Activity Design Paper 2.0 Mexico Net Zero Cities.pdf

USAID/Mexico Partnership for Net Zero Cities

ACTIVITY DESIGN PAPER

1. Background

Mexico’s greenhouse gas (GHG) emissions have increased by 63 percent over the last three decades and are projected to continue to increase until at least 20301. Mexico will need to scale up climate action to meet its Nationally Determined Contributions (NDC); its current plan is deemed unambitious and insufficient with achieving a way to maintain less than a 1.5 C increase in temperature. Fossil fuels still make up 87 percent of Mexico’s energy mix, which is above the G20 average and despite declining output, the country is still the second largest oil producer in Latin America.

Given the Mexican administration's focus on strengthening the state-owned oil and electricity companies, progress for emission reductions in these sectors does not seem likely. Accelerating the pace of emissions reductions in other sectors, (e.g. transport and buildings) is needed in order to help Mexico remain on a path towards net zero emissions by 2050. Not only do transportation and buildings account for the majority of Mexico’s GHG emissions2, but energy efficiency in buildings, transportation, and industry is expected to account for at least 40 percent of GHG emission reductions in 20503. By accelerating the transition to energy efficient buildings and transportation, this activity will lay the foundation for Mexico to quickly deploy low-cost renewable energy resources in the next ten years. Also, improvement of energy efficiency in general could also have broader collateral benefits in terms of competitiveness. For example, a close alignment on energy efficiency between the US and Mexico (in the framework of USMCA) could reduce energy costs and strengthen the North American competitiveness4.

Transport and buildings present the greatest opportunity for emissions reductions. Mexico’s transport sector has grown over the years without prioritizing low emission technologies and today, it represents one of the biggests emitters of GHGs in the country - second only to power generation. Mexico’s transport sector is dominated by fossil fuels, and the light passenger and heavy-duty vehicles are not only key contributors of GHG emissions but are also the primary source of outdoor air pollution in Mexican cities. Working on fuel efficiency standards and electromobility is thus a promising route to achieve mitigation targets and reducing health impacts. On the other hand, buildings accounted for about 23 percent of GHG emissions in Mexico5, including direct emissions from fuel burnt onsite and indirectly from electricity consumption. The buildings share is expected to grow to 27 percent by 20506, driven by (1) increased electricity use in homes, particularly as air conditioning becomes more affordable and

(2) the growth of the commercial sector with office buildings, shopping centers and hotels.

Fortunately, the building sector offers great opportunities to mitigate GHG emissions and

1 Mexico Climate Transparency Report 2020 2 Coalition for Urban Transitions https://urbantransitions.global/en/publication/seizing-the-urban-opportunity/seizing-mexicos-urban-opportunity/ 3 IEA Net Zero by 2050 4 U.S.-Mexico Climate Change Working group briefing paper - energy efficiency, June 4, 2021.

5 (SENER-Sistema de Información Energética 2019) 6 LBNL, preliminary estimate.

https://www.iea.org/news/pathway-to-critical-and-formidable-goal-of-net-zero-emissions-by-2050-is-narrow-but-brings-huge-benefits https://paperpile.com/c/ULZUnk/EtZxv contribute to overall climate goals. In fact, the building sector has the potential to emit no net emissions using current technologies.

Additionally, short-lived climate pollutants (SLCP), including black carbon, methane and hydrofluorocarbons, are powerful climate forcers which can also impact air quality. Reducing these pollutants can bring climate benefits and improve health and livelihoods, by preventing premature deaths. Mexico’s climate change commitments include a target of reducing black carbon emissions by 51% in 2030 compared to BAU scenarios. Mexico has an integrated strategy to reduce SLCP, and key sectors in which opportunities exist are the waste, industry and oil and gas sectors.

The prospects are good for international collaboration with Mexico on energy efficiency. In many cases, the most effective approach remains to work directly with the federal government developing regulations, and engaging with subnational governments. For example, while the federal government issues mandatory energy efficiency construction codes, these are implemented at the municipal level. Specifically, in the buildings and transportation sector, subnational actors have the necessary legal mandates over development of these sectors.

Additionally, subnational actors are often eager to fill the current gap in clean energy development left by the federal level and are more likely to be willing to work with USAID.

There is political will in Mexico to address climate change at the subnational level. Many states and municipalities have come up with plans including Mexico City’s eight point strategy to curb annual emissions by 65 metric tons of CO₂ equivalent (mtCO2e) by 2050. The state of Jalisco has also been identified as a climate champion with over seventy-two percent of municipalities having developed climate strategies. Mexico City and Guadalajara also have 2050 net zero targets.

Therefore, an opportunity exists for cities/states to play an important role in climate leadership and many already are climate champions. Even if the national government returns to ambitious national climate commitments, it will not be enough to reduce emissions--cities and states must be empowered and enabled to implement those commitments.

2. Alignment to Strategy

The Biden Administration has placed responding to climate change very high on its list of policy priorities. The Executive Order on Tackling the Climate Crisis at Home and Abroad highlights the need to advance the clean energy transition to address climate-related challenges. In addition, the U.S. International Climate Finance Plan makes a case to end support for carbon-intensive fossil fuel based energy.

Climate touches all facets of our diplomatic operations: policy engagement with heads of state, multilateral negotiations in a wide range of fora, capacity building programs for utility regulators, dialogue with youth activists, lifting up the leadership of mayors and governors, promoting the adoption of U.S. climate innovation, such as smart metering and air quality monitors, and clean technologies that are developed and manufactured on our shores, while also learning from the advances of others. In addition, the Oct 19 Joint Statement on Mexican – U.S.

Engagement on Climate Change specifically mentions energy efficiency and greening of transportation as opportunities for increased ambition.

The activity will contribute to the Mission’s Country Development Cooperation Strategy https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/27/executive-order-on-tackling-the-climate-crisis-at-home-and-abroad/ https://www.whitehouse.gov/wp-content/uploads/2021/04/U.S.-International-Climate-Finance-Plan-4.22.21-Updated-Spacing.pdf https://www.state.gov/joint-statement-on-mexican-u-s-engagement-on-climate-change/ https://www.state.gov/joint-statement-on-mexican-u-s-engagement-on-climate-change/ through Intermediate Result (IR) 2.2: Improved Business Transparency and Integrity Practices under Development Objective 2: Expanded bilateral economic ties through improved competitive business climate. Within the Embassy, the program will contribute to the new Embassy interagency climate strategy.

Geography

Under this activity, USAID/Mexico will identify and work with subnational champions -- states and cities -- to advance decarbonization in Mexico. According to Iniciativa Climatica de Mexico (ICM), Mexican states fall into roughly three categories in terms of their commitments and action to address climate change. The final geographical scope will be determined according to the following criteria:

● emissions reduction potential at the original intervention site;

● potential to scale up to other cities and states across the country;

● political opportunity/support among key state or municipal authorities (climate change champion);

● potential demonstration effect; and

● technical capacity of subnational entities as a determinant.

3. The Activity

Purpose

The purpose of this activity is to reduce greenhouse gas emissions by improving energy efficiency measures in the buildings and transportation sectors, and reducing Short Lived Climate Pollutants (SLCP), thereby helping to put Mexico on a pathway to netzero emissions after 2030.

Theory of Change

IF Mexico pursues subnational climate mitigation actions by requiring net zero pathways for buildings, transportation, and waste sectors, and if finance barriers are addressed and subnational capacity and planning processes are strengthened THEN GOM will make significant progress towards 2030 NDC targets and future climate ambitions, while reducing consumer energy costs and improving energy security. To achieve these goals, in the target cities, this activity will need to improve building cooling efficiency by 50 percent (Objective 1), increase public transport to 30 percent zero emissions vehicles (Objective 2), and reduce methane emissions by 30 percent from the waste sector (Objective 3). Achieving these goals will require access to private/climate finance and improved capital investment planning and procurement processes (Objective 4). If these goals can be achieved in 3-6 target cities/states by 2025, then this activity could be scaled to other cities/states so that GOM is on a pathway to achieving net zero emissions by 2030.

Illustrative or Potential Interventions

Objective 1 (O1): Adopt Energy Efficiency pathways to net zero buildings in 2050

Goal: 50% Improvement in Building Cooling Efficiency in target cities

- Result 1 (R1): Adoption of high efficiency cooling technologies (e.g. mini-split air https://docs.google.com/document/d/1rZducwQUiOVK6PAiWKDVYZzRf_dN4v7N/edit#heading=h.2xcytpi https://docs.google.com/document/d/1rZducwQUiOVK6PAiWKDVYZzRf_dN4v7N/edit#heading=h.2jxsxqh https://docs.google.com/document/d/1rZducwQUiOVK6PAiWKDVYZzRf_dN4v7N/edit#heading=h.2jxsxqh conditioners)

- R2: Building Code Enforcement and Implementation

- R3: Research & Development

Building energy efficiency measures could provide 50 Mt CO2e of carbon mitigation potential by 2030, while creating ~500k jobs (Coalition for Urban Transitions). Cooling in the residential and commercial sectors already accounts for a quarter of all electricity use in the summer months and improving cooling efficiency will also reduce peak demand and transmission constraints (Lawrence Berkeley National Lab, LBNL). Therefore, it makes sense to prioritize cooling efficiency as a first step in the pathway to net zero buildings. Second, implementation of net zero building codes in Mexico City (see LBNL/C40 Building Decarbonization Roadmap) would result in electricity bill savings through 2050 of $13 billion and a reduction of $5 billion for electricity subsidies. But the capacity to enforce building codes is lacking. Third, research is needed to provide evidence to private sector developers and manufacturers on the least-cost energy efficiency solutions.

R1: Adoption of High Efficiency Cooling Technologies

Goal: Increasing market penetration of high efficiency cooling technologies (e.g. mini-split air conditioners)

Cooling use is likely to grow massively in the coming decades due to three main factors. First, single room air conditioners, known as ‘mini splits’ are increasingly affordable to Mexican families as the economy grows and incomes rise. Second, the commercial sector is growing more rapidly than other economic sectors, and the electricity intensity per square meter of floor space is growing, largely due to cooling. Finally, the effects of climate change are difficult to forecast, but it is likely that average temperatures will rise widely, exacerbating the need for air conditioning in the warmest areas and extending it to today’s temperate zones. The Mexican National Commission for Efficient Energy Use of Energy (CONUEE) and the state of Sonora recognize the importance of improving cooling efficiency for decreasing peak demand and consumer costs. Commercial buildings (e.g. hotels in Merida/Quintana Roo) and public housing are strong candidates for pilot, incentive, or rebate programs to encourage A/C efficiency.

R2: Building Codes

Goal: Increasing enforcement of building codes to increase building envelope efficiency

Despite a long history of success, there are important gaps in the development and enforcement of Mandatory National Standards (NOMS) that currently pose a barrier to progress towards net zero energy (NZE) buildings. Through this activity, USAID/Mexico will support pathways to net zero buildings in 2050 through implementation of minimum energy efficiency construction codes (building codes) and minimum energy performance standards (MEPS), which are the foundation of large-scale and long-term reduction of energy demand. MEPS and building codes are developed by the Mexican federal government (CONUEE) through Mexico’s system of Mandatory National Standards (NOMs). Enforcement of these codes lies with local governments (municipalities), and is negligible due to technical and financial capacity limitations in these governments.

R3: Research and Deployment https://c40cities.medium.com/energy-buildings-5ac98f762e00

Goal: Broadly, this IR will support research to address deployment and/or adaptation of established clean energy technologies and policies to accelerate adoption

Reaching net zero buildings will require research and development to decrease the private sector and consumer cost of complying with increasingly efficient building codes. This will also require development of complementary technologies and programs to decrease cooling use such as alternative cooling technologies, cool surfaces, and smart buildings. Distributed Generation (DG) may also be an option for Commercial Buildings and SMEs depending on the existing local/utility regulations in the region. Combined with the improved cooling and building envelope efficiency, these new technologies should decrease pressure on transmission and distribution capacity for the utility. LBNL will lead building efficiency R&D with their in-country university and private sector counterparts, while NREL will continue to focus on DG opportunities and ideally follow up on their past Yucatan engagements.

Objective 2: Accelerate the transition to a zero emission, equitable urban transportation system

Goal: 30% public transit (bus) sales are zero emission vehicles by 2030

- R1: Avoid travel from high emitting modes of transport; enable the shift to more efficient modes

- R2: Improve vehicles and vehicle operations to reduce emissions

The most economically attractive options for GHG mitigation at the subnational level are in transportation, which accounts for 28 percent of emissions reduction potential in cities (Coalition for Urban Transitions). According to a WRI estimate, modernizing the transport sector in Mexico could reduce the sector’s emissions by 86 percent below business as usual (BAU) by 2050, and avoid 75,000 deaths related to air pollution exposure (NREL).

There appears to be political will within several cities and states to improve the transportation system. Transport is included in state climate action plans, cities are building bus rapid transit lines and are procuring e-buses, incentives exist to replace minibus and taxi fleets with electric vehicles, and goals exist to better connect urban residents with safe and accessible bicycle and pedestrian infrastructure. Many cities are looking at the many opportunities within the transportation sector to link goals to improve equity through affordable and high quality transportation access with deep decarbonization and public health improvements.

There are two primary levers USAID can pull to simultaneously reduce urban transport emissions and improve transportation service quality: (1) avoiding travel from high emitting modes, like private automobiles, by enabling the shift to more efficient modes, like buses, rail, trolleys, bicycles, and walking; and (2) improving vehicles and vehicle operations to reduce emissions through replacement with electric vehicles or other technologies, reducing congestion, and fuel economy standards.

R2.1 Avoid + Shift: USAID has opportunities across all cities to increase the share of trips to transit, bicycle, and walking by supporting improved coordination between transportation and land use, the planning, procurement, and implementation of critical infrastructure (such as new bus rapid transit lines and protected infrastructure for bicycling and walking), transit route planning and operational improvements, and travel demand management, including policies and incentives to limit car use while providing good alternatives.

USAID can support subnational governments to develop or strengthen urban planning processes and translate their visions and goals into more detailed and transparent investment plans that take advantage of the high levels of capital available in Mexico. There is also potential collaboration at the national level with the Secretariat for Agrarian, Land and Urban Development (SEDATU), which has developed a national planning strategy and provides capacity development and investment to municipalities to revitalize urban infrastructure, particularly for low income communities.

R2.2 Improve: USAID also has opportunities across cities and states, and at the national level, to improve the urban transportation fleet, including buses, minibuses, taxis, and private vehicles.

The focus of USAID’s interventions will depend on the travel and demographic characteristics, as well as the political priorities of each city or state. In some cities (such as Monterrey and Mexicali), where vehicle dependence is high, interventions to improve private vehicles will be more impactful; whereas in cities where public transport dominates, buses will likely be the primary focus. For example, in Mexico City, transportation is dominated by public transit.

USAID can support the city’s goals to replace the more than 5000 aging, polluted minibuses with e-buses, transform BRT lines into zero emissions lines, and accelerate the electrification of tens of thousands of taxis. USAID can also support the technical advancement of more stringent fuel efficiency and vehicle standards at the national level and support incentives, partnerships, policies, and planning for infrastructure to electrify light-duty vehicles. Electrification of vehicles is likely to be less politically sensitive than fuel efficiency standards, while it may reduce PEMEX sales, it will provide new customers for CFE and could also be pitched as a way for Mexico to insert itself in electric vehicle supply chains.

O3: Reduce short-lived climate pollutants (e.g. methane, black carbon) in industry/waste sectors Goal: 30% reduction in methane in accordance with Global Methane Pledge

-R 3.1 Waste -R 3.2 Industry

Mexico is one of more than 100 countries that have agreed to the Global Methane Pledge with the expectation of meeting the 30 percent reduction in methane emissions from agricultural sectors.

-R 3.1 Waste

Solid Waste and Wastewater account for ~75 percent Methane Emissions in Mexico City (SNAP II). However, USAID is limited in its ability to work on waste/wastewater sectors due to the definition of “clean energy” under the renewable energy earmark and likely will only be able to use clean energy money for the capture of landfill gas or biogas.

-R 3.2 Industry

There is ample opportunity to reduce both carbon and air pollution emissions through improved operations and maintenance in industry. Berkeley Lab has already begun to explore Industrial Energy Efficiency opportunities to bring steel/cement manufacturing practices up to international standards, as these are the two largest energy-consuming industries globally. Given the ability of industry to install renewable energy up to 500kW, this activity will leave the door open to https://docs.google.com/document/d/19kOgF1STO_mZCWzhpEn6DrTY_hvvByCKnmqApr4gimA/edit https://docs.google.com/document/d/19kOgF1STO_mZCWzhpEn6DrTY_hvvByCKnmqApr4gimA/edit engage with industry on energy efficiency, distributed generation, and battery storage; depending on whether there is additional funding and political will to reduce emissions from the industry sector.

O4: Municipal Governance/Finance

- R1: Climate Smart Capital Investment Planning

- R2: Transparent Green Procurement and Finance

- R3: Project Development Support (advisory services)

The realization of ambitious NDCs relies in large part on the ability of subnational entities to implement climate actions, particularly in the buildings and transport sectors. Globally, more than half of the actions required to meet Paris targets must be taken by local governments.

More states and cities across Mexico have shown a desire to increase the ambition of their climate targets but they are faced with the same challenges that burden subnational governments and decision makers around the world. The ability of cities to implement these actions rests on their ability to plan investments, structure projects, and mobilize both public and private finance. Even advanced cities, like Mexico City, do not have coordinated, annually updated capital investment plans, which assess the financial health of the city, including existing and potentially new revenue sources, and prioritize projects for investment or potential for blended finance. In all cases, public finance will not be sufficient to meet city- or national-level climate and development goals; however, lack of creditworthiness is the primary barrier to cities’ ability to take on smart, strategic debt and attract private investment. Many cities, like Mexico City, are also debt averse, further constraining their ability to fully fund infrastructure-related needs.

As a result, local governments encounter budget constraints and are unable to finance the climate-smart projects needed to realize a just transition. In Mexico, USAID can address these challenges by 1) strengthening climate-smart investment planning, 2) facilitating investment through strategic partnerships with regional investment opportunities (e.g. NADBank) and 3) providing advisory services for prioritized project development.

R 1: Climate-Smart Capital Investment Planning:

USAID can support a wide range of Mexican cities to strengthen their capital investment planning processes in order to make them (1) climate smart; (2) a regularized process with annual updates; (3) coordinated across government bodies; (4) comprehensive to include all projects and enable systems-based prioritization (as opposed to individual project by project analysis); and (5) inclusive of financial underpinnings, such as analysis of revenue sources, needs, and opportunities to raise more revenue and mobilize domestic resources. Through this process, USAID can support cities to better identify which projects to develop and/or have potential to be public-private partnerships. They can also use the process to strategically plan for, leverage, and manage debt to most effectively meet economic development, climate, and other priorities, which may ease existing aversion to incurring new, but necessary debt. The capital investment planning process directly contributes to attaining or improving creditworthiness, which will lead to procurement and project development. USAID will need to assess each city for specific goals and needs to tailor assistance on capital investment planning as most, if not all cities will have familiarity with the concept and an existing process on which to build. It is likely, though, that most cities, including advanced ones like Mexico City, will need support across the components listed above--particularly with regard to planning climate smart investments.

R 2: Transparent Green Procurement and Finance:

Mexico City has published guidelines on green purchasing and three other cities have initiated pilot projects. However, the quality of green purchasing in municipalities remains low owing to lack of information on green alternatives, insufficient metrics to evaluate and compare the sustainability of products, and local regulations that force local governments to purchase the cheapest option rather than the best option for society or the environment (Leal et al 2020).

USAID can marshall technical resources, in coordination with USG and local partners, to develop directories containing ample information with respect to products’ technical specifications, based on ecological best practices based in science and information obtained in part from civil society and industry. Furthermore, USAID could leverage technical expertise to train officials at the regional, state, and municipal level on green purchasing policies to create an enabling environment in order to learn from, improve upon, and scale green procurement efforts around Mexico.

R 3: Access to Green Finance: Hundreds of millions are committed or delivered to Mexico to fund energy efficiency and transport focused projects from the World Bank’s Clean Technology Fund in coordination with the InterAmerican Development Bank. Additionally, the Green Climate Fund has approved almost US$780 million to catalyze long-term climate investment at the local level. As such, Mexico is one of the largest recipients of global climate finance yet little clarity exists as to how those funds are managed. USAID can support subnational governments with technical assistance aimed at tapping into these large reservoirs of financing and planning projects around the country.

Illustrative activities:

● Political economy analysis

● Technical diplomacy: exchanges and workshops

● Technical analysis: economic modeling, transport modeling, scenario planning, energy use modeling (LBNL)

● Procurement structuring including financial analysis--capital expenditure and operational expenditure analyses for buses, buildings, etc.

● Build workforce capacity through energy efficiency learning networks; Different topical networks (different types of companies involved e.g. Hotels, Commercial Buildings, Residential (low-income public housing)

● Update of Air Conditioners (mini-split standards (NOMs) - Current standards or residential air conditioners inadequately promote adoption of high-efficiency, ‘inverter’ units. A revised program to consolidate and update these standards would strongly propel the market towards mass adoption of more efficient inverters.

● Provide incentive/financing mechanism for commercial buildings meeting a certain EE threshold (e.g. LEED or IFC EDGE) which could be an update to the NAMA green mortgages facility

● Develop long-term capital investment planning strategy with municipalities to evaluate https://www.conavi.gob.mx/images/documentos/sustentabilidad/4_Supported_NAMA_for_Sustainable_Housing_in_Mexico.pdf https://www.conavi.gob.mx/images/documentos/sustentabilidad/4_Supported_NAMA_for_Sustainable_Housing_in_Mexico.pdf low-carbon transportation procurement opportunities

● Provide technical assistance to municipalities and planning agencies so that they can meet the project requirements for accessing green finance.