-switching in Los Angeles, USA Los Angeles, USA provides an informative case of a successful green project in public transportation. The city completed the transition from diesel to gas in public buses in 2011, reducing the impact of transport on climate and on local air pollution. Los Angeles has long been one of America’s most smog-plagued cities. However, the city is making efforts to improve the situation. The Los Angeles County Metropolitan Transportation Authority purchased its first clean compressed natural gas (CNG) bus in 1995 and retired its last diesel bus in 2011. Today the Los Angeles metropolitan area has the largest fleet of CNG buses in the US—approximately 2,200 buses. The Los Angeles buses cover approximately 1.5 billion miles annually, and it has been estimated that, as of 2011, the CNG buses have collectively driven more than one billion miles. Fuel-switching helped reduce emissions while lowering fuel costs. Since the conversion to CNG buses, the daily release of particulate matter from the bus fleet has decreased by 80 percent, and greenhouse gas emissions have fallen by approximately 300,000 pounds. In addition, 10 to 20 percent of operational costs are being saved on fuel alone. Los Angeles residents are noticing the difference. Regular riders note that before the switch to CNG, bus exhaust was visible and the noise from the buses was louder. They say that Los Angeles has become cleaner as a result of the switch. Source: America’s Natural Gas Alliance, http://thinkaboutit.org/transportation/#.Uo7QuGT5kQs 76 F Y R M aced onia Gr een Grow th Country A ssessment Box 7.1. External costs of road transporta A recent publication by Proost and Van Denderb presented the Five main external costs of Box Table 7.1. estimates for the main five external costs of the transport sector (Table X). The estimates of the cost of damages from emissions transport sector emissions and air and noise pollution, which adds up to US$ 0.46 (at the high end of the estimate range), are dwarfed by those from main Cost: US cents sectoral inefficiencies - traffic congestion and accident risk, - which Externality per mile, 2005 amount to US$ 0.28 (Table X). These costs exceed typical fuel taxes. prices Congestion 4.2-35.7 Climate change mitigation offers considerable co-benefits in Air pollution from fuel combustion 1.1-14.8 terms of reduced sectoral inefficiencies, especially congestion, and exaust and vice versa. For exam­ ple, in Istanbul, as its population increased Traffic safety: high traffic density 1.1-10.5 by 3.3 percent per year, average motorized travel times increased increases accident risk from 41 minutes in 1996 to 49 minutes in 2007, and estimated Noise 0.1-9.5 CO2 emissions jumped from 7 million to 9 million tons (Gerçek Climate change: GHG emissions 0.3-3.7 and Demir 2008). Another example is Washington, DC, the most from fossil fuel use congested metro area in the United States (2011). Its approximately 2.6 million commuters each spent an average of 73 hours annually in traffic jams in 2010, each burn­ ing an extra 37 gallons (140 liters) of gasoline. In total, this wastes 95 million gallons (360 million liters) and adds 840,000 tons of CO2 to the already significant emissions from the region’s road transport. The extra gasoline and wasted time cost the regional economy US$3.8 billion or about US$1,495 per commuter per year. Source: Proost, Stef, and Kurt Van Dender. 2011. “What Long-Term Road Transport Future? Trends and Policy Options.” Review of Environmental Economics and Policy 5 (1): 44–65. Oxford: Oxford University Press. Based on several European and US sources presented in: Small, Kenneth, Kurt Van Dender. 2007. “Long-run trends in transport demand, fuel price elasticities, and implications of the oil outlook for transport policy.” Joint Transport Research Center Discussion Paper 2007-16. Paris: Organization of Economic Cooperation and Development / International Transport Forum. a. Deichmann, Uwe and Fan Zhang. 2013. Growing Green: The Economic Benefits of Climate Action. Washington, DC: World Bank. b. Proost, Stef, and Kurt Van Dender. 2011. “What Long-Term Road Transport Future? Trends and Policy Options.” Review of Environmental Economics and Policy 5 (1): 44–65. Oxford: Oxford University Press. pricing (including toll roads and high occupancy (HOV) lanes), and travel time lead to traffic congestion129. These problems urban congestion pricing, vehicle registration fees, parking can be addresses with public transportation designed in policy and other measures. Fuel pricing is the most effec- response to a changed urban shape, land use policies limiting tive policy instrument in reducing travel time and creating urban sprawl, city center re-design to promote walking and incentives for switching to fuel efficient vehicles. Inefficiencies cycling and discourage driving, and transport management resulting from the usage of the fuel inefficient technology systems reducing congestion and smoothing traffic flows. and deficient parts can be reduced through regulation. In particular, introduction of vehicle emission standards would In addition to addressing the inefficiencies of the road create incentives to buy newer and more fuel efficient cars, transport sector, a modal shift from road to a much less including vehicles that run on electricity (hybrid and plug-in), emission intensive rail transportation could be beneficial, on natural gas (compressed or liquefied), or on biofuels, and as it would help contain road transportation demand and maintain existing vehicles. Inefficiencies resulting from a therefore emissions, while also resulting in a co-benefit of deficient urban form are most notorious in the transition reduced road congestion. For example, to transport 100 tons countries128. In Skopje, unplanned urban sprawl resulted in of freight from Basel (Switzerland) to the port of Rotterdam deterioration of services including public transportation and (Netherlands) 4.7 tons of CO2 emissions are generated by services requiring transportation (e.g., health, education and road, 2.4 tons by inland waterways, and 0.6 tons by rail. A social services), while increased personal vehicle ownership recent independent study commissioned for the US Federal Railroad Administration found that on average rail was four times more fuel efficient than trucks, reducing GHG emissions 128. One of the extreme examples is the congestion levels in Moscow, by 75 percent.130 where the number of vehicles has risen since 1990 from 400,000 to 4 million while the transportation system did not change sufficiently and where the 129. See a detailed discussion of it in Chapter 8 describing the urban issues. mayor publicly announced the fight against congestion to be his major task as the city administrator (see in: Carolina Monsalve. 2013. “Controlling 130. Monsalve, Carolina. 2013. “Controlling Greenhouse Gas Emissions Greenhouse Gas Emissions Generated by the Transport Sector in ECA: Generated by the Transport Sector in ECA: Policy Options.” Transport Policy Options.” Transport Papers. Washington, DC: World Bank.). Papers. Washington, DC: World Bank. H ow C an Transport Support Sustaina ble Growth ? 77 METHODOLOGY AND MAIN FINDINGS policies was modeled to understand how the issues result- ing from deficient urban development could be dealt with. Methodology These policies include parking management in Skopje, investment in urban and inter-urban transit, investment in The objective of the analysis was to assess the impact of walking and cycling infrastructure, land use planning and “green” policies and investments on transport demand and regulation (including pedestrian zones, limited parking, resulting emissions, estimate cost of the proposed green provision of public transport), urban access freight restric- investments per unit of related emission reduction and tions and consolidation centers, urban traffic management evaluate transport sector vulnerability to climate change. systems, and congestion charge in Skopje. Several policies The impact of green policies was assessed by comparing the encouraging improvement in vehicle fuel efficiency were outcomes of Green and Super Green scenarios against the modeled as well: encouraging the purchase of fuel efficient Business as Usual (BAU) scenario (see scenario description vehicles, pricing policy (taxation of fuel), behavior change in Table 7.1). The outcomes were measured using sectoral and travel planning (including information campaigns, poli- indicators, such as vehicle population and age, vehicle sales, cies to reduce vehicle occupancy and the number of trips), vehicle scrappage, vehicle-kilometer traveled, passenger- eco-driving information campaigns, and investment in vehicle kilometer traveled, ton-kilometer transported, and volume of train technology. A modal shift from road to rail was modeled rail travel. Sectoral outcomes helped project the level of fuel as a rail infrastructure investment option. Proposed policies consumption and emissions including CO2, NOX, and PM10.131 and investments included in green scenarios for each policy option are provided in Table 7.1. Modeling included policies and investments that would address inefficiencies discussed above and the rail sector The following models were used for the analysis and investment. In particular, a wide range of urban development implemented in the sequence shown below (Figure 7.4): the European Commission’s (EC) TREMOVE (economic TRansport 131. CO2 is carbon dioxide. NOx is a generic term for mono-nitrogen oxides, and EMissions model), the EC’s TRANSTOOLs (TOOLS for in particular, NO2. NO2 forms quickly from emissions from cars, trucks and TRansport Forecasting ANd Scenario testing), the World buses, power plants, and off-road equipment. In addition to contributing to the formation of ground-level ozone, and fine particle pollution, NO2 is linked Bank’s EFFECT (Energy Forecasting Framework and Emissions with a number of adverse effects on the respiratory system. NOx are distinct from nitrous oxide (N2O), a greenhouse gas emitted from agricultural lands. Consensus Tool) and its MacCurve tool. PM10 is atmospheric particulate matter smaller than 10 microns. 78 F Y R M aced onia Gr een Grow th Country A ssessment Table 7.1. Green policy actions in transport Policy actions and investments evaluated in modeling, by scenario Green scenario: Super Green scenario: Assumes compliance with EU requirements by 2020 and Assumes stricter policy actions or tighter schedules as Policies includes other proposed green policies and investments. compared with Green scenario. Pricing signal ●● fuel tax starting in 2013; ●● 60% increase in fuel prices relative to BAU by 2020, to (fuel price) ●● 20% increase in fuel prices relative to BAU by 2020, to top EU level of US$2.5/liter. average EU level of US$2/litre. Encouraging ●● passenger car requirements: used imported vehicles ●● passenger car requirements: used imported vehicles purchase of fuel should meet Euro 4 standard starting in 2015; should meet Euro 5 standards in 2015; efficient vehicles ●● passenger car scrappage scheme targets 60,000 cars ●● passenger car scrappage scheme: same as in Green but between 2012 and 2015: replacement of Euro 2 standard targets 120,000 cars over the same time; (or lower) vehicles with new or used vehicles at Euro 4 or ●● public sector fleet: same as in Green, plus introduction of 5 standard and with a maximum emissions rate of 140g electric vehicles to the fleet; CO2/km; ●● buses: same as Green plus 10% of national bus ●● public sector fleet : Clean Vehicle Directivea; kilometers (all within Skopje) would be covered by ●● buses below Euro 4 standard should be renewed to Euro electric bus by 2025; 5 standard by 2025; ●● taxis should meet Euro 5 standard by 2020; 5% of taxi ●● taxis: all Skopje taxis should meet Euro 4 standard by fleet would be electric by 2020. 2020. Eco-driving ●● awareness campaign and driver training, 2013 2015: Same as in Green, but more intensive campaigns. information aimed at driving style (smooth acceleration and campaign and deceleration, no idling), observed speed limits, tire FUEL EFFICIENCY training pressure checks, timely vehicle maintenance); ●● campaigns repeated every 3 years. Vehicle trains Not implemented Implementation starts in 2020 on the key road corridor, with 5% of HGVs and 2% of cars taking part in 2020 and 10% and 5% respectively taking part in 2050. Investment in rail ●● track and infrastructure investment along Pan-European Same as Green, but more intensive strategy. infrastructure corridor VIII; and services ●● investment in stations, rail yards and depots; and rail energy efficiency ●● competitive fares (against car use costs) and freight access charges; ●● improved service quality ; ●● passenger information system and e-ticketing, electronic freight billing and tracking of shipments; ●● rolling stock investment and improved management; RAIL INVESTMENT ●● regenerative braking (rolling stock and infrastructure investment); ●● driver energy efficiency (on-board energy use metering and software, driver training); ●● changes to electricity recharge mechanism to incentivize operators adopting energy efficient behaviors. a. The Clean Vehicle Directive is a European Union initiative (“The Directive on the Promotion of Clean and Energy Efficient Road Transport Vehicles”). Its objective is increased usage of environmentally-friendly vehicles. It requires that energy and environmental impacts of road vehicle operation over their lifetime are taken into account in all purchases of such vehicles. See: http://ec.europa.eu/transport/themes/urban/vehicles/directive/ H ow C an Transport Support Sustaina ble Growth ? 79 Parking ●● step 1: expansion of regulated and paid parking: all 6000 Same as in Green, except stricter: management existing spaces in central Skopje charged at current rates ●● 50% increase in parking charges in the center effective in improvements (100 denars per day); 2013, and a 100% increase above current charges in 2030 (Skopje) ●● step 2: a 50% increase in parking charges in the center of (corrected for inflation). Skopje (corrected for inflation) in 2030. Behavior change Information campaigns, policies to reduce vehicle Same, but more stringent measures. and travel occupancy and the number of trips. planning Investment in ●● building tram infrastructure in Skopje: tram line 1 opens ●● tram: same as in Green, plus implementation of three urban and inter- in 2015-2020; additional tram lines in Skopje by 2020; urban transit ●● improved ticketing system and fares levels: integration ●● ticketing and fares: same as in Green, plus fares and smart cards, 2012-2015; subsidization with a 10% decrease in fares for all users; ●● urban bus: urban traffic management system (UTMS), ●● urban bus: same as in Green. improvements to vehicles and routing: reduction of travel time, increased occupancy, 2015-2019. Land use ●● pedestrian zones; Same as in Green, but more stringent measures. planning and ●● limited parking; regulation ●● provision of public transport. Investment ●● Options include: Same as in Green, but more stringent measures. in walking ●● additional pedestrian streets; and cycling infrastructure ●● removal of cars parked on pavements; ●● improved crossing facilities; ●● additional cycling facilities (extensive network of cycle paths and lanes, cycle parking facilities); ●● walking and cycling information and campaigns; ●● use of regulations and agreements with developers and employers to improve facilities and promote walking and cycling. Urban access ●● one Low Emissions Zone (LEZ) and one consolidation ●● same as in Green, but expanded: one LEZ and three freight center in Skopje, with use encouraged through consolidation centers in Skopje, plus one LEZ and one restrictions and regulation and/or pricing signals. Each LEZ would require consolidation center in each of the locations: Bitola, consolidation the HGVs entering it to meet Euro 4 standards from Kumanovo and Tetovo. centers 2015, Euro 5 from 2020 and Euro 6 from 2030. URBAN DEVELOPMENT Urban traffic ●● ongoing UTMS upgrade, due in Skopje in 2013; ●● same as in Green, but coverage is expanded to include management ●● traffic regulation and enforcement: investment is limited Bitola, Kumanovo and Tetovo. systems (UTMS) to Skopje in 2013-14; then investment every 5 years up to 2045 for upgrades. Congestion ●● Not implemented ●● Implementation starts in 2020. Options considered: charge (Skopje) ●● cordon/zone charging: a charge is applied when vehicles cross a defined cordon line; ●● area licensing: charges are applied when vehicles drive within a defined area. Note: Vehicle trains are groups (platoons) of vehicles electronically connected together with a single manually-driven lead vehicle. This technology is new and currently undergoing trial, it is assumed available only starting in 2020. Each vehicle taking part is very conservatively assumed to achieve a 10 percent reduction in fuel use. 80 F Y R M aced onia Gr een Grow th Country A ssessment Figure 7.4. Methodological framework for Because none of the existing transport sector models transport sector included FYR Macedonia , the modeling outcomes for countries with characteristics similar to FYR Macedonia (for instance, in terms of fuel prices, trading patterns and socio demographic changes), adjusted using key economic European Commission’s indicators such as GDP/capita, population size and type TREMOVE and TRANSTools of settlement (metropolitan, urban or rural), were used for FYR Macedonia. The countries selected to provide proxy estimates for FYR Macedonia were main East European countries: Bulgaria, Czech Republic, Estonia, Hungary, Impact of various transport and environmental policies Latvia, Lithuania, Poland, Romania, and Slovakia. The on the transport sector outcomes output of macro modeling was used as one of the inputs to the bottom-up engineering model, EFFECT. ■■ Step 2. The World Bank’s EFFECT model (Box 7.3) : Energy Demand Modeling bottom-up modeling to assess green policy interven- (EFFECT) tions and their potential impact on transportation demand and emissions. EFFECT was used to project energy demand for four sectors – transport, household, Impact of green policies on road travel demand non-residential and industrial – over the period from and road transport fleet composition 2010 to 2035. The results were then extrapolated to and performance, including fuel consumption and emissions. year 2050. For each sector, demand was projected by subsector and type of usage. The projections were made separately for power and non-electric energy. The projections for sectors other than transport are Marginal Abatement Cost Analysis (MAC) presented in the energy chapter of this report. The road transport module of EFFECT was utilized to estimate the impact of green policies on road travel demand and road transport fleet composition and MAC Curves to determine performance, including fuel consumption and emis- cost effectiveness of each policy option. sions. The inputs included macro variables such as GDP, population, urbanization, household expenditure and Source: Transport sector technical paper other household characteristics, forecasted for period 2010-2050, and actual current sectoral data for such as car ownership and fleet composition. The outputs ■■ Step 1. European Commission’s TREMOVE and comprise forecast levels of vehicle ownership, travel TRANSTOOLs (Box 7.2): transport sector top-down model- and emissions (including CO2, NOX and PM10 ), by vehicle ing aimed at evaluating the impact of various transport and category (including mini, small, medium, large/luxury environmental policies on the transport sector outcomes. cars, sports utility vehicles, goods and passenger light The models used were the EC’s TREMOVE (economic commercial vehicles, heavy goods vehicles, and buses TRansport and EMissions model) and TRANSTOOLs and coaches) and year in the period from 2010 to 2050. (TOOLS for TRansport Forecasting ANd Scenario test- ing) models. They have been used in a number of recent Some of the sector indicators essential for EFFECT model- forecasting studies of carbon impact of transport, including ing were not available from the existing sources and a TEN-Connect132 TRANSVisions 2009133 and iTren 2030.134 survey was conducted to collect the missing data. The survey collected data on vehicle usage, ownership, and 132. Report on Scenario, Traffic Forecast and Analysis of Traffic on the the number of privately imported vehicles. One of the TEN-T, 2009: http://www.tetraplan.com/cases/ten-connect.aspx main objectives was to define mortality curves per vehicle 133. Petersen, Morten S., Carlo Sessa, Riccardo Enei, Andreu Ulied, type for FYR Macedonia. The survey was implemented Efrain Larrea, Oriol Obisco, Paul M. Timms, Christian O. Hansen. 2009. TRANSvisions: Report on Transport Scenarios with a 20 and 40 Year Horizon. by Ipsos Strategic Pulse. It was administered in gas & Final report. Copenhagen: European Commission, Directorate General for Transport and Energy (EU DG TREN). fuel stations and covered 3116 vehicles. The sample was 134. Integrated Energy and Transport Baseline to 2030, 2009: http:// representative of types of vehicles and of different areas ec.europa.eu/research/transport/projects/items/__itren_2030__en.htm H ow C an Transport Support Sustaina ble Growth ? 81 European Commission’s TREMOVE Box 7.2. Box 7.3. World Bank’s EFFECT and TRANSTOOLS models (economic EFFECT (Energy Forecasting Framework and Emissions TRansport and EMissions model and Consensus Tool) was developed by the World Bank and is an TOOLS for TRansport Forecasting ANd Excel-based modeling tool used to forecast cross-sectoral Scenario testing) greenhouse gas (GHG) emissions for a country under a range of development scenarios. It covers sectors that contribute TREMOVE*: estimates impact of transport and environment significantly to emissions including road transport, power, indus- policies on transport sector characteristics including emissions. try, household and non-residential sectors. It is an “open” tool The policies included in the analysis are road pricing, public with all inputs and formulas visible (or “open”) to the users. It is transport pricing, emission standards, and subsidies for cleaner also “open” to the public because its usage does not require cars. The output indicators are transport demand, modal shift, specialized knowledge and anybody proficient with Excel can vehicle stock renewal, scrappage decisions, as well as GHG utilize it. EFFECT is a bottom-up modeling tool and is very data emissions, air pollutants and welfare. It models passenger extensive: it is based on very detailed data, such as energy and freight transport, as well as inland urban and interurban usage by household appliance and by unit of industrial equip- transport modes: road, rail, water, and air transportation. It ment, and structure of car ownership by vehicle model and age. covers 1995-2030 and includes 31 countries: EU-27 plus Croatia, The data are collected using available statistics, industry data Norway, Switzerland and Turkey**. (e.g., sales of new cars by model), expert opinions (e.g., when designing a set of assumptions for projections) and consumer TRANSTOOLS***: estimates impact of transport and surveys. Consumer surveys are used when data are not available environmental policies, as well as transport infrastructure otherwise, for example, to collect data on the model and make characteristics, on transport sector performance. Output indica- structure of vehicle park for vehicles bought as used. The model tors include transport activity (traffic volumes, modal shares, is available at http://esmap.org/esmap/EFFECT. congestion points, accessibility indicators, level of service), economic activity (impact on GDP, employment, welfare, gov- ernment budget, and production costs average transport costs) and energy and environment (fuel consumption; emissions, noise and accidents). Transtools models passenger (car, rail, ■■ Step 1. Assessment of sensitivity of road and rail air) and freight (truck, rail, inland water, sea shipping) transport infrastructure assets and services to climate change : and includes 55 countries.*** estimation of the marginal cost of increased exposure due to the following change in climate: *Additional information available at http://www.tremove.org, http:// www.tmleuven.be/methode/tremove/home.htm ■■ cold weather: shorter winters, less days with tem- **Source: http://ec.europa.eu/environment/air/pollutants/models/ peratures below freezing; tremove.htm ***Developed in projects funded by the European Commission Joint ■■ hot weather: more hot, heat waves and extremes, Research Centre’s Institute for Prospective Technological Studies (IPTS) and DG TREN maximum temperatures increase; ****Sources: http://energy.jrc.ec.europa.eu/transtools/, http://www. ec-gis.org/Workshops/inspire_2008/presentations/11_3_Bamps.pdf ■■ wet weather: rainfall declines, except in winter; rainfall heavier, snow-melt quicker and earlier. of the country. It included Skopje and the surrounding ■■ Step 2. Evaluation of adaptation measures and their rural areas, Northwest and Kumanovo (areas with good prioritization, design of an adaptation Action Plan, roads), Southwest (areas with fair roads) and East/Central design of adaptation guidelines, for use in future risk region (mainly rural areas with lower quality roads). assessments. Implementation of the plan, with associated monitoring and evaluation, should reduce existing and Modeling was complemented by vulnerability analysis aimed future vulnerability of land transport assets and services at assessing transport sector’s climate change sensitivities. to weather-related risks. An assessment of climate change vulnerability was con- ducted in addition to modeling. Vulnerability is a function Main findings of three variables: sensitivity of infrastructure and services to weather and climate, exposure to climate change, and adap- Emissions are estimated to grow significantly under the BAU tive capacity or ability to respond to climate events (physically, scenario. Land transport GHG emissions increase by over 70 financially and organizationally). Vulnerability analysis involved percent between 2010 and 2030 and more than double (165 the following steps: percent growth) between 2010 and 2050. Within the land 82 F Y R M aced onia Gr een Grow th Country A ssessment transport sector, GHG emissions from road freight grow the BAU, Super Green policies reduce emissions by 25 percent most, by 400 percent during 2010-2050, due to an increas- in 2030 and by 32 percent in 2050. The largest reduction as ing share of road freight in land transport, which reaches 65 compared with BAU is in road freight. Transit and rail emissions percent in 2050. This change is mainly driven by significant grow due to increase in rail freight. The same policy options GDP growth. Figure 7.5 presents main outcomes of modeling as in the Green scenario bring the highest GHG reduction for the two green scenarios as compared with the baseline. as compared with BAU: pricing signal, investment in rail and promotion of fuel efficient vehicles. Green policies limit projected emission growth as compared with the baseline projections. Overall land transport CO2 Implementation of a complete set of the options modeled emissions increase is only 50 percent during 2010-2030 and in the Green scenario delivers modest abatement while 120 percent during 2010-2050. These increases are below the the Super Green scenario triples that abatement. Green ones observed in BAU. They are reduced by 14 percent from scenario options total 12.5 MtCO2e in reduced transport the BAU level in 2030 and by 18 percent in 2050. The highest emissions, while a full Super Green scenario’s set of options reduction as compared with BAU is in road freight. Transit provides abatement of 24.9 MtCO2e. Table 7.2 presents (public transport except rail) and rail emissions increase due modeling outcomes in absolute terms (cost, abatement level to significant additional rail freight and some other services. and unit abatement cost) by scenario, policy package and The highest GHG reduction as compared with BAU among policy option. The cost effectiveness of each scenario (unit policy options, assuming each one of them is implemented abatement cost) appears high but other factors need to be independently, is from the implementation of pricing policies, considered:135 €41.1 per TCO2e in the Green scenario and €60.9 investment in rail and promotion of fuel efficient vehicles. per TCO2e in the Super Green scenario. These characteristics differ by policy package and by policy option within pack- Super Green policies push projected emission growth further ages. It is important to note the set of green actions needed down as compared with BAU although still don’t achieve an 135. As previously discussed, specifics of the transport sector mitigation absolute reduction in emissions relative to 2010. Overall land are such that the set of green actions needed for mitigation significantly overlaps with the set of sectoral reforms required to increase sector transport GHG emissions increase by 30 percent during 2010- efficiency, and, therefore, the green objectives of reducing the transport 2030 and by 80 percent during 2010-2050. As compared with sector emissions will have a co-benefit of increased sectoral efficiency. Figure 7.5. Green policies limit emissions growth, but do not achieve an absolute reduction Projected land transport emission levels by scenario, in kilotons of CO2e per year, and emission reduction in green scenarios, 2050, as % of BAU emissions 3,500 Difference in the level of CO2 in 2050 in green scenarios as compared with BAU, by mode of transport, in kt of CO2 3,2 3,000 66 3,266 Green Super-Green BAU 2,500 Private road -108 -216 2,686 Kilotons of CO2 per year Green 2,000 Freight road -575 -949 Super-Green 2,232 1,500 Transit 1 4 1,000 Rail 102 127 500 0 -580 -1,034 2010 2030 2050 Source: Transport sector modelling outcomes, Transport sector technical paper. H ow C an Transport Support Sustaina ble Growth ? 83 for transport mitigation significantly overlaps with the set of efficiency of vehicles. Instruments modeled comprised the sectoral reforms required to increase sector efficiency, and, following: regulations to improve freight fleet efficiency, therefore, the green objectives of reducing the transport regulations requiring higher standards for car imports, sector emissions will have a co-benefit of increased sectoral scrappage scheme for passenger cars, Clean Vehicle efficiency. Directive136 for public sector fleet, and new regulation for buses and taxis (see Table 7.1 for details). Increased The Fuel Efficiency package delivers the highest benefits. fuel efficiency of vehicles reduces demand for fuel and This package generates 80 percent of the total Green abate- therefore lowers emissions. Modeling outcomes show that ment and 68 percent of the total Super Green abatement. this policy option will result in the third best abatement This package also has the best outcomes in terms of cost level among all policy options: 2.5 MtCO2e in the Green efficiency: €18.3 per TCO2e in the Green scenario and €26.7 scenario and 4.8 MtCO2e in the Super Green scenario. The per TCO2e in the Super Green scenario. The package consists option is cost efficient and requires €31 per TCO2e in the of policy options that create incentives to use less fuel, either Green scenario and €30 per TCO2e in the Super Green by using fuel efficient technologies/driving mode, or by driving scenario. This option is consistent with the EU require- less. The package is not designed as a set of options that ments to transport. are complementary to each other; each of the options in the package is self-standing. Modeling outcomes for individual ■■ Eco-driving information campaign and training. This policy options in this package are as follows: option was modeled to include training and information campaign, mainly for freight operators and bus drivers, ■■ Pricing signal (modeled as increased fuel price). This regarding driving speed and driving style, removal of policy option can include a number of instruments: fuel roof racks, timely vehicle maintenance, and tire pressure taxes, vehicle registration fees and taxes at point of pur- checks. The emission reduction is achieved through chase, charges associated with usage of roads, or a fixed changed driving habits and purchase of smaller cars. road fee for a time period. (see Good Practice Box 2 with While this measure delivers limited abatement, it is cost an example of a successful pricing policy, which increased efficient and has an important co-benefit of road safety. the price of higher emissions cars and reduced the price of lower emission cars in France). In this study, the pric- ■■ Vehicle trains are a new technology, still in the testing ing signal policy option was modeled through a fuel tax, stage. This technology would be implemented only in the the most effective of these instruments (see details in Super Green scenario starting in 2020 and would affect Table 7.1). A fuel tax increases the price of fuel, creating a limited share of traffic. Therefore, the modeling shows incentives to reduce travel and to use fuel-efficient cars a very small level of abatement from the implementation (smaller cars or those with better emission standards), of this option. This option has significant co-benefits in thus reducing demand for fuel for road transport and road reduced freight costs, increased road safety and reduced transport emissions. The outcomes of modeling show that congestion. It will have a greater impact when the technol- the pricing signal option is one of the two most beneficial ogy is more widespread. options (together with rail investment), judged by both the resulting abatement and the unit abatement cost: it ■■ The Rail Investment package provides second highest reduces emissions by 3.7 MtCO2e in the Green scenario benefits after the fuel efficiency package: it delivers and by 11.2 MtCO2e in the Super Green scenario, while abatement of 3.9 MtCO2e in the Green scenario and of 5.0 the unit cost of abatement is €8.4 per TCO2e in the Green MtCO2e in the Super Green scenario. The cost efficiency scenario and €24.9 per TCO2e in the Super Green scenario. of the package is good for a transport sector intervention: This option is essential for transport sector policy, because €65 per TCO2e in the Green scenario and €98.2 per TCO2e price incentives provide the most impact directly and in the Super Green scenario. This policy option is aimed because many other measures deliver better results if mainly at increasing the availability of both freight and built on them. passenger rail service, together with increased energy efficiency of rail. Rail investment will result in significant ■■ Encouraging purchase of fuel efficient vehicles. This co-benefits including reduced congestion, increased road policy option can include the following instruments: point- safety, and lowered air pollution level. of-purchase taxes related to fuel efficiency of vehicles, stricter vehicle import regulations, scrappage schemes, 136. As previously described, the Clean Vehicle Directive is a European low emission standards for public sector vehicles and Union initiative aimed at increased usage of environmentally-friendly vehicles and internalization in vehicle price of environmental impacts of taxis, and information and marketing regarding fuel road vehicle operation over their lifetime: http://ec.europa.eu/transport/ themes/urban/vehicles/directive/ 84 F Y R M aced onia Gr een Grow th Country A ssessment planning and regulation, investment in walking and cycling Good Practice Box 8. infrastructure, and urban access freight restrictions and con- Reducing transport emissions through a solidation centers137— will deliver abatement of 1.7 MtCO2e price mechanism in France in the Green scenario and 2.6 MtCO2e in the Super Green French experience demonstrates how pricing policies help scenario and provide significant co-benefits of enhanced reduce emissions through modifications in consumer behav- business development in the city centers and therefore ior. During 2003 to 2009, the average emissions of new cars improved standards of living, as well as improved urban in France decreased, dropping precipitously in 2008 after the quality of life and road safety. Particular options have the government introduced a “feebate,” which increased the price following features: of high-energy and reduced the price of low-energy-consuming cars. This led to a 20 percent decrease in the average CO2 emis- sions of new cars, of which 34 percent is related to the type of ■■ The parking management option will aim at providing cars on the market and 46 percent to price effects (gasoline adequate parking supply, management, pricing and prices and “feebate”). The biggest preference changes occurred information, as well as parking enforcement. Modeling among young people and rich people. of this option involves better (limited in the city center) parking supply, and improved management, as well as 160 compulsory feebate increased parking pricing. As a result, demand for travel energy labels in the city will be reduced and emissions lowered. grams per kilometer 155 150 145 ■■ Behavior change is a low cost option designed to enhance 140 the impact of the other measures in the package. It was modeled through information campaigns leading to 135 reduced demand for trips and a mode switch from cars 130 03 3 04 4 05 5 06 l-0 6 07 l-0 7 08 8 09 to public transport and walking and cycling. n- l-0 n- l-0 n- l-0 n- n- n- l-0 n- Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja observed emission trend ■■ Investment in urban and interurban transit can include investment in bus and tram services, in bus rapid transit, in Source: World Bank. 2012. Inclusive Green Growth: The Pathway to better ticketing systems, and subsidized public fares. This Sustainable Development. Washington, DC: World Bank. option was modeled as investment in a tram network, in interurban bus service and in an efficient ticketing system with increased fares. The outcome of this investment is a The Urban Development package is characterized by transportation mode switch, away from cars and toward mutual complementarity of its policies. Many of the Urban public transport. Development policies support each other and are not as beneficial individually as they are in the package. For example, ■■ Land use planning and regulation is a set of measures investing in the re-design of the downtown areas into low limiting and reversing urban sprawl. It includes various traffic ones with walking-only streets should be combined with regulations aimed at permitting only planned urban devel- well-developed parking and public transportation. Behavior opment, with the priority building construction as a fill-in change effort is complementary to investments and policy in existing city areas, and with new developments permit- incentives, such as land use planning, investment in urban ted only if public transportation and city infrastructure are and interurban transit, and parking management. Individually, provided. This option is modeled through its impact on some policies in the Urban Development package have very the demand for travel. high unit abatement cost, but this outcome should not be regarded as a reason to abandon them: they are part of the ■■ Investment in walking in cycling infrastructure can involve package and deliver interlinked value within the package. construction of cycling facilities, pedestrian streets, Urban transport policies are only one, albeit significant, part of improved crossing, and information campaigns regarding the overall bigger urban package, which also includes mutually walking and cycling. The modeling focused on develop- complementary interventions in the energy sector, water and ment of walking and cycling infrastructure resulting in a wastewater sectors, and solid waste sector. mode switch from driving to walking and cycling. The combination of the first six measures in the Urban pack- age (Table 7.2) – parking management (Skopje), behavior 137. Consolidation or transshipment centers are facilities at an intermediate shipment destination, from which goods are transferred to their next or final change, investment in urban and inter-urban transit, land use destination, often using different vehicles. H ow C an Transport Support Sustaina ble Growth ? 85 ■■ Urban access freight restrictions and consolidation Figure 7.6. Cost of Super Green policies centers can have different designs, with restrictions (NPV, 2012-2050) is not directly related based on emissions levels from vehicle operation, weight to the resulting abatement and size of vehicles, loading factors, or time of day. The Cost of interventions (NPV, 2012-2050) and projected land option was modeled using EU emission standards-based transport emission level by policy, in kilotons of CO2e per restrictions and involved construction of consolidation year (log scale), and emission (log scale) centers. This intervention will reduce demand for heavy duty vehicle travel within the cities. (Heavy vehicles are 14 Cost, Euro thousand (log scale) rail already prohibited from Skopje in summer). 13 congestion pricing 12 transit fuel effic. 11 walking Other options in the Urban Development package – urban 10 freight eco-driving urb. traffic mgt traffic management systems (UTMS) (Skopje) and congestion 9 8 parking mgt charge (Skopje) - would also add value in terms of abatement land use 7 (Table 7.2), as well as co-benefits, such as reduced traffic 6 and increased safety. However, modeling showed limits to 5 behavior their implementation. UTMS allow for better use of existing 4 2 3 4 5 6 7 8 9 10 city infrastructure, optimized speed and therefore safety Abatement, kt CO2 (log scale) and reduced emissions. The option was modeled through an upgrade of the existing UTMS. This option has high cost Source: Staff calculations based on transport sector modeling outcomes. and limited benefits as compared with other interventions. Congestion charge was modeled through a charge applied when vehicles cross a border to the city center. It would apply requiring increased maintenance and investment expenses. in the Super Green scenario only and have a limited applicabil- Drainage infrastructure will be affected by capacity exceed- ity due to a complicated implementation. ance and erosion caused by rain and flooding. Embankments and cuttings remain highly vulnerable to subsidence (exac- While the previous paragraphs describe modeling outcomes erbated by poor drainage) and river erosion. For rail, future in terms of abatement level and unit abatement cost, it is vulnerability to cold and hot weather is the main concern. Rail also important to consider the overall cost of the policy tracks will be more vulnerable to buckling. In hot weather, the options, especially from the point of view of financing and risk of fire is the main concern. In wet weather, bridges, tracks, budget impact. Figure 7.6 shows the relationship between the and the substructure are likely to become more vulnerable total cost of the policy options included in modeling (see Box due to the increased likelihood of floods and landslides. 7.4 for details on the calculation of costs) and the achieved abatement level, based on the data presented in Table 7.2. It provides a good illustration of no or little direct relationship RECOMMENDATIONS between investment level and emission reduction outcome by policy option. This seemingly perplexing conclusion is The proposed mitigation action plan recommends a set of driven by the importance of policy complementarity and actions on the basis of estimated benefits. This plan includes co-benefits, discussed above. The figure also illustrates the implementation of a pricing signal, encouraging purchase of high abatement level delivered by certain policy options— a fuel efficient vehicles, rail investment, parking management pricing signal, rail investment and encouraging purchase of (Skopje), investment in urban and inter-urban transit, and fuel efficient vehicles—as well as a relatively high level of behavior change. The main areas of concern coincide with abatement in combination with low cost of such measures as the top drivers of emissions, and many of them—such as the land use planning and regulation, parking management (in old vehicle fleet and increasing private ownership of vehicles— Skopje), and behavior change by households. should be addressed using policy or behavioral incentives such as regulations, taxes, fees and pricing aimed at encouraging Analysis of transport sector sensitivity to climate change replacement of old vehicles with newer and more fuel efficient concluded that the main concern in this area is related to ones (at a faster pace than current turnover) and at achieving projected increase in temperatures and precipitation, which reduction in driving time per vehicle, as well as reducing driving will push the costs up. Vulnerability analysis found that road in the city centers. In particular, the recommended pricing signal sector is highly sensitive to projected hot and wet weather: option would include increased fuel taxes, vehicle registration high temperatures, rain and flooding will damage pavement fees and sales taxes, vehicle/infrastructure charge/tax for a and cause road closures, traffic delays, and accidents, thus fixed period (vignette), as well as charges for using roads (tolls). 86 F Y R M aced onia Gr een Grow th Country A ssessment Table 7.2. Main outcomes of modeling: abatement level, implementation cost and unit cost of abatement, by scenario, policy package and individual policy option. GREEN SUPER GREEN POLICY PACKAGES AND Abatement, kt Cost, 2012-50, Unit abatement Abatement, kt Cost, 2012-50, Unit abatement INDIVIDUAL POLICY OPTIONS CO2 NPV, € thousand cost, € / TCO2e CO2 NPV, € thousand cost, € / TCO2e Package 1: FUEL EFFICIENCY 1 Pricing signal (fuel price) 3,728 31,196 8.4 11,180 278,521 24.9 Encouraging purchase of fuel 2 2,487 77,169 31.0 4,750 142,733 30.0 efficient vehicles Eco-driving information 3 602 16,244 27.0 894 30,324 33.9 campaign and training 4 Vehicle trains Not applied -- -- 67 52 0.8 SUBTOTAL: FUEL EFFICIENCY 6,817 124,609 18.3 16,891 451,630 26.7 Package 2: RAIL INVESTMENT Investment in rail infrastructure 5 and services and rail energy 3,917 256,026 65.0 4,958 486,733 98.2 efficiency Package 3: URBAN DEVELOPMENT 6 Parking management (Skopje) 632 1,679 2.7 671 3,358 5.0 7 Behavior change 431 57 0.1 796 107 0.1 Investment in urban and inter- 8 311 74,092 238.1 346 180,140 520.1 urban transit 9 Land use planning and regulation 211 1,506 7.1 421 1,506 3.6 Investment in walking & cycling 10 113 29,122 256.9 259 103,085 398.0 infrastructure Urban access freight restrictions 11 13 16,831 1,318.7 88 33,569 380.3 & consolidation centers Urban traffic management 12 9 7,727 893.3 12 11,409 990.6 systems (Skopje) 13 Congestion charge (Skopje) -- -- -- 490 246,149 502.4 SUBTOTAL: URBAN DEVELOPMENT 1,719 131,013 76.2 3,084 579,324 187.9 TOTAL 12,453 511,648 41.1 24,933 1,517,686 60.9 Other measures would involve changes in regulations applied management (parking management, urban traffic manage- to second-hand vehicles to discourage imports of old polluting ment systems). vehicles, incentives to purchase fuel efficient vehicles, e.g., through taxation and scrappage schemes. Capacity building The climate change adaptation plan’s measures mostly and training would be important to support options such as relate to better implementation of existing standards on parking management improvement. local roads and improvement of road surface. Further improvements, using new pavement materials and imple- Investment is needed to address other emission drivers mentation of new standards, may be required in order to within the proposed action plan to reduce emissions. In adapt to future changes in climate. (See Chapter 9 on how particular, this relates to recommended rail infrastructure policymakers can choose adaptation more efficiently for and service development, which would provide a lower- infrastructure assets). emission alternative to road transport, both passenger and freight. Investment is also needed to revive public transport The institutional side of adaptation reform is critical. in Skopje, a clear alternative to private road transport, which Actions in this area should start with collaboration between can be developed faster and at a much lower cost than rail. transport stakeholders, such as Government ministries and Yet another investment recommended would help with the departments, the Agency for State Roads, the rail sector, re-design of the city centers and improvements in sector the City of Skopje, municipalities, bus operators and parking H ow C an Transport Support Sustaina ble Growth ? 87 Box 7.4. Sources and assumptions for implementation cost estimatesa Costs of the implementation of the policy options to the public sector are calculated, for most of the options, based on international experience. For example, parking management option costs are based on evidence from the Paris ‘bollard’ scheme, corrected for population size; scrappage scheme costs (part of the option encouraging purchase of fuel efficient cars) are derived from evidence reported by the European Commission,b congestion charge costs are drawn from experience in Stockholmc, eco-driving cost assumptions are obtained from experience in the Netherlands,d while cycling infrastructure costs are gained from London cycling budgets. For some of the options, the cost estimates are based on existing assessments made for Skopie: for the UTMS policy option, costs include the amount of existing loans provided for the purpose of this intervention; in the case of tram network development (within the option of urban and inter-urban transit), the concession study conducted for the proposed tram line is utilized; and in the case of rail investment, costs were provided by Macedonian Railways Transport JSC Skopje, the public rail company. The approach to estimating the costs of the pricing signal option differs. It is based on calculation of the deadweight loss or “Harberger triangle” from the introduction of fuel tax. In the calculations, it is assumed that supply is perfectly elastic and that fuel price elasticity of demand equals 0.11.e The level of demand and price before the introduction of the fuel tax are from EU databases. The price after the tax is introduced is calculated according to the Green and Super Green scenario modeling (20 percent increase in the Green scenario and 65 percent increase in the Super Green scenario). Then the after-tax quantity demanded is calculated using these inputs and the standard formula: e=d(Q)/d(P) , where e is the price elasticity of demand, and d(P) and d(Q) are, correspondingly, price and quantity differentials before and after tax introduction. Next, the deadweight loss is calculated as one-half of the multiple of the quantity and price differential. a. Kodransky, M., G. Hermann: Europe’s Parking U-turn: from Accommodation to Regulation, 2011 b. Assessment of the Effectiveness of Scrapping Schemes for Vehicles Economic, Environmental and Safety Impacts, European Commission, March 2010. c. Carl Hamilton: Revisiting the Cost of the Stockholm Congestion Charging System, Center for Transport Studies , Royal Institute of Technology, Stockholm, 2010. d. ECODRIVEN Campaign Catalogue for European Eco-driving and Traffic Safety Campaigns. e. Transport sector EFFECT model. management organizations. More complicated but also projects in public transportation development and in walking necessary actions in this area should aim at creating clear and cycling infrastructure development. governance structures and contractual arrangements, as well as increasing administrative and technical capacity to support There is an urgent need for improved transport sector strategy development and project implementation. adaptation information and data. Information and data limitations make FYR Macedonia lag behind best practice A behavior change program within adaptation measures in other countries in climate change adaptation. There is no would involve an eco-driving information campaign and database of extreme weather events, the Agency for State driver training, specifically for drivers with traffic offenses, for Roads does not conduct damage calculations, nor has it a public sector and high mileage drivers (such as drivers of vans, database quantifying or costing infrastructure damages by taxis, and buses); and demonstration projects targeting main weather events. transport generators in urban areas that could be linked to 88 F Y R M aced onia Gr een Grow th Country A ssessment H ow C an Transport Support Sustaina ble Growth ? 89 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND AGRICULTURE URBAN ISSUES SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 8 Can Urban Areas Lead on Greening? CHAPTER SUMMARY pertinent legislation; an in-depth city level analysis of Skopje using the Tool for Rapid Assessment of City Energy (TRACE); and rapid assessments of selected additional Macedonian f cities. TRACE was used as a tool for assessing potential energy and cost savings from energy efficiency measures in Skopie and prioritization of policies and investments across sectors. The TRACE analysis was conducted for six municipal service areas: urban transport, municipal buildings, water and FYR Macedonia’s urban areas have a leading wastewater, power and heat, street lighting, and solid waste role in the overall economy, with most people management. and most economic assets; thus, green growth needs strong roots in cities and towns. More The findings show that cities have a high potential to achieve than two-thirds of the country’s population resides in cities, improved growth coupled with reduced emissions. Urban and rural-to-urban migration is rising. Skopje alone gener- sprawl induces increased per capita emissions, mainly driven ates some 60 percent of national GDP and an estimated by growth in the number of single family houses that use wood comparable share in greenhouse gas emissions. Cities and for heating and private cars for commuting. Better building municipalities are responsible, moreover, for the provision insulation138 and increased energy efficiency of street light- of key public services. Greener growth in urban areas would ing could help reduce emissions significantly and should be mean improved public service provision; increased efficiency prioritized by the municipalities. Emissions from urban transport and lowered emissions; reduced water losses; proper treat- are driven by an increase in private car ownership and an old ment of wastewater; collection, separation and processing of vehicle fleet; therefore, focus on public transport systems is solid waste using modern equipment and improved landfills; essential.139 Rising air and water pollution from wastewater and well-organized public transport; and modern health and solid waste from run-down sector assets as well as unacceptable education services that are consistent with the needs of a waste collection and disposal practices constitute another set competitive economy. of municipal challenges. Lastly, municipal water supply suffers from high technical losses and low revenue collection, leading The analysis presented in this chapter is aimed at defining issues of urban development that are most important to 138. Building insulation is one of the main energy efficiency measures address in the context of green growth. The methodology recommended in Chapter 6 on energy on the basis of modeling. was designed to assess the impact of urban policies and invest- 139. A detailed discussion of the emission intensity of transport as it relates to growth in private car ownership and increased number and length of car ments and included a review of urban policies, strategies and trips in FYR Macedonia is discussed in Chapter 7 on transport. C an Ur ban A reas Lead on Greening ? 91 to subsidization of the sector.140 Recommended priority areas FYR Macedonia’s urban population Figure 8.1. for intervention include investment in public transport and in has recently been growing faster than rural water and wastewater networks rehabilitation, establishment of population integrated regional waste management systems, and expansion Rural and urban population growth, annual of energy efficiency programs. 1.5 CHALLENGES FOR GREENER GROWTH 1 Overview percentage 0.5 FYR Macedonia is an urbanized country with 68 percent 0 of its population residing in cities. The five biggest cities 1991 1997 2001 2007 2011 1992 1993 1994 1995 1996 1998 1999 2000 2002 2003 2004 2005 2006 2008 2009 2010 alone–Skopje, Kumanovo, Bitola, Tetovo and Prilep–are home to 40 percent of the population. A relatively recent trend, -0.5 observed during the last six to seven years, is an increasing rate of migration from rural areas of the country to the cities. As a -1 result, during 2006 to 2011, the urban population grew by 1.7 percent, while the rural population increased by 0.6 percent. Rural population growth rate Urban population growth rate In 2010-11, urban population growth equaled 0.4 percent, Source: World Bank Development Data Platform. while rural population fell by 0.2 percent. FYR Macedonia is now as urbanized as Italy and Austria and more urbanized than the City of Skopje account for the largest share of both local countries like Portugal, Greece, Finland, or Ireland. (Figure 8.1). revenues and capital expenditure. Cities produce most of FYR Macedonia’s wealth and drive Cities are responsible for most of the country’s emissions.143 economic growth. Wealth in FYR Macedonia is dispropor- FYR Macedonia’s economy is emissions intensive, and most of tionately concentrated in the capital city. In 2009, Skopje the emissions – 95 percent - come from energy, transport and generated almost 60 percent of the country’s GDP.141 It has a manufacturing and are related to urban activities.144 A major quarter of the country’s population (not counting nearby cities, part of emissions is from the energy sector and constitutes towns, and villages which form the Skopje agglomeration 71.2 percent of total. The transport sector contributes 14.7 or ‘big Skopje’), and current trends suggest that Skopje will percent to overall emissions, while manufacturing adds 9.3 continue to grow disproportionately. percent. At the same time, agriculture/forestry contribute only 0.4 percent to the overall level, and residential emissions Macedonian cities play an increasing role in public service (produced mostly by rural households and urban ones living in provision and investments. Municipalities are responsible single family houses145 ) equal only 1.6 percent of the total.146 for provision of key public services, such as water supply and sanitation, solid waste management, and public transport, but At the same time, cities in FYR Macedonia will benefit from also for critical social services such as primary and secondary implementing green growth policies. As will be outlined in the education and basic health care. Local governments have the following, Macedonian cities may reduce costs from energy and responsibility to prepare urban plans to guide development in resource consumption, increase employment and contribute their jurisdictions and allocate funds for capital investments. to long-term economic growth, and improve citizen’s qual- In 2011, Macedonian cities and municipalities invested more ity of life. Infrastructure and service quality upgrading helps than €116 million in public infrastructure, equivalent to 40.5 improving productivity and attracts skilled people. Growth percent of total public capital expenditure or 1.5 percent of the in knowledge, service and other green industries located in national Gross Domestic Product (GDP), up from 0.95 percent cities can help address the country’s endemic unemployment in 2008. The increase of local government revenues has been issue; and as one of the most energy intensive economies even more dramatic: revenues rose from 0.88 percent of GDP in 1999 to 5.65 percent in 2011142. Urban municipalities and 143. Source of data in this paragraph: IEA database. 144. A major part of emissions is from the energy sector and constitutes 71.2 percent of total. Transport sector contributes 14.7 percent to the overall 140. Chapter 4’s water sector analysis includes a discussion of the municipal emissions, while manufacturing adds 9.3 percent. Energy sector refers to water demand gap, which is exacerbated by the dilapidated condition of electricity and heat production and energy sector own use. Transport sector water supply infrastructure. includes all transport activity regardless of the economic sector 141. State Statistical Office of the Republic of FYR Macedonia. 145. Residential refers to emissions from fuel combustion in households. 142. World Bank. 2013. Western Balkans Municipal Finance Review. 146. IEA database. See details in chapters on Energy and Agriculture. Forthcoming. 92 F Y R M aced onia Gr een Grow th Country A ssessment in Europe, FYR Macedonia has enormous savings potential for cities, including in public service provision. Investments Eco-cities allow Good Practice Box 9. in upgrading FYR Macedonia’s municipal infrastructure will ecological and economic progress to go support ‘greener growth’, but also help making progress in hand-in-hand through integrated urban meeting the requirements of FYR Macedonia’s accession to planning and management in Singapore the European Union (EU). FYR Macedonia has already ratified In many ways, Singapore is the prototype of effective urban the EC Treaty for South East Europe in 2006, agreeing to a environmental policy. Its clean and green image has even been schedule for the implementation of the in the fields of energy, a critical marketing tool in attracting foreign investment. The competition, environment, and renewable energy. To catch up Singaporean Government is very successful in using a compre- with EU income levels while improving environmental sustain- hensive mix of regulations and standards, financial incentives and pricing systems, consumer education and awareness, and ability, FYR Macedonia needs to unleash the full potential of capacity building. its cities through well targeted urban policies, regulations, and investments. Experience shows that urban green interven- The Green Plan 2012 was launched at the World Summit on tions are most effective when implemented as a package of Sustainable Development in Johannesburg in 2002 and has been various measures, combining investments with regulations, reviewed and upgraded at 3-year intervals. Singapore has also financial incentives, pricing measures, consumer awareness been effective in applying a rigorous approach to developing and capacity building (see Good Practice Box 9). tailored and coordinated solutions for each environmental goal. The Inter-Ministerial Commission on Sustainable Development launched the Sustainable Singapore Blueprint in 2009, setting Critical Urban Issues in the Context of Green out ambitious and specific targets for energy efficiency, water Growth consumption, local air pollution, use of public transportation, water catchment areas, and green certification of buildings. Two main areas of focus in the context of urban green growth in FYR Macedonia are the way urban form is taking shape Background information from the Green Growth Best Practice and how key local services are being delivered. Both have a Initiative, Green Growth Best Practice Assessment Report 2013. Seoul: GGBP. direct influence on the efficiency and environmental impacts of cities. Urban form is a determining factor for the use of land and Denser cities account for fewer Figure 8.2. energy in cities, and the cost of infrastructure and municipal services. Denser cities use less energy and generate lower GHG emissions per capita emissions per capita (Figure 8.2) as compared to cities with GHG emissions per capita and density of population, higher rates of urban sprawl. They also provide access to global comparison services at lower cost. Generally, cities with a dense urban 25 mass tend to have lower energy intensities and fewer emis- Denver sions than sprawling cities (see Figures 8.2-8.3). A compact 20 tCO2e/capita city promotes energy efficiency in different ways. An apart- St. Petersburg ment in multi-story building has a lower footprint than a single 15 detached home, as heating and cooling are shared between Turin 10 New York apartments. Also, apartments tend to have a smaller area that HamburgLondon Brussels needs to be heated, cooled, lighted, and otherwise powered. 5 Paris Istanbul Barcelona Services are provided at lower cost. It is easier and more cost- Stockholm Mumbai efficient to provide a public transportation system in a city 0 0 5,000 10,000 15,000 20,000 25,000 30,000 with higher densities. Public transport networks in dense cities Density (Pop/Km ) 2 are generally easier to maintain as they cover a smaller area, require less energy inputs, and have a higher ridership. Solid Source: World Bank Development Data Platform and Citymayors.com waste management systems require smaller transport times in compact cities than in sprawling cities, and waste can be collected in a more efficient way from apartment buildings than from individual homes. Water and sewage systems are more compact in denser cities, which means that networks are easier to maintain, demand for energy to pump water in and wastewater out of the system is lower, and incidences of C an Ur ban A reas Lead on Greening ? 93 leaks are less frequent. Denser cities have fewer streets that buildings. Municipal water supply and wastewater services need to be lit, so expenses on public lighting sector are lower. are characterized by unreliable service provision, high level of system losses, subsidization and low revenue collection. FYR Macedonia’s cities are sprawling out and losing density. Wastewater treatment is almost non-existent leading to high Macedonian cities’ urban mass is growing at a faster rate than level of water pollution. Water and wastewater assets are in a the city population. The number of new dwellings added annu- deteriorated condition. Solid waste collection rates are low, ally is higher than actual population growth, and more than especially outside of Skopje, and recycling rates are the lowest four times higher than the growth in the number of households in the region. Emissions from solid waste are among the high- (see Figure 8.4). A majority of new dwellings is represented by est in Europe. Energy efficiency of buildings can be improved detached houses with four rooms or more, built on the out- and the municipalities can lead this transition. Street lighting skirts of cities. This pattern is typical for transition countries: efficiency can also be improved. Urban transport infrastructure during transition, many cities expanded despite stagnating or has been declining and the quality and availability of public even decreasing population, driven by the unmet demand for transportation has been decreasing. All these urban sectors housing from the centrally planned systems. Available housing require significant investment to bring urban services to a stock was mostly in apartments in multi-story buildings in level compatible with that of the EU. overbuilt cities, while demand for single family housing was unsatisfied, and available land was usually on the city outskirts. Today’s investment decisions in Macedonian cities and As a result, most cities in transition countries have witnessed municipalities will define their development path for the a process of de-densification of city centers, as people move future, determining operational performance, energy inten- out of crowded apartments to new dwellings, in many cases sity and emissions for decades to come. A careful assessment single detached houses in the city outskirts. and weighing of different available options and between conflicting priorities across sectors is required to optimize Municipal service provision in FYR Macedonia requires public resource use for green growth in cities. This requires improvement. The most challenging problem is the dilapi- long-term, integrated planning across multiple sectors and dated condition of the municipal assets. Management of stakeholders which has to be based on reliable and compa- public services is another area of concern. This involves rable information of the current situation to make informed such sectors as urban water and wastewater, urban public decisions. The analysis done under the FYR Macedonia Green transportation, urban solid waste collection, and municipal Growth urban sector work provides a first step in that direction. Urban form influences service delivery Figure 8.3: Houses in FYR Macedonia are growing Figure 8.4: patterns and energy intensity much faster than households Urban density, transportation mode, and energy intensity Annual increase in number of dwellings, population, and of passenger transport, 2010 number of households, 2006-10 7,000 100 4 6,000 75 3 5,000 50 2 4,000 number 25 1 3,000 2,000 0 0 14.9 52.9 54.9 59.9 74.7 118.8 150.3 204.1 United Eastern Western Africa Latin Middle High- Low-income 1,000 States Europe Europe America East income Asia Asia 0 Urban density (people per hectare) 2006 2007 2008 2009 2010 Nonmotorized Public transport Private modes Dwellings Population Households private modes Energy used per passenger kilometer (megajoules) Source: Statistical Yearbook of the Republic of FYR Macedonia, 2011. Source: World Bank Development Data Platform. 94 F Y R M aced onia Gr een Grow th Country A ssessment METHODOLOGY AND MAIN FINDINGS The Tool for Rapid Assessment of Box 8.1. City Energy (TRACE)a Methodology TRACE is a decision-support tool developed by ESMAP (Energy Sector Management Assistance Program, World Bank) and The objective of the urban sector analysis was to assess the designed to help cities quickly identify under-performing impact of urban policies and investments under different sectors, evaluate improvement and cost-saving potential, and green growth scenarios in FYR Macedonia. Cities are complex, prioritize sectors and actions for energy efficiency intervention. It covers six municipal sectors: passenger transport, municipal multi-sector and multi-stakeholder systems. To build a diagnos- buildings, water and waste water, public lighting, solid waste, tic that adequately assesses and tracks green performance in and power and heat. such systems, a staged approach from a general urban sector review to a simple multi-city indicator performance review and TRACE is designed with the intention to involve city decision an in-depth single city-level analysis was applied. The analysis makers in the deployment process. It starts with benchmark data was done using the following sequence: collection, goes through an on-location assessment involving experts and decision makers, and ends with a final report to ■■ Step 1. General urban sector review. A scoping paper was city authorities with recommendations of energy efficiency interventions tailored to the city’s individual context. developed to summarize the current state of urban sector knowledge. The scoping paper reviewed urban policies, TRACE consists of three modules: an energy benchmarking strategies and pertinent legislation; identified existing module which compares key performance indicators (KPIs) data sources; and provided a preliminary overview of key among peer cities, a sector prioritization module which identi- urban trends in FYR Macedonia, e.g. demographic shifts, fies sectors that offer the greatest potential with respect to growth dynamics in a spatial context, land and housing energy-cost savings, and an intervention selection module development patterns, and performance of municipal which functions like a “playbook” of tried-and-tested energy efficiency measures and helps select locally appropriate energy public services. efficiency interventions. ■■ Step 2. An in-depth city level analysis was conducted TRACE was initially field-tested with positive results in Quezon in Skopje using the Tool for Rapid Assessment of City City, Philippines. The tool has since been deployed in thirteen Energy (TRACE) (see Box 8.1) for data collection and other cities. In Turkey, TRACE helped define the Sustainable benchmarking. Although TRACE has a focus on energy Cities pillar in Turkey’s US$4.5 Billion Country Partnership efficiency, the scope of the city-level analysis goes well Strategy with the World Bank for the years 2012-2015. In Indonesia, the World Bank used TRACE to create city-level case beyond that and includes urban transport, municipal studies, the results of which are being used to create Sustainable buildings, street lighting, water and waste water, power Urban Energy Program guidelines for cities across the region. In and heating, and solid waste. Data on a number of indi- Georgia, TRACE contributed to the development of the Georgia cators related to energy consumption within these six Municipal Development fund where a third generation of the sectors were collected using TRACE. The tool provided fund will consider using the sustainable cities framework. TRACE a structured way to collect and analyze data. In addition, is expected to be deployed in cities in Africa, Latin America and the same data were collected from other cities in the the Middle East in 2013. As new cities use TRACE, additional city benchmark data will be added to the tool, as well as more country to allow for benchmarking of performance and case studies, making it even more effective in the years ahead. to identify areas of greatest potential efficiency gains. TRACE provided initial pointers and recommendation for implementing improvements. a ESMAP: http://esmap.org/TRACE TRACE was used as a decision making tool for assessing potential energy and cost savings from implementing are typically under the responsibility of cities: urban trans- cross-sectoral energy efficiency measures in Skopie and port, municipal buildings, water and wastewater, power to use the outcomes to plan the city’s green growth in and heat, street lighting, and solid waste management. a systematic way, prioritizing policies and investments Indicators used in the analysis included both energy and across sectors. The analysis had three objectives: (i) to non-energy measures, the latter providing recommenda- assess potential energy and cost savings; (ii) to help local tions beyond energy savings. The findings were assessed authorities and policy makers to think about cities in an using a benchmarking process that compared Skopje with integrated way; and (iii) to guide ‘green’ city planning. other cities included in the international TRACE data- The analysis focuses on six municipal service areas that base and helped prioritize possible interventions. For C an Ur ban A reas Lead on Greening ? 95 comparison purposes, cities were selected based on the Figure 8.5. Skopje is sprawling outwards level of development, climate, and population. ■■ Step 3. To complement TRACe’s analysis of Skopje, rapid assessments were conducted in selected addi- tional Macedonian cities using indicators from various tools, including TRACE and International Benchmarking Network for Water and Sanitation Utilities (IBNet). The objective was to make selected in-country comparisons and to prioritize proposed green growth policy actions outside of Skopje. Main findings Source: Urban sector paper. Urban sprawl increases per capita emissions and drives up the cost of public service delivery. FYR Macedonia’s cities Skopje, and the thermal performance of municipal buildings are sprawling out and loosing density. This relates to most has significantly improved. of cities, but more so to Skopje (Figure 8.5), which is now five times as large as the second largest city Kumanovo. Urban Street lighting energy efficiency improvements has cost sprawl leads to increased emissions and problems with public savings potential. Although public street lighting accounts service delivery pushing their cost up and their quality down. for only 1.42 percent of total electricity consumption in FYR The main source of increased urban emissions is a growing Macedonia, it translates into expenses significant for municipal number of urban single family houses that use dirty fuels for budgets. The efficiency of street lighting is low because the heating and cooking, which is not usually an option in apart- bulbs currently used produce little light and a lot of heat. In ment buildings. Problems with service delivery are related 2007, 86 percent of all street lamps had energy inefficient to a larger city territory, which means that such networks as mercury vapor light bulbs150. Modern sodium lamps have a transportation, water and sanitation, solid waste collection, lifetime period three times higher than that of mercury vapor roads, street lighting and other infrastructure need to be bulbs and generate more than double their light output. Bulb expanded in areas with lower population density and therefore replacement therefore can significantly increase street lighting higher per household service cost. efficiency. Many cities in FYR Macedonia started bulb replace- ment programs. In 2008-09, Skopje replaced 60-70 percent of Buildings insolation and increased energy efficiency of street street lights on the main streets. Bogdanci, a small town in the lighting could help reduce emissions significantly. Energy south of FYR Macedonia, saved 47 percent of the electricity consumption and emissions from public buildings can be bill as a result of street light bulb replacement: using a loan, significantly reduced using thermal insulation. Globally, the city replaced 520 inefficient lights and extended the street buildings are responsible for up to 40 percent of primary lighting system. In addition, maintenance costs were reduced energy use and 30 percent of global GHG emissions147. In by 78.4 percent. FYR Macedonia, residential, commercial and public buildings combined account for over 40 percent of total energy con- Emissions from urban transport are driven by an increase in sumption and 6 percent of electricity and heat consumption. private car ownership and old vehicle fleet in both private This makes them the top energy consumer in the country and public segments. 151 Transport is the second largest emit- and therefore the top emitter. Most of the energy in build- ter in FYR Macedonia, following energy sector. The share of ings is used for heating (67 percent), followed by lighting transport emissions in total stayed stable over the last 20 and electrical appliances (15 percent)148. Cost savings can be years, while the level of emissions has increased significantly. mainly achieved from thermal insulation, fuel switching and The primary reason for growth in transport sector emissions increased efficiency of heating and cooking appliances149. in the increase in private car ownership: a growing number Local authorities in FYR Macedonia have already started taking of passenger cars and a growing number of car trips. This measures to address building energy efficiency, primarily in trend was paralleled with the cities’ sprawling, intensifying it and being exacerbated by it. With decreasing density, public 147. United Nations Environment Program (UNEP). 2009. Buildings and Climate Change. Summary for Decision Makers. Paris: UNEP. 150. Energy Charter Protocol on Energy Efficiency and Related 148. European Commission’s Energy Efficiency Plan: http://ec.europa.eu/ Environmental Aspects (PEEREA). 2007. In-depth Review of Energy energy/efficiency/action_plan/action_plan_en.htm Efficiency Policies and Programmes. Brussels: Energy Charter Secretariat 149. See more information in the Energy chapter. 151. See more information in the Transport chapter. 96 F Y R M aced onia Gr een Grow th Country A ssessment transportation networks become less economical and have to Table 8.1. Urban transport network and reduce coverage, leaving even more urban residents without equipment declines public transport and leading to even higher rate of private Main urban public transport indicators transportation. Between 2006 and 2010, the number of public transit lines fell by 25 percent, their total length dropped by 42   2006 2007 2008 2009 2010 percent, the number of public transport vehicles and seating Number of Lines 195 167 148 136 145 capacity decreased by 16 percent, and urban public transport Length of Lines, Km 4,109 4,073 3,417 2,096 2,394 ridership shrank by 100 million people from a peak of 164 Number of Vehicles 773 722 670 651 650 million in 1988 to 64 million in 2010 (Table 8.1, Figures 8.6-8.7). Seating and 87,846 82,522 77,163 74,775 74,178 Standing Capacity Public transport is old and emissions-intensive, but first steps Average Number 435 380 408 355 494 to improve the situation have been made.152 Buses represent of Vehicles the only public transport available in FYR Macedonia, and out Passengers Carried 66,687 61,147 64,378 65,151 64,120 of 494 urban public transport buses, 459 are in Skopje (2010). (in ‘000) The bus fleet is very old. From 2001 to 2007, there were almost Source: Statistical Yearbook of the Republic of FYR Macedonia , 2011 no efforts to renew it and the decrease in quality of service was dramatic. Private bus operators were allowed to in 1994, and the competition decreased demand for public trans- most of waste), widespread wild dumps and waste burning in portation. In 2011, Skopje procured 200 new double-decker backyards. In Skopje, only 87 percent of generated waste is buses. As a result, ridership has increased substantially with collected. Landfills usually don’t comply with minimum dis- the introduction of the new buses. In 2011, Skopje public buses posal standards: the ‘Drisla’ landfill, which serves the Skopje carried 10 percent more passengers than in 2010. In parallel, region, is the only one complying with these standards. All Skopje together with the Public Transport Enterprise started other municipal landfills dispose of waste openly, without an initiative aimed at converting part of the old vehicle fleet minimum engineering standards to meet basic environmental from diesel to natural gas. criteria, let alone methane gas capture. Frequently, hazardous waste, including medical and animal waste, is disposed of Increased air and water pollution from wastewater and solid together with regular waste, which causes serious risks to waste caused by the run down sector assets and unaccept- public health. (Figure 8.8) able waste collection and disposal practices, as well as insufficient management capacity lead to increased emis- Waste collection coverage and recycling rates remain low, sions. Limited wastewater treatment has become a major particularly in rural areas. In 2008, only 60-70 percent of the source of water pollution. Although countrywide 80 percent urban population was covered by regular municipal solid waste of the population has access to wastewater collection, only 5 collection services. In some rural areas, collection coverage is percent of the sewage is currently being treated. Most of the as low as 10 percent. As a result, solid waste is disposed of in wastewater is being discharged directly into rivers and lakes. wild dumps. The recycling industry is small and dominated by For example, Skopje does not have a functioning wastewater the informal sector. Only a few cities including Skopje started system. All of the wastewater is discharged into the Vardar introducing separate collection systems for recyclables. Still, virtually untreated. Local authorities indicate that the Vardar Skopje’s recycling rate of 1.5 percent ranks among the lowest River enters Skopje with Category II level pollution and leaves in the region (2008). the city with higher pollution, at Category III or even IV. The existing waste management system is atomized and GHG emissions from waste have been increasing in the mostly inefficient. Upgrading it to reach the EU standards transition years due to rising waste quantities and inappro- will require most of the existing landfills to be closed. Only a priate disposal practices. GHG emissions from solid waste in few of the existing sites could be economically rehabilitated FYR Macedonia are almost double the EU average. Although to meet the EU sanitary disposal standards. In addition, the FYR Macedonia generates less waste per capita than most system is inefficient due to high market fragmentation, which of European countries, the share of emissions from waste is prevents it from achieving economies of scale. Municipalities estimated at almost 6 percent, compared to around 3 percent operate a vast number of small dumps, with 45 municipal globally. The high share of emissions from waste is a result landfills covering only 15,000 people per landfill153, many of of waste disposal in landfills without a treatment (occurs with them close to each other, servicing municipalities within a 153. According to the National Waste Management Plan 2008-14 152. Transport sector modeling included policy options related to public transportation, see Chapter 7. C an Ur ban A reas Lead on Greening ? 97 Figure 8.6. Share of public transportation in Skopje is below average Share of public transportation, global comparison 100 90 80 70 Percentage 60 50 40 30 20 10 0 Cebu Kiev Quezon Gaziantep Belgrade Baku Sarajevo Bogota Dakar Mexico City Paris Singapore Bangkok Rio de Janeiro Mumbai Budapest Tokio Talinn Skopje Warsaw Jakarta Cairo Ljubljana Teheran Casablanca Hong Kong Zarqa Shanghai Cape Town Amman Guanghzou Toronto Vijaywada Johanesburg Pune New York Jabalpur Kuala Lumpur Sydney Ho Chi Minh Danang Source: Urban technical papers. Figure 8.7. Urban public transport ridership in radius of no more than 10-30 km. Outdated collection equip- FYR Macedonia has been declining ment is often fuel inefficient and adds to high operating cost Ridership and to emissions. 180 Municipal water supply in FYR Macedonia suffers from high technical losses and low revenue collection. The networks Number of ridership in millions 160 are old, mostly built before the 1990s and some constructed 140 more than 100 years ago, they are in dire need of rehabilitation. This causes significant water losses ranging between 40 and 120 80 percent in Macedonian cities154. Skopje has one of the 100 highest levels of water loss in the region equaling 61 percent. Cities in FYR Macedonia had higher water system losses and 80 collected fewer revenues compared to other cities in the ECA 60 region (Figure 8.9). Two main causes have led to high losses: 1982 1986 1990 1994 1998 2002 2006 2010 154. World Bank, International Benchmarking Network for Water and Source: Statistical Yearbook of the Republic of FYR Macedonia, 2011. Sanitation (IBNet): www.ib-net.org/ Figure 8.8. FYR Macedonia generates less waste than other EU countries Waste generated and percentage of GHG emissions from waste A. WASTE GENERATED B. GHG EMISSION FROM WASTE 900 800 14 Kg/person/year 700 12 600 10 Percentage 500 400 8 300 6 200 4 100 2 0 0 FYR MACEDONIA FYR MACEDONIA Turkey Belarus Bulgaria Malta Lithuania Romania Estonia Hungary Slovakia Russia Croatia Ukraine Poland EU27 World Czech Republic Poland Slovakia Latvia Bosnia Estonia Romania Turkey Lithuania Croatia Greece Hungary Slovenia Bulgaria Belgium Sweden Portugal EU27 Finland France Italy United Kingdom Spain Germany Austria Ireland Denmark Source: Statistical Yearbook of the Republic of Macedonia, 2011. 98 F Y R M aced onia Gr een Grow th Country A ssessment The level of non-revenue water in FYR Figure 8.9. Skopje are estimated at US$7.0 million; while cost savings of Macedonia is high comparable to cities in the US$4.1 million are expected from upgrading public transport region infrastructure. Percentage of non-revenue water: Macedonian cities and Energy efficiency: expand energy efficiency improvement regional averages programs beyond Skopje and other pilot cities. In Skopje, 90 potential cost savings from energy efficiency improvements 80 in municipal buildings and public street lighting are estimated 70 at US$1.4 million. However, despite strong financial incentives, 60 replication of existing experience across the country is yet Percentage 50 to start. Municipalities need to require better dissemination 40 30 of pilot experience and information about available funding 20 sources and financial instruments. 10 0 Water sector: investing in water network rehabilitation and Stip Kichevo Gostivar Struga Kavadarci Kocani Skopje Resen Berovo Negotino Bitola Kumanovo Strumica Radovish Veles Vasilevo Krusevo Ograzden Pecevo Balkans EU Countries metering to reduce losses and increase cost recovery. Network rehabilitation should have priority over network extensions. Also, technical water losses should be reduced. Municipalities Source: World Bank IBNet. need to address low cost recovery caused by a combination of operational inefficiencies, low tariffs and low revenue collection. relatively old network infrastructure and poor metering, the Municipalities should request utilities to draft and adopt opera- latter accounting for an estimated 20 percent of losses. tional performance improvement plans, achieve 100 percent water metering and upgrade meters to ensure proper function- ing. Local authorities need to implement tariff increases and Recommendations reduce untargeted subsidies, which led to over-consumption of water and financial melt-down of utilities. The following actions would address urban sprawl and urban service deterioration, the main problems in urban develop- Wastewater sector: access available grant funding to ment in FYR Macedonia, and help to reduce urban emissions : invest in wastewater treatment infrastructure. Financing to urban planning, public transportation improvements, energy improve wastewater treatment is available from the European efficiency measures, water network rehabilitation and meter- Commission Instrument for Pre-Accession (IPA) and International ing of water supply, wastewater infrastructure rehabilitation, Financial Institutions. Municipalities should use these resources and creation of regional waste management systems. and require technical assistance from central government to facilitate access to capital investment funds. Urban planning: developing integrated urban plans and providing incentives to make city centers more livable will Solid waste sector: accelerate establishing integrated regional decrease urban sprawl. Local authorities can influence dwell- waste management systems. Annual GHG emissions could be ing patterns through investment decisions and urban planning reduced by more than 160,000 tons per year by installing meth- that provide incentives for citizens and businesses to stay ane capture and flaring devices at existing landfills. However, in the core city. This will require integrated planning across given the cost of integrated solid waste management, munici- departments in city administration and better enforcement palities need to cooperate at the regional level to benefit from of existing planning regulations: building permits, parking economies of scale. Although FYR Macedonia has assigned zones, and business licenses. six waste management regions to implement regional waste management plans, progress on the ground has been very Public transport sector: improve coverage and quality of slow. More targeted support and assistance from the central public transport and invest in non-motorized transport level is required. Also, municipalities should extend waste col- modes. The recent positive trend of increasing public rider- lection coverage to 100 percent of the population, including ship numbers should be continued in Skopje and expanded to in rural areas, upgrade waste collection equipment and start other cities in FYR Macedonia. In parallel, cites may consider implementing waste separation schemes. International experi- extending pedestrian and bicycle infrastructure. Potential ence in improving landfills and establishing recycling and waste cost savings from extending non-motorized transport modes separation and processing practices could be replicated (see, and implementing parking and traffic restraint measures in for example, the experience of Japan and Turkey). C an Ur ban A reas Lead on Greening ? 99 Good Practice Box 10. Waste management in Japan and Turkey Improved waste management in Yokohama, Japan In Yokohama, Japan, improved waste management has generated ecological as well as economic surpluses. During a period when population grew by 170,000, Japan’s second largest city managed to reduce solid waste by 38.7 percent. Urban planners integrated waste management with stakeholder engagement to pursue the goals of reducing waste and increasing recycling. When the city doubled its trash categories to 10, it handed residents a 27-page booklet with detailed instructions on how to sort their trash. The significant waste reduction allowed Yokohama to save US$1.1 billion in capital costs and US$6 million annual operation and maintenance costs. Converting hazardous landfills into a recycling facility in Turkey Turkey’s success with landfill rehabilitation is an example of an innovative project that produced combined economic, environmental, and health benefits: it reduced methane and carbon dioxide emissions, eliminated health hazards from improperly disposed waste, created a new renewable energy generation facility that utilizes waste, increased local employment and improved quality of life in the area surrounding the landfill. The horrible smell from the decomposing waste at the Mamak landfill along the highway has long been an assault to visitors coming from the airport into the capital city of Ankara in Turkey. The residues caused serious environmental and health problems. With financing from the World Bank through the Industrial Development Bank of Turkey, the landfill was converted into a garbage-recycling station that creates heat and energy for local greenhouses. A bio-digester at the facility treats organic waste and produces biogas, which is then used to generate power and heat in a power plant with 14.6 MW of capacity – enough to power 31,000 households in Turkey. Recyclable waste such as glass and plastics are processed and sold. What remains is less than 10 percent of the incoming waste mass, which is placed back in the landfill, covered with soil and reforested. The excess heat produced by power generation and waste processing is fed to a greenhouse where tomatoes are grown. Heat will also be provided to a new café on the site. Source: World Bank. 2010. Lights Out? The Outlook for Energy in Eastern Europe and the Former Soviet Union. Washington, DC: World Bank. 10 0 F Y R M aced onia Gr een Grow th Country A ssessment C an Ur ban A reas Lead on Greening ? 101 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE INFRASTRUCTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 9 Should Infrastructure Be Built Differently to Be Climate Resilient? CHAPTER SUMMARY climate change projections in infrastructure planning bearing in mind all these considerations. Should infrastructure be built differently to be climate resilient? b This chapter develops a framework for decision-making when planning for the development of infrastructure assets in the context of climate change. The methodology combines cost-benefit analysis under uncertainty, climate-informed uilding physical infrastructure155 resilient decision analysis, and robust decision-making. Relationships to future climate change is an important reflecting the sensitivity of the infrastructure service costs component of green growth. However, to climate conditions are an essential element of the model. climate change projections are typically The analysis applies a cost-benefit approach over a range not taken into account in planning infrastructure investment of climate scenarios to identify robust options. Rather than and maintenance, and there is no agreed practice of how to using a cost-benefit approach to select optimal infrastruc- do it. It is clear that there are two alternative approaches: (i) ture development and investment plans based upon specific an adaptive strategy : building more resilient infrastructure in assumptions about key parameters, the focus is on identifying anticipation of climate change as projected and (ii) a reactive a subset of infrastructure development and investment plans strategy : maintaining existing design standards and managing that are likely to yield satisfactory results under a range of the impacts of climate change once they are realized. The climate outcomes. adaptive strategy involves high up-front investment balanced by lower costs during the life of the asset. The reactive strategy It is recommended that FYR Macedonia apply the adaptive involves the risk of a costly replacement of the infrastructure approach to some assets and the reactive approach to other before the end of its economic life. The choice between the assets. The priorities for adaptation include urban drainage adaptive and reactive strategies is complicated by two con- systems, health and educational facilities, and municipal build- siderations: a wide range of projections of the future climate ings. For these infrastructure assets, design standards and and a long life of the infrastructure assets, most of which operations and maintenance practices should be modified cannot be easily upgraded. The question is how to include based on projected climate conditions ten to twenty years from the date of construction. In contrast, the best option for 155. All types of infrastructure are included in the analysis: electricity- roads is to follow a reactive strategy and to plan enhanced generating capacity, fixed telephone lines, roads, rail, airports, ports, water and wastewater treatment facilities, transmission and distribution lines, maintenance and upgrades to respond to weather stresses. water/sewer infrastructure, hospitals, health facilities, school buildings, municipal infrastructure, urban storm water drainage, dwellings of durable For other sectors including power, telecoms, water and sewer materials, and others. Should Infrastructure Be Built Differently to Be Climate Resilient? 103 networks, and non-road transport, costs and benefits of adap- Impact of climate change on weather Figure 9.1. tation are small, and the reactive strategy will be sufficient. patterns is uncertain Finally, monitoring weather outcomes and updating climate Distribution of maximum 3-day rainfall for FYR Macedonia projections using the data collected is essential. Assessment for 17 climate scenarios from 2010 to 2090 of the optimal choices for infrastructure planning must also be updated regularly using the latest climate projections. 180 Maximum 3-day rainfall (mm) 160 CHALLENGES FOR GREENER GROWTH 140 Overview 120 Building physical infrastructure resilient to future climate 100 change is an important component of green growth. Climate-resilient infrastructure reduces shocks to the 1980 2010 2030 2050 2070 2090 economy and society from increasingly severe weather, which is characteristic for a changing climate. Countries Source: Infrastructure technical paper. with infrastructure that can sustain weather shocks have much lower costs of the after-shock recovery and are able to imple- Uncertainty about future climate patterns means that plan- ment actions needed for the recovery in a timely fashion. This ners do not know to what conditions they should adapt. relates not only to the economic aftermath of such shocks, Current climate models agree that global mean surface tem- but also to human outcomes, such as a reduced death and peratures will increase under the business-as-usual scenario, injury toll. The importance of weather resilient and high qual- but disagree about the extent to which temperatures will ity infrastructure makes it one of the main indicators of a increase, globally or at particular locations. Similarly, though country’s sensitivity to climate change.156 there is relative agreement that climate change will increase the intensity of precipitation events, and the frequency and Climate change projections need to be taken into account intensity of extreme weather events, there is little agreement in planning infrastructure investment and maintenance. among the models on such issues as whether total rainfall However, currently the level of the infrastructure resilience is will increase or decrease in particular regions or the extent engineered based on the past weather experience, typically of increase in frequency of extreme events. This creates dif- using the weather patterns of the preceding 40 years, without ficulties in accounting for climate change in infrastructure considering projected climate change. Since the weather and planning. For example, a key factor in designing roads to cope climate conditions of the past are no longer a good guide to with flooding is the amount of short-term rainfall intensity. the future, they no longer constitute a good basis for infra- At the same time, there is a large variation in projections of structure engineering decision-making. If current practices rainfall intensity, as shown in Table 9.1. The median value for are not changed, higher summer temperatures, more intense the maximum three-day rainfall (shown by the solid line in the precipitation, flooding or water shortages, and more severe boxes) increases up to 2030 and thereafter decreases. At the freeze-thaw cycles will drive up the costs of infrastructure same time, the full range of the distribution increases over maintenance and require that infrastructure be replaced time. Should the planner build roads to cope with the median before the end of its economic life. However, despite a clear value, the maximum value or the minimum value? need in including climate change projections in infrastructure planning, there is no agreed practice on how to do it. Most of the infrastructure assets are long-lived and cannot be upgraded easily. For some types of infrastructure, the Development of a new practice of including climate change cost of adapting upfront will be lower than the cost of doing projections in infrastructure planning is complicated by two nothing and relying on O&M or early upgrade to cope with considerations: uncertainty about future climate patterns climate impacts for the same climate outcome. While in the (a wide range of projections of the future climate) and the case of roads, it is neither difficult nor expensive to upgrade long life of infrastructure assets, most of which cannot be the specification of pavements to cope with higher tem- easily upgraded. peratures or to install additional culverts to cope with higher precipitation as a part of intermittent maintenance or upgrad- ing operations, it will be much more difficult to raise bridges or divert the route of roads to accommodate more extreme 156. An index of sensitivity to climate change is described in Box 1.1. Measuring Vulnerability to Climate Change. flooding or to increase the size of underground sewers to 104 F Y R M aced onia Gr een Grow th Country A ssessment handle higher water flow (Table 9.1 provides economic life Table 9.1. Infrastructure assets are long-lived data for different infrastructure assets). Difficulty in upgrading Commonly assumed economic life of selected some infrastructure assets will bias the decision in favor of infrastructure assets building infrastructure differently. (See Good Practice Box 11 on how flexibility of project design in the Thames Estuary Life Infrastructure assets 2100 project in London reduces the risk of financial loss in (years) the future). 10 Unpaved roads 20 Airports 40 Generating plants, fixed telephone lines, ports, water & wastewater treatment, electricity networks, water The UK’s Thames Good Practice Box 11. networks, health, education & social infrastructure Estuary 2100 Project 50 Paved roads, railway track The Thames Estuary 2100 Project (TE2100) in London is an 60 Sewer networks, housing integral part of the city’s flood risk management strategy that Source: Infrastructure technical paper. has reduced the uncertainty of the planning process, such that decisions made today are more resilient to changes in future cli- mate. In 1980, the Thames barrier was opened for construction to guard Central London against storm surges until 2030. However, the protection system might need interim modifications, given that the central risk components – the frequency and intensity METHODOLOGY AND MAIN FINDINGS of storm surges – are expected to increase with climate change. Methodology Flexibility is essential for infrastructure investment adaptation projects, since they are often large-scale, costly and irrevers- This chapter develops a framework for decision making when ible, while at the same time based on decisions made in light planning for the development of long-lived infrastructure of uncertain climate risk projections. Investment costs under certain scenarios in TE2100 can reach £9 billion. Therefore, assets in a context of uncertainty about future climate TE2100 adopted a ‘route-map decision analysis’ (or a ‘deci- conditions. The decision making framework considers two sion pathways approach’) to sequence packages of adaptation basic alternative approaches: (i) adaptive strategy : creating options over a broad range of possible climate scenarios by new infrastructure construction standards in anticipation 2100. Initial packages are ‘no-regrets’ measures that suit almost of climate change as projected and (ii) reactive strategy : all scenarios and allow resources for adjustments in the future, maintaining existing design standards and managing the when risk is better understood. Examples include early warning impacts of climate change once they are realized. Adaptive systems and construction of walls with larger foundations so that they can be raised rather than replaced. Packages at later strategy involves high up-front investment and lower costs stages include more irreversible measures such as building a new during the life of the asset. Reactive strategy involves a risk barrage as opposed to upgrading the existing one. Construction of a costly replacement of the infrastructure before the end of in each package is to be triggered when water levels cross a its economic life. The choice between these two approaches pre-determined threshold, budgeting for lead time needed for should be based on comparing the cost of building stronger implementation. The flexibility to examine whether and when the infrastructure (adaptive strategy) and the cost of more fre- system needs to be modified can increase the overall costs, and quent maintenance or partial reconstruction. The decision therefore economic analysis (net present value of investments making framework is applied to a range of infrastructure types: and environmental impact) will be applied. transport (roads and rail), electricity, water and sanitation, Encouraged by the example set by the UK’s Environment communications, urban drainage, urban housing, and health Agency, similar route-maps are also being proposed in New and education facilities. York City and the Netherlands as part of their climate change adaptation strategies. The framework uses a combination of methods – cost-benefit analysis (CBA) under uncertainty, climate informed deci- Source: Reeder, Tim and Nicola Ranger. 2011. “How do you adapt in sion analysis (CIDA) and robust decision making (RDM). an uncertain world? Lessons from the Thames Estuary 2100 project.” World Resources Report 2010-2011: Decision Making in a Changing Relationships reflecting the sensitivity of the costs of pro- Climate. Washington, DC: World Resources Institute. viding infrastructure services to climate conditions are an essential element of the model. The analysis applies a cost- benefit approach (CBA) over a range of climate scenarios to identify robust options. Rather than using CBA to select optimal plans based upon specific assumptions about key Should Infrastructure Be Built Differently to Be Climate Resilient? 105 parameters including climate projections, the focus is on iden- around the world158. These dose-response relationships tifying a subset of options that are likely to yield satisfactory capture the change in costs as materials and designs are cost-benefit results under a range of climate outcomes. The altered to maintain the quality of the infrastructure services framework is applied to decisions made at the beginning in the face of climate change. For example, more expensive of each five-year period from 2015 to 2050. It involves four binders have to be used in the pavement layer of roads if broad steps: they are exposed to higher temperatures; more culverts may have to be installed to minimize the risk of flooding ■■ Step 1 is defining the baseline infrastructure needs for and the damage caused by standing water. all asset types for each five-year period from 2015 to 2050. The baseline infrastructure needs are defined under the ●● Planning horizon. How far ahead should a planner look assumption that the past climate conditions will continue when taking account of climate change in designing new into the future and there will be no necessity to cope with infrastructure? Should the planning horizon be the same for the future climate change. The baseline is calculated on the all climate scenarios? The economic life of the assets consid- basis of such indicators as GDP per capita, population, and ered in the study ranges from 10 to 60 years (see Table 9.1 climatic conditions. The approach taken is to assume that for details). Building assets that are capable of withstanding there is sufficient infrastructure and that it is built to the right weather stresses that they may only encounter at the very design standard such that there is no adaptation deficit. This end of their life is likely to be an unnecessarily expensive assumption holds for the entirety of the investment profile strategy. For pragmatic reasons, therefore, the maximum so that in the future too investments are made to cope with planning horizon examined in this study is 40 years, so one weather variability present at the time of the investment. option for assets built in 2045 is to construct them so that they are capable of withstanding the weather stresses to ■■ Step 2 is estimating the costs157 for each infrastructure which they may be exposed in 2085. The minimum planning category under adaptive and reactive strategies. Costs horizon is zero years. The analysis also examines planning of the adaptive strategy are defined as the present value of horizons of 10, 20 and 30 years in order to assess whether the sum of the baseline cost of the project (the costs to be the most economic planning horizon varies across types incurred under the assumption that future climate condi- of infrastructure or over time. tions will be identical to the historic climate), incremental capital costs of the adaptive strategy due to the prospect ●● Climate uncertainty. Finally, it is important to estimate of climate change, and O&M costs that must be incurred the costs across a wide range of climate projections. annually. Costs of the reactive strategy are defined as There is no one ‘correct’ future climate projection. the present value of the sum of the baseline cost of the Different climate projections are based on structural project, annual O&M costs, and costs of upgrade or early models that are conceptually different and should be replacement of the asset. O&M costs under the reactive treated as being equally likely. It would be wrong to strategy will be higher than O&M costs under the adaptive rely on probability-weighted combinations of different strategy for the same climate event. projections or to rely on the average of all projections. The analysis carried out in preparing this chapter exam- The main factors of the costs in both strategies are the ined 17 climate scenarios up to 2090 that are based on impact of climate events on the infrastructure, the plan- separate Global Circulation Models (GCMs) runs using ning horizon, and the nature of the climate uncertainty. the A2 SRES scenario for emissions of CO2 and other To measure the impact of these factors, certain functions greenhouse gases.159 The projections for the key climate are used and decisions made: variables – monthly average, minimum and maximum temperatures plus precipitation – for each GCM are ●● Stressor-response functions. For each infrastructure cat- constructed by calculating average differences for egory a set of dose-response relationships between the relevant climate stresses and the costs are specified using 158. The dose-response relationships used in this study reflect the economic detailed evidence collected by engineers from experience and engineering choices made by a wide pool of experts based upon their collective knowledge. 159. It is possible to obtain a larger set of 26 or more GCM projections on 157. The cost analysis is limited to non-extreme weather events and does a consistent basis for a specific SRES scenario, but the suite used here is not include catastrophic failures linked to climate events–bridges falling smaller because not all of the projections provide values for maximum and down, roads being washed away, buildings being destroyed by wind or minimum temperatures, which are important for examining the impact of storm surges. This is done for two reasons. First, this allows to simplify climate change on infrastructure. Additionally, the analysis in this paper does the analysis and to avoid the necessity of specifying a damage function not explore the implications of uncertainty surrounding climate projections associated with every climate event. Second, it is hard to estimate the from a given GCM. GCMs are usually stochastic and therefore repeated runs shift in the distribution of extreme events that is caused by climate of these models generate a distribution of future climate projections. When change because these events are too rare for drawing statistically reliable reference is made to the projections generated by a GCM, that is, to a climate conclusions on the basis of existing observations. scenario, this usually refers to the mean or median projections of interest. 106 F Y R M aced onia Gr een Grow th Country A ssessment 2026-35 (2030), 2046-55 (2050) and 2086-95 (2090) for 1° effective for the former two scenarios and the planner needs grid squares with respect to the average of runs for the to identify a robust adaptation strategy. The matrix also shows same GCM over the period 1960-99. These differences that if the country is not risk averse, the best planning scenario were added to the mean values of historical climate would be a scenario with one of the lowest expected adapta- variables, obtained from the CRU historic dataset,160 tion cost: Reactive, MIROC or NCAR. If the country is highly for the same time period and interpolated to generate risk averse, then it would wish to minimize the worst outcome projections for each time period. Since the costs of given the choice of the scenarios. In that case it should focus adaptation are affected by changes in humidity as well on the column marked “Max” and the best scenario would be as extreme values (represented by the 99th percentile) of the MIROC scenario. For less risk averse planners, the analysis both temperature and precipitation, statistical models to identify a robust strategy must also include a measure of the based upon historical data have been used to estimate variability of the distribution of adaptation costs over climate the changes in weather variables that are not generated outcomes and the planner would want to identify a strategy directly by the GCMs. that has a low mean and low variation. The reactive and the CSIRO scenario have a high variation in outcomes, whereas the ■■ Step 3 is filtering out infrastructure categories for which UKMO has the lowest variation but a high mean. The UKMO adaptation is cost effective. As an initial filter in considering outcome is consistently among the worst climate scenarios whether upfront adaptation is justified, planners should for all of the planning scenarios. The MIROC and the NCAR look at whether it is cost-effective to adapt under perfect scenarios, on the other hand, have the lowest average costs foresight. The motivation for this step is that if ex-ante and the lowest variability. Although there are small differences adaptation cannot be justified when the decision maker between them, there is no strong reason to prefer one over has complete information about future climate outcomes, the other, so either of them may be considered robust. then it will not be justified when allowance is made for the effects of uncertainty about future climate scenarios. If The adaptation cost matrix can provide the starting point for the planner knows with certainty what climate pattern will a variety of other analyses. For example, the calculation of the evolve, then there is no risk that the initial investment in expected adaptation costs under uncertainty can be adjusted adaptation will be redundant. This step allows the planner if planners believe that some climate scenarios are more likely to identify the types of infrastructure for which there is a than others for the country. The choice of a planning horizon prima facie case that adaptation is cost-effective. can be incorporated into the analysis by allowing selection over combinations of climate scenarios and the planning ■■ Step 4 is defining a robust adaptation strategy. For all horizon, so that the MIROC option becomes MIROC with infrastructure categories where adaptation is cost effec- horizons of 10, 20, 30 or 40 years and so on. tive, a robust adaptation strategy, that is, a strategy that is optimal for a wide range of climate outcomes, needs to be Main findings defined. The key idea is to focus on the expected cost of the errors associated with each option. The analysis makes To provide an indication of the magnitude of the costs required use of standard economic models of decisions subject for upfront adaptation, Table 9.3 shows estimates of the costs to uncertainty. The identification of a robust adaptation of adaptation under perfect foresight averaged over all climate strategy relies upon a systematic evaluation of all possible scenarios for FYR Macedonia and other countries in the region. combinations of planning scenarios, planning horizons, For FYR Macedonia, the average costs of adaptation are 0.5 and climate outcomes. The objective is to identify a set percent of the baseline infrastructure expenditures. This is of planning assumptions that minimize the risk of making significantly below the sample average cost of adaptation particularly costly mistakes and, at the same time, perform of 1.4 percent of baseline expenditures and even below the reasonably well for a range of climate outcomes. sample average of 1 percent after the outliers— Greece and Montenegro—are excluded. Table 9.2 provides an illustration of an adaptation cost matrix across a range of climate scenarios covering the entire range of Table 9.4 shows how the average adaptation costs as a percent- the adaptation costs. Note that the net adaptation costs (the age of baseline expenditures are distributed across different difference between the final two rows in the table) is positive infrastructure categories by country. Though average costs for the MIROC and the NCAR scenarios, but not for the other of adaptation across all climate scenarios and all infrastructure three scenarios. This suggests that adaptation may be cost types are below 0.5 percent of baseline expenditures on infra- structure, adaptation costs are significantly higher in the roads 160. The CRU historic dataset refers to series of historic weather data for 0.5o grid squares compiled by the Climate Research Unit at the University of and other transport sectors. The average cost of adaptation for East Anglia (in cooperation with the UK Met Office). Should Infrastructure Be Built Differently to Be Climate Resilient? 107 Table 9.2. Cost matrix for all infrastructure for five selected adaptation scenarios, FYR Macedonia, 2031-35 (US$ million per year at 2005 prices) Climate outcome scenarios: Equal probabilities Planning scenarios: BCCR CSIRO MIROC NCAR UKMO Mean Max SD BCCR BCM20 34 33 46 41 55 42 55 9 CSIRO MK30 39 34 78 56 75 56 78 20 MIROC 32 39 35 35 35 45 38 45 4 NCAR CCSM30 37 34 37 34 47 38 47 5 UKMO HADCM3 55 54 54 54 59 55 59 2 Comparison under perfect foresight Reactive 29 10 59 42 52 38 Adaptation 34 34 35 34 59 39 Notes: Discount rate of 5% and 20-year planning horizon. Source: Infrastructure background paper. Adaptation costs for most countries Table 9.3. in costs of building roads relative to the baseline. These costs are below 2 percent of baseline expenditures affect other transport infrastructure—railways, ports and airports—as well. For other sectors, adaptation costs are one Average cost of adaptation for all infrastructure assets by country for 2011-50 percent or less of baseline expenditures in FYR Macedonia and most countries in the region. Average Average as % of How should FYR Macedonia build its infrastructure differently US$ million as % of aggregate to be resilient to climate change? The low cost of upfront Country per year baseline GDP adaptation for some categories of infrastructure means that Albania 30 0.7% 0.07% the risks of upfront adaptation are also relatively low: incurring Bulgaria 110 0.7% 0.08% additional costs amounting to 1% of baseline expenditures to Bosnia 43 0.9% 0.09% adapt to uncertain climate scenarios will not impose a significant Greece 1,033 3.4% 0.30% economic burden. However, there is rather more at stake in Croatia 166 1.8% 0.15% the choice between upfront and reactive adaptation, when the costs of upfront adaptation are larger or when they vary Kosovo 15 0.7% 0.06% substantially across alternative climate scenarios. FYR 18 0.5% 0.05% Macedonia Montenegro 35 2.9% 0.33% In order to assess whether the adaptive strategy is better than the reactive strategy, the time profiles of the expected Romania 656 1.6% 0.16% capital and O&M costs associated with climate change under Serbia 76 0.6% 0.06% the alternative strategies are constructed and the discount Slovenia 126 1.5% 0.18% rate applied to convert future costs to present values. The net benefit of upfront adaptation is calculated as the present Notes: Averaged over all climate scenarios; values at 2010 international value of adaptation costs under the reactive strategy minus prices with no discounting; planning horizon = 20 years. Source: Infrastructure background paper. the present value of adaptation costs with upfront adaptation. As an initial filter, the average net benefits are calculated on the assumption of perfect foresight for each climate scenario roads is 2.4 percent of baseline expenditure in FYR Macedonia and then averaged over climate scenarios. and this is low as compared to other countries in the region. Using more expensive pavement binders to cope with higher Figure 9.2 shows that, with perfect foresight, upfront adap- pavement temperatures as well as building and maintaining tation generates positive net benefits for some, but not unpaved roads to cope with changes in the levels and monthly all sectors in FYR Macedonia. Consistently positive net precipitation patterns of rainfall lead to a significant increase benefits are observed in social sector (health and schools) 108 F Y R M aced onia Gr een Grow th Country A ssessment Table 9.4. Adaptation costs vary considerably by sector Average cost of adaptation by sector as% of baseline expenditures Power & Water & Other Health & Country Roads Urban Housing phones sewers transport schools Albania 0.6% 0.2% 7.1% 3.7% 0.9% 1.1% 0.0% Bulgaria 0.6% 0.4% 3.2% 2.9% 1.0% 1.1% 0.0% Bosnia 0.6% 0.3% 8.5% 5.4% 1.0% 1.2% 0.0% Greece 0.8% 0.5% 22.6% 2.4% 2.1% 2.3% 2.0% Croatia 0.6% 0.3% 25.2% 5.3% 1.0% 1.1% 0.0% Kosovo 0.6% 0.3% 21.4% 2.9% 0.9% 1.1% 0.0% FYR Macedonia 0.5% 0.3% 2.4% 2.4% 0.9% 1.0% 0.0% Montenegro 0.6% 0.3% 22.3% 4.2% 0.9% 1.0% 0.0% Romania 0.6% 0.3% 13.3% 4.5% 1.0% 1.1% 0.0% Serbia 0.6% 0.3% 4.0% 3.8% 1.0% 1.1% 0.0% Slovenia 0.7% 0.3% 10.6% 4.6% 1.1% 1.2% 0.0% Notes: Averaged over all climate scenarios; planning horizon = 20 years. Source: Infrastructure background paper. and in urban infrastructure. In these sectors the net benefits Having concluded that it may be cost-effective for FYR increase markedly over time, rising from a total of about US$7 Macedonia to adapt its investments in social and urban infra- million in 2011-2015 to US$41 million by 2046-2050. However, structure, the next question to answer is: what constitutes a the total net benefits are less than $20 million for periods robust adaptation strategy, which would take account of the before 2031-35, so that delay in adopting a strategy of upfront uncertainty of the climate scenarios? For a risk-neutral planner adaptation does not involve a large loss of welfare. The net a robust adaptation strategy is one that yields the lowest benefits are small (between (-2) and 2 percent) for three cat- adaptation costs over all climate scenarios. With a high level egories: power & telecoms, water and sewage networks, and of risk aversion, however, the best strategies are those that non-road transport. The net benefits of upfront adaptation minimize the maximum cost of adaptation under all climate are consistently negative for the roads sector. The high costs outcomes. In the case of FYR Macedonia, the results indicate of upfront adaptation in this sector mean that the alternative that even for a very risk averse planner it is rarely worth adopting strategy of waiting for the impacts of climate change to be a planning horizon of more than 10 years and never one longer realized and then either investing in O&M or road upgrading than 20 years. A short planning horizon reduces the potential is a better option. variation between the climate scenarios with respect to the dif- ferences between climate projections in the weather stresses to There are two other features of the analysis, which should be which social and urban infrastructure will be exposed. This eases noted. First, the analysis suggests that it is rarely cost-effective the task of identifying a robust set of planning assumptions. for the planner to use a planning horizon that looks beyond 20 years from the time at which the infrastructure is being On the assumption that the country is risk neutral, which is built. Even with perfect foresight about the climate scenario, a reasonable assumption given the relatively low costs of upfront investment to reduce potential O&M costs due to adaptation, the differences between decisions based upon climate change that will arise 30 or more years in the future the optimal planning scenario and the average of all climate is rarely cost efficient. Second, the standard deviations of the scenarios are quite small—no more than 0.1 percent of the net benefits of upfront adaptation across climate scenarios baseline expenditure. Further, the risk of making a bad decision is more than 50% of the averages for the social and urban is limited since the difference between the best and worst infrastructure categories up to 2026-30. This means that the scenarios amounts to 0.2 to 0.4 percent of baseline expenditure. variation in costs and net benefits across climate scenarios As a consequence, it would make sense for FYR Macedonia to is substantial and therefore identifying the climate scenario rely upon an average of all climate scenarios when planning that best represents the changes in climate stresses in these adaptation since the benefits of identifying optimal strategies sectors is a significant issue. for each sector and time period will be limited. This implies that reliance upon the average climate scenario as the basis for planning adaptation is a robust choice for the next 20 years. Should Infrastructure Be Built Differently to Be Climate Resilient? 109 Figure 9.2. Adaptation is cost-effective for FYR Macedonia in some but not all sectors, and its value rises over time for many sectors Net present value of adaptation for different types of infrastructure 30 20 10 US$ mln 0 -10 -20 -30 Power & telecoms Water & sewers Roads Other transport Health & schools Urban 2011-15 2016-20 2021-25 2026-30 2031-35 2036-40 2041-45 2046-50 Notes: Averaged over all climate scenarios; discount rate = 5%. Source: Infrastructure technical paper. RECOMMENDATIONS FYR Macedonia should build its infrastructure differently to The priorities for adaptation in the current decade include be resilient to climate change. Projected changes in climate urban drainage systems, health and educational facilities patterns will affect the reliability and quality of infrastructure and municipal buildings. The net benefits of adaptation for services. Temperature increases will cause roads to degrade, urban and social infrastructure increase over time. For these and intense rainfall events will lead urban drainage systems to infrastructure assets, design standards and O&M practices overflow, for example, affecting connectivity and economic activ- should be modified so as to look ahead to projected climate ity. To minimize the economic impacts and manage these risks, conditions either 10 or 20 years ahead of the date of construc- FYR Macedonia should take account of future climate condition tion. In contrast, the best option for roads is to follow a reactive when designing new infrastructure or replacing existing assets. strategy of “wait, monitor, and act,” in which adaptation takes the form of enhanced maintenance and upgrades to respond Overall adaptation costs are very modest at 0.05 percent to current weather stresses. For other sectors including power, of GDP annually for the next 40 years. Although the net telecoms, water and sewer networks, and non-road transport benefits of adapting vary depending on climate scenarios both the costs and benefits of adaptation are small, so that the and time periods (with higher benefits for investments made reactive strategy will be sufficient for the next two decades. further in the future), the incremental costs are very small in relation to the substantial cost of meeting the country’s future Finally, resources to monitor weather outcomes and to infrastructure requirements. All infrastructure assets—roads update climate projections using the data collected are and rail, electricity, water and sanitation, communications, an essential element of any set of adaptation policies. urban drainage, urban housing, and health and education Projections of future climate are being improved and revised facilities—could be adapted to maintain service levels as the continuously. Assessment of the optimal choices for adapta- climate changes for an additional cost of US$18 million per tion in infrastructure assets must also be updated regularly. year or about 0.5 percent of infrastructure investment costs. 110 F Y R M aced onia Gr een Grow th Country A ssessment Should Infrastructure Be Built Differently to Be Climate Resilient? 111 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 10 Can Co-benefits such as Cleaner Air Arise from Greening? CHAPTER SUMMARY over 800 deaths and many lost work days, representing a health cost savings of €151 million per year. Most of PM f pollution is generated by five economic activities in a few largest industrial facilities, as well as in the road sector and the household sector. It can be reduced by 80-90 percent using available technologies in the industry and the road sectors and by government programs supporting usage of modern YR Macedonia’s air pollution is one of the highest fuel efficient stoves in the household sector. Pollution can also in Europe and any green growth path that takes be geographically targeted, as over 45 percent of the health into consideration human health would include its impact occurs in Skopje and a few several local production reduction161. The objective of the analysis in this zones. Also, at least one-third of PM emissions are estimated to chapter is to estimate the health impacts of air pollution in come from transboundary sources, and regional agreements FYR Macedonia and the cost of these impacts to the society. are needed to control them. Using the exposure-response functions that quantify the relationship between the exposure to particulate matter and CHALLENGES FOR GREENER GROWTH mortality/morbidity, the analysis provides an aggregated measure of the impact of pollution on public health. The Overview aggregated measure – DAYLY (disability-adjusted life years) - weighs illnesses by severity assigning the highest weight of 1 FYR Macedonia’s air pollution (see definitions in Box 10.1) to mortality. Next, the analysis estimates the cost of the health is one of the highest in Europe, and any growth path that impact to the society using three approaches: adjusted Human values health would include its reduction. Particulate matter is Capital approach, Value of a Statistical Life, and Cost of illness. responsible for over 1350 deaths in FYR Macedonia annually and thousands of lost work days–representing a loss equivalent to The findings show that particulate matter (PM) is respon- 3.2 percent of GDP. FYR Macedonia ranks highest in its popula- sible for over 1350 deaths in FYR Macedonia annually and tion’s exposure to particulate matter in the air and fifth in annual thousands of lost work days, representing an economic cost deaths due to small particulate (PM10 ) air pollution in Europe, of €253 million annually or 3.2 percent of GDP. Lowering and even with reduced industrial activity due to the economic PM10 and PM2.5 to EU limit values would result in avoiding crisis little changed by 2011 (Figure 10.1, Figure 10.2)162. 161. Particulate air pollution is one of the indicators of a society’s sensitivity to climate change and is part of the index of climate change vulnerability. The 162. European Environment Agency (EEA). 2009. Spatial Assessment of higher the particulate matter (PM) air pollution levels, the more vulnerable the PM10 and Ozone Concentrations in Europe (2005). EEA Technical report No country is to climate change impact (Chapter 1, Benchmarking). 1/2009. Copenhagen: EEA. C an Co - benefits such as Cleaner A ir A rise from Greening ? 113 Box 10.1. PM10 and PM2.5: definitions and their health impact Air pollution is most often measured using particulate matter (PM). PM is made up of tiny particles (a fraction of the thickness of a human hair) in the air and is linked to various respiratory diseases and premature death. The health impacts of particulate air pollution are calculated using ambient (background) concentrations of PM10 or PM2.5. PM10 stands for Particulate Matter of less than 10 micrometers (10μm) in diameter. These particles have the greatest potential for reaching the furthest parts of the lungs. PM2.5 stands for Particulate Matter of less than 2.5 μm, which is covered by the PM10 heading. It is believed that PM2.5 is responsible for much of the health effects attributable to PM10. Particles may arise from a wide variety of sources, natural or man-made. Natural sources include sea spray, pollens, fungal spores or soil particles. Man-made particles mainly result from combustion processes, working with soil or rocks, industrial processes or friction of road surfaces by motor vehicles. Generally, there are six major sources of PM10 : airborne road dust and soil, vehicle exhausts, secondary particles, coal combustion, incineration and the metals industry, road salt and marine aerosols. According to the WHO (2005), the following are attributed to short-term PM exposure: respiratory and cardiovascular hospital admissions, emergency department visits, and primary care visits; use of respiratory and cardiovascular medications; days of restricted activities; work and school absenteeism; acute symptoms (wheezing, coughing, phlegm production, respiratory infections); physiological changes (such as lung function); and even death. Effects attributed to long-term exposure include mortality due to cardiovascular and respiratory disease; chronic respiratory disease incidence and prevalence (asthma, chronic obstructive pulmonary disease (COPD), and chronic pathological changes); lung cancer; chronic cardiovascular disease; and intrauterine growth restriction (for example, low birth weight at term). PM is one of the most significant pollutants associated with short- and long-term respiratory disease and death. The relationship between particulate matter and health has been investigated in literaturea including several studies in FYR Macedonia.b A recent study in Skopje found that an increase of PM10 by 10 μg/m3 above the daily maximum permitted level (50 μg/m3 ) was associated with a 12% increase in cardiovascular disease.c Analyses of monthly morbidity reports produced by the Institute of Public Health show that both preschoolers (under 6 years of age) and schoolchildren (aged between 7 and 14 years) living in polluted cities, such as Skopje and Veles, are two to three times more likely to have respiratory diseases (excluding influenza and pneumonia) than children living in less polluted villages. The difference is higher in the winter, when heating and climatic factors (including temperature inversion) contribute to an increase in air pollutants. a. Ostro, Bart. 1994. “Estimating the Health Effects of Air Pollution: A Method with an Application to Jakarta.” World Bank Policy Research Working Paper 130. Washington, DC: World Bank; Ostro, Bart. 2004. “Outdoor Air Pollution: Assessing the Environmental Burden of Disease at National and Local Levels.” Environmental Burden of Disease Series, No. 5. Geneva: World Health Organization (WHO); Pope, C.A., R.T. Burnett, M.J. Thun, E.E. Calle, D. Krewski, K. Ito, and G.D. Thurston. 2002. “Lung Cancer, Cardiopulmonary Mortality, and Long-term Exposure to Fine Particulate Air Pollution.” Journal of the American Medical Association (JAMA) 287: 1132-1141. JAMA online. b. Kochubovski, M. and V. Kendrovski. 2012. “Monitoring of the Ambient Air Quality (PM10) in Skopje and Evaluation of the Health Effects in 2010.” Journal of Environmental Protection and Ecology 13(2): 789-796. Thessaloniki, Greece: Balkan Environmental Association; Kochubovski, M., J. Janevski, M. Dimovska, P. Simjanoski, and V. Ristova. 2008. “Monitoring of the Ambient Air Quality in Skopje and Veles and Evaluation of the Health Effects in 1990-2006.” Journal of Environmental Protection and Ecology 9(4): 743-752. Thessaloniki, Greece: Balkan Environmental Association. c. Kochubovski, M. and V. Kendrovski. 2012. “Monitoring of the Ambient Air Quality (PM10) in Skopje and Evaluation of the Health Effects in 2010.” Journal of Environmental Protection and Ecology 13(2): 789-796. Thessaloniki, Greece: Balkan Environmental Association. FYR Macedonia has recognized the seriousness of this issue regulatory and informational foundation, FYR Macedonia by creating pollution inventory and air quality monitoring sys- should focus on actions to reduce emissions: identify major tems. Through its air quality monitoring network, the Ministry polluters and formulate policy in reducing air pollution. of Environment and Physical Planning (MEPP) can now gauge the level of air quality in major urban and industrialized centers. The MEPP also developed air pollution monitoring methods METHODOLOGY AND MAIN FINDINGS – based on EU experience – of sources and assembled this information in its Cadastre of Polluters and Pollutants to track Methodology major contributors and meet the reporting requirements of the Convention on Long-Range Transboundary Air Pollution The objective of this analysis was to estimate the health (CLRTAP). In addition, many of the EU air quality Directives impacts of air pollution in FYR Macedonia and the cost of have been transposed and integrated into various laws on these impacts to the society. The analytical framework is ambient air quality and the environment.163 Based on this presented in Figure 10.3. The analysis used the air quality information collected through FYR Macedonia’s monitoring 163. For a summary of what has been implemented, see Ministry of Environment and Physical Planning, FYR Macedonia. 2012. National Plan for systems, health data from the Ministry of Health and the the Protection of Ambient Air. Skopje. 114 F Y R M aced onia Gr een Grow th Country A ssessment Figure 10.1. FYR Macedonia’s population has the highest exposure to particulate matter air pollution Population-weighted PM10 concentration, 2005 (for FYR Macedonia: 2005 and 2011) 45 40 micrograms per m3 (µg/m3) 35 30 25 20 15 10 5 0 FYR Macedonia (2005) FYR Macedonia (2011) Serbia and Montenegro Romania Bulgaria Malta Albania Hungary Czech Rep. Slovakia Croatia Poland Bosnia and Herzegovina Slovenia San Marino EU-15 Liechtenstein Lithuania Switzerland Latvia Norway Estonia Andorra Iceland Source: European Environment Agency (EEA). 2009. Spatial Assessment of PM10 and Ozone Concentrations in Europe (2005). EEA Technical Report No. 1/2009. Copenhagen: EEA. Figure 10.2. FYR Macedonia has fifth largest death rate in Europe due to particulate matter air pollution Premature deaths attributable to PM10 exposure, 2005 1,800 Number of premature deaths per million inhabitants 1,600 1,400 1,200 1,000 800 600 400 200 0 Bulgaria Serbia and Montenegro Romania Hungary Croatia Greece Czech Rep. Malta Belgium Portugal Slovakia Poland Slovenia Netherlands EU-27 Spain Albania Latvia Germany Lithuania United Kingdom Austria Denmark Estonia Liechtenstein Switzerland France Norway Luxembourg Sweden Finland Ireland Iceland Bosnia and Herzegovina Italy FYR Macedonia Source: European Environment Agency (EEA). 2009. Spatial Assessment of PM10 and Ozone Concentrations in Europe (2005). EEA Technical Report No. 1/2009. Copenhagen: EEA. C an Co - benefits such as Cleaner A ir A rise from Greening ? 115 Institute of Public Health, and demographic data from the actual behavior and the tradeoff between risk and money. FYR Macedonia State Statistical Office. To calculate the impact The COI estimates the direct treatment costs of doctor of air pollution on health, exposure-response functions that visits, hospitalization, and restricted activity days. Mortality capture the relationship between a pollutant’s concentration was valued using HCA as a lower bound and the VSL as and the health response of an individual were applied. The the upper bound. For morbidity, COI was used as a lower calculations were conducted following a sequence of steps: bound and a doubled COI as a higher bound. ■■ Step 1. Collection of monitored data on air pollutants. ■■ Step 6. Data were matched at the municipal level and A network of 17 Automatic Monitoring Stations of the associated with information from the air quality sta- Ministry of Environmental Protection was used to collect tions. For each municipality, population and health data the air pollutant data. The data included levels of SO2, were associated with air quality from nearest station data. NO2, CO, PM10, PM2.5, ozone, benzene, toluene, ethyl Municipalities classified as ‘rural’ were associated with the benzene, and BTX. rural station in Lazaropole, near Debar, unless an actual station existed in the municipality. In a few instances, ■■ Step 2. Estimation of exposed population. Demographic municipalities were classified as rural but contained data including age distribution of the population to reflect industrial activities. However, a local monitoring station higher vulnerability of children under 5 years of age and was present in each case. people over 65 was used. Main findings ■■ Step 3. Exposure-response functions are based on epidemiological statistical research. They quantify the Particulate matter concentrations violate annual EU standards relationship between exposure to PM10 /PM2.5 and mortal- for air quality. Observations from the monitoring network sug- ity/morbidity. The mortality functions represent statistical gest that particulate matter is one of the most serious concerns relationships between exposure to pollutants and the risk in the country. PM10 significantly exceeds the EU annual standard of three types of causes of death: cardiopulmonary, lung of 40μg/m3 (Figure 10.4). PM10 has been on the decline since cancer, and ALRI in children under five. Mortality functions 2005 reaching its minimum in the aftermath of the economic were used from Ostro164 and morbidity coefficients were crisis. However, 2011 and 2012 readings suggest it is on the rise applied from Ostro165 and Abbey et al.166. again, driven by recovering economic activity. ■■ Step 4. Calculation of physical health impacts: mortal- Over 90 percent of particulate emissions (PM) are gener- ity, morbidity, DALYs. Using the ambient concentration ated by five economic activities and 92 percent in largest data and demographic data for FYR Macedonia in the industrial facilities.167 They can be reduced by 80-90 percent exposure-response functions, mortality and morbidity using available technologies. The economic activities with rates are calculated and combined into one measurement highest PM emission concentration are ferroalloy production, – DALY (disability-adjusted life years). The DALY method electricity and heat production, energy combustion in the weighs illnesses by severity: more severe illnesses have non-ferrous metals industry, road paving and wood combus- higher weights, while mortality has the highest weight of tion by households (Figure 10.5). Emissions are concentrated 1. Weights from Larsen (2004) were utilized. in particular production facilities and three large industrial emitters are responsible for 92 percent of emissions from large ■■ Step 5. Monetizing the health impact. Valuation used three emitters: Jugohrom Ferroalloys near Tetovo (metallurgy), REK approaches: the adjusted Human Capital approach (HCA), Oslomej, and Bitola (energy). The largest emitter, Jugohrom Value of a Statistical Life (VSL), and The Cost of Illness (COI). Ferroalloys has smelting processes that produce ferrosilicon The HCA estimates the indirect cost of productivity loss (iron and silicon) which is used by the steel industry to enhance through the value of the individual’s future earnings. The product performance. REK Bitola has three large lignite-fired VSL measures the willingness to pay to avoid death using turbines installed in the early to late 1980s. 164. Ostro, Bart. 2004. “Outdoor Air Pollution: Assessing the Environmental Burden of Disease at National and Local Levels.” Environmental Burden of Particulate matter pollution could be reduced by up to 80 Disease Series, No. 5. Geneva: World Health Organization (WHO). percent in the ferroalloys and energy sectors and by 90 165. Ostro, Bart. 1994. “Estimating the Health Effects of Air Pollution: percent in road paving activities and among wood-burning A Method with an Application to Jakarta.” World Bank Policy Research Working Paper 130. Washington, DC: World Bank. 166. Abbey, D. et al. 1995. Long-Term Ambient Concentrations of 167. Energy sector modeling (Chapter 6) notes that large industries are the Particulates and Oxidants and Development of Chronic Disease in a Cohort worst emitters after the energy sector and concludes that GHG emission of Nonsmoking California Residents. Inhalation Toxicology, Vol 7: 19-34. reduction efforts should address the issue of emission-intensive processes London: Informa. and equipment in large industries. 116 F Y R M aced onia Gr een Grow th Country A ssessment Figure 10.3. Analytic framework Skopje during the winter months exacerbates the health impact of PM air pollution. Outside Skopje, specifically-sited industrial production is the major contributor to local air quality: energy Air quality monitoring ■ Ministry of Environmental Protection station data & and Physical Planning production in the municipality of Bitola, metallurgical works in air pollution sources ■ Ambient air pollutants, including PM10 and PM2.5 and emissions from air pollution sources Kavadarci and Tetovo and oil refining in Miladinovci. (Figure 10.6) ■ Institute of Public Health/ Ministry of Health/ Up to 30-80 percent of particulate matter may come from Health statistics State Statistical Office ■ For example, annual deaths by disease type; transboundary sources – and FYR Macedonia’s compliance frequency of chronic bronchitis and asthma, with EU standards may only be realized with a regional agree- infant mortality; health cost data ment. Several studies have shown that depending on the ■ International and local literature location and season, emissions from neighboring countries Exposure-response functions ■ Relative risk functions that describe the can contribute between 30 and 80 percent of air quality condi- relationship between PM10 /PM2.5 and mortality tions in FYR Macedonia.168 Therefore, local interventions need to be combined with regional agreements. FYR Macedonia Municipal ■ State Statistical Office needs to undertake studies to determine how much of the demographics ■ Municipal population, age groups, gender, urban/rural population, etc air pollution is from local or regional sources. Source: Air pollution technical paper. Particulate matter pollution is responsible for approximately 1350 deaths annually with thousands of lost productive work-days – representing an economic cost of €253 million households by using simple technologies: adoption of dust annually or 3.2 percent of GDP. Premature deaths occur from collection and scrubbing technologies in the energy sector; cardiopulmonary disease and lung cancer. In 2011, the level usage of dust collectors in road pavement processes; and of particulate matter pollution was primarily responsible for replacement of inefficient wood stoves, increasingly used for 485 new cases of chronic bronchitis, 770 hospital admissions, heating in response to tariff increases, in the household sector. 168. Klein, Heiko, Michael Gauss, Agnes Nyiri and Birthe Marie Steensen. 2011. 2012. Transboundary Air Pollution by Main Pollutants (S, N, O3 ) and Over 45 percent of the health impact occurs in Skopje and PM: The Former Yugoslav Republic of Macedonia. Data Note. Norwegian Meteorological Institute. Oslo: European Monitoring and Evaluation several local production zones. Insufficient air circulation in Programme (EMEP). Figure 10.6. Health impacts are highest in municipalities of Skopje, Bitola, Kumanovo, Tetovo, Veles Economic cost of PM air pollution, € million Source: Air pollution technical paper. C an Co - benefits such as Cleaner A ir A rise from Greening ? 117 Figure 10.4. Air pollution has been above EU standards for years Annual average PM10 concentration by monitoring station 250 200 PM10 concentration (ug/m3) 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 Skopje Bitola Veles Tetovo Kumanovo Kavadarci Kocani Kicevo Rural EU std Source: Ministry of Environment and Physical Planning, FYR Macedonia. 2012. Macedonia’s Informative Inventory Report (IIR) 2010. Submission under the United Nations Economic Commission for Europe (UNECE) Convention on Long-range Transboundary Air Pollution. Skopje: UNECE. and 15,200 emergency visits. Converting it into DALYs169, these Figure 10.5. Over 90 percent of PM emissions health effects represent an annual economic cost of €253 million are from metallurgy, electricity and heat or 3.2 percent of GDP170. These estimates are consistent with production, asphalt mixing in road paving other recent studies including one in Kosovo.171 (See Table 10.1) and household wood burning. Lowering PM10 and PM2.5 to EU limit values would result Sources of PM emissions, 2003-2010 in avoiding over 800 deaths and thousands of days in lost productivity, representing a health cost savings of €151 mil- lion per year. If greening interventions were undertaken in the 7% Ferroalloys production sectors identified above and this lowered current particulate 8% Public electricity matter concentrations to EU limit values,172 the number of and heat production 10% 44% Combustion in non-ferrous deaths and disabilities would be substantially lower. A reduc- metal production tion of even 1 μg/m3 in ambient PM10 or PM2.5 would imply Road paving with asphalt 14% savings of €34 million per year in reduced health costs or 0.4 Residential (households) percent of GDP (see Table 10.2). If FYR Macedonia were to 17% Other comply with EU standards, the savings would be €151 million per year or 1.9 percent of GDP. Source: Compiled from: Ministry of Environment and Physical Planning, 169. More precisely, disability-adjusted life years is the sum of years of FYR Macedonia. 2012. Macedonia's Informative Inventory Report (IIR) 2010. potential life lost due to premature mortality and the years of productive life Submission under the United Nations Economic Commission for Europe lost due to disability. (UNECE) Convention on Long-range Transboundary Air Pollution. Skopje: UNECE. 170. Note that premature death accounts for over 90 percent of the total health cost since the loss of life is a loss of total income. 171. World Bank. 2012. Kosovo Country Environmental Analysis: Cost Assessment of Environmental Degradation, Institutional Review, and Public Environmental Expenditure Review, Washington, DC. 172. That is PM10 = 40 µg/m3 and PM2.5 = 20 µg/m3. 118 F Y R M aced onia Gr een Grow th Country A ssessment Annual deaths and disabilities in FYR Macedonia due Table 10.1. to air pollution cost over €253 million Number of annual cases, DALYs per year and economic cost in million Euros, 2011 Annual Total DALYs economic cost Health impact Annual casesa per year (€ million) Cardiopulmonary & lung cancer mortality (PM2.5 ) 1,351 10,809 232.0 Acute lower respiratory infections mortality (PM10 ) 1 17 0.1 Chronic bronchitis (PM10 ) 485 1,066 3.0 Hospital admissions (PM10 ) 770 12 0.4 Emergency room visits (PM10 ) 15,200 68 0.9 Restricted activity days (PM10 ) 3,213,000 964 8.6 Lower respiratory illness in children (PM10 ) 22,400 146 1.5 Respiratory symptoms (PM10 ) 10,197,000 765 6.8 Total 13,847 253.3 Notes: a. Mid-point estimates using a baseline for PM10 = 15 µg/m3 and PM2.5 = 7.5 µg/m3 See Ostro, B. (2004), Outdoor Air Pollution - Assessing the Environmental Burden of Disease at National and Local Levels. Environmental Burden of Disease, Series, No. 5. Geneva: WHO. Source: Air pollution technical paper, staff calculations. Potential health savings from reduction in PM10 and PM2.5 can equal 2 percent of GDP Table 10.2. if EU limit values were reached, € million and % GDP Level of reduction in Final air pollution impact ambient PM10 and PM2.5 Annual health savings Savings as % as % of GDP (μg/m3) a (€ million) of GDP (2011) (Total impact minus savings) 0 0.0 0.0 3.2 1 34.1 0.4 2.8 5 98.9 1.3 2.0 10 133.6 1.7 1.5 15 161.5 2.0 1.2 20 184.9 2.3 0.9 EU standards met b 151.5 1.9 1.3 Source: Air pollution technical paper, staff calculations. a – Example reductions were equally applied to both PM10 and PM2.5 and at the same time. b – PM10 = 40 µg/m3 and PM2.5 = 20 µg/m3 C an Co - benefits such as Cleaner A ir A rise from Greening ? 119 Table 10.3. Skopje and its municipalities represent Good Practice Box 12. half of the health burden from air Improving air quality in Vienna Annual cost, € million, % share, and % GDP and Mexico City Under current EU law, local authorities are required to reduce Annual cost % Cum air pollution and to comply with air quality limit values for sev- Municipality (€ million) total % eral pollutants. Vienna has, therefore, adopted a modal shift Skopjea 113.4 44.8 44.8 to public transport, which includes metro, tram and bus lines. Bitola 21.5 8.5 53.2 The fleet consists of over 500 tramcars and 500 buses and has been optimized and extended over the years. The city’s bus Kumanovo 20.4 8.0 61.3 fleet operates fully with liquefied petroleum gas engines, mostly Tetovo 13.0 5.1 66.4 equipped with additional filter systems. The current focus is Veles 12.2 4.8 71.2 on the U1 and U2 metro lines as well as the new main station. The city also plans to continue the expansion of ‘park and ride’ Kavadarci 8.5 3.4 74.6 spaces, which stand at 30,000 currently. Koč ani 8.0 3.2 77.7 Mexico City has also made determined efforts to reduce vehicle Kičevo 6.6 2.6 80.3 emissions, which represent the greatest source of pollution in a Prilep 3.6 1.4 81.8 city that the United Nations declared to be the most polluted Ohrid 3.0 1.2 82.9 urban area in the world in 1992. About 1,000 deaths and 35,000 Gostivar 2.8 1.1 84.1 hospitalizations per year were estimated to be caused by the dangerous air quality. Similar to Skopje, thermal inversions held Ilinden 2.7 1.1 85.1 a blanket of dirty air over Mexico City, especially in the winter Strumica 2.5 1.0 86.1 months. Yet the city has many practical lessons to offer to other Struga 2.3 0.9 87.0 fast-growing cities in the world today. The presence of lead in the air has dropped by 90 percent since 1990. Particulate matter Aračinovo 1.9 0.8 87.8 has been cut by 70 percent. Carbon monoxide and other pollut- ants also have been drastically reduced. The improvement can Source: Air pollution technical paper, staff calculations. a – Skopje includes the municipalities of Centar, Gazi Baba, Aerodrom, Č air, be attributed to the multi-pronged approach and determined Kisela Voda, Butel, Šuto Orizari, Karpoš, Gjorče Petrov and Saraj. efforts of the city: ■■ Industrial and power sectors: Refineries and factories were closed or relocated; fuel oil was replaced with natural gas; ■■ Public transport: the low-emissions Metrobus, hybrid buses Across FYR Macedonia’s 80 municipalities, 15 represent 88 and suburban train system will be expanded to replace percent of the total health burden of air pollution with nearly hundreds of thousands of vehicles; half in Skopje. The municipalities of Skopje are small, densely ■■ Auto emissions: Under the “One Day without a Car” (or “Hoy populated and urbanized. When combined with the poor No Circula”) program, older and soot-emitting cars are kept atmospheric conditions in December–air pollution becomes off the road for one day a week. Older cars that do not meet a serious concern. The distribution of this burden is reflected emissions standards are further subject to an environmental in Table 10.3 where Skopje (and its municipalities) constitutes contingency program, which bans them from city roads on days when measured pollution levels are high. Furthermore, 45 percent of the total health cost. Other more industrialized Mexico-based auto manufacturers are required to put cata- areas such as Bitola, Kumanovo, Tetovo, Veles and Kavadarci lytic converters on car engines, and all diesel vehicles are also rank high. International examples show that addressing required to be retrofitted with a filter that is equivalent of a urban pollution as a whole, including all types of pollution catalytic converter. sources, brings highest benefits (See Good Practice Box 12). Sources: European Environmental Bureau and Friends of the Earth Germany website. The City Ranking Project of Soot-Free-For-the- Climate. Accessed on November 26, 2013: http://sootfreecities.eu/city O’Connor, Anne-Marie. 2010. “Mexico City drastically reduced air pollutants since 1990s.” Washington Post, April 1, 2010. 120 F Y R M aced onia Gr een Grow th Country A ssessment RECOMMENDATIONS new investments to reduce emissions from existing sources and switching to natural gas. Emissions from public electric- The analysis conducted for this chapter identified main ity and heat production could be reduced up to 80 percent sources of air pollution and actions targeted at reducing through the installation of pollution abatement equipment and pollution from these sources should be prioritized. These fuel switching. The primary fuel source in FYR Macedonia is actions include using modern equipment in ferroalloys and high emission lignite. In addition, outdated plant equipment non-ferrous metal production, installation of pollution abate- exacerbates the problem. ment equipment and fuel switching in the heat and power production, installation of dust collectors and fabric filters In the road sector, installation of dust collectors and fabric fil- in asphalt mixing plants, and usage of new modern stoves in ters in asphalt mixing plants is essential to reduce emissions. the household sector. In addition, regulations related to air The most significant source of emissions in the road sector pollution should be significantly improved. is from batch mix plants where asphalt is made. Aggregate dust, VOCs and a fine aerosol of liquids are also emitted from Actions in Priority Sectors. Reduction of pollution from the conveying, classifying and mixing equipment. Vented ferroalloys and non-ferrous metal production is a priority, emissions from these areas may be controlled by equipment since it constitutes a large share of overall pollution. They ranging from dry mechanical collectors to scrubbers and fabric can be reduced using modern equipment. For example, in collectors. Many of these technological solutions can reduce the biggest polluter Jugohrom Ferroalloy’s, emissions could emissions by over 90 percent174. be reduced by up to 80 percent through such measures as low energy scrubbers, sealed furnaces and enclosed product In the household sector, new modern stoves should be used transfer (e.g., conveyor) systems. to replace the currently utilized inefficient ones. They run on fuel such as concentrated wood pellets, can reach 80-90 In the energy sector, in response to the new EU directives173 percent efficiency and are associated with lower emissions regulating particulate emissions entering into force in 2016, the major heat and energy suppliers need to undertake 174. European Monitoring and Evaluation Programme/European Environment Agency (EMEP/EEA). 2009. Emission Inventory Guidebook 2009: Technical Guidance to Prepare National Emission Inventories. 173. 2001/80/EC Copenhagen: EMEP/EEA. C an Co - benefits such as Cleaner A ir A rise from Greening ? 121 of carbon monoxide, volatile organic compounds (VOCs), The Government should continue financial support to particulate matter and other hazardous air pollutants. These maintain and expand the air quality monitoring abilities of stoves Investment costs could be subsidized through govern- the MEPP and strengthen capacity in new areas – such as ment programs aimed at emission reduction. source attribution studies. FYR Macedonia has progressed in the development of monitoring and evaluation systems Actions at the Policy Level. The programs to reduce air for air quality. emissions in FYR Macedonia need to include particulate matter. Currently existing programs175 focus on sulfur oxides, At the policy and strategic level, health impacts should factor mono-nitrogen oxides, ammonia, and volatile organic com- into urban, energy and transport planning177. Spatial planning pounds and not on particulate matter. that limits urban sprawl and lessens the burden on transport and roads would help curb pollution. More accessible public The process of obtaining environmental permits should transport that gets more cars off the road would achieve the be shortened. Industrial facilities are obliged to introduce same objective. Cleaner energy sector mix would also mean measures to reduce emissions in all environmental media reduced pollution. (by way of obtaining an Integrated Pollution Prevention and Control (IPPC) permit176, introducing Best Available Techniques In the public health sector, there is a need to undertake more (BAT), efficient use of resources, use of better quality fuels and health impact assessments and support greater technical renewable energy sources, introducing filters and installing and human capacity on environment/health linkages at the systems for pollution reduction). However, given the time it Institute of Public Health. Further research on the linkages takes for the enterprises to invest in environmental protection, between environmental quality and public health is necessary in the lack of expertise in BAT implementation and the length providing evidence that certain economic activities are impact- of time to issue a permit (e.g. up to one year) - the status of ing the population. Specific health assessments in the areas issuance is becoming a concern. of air quality should become part of regular monitoring by the Institute of Public Health and other health-related organizations. To help speed up environmental protection investments, The first step would be to build capacities in these institutions FYR Macedonia should explore the use of economic instru- (e.g. epidemiology) and then to plan strategic studies that ments to incentivize emission reductions. In particular, in would tackle some of the largest gaps in FYR Macedonia’s cooperation with the financial sector, the Government may knowledge (e.g. studies on the impact of particulate matter offer forms of financing that could be made available to enter- pollution). This would enable practitioners to base results prises with well-developed plans for improved environmental from FYR Macedonia’s population – and not rely as much on management. At a household level, similar incentives could be international studies to back up their expert judgment. offered to improve energy efficiency. Government revenues generated from the implementation of the ‘polluter pays’ principle (from companies that pay fines or penalties due to their non-compliance with a standard) could help finance these environmental investment activities. 175. The most recent ones are: (1) Ministry of Environment and Physical Planning, FYR Macedonia. 2012. National Programme for Gradual Reduction of Emissions of Certain Pollutants at the Level of the Republic of Macedonia. Skopje. And (2) Ministry of Environment and Physical Planning, FYR Macedonia. 2012. National Plan for the Protection of Ambient Air. Skopje. 176. In 2010, the IPPC Directive was replaced by the Industrial Emissions Directive (IED) (2010/75/EU). 177. See chapters: Energy, Transport and Urban 122 F Y R M aced onia Gr een Grow th Country A ssessment C an Co - benefits such as Cleaner A ir A rise from Greening ? 123 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 11 How Should Social Dimensions Be Addressed? s CHAPTER SUMMARY at developing and testing a suitable participatory approach to green growth decision making in FYR Macedonia. The workshops with local and regional stakeholders discussed major challenges of green growth and potential development scenarios and policy options for a green transition. ocially-inclusive green growth would take into account the characteristics as well as The pilot provided evidence that the PSD approach is a valu- the perceptions of various social groups to able tool for participatory decision making. The workshop maximize inclusion of all parts of the society discussions provided information about the level of awareness into a greener economy. Participation of the population in of the concept of green growth; the potential impact on vul- the design of green growth strategies will help to increase nerable groups including farmers and socially disadvantaged awareness about climate change and to build resilience and groups and the need for strengthened social safety nets; the flexibility at the community level to adopt green growth potential impact on employment and the need for programs measures. FYR Macedonia is characterized by wide social dis- aimed at creating new skills and knowledge to adapt to new parities, a situation that makes the objective of social inclusion conditions; and the need for improved local capacity for plan- especially challenging but also especially important. Inequality ning and implementing green growth strategies. complicates green growth policy design and implementation, while social inclusion can help ameliorate these complications. How should social dimensions be addressed? CHALLENGES FOR GREENER GROWTH This chapter describes the outcomes of a pilot application of Overview a participatory methodology aimed at making green growth design and implementation socially inclusive. This meth- Participation of the population in the design of green growth odology— Participatory Scenario Development (PSD)178 – is strategies is critical for the success of their implementation. proposed to the Government as an important and useful tool A participatory process helps to increase awareness about for green growth decision making. The pilot PSD was aimed climate change and to build resilience and flexibility to adopt green growth measures. Social inclusion in the context of 178. Participatory scenario development (PSD) is a method of social assessment applied to test potential reaction of different stakeholder green policy design and implementation will help support groups to a set of policy options in order to identify those that would equitable outcomes, improved governance, better decision win public support. PSD was developed by the World Bank (see Bizikova, Livia, Samantha Boardley, and Simon Mead. 2010. “Participatory Scenario making and efficient institutional development. Green poli- Development Approaches for Identifying Pro-Poor Adaptation Options.” Development and Climate Change. World Bank Discussion Paper 18. cies, when implemented, will impact various social groups Washington, DC: World Bank.). How Should Socia l Dimensions Be A ddressed ? 125 in different ways and it is important to anticipate the impact to make sure that all parts of the society benefit from green Good Practice Box 13.Participatory approach growth in an equitable way and the vulnerable groups are helps to link global environmental solutions protected in the process of economic restructuring. Also, it with local development in India is important to understand perceptions and verbal behavior Participatory methods prove efficient when local specifics need of the population in respect to green growth policies and use to be taken into account in the design of the country-wide or it in policy design and implementation. This would include region-wide programs. Such methods are also useful instru- design of the regionally specific policies, mass media actions, ments to strengthen support for reforms among citizens and and information campaigns. In addition, FYR Macedonia to maximize reform benefits across the population. has significant differences in economic, social and cultural In Andra Pradesh, the government faced a difficult task of characteristics by region and urban-rural location. These designing an effective state-wide adaptation strategy to reduce differences need to be reflected in the Macedonian green the impacts of increasing drought on agriculture. The challenge growth strategy. Socially inclusive policies will help take these was that the effects of the drought differed across the state due differences into account. Participatory approaches have to variations in local climatic and land characteristics, access to proved efficient in many countries, making a difference in markets, and irrigation water availability. Participatory methods green policy implementation (see Good Practice Box 13 for helped tailor interventions to local differences. The pilot Andhra Pradesh Drought Adaptation Initiative selected communities an example from India). that were representative of different challenges (e.g., little irri- gated land, common property, depleted topsoil) and conducted This chapter describes the outcomes of a pilot application participatory consultations with community members to identify of a methodology aimed at making green growth design vulnerabilities and devise ways of addressing them. A set of and implementation socially inclusive. This methodology - matrices classifying drivers of vulnerability, climate change Participatory Scenario Development (PSD) 179 – is proposed impact, and potential responses was created and analyzed. to the Government to be used as one of the instruments of The matrices were used to determine interventions optimal for green growth decision making. The pilot was designed180 to each community. The findings were then used in the state level strategy, and it was decided that this project will be scaled up test the suitability of the PSD approach for discussing green to a larger area. growth challenges and policy options with a large number of stakeholders in order to understand which groups are Source: World Bank. 2011. Social Resilience and Climate Change: affected by climate change and green growth measures, Operational Toolkit. Washington, DC: World Bank. how they perceive these the changes, what actions they are willing to take to adapt their living and working situation to the changing conditions, and what actions they expect from local and national government. FYR Macedonia is characterized by wide social disparities, the situation that makes the objective of social inclusion Challenges of Social Inclusion in the Context of especially challenging and also more important than in Green Growth equitable societies because inequity complicates green growth policy design, while social inclusion can help reduce Socially inclusive green growth would consider objective these complications. Disparities in FYR Macedonia include characteristics and perceptions of various social groups while a Gini coefficient181 that is the highest in Europe, equaling designing green policies, with the objective to maximize 44 percent,182 and which has been steadily increasing from benefits to all parts of the society from green economy. the level of 28 percent in 1998; the second highest in Europe Social groups differ with respect to income and employment, (after Kosovo) level of unemployment at 35 percent183 and knowledge and skills, age and gender, urban-rural location 54 percent among young people184, 3.8 times above the EU and other characteristics. The challenge of designing a level;185 large gaps in incomes and quality of life between socially inclusive green growth strategy is in understanding and incorporating in a green growth strategy relevant views and behavioral reactions of all these diverse groups. 181. The Gini coefficient is one of the indicators of a society’s adaptive capacity for climate change and part of the climate change vulnerability index. The higher the inequality (and Gini), the lower the adaptive capacity and the more vulnerable the country is to climate change impact (see the Benchmarking analysis in Chapter 1). 179. Ibid. 182. Social sector technical paper. 180. The pilot PSD in FYR Macedonia was developed for the Green Growth study by a project team of the Agricultural Economics Research 183. Ibid. Institute (LEI), part of Wageningen University and Research Centre in the 184. Ibid. Netherlands, in close cooperation with its Macedonian partner Terra- Consulting and NGO’s in FYR Macedonia. 185. See also the discussion of unemployment in the Macroeconomic chapter (Chapter 12). 126 F Y R M aced onia Gr een Grow th Country A ssessment urban and rural communities,186 significant ethnic inequality, Figure 11.1. The gap in living standards between regional inequalities, and other disparities. Twenty-seven urban and rural regions increases percent of the households in the country live below poverty Population below poverty line line187 and per capita GDP is one of the lowest in Europe at $5,058. (Figure 11.1, Figure 11.2, Table 11.1). Creating employment is crucial for green growth to be 25 socially inclusive. High unemployment rates cause many 20 Macedonians to emigrate and seek jobs abroad, emigration percentage 15 rates are particularly high in the rural areas in the Northeast, Vardar and South-Western regions. Ongoing efforts to make 10 agriculture more sustainable may create new jobs, but in 5 order to reduce unemployment, incentives must be created 0 for employers to hire more workers. Possible institutional 2002 2003 2004 2005 2006 186. These issues are also mentioned in the Agriculture chapter (Chapter 5) Rural Urban and in the Urban chapter (Chapter 8). 187. Social sector technical paper. Source: Social sector technical paper. Table 11.1. Employment opportunities in some regions are scarce Participation and unemployment rate by region, 2008 Working population FYR Vardar East South-west South-east Pelagonia Polog North-east Skopje (15 years and older) Macedonia Number of persons 1,633,341 122,138 152,504 176,191 141,859 195,363 234,365 137,773 473,148 Participation rate 56.3 57.9 59.2 55.5 70.5 63.6 43.9 59.5 53.1 Unemployment rate 33.8 43.6 20.0 39.3 11.7 34.5 26.4 58.0 37.3 Figure 11.2. Regional differences in employment are high Population in labor force and unemployed, persons, 2008 Source: Social sector technical paper. How Should Socia l Dimensions Be A ddressed ? 127 barriers in the labor market, such as closed-shop conditions, METHODOLOGY AND MAIN FINDINGS should be removed. Methodology A transition towards a green economy requires an educated society capable to acquire new competences and skills. The The pilot Participatory Scenario Development (PSD) educational attainment in FYR Macedonia have improved in approach189 was aimed at developing and testing a suitable recent years: among 18-24 year olds, the percentage of school participatory approach to green growth decision making drop-outs at the level up to junior secondary school decreased in FYR Macedonia. The workshops with local and regional from 31 percent in 2000 to 20 percent in 2008.188 This level stakeholders discussed major challenges of green growth is comparable with the EU average, which is 15 percent. The and potential development scenarios and policy options quality of education requires improvement. However, with a for a green transition. Representatives of different local and share of GDP at 3 percent, the expenditure on public educa- regional organizations and social groups including municipal tion in FYR Macedonia is low. governments, public organizations, private trade and industry representatives, business associations, social and cultural Green growth presents specific challenges for urban areas. organizations, research and (inter)national developmental FYR Macedonia is a highly urbanized country, with 68 percent organizations, participated in the workshops. The partici- of the population living in cities, with strong urban growth, pants expressed their opinions about two scenarios of FYR especially in Skopje which already has more than a quarter of Macedonia’s Green Growth development: Business as Usual the total population and is growing at over 3 percent per year. and Green Growth, the last one following the EU 2020 poli- Urbanization largely takes place in the form of unplanned urban cies. The scenarios are hypothetical and represent different sprawl, which necessarily increases the costs of infrastructure pathways for the future, with different policy objectives and services, such as water, electricity, transportation, sewage 189. Participatory scenario development (PSD) is a method of social and waste disposal. Skopje has most of urban development assessment applied to test potential reaction of different stakeholder issues due to the high and unplanned growth. groups to a set of policy options in order to identify those that would win public support. PSD was developed by the World Bank (see Bizikova, Livia, Samantha Boardley, and Simon Mead. 2010. “Participatory Scenario Development Approaches for Identifying Pro-Poor Adaptation Options.” 188. State Statistical Office, Republic of FYR Macedonia (2010). Regions of Development and Climate Change. World Bank Discussion Paper 18. the Republic of FYR Macedonia, 2009. Washington, DC: World Bank.). 128 F Y R M aced onia Gr een Grow th Country A ssessment measures useful as starting points for the discussions in the level, were further explored by the participants for the workshops and illustrating the green growth policies to the impact on their region, drawing timelines for possible participants in the workshops (see Box 11.1). social, economic and environmental developments under different assumptions and mind mapping for identifying The project team organized four PSD workshops. The PSD the social groups that will be affected by these develop- workshops took place in August and September 2012 in ments. This part of the workshop consisted of one or Probistip, Ilinden and Gostivar (see locations in Figure 11.3). two sessions in which the participants worked together The national concluding workshop was held in Skopje in in groups of about six people, followed by a plenary November 2012. The workshop duration was up to six hours. feedback session. The sequence of activities and methods were adapted to the topics of the respective workshops (overview of topics ■■ Step 3. Exploring solutions for negative effects of is presented in Table 11.2). The workshops consisted of four climate change and green growth measures. After a successive steps: plenary feedback session to prioritize the negative effects of climate change and green growth measures for specific ■■ Step 1. Informing the participants of climate change groups in the region, the participants returned working in and green growth. The project team presented the small groups to identify possible solutions. Brainstorming major aspects of climate change and green growth to and mind mapping were tools used in this session. the participants at hand of two distinctive scenarios, which are explained below. The differences between the two ■■ Step 4. Assessing feasibility of proposed options and scenarios were illustrated by graphs, timelines and impact recommendations. In a plenary meeting, after prepara- chains. tion in working groups, the participants discussed the feasibility of the various options proposed to improve the ■■ Step 2. Determining the (social) impact of climate change situation in the region. Ranking methods were used to and green growth. The scenarios, explained at national prioritize the identified problems and proposed solutions. Box 11.1. Summary of scenarios used at the PSD workshops A. Business-as-usual scenario In the business-as-usual scenario, a development path is assumed in which no new (significant) green growth policies and measures are undertaken and no adaptation measures on climate change. In summary, this scenario includes the following developments: ■■ The current development of sectors is linearly extended to the future; ■■ The expected exogenous challenges, such as climate change, energy demand, and demography are included; ■■ No new policies are assumed or included, only those presently in force; ■■ Investments for renewal or replacement in the energy, construction and transport sector are based on conventional technology only; ■■ No specific green investments are foreseen. ■■ Accession to the EU, with additional policy demands to FYR Macedonia is not anticipated. B. Green Growth scenario The concept of green growth aims at long-term economic development without aggravating climate change, environmental degradation and unsustainable use of natural resources. The green growth strategy is aiming at adaptation to a changing climate, reducing GHG emissions and other pollution, promoting efficient use of natural resources and preserving biodiversity, and at the same time promoting green innovation and jobs, i.e. processing agro-raw material for biofuels, pharmaceutics, textile and new biomedical material. The Green scenario assumes that FYR Macedonia will enter the European Union and will implement the EU green growth strategy as described in the Europe 2020 strategy. The priorities of this strategy are: ■■ Smart growth: improving the performance in education, research and innovation, and digital society. ■■ Sustainable growth: building a more competitive low-carbon economy, protecting the environment, developing new green tech- nologies and production methods, improving the business environment and helping consumers to make well-informed decisions. ■■ Inclusive growth: developing a high-employment economy, ensuring economic, social and territorial cohesion, creating more and better jobs and modernizing labor markets and welfare systems. The Green Growth scenario involves major investments in a ‘cleaner’ economy. These investments are not made quantitative in the social module but only described in qualitative terms. How Should Socia l Dimensions Be A ddressed ? 129 Table 11.2. Overview of the major environmental, economic and social dimensions by sector/theme Topics of the workshops Dimensions Environmental Economic Social Sectors dimensions dimensions dimensions Agriculture Inefficient water use Many small farms Age structure Erosion Fragmented farms Poverty Decreasing yields Lagging investments Health problems Soil & water pollution (incl. irrigation systems) Social/ethnic tensions Decreasing biodiversity Inefficient land use GHG emissions Low income Hidden unemployment Energy GHG emissions Outdated power plants Dependence on subsidies Air pollution Inefficient use of resources Landscape destruction Energy prices not market driven through open-pit mining Transport Air pollution Declining public transport Declining access to transport GHG emissions Increasing private transport (cars) Increasing isolation of low income groups Health problems Urban issues Water scarcity High cost of solid waste management Health problems Lack of wastewater treatment High cost of infrastructure Social /ethnic tensions Inefficient sanitation services Urban sprawl One of the methods was scoring the possible solutions The workshop discussions provided information about the on a combined cost and complexity scale, as presented level of awareness of the green growth concept; the potential in Figure 11.4. The priority problems and solutions were impact on the vulnerable groups including farmers and socially integrated into recommendations for short and medium disadvantaged groups such as the unemployed, disabled, term for the government at different levels. The workshops elderly, children, rural women and farmers, and the need in were prepared by the project team and a number of facili- social protection strategies; the potential impact on employ- tators trained to provide support to the working groups. ment and the need in programs aimed at creating new skills and knowledge to adapt to new conditions; and the require- Main findings ments to local capacity for planning and implementing green growth strategies. The pilot demonstrated that the PSD approach is a valuable tool for participatory decision making. If used as a part of The participants in the workshops identified a long list of green growth strategy design, PSD will increase the sustain- possible inclusive green growth measures and ranked them ability of the green growth measures by providing a tool for on a two-dimensional scale of complexity and costs. This stakeholder consultations early on in the process and by approach can be used in the PSD workshop discussions in the increasing awareness about climate change. future. In Figure 11.4, a selection of green growth measures is presented in a four-quadrant cost-complexity diagram where The outcomes of the workshop discussions show what type the easiest and cheapest set of measures can be started imme- of findings the PSD approach provides. The pilot outcomes diately, such as walking and cycling instead of taking the car, cannot be used to make conclusions regarding the percep- turning off the light, recycling of waste, and rational use of tions of the population of the green growth issues because water. The second set of measures is easy to implement, but the pilot, being used to test the methodology, did not involve they require investments. These include thermal isolation of a wide enough representation of the Macedonian population buildings, installation of solar energy panels and drip irrigation and therefore the outcomes are not representative for the systems. The third set of measures is hard to implement and entire country or any part of it. expensive. Examples are solar and wind power plants, electric 130 F Y R M aced onia Gr een Grow th Country A ssessment Figure 11.3. FYR Macedonia is a country with major environmental, economic and social problems Hot spots identified during the inception workshop and the location of the PSD workshops Source: Social sector technical paper. Examples of green growth measures, divided in categories of complexity and costs of Figure 11.4. implementation by workshop participants Most expensive, need for financial support Easy to implement Hard to implement Innovation in green technology Hybrid/electric vehicles (private/public) Utilization of solar renewable energy sources Hydro and geothermal power plants Thermal insulation of buildings New water reservoirs Irrigation and drainage systems in agriculture Sewage water treatment plants Increasing the service level of public transport Gas-fuelled heating systems Early retirement schemes to provide jobs for young people Public-private partnerships in public services and green industry Vocational training in new technologies Revision of education system Education and training of farmers Changing legislation Awareness raising campaigns on climate change, Law enforcement environment and green growth, incl. energy saving and waste recycling Less expensive, no need for financial support How Should Socia l Dimensions Be A ddressed ? 131 transport, waste collecting and recycling facilities, and waste strategy, but also for informing general decision making in dumpsites. The fourth set includes most complex and time all sectors included in the workshop discussions, such as consuming ones: revision of the education system, new and water, agriculture, energy, transport, and urban. They can adapted legislation and law enforcement, are required, which also provide relevant information for the social sectors, in is, in most cases, complex and time consuming. particular, for education and social protection. To use the workshop discussions to the full benefit of the sectors, sector representatives should be consulted during the preparation recommendations of the workshop discussion instruments and be encouraged to add questions or topics of importance to their work. This The piloted Participatory Scenario Development approach approach would also increase incentives for the govern- proved to be a valuable tool for participatory decision making. ment stakeholders to be fully involved in the Green Growth It can provide information about the level of awareness and strategy design. understanding of the concept of green growth; the potential impact on vulnerable groups; the potential impact on employ- Workshop outcomes should be analyzed taking into ment and the need for programs aimed at creating new skills and account the location where they took place, representa- knowledge to adapt to new conditions; new insights into how to tion of various social groups (by education, age, gender, strengthen social safety nets; and the need for improved local income, professional affiliation), in each workshop and the capacity for planning and implementing green growth strategies. timing of the workshop in relation to major events that are relevant to the topics of workshop discussion. Then, PSD should be used from early-on and at all stages of the the outcomes could be used at the local, as well as central decision making process in order to ensure full inclusion of the level, and interpreted with a better insight. The outcomes stakeholder input into the Green Growth strategy and to maximize could be compared across the workshops to conclude which the level of population awareness of the Green Growth measures. opinions are typical for the country and which could be representative for certain social groups and locations. The The outcomes of Green Growth PSD workshops can be temporary impact of major events and their discussion in used not only to support the design of the Green Growth mass media could be separated from stable public opinion. 132 F Y R M aced onia Gr een Grow th Country A ssessment How Should Socia l Dimensions Be A ddressed ? 133 WATER ENERGY AIR POLLUTION TRANSPORT ENERGY DEMAND URBAN ISSUES AGRICULTURE SOCIAL DIMENSIONS AND COMMUNITY FEEDBACK MACROECONOMIC ANALYSIS & MODELING Chapter 12 How Can Public Investment Choices Support Greener Growth? t CHAPTER SUMMARY low carbon growth country study for Poland190 to integrate detailed engineering options for mitigating greenhouse gases. Adaptation measures were analyzed by the MOMA model, not only in this ‘bottom-up’ manner (for agriculture and water) but also econometrically in a ‘top-down’ manner (for facilities of he macroeconomic model constitutes a back- physical infrastructure). The Green and Super Green scenarios, bone for the harmonization of the sectoral work derived from the sector analyses, reflect ambitious and very in a consistent and rigorous manner, and the ambitious climate action. The mitigation measures, mainly in economy-wide analysis builds directly on the energy, enable impressive 40 percent and 70 percent reductions sectoral analyses of water, agriculture, infrastructure, energy, in greenhouse gas (GHG) emissions starting in the early 2030s, and transport. The modeling assesses the impact on growth in the Green and Super Green scenarios respectively, measured and employment of packages of actions on green growth relative to the business-as-usual scenario (including the impact across sectors and calculates the impact of actions in any one of a changing climate). Implementation of the Green package sector on all the others. While there is some body of experi- of policies and investments will dampen GDP by 2.7 percent in ence with linking mitigation measures to a macroeconomic the short-term, but boost GDP by 1.5 percent of GDP by 2050, model, a useful approach to adaptation actions has been more while Super Green implementation will undercut GDP by almost elusive. Putting the sectors together provides the govern- seven percent in the short-term. The (‘bottom-up’) estimates of ment with a potentially powerful tool to consider which public costs of adaptation in the water sector were revealed to be of investments will have the highest returns over time, including much higher magnitude than the (‘top-down’) costs of protecting investments to counter climate change and investments to infrastructure facilities; while for mitigation actions, the model reduce greenhouse gas emissions. This modelling analysis finds that energy efficiency measures are most promising from aims to inform policymakers on the question, “How can public a long-term growth perspective. The interventions proposed investment choices support greener growth?” for transport seem to be prohibitively costly, but there is an important caveat in this interpretation as local benefits of a The Macroeconomic Options of Mitigation and Adaptation modernized transport infrastructure were omitted. In the Super model (MOMA model) is a dynamic stochastic general equi- Green package, the economic effects are of similar pattern but librium model and captures the complex linkages between of a higher magnitude. climate mitigation and adaptation policies and macroeconomic performance in an innovative manner. This large-scale model 190. Jorgensen, Erika, and Leszek Kasek (2011), Transition to a Low- Emissions Economy in Poland. A Low Carbon Growth Country Study. builds on the advances generated under the World Bank’s Washington, DC: World Bank. How Can Public Investment Choices Support Greener Growth? 135 Public investment choices on green actions can be guided ever-improving in-country analyses to provide up-to-date by the findings produced by macroeconomic modeling. assessments for their policy decisions. Technical assistance in Adaptation interventions are less costly, and so more easily building such tools with a working group drawn from across afforded than mitigation measures, both on the investments government and local institutions enables the government to needed and the expected economic impacts. Within adaptation apply these models and their successors to a variety of policy measures, public investments to prevent losses in agricultural questions in the future. production are significantly higher than those for maintenance of various infrastructure services. The investments in infrastruc- ture resilience can be interpreted as a type of insurance against CHALLENGES FOR GREENER GROWTH the risk that a changing climate will derail the country’s growth in future decades by disrupting infrastructure services. From The preceding chapters have set out findings and recommen- the viewpoint of cost efficiency and economic performance, dations across eight sectors and topics, but that presentation the government’s approach to mitigation should be equally does not constitute a unified analysis. Each sector chapter has selective and should focus first on energy efficiency. While provided recommendations on climate actions—to support foreign financing would counter the short-run costs to FYR mitigation of greenhouse gas (GHG) emissions or adaptation Macedonia from green policies and investments, given the to a changing climate—and greening. Governments cannot uncertainty of access to non-debt financing, including the avail- simply aggregate sector level recommendations and requests ability of EU funds, domestic savings options are the most likely for spending. Limited resources need to be allocated, and so funding source over the near term. This fiscal constraint makes sector assessments need to be integrated to some degree, prioritization of public investments, including green invest- and recommendations prioritized. One approach to such ments, even more important since even the green scenario’s integration is economy-wide analysis that aims to link up with relatively modest financing needs would constitute one-quarter the sectoral analyses. to one-fifth of the annual public investment budget. Lastly, this assessment is not cast in stone. Many sources of uncer- At the macroeconomic or economy-wide level, modeling tainty and several methodological issues remain in applying can provide integration across sectors. General equilib- an economy-wide model such as MOMA, in conjunction with rium models set up a coherent economy-wide framework sector analytic approaches, to key green growth policy ques- and allow economic decision-making to be the outcome of tions. Government must make a commitment to ongoing and decentralized optimization by producers and consumers. 136 F Y R M aced onia Gr een Grow th Country A ssessment They simulate the functioning of a market economy, includ- reflecting intersectoral linkages. The model was calibrated ing markets for commodities, for labor, and for capital. They directly on Macedonian macroeconomic data for 2008 and provide a detailed look at how changes in economic condi- includes 12 sectors: agriculture (including food industry), tions are mediated through prices and markets while assuring light industry, heavy industry, energy and heat production, that all economy-wide constraints are respected. They also lignite mining, gas and oil refining, construction, transport, enable quantitative examination of how shocks or policies finance and business services, trade, public services, and other move through the economy and influence its performance services. The MOMA model is in line with mainstream contem- and structure. Dynamic processes can be captured, which is porary macroeconomics: neoclassical in spirit (microeconomic important if the time horizon of the modeling is long (such principles, optimization by producers and consumers), but as the 40 year horizon used here). combines elements of Real Business Cycle (flexible prices, business cycle due to technological change) and New Putting the sectors together will provide the government Keynesian theories (prices set in monopolistic competition, with a potentially powerful tool to consider which public market frictions and other imperfections). (Figure 12.1). investments will have the highest returns over time, including investments to counter climate change and investments The MOMA model captures the linkages between climate to reduce greenhouse gas emissions. Formal links to the mitigation and adaptation policies and macroeconomic detailed sector analysis, or iterative interactions, will enhance performance in an innovative manner. GHG emissions are a the consistency of the sector analysis and strengthen the byproduct of intermediate goods consumption by produc- insights that emerge from the macroeconomic analysis. The ers, sector by sector, and final consumption of households. macroeconomic modeling needs to provide a basic economic Emissions from both sources are associated with the con- framework to each of the sectors as a starting point: overall sumption of fossil fuels. The MOMA model builds on the growth, inputs, and prices; while the sector analysis confirms advances generated under the Poland low carbon study, but the consistency of sectoral details in the economy-wide baseline scenario. The integration of sector findings into the Figure 12.1. Three markets and three agents macroeconomic model then allows richer insights about the Basic layout of the Macroeconomic Options of alternative scenarios. However, the method of integration is Mitigation and Adaptation (MOMA) model not clear-cut. The modeling approaches developed for the World Bank’s low carbon growth country study for Poland191 Public consumption, Investment goods allowed for inclusion of mitigation investment options into International trade the model, thus feeding the ‘bottom-up’ analysis of sectors Consumption GOODS Material and investment goods directly into a general equilibrium framework. MARKET Output Supply Demand LABOR METHODOLOGY AND MAIN FINDINGS Wages MARKET Labor force Methodology HOUSEHOLDS Stocks Stocks FIRMS Bonds CAPITAL Profits, dividends MARKET The Macroeconomic Options of Mitigation and Adaptation Profits, dividends model (MOMA model) is a DSGE-type of model and captures complex links between economic sectors and policy instru- CO2 CO2 PIT and other taxes ments. It is a simulation model and generates conditional PUBLIC Transfers CAPITAL forecasts of future economic development depending on Bonds (EXTERNALITY) CIT, VAT various policy choices. The MOMA model is a large-scale, dynamic, stochastic, general equilibrium (DSGE) model. It is dynamic in that it captures the path of an economy, not just EU funds GOVERNMENT an end point, providing insight into the transition process that occurs following an economic shock. It is stochastic, including random shocks to the economy, such as technology changes, Climate policy instruments (caps, taxes and subsidies) changes in relative prices, or new government policies. Finally, it is general equilibrium and covers the economy as a whole, Source: Macroeconomic technical paper. 191. Jorgensen, Erika, and Leszek Kasek (2011), Transition to a Low- Emissions Economy in Poland. A Low Carbon Growth Country Study. Washington, DC: World Bank. How Can Public Investment Choices Support Greener Growth? 137 it has several new features: a more detailed representation of econometrically in a ‘top-down’ manner (for facilities of international trade at the sectoral level; a semi-endogenous physical infrastructure). The protection of physical infrastruc- growth mechanism based on productive R&D spending; ture against changing precipitation or rising temperatures is and a flexible mechanism of capital vintages (although not a different kind of adaptation than, for example, expanding implemented fully due to data scarcity). This treatment of irrigation to reduce losses in agriculture. The question for capital, nevertheless, enables modeling of the endogenous policymakers is whether to invest in strengthening (adapt- responses of enterprises and households to economic shocks ing) infrastructure today—building it differently—to make it and also to technological innovations arising in energy and resilient enough to maintain the level of infrastructure services emissions efficiency and in resilience (to climate change) of despite the future stresses of extreme weather. An economet- new investment goods. The model incorporated mitigation ric estimation of infrastructure needs resulting from changes actions related to energy supply, energy efficiency, and trans- in climate conditions was carried out for the following sectors: port and adaptation measures related to agriculture, water, power and telecommunications, water and sewers, roads, and infrastructure. other transport, health and schools, urban, and housing. (See Chapter 9). These interventions have varying implementation Microeconomic mechanisms in the model allow integration timelines, ranging from just a few years (for power and water) of mitigation and adaptation policies, albeit in simplified to decades (for transport infrastructure). (Figure 12.3). form. Climate action measures, whether mitigation or adapta- tion, can be characterized as requiring investment upfront A critical complementary activity to the MOMA model devel- and providing benefits later: for mitigation options, reduced opment was technical assistance to build economy-wide operations and maintenance (O&M); for adaptation options, modeling capacity in FYR Macedonia. A gradual, systematic, averted losses. The initial costs tend to depress GDP, as higher and highly-interactive learning approach was applied, with a relative prices of capital goods suppress investment. Neither combination of tailored learning and distance learning utilizing savings on fuel nor reduced climate damage can outweigh both World Bank technical staff and international experts these costs in the short-run. Over time, however, the economy with a group of technical staff from the public administration benefits either from more emissions-efficient or more resilient and academia. A dynamic Computable General Equilibrium capital. Figure 12.2 presents a simple exposition of the short- model for FYR Macedonia has been developed, with an run impact of a mitigation investment. (See also Figure 12.3). interactive user-friendly interface, and is available for future assessments and updates. Technical assistance in building Adaptation measures were analyzed not only in this such tools enables the government to apply such models to ‘bottom-up’ manner (for agriculture and water), but also a variety of policy questions in the future. Figure 12.2. Short-run impact of mitigation investment on GDP Main pathways for a policy shock Less investment by firms Increased & small PHYSICAL CAPITAL demand and high prices of investment goods Decrease of LABOR productivity & less employment Mitigation investment Decrease of MATERIALS Lower GDP productivity & less services used in the short run Improvement in energy efficiency & fall in prices Decrease of SERVICES of fuels productivity & less services used and energy Decrease of ENERGY USE in some sectors & Increase in productivity leading to a rebound effect Source: Macroeconomic technical paper 138 F Y R M aced onia Gr een Grow th Country A ssessment Modeling macroeconomic impact Figure 12.3. supply and energy efficiency measures, while transport’s con- of ‘green’ policy interventions in sectors tribution is relatively minor. Also, the most substantial change occurs between 2026 and 2035, when an existing lignite-fired Diagram of links to mitigation and adaptation measures power plant is to be decommissioned and replaced by a new power plant, powered by a modern but still lignite-fired plant Climate-resilient in the baseline scenario, and replaced by a natural gas plant infrastructure Green and Super-green policy - Power & telecom interventions at the sector level in the Green scenario and a nuclear plant in the Super Green - Water & sewers - Roads scenario. (Figures 12.4 and 12.5). - Other transport Baseline + scenario 2050 - Health and school Top-down facilities approach for infrastructure Baseline Impact of - Urban drainage scenario changing - Housing investments FYR Macedonia climate 2050 -direct shock -gradual convergence in agriculture and other Figure 12.4. GHG emissions fall by 40 percent Sector measures Bottom-up approach for to EU spillovers Adaptation selected -exogenous -probability Projected GHG emissions by 2050 in Green scenario - Water sectors: assumptions estimates for - Agriculture energy, (engergy extreme transport, prices) events Mitigation water, & sectoral trends 0 5 0 5 0 6 0 5 - Energy sector agriculture 02 02 03 03 04 04 05 01 - Energy efficiency -2 -2 -2 -2 -2 -2 -2 -2 16 21 26 31 36 41 46 11 - Transport 20 20 20 20 20 20 20 20 0 -10 Source: World Bank staff. Percentage change -20 relative to BAU -30 -40 Transport Main Findings -50 Energy supply -60 Energy efficiency The Green and Super Green scenarios reflect ambitious -70 Green Scenario and very ambitious climate action on the mitigation and -80 adaptation front. Mitigation measures are drawn from energy supply and energy efficiency and transport, while adaptation Transport Energy Energy Green supply efficiency Scenario measures derive from the agriculture and water sectors. The package of actions that are defined as the Green scenario Source: Macroeconomic model output. contains mitigation actions to achieve a 40 percent reduction in GHG emissions. A precautionary set of adaptation measures were selected in water and agriculture based on financial assessments (including benefit-cost ratios and NPVs) and in Figure 12.5. GHG emissions fall by 70 percent infrastructure based on positive rates of return. The Super Projected GHG emissions by 2050 in Super Green Green scenario has mitigation actions to achieve an almost scenario 70 percent reduction in GHG emissions plus a set of proactive adaptation actions. These scenarios differ from each other 5 0 5 0 5 0 6 0 01 02 02 03 03 04 04 05 in terms of associated investment costs, avoided economic -2 -2 -2 -2 -2 -2 -2 -2 11 16 21 26 31 36 41 46 Percentage change relative to BAU 20 20 20 20 20 20 20 20 losses, and abated GHG emissions. Projected incremental 0 investment costs in the Green scenario are well below one -10 percent of GDP equivalent, while in the Super Green sce- -20 nario they approach two percent of GDP. The MOMA model -30 compares the Green and Super Green scenarios to the BAU -40 scenario—the business-as-usual scenario including the impact -50 of a changing climate. (Chapter 3). (See Table B for a summary -60 of policies and investments in the green scenarios). -70 -80 The mitigation measures, mainly in energy, enable an impres- sive 40 percent and 70 percent reductions in GHG emissions Transport Energy Energy Green supply efficiency Scenario starting in the early 2030s, in the Green and Super Green scenarios respectively, measured relative to BAU. The major Source: Macroeconomic technical paper. reduction in emissions is to be achieved through energy How Can Public Investment Choices Support Greener Growth? 139 Projected incremental investment costs in the Green sce- Implementation of the Green package of policies and invest- nario are well below one percent of GDP equivalent while, ments will dampen GDP by 2.7 percent in the short-term in the Super Green scenario, they exceed two percent of but boost GDP by 1.5 percent of GDP by 2050, while Super GDP in the later years of the current decade. It might be Green implementation will undercut GDP by almost seven surprising that capital costs for energy supply turn negative percent in the short-term. The macroeconomic impact of the after 2025 in the Green scenario and between 2021 and 2025 in Green and Super Green policy packages are neutral or positive the Super Green scenario, but this result stems from the lower in the long-run, but at a cost of short-term GDP losses.192 With capacity that needs to be installed in comparison to the BAU the savings rate determined by the optimal decisions of house- scenario due to sizable energy efficiency interventions on the holds, the large-scale investment program in ‘green’ sectors demand side in the current and next decades. The baseline absorbs limited resources from the rest of the economy and for the energy sector was defined in a bottom-up manner in leads to slower growth. By 2020, the level of real GDP falls by the MARKAL model. (Chapter 6). For transport, the major about 2 percent below the baseline while by 2050, it rebounds cost driver is the modernized transport infrastructure that is to 1.5 percent above the BAU path. To the extent that some to be developed (in both scenarios) in the current decade. upfront costs are funded externally (as tested in the “FDI or (Figures 12.6 and 12.7). foreign grants financing closure” of the model, which would include any EU structural funds available to finance green On the operations and maintenance side, savings result policies and investments),193 then the negative temporary from energy efficiency improvements (lighting and heating) effects on GDP are offset because of the positive impact and modernized energy plants, while transport generates of external financing on domestic aggregate demand. The additional costs. The incremental O&M benefits are much higher in the Super Green scenario, and by 2050, they reach 192. As an alternative to GDP, consumption or welfare changes could 0.8 percent of GDP for energy supply (especially due to savings be presented, but because they are strongly correlated with GDP, the differences are not significant. In the MOMA model, welfare is defined as on fuel costs) and 0.5 percent of GDP for energy efficiency a function of discounted consumption and leisure. Local pollutants are not measures. Given the existing gaps, a big potential for savings modeled, because of a lack of geographical dimension in this analysis, so the model cannot demonstrated the co-benefits of climate action, other is available in the current decade. Note that for transport, than a more efficient use of (cleaner) energy or a more diversified economy. the operational benefits stemming from a modernized infra- 193. Fiscal closure is the variable in the model that satisfies the government budget constraint. To meet the government budget constraint, a change structure might be underestimated as the cost estimates are in taxes or expenditures is required to cover the fiscal losses or gains focused on emissions abatement and do not take into account resulting from the policy change. Six fiscal closures are used in which these categories of spending or taxes are adjusted: social transfers, public other benefits such as safer roads and fewer fatalities, time consumption, FDI and foreign grants (which would include any EU structural funds available to finance green policies and investments) and three tax saved from reduced traffic congestion, or less air pollution. closures: personal income tax, corporate income tax, and value-added tax. Figure 12.6. Green mitigation requires Figure 12.7. Super green mitigation requires investments of 1% of GDP investments of 2% of GDP Incremental investment in mitigation measures in Incremental investment in mitigation measures in Super Green scenario, deviation from BAU as % of GDP Green scenario, deviation from BAU as % of GDP 2.5 2.5 2.0 2.0 percentage of GDP percentage of GDP 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 5 0 5 0 5 0 6 0 15 20 25 30 35 40 46 50 2 01 2 02 2 02 2 03 2 03 2 04 2 04 2 05 20 20 20 20 20 20 20 20 -0.5 11- 16- 21- 26- 31- 36- 41- 46- -0.5 11- 16- 21- 26- 31- 36- 41- 46- 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Transport Energy Energy Transport Energy Energy supply efficiency supply efficiency Source: Macroeconomic technical paper. Source: Macroeconomic technical paper. 140 F Y R M aced onia Gr een Grow th Country A ssessment short-term loss in real GDP can be reduced to a marginal level climate change; they have rather limited economic impact but in this case. Over the long-term, the economy benefits from pay back faster than mitigation measures. In the short run, improved resource efficiency and modernized infrastructure. the effects of adaptation interventions are similar to those of The impact on employment is noticeably smaller than the mitigation measures, but they start to bring benefits to the impact on GDP, but the pattern is similar. (Tables 12.1 and 12.2). economy soon after their introduction through the expected value of avoided losses. Also, in contrast to mitigation mea- The short-term impact on GDP differs across climate action sures, their O&M costs are small. Since adaptation activities measures. Among mitigation measures, those aimed at cost much less than mitigation projects, their macroeconomic increasing energy efficiency have stronger positive effects impact is also smaller—by at least one to two orders of mag- driven by savings on energy. Less energy use means more nitude. (Figure 12.8). resources available for other sectors. Lower energy demand translates into a decrease in energy commodity prices, which The decomposition of GDP impact in the Super Green sce- stimulates other sectors to expand output over time. Transport nario is similar to the Green scenario, but its magnitude is measures constitute a drag on real GDP over the whole bigger. More ambitious climate action delivers a significant period as they require not only higher initial expenditures shift towards a low-emissions economy (due to the addition on the transport infrastructure than in the baseline, but also of nuclear power to the generation mix), and a more resilient higher outlays on its maintenance. This observation has to be economy (especially for agriculture). In this scenario, even treated with caution since the sectoral transport estimates, substantive external financing, e.g. from EU funds, cannot while focused on costs of emissions abatement, did not take completely compensate for GDP losses, although the losses into account other benefits of a modernized transport infra- from transport seem to be again overestimated. (Figure 12.9). structure such as less congestion, fewer traffic accidents, and cleaner air. Therefore, the negative impact of transport on The estimates of costs of adaptation in the water sector are GDP is likely overestimated in the MOMA model. Adaptation of much higher magnitude than costs of protecting infra- measures are aimed at preventing future losses resulting from structure facilities. While incremental investments in the water Table 12.1. Economic impact of the Green scenario (deviation from BAU, in %) 2015 2020 2025 2030 2035 2040 2045 2050 Closure: VAT GDP -2.7 -2.2 -0.5 0.2 0.8 1.2 1.3 1.5 Employment -1.0 -1.1 -0.5 -0.2 0.0 0.2 0.3 0.4 Closure: FDI or foreign grants GDP -0.3 -0.3 -0.2 0.5 0.9 1.0 1.0 1.1 Employment -0.4 -0.5 -0.4 -0.2 0.0 0.2 0.2 0.3 Source: Macroeconomic technical paper, MOMA model simulations. Table 12.2. Economic impact of the Super Green scenario (deviation from BAU, in %) 2015 2020 2025 2030 2035 2040 2045 2050 Closure: VAT GDP -6.9 -3.7 -0.1 -2.3 -2.4 0.1 0.6 1.3 Employment -2.9 -1.7 -0.2 -1.1 -1.5 -0.1 0.1 0.4 Closure: FDI or foreign grants GDP -1.6 0.2 0.1 -1.1 -1.2 0.5 0.8 1.1 Employment -1.6 -0.4 -0.3 -0.9 -1.2 -0.1 0.1 0.3 Source: Macroeconomic technical paper, MOMA model simulations. How Can Public Investment Choices Support Greener Growth? 141 Figure 12.8. Impact on GDP differs across climate Decomposition of GDP impact in the Figure 12.9. action measures Super Green scenario is similar to the Green Decomposition of GDP impact of Green scenario, VAT scenario, but its magnitude is bigger closure Decomposition of GDP impact of Super Green scenario, VAT closure 2.0 1.5 3.0 GDP deviation from BAU, in % 2.0 1.0 1.0 GDP deviation from BAU, in % 0.5 0.0 0.0 -1.0 -0.5 -2.0 Water adaptation -1.0 -3.0 Infrastructure adaptation -4.0 -1.5 Transport -5.0 Energy Supply -2.0 -6.0 Energy Efficiency -2.5 -7.0 Total Green -3.0 -8.0 2015 2020 2025 2030 2035 2040 2045 2050 2015 2020 2025 2030 2035 2040 2045 2050 Water adaptation Transport Energy Efficiency Infrastructure adaptation Energy Supply Total Green Water adaptation Transport Energy Efficiency Infrastructure adaptation Energy Supply Total Green Source: Staff calculations based on macroeconomic modeling outcomes, Macroeconomic technical paper. Source: Macroeconomic technical paper, World Bank staff calculations. sector in the Super Green scenario reach one percent of GDP by 2015, the measures to protect infrastructure would cost less RECOMMENDATIONS than 0.1 percent of GDP. However, patterns of investment and O&M costs are similar– investments incur upfront costs, and Public investment choices on green actions can be guided benefits emerge later. Also, the benefits increase in the long by the findings produced by macroeconomic modeling. run if measured in absolute values but tend to decline over Adaptation interventions are less costly than mitigation mea- time if measured as a percentage of the country’s rising future sures from the macroeconomic perspective, calculated either GDP. Aging adaptation capital also requires higher expenses as the value of associated investment needs or in terms of for repairs and maintenance. expected economic impacts. Moderate adaptation measures in agriculture or incremental expenses in the climate-proofing Adaptation measures in the water and agriculture sectors of physical infrastructure would amount to the equivalent are profitable even at high discount rates (10 percent), of around 0.1 percent of annual GDP, while Green mitiga- while profitability of adaptation in infrastructure largely tion measures would require the mobilization of resources depends on the choice of discount rate. By 2050, the ratio of constituting about 1 percent of annual GDP. Given the current net benefits from adaptation in agriculture and the required economic situation and tight public budgets, this difference investment ranges between 1.2 and 1.3 in the Green and is not trivial. Should the authorities decide on more ambitious between 1.4 and 1.8 in the Super Green scenario. In the case climate action, the investment costs of Super Green adapta- of infrastructure measures, the discount rate of 5 percent tion would approach 1 percent of GDP, while Super Green indicates a break-even point between investment cost today mitigation would require the equivalent of around 2 percent and discounted benefits. For a rate below 5 percent, the of GDP. The effects of the proposed adaptation measures investments are profitable; otherwise, discounted benefits on GDP and employment are marginally negative or almost are lower than the cost of the investment. neutral from a short-term perspective, reaching a slightly posi- tive level in the medium term (5 years from the investment phase). Moderate or ambitious mitigation action would also promise a medium- to long-term boost in GDP level up to 142 F Y R M aced onia Gr een Grow th Country A ssessment 1.5 to 2 percent by 2050, but the short-term GDP loss would the short term, then they will be willing to invest in this insur- exceed 2 percent were financing to be mobilized domestically. ance. In technical terms, time preferences are reflected in the assumed discount rate. With a discount rate below 5 percent, On adaptation, public investment requirements aimed at investments in climate change-resilient infrastructure bring preventing losses in agricultural production due to changing more benefits that costs. However, if less value is attached climate patterns are significantly higher than investment to costs and benefits in the future (and the discount rate is requirements focusing on the maintenance of infrastructure higher than 5 percent), these investments will prove inefficient. services across different sectors. Aggressive action avert- Naturally, there are significant differences in the costs and ing potential losses in agricultural production and farmers’ benefits associated with investments in various types of infra- incomes through the modernization of irrigation and other structure. Additional funds devoted to the climate resilience facilities would require investments as high as the equivalent of of health and education facilities, urban drainage systems, 1 percent of annual GDP. According to the water sector analy- and municipal buildings are more efficient than spending sis, the monetary benefits of such interventions are higher on roads, other transport, and power and telecoms facilities. than costs and are not sensitive to the assumed discount rate. This means that investing in modernized irrigation and more From the viewpoint of cost efficiency and economic per- resilient crops pays off even at relatively high (above 5 percent) formance, the government’s approach to mitigation should discount rates. By comparison, making power, road or urban be selective with respect to different sectors and should infrastructure more climate-resilient is aimed at preventing focus first on energy efficiency. Improved energy efficiency disturbances in FYR Macedonia’s future economic develop- can be tapped into before deciding to build new low- or ment. This can be interpreted as a type of insurance against zero-carbon power plants or trying to implement impressive the risk that a changing climate will derail the country’s growth developments in the transport sector through upgraded rail and income convergence towards Europe in future decades. infrastructure, urban and inter-city transit or traffic manage- Following the patterns in other countries in the past, this ment systems similar to those operational in richer countries. will require more investment in physical infrastructure and Green and Super Green energy efficiency measures would improvements in its quality. The low price of this insurance, at reduce medium-term GDP by 0.5 or 1 percent relative to the the equivalent of 0.1 percent of annual GDP; makes it seem a baseline respectively, but by 2050, GDP would reach a level 1 price worth paying to prevent potential climate damage over percent and almost 2 percent respectively above the baseline the next decades. On the other hand, the price for even more path. Investments in green energy supply (mainly gas-fired resilient infrastructure largely depends on the authorities’ plants) induce effects on GDP and employment similar to time preference. If they attach a higher value to costs and energy efficiency measures (an affordable drag on GDP in the benefits emerging over the medium- to long term rather than short term and benefits in the longer term). By comparison, How Can Public Investment Choices Support Greener Growth? 143 ambitious green measures in energy supply or mitigation for in the rest of the economy through 2050. Therefore, the gov- transport are more difficult objectives for the Macedonian ernment needs to be prepared to monitor the cross-sectoral government to achieve. GDP losses under the Super Green effects of the green transition and consider measures aimed scenario in energy supply (due to the construction of a nuclear at facilitating the reallocation of labor and capital from one power plant), or transport investments in both scenarios, lead sector to another. to persistent and significant GDP losses (up to 3 percent of GDP). However, these estimates are based on the assump- Government must make a commitment to ongoing and tion that this costly transition in power and transport relies ever-improving in-country analyses to provide up-to-date exclusively on domestic savings and the fiscal space created assessments for their policy decisions. Many sources of uncer- either by higher taxes or reduced public expenditure (which tainty and several methodological issues remain in applying are suitably conservative assumptions). an economy-wide model such as MOMA, in conjunction with sector analytic approaches, to key green growth policy ques- The source of finance for green transformation investments tions. Some of the key uncertainties and issues follow. First, is important for macroeconomic results. Domestic savings technical progress creates an enormous source of uncertainty options are the most likely funding source over the near term. over the 40-year horizon. Technological breakthroughs could Given the reality of fiscal constraints, prioritization of public substantially decrease the costs of climate action. Secondly, investments, including green investments, becomes even global developments—on natural resource prices and on more important since even the green scenario’s relatively global economic growth—will drive local costs and benefits modest financing needs would constitute one-quarter to one- but are almost impossible to predict. Third, projections of the fifth of the annual public investment budget. Unsurprisingly, global climate models vary considerably–more pessimistic a reliance on external non-debt creating sources such as climate developments translate into higher economic losses private FDI or EU accession or structural funds yields the best in the future and larger benefits of adapting. Fourth, ‘adaptive outcomes for the domestic economy. Access to the latter is capacity’ determines how well countries cope with a changing dependent on the political agenda, of course, and cannot climate, but a precise definition that would allow this factor to be predicted in this sort of model; but the impact of such be integrated into analysis is lacking. Fifth, there is a lack of financing, if it were to become available, can be simulated. distinction between the costs of climate change and the costs Financing the Macedonian green transformation from EU of natural disasters that occur within current climate conditions. funds would provide the exceptional possibility of raising Sixth and finally, the discount rate is critical. If the discount rate aggregate demand without creating a public debt burden is high, reflecting less concern about the future on the part of or requiring some part of current savings to be discarded. citizens and government, then both future benefits and future This conclusion supports the government’s efforts to attract costs will be heavily discounted, and fewer green actions will foreign investors and strengthen the environment for doing have positive net present values. For progress against these business in FYR Macedonia—it’s good for growth, and it’s challenges to full understanding of a green growth path, ana- good for green growth. lytic work needs to continue in future years. Technical assistance to a working group drawn from across government and local Mitigation measures also provoke different economic institutions has enabled the government to apply these models repercussions across sectors and the adjustment is mainly to a variety of policy questions in the future, even as data, borne by the energy-intensive and trade-exposed sectors. tools, and models are improved. The comprehensive analysis These sectors play an important role in such a small and of this report, and the acquisition of tools to apply into the open economy. 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FYR Macedonia Energy Demand Forecast, Methodological Note, technical paper, March 2013. Urban sector: Setting up an Energy Consumption and Efficiency Information System, Building Sustainable Cities in FYR Macedonia: Urban Strategies for Green technical note, September 2013. Growth, March 2013. World Bank, 2012. Infrastructure: ECA Sustainable Cities: Improving Energy Efficiency in Skopje, FYR Does Infrastructure Need To Be Built Differently To Be Climate Resilient? Macedonia. TRACE Study. ECA Sustainable Cities. Washington, DC: Making Robust Decisions, sector paper, March 2014, forthcoming. ESMAP, World Bank, April 2012. Macroeconomic modeling: Water sector: Macroeconomic Assessment of Climate Change and Climate Action in FYR Green Growth: Water Sector, May 2013. Macedonia, sector paper, February 2014. Water Sector Investment Analysis, February 2013. 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REFERENCES 151 RELEVANT WEBSITES: European Commission’s Clean Vehicle Directive: http://ec.europa.eu/transport/themes/urban/vehicles/directive/ European Commission’s climate action: http://ec.europa.eu/clima/policies/transport/vehicles/cars/index_en.htm European Commission’s Energy Efficiency Plan: http://ec.europa.eu/ energy/efficiency/action_plan/action_plan_en.htm Green Growth Knowledge Platform website, developed in partnership between the Global Green Growth Institute, the OECD, UNEP, and the World Bank. http://www.ggkp.org; http://www.oecd.org/greengrowth/greengrowthknowledgeplatform.htm; http://gggi.org/activities/research/green-growth-knowledge-platform/; http://sustainabledevelopment.un.org/index.php?menu=1447. International Energy Agency’s Energy Technology Systems Analysis Program (IEA-ETSAP): MARKAL: http://www.iea-etsap.org/web/Markal. asp South East European Forum on Climate Change Adaptation: http://www.seeclimateforum.org/CCA-Forum/1/Home.shtml Transport sector models: http://www.tremove.org, http://www.tmleuven.be/methode/tremove/ home.htm http://energy.jrc.ec.europa.eu/transtools/, http://www.ec-gis.org/Workshops/inspire_2008/presentations/11_3_ Bamps.pdf http://ec.europa.eu/environment/air/pollutants/models/ tremove.htm United States Environmental Protection Agency: MARKAL Technology Database and Model (EPANMD): http://www.epa.gov/nrmrl/appcd/ climate_change/markal.htm. World Bank’s EFFECT: http://esmap.org/esmap/EFFECT. World Bank’s TRACE: http://esmap.org/TRACE 152 F Y R M aced onia Gr een Grow th Country A ssessment This Green Growth Country Assessment for FYR Macedonia defines a green growth path to 2050, focusing on climate action. While addressing today’s economic challenges, policymakers need to keep the long-term in mind, both the likely impact of a changing climate on water, agriculture, and infrastructure and growing obligations to mitigate greenhouse gas emissions, especially from energy and transport. These considerations are particularly important for decisions on long-lived infrastructure such as power supply, irrigation, or urban streets, water distribution, and sewers. Innovative modeling of water, as a constraint on growth as the climate becomes warmer and drier, quantified the tough tradeoffs that will be needed to balance competing demands from agriculture, the power sector, and municipalities and industry. A greener energy sector demands aggressive energy efficiency measures while bolstering supply security and reducing greenhouse gas emissions. Sizable investments are needed in rail and public transport to support growth and reduce emissions. Growing energy intensity in urban areas, driven by sprawling development of single family houses using wood for heating and private cars for commuting, must be reversed. Any green growth path must also address the country’s harmful air pollution, the reduction of which will provide large local benefits to Macedonians’ health. Carefully-chosen public investments and policies can ease the path to a more resilient and climate-friendly economy without sacrificing long-term growth. An economy-wide macroeconomic assessment found that climate investments pose costs upfront but provide benefits both now and later. Even if financed entirely domestically, the impact on GDP growth of a package of green actions on adaptation (which protects tomorrow’s output from climate damage) and mitigation (which nearly halves greenhouse gas emissions) is modestly negative at first and becomes a boost to growth within 15 years. On the benefit side, policymakers will have taken a significant step towards creating a greener, more sustainable economy for generations to come. Such comprehensive analysis should give confidence to policymakers considering green investments and policies. Supported by MACEDONIAN GREEN GROWTH AND CLIMATE CHANGE ANALY TIC AND ADVISORY SUPPORT PROGRAM