Thursday, July 30, 2015

Why Paris won’t be Copenhagen: role of the INDCs in progress towards the Paris Agreement

By Luis Alberto Fierro, Climate Finance Adviser to AILAC (*)

As of August 3rd, 50 Parties have presented their “intended Nationally Determined Contributions” or INDCs.

The INDCs are the climate change pledges that all Parties to the UNFCCC are making, in advance of the 21st Conference of the Parties (COP21) in Paris.  Countries agreed at COP19 (2013) to present them in advance of COP21 (December 2015).

As such, they are a way to operationalize what academics had determined to be the best cooperative solution in a game theory approach to climate change negotiations. 

For example, Peter Wood, in a 2010 research report on “Climate Change and Game Theory” (https://goo.gl/CP0yAl), concluded the following:

In its simplest form, climate change mitigation is a prisoner’s dilemma. The prisoner’s dilemma has a Nash equilibrium that involves players acting non-cooperatively in a manner that is socially sub-optimal. When countries have a continuous choice about how much to pollute, the Nash equilibrium involves much more pollution than is optimal There are several strong results about mechanisms that implement a cooperative outcome via subgame perfect equilibrium when there is a social dilemma. These include subscription games (Example 4.2), bargaining based on confirmed proposals (Example 4.3), and approaches where countries ‘match’ each other’s pollution abatement commitments (Example 4.4)... This suggests that when countries are willing to increase their emission reduction commitment if others do the same, cooperation is more likely. It also suggests that cooperation would be more likely if an international mechanism were to exist that would allow countries to make a binding conditional commitment”

In other words, the cooperation will be more likely if there were an international mechanism to allow countries to propose a “binding conditional commitment”, and have other countries “match” these commitments.

This is basically how the INDCs were designed, and how they have been working thus far.  As of August 3rd, 22 INDCs have been submitted (representing 50 Parties, as the EU includes its 28 Member States), which include 58 % of total emissions.  Of major emitters, China, the United States, the European Union, Russia, Japan, Mexico, Canada, and South Korea have already presented their INDCs.  Still missing among major emitters:  Australia, India, Brazil, Indonesia, Iran, Saudi Arabia, South Africa, Turkey, Ukraine and Thailand.  


Among Developing Countries, the following have already presented their INDCs:  China, Ethiopia, Gabon, Kenya, Marshall Islands, Mexico, Morocco and Singapore.  Of these, the Marshall Islands is the first and so far only developing country with an absolute emissions reduction target, meaning its emissions have already peaked and the country will now continue to reduce emissions.  This is of huge significance, as this type of mitigation goal has traditionally only been utilized by developed “Annex I” countries.

AILAC member countries have reaffirmed their commitment to present theirs before October, in time for the compilation by the Secretariat (http://goo.gl/6YRoYY).  The President of Colombia, Juan Manuel Santos, announced to the country’s Congress that emissions would be reduced 20 % by 2030.

The following graph, developed by the World Resources Institute (WRI) illustrate the top 18 emitters, highlighting in particular the top 10 (and which sectors are involved).


The different mitigation pledges are difficult to compare, as they use different base years, different target years, and in some cases are not quantified economy-wide emission reduction targets, but rather deviation from “business as usual” baseline projections, or carbon intensity targets (reducing the CO2 emissions per unit of GDP).

Switzerland proposes a 50 % reduction of greenhouse gas (GHG) emissions by 2030, from 1990; the European Union, Norway and Liechtenstein propose a 40 % reduction in GHG from 1990 to 2030.  The United States proposed a 26-28 % reduction from 2005 to 2025.  New Zealand proposed a 30 % reduction by 2030, based on a 2005; this has been estimated as an 11 % reduction from 1990. Canada also proposed a 30 % cut from 2005 to 2030. 

Russia proposed a 25-30 % reduction from 1990 to 2030; however, since emissions fell after 1990 (after the collapse of the Soviet Union), this in fact could imply an increase of 41 % in emissions between 2012 and 2030.  This is an example of how the way that pledges are formulated can actually imply an overall increase in emissions, rather than a reduction

China did not propose an emissions reduction, but rather to reach a peak emission in 2030 (with a “best effort” to peak earlier).  China has also pledged to source 20% of its energy from low-carbon sources by 2030 and to cut emissions per unit of GDP by 60-65% of 2005 levels by 2030.

World Resources Institute (WRI) has estimated that the INDC pledges represent an annual reduction of -2.8 % in GHG for the European Union and the United States; -2.3 % per year for Japan; and -1.7 % for Canada (http://goo.gl/lRgV5W).



Climate Action Tracker (CAT, http://goo.gl/XXEp4c), a group of climate scientists and policy experts, considers that the following INDCs are “inadequate” towards meeting the 2 degree C temperature increase limit: Canada, Japan, New Zealand, Russia, and South Korea; it gave China’s carbon intensity target an “inadequate” classification, whereas it gives a “medium” rating to its national policies and actions, including the increase of its non-fossil fuel share of primary energy to 20 %.

According to CAT (http://goo.gl/lNSHzr), “Current policies place the world on a path towards 3.6 to 4.2°C warming above pre-industrial levels, whereas the unconditional pledges or promises that governments have made, as of early 2015, would limit warming to 2.9 to 3.1°C above pre-industrial levels. In other words, there is still a substantial gap between what governments have promised to do and the total level of actions they have undertaken to date. Both the current policy and pledge trajectories lie well above emissions pathways consistent with a 1.5°C or 2°C world.”

It is not clear how the “intended” contributions would be strengthened to close the “ambition gap”. Some Parties (including AILAC) had proposed a robust ex-ante assessment process, but Parties were only able to agree to let the Secretariat of the UNFCCC carry out a synthesis report of the aggregate effect of the INDCs, which is due to be published by November 1st. There will also be an informal review in Morocco.

The UN's Intergovernmental Panel on Climate Change (IPCC) in its Fifth Assessment Report (AR5) estimated that a 40 to 70% GHG emissions reductions is required by 2050 compared to 2010, and net emissions levels near zero or below in 2100, in order to keep the temperature increase under 2 degrees (http://goo.gl/b63SI9).

As major developed countries are reducing emissions, some major emitters in the developing world are continuing to increase theirs.  India has not yet announced a “peaking year”, citing economic growth and development imperatives.


Paris Agreement


In any case, however the INDCs are “finalized” and the commitments are established, they will need to be an integral part of the legally binding agreement to be adopted in Paris at CoP21.  There must be a strong legal obligation to implement and achieve the targets set out in the national commitment documents. This, regardless of where the commitments end up being captured, whether it be an annex, schedule or an online registry, as Parties have suggested.

The fact that there are already many INDCs on the table has given both national governments and non-state actors a reason to be optimistic for the Paris outcome.  But the biggest and most important decision is yet to come: a legal agreement that makes these INDCs binding is the best way to enhance trust and confidence in the multilateral process.

According to the C2ES executive vice-president, Elliot Diringer, “I see far greater convergence on the broad outlines of the deal than we ever saw in the time preceding Copenhagen.” C2ES conducted a year-long consultation with climate negotiators from more than 20 countries.

Laurence Tubiana, France’s chief climate envoy, indicates that “This is a very new thing,” she said. “This is a process where countries progressively do more and more over time. This is a long and deep transformational process that will extend over the next 40 to 50 years and beyond. We need a clear framework of rules to do that.” (http://goo.gl/s08s47).
            
Christiana Figueres, Executive Secretary of the UNFCCC, is confident that CoP21 will deliver on its target to agree on action to limit global warming to 2C. “The stars are aligning towards a Paris agreement that will establish a pathway that keeps us within the limit of 2C. What is unique here is that everyone is realizing that this truly is a very, very urgent moment in the history of addressing climate change. That this is a moment we cannot afford to miss. And because everybody is mobilized in the same direction, we actually have a very good chance of doing something meaningful.” (http://goo.gl/n3apmE).

Climate Finance

One of the linchpins in achieving an ambitious and effective outcome in Paris is climate finance. The provision of climate finance to developing countries will be indispensable to achieve the emissions reduction that is required, and also to build trust in order to conclude a successful agreement in Paris.

According to the IPCC AR5, “For mitigation scenarios that stabilize concentrations (without overshoot) in the range of 430 to 530 ppm CO2-eq by 210019, annual investments in low carbon electricity supply and energy efficiency in key sectors (transport, industry and buildings) are projected in the scenarios to rise by several hundred billion dollars per year before 2030. Within appropriate enabling environments, the private sector, along with the public sector, can play important roles in financing mitigation and adaptation” (goo.gl/b63SI9).

Developing countries are estimated to need $350 billion per year for mitigation, plus an additional $70-$100 billion per year for adaptation to climate change. In addition, if the impacts of climate change continue to mount, increased funding will be needed to deal with “losses and damage” of climate-related disasters, such as hurricanes, flooding, droughts, and the rising sea level.

Developed Countries have already committed to “jointly mobilize” $100 billion per year in climate finance for developing countries, including private funds leveraged by public resources, but there is still a lack of clarity that on whether and how this goal will be reached. 

AILAC and other developing countries have suggested that the Paris Agreement needs to include:

a)       A long-term, qualitative goal on means of implementation: “all investments are to progressively become low-emission and resilient to climate impacts, contributing to the necessary transformation towards sustainable development and the achievement of the goal of maintaining the average global temperature increase below 2 ºC or 1.5 ºC, as well as building economies, societies and ecosystems that are resilient to climate change” (from the negotiating text, http://goo.gl/JeuL68).


b)      A “short-term collective quantified goal shall be determined every five years starting in 2020 on the basis of a floor of USD 100 billion per year, in order to enhance the predictability of the provision of climate finance, indicating specific levels of funding from public sources to be provided”.

c)      “Each developed country Party and other Parties in a position to do so commit to communicate on an annual/biennial basis in the post-2020 period the scaled-up, quantified financial contribution they will provide to support developing countries in the effective implementation of mitigation and adaptation action, in the light of the transformational goal set forth in article above and the global goal set forth in article 5.3 above, which shall be considered and reviewed”.  This could build upon the experience of the Submissions on Strategies and Approaches to scale up climate finance, by including ex-ante information on funds to be provided.

d)     Strengthen the Operating Entities of the Financial Mechanism of the Convention, including the Green Climate Fund (GCF), the Global Environment Facility (GEF) and the Adaptation Fund (AF).

e)      Develop new carbon market mechanisms for trading certified emissions reductions (several of the INDCs include a component linked to a market mechanism).  This could build on the existing mechanism under the Kyoto Protocol; and include a levy for adaptation finance.

In conclusion, progress has been made through the presentation of the INDCs, but it will be necessary to achieve a Paris Agreement that ensures the environmental integrity and ambition of the commitments (up-front information, quantifiable targets, cycles with a common timeframe, accounting rules, ex-ante assessment and ex-post review, etc.).

(*) The views expressed in this article are the author’s and do not reflect the views of the AILAC Group or any of its member countries.

Sunday, July 26, 2015

Mi filosofía de inversión

  • A largo plazo, los indices de acciones siempre subirán de precio, pese a fluctuaciones de corto plazo.
  • Comprar cuando los precios de las acciones/índices están bajos, vender cuando están altos (aunque la gran mayoría de inversionistas se dejan guiar por el concepto contrario, de manada, comprando empresas sobre-valoradas que han subido mucho, y luego vendiendo en pánico cuando bajan, asegurando pérdidas).
  • Basarse en los fundamentos.  Por ejemplo, el precio de las acciones de Apple es 15 veces las ganancias anuales (relación Precio/Ganancias, o P/E), por debajo del promedio del mercado (21).  Mientras tanto, Amazon, Facebook, LinkedIn, Pandora, Netflix, estan todos por encima de 97 veces las ganancias anuales; y en el caso de Amazon está en 2.800 veces las ganancias anuales.  No tiene sentido comprar en estos niveles: ni por ganancias, ni por potencial a largo plazo de que suba el precio.
  • Diversificar el riesgo.  Por eso recomiendo comprar índices de acciones (Exchange Traded Funds, ETFs), en lugar de acciones en empresas individuales.
  • Buscar oportunidades de reducir comisiones e impuestos.  Por ejemplo, invertir en fondos de jubilación individual Roth (Roth IRAs), y en ETFs, en lugar de fondos mútuos (mutual funds).
Estos cinco criterios se traducen en una estrategia de largo plazo, de comprar y mantener índices de acciones, comprando cuando los precios están relativamente bajos.  Maximizar los aportes a vehículos con ventajas tributarias, como cuentas de IRA, cuentas de ahorro individual para salud y educación, etc.

Tuesday, July 14, 2015

Climate Change – the defining issue of our time

My contribution (limit: 150 words) on the most significant issue in the 21st Century, for an upcoming publication by the Strategic Foresight Group. Here is their previous publication on the topic
Climate Change – the defining issue of our time
By Luis Alberto Fierro 
Without a doubt, the defining issue of the 21st Century, and centuries to come, is climate change. The emission of greenhouse gases has already caused an increase of 0.8 C degrees since pre-industrial times, and future forecasts range from 2 to 6 degrees.
Even an increase of 2 degrees, which most climate scientists consider inevitable, will have devastating consequences. Forecasts regarding the rise of the sea level range from 1 to 6 meters; one meter would be devastating, 6 meters would be catastrophic. Hundreds of millions of people would be displaced (especially in China, India and Bangladesh), at least four nations would disappear (Kiribati, Maldives, Marshall Islands, and Tuvalu), tropical cyclones would increase in intensity, and climate-related events would cause trillions of dollars in losses and damage annually.
Given the magnitude of the problem, additional progress needs to be made, within and outside the UNFCCC negotiation process, to effectively address climate mitigation, adaptation and finance

Wednesday, February 18, 2015

How are oil exporting countries facing the falling price of oil?

By Luis Fierro Carrión (*)

(A Spanish version of this article was written for the February 2015 edition of Revista Gestión, Ecuador).

The international price of crude oil has dropped by 50% between June 2014 and February 2015 (the benchmark West Texas Intermediate - WTI - has dropped from $ 105 US dollars per barrel to $ 50, while the Brent fell from $ 115 per barrel in June to $ 61 in February).


While it is difficult to predict the future evolution of economic variables, it is not impossible - in September 2013 I had already predicted a fall in the oil prices, in an article published in Revista Gestión No. 231 (http://goo.gl/qZJin8) and in my blog (http://goo.gl/BsKHab).

Several structural factors in the oil market lead us to believe that the price will remain at around current levels, and take time to recover:

• Supply has increased, particularly with the expansion of oil production in North America, which has led the US to replace Saudi Arabia as the world's largest oil producer; and that Canada has entered the list of the 10 largest oil exporters. It is estimated that there is an oversupply of 1.5 million barrels per day (bpd).

(See chart on changes of oil production on p. 160 of goo.gl/JY5lnG).

• Reduced demand due to the promotion of renewable energies and energy efficiency, the persistent recession in the European Union and Japan, and slowing economic growth in the BRICS countries (Brazil, Russia, India, China and South Africa - particularly Russia, which has entered into an economic crisis, and Brazil, which will also see an economic contraction).

• In 2014, there was a total of $ 310 billion invested in clean energy, the issue of "green bonds" tripled to $ 38 billion, and the capacity of renewable energy generation reached 1,560 GW (http://goo.gl/5xQpQt, http://goo.gl/b1FBfs).

• An additional factor was the appreciation of the US dollar against other currencies (by 10% over 2014), which implies cheaper dollar-denominated commodity prices.

In addition, Saudi Arabia and other oil exporters in the Middle East changed their strategy, from the defense of high prices to the defense of market share, to the extent that Prince Alwaleed bin Talal of Saudi Arabia stated that the price of oil will never again reach $ 100 per barrel, due to changes in supply and demand.  There were also reports that Saudi Arabia was using the oil market to pressure Russia to abandon its Syrian ally, Bashar al-Asaad (http://goo.gl/4nbQQV).

Some OPEC members may also be seeking to pressure some high-cost producers such as those drilling using hydraulic fracturing ("fracking"), the tar sands of Canada and Venezuela, and those who drill on offshore platforms in inhospitable areas (such as the Arctic Ocean). There has already been a decline in investment in new wells, with the suspension of investments for several tens of billions of dollars (http://goo.gl/Yi9rDb). The bet of some Middle Eastern producers is that, after several years of reduced exploration in new wells, global supply will fall, they will regain market share, and prices will rise again.


Goldman Sachs predicted that WTI will remain at $ 39 per barrel over the next six months, and will reach $ 65 within 12 months (previously, it forecasted $ 75 and $ 80 at 6 and 12 months) (http://goo.gl/vXhvXa).

Macro-economic impact

The oil exporting countries exported a total of about 43 million barrels per day (of which about 30 million were from OPEC). Of this total, 75% corresponds to the 10 largest exporters. Export revenues amounted to US $ 1.56 trillion, at an average price of $ 100 per barrel and $ 784 billion at an average price of $ 50 per barrel - that is, those countries have lost approximately half of their oil revenues (in practice, even more than half, as part of the production is performed by private companies, that participate in the rent - or, in the case of Ecuador, have a guaranteed price for their provision of services).

Among the top 10 exporters, oil revenues represent an average of 24.5% of GDP; the impact on GDP growth rate is estimated between -3.8% in Saudi Arabia and +0.2% of GDP in Canada (in Canada the ratio of oil in total GDP is minimum, 3.2%).

In the case of Ecuador, oil’s share of GDP in 2012 was 19.1%, and Maria de la Paz Vela estimated in issue No. 247 of Revista Gestión, in a low scenario, with an average oil price of $ 61.5 per barrel, GDP growth would be between 1.8 and 2.3%, i.e. about 2% below the initial projection of the government. The average impact on GDP for OPEC countries for which there are estimates is -1.9%.

Oil exports also represent a significant percentage of total exports, which fluctuated in 2013 – according to OPEC – between more than 99% of exports for the cases of Angola, Libya and Iraq, 96% in Venezuela and 33.2 % in the case of the United Arab Emirates (UAE). Ecuador was in an intermediate point between OPEC countries, with 54.9%. According to the Central Bank of Ecuador (BCE), this percentage dropped to 51.3% in the third quarter of 2014 (reflecting the initial drop in prices).

But what is more serious is the impact on tax revenues. The dependence on oil revenues in some OPEC countries in 2013 amounted to over 90% of total tax revenues (Saudi Arabia, Iraq and Libya). Venezuela was in between, with 46.6%, while in Ecuador it was about 30%.

Another way of looking at fiscal dependence is the price of oil that is required to balance the fiscal accounts. Here the range is between $180 US dollars per barrel for Libya, to $ 137 for Iran, about $ 120 for Ecuador and Venezuela, and $ 68 for the UAE.

The difference between the level of dependence on oil for revenue and the price per barrel that is required to balance the budget is because some countries were already dragging a large fiscal deficit and foreign debt. In Venezuela, for example, the fiscal deficit had already exceeded 14% of GDP in 2014 - before the collapse of the international price of oil - while in countries like Iraq, Ecuador and Algeria, the fiscal deficit already exceeded 4% of GDP.
            
In part, the fiscal deficit in some oil exporting countries is due to the high subsidies offered to energy consumption. According to IMF estimates for 2011 (http://goo.gl/n45CYl), Iran offered energy subsidies (oil, gas, electricity and coal) amounting to 50.94% of total tax revenue. Second among oil exporters stood Venezuela, with 20.38%; then Saudi Arabia with 18.66%, UAE with 16.25%, and Ecuador fifth with 15.88% of tax revenue. Since then, Iran and other countries (Egypt, India, Indonesia, Malaysia, among others) have significantly reduced their energy subsidies. Some analysts and institutions have suggested that now is the best time to reduce subsidies, since prices have dropped, so the impact of the elimination of subsidies will be reduced.

Economic policies to address the fall in oil prices

With respect to the response that major oil exporters have adopted to the fall in international prices, we can divide the exporting countries into three groups:

a) Countries with high international reserves and sovereign wealth funds

Many countries exporting oil and other commodities took advantage of the windfall gains of the last decade (with high prices) to accumulate international reserves, sovereign wealth funds (SWF), pre-pay their debts, and accumulate other net assets. That is to say, they followed anti-cyclical policies, and saved during the time of "fat cows".

For example, Saudi Arabia currently has reserves of $ 740 billion, equivalent to 60 months of imports (five years); additionally, it has two SWFs with a current value of $ 762 billion. In other words, it can overcome a prolonged period of low prices without any difficulty (and, additionally, has proven reserves of 265 billion barrels, which means it could continue producing at current levels for 28 years, without any additional exploration).

In the case of the UAE, while reserves only cover imports for 2.8 months, it has the second largest amount invested in sovereign wealth funds (after China), with a total of $ 1,078 billion. Adding the reserves and the funds, it has enough to cover 54 months of imports.

Norway and Canada, which are the ninth and tenth largest oil exporters, have the third and seventh largest amount invested in sovereign funds, $ 893 and $ 416 billion respectively.

b) Countries with average levels of reserves and sovereign wealth funds

Another group of oil-exporting countries whose reserves allow them to import between 8 and 20 months of goods are: Angola, Iraq, Russia, Iran, and Nigeria. All these have sovereign wealth funds, with amounts ranging from $ 1.4 billion for Nigeria to $ 181.8 billion in the case of Russia.

In each of these cases, there are, however, other complicating factors:

• Russia and Iran are subject to international sanctions (for the invasion of parts of Ukraine in the case of Russia, for the enrichment of nuclear material in Iran's case). In both cases, they also face significant fiscal deficits and foreign debt.

• In the case of Russia, the ruble has lost half of its value in the past year; the stock market has fallen 48.5% since last year; a fiscal deficit of 3% of GDP is forecast; and a GDP contraction of 4-5% in 2015. The rating agency Moody's downgraded the Russian debt to Baa3, or “junk” category. It is uncertain what the effect of the severe economic crisis might be on Russia’s foreign policy, particularly regarding the intervention in several former Soviet countries (Ukraine, Georgia, Moldova, etc.).

• As for Iran, its currency (the rial) has lost two thirds of its value against the dollar in recent years; it has already reduced subsidies to energy and basic goods; and 20% spending cuts were announced. Iran is likely to consider the desirability of reaching an agreement regarding the development of nuclear materials to remove sanctions (which have led to reducing oil exports in half).

• Iraq faces internal conflict, which has recently evolved into the occupation of part of its territory by the Islamic State, and the growing autonomy of the Kurdish region. Given the severe impact of the falling price of oil on their tax coffers, it will probably have to reduce energy subsidies, and make other spending cuts, while at the same time trying to consolidate the power of the central state.

• Nigeria also faces ethnic conflicts, particularly by the Islamist group Boko Haram. It also suffers from problems of governance and corruption. The rebel groups steal some of the oil production; and in late 2013 the Governor of the Central Bank reported that the State oil company had failed to deposit $ 50 billion in oil revenues.

• Angola is nominally a country ruled by a Marxist party that led the process of independence with support from Cuba. However, the daughter of President José dos Santos (in power for 35 years), Isabel, is the richest woman in Africa, with a fortune estimated at $ 3 billion; his son, José Filomeno, was named Manager of the (public) sovereign wealth fund of Angola, and also founded a private bank in Switzerland. Angola will likely cut government spending.

c) Countries with meager reserves, high fiscal deficits

Finally, we have the cases of Ecuador and Venezuela, which have reduced amounts of international reserves; a sovereign fund with very meager investments in Venezuela ($ 800 million) and none in Ecuador; which were already facing high fiscal deficits for several years (despite high oil prices); and which have also been increasing their indebtedness rapidly in recent years.

According to a study by the Institute of International Finance, "Weaker public finances will dim the growth outlook for net oil exporting countries such as Ecuador, Venezuela and some in MENA (Middle East and North Africa), where rising oil revenues boosted fiscal spending in recent years… Countries with an already high current account deficit, such as Colombia and Ecuador, could come under additional pressure. Venezuela and Ecuador in particular have a low reserve coverage ratio and fragile capital market access, posing financing risks” (http://goo.gl/ipGyGU)The two countries also have high levels of energy subsidies.

The Presidents of the two countries traveled to China in January to try to get new credit.

In the case of Ecuador, the official news agency ANDES announced a line of credit from Eximbank of China, to finance the export of goods and services from China, amounting to $ 5,296 million; $ 250 million of the same entity for the import of induction stoves; $ 1,500 million from the China Development Bank (CDB) to partially finance the investment plan of Ecuador; and $ 480 million from the Bank of China to finance Millennium Schools and other infrastructure projects. The Finance Minister subsequently reported that, of this total, about $ 4 billion would enter in 2015. The Inter-American Development Bank (IDB) would provide $ 800 million. These new loans will help to close the funding gap in the budget, estimated at $ 10 billion after the fall of oil prices.

With these loans, total debt to China (including the balance of oil pre-sale credits) exceed $ 10 billion; and constitute almost half of the public external debt, that with these new resources would amount to $ 21,713 million. Total public debt, including domestic, would represent more than 30% of GDP, still below the legal limit of 40%.

Unlike other producers of oil, Ecuador is dollarized and therefore cannot devalue or promote a depreciation of the exchange rate (in fact, as was noted above, the dollar has appreciated against other currencies). This has led the government to impose trade safeguards against imports; restrict the import quota of vehicles (assembled and CKD); and adopt other import restrictions. Some fiscal measures were also adopted to try to raise the non-oil tax revenues (surtax to telecommunications companies that dominate the market, limits to the distribution of private company profits to their employees; 100% tax to stoves, water heaters and other appliances that use gas; among others).

The government cut by 3.9%, $ 1,420 million, the 2015 budget (in part, by suspending the salary increase to public employees of 5% that had initially been considered).
            
Venezuela presents a more complicated picture, given the high dependence of the economy on oil: 96% of exports, 26.7% of GDP and 46.6% of tax revenues. The public external debt reached $ 118 billion in 2013. In recent weeks, the "country risk" has risen to 3,100 points, insurance in case of moratorium (CDS) has soared, to reflect a moratorium probability of 81% in a year; and the risk rating has fallen to near-moratorium levels (Moody's downgraded to Caa3 from Caa1, just one step above moratorium).

The fiscal deficit, which had already reached 14% of GDP, could increase despite the announcement of a 20% cut in spending. The bolivar is currently handled in various exchange rates, and there is growing scarcity of commodities. The official inflation rate has exceeded 63%, the highest in the world.


Other Policy Recommendations

In its study on "Global Economic Prospects" published in mid-January 2015 (http://goo.gl/JY5lnG), the World Bank made some policy recommendations against falling oil prices:

• Reduce or eliminate subsidies to fossil fuels.

• Instead, consider introducing fuel taxes (to continue promoting the reduction of energy intensity of GDP, despite the lower oil price).

• "For oil-exporters, the sharp decline in oil prices is also a reminder of the vulnerabilities inherent in a highly concentrated reliance on oil exports and an opportunity to reinvigorate their efforts to diversify. These efforts should focus on proactive measures to move incentives away from activities in the non-tradable sector and employment in the public sector, including encouraging high-value added activities, exports in non-resource intensive sectors, and development of skills that are important for private sector employment" (p. 168).

The collapse in oil prices could help oil producers and exporters to move away from high-emission sectors and industries towards renewable energy and other low-emission technologies.

In the article published in Revista Gestión No. 231 (September 2013), which had anticipated a future decline in oil prices, I added the following: "What can Ecuador do to adapt to this scenario? In general, it should invest windfall revenues currently generated by oil, either through a sovereign wealth fund (á la Norway or Kuwait) or directly in the generation of hydropower and other renewable energy, and development of other sources of revenue." I also recommended "to reduce the subsidy to domestic consumption of hydrocarbons."

In No. 242 (August 2014), Maria Gabriela Vivero and I suggested that "moments of expansion and large inflows of resources such as this should be used to repay debt and build reserves. Therefore, the aggressiveness with which the Government is acquiring new debt obligations is surprising".

(*) Climate Finance Advisor. Economist, Catholic University of Ecuador; M.A. in Economics, the University of Oregon, M. Sc. Econ. and Ph.D. (c), the University of Texas at Austin. The views expressed are personal and do not reflect those of any institution.

Sunday, January 18, 2015

Indices de Acciones que pagan altos dividendos

Aquí algunos Exchange-Traded Funds (ETFs) que pagan altos dividendos anuales, así como ETFs de fondos de inversión inmobiliarios (Real Estate Investment Trusts, REITs ).


iShares Emerging Markets Dividend

Fluctuación del valor del ETF en ultimo año (FL):  $ 40.51 a $50.55 (por cada "acción")

Valor Actual (VA):  $ 4
​1​
.
​96​
  (cerca del mínimo, es un buen momento para comprar).

Dividendo Anual Actual (DA):  
​4.49​
 %


SPDR S&P International Dividend


FL:  4
​0​
.
​59​
 - 52.64

VA:  42.
​28​ (cerca al mínimo, buen momento para comprar)

DA:  5.
​99​
 %


SPDR Barclays High Yield Bond ETF

FL:  37.26 - 41.82


VA:  38.
​64​

DA: 5.9
​9​
 %

Estos son bonos de alto rendimiento, llamados "junk bonds".  En general, tienen mas riesgo, dado que: (1) algunas empresas pueden entrar en mora, es decir dejar de pagar sus bonos; y (2) si suben mucho la tasa de interés, podría bajar el precio de los bonos.  Pero como es un indice, los riesgos se aminoran; representa un total de 776 bonos corporativos.


Global X SuperDividend ETF

FL: 22.10 - 26.20

VA:  23.
​13​

DA:  
​6.24​
 %


YieldShares High Income ETF

FL: 2
​0​
.
​79​
 - 25.74

VA: 21.
​19​

DA:  9.
​51​
 %

REAL ESTATE INVESTMENT TRUSTS (REITs)


iShares Mortgage Real Estate 

FL:  11.
​5​
2 - 12.94

VA:  11.
​70​

DA:  1
​4​
.52 %


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​6​
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 - 6
​4.57​
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VA: 
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 el máximo anual, tal vez no comprar en este momento)
DA: 3.
​13​
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Thursday, January 1, 2015

Innovative instruments for climate finance

By Soledad Aguilar (*), Luis Fierro (**) and Virginia Scardamaglia (***)

Funding to address climate change was one of the main topics of discussion at the recent COP20 in Lima, Peru. One focus of climate negotiations in recent months has been the capitalization of the Green Climate Fund (GCF), which during the COP reached an initial resource mobilization of US $10.2 billion; as well as the efforts to scale up climate finance in order to reach the goal of joint mobilization of $ 100 billion annually by 2020.

It is worth noting that, today, not only developed countries are mobilizing resources but some developing countries are doing so as well. Thus, three members of AILAC announced contributions to the Green Climate Fund: Colombia and Peru will contribute US $ 6 million each; and Panama will provide a million dollars. Other developing countries such as Mexico, Mongolia and South Korea also announced contributions to the GCF.

At the same time, these countries are also recipients of resources for climate change. All the members of the AILAC group, comprising Chile, Colombia, Costa Rica, Guatemala, Panama and Peru, receive funding for mitigation and adaptation. Funding comes mainly from traditional sources such as: multilateral and bilateral development banks, particularly the World Bank (WB), the Inter-American Development Bank (IDB), the Andean Development Corporation (CAF), and the European Investment Bank (EIB); bilateral development agencies; and specialized funds, such as the Global Environment Facility (GEF), the Climate Investment Funds (CIF), and the Adaptation Fund.

The AILAC countries also promote innovative and creative approaches to climate finance. In the current negotiations, members of AILAC are among a group of countries that has proposed that financial contributions should not be limited to the traditional group of donor countries, but others countries in a position to do so may also provide financial resources and other means implementation. Chile, for example, established various trust funds at the Inter-American Development Bank (IDB), and the UNASUR countries jointly provided financial assistance to Haiti after its devastating earthquake, along with material support.

Some of the newer instruments used to finance mitigation and adaptation by governments in the region include the carbon tax introduced by Chile, the first of its kind in the region. Several countries in the region, such as Colombia and Peru, have launched National Climate Funds. In the case of Colombia, the National Adaptation Fund (www.fondoadaptacion.gov.co) was created, which will complement the existing Calamity Fund, designed for emergency assistance in the event of a natural disaster; and in the case of Peru there is the Fund for the Promotion of Natural Protected Areas of Peru (www.profonanpe.org.pe).

Among the investments of funds from public sources, some interesting examples to highlight are the following:

  • The European Union (EU) launched the Latin American Investment Facility (LAIF), which provides a grant as part of a financing package which includes hybrid loans, concessional loans, grants, guarantees, equity investments, risk mitigation, and technical assistance from European and Latin American public financial institutions.
  • The implementation of a Program for Climate Change and Clean Energy, funded by the German Development Bank (KfW) and CAF for members of that institution in the region.
  • The EU, Germany and Norway created the Global Fund for Energy Efficiency and Renewable Energy (GEEREF). Its aim is to anchor new private equity funds for renewable energy and energy efficiency.
  • Debt for nature swaps, as was the case of a swap with the participation of Germany and Guatemala,
  • CAF and KfW are launching a new Geothermal Development Fund for Latin America. The fund intends to mitigate risk for the development of geothermal energy in Chile, Colombia and Peru, among other countries.

Among the investments of private, or mixed, sources, we highlight the following:

  • The Multilateral Investment Fund (MIF) created, along with other public and private institutions, the Eco-Business II biodiversity fund, which invests venture capital for the growth of sustainable ventures in unique business niches, such as organic agriculture, non-timber forest products, sustainable forestry and eco-tourism. The instruments used are quasi-equity, convertible notes and long-term debt, among others.  Several AILAC countries have participated in the operations of this Fund.
  • Althelia Climate Fund backed carbon credits for Peru's Cordillera Azul National Park.
  • In Peru, the International Finance Corporation (IFC) of the World Bank Group issued its first "Green Bond" denominated in Peruvian soles, with Rimac Seguros.
  • Peruvian wind energy producer Energia Eolica SA (an indirect subsidiary of Contour Global) issued a $204 million green project bond with a coupon of 6% and 20 year tenor.
  • Another interesting example, although without AILAC country participation, is the Caribbean Catastrophe Risk Insurance Facility, supported by the governments of Caribbean countries and administered by the World Bank, which has allowed the pooling of risks to address natural disasters in the region such as hurricanes. This is a mechanism that could be replicated in other regions that share similar climate risks.

As we have seen, there are many new and creative sources of funding for mitigation and adaptation to climate change in Latin America and the Caribbean, and the countries of AILAC in particular, although thus far with a majority participation of public funds.

In the case of private investment, the necessary measures to attract such resources require a more proactive role of the State (and sub-national entities), to adopt regulations that create the market conditions necessary to attract investment in sectors that are not commercially viable in the absence of specific legislation or regulations (concessions, approvals, incentives, etc.). For example, it is necessary to adopt specific regulations to promote the development of renewable energy; build large infrastructure to prevent flooding; or develop the market for indexed weather insurance.

National development banks play a key role in creating the type of financial instruments needed (such as political risk guarantees and concessional/hybrid lines of credit) to encourage investment by the private sector.

Once the business environment that enables private investment is established, a wide variety of instruments can be used to channel investments, including traditional bonds, equity investments and guarantees, as well as some newer instruments, such as green bonds, catastrophe or contingent bonds, securitization of resource flows for energy efficiency, the development of index insurance for climatic disasters, the development of carbon markets, and the aggregation of climate assets, all of which operate today in developed countries and have some incipient development in AILAC member countries.

(*) Soledad Aguilar, Lawyer (UBA), LLM (London School of Economics). Directs the Graduate Program on Law and Economics of Climate Change, FLACSO-Argentina. She currently leads a consultancy on Innovative Financial Mechanisms for AILAC.

(**) Luis Fierro, Climate Finance Adviser for AILAC. Economist (PUCE), M. A. (University of Oregon), M.Sc. and Ph.D. (c) (U. of Texas at Austin). Profile: www.linkedin.com/in/luisfierro. The opinions expressed do not necessarily reflect the position of the member countries of AILAC.

(***) Virginia Scardamaglia, Master in International Relations and Negotiations (FLACSO), research assistant at the Graduate Program on Law and Economics of Climate Change, FLACSO-Argentina. Works with Soledad Aguilar in a consultancy on Innovative Financial Mechanisms for AILAC.