Document of
THE WORLD BANK
Report No.: 39767-CO
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED PURCHASE OF EMISSION REDUCTIONS BY THE COMMUNITY DEVELOPMENT CARBON FUND
IN THE AMOUNT OF UP TO US$1.1 MILLION
FOR THE
COLOMBIA: FURATENA ENERGY EFFICIENCY PROJECT
May 29, 2007
Sustainable Development Department
Colombia and Mexico Country Management Unit
Latin America and the Caribbean Region
CURRENCY EQUIVALENT
(Exchange Rate Effective June, 2007)
Currency Unit = Pesos Colombianos
1950 Pesos Colombianos = US$1
Fiscal Year
January 1 – December 31
ABBREVIATIONS AND ACRONYMS
BCF / BioCarbon FundCAS / Country Assistance Strategy
CDCF / Community Development Carbon Fund
CDM / Clean Development Mechanism
CEA / Country Environmental Analysis
CER / Certified Emission Reduction
CF / Carbon Finance
CO2e / Carbon Dioxide Equivalent
DNA / Designated National Authority
DOE / Designated Operational Entity
EIA / Environmental Impact Assessment
EMP / Environmental Management Plan
EPMF / Empresa Procesadora de Mieles Furatena
ER / Emission Reduction(s)
ERPA / Emission Reduction Purchase Agreement
GHG / Greenhouse Gas
GOC / Government of Colombia
GWP / Global Warming Potential
IPCC / Intergovernmental Panel on Climate Change
LULUCF / Land Use, Land Use Change and Forestry
MP / Monitoring Plan
NCCP / National Climate Change Plan
NDP / National Development Plan
NGO / Non-governmental Organization
NPV / Net Present Value
NSS / National Strategy Study
PAD / Project Appraisal Document
PDD / Project Design Document
UBN / Unmet Basic Needs
UNFCCC / United Nations Framework Convention on Climate Change
Vice President: / Pamela Cox
Country Manager/Director: / Makhtar Diop
Sector Director: / Laura Tuck
Sector Manager: / Susan G. Goldmark
Task Team Leader: / Walter Vergara
COLOMBIA: FURATENA ENERGY EFFICIENCY PROJECT
CONTENTS
A. STRATEGIC CONTEXT AND RATIONALE 6
1. Key development issues and government strategy 6
2. Rationale for Bank involvement 9
3. Sector issues to be addressed by the project and strategic choices 10
4. Higher level objectives to which the project contributes 11
B. PROJECT DESCRIPTION 13
1. Project development objective 14
2. Performance indicators 14
3. Project components 14
4. Sustainability and Replicability 15
5. Alternatives considered and reasons for rejection 16
6. Major related Projects supported by the Bank and/or other development agencies 16
7. Lessons learned and reflected in the project design 17
C. IMPLEMENTATION 18
1. Institutional and implementation arrangements 18
2. Monitoring and evaluation of outcomes/results 19
3. Critical risks and possible controversial aspects 20
4. ERPA conditions and covenants 21
D. APPRAISAL SUMMARY 21
1. Financial analysis 21
2. Technical 22
3. Economic 23
4. Social 23
5. Environment 24
6. Safeguard Policies 25
E. COMPLIANCE WITH BANK POLICIES 26
ANNEX 1: DETAILED PROJECT DESCRIPTION 27
ANNEX 2: IMPLEMENTATION ARRANGEMENTS 34
ANNEX 3: FINANCIAL ANALYSIS 38
ANNEX 4: PROJECT PREPARATION AND SUPERVISION 42
ANNEX 5: EMISSION REDUCTION PURCHASE AGREEMENT/TERM SHEET 43
ANNEX 6: The Panela Industry in Colombia 44
ANNEX 7: FURATENA: SOCIAL Impacts ASSESSMENT AND SOCIAL MONITORING 47
ANNEX 8: Barrier analysis and additionality 53
ANNEX 9: baseline analysis 56
ANNEX 10: CALCULATION OF EMISSION REDUCTION 61
ANNEX 11: ENVIRONMENTAL MANAGEMENT AND SANITATION PLAN 66
ANNEX 12: TECHNICAL AND SANITARY STANDARDS FOR THE PANELA PROCESSING SECTOR 71
ANNEX 13: FINANCIAL ANALYSIS FROM SMALL PRODUCER’S PERSPECTIVE 76
Annex 14: CDM approved methodology for Small Scale Energy Efficiency Activities 81
PROJECT APPRAISAL DOCUMENT
Latin America and Caribbean Region
Sustainable Development Department
Date: May 23, 2007Country Director: Makhtar Diop
Sector Director: Laura Tuck
Project ID: P086455 / Team Leader: Walter Vergara
Sectors: Agro-Industry (100%)
Themes: Climate Change (P), Other environmental management (S)
Project Financing Data:
[ ] Loan [ ] Credit [ ] Grant [ ] Guarantee [X] Other: Carbon Finance
For Loans/Credits/Others: This project does not involve Bank financing. Total Carbon Revenues amounts to US$ 1.13 million; The CDCF has agreed to purchase 60,000 t CO2e by 2014 with an option to purchase an additional 40,000 t CO2e upon delivery. Proposed terms: $ 8.5 per ton CO2e
Financing Plan (US$m.)
Source / Local / Foreign / Total
Net CDCF revenues / 0.7
Other carbon revenues / 0.3
EPMF / 3.3
Total / 1.0 / 4.3
Borrower: Not applicable
Implementing agency: EPMF “La Empresa Procesadora de Mieles Furatena”
Address: Cll169 No 67- 81 Int 2 Oficina 304, Utica
Contact person: Jorge Eduardo Angel Riveros
Estimated emission reductions in t CO2e/year and in USD
PY / 2007 / 2008 / 2009 / 2010 / 2011 / 2012 / 2013 / 2014 / 2015 / 2016 / 2017
Annual
(in tCO2e) / 0 / 2809 / 6041 / 8396 / 12917 / 12917 / 12917 / 19375 / 19375 / 19375 / 19375
Cumulative / 0 / 2809 / 8850 / 17246 / 30163 / 43080 / 55997 / 75372 / 94748 / 114123 / 133499
Annual
(in m USD) / 0 / 0.02 / 0.05 / 0.07 / 0.11 / 0.11 / 0.11 / 0.16 / 0.16 / 0.16 / 0.16
Cumulative / 0 / 0.02 / 0.75 / 0.15 / 0.26 / 0.37 / 0.48 / 0.64 / 0.81 / 0.97 / 1.1
Project implementation period: 2007–2017
Expected effectiveness date: June 5, 2007
Expected closing date: December 2017
Does the project depart from the CAS in content or other significant respects? / ○ Yes X No
Does the project require any exceptions from Bank policies?
Have these been approved by Bank management?
Is approval for any policy exception sought from the Board? / ○ Yes X No
○ Yes X No
○ Yes X No
Does the project include any critical risks rated “substantial” or “high”? / ○ Yes X No
Does the project meet the Regional criteria for readiness for implementation? / X Yes ○ No
A. STRATEGIC CONTEXT AND RATIONALE
1. Key development issues and government strategy
Climate is changing rapidly at a global scale. There is no scientific doubt that the main cause of global warming is the atmospheric accumulation of greenhouse gas emissions from anthropogenic activities. The Fourth Assessment Report, Summary for Policymakers of the Intergovernmental Panel for Climate Change (IPCC-SPM, 2007) concluded that, the global average surface warming following a two-fold of carbon dioxide concentrations over pre-industrial levels, is likely to be in the range 2 to 4.5°C with a best estimate of about 3°C, and is very unlikely to be less than 1.5°C. A temperature increase of this magnitude is unprecedented. The report also indicates that CO2 concentration in the atmosphere in 2005 exceeds by far the natural range during the last 650,000 years. The doubling of CO2 is now expected to occur within this century.
Emissions from agricultural activities account for about 15 percent of global GHG emissions (WRI, 2006). This amount is divided roughly evenly between CH4 and N2O (about 45 percent each), with CO2 from fossil fuel combustion and electricity use in agro-activities accounting for the remaining share. At the activity level, the largest agricultural source is soil management (40 percent of the sector total), where emissions result from tillage and cropping practices, and the use of synthetic fertilizers. Other important agriculture sources of methane are wetlands rice cultivation and manure management. Agriculture also contributes to CO2 through land clearing and the burning of biomass. (WRI, 2006)
Colombia’s emissions of GHG are very modest (0.2% of global, with 0.6% of global population). However, within these low intensity emissions, opportunities for GHG mitigation are already being actively pursued in Colombia in the renewable energy, wastewater treatment and carbon sink sectors (Jepirachi, Amoya, Rio Frio and Caribbean Savannah projects). Opportunities do exist to mitigate emissions in other sectors such as in agro-industry (National Strategy Study (NSS), 2002). According to the NSS, the Panela (raw brown sugar) processing sector has a good potential for GHG abatement through energy efficiency measures that could also result in significant social and environmental benefits.
In Colombia the agriculture sector was responsible for 41% of national carbon dioxide equivalent emissions in 1994. Activities related to agriculture emitted about 61,000 Gg in 1994. While no recent estimates have been reported, it s believed that the contribution of agriculture continues to account for a sizable share of the total emissions of CO2 in the nation.
Table 1 – Carbon dioxide equivalent emissions – 1994 (Gg) (Source: IDEAM)
Sectors / CO2 / CH4 / N2O / TotalEnergy / 55.351,7 / 5.972,4 / 476,6 / 61.800,7
Industrial Processes / 5.212,3 / 8,2 / 77,5 / 5.298,0
Agriculture / 34.319,5 / 27.126,6 / 61.445,1
Land Use Change and forestry / 16.540,0 / 88,7 / 9,0 / 16.637,7
Waste / 4.061,4 / 625,0 / 4.686,4
Total Country (Gg) / 77.103,9 / 44.450,1 / 28.313,7 / 149.867,8
Rural Colombia is characterized by high poverty and low agricultural competitiveness. Colombia’s rural poverty rate is 68% (2005) and affects 8 million people, most of them small farm families. Rural poverty represents 36.5% of national poverty and 49% of the national extreme poverty. Colombia’s rural poverty is rooted in structural elements: limited access to resources and information, and low productivity.[1] Agriculture can be a source of substantial rural growth and an effective tool to reduce rural poverty particularly amongst small producers. To achieve this, there is a need to address barriers that prevent advances in agricultural productivity, limit access to financial mechanisms (land tenure, irrigation) and to new technologies.[2]
The Panela industry is characterized by inefficient use of energy. Colombia has become the second largest panela (processing sugar cane juice to manufacture brown sugar paste) producer in the World, after India. Production takes place mostly through “family owned facilities”, trapiches y entables, which serve few dozen hectares of sugar cane. In the nearly 15,000 small processing units in Colombia, efficiency varies widely. There is consensus on the very low thermal efficiency (20 to 30%) in traditional processing systems. These very low efficiencies translate into great demand for fuels.
GHG emissions caused by Panela processing in Colombia can be reduced through improvements in energy use. Colombia produces 1.2 million tons of panela per year, with an estimated emission of GHG of nearly 3.0 million tons CO2 equivalent per year. It is estimated that panela production in a well designed, medium size, industrial facility could cut CO2 emission by more than 80%.
Panela manufacture is a major source of rural employment and income. Panela production is the second largest source of employment in the rural sector (350,000 direct jobs). The average sugar cane unit is 3.0 hectares. Only 5% of all the panela produced in Colombia comes from facilities with 50 hectares or more (61 facilities). The remaining 15,000 units are either small or very small. This industry faces strong competition and poor quality of product. While new emphasis on the production of bio-fuels and the commissioning of a large facility to process panela molasses in the Suarez basin is expected to divert sugarcane production away from the household market, panela prices remain deprived and thus small farmers and producers are unable to introduce improvements in the manufacturing facilities or obtain economies of scale that could reduce unit manufacturing costs.
Panela production is an attractive rural industry, if the scale and technology are adequately selected and product quality improves. Panela manufacture benefits from economies of scale. Modern processing facilities are frequently more environmentally friendly and cost effective. Good quality products, with the potential to assure volume and quantity to selected buyers, can command good prices in the market.
Government Strategy
Colombia is a party to the Framework Convention on Climate Change and has also signed and ratified the Kyoto Protocol (Law 629 enacted November 30, 2001). Colombia has been a
leading participant in the discussions on the provisions and regulations of the Clean Development Mechanism (CDM), in the context of the international negotiations under the auspices of the UNFCCC, and has developed a detailed negotiations agenda on items leading to the definition of the rules for the CDM.
As part of these activities, the Government completed, with Bank support, a national assessment for the optimal use of the CDM (NSS, 2002) and has since become the country with the largest number of Bank-supported CDM projects in Latin America. The Government has, likewise, taken steps leading to the further development of institutional capacity through: a) the organization of an inter-institutional committee under the aegis of the Vice-president’s office to ensure full coordination on climate change issues; and b) the set up of a climate change office, which has now been in operation for the last five years. The government is now in the planning stages of a national policy on climate change.
National Development Plan (NDP). The government of Colombia (GoC) has adopted, through Congress (Law 788 of December 2002), the NDP after a long and participative process of consultations and negotiations. For the social management of rural areas the NDP defines four strategies as follows:
· Promote food security by facilitating producers’ access to factors of production, technical assistance and financial markets. Also by implementing strategies to improve market structure in key products and give transparency to price formation;
· Support productive rural associations, through the development of product chains, building regional competitiveness agreements, integrating national markets and reducing transaction costs;
· Develop technical and scientific support for selected agriculture products by strengthening the National System of Science and Technology, implementing strategic plans of action and promoting the National Information System of Agricultural Products; and,
· Facilitate access to productive and financial services benefiting rural associative initiatives.
Rural development strategy. A main thrust of the government rural development strategy is ensuring that recent free trade agreements provide conditions conducive to the development of a more competitive agricultural and agro-industrial sector and that rural activities generate employment and wealth in rural poor areas. This thrust is supported amongst others by the Agro, Ingreso Seguro (AIS) program designed to strengthen and guarantee agricultural incomes. A main component of this strategy is to assist smallholders to become full-fledged entrepreneurs (‘empresarios’) by enhancing their competitiveness and equipping them with skills and knowledge to confront the challenge of the global economy. The Furatena Project is aligned with this latter thrust of the AIS program as it will create and strengthen the capacity of an association of small producers to prepare them to respond to the requirements of the national and international markets where adhering to strict phytosanitary norms, product quality and regular supply is a key determinant.